INTEGRATED TECHNOLOGY USA INC, SB-2/A, 1996-10-01

INTEGRATED TECHNOLOGY USA INC
SB-2/A, 1996-10-01
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1996

REGISTRATION NO. 333-9697
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 3

FORM SB-2

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933

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

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

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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:

<TABLE>
<CAPTION>
<S> <C>
JOSEPH EHRENREICH, ESQ. DAVID SCHOTTENFELS, ESQ.
EHRENREICH & KRAUSE SILBER, SCHOTTENFELS, GERBER & LEWIN
1140 AVENUE OF THE AMERICAS 29B KEREN HAYESOD
NEW YORK, NEW YORK 10036 JERUSALEM 94591, ISRAEL
212-302-8050 011-972-2-6257751

ALAN I. ANNEX, ESQ. CLIFFORD M.J. FELIG, ESQ.
CAMHY KARLINSKY & STEIN LLP HERZOG, FOX & NEEMAN
1740 BROADWAY ASIA HOUSE 4, WEIZMANN STREET
NEW YORK, NEW YORK 10019 TEL AVIV 64239, ISRAEL
212-977-6600 011-972-3-692-2020
</TABLE>
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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. / /

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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share
('Common Stock')...................... 3,450,000(3) $ 8.00 $27,600,000 $ 9,518

Redeemable Common Stock Purchase
Warrants ('Redeemable Warrants'), each
exercisable for one share of Common
Stock................................. 3,450,000(4) $ 0.10 $ 345,000 $ 119
Common Stock issuable upon exercise of
Redeemable Warrants................... 3,450,000 $12.00 $41,400,000 $ 14,276
Representative's Warrants, each
exercisable for one share of Common
Stock and/or one warrant(s)........... 300,000 $0.001 $ 300 $ 1
Common Stock issuable upon exercise of
Representative's Warrants............. 300,000 $13.20 $ 3,960,000 $ 1,366
Warrants issuable upon exercise of
Representative's Warrants............. 300,000 $ 0.17 $ 51,000 $ 18
Common Stock issuable upon exercise of
warrants issuable upon exercise of
Representative's Warrants............. 300,000 $19.80 $ 5,940,000 $ 2,049
Total................................... $ 27,347
</TABLE>

(1) Pursuant to Rule 416 under the Securities Act of 1933 (the 'Act'), there are
also being registered such additional securities as may become issuable
pursuant to the antidilution provisions of the Redeemable Warrants or the
Representative's Warrants.

(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Act.

(3) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.

(4) Includes 450,000 Redeemable Warrants which the Underwriters have the option
to purchase to cover over-allotments, if any.

(5) Such warrants will be the same as the Redeemable Warrants, except that the
exercise price will be 165% of the exercise price of the Redeemable
Warrants.

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

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

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1996

PROSPECTUS

[LOGO]

3,000,000 SHARES OF COMMON STOCK AND
3,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

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

This Prospectus relates to the offering (the 'Offering') of 3,000,000
shares of common stock, par value $.01 per share ('Common Stock'), and 3,000,000
Redeemable Common Stock Purchase Warrants ('Warrants'), of Integrated Technology
USA, Inc. (the 'Company'). Such shares of Common Stock and Warrants are
sometimes hereinafter collectively referred to as the 'Securities.' The shares
of Common Stock and the Warrants offered hereby may only be purchased in the
Offering together, on the basis of one share of Common Stock and one Warrant,
but are separately transferable immediately upon issuance. Each Warrant entitles
the registered holder thereof to purchase one share of Common Stock at an
initial exercise price of $ per share [150% of the initial public offering
price per share of Common Stock] at any time during the four-year period
commencing one year after the date of this Prospectus. The Warrant exercise
price is subject to adjustment under certain circumstances. Commencing 18 months
after the date of this Prospectus, the 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 the American Stock Exchange equals or exceeds $
[250% of the initial public offering price per share of Common Stock] per share
for any 20 trading days within a period of 30 consecutive trading days ending on
the fifth trading day prior to the notice of redemption. See 'Description of
Securities.'

Prior to the Offering, there has been no public market for the Securities,
and there can be no assurance that such a market will develop after completion
of the Offering or, if developed, that it will be sustained. It is currently
estimated that the initial public offering price per share of Common Stock will
be between $6.00 and $8.00 and that the initial public offering price per
Warrant will be $0.10. For information regarding the factors considered in
determining the initial public offering prices of the Securities and the terms
of the Warrants, see 'Underwriting.' Application has been made to have the
Common Stock and the Warrants approved for listing on the American Stock
Exchange ('AMEX') under the symbols ITH and ITH.WS, respectively.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE 'RISK FACTORS'
COMMENCING ON PAGE 9 AND 'DILUTION.'

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

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.

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<CAPTION>
PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO THE
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Per Warrant................................. $ $ $
Total(3).................................... $ $ $
</TABLE>

(1) Excludes (i) additional compensation payable to National Securities
Corporation, the representative (the 'Representative') of the several
underwriters (the 'Underwriters'), in the form of a non-accountable expense
allowance equal to 2.5% of the gross proceeds of the Offering, and (ii) the
value of five-year warrants (the 'Representative's Warrants') to purchase an
aggregate of 300,000 shares of Common Stock and/or 300,000 warrants, at an
exercise price of $ per share [165% of the Price to Public of the Common
Stock] and $0.16 per warrant, respectively, that will be sold to the
Representative at a nominal price. In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
'Underwriting.'

(2) Before deducting estimated expenses of $950,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.

(3) The Company has granted to the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to 450,000 additional
shares of Common Stock and/or 450,000 additional Warrants on the same terms
and conditions set forth above, to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Commissions, and Proceeds to the Company will be $ ,
$ and $ , respectively. See 'Underwriting.'

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

The Securities are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify the Offering and to reject any order in whole or in part. It is expected
that delivery of the Securities offered hereby will be made against payment in
New York, New York on or about , 1996.

NATIONAL SECURITIES CORPORATION

The date of this Prospectus is , 1996.

<PAGE>
[Pictures]

EXPANDING THE POWER OF INTERNET TELEPHONY

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The Company intends to furnish annual reports to its stockholders, which
will include financial statements audited by its independent public accountants,
and such other periodic reports as it may determine to furnish or as may be
required by law, including Sections 13(a) and 15(d) of the Securities Exchange
Act of 1934, as amended.

CompuPhone 2000(Registered) is a registered trademark of the Company in the
United States. The Company has a United States trademark application pending for
CompuNet 2000(Trademark). This Prospectus also includes trademarks and trade
names of other companies.

<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, (i) 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') and (ii) assumes that the Underwriters will not
exercise their over-allotment option. 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.

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 expects to commence sales of CompuNet
2000 by the end of 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.

The Company's objective is to become a leading developer and vendor of a
wide range of products for the Internet Telephony and computer/telephone
integration markets. In furtherance of this objective, the Company intends to
devote significant research and development resources in order to develop both
enhancements to its existing products and new products for its target markets.
The Company believes that its existing technology base and the substantial
experience of its product development team will provide the Company with a
significant advantage in its efforts to develop new products. While the Company
expects to rely primarily on its internal product development efforts, the
Company also intends to explore the possibility of establishing strategic
alliances with companies that can provide the Company with technology,
subsystems or complementary products

<PAGE>

which can be integrated into or offered with the Company's products. For
example, the Company has recently entered into a bundling agreement with
VocalTec Ltd., a publicly traded company that is a provider of software that
enables Internet Telephony. This agreement grants the Company the right to
bundle a version of VocalTec's Internet Telephony enabling software with the
Company's CompuNet 2000 product.

The Company currently markets products directly and through independent
representatives and distributors. However, the Company's marketing efforts to
date have been limited due to financial constraints. The Company intends to
increase its marketing capability by expanding the Company's internal sales
force; establishing relationships with additional independent representatives
and distributors; and significantly increasing advertising. In addition, the
Company is seeking to enter into arrangements with original equipment
manufacturers ('OEMs'), such as computer manufacturers, pursuant to which OEMs
would incorporate the Company's products into their finished hardware products.

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...................... 3,000,000 shares of Common Stock and 3,000,000 Warrants.
Terms of Warrants....................... Each Warrant entitles the registered holder thereof to purchase
one share of Common Stock at an initial exercise price of $
per share [150% of the initial public offering price per share of
Common Stock] at any time during the four-year period commencing
one year after the date of this Prospectus. The Warrant exercise
price is subject to adjustment under certain circumstances.
Commencing 18 months after the date of this Prospectus, the
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 equals or exceeds $ [250% of the initial public
offering price] per share, subject to adjustment, for any 20
trading days within a period of 30 consecutive trading days ending
on the fifth trading day prior to the notice of redemption. See
'Description of Securities.'
Common Stock Outstanding Prior to the
Offering(1)........................... 2,930,178 shares of Common Stock.
Securities to be Outstanding after the
Offering(1)(2)........................ 5,930,178 shares of Common Stock and 3,000,000 Warrants.
Use of Proceeds......................... The Company intends to use approximately $1.2 million of the net
proceeds of the Offering for repayment of outstanding indebtedness
and the balance of such net proceeds for: (i) advertising and
marketing; (ii) research and development; (iii) acquisition of
equipment and new product tooling; and (iv) working capital and
general corporate purposes.
Proposed American Stock Exchange
Symbols:
Common Stock....................... ITH
Warrants........................... ITH.WS
</TABLE>
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(1) Does not include (i) 403,189 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 12,756 of which provide for an exercise
price of approximately $2.74 per share), (ii) 548,333 shares issuable upon
exercise of options to be granted prior to completion of the Offering (as
described under 'Management--Options to be Granted Prior to the Offering'),
which options will have an exercise price equal to the the initial public
offering price per share of Common stock in the Offering, (iii) 285,000
shares reserved for possible future grants of options under the Company's
1996 Stock Option Plan, (iv) shares issuable upon the exercise of certain
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, including warrants that were issued
to a party that assisted the Company in connection with the Bridge
Financing. The aggregate number of shares issuable upon exercise of the
Bridge Warrants will be determined by dividing (x) $1,195,000 by (y) the
initial public offering price per share of Common stock in the Offering, and
the exercise price per share will equal 10% of such initial public offering

price. Assuming an initial public offering price per share of Common Stock
of $7.00 (the midpoint of the range of such initial public offering price
stated on the cover page hereof), the aggregate number of shares issuable
upon exercise of the Bridge Warrants would be 170,715 and the exercise price
per share would be $0.70. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Bridge Financing.'

(2) Does not include (i) 3,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in the Offering, (ii) 300,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and (iii) warrants
to purchase 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. The warrants issuable upon exercise of the
Representative's Warrants are the same as the Warrants offered hereby,
except that they are exercisable at a price of $ per share of Common
Stock (165% of the exercise price of the Warrants offered hereby).

<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462
Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
Selling, general and
administrative expense...... 595,004 1,723,929 1,634,164 814,046 816,300
Research and development
expenses,
net......................... 30,023 291,970 357,117 118,949 151,499
--------- ----------- ----------- --------- ---------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)
Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
--------- ----------- ----------- --------- ---------
Net loss...................... (621,852) (1,977,628) (1,683,064) (749,130) (949,157)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)................ $(339,398) $ 16,567,828
Total assets.................. 688,705 17,595,931
Total liabilities............. 980,958 595,689
Stockholders' equity (net
capital deficiency)......... (292,253) 17,000,242
</TABLE>

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(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 Securities offered hereby at
an assumed initial public offering price of $7.00 per share of Common Stock
(the midpoint of the range of such initial public offering price stated on
the cover page hereof) and $0.10 per Warrant.

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 June 30, 1996, had an
accumulated deficit of $6.20 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.

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

<PAGE>

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 has not yet commenced sales of CompuNet 2000. Although the
Company expects to commence such sales by the end of 1996, there can be
no assurance that the Company will be able to commence such 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 Offering are applied.

o Immediately following completion of the Offering, 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 will continue to own.

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

<PAGE>

o Purchasers of Common Stock in the Offering will experience an immediate
and substantial dilution in the net tangible book value of the shares of
Common Stock purchased by them from the initial public offering price.

o Prior to the Offering, there has been no public market for the Common
Stock or the 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 Securities.

o The price and liquidity of the Securities may be significantly affected
by the degree, if any, of the Representative's participation in the
market, if one develops, for the Securities.

o There can be no assurance that the market value of the Warrants will
equal or exceed the initial public offering price or that it will ever be
profitable for holders of the Warrants to exercise their Warrants.

o The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock
issuable upon exercise of the Warrants and such shares have been
registered, qualified or deemed to be exempt under the securities or
'blue sky' laws of the state of residence of the exercising holder of the
Warrants. Although the Company has undertaken to use its reasonable
efforts to have all of the shares of Common Stock issuable upon exercise
of the Warrants registered or qualified on or before the exercise date
and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to
do so.

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 Securities 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 Securities. 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 June 30, 1996,
had an accumulated deficit of $6.20 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 $208,000 in the first six
months of 1996). The Company expects that it will commence initial sales of
CompuNet 2000 by the end of 1996 and 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 CompuNet 2000' and '--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 demands, and
frequent new product introductions and enhancements. As a result, the Company's
ability to

<PAGE>

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, it is possible that fees and/or taxes
will be imposed on use of the Internet that would reduce, or completely
eliminate, this price differential. 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 has not yet commenced sales of CompuNet 2000 and
expects that the sales to Gemini contemplated by the distribution agreement will
be the first sales of CompuNet 2000 that the Company will make. 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. As described above, the Company
expects to commence sales of CompuNet 2000 by the end of 1996. However, the
Company's ability to commence sales within the expected time frame 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 Gemini to
purchase in 1996 pursuant to the distribution agreement described above. As

<PAGE>

described under 'Business--Manufacturing,' the Company intends to have CompuNet
2000 units initially produced by retrofitting CompuPhone 2000 units that the
Company has in inventory. The possibility that the Company may experience
production delays or unforseen technical problems is heightened by the fact that
the Company has not previously had experience with such type of retrofitting.
Consequently, there can be no assurance that the Company will be able to
commence sales of CompuNet 2000 within the expected time frame or at all. The
failure by the Company to commence 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.

<PAGE>

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. In 1995, one customer

accounted for approximately 18% of the Company's net sales. In the first half of
1996, three customers accounted for approximately 34% of net sales (one customer
11%, one 11% and one 12%). To the extent 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

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 to manufacture CompuPhone 2000 and
expects to use the same manufacturer to manufacture CompuNet 2000 (except that
initially the Company intends to use a contract manufacturer in the United
States to manufacture the product by retrofitting existing units of CompuPhone
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

<PAGE>

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. Furthe rmore, 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 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 of the Company's products accounted for 23% of net
sales in 1995 and 35% of net sales in the first half 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>

HIGHLY COMPETITIVE MARKETS

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 a product outside the United States 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.

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,

<PAGE>

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 two
quarters 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%); first quarter of 1996 (the inflation rate was 2.80%, not
annualized, while the NIS appreciated by 0.76%); and second quarter of 1996 (the
inflation rate was 7.03%, not annualized, while the NIS was devalued by 2.17%).
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.

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 PROCEEDS

The Company intends to use approximately $1.2 million of the net proceeds
of the Offering to repay outstanding indebtedness and the balance for the other
purposes described under 'Use of Proceeds.' Although the Company's current
estimate as to the amount of such net proceeds that will be used for each such
other purpose is set forth under 'Use of Proceeds,' the Company reserves the
right to change the amount of such net proceeds that will be used for any
purpose to the extent that management determines that such change is advisable.
Consequently, management of the Company will have broad discretion in
determining the manner in which the net proceeds of the Offering are applied.

CONSIDERATIONS RELATING TO THE SECURITIES

CONCENTRATED CONTROL

Immediately following completion of the Offering, 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) will beneficially own approximately 27.01% 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.'

DILUTION

Purchasers of shares of Common Stock in the Offering will experience an
immediate and substantial dilution in the net tangible book value of the shares
of Common Stock purchased by them in the Offering. Additional dilution to future
net tangible book value per share may occur upon exercise of outstanding stock
options and warrants (including the Warrants and the Representative's Warrants)
and may occur, in addition, if the Company issues additional equity securities
in the future. The current stockholders of the Company, including the Company's
officers and directors, acquired their shares of Common Stock for nominal
consideration or for consideration substantially less than the public offering
price of the shares of Common Stock offered hereby. As a result, new investors
will bear substantially all of the risks inherent in an investment in the
Company. See 'Dilution.'

<PAGE>

NO ASSURANCE OF PUBLIC TRADING MARKET; ARBITRARY DETERMINATION OF PUBLIC
OFFERING PRICE; POSSIBLE VOLATILITY OF COMMON STOCK AND WARRANT PRICES

Prior to the Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that an active trading market for
any of the Securities will develop or, if developed, be sustained after the

Offering. The initial public offering prices of the Securities offered hereby
and the terms of the Warrants have been arbitrarily determined by negotiations
between the Company and the Representative, and do not necessarily bear any
relationship to the Company's assets, book value, results of operations or any
other generally accepted criteria of value. See 'Underwriting.' The trading
price of the 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 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 Securities.

The Company and certain holders of Common Stock and/or other securities of
the Company have entered into lock-up agreements as described below. See 'Shares
Eligible For Future Sale' and 'Underwriting.'

Company. The Company has agreed that, during the period commencing on the
date of this Prospectus 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 this
Prospectus contemplates will be granted prior to completion of the Offering or
that are hereafter granted in accordance with the preceding clause.

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 the
Effective Date. (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). The Two-Percent Holders that have entered into the foregoing
agreement hold in the aggregate 1,782,561 shares of Common Stock and options to
purchase 751,973 shares of Common Stock (including the options that this
Prospectus contemplates will be issued prior to completion of the Offering). As
used herein, a 'Two-Percent Holder' means any person or entity that immediately
prior to the Offering owns a number of shares of Common Stock (calculated on a
pro forma basis giving effect to the exercise of all outstanding options and
options that this Prospectus contemplates will be granted prior to completion of
the Offering) that constitutes 2% or more of the outstanding Common Stock
immediately prior to the Offering (calculated on a pro forma basis as
aforesaid).

<PAGE>

Other Holders of Common Stock or Options. The Company has agreed to cause
each holder of Common Stock and/or options that is not a Two-Percent Holder to
agree that, until the 270th day following the Effective Date, 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. Such holders hold in the
aggregate 1,147,617 shares of Common Stock and options to purchase 199,549
shares of Common Stock (including the options that this Prospectus contemplates
will be issued prior to completion of the Offering).

Holders of Bridge Warrants. Prior to completion of the Offering the
Company intends to file a Registration Statement registering the resale of the
shares issuable upon exercise of the Bridge Warrants. However, each holder of
Bridge Warrants has agreed that, during the three-month period commencing on the
Effective Date, 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.

REPRESENTATIVE'S INFLUENCE ON THE MARKET

A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such Securities through or with the
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market, if one develops, for the Securities. The
price and liquidity of the Common Stock and the Warrants may be significantly
affected by the degree, if any, of the Representative's participation in such
market. See 'Description of Securities.'

SPECULATIVE NATURE OF THE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS

The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, commencing one year after the date
of this Prospectus, holders of the Warrants may exercise their right to acquire
Common Stock and pay an exercise price of $ per share [150% of the initial
public offering price per share of Common Stock], subject to adjustment upon the
occurrence of certain dilutive events, until five years after the date of this
Prospectus, after which date any unexercised Warrants will expire and have no
further value. Moreover, following the completion of the Offering, the market
value of the Warrants is uncertain and there can be no assurance that the market
value of the Warrants will equal or exceed their initial public offering price.
There can be no assurance that the market price of the Common Stock will ever
equal or exceed the exercise price of the Warrants, and consequently, whether it
will ever be profitable for holders of the Warrants to exercise their Warrants.

Commencing 18 months after the date of this Prospectus, the Warrants are
subject to redemption at $0.01 per Warrant on 30 days' prior written notice to
the warrantholders if the average closing bid price of the Common Stock equals
or exceeds $ [250% of the initial public offering price] per share 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. If the Warrants
are redeemed, holders of the Warrants will lose their rights to exercise the
Warrants after the expiration of the 30-day notice period. Upon receipt of a
notice of redemption, holders would be required to: (i) exercise their Warrants
and pay the exercise price at a time when it may be disadvantageous for them to
do so, (ii) sell their Warrants at the then-prevailing market price, if any,
when they might otherwise wish to hold their Warrants, or (iii) accept the
redemption price which is likely to be substantially less than the market value
of the Warrants at the time of redemption. In the event that holders of the
Warrants elect not to exercise their Warrants upon notice of redemption, the
unexercised Warrants will be redeemed prior to exercise, and the holders thereof
will lose the benefit of the appreciated market price of the Warrants, if any,
and/or the difference between the market price of the underlying Common Stock as
of such date and the exercise price of such Warrants, as well as any possible
future price appreciation in the Common Stock. See 'Description of
Securities--Warrants.'

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS

The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities or 'blue sky' laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its reasonable efforts to have all of the shares of Common
Stock issuable upon exercise of the Warrants registered or qualified on or
before the exercise date and to maintain a

<PAGE>

current prospectus relating thereto until the expiration of the Warrants, there
is no assurance that it will be able to do so. The value of the Warrants may be
greatly reduced if a current prospectus covering the Common Stock issuable upon
the exercise of the Warrants is not kept effective or if such Common Stock is
not qualified or exempt from qualification in the states in which the holders of
the Warrants reside. The shares of Common Stock and the Warrants offered hereby
may only be purchased in the Offering together, on the basis of one share of
Common Stock and one Warrant, but the Warrants will be separately tradeable
immediately upon issuance. Although the Securities will not knowingly be sold to
purchasers in jurisdictions in which the Securities are not registered or
otherwise qualified for sale, investors residing in such jurisdictions may
purchase the Warrants in the secondary market or investors may move to a
jurisdiction in which the shares underlying the Warrants are not registered or
qualified during the period that the Warrants are exercisable. In such event,
the Company will be unable to issue shares to those persons desiring to exercise
their Warrants unless and until the shares are qualified for sale in
jurisdictions in which such purchasers reside, or an exemption from such
qualification exists in such jurisdictions, and holders of the Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See 'Description of
Securities--Warrants.'

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

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 69% of the Company's consolidated net
capital deficiency as of June 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. See 'Conditions 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 net proceeds to the Company from the Offering are estimated to be
approximately $17,794,000, based upon an assumed initial public offering price
per share of Common Stock of $7.00 (the midpoint of the range of such initial
public offering price stated on the cover page hereof) and $0.10 per Warrant and
after deduction of underwriting discounts and commissions and estimated offering
expenses. The Company expects to use such net proceeds for the purposes set
forth in the table below. Pending use of the net proceeds for such purposes, the
Company intends to invest the net proceeds in high-grade, short term interest
bearing investments.

<TABLE>
<CAPTION>
APPROXIMATE AMOUNT OF NET
PROCEEDS PROJECTED TO BE USED(1)
--------------------------------

<S> <C>
Repayment of promissory notes issued in connection
with the Bridge Financing(2).................... $1,200,000

Advertising and marketing (including expanding the
Company's internal marketing and sales force)... 3,325,000

Research and development (including hiring
additional research and development
personnel)...................................... 3,000,000

Acquisition of equipment and acquisition of new
product tooling
(tooling that the Company provides to its

contract manufacturers to
enable them to manufacture the Company's
products)....................................... 1,700,000

Working capital and general corporate purposes.... 8,569,000
</TABLE>

- ------------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be
used for such purpose. However, the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent
that management determines that such change is advisable. Consequently,
management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied.

(2) The Company intends to use approximately $1.2 million of the net proceeds to
pay the outstanding principal of, and accrued interest on, certain
promissory notes (the 'Bridge Notes') issued by the Company during the
period April 30, 1996, through July 30, 1996 in connection with the Bridge
Financing. Such notes accrue interest at the rate of 10% per annum and are
due and payable, together with accrued interest, 10 days after completion of
the Offering. The Company used the net proceeds of such bridge financing
($1.06 million) to fund working capital requirements, general corporate
purposes and the Company's financing plans. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Bridge
Financing.'

<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 June 30, 1996: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
giving effect to the transactions related to the Bridge Financing (described
under 'Management's Discussion and Analysis of Financial Condition and Results
of Operations--Bridge Financing') that were completed subsequent to June 30,
1996; and (iii) such pro forma capitalization as adjusted to give effect to (x)
the sale in the Offering of 3,000,000 shares of Common Stock and 3,000,000
Warrants at an initial public offering price of $7.00 per share (the midpoint of

the range of such initial public offering price stated on the cover page hereof)
and $0.10 per Warrant 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 'Use of Proceeds.'

<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------------- -------------- ------------
<S> <C> <C> <C>
Short-term debt.............................. $ 385,269(1) $ 797,019(1) $ 51,269
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000
shares authorized; 2,930,178 shares
issued and outstanding and issued and
outstanding on a pro forma basis(2);
5,930,178 shares issued and outstanding,
pro forma as adjusted(2)(3)............. 29,812 29,812 59,812
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding............................. -- -- --
Additional paid in capital................. 5,852,471 6,069,652 23,833,652
Treasury stock............................. (165,000) (165,000) (165,000)
Accumulated deficit........................ (6,149,765) (6,149,765) (6,651,270)(1)
Cumulative translation adjustment.......... 140,229 140,229 140,229
-------------- -------------- ------------
Total stockholders' equity (net capital
deficiency)........................... (292,253) (75,072)(1) 17,217,423(1)
-------------- -------------- ------------
Total capitalization.................... 93,016 721,947 17,268,692
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>

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

(1) Actual short-term debt includes the proceeds from the Bridge Financing
received through June 30, 1996 less the amount of such proceeds allocated to
the Bridge Warrants. Pro forma short-term debt includes the total proceeds
from the Bridge Financing of $1,175,000 (including proceeds in the amount of
approximately $675,000 received after June 30, 1996) 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 Offering prior to the scheduled maturity of such notes
(which is December 15, 1996), the unamortized portion of the loan discount
and deferred financing costs at such time will be 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 June 30, 1996. Both pro forma stockholders' equity and pro forma
as adjusted stockholders' equity include the portion of the net proceeds of
the Bridge Financing allocated to the Bridge

(Footnotes continued on next page)

<PAGE>

(Footnotes continued from previous page)

Warrants. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Bridge Financing.'

(2) Does not include (i) 403,189 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 12,756 of which provide for an exercise
price of approximately $2.74 per share), (ii) 548,333 shares issuable upon
exercise of options to be granted prior to completion of the Offering (as
described under 'Management--Options to be Granted Prior to the Offering'),
which options will have an exercise price equal to the the initial public
offering price per share of Common stock in the Offering, (iii) 285,000
shares reserved for possible future grants of options under the Company's
1996 Stock Option Plan and (iv) shares issuable upon the exercise of the
Bridge Warrants. The aggregate number of shares issuable upon exercise of
the Bridge Warrants will be determined by dividing (x) $1,195,000 by (y) the
initial public offering price per share of Common stock in the Offering, and
the exercise price per share will equal 10% of such initial public offering
price. Assuming an initial public offering price per share of Common Stock
of $7.00 (the midpoint of the range of such initial public offering price
stated on the cover page hereof), the aggregate number of shares issuable
upon exercise of the Bridge Warrants would be 170,715 and the exercise price
per share would be $0.70. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Bridge Financing.'

(3) Does not include (i) 3,000,000 shares of Common Stock issuable upon exercise
of the Warrants sold in the Offering, (ii) 300,000 shares of Common Stock
issuable upon exercise of the Representative's Warrants and (iii) warrants
to purchase 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants.

22
<PAGE>
DILUTION

The negative net tangible book value of the Company at June 30, 1996, was

$(334,000), or $(0.11) per share of Common Stock. After giving effect to the
sale by the Company of the Securities offered hereby, deduction of the
underwriting discounts and commissions and estimated offering expenses, and the
application of a portion of the net proceeds to repay the Bridge Notes (as
described under 'Use of Proceeds'), the net tangible book value of the Company
at June 30, 1996, on a pro forma basis would have been approximately $16,958,000
or $2.86 per share. This represents an immediate increase in net tangible book
value per share of $2.97 to the Company's existing stockholders and an immediate
dilution of $4.14 per share to new stockholders purchasing shares of Common
Stock in the Offering. The foregoing calculation and the table below assumes an
initial public offering price per share of Common Stock of $7.00 (the midpoint
of the range of such initial public offering price stated on the cover page
hereof) and per Warrant of $0.10. The following table illustrates this dilution
on a per share basis:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per
share...................................... $ 7.00
Negative net tangible book value per share
before the
Offering(1)............................. (0.11)
Increase per share attributable to new
investors............................... 2.97
Pro forma net tangible book value per share
after the Offering(2)...................... 2.86(4)
------
Dilution per share to new investors(3)....... $ 4.14(4)(5)
------
------
</TABLE>

- ------------------
(1) Represents (i) tangible asets less liabilities divided by (ii) the number of
shares of Common Stock issued and outstanding.

(2) Pro forma net tangible book value after the Offering gives effect to the
sale by the Company of the Securities offered hereby, deduction of the
underwriting discounts and commissions and estimated offering expenses, and
the application of a portion of the net proceeds to repay the Bridge Notes
(as described under 'Use of Proceeds').

(3) Dilution is determined by subtracting pro forma net tangible book value
after the Offering from the initial public offering price per share.

(4) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the Offering would be $3.10
and the dilution per share to new investors would be $3.90. See
'Underwriting.'

(5) The exercise prices per share provided for by the Bridge Warrants and by

certain outstanding options are substantially lower than the assumed initial
public offering price per share. See 'Description of Securities-- Bridge
Warrants' and 'Description of Securities--Options.' Additional dilution to
future net tangible book value per share may occur upon exercise of such
warrants and options.

<PAGE>

The following table sets forth on a pro forma basis giving effect to the
sale of the Securities offered hereby: (i) the number of shares of Common Stock
purchased from the Company by its existing stockholders, (ii) the number of
shares of Common Stock purchased by investors in the Offering, (iii) the total
consideration paid to the Company by its existing stockholders and by such
investors and (iv) the average price paid per share paid by its existing
stockholders and such investors. The information in the table assumes an initial
public offering price per share of Common Stock of $7.00 (the midpoint of the
range of such initial public offering price stated on the cover page hereof) and
per Warrant of $0.10.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.... 2,930,178 49.4% $ 4,694,248 18.1%(2) $ 1.60
New Investors............ 3,000,000(1) 50.6(1) $21,300,000(1)(2) 81.9%(2) $ 7.10
--------- ------- ----------- -------
Total............... 5,930,178 100.0% $25,994,248 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>

- ------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares purchased by new investors would be 3,450,000 (or 49.5% of the
total number of shares purchased by existing stockholders and new investors)
and the total consideration paid by new investors would be 24,495,000 (or
83.9% of the total consideration paid for the Common Stock by existing
stockholders and new investors).

(2) Allocates the total gross proceeds from the Offering to the Common Stock
sold in the Offering.

<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 June 30, 1996, and the income statement data presented
below for the six month periods ended June 30, 1996 and June 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462
Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
Selling, general and
administrative expenses..... 595,004 1,723,929 1,634,164 814,046 816,300
Research and development
expenses, net............... 30,023 291,970 357,117 118,949 151,499
--------- ----------- ----------- --------- ---------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)
Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
--------- ----------- ----------- --------- ---------
Net loss...................... (621,852) (1,977,628) (1,683,064) (749,130) (949,157)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- -------- ----------

<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)....... $ 780,018 $179,494 $ (339,398)
Total assets....................... 1,312,029 829,546 688,705
Total liabilities.................. 400,058 531,322 980,958
Stockholders' equity (net capital
deficiency)...................... 911,971 298,224 (292,253)
</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

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 June 30, 1996, the
Company incurred aggregate R&D expenses (net of contributions by the Government
of Israel Chief Scientist) and SG&A expenses of $5.60 million ($0.83 million of
R&D and $4.77 million of SG&A).

At the same time, during the period January 1, 1993 through June 30, 1996,
the Company had only limited revenues ($1.18 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 has not yet commenced sales of CompuNet 2000 or WPS-1000 and (iv) the
Company's sales and promotional efforts relating to CompuPhone 2000 and its
ability to bring its other two products to market have been limited due to
financial constraints.

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 June 30, 1996, had an accumulated deficit of $6.20 million.
Such conditions raise doubt about the Company's ability to continue as a going

concern. The report of independent accountants on the Company's financial
statements at December 31, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995, 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 about the
Company's ability to do so. The Company's financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

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 expects to commence
sales of CompuNet 2000 by the end of 1996 and WPS-1000 in the first quarter of
1997. Second, the Company intends to use a portion of the net proceeds of the
Offering 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 commencing sales of CompuNet 2000 and WPS-1000 within
the contemplated time frames 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 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.

<PAGE>

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995

Net Sales. The Company sold 2,614 CompuPhone 2000 units during the first
six months of 1996 compared with 5,285 units during the first six months of
1995. Due to financial constraints, promotional activities relating to
CompuPhone 2000 were reduced in the first half of 1996 compared with the first
half of 1995. Examples of promotional means that were used in 1995 but were
discontinued, or substantially curtailed, in 1996 include (i) listing the
product in a variety of catalogues published by mail order vendors and (ii)
using independent representatives to market the product. Furthermore, the

initial introduction of CompuPhone 2000 in early 1995 generated press coverage
typically associated with a new product launch. This form of free (or low cost)
publicity was no longer available to the Company in 1996 as the product matured,
and the Company was unable to generate comparable press coverage through paid
advertising due to financial constraints. The Company believes that this
reduction in the promotional activities related to CompuPhone 2000 contributed
to the decrease in the number of units of CompuPhone 2000 sold in the first half
of 1996 compared with the first half of 1995. However, there can be no assurance
that this decrease does not reflect lack of market acceptance of the product or
that the allocation of significant additional resources to sales and promotional
efforts will result in increased sales.

CompuPhone 2000 units were sold at an average sales price of approximately
$77.00 per unit during the first six months of 1996 compared with an average
sales price of approximately $69.00 per unit during the first six months of
1995. This increase in average sales price primarily reflected the fact that the
Company made fewer promotional sales in the first half of 1996 than in the first
half of 1995.

Net sales in the first six months of 1996 were $208,000, representing a
decrease of 41.4% from net sales of $355,000 in the first six months of 1995.
This decrease reflected the decrease in unit sales of CompuPhone 2000 discussed
above.

Gross Profit. Gross profit was 45.8% of net sales in the first six months
of 1996 and 44.2% in the first six months of 1995. The Company believes that its
historical gross margins are not indicative of future gross margins for several
reasons, including the following. First, the Company's historical gross margins
do not reflect any sales of CompuNet 2000 or WPS-1000, products that the Company
expects to commence selling as described above. Second, the Company does not
have any long-term, fixed price agreements with the contract manufacturers that
manufacture (or are expected to manufacture) its products and, accordingly, its
future manufacturing costs are uncertain. Third, the prices that the Company
will be able to obtain for its products in the future will depend on future
market conditions, which cannot currently be predicted. Although the Company
cannot at present predict its gross profit margin for future periods, such gross
profit margin may be well below the Company's gross profit margin in the first
six months of 1996. See '--Certain Information Concerning Distribution Agreement
With Gemini,' for certain information concerning the gross profit margin
anticipated from sales of CompuNet 2000 expected to be made to Gemini in 1996.

SG&A. The Company had fewer employees in the first half of 1996 than in the
first half of 1995, reflecting staff reductions necessitated due to the
Company's increasing deficit. However, the costs savings associated with such
staff reductions were offset by compensation increases to remaining employees.
As a result, there was no material change in SG&A in the first half of 1996
compared with the first half of 1995.

R&D, Net. R&D expenses increased to $151,000 in the first six months of
1996 from $119,000 in the first six months of 1995. This increase primarily
reflected increased research and development activities relating to CompuNet
2000 and WPS-1000, as well as compensation increases to certain employees
involved in research and development.

Interest Income (expense). In the first six months of 1996, the Company had
interest expense of $77,000 compared with interest income of $27,000 in the
first six months of 1995. The interest expense in 1996 primarily reflected (i)
interest on the Bridge Notes and the amortization of loan discount and deferred
financing costs relating to such notes and (ii) interest on bank overdrafts. See
'--Bridge Financing.'

<PAGE>

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 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.'

<PAGE>

Each of the Israeli Subsidiaries will be 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 $6.20 million as of June 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 half of 1996. The amount of cash used
by the Company for operating activities was $0.60 million, $1.40 million, $1.72
million and $0.53 million during 1993, 1994, 1995 and the first six months of
1996, respectively. The Company has 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.'

The Company expects that following the Offering its principal cash
requirements will be to fund operating activities and working capital. The
Company expects that the cash required for such purposes will increase
significantly following the Offering primarily as a result of the Company's
plans to (i) commence production and sales of CompuNet 2000 and 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 Offering. The Company does not have any bank or other lines of
credit available to it at present.

The Company estimates that the net proceeds of the Offering and cash
generated from operations will be sufficient to fund its cash requirements for
at least 12 months following completion of the Offering, 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 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.

<PAGE>

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 are due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the Offering or (ii) December 15, 1996. The Company plans to repay
the Bridge Notes from the net proceeds of the Offering. See 'Use of Proceeds.'

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 a number of shares of Common Stock determined by dividing (i) the
aggregate principal amount of the Bridge Note issued to such recipient by (ii)
the initial public offering price per share of Common Stock in the Offering. 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. The aggregate
number of shares issuable upon exercise of the Other Bridge Warrants that remain
outstanding will be determined by dividing (i) $20,000 by (ii) the initial
public offering price per share of Common Stock in the Offering. The Bridge
Warrants provide for an exercise price per share equal to 10% of the initial
public offering price per share of Common Stock in the Offering.

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 (the midpoint of the range of the initial public
offering stated on the cover page hereof) 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 Offering 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). Such loan discount and
deferred financing costs are being amortized over the estimated terms of the
Bridge Notes, and for the six months ended June 30, 1996, the Company recognized
$33,000 of non-cash interest expense. Upon repayment of the Bridge Notes from
the net proceeds of the Offering, the unamortized portion of the loan discount
and deferred financing costs at such time will be recognized as an extraordinary
loss. As of August 31, 1996, such unamortized portion of the loan discount and
the deferred financing costs amounted to $337,000.

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. 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). The term of this
agreement commences on June 1, 1996 and extends until the end of 1997 (subject
to extension by mutual agreement).

<PAGE>

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 estimates that the gross profit margin from sales to Gemini in
1996 will be approximately 23% with respect to units that are produced through
retrofitting existing units of CompuPhone 2000 and approximately 38% with
respect to units that are originally produced as CompuNet 2000 units. (The
Company estimates that approximately 5,000 of the units to be sold to Gemini in
1996 will be produced through such retrofitting as described under
'Business--Manufacturing.') There can be no assurance, however, that the gross
profit margin from such sales will not be significantly lower. Factors that may
cause such gross profit margin to be lower include, among others, (i)
unanticipated manufacturing problems or delays, (ii) the failure of a contract
manufacturer used by the Company to fulfill its commitments or (iii) the need
for design changes due to the discovery of heretofore undetected errors. See
'Risk Factors--Considerations Relating to the Business of the Company--Certain
General Risks Related to Products' and 'Risk Factors--Considerations Relating to
the Business of the Company--Dependence on Contract Manufacturers.'

The Company cannot at present predict the gross profit margin that will
result from any sales to Gemini subsequent to 1996. Such gross profit margin
will be affected by the Company's future manufacturing costs, which depend on
various factors that are currently not known. Such factors include, among
others, future market conditions relating to prices charged by contract
manufacturers, future costs for components, and the volume of product that the
Company will have manufactured in the future. Such gross profit margin will also

be affected by the price that the Company will be able to obtain in respect of
future sales to Gemini. As described above, the distribution agreement with
Gemini provides that Gemini may terminate the agreement if any competitive
product is offered in the market place and the Company fails to keep Gemini
competitive in price and quality. Furthermore, the distribution agreement
contemplates that the Company will exercise its best efforts to reduce the price
at which it sells CompuNet 2000 to Gemini. Although the Company cannot at
present predict the gross profit margin that will result from any sales to
Gemini subsequent to 1996, such gross profit margin may be well below the
Company's gross profit margin in the first six months of 1996.

CERTAIN INFORMATION CONCERNING INTERNATIONAL SALES

<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

<PAGE>

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 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.

STRATEGY

The Company's objective is to become a leading developer and vendor of a
wide range of products for the Internet Telephony and computer/telephone
integration markets. To achieve this objective, the Company is pursuing a
strategy that involves the following key elements:

Continue to Enhance Existing Products. The Company intends to devote
significant research and development resources in order to continue to
develop enhancements to its existing products and extensions of these
products. The Company's principal focus is on enhancements and extensions
that will provide its existing products with additional functionality and
expand the potential end user market for these products.

Leverage Existing Technology Base to Develop Additional Products. The
Company also intends to devote significant research and development
resources in order to develop new products for its target markets. The
Company believes that its existing technology base and the substantial
experience gained by the Company's product development team in connection
with developing its existing products will provide the Company with a
significant advantage in its efforts to develop new products.

Establish Strategic Alliances. While the Company relies primarily on
its internal product development efforts, it may determine from time to
time that the acquisition or licensing of certain technology or components
is more economically feasible than internal development. Accordingly, the
Company intends to explore the possibility of establishing strategic
alliances with companies that can provide the Company with technology,
subsystems or complementary products which can be integrated into or
offered with the Company's products. For example, the Company has recently
entered into an agreement with VocalTec Ltd. that grants the Company the
right to bundle an OEM (original equipment manufacturer) version of
VocalTec's Internet Telephony enabling software with the Company's CompuNet
2000 product. See '--End Users, Distribution Sales and Marketing.'

Increase Marketing. The Company currently markets products directly
and through independent representatives and distributors. However, the
Company's marketing efforts to date have been limited due to financial
constraints. The Company intends to increase its marketing capability by
expanding the Company's internal sales 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, such as computer manufacturers,
pursuant to which OEMs will incorporate the Company's products into their

finished hardware products.

Leverage Third-Party Manufacturing Expertise. The Company currently
outsources substantially all of its manufacturing 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). The Company believes that outsourcing the
manufacturing function enables the Company to gain access to advanced
production technologies and reduces the Company's capital requirements.
Outsourcing also allows the Company to focus more of its resources on its
core competencies--product design and development and marketing.

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.

<PAGE>

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 expects to commence
sales of this product by the end of 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.

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);

<PAGE>

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. (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

<PAGE>

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 end user markets for the Company's CompuPhone 2000 product include home
PC users (both for personal and business functions) and small offices. In
addition, such end user markets include large corporations that can benefit from
using CompuPhone 2000 in connection with selected activities that involve
high-volume telephone contacts and simultaneous computer use, but do not require
a multi-line system. These may include activities such as telemarketing, order
processing, customer service and support, market research, and emergency
dispatching. The corporate customers that have purchased CompuPhone 2000 include
Lucent Technologies Inc.

<PAGE>

and AT&T Atlantic, which together have purchased an aggregate of approximately
600 units of CompuPhone 2000 for use in telemarketing operations.

The Company believes that the potential end user markets for CompuNet 2000
and WPS-1000 include home PC users (both for personal and business functions),
small offices and large corporations. However, sales of these products has not
yet commenced and, consequently, there is no 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.

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 CompuPhone 2000 product
is presently carried by several leading United States retailers of PC
peripherals and is also presently advertised in a number of catalogues
distributed by mail order vendors.

The Company's objective is to expand its distribution capability, which to
date been limited due to financial constraints. 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 plans to commence sales of CompuNet 2000 by the end of 1996. In
furtherance of such plan, the Company has recently 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). 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

<PAGE>

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 65% of the Company's net sales in 1995 and the first six 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 1995,
Neostar Retail Group Inc. (the parent of the Software Etc. Stores, Inc. and
Babbage's, Inc. retail chains) accounted for approximately 18% of net sales. In
the first six months of 1996, Staples, Inc., Lucent Technologies Inc., and
Future Shop, Inc. accounted for approximately 12%, 11%, and 11% of net sales,
respectively. Except for the customers identified above, no single customer
accounted for 10% or more of the Company's net sales in 1995 or the first six
months of 1996.

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. However, to date the Company's promotional
efforts have been limited due to financial constraints. Following the Offering,
the Company intends to significantly increase it promotional efforts through
multiple channels. These 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. In
addition, the Company plans to increase its sales and marketing staff. Based
upon the Company's current marketing plans, the Company has budgeted for the one
year period following completion of the Offering approximately $2.2 million for
promotional efforts and increasing its sales and marketing staff. However, the
actual amount that the Company spends for such purposes may differ significantly
from the amount currently budgeted due to various factors, including the need to
respond to changing market and business conditions, unanticipated developments,
and changes in the Company's business plan.

MANUFACTURING

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). The Company believes that
outsourcing the manufacturing function provides the Company with several
potential advantages, including (i) enabling the Company to gain access to
advanced production technologies, (ii) reducing the Company's capital
requirements and (iii) allowing the Company to focus more of its resources on
its core competencies--product design and development and marketing. However,
there are also significant risks associated with such outsourcing. See 'Risk
Factors--Dependence on Contract Manufacturers.'

The Company currently employs Monterey International Corp. ('Monterey'), a
contract manufacturer with facilities in Taiwan, to manufacture CompuPhone 2000.

The Company expects that it will also use Monterey to manufacture CompuNet 2000
(except as described in the following paragraph). An independent testing company
retained by the Company performs final product testing prior to the shipping of
the products by Monterey.

As described under '--End Users, Distribution, Sales and
Marketing--Distribution Channels,' the Company has entered into a distribution
agreement with Gemini that contemplates that the Company will sell 10,000 units
of CompuNet 2000 in 1996 (during the period August 15, 1996 through December 31,
1996). In order to enable the Company to meet this schedule, the Company intends
to have CompuNet 2000 units initially produced by retrofitting CompuPhone 2000
units that the Company has in inventory. The Company expects to use a contract
manufacturer in the United States for such retrofitting process.

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.'

<PAGE>

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 '--Strategy,'
'--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 June 30, 1996, was comprised of six hardware and software
engineers (including one independent consultant working for the Company) and
support staff. The Company expects that it will use a portion of the net
proceeds of the Offering to hire additional research and development personnel
and to purchase tools and equipment required in connection with its research and
development activities. See 'Use of Proceeds.'

COMPETITION

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.

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

<PAGE>

(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 June 30, 1996, the Company had 15 employees, including five in research
and development, five in finance and administration and five in sales and
marketing. Approximately 10 of such employees are based in Israel. The Company,
from time to time, retains independent consultants with specialized engineering
or scientific expertise to work as part of its research and development team. At
June 30, 1996, one consultant was working for the Company. The Company considers
its relationship with its employees to be satisfactory. The Company expects that
it will use a portion of the net proceeds of the Offering to hire additional
sales and marketing personnel and research and development personnel. See 'Use
of Proceeds,' '--End Users, Distribution, Sales and Marketing,' and '--Research
and Development.'

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 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, (iii) approximately 200 square feet of space
in Dallas, Texas, which is used primarily for a sales office and (iv)
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

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

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

NAME AGE POSITIONS
- ---------------------------------------- --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
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(1)........................ 40 Executive Vice President; Chief Financial
Officer; Director of Research and Development
and Director
Bernard S. Appel........................ 64 Vice Chairman of the Board and Director
Nicole R. Kubin(1)(2)................... 42 Director
Morton L. Landowne(1)................... 48 Director
Noah Perlman(1)......................... 45 Director
Morris J. Smith......................... 39 Director
William Spier(1)........................ 61 Director
KEY EMPLOYEES:
Edward Y. Abramson...................... 49 Director of Communications
Betsy Mehlman........................... 37 Senior Vice President for Sales and Marketing

</TABLE>

- ------------------
(1) Mr. Kahn, Ms. Kubin, Mr. Landowne, Mr. Perlman and Mr. Spier are not
currently directors, but will become directors following completion of the
Offering. The Company anticipates that one additional person will become a
director following completion of the Offering, but has not yet identified
such person.

(2) As described under 'Underwriting,' the Company has agreed that, for a period
of three years after the date of this Prospectus, 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.

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 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. Mr. Kahn will become a director of the Company following
completion of the Offering. From 1982 to 1992, Mr. Kahn was Chief Financial
Officer of

<PAGE>

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.

Nicole R. Kubin will become a director of the Company following completion
of the Offering. 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 will become a director of the Company following
completion of the Offering. 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 will become a director of the Company following completion of
the Offering. 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 will become a director of the Company following completion of
the Offering. 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.

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

Betsy Mehlman has been Senior Vice President for Sales and Marketing for
the Company since March 1996. From 1993 to 1995, Ms. Mehlman was Director of
International Marketing for the Company. From 1989 to 1991 Ms. Mehlman was
Director of International Business Development for Crown Products, Inc., a
manufacturer of plastics processing machinery.

Upon completion of the Offering, the number of directors comprising the
Board of Directors will be increased from four to ten.

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 within
90 days of completion of the Offering.

Upon completion of the Offering, the Board of Directors will appoint an
audit committee. The responsibilities of the audit committee will include
reviewing the scope and results of the audits conducted by the Company's
independent accountants. The Company also intends to establish a compensation
committee. The responsibilities of the compensation committee will include
establishing and reviewing employee compensation policies and related matters.

<PAGE>

COMPENSATION OF DIRECTORS

Directors do not currently receive any compensation for attendance at Board
of Directors meetings, other than reimbursement of out-of-pocket expenses. After
completion of the Offering, directors who are not employees of the Company will
receive $500 for attendance (in person or by telephone) at meetings of the Board
and all directors will be reimbursed for out-of-pocket expenses incurred in
connection with attendance at Board meetings.

The Company has heretofore granted to directors of the Company options to
purchase Common Stock as follows: 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 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 were granted in 1994 and are currently exercisable or have
been exercised. As described under '--Options to be Granted Prior to the
Offering,' the Company intends to grant additional options prior to the
completion of the Offering. Such options will include options to purchase an
aggregate of 405,001 shares that will be granted to current directors of the
Company (including directors who are executive officers) and to the persons who
will become directors of the Company upon completion of the Offering. All such
additional options will have an exercise price per share equal to the initial
public offering price per share of Common Stock in the Offering and will vest in
two installments: (one-half in November 1997 and one-half in February 1999).

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 (representing the midpoint of the
range of the initial public offering price stated on the cover page hereof).
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 commences upon
completion of the Offering and extends through December 31, 1999. However,
the salary and benefits described below will be 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 Offering is
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.

INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS

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.

The Company's Certificate of Incorporation and By-laws require the Company
to indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law.

The Company has not entered into indemnification agreements with any of its

directors and officers (except with Mr. Haber as described under '--Employment
Contracts'). The Company may in the future enter into separate indemnification
agreements with its directors and officers containing provisions which may in
some respects be broader than the specific indemnification provisions contained
in the Company's Certificate of Incorporation and By-laws. Such indemnification
agreements may require the Company, among other things, to indemnify such
directors and officers against certain liabilities that may arise by reason of
their status as directors and officers (other than liabilities arising from
wilful misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' liability insurance, if available on
reasonable terms.

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

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 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

<PAGE>

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 TO BE GRANTED PRIOR TO THE OFFERING

Immediately prior to completion of the Offering, the Company intends to
grant options, pursuant to the Stock Option Plan, to purchase an aggregate of
approximately 548,333 shares of Common Stock. Such options will have an exercise
price per share equal to the initial public offering price per share of Common
Stock in the Offering and will vest in two installments: (one-half in November

1997 and one-half in February 1999). Of such options to be granted, options with
respect to 405,001 shares will be granted to current directors of the Company
(including directors who are executive officers) and to persons who will become
directors upon completion of the Offering 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), Mr. Spier
(options for 15,000 shares), and an additional person (not identified as yet)
who the Company anticipates will become a director upon completion of the
Offering (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 has been receiving compensation at
the rate of $48,000 per annum in 1996. 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 has been receiving compensation at
the rate of $40,000 per annum in 1996. Carol Haber, Alan Haber's wife, serves as
a graphic artist and is receiving compensation at a rate per annum of
approximately $12,000.

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 June 30, 1996 by (i) each
executive officer of the Company, (ii) each director of the Company (including
each identified person who will become a director upon completion of the
Offering as described under 'Management--Executive Officers, Directors and Key
Employees'), (iii) all directors and executive officers of the Company as a
group (including each identified person who will become a director upon
completion of the Offering), and (iv) each

<PAGE>

person or entity known by the Company to be the beneficial owner of more than
five percent of the Common Stock.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1) PERCENTAGE OWNED(1)
NAME AND ADDRESS OF ------------------- ---------------------------------
BENEFICIAL OWNER(2) NUMBER BEFORE OFFERING AFTER OFFERING
- ------------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Alan P. Haber................. 986,972(3) 32.20% 16.27%
Barry L. Eisenberg............ 284,839(4) 9.60%(4) 4.77%(4)
Simon M. Kahn................. 40,928(5) 1.38% *
Bernard S. Appel.............. 112,689(6) 3.70% 1.86%
Nicole R. Kubin............... 3,571(7) * *
Morton L. Landowne............ 11,410(8) * *
Noah Perlman.................. 30,426(9) 1.04% *
Morris J. Smith............... (10) --(10) --(10)
William J. Spier.............. 54,669(9) 1.87% *
All directors and executive
officers as a group (9
persons).................... 1,525,504(11) 46.90% 24.40%
OTHER 5% STOCKHOLDERS:
Jack Nash
c/o Odyssey Partners
31 W. 52nd Street
New York, NY 10019.......... 160,048(9) 5.46% 2.70%
Gila Green
Ulmbergstrasse 7
8002 Zurich
Switzerland................. 190,158(9) 6.49% 3.21%
Brook Road Nominee Trust
1752 Gerritsen Avenue
Brooklyn, NY 11229.......... 163,653(12) 5.59% 2.76%
</TABLE>

- ------------------
* 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

(Footnotes continued on next page)

<PAGE>

(Footnotes continued from previous page)
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. As
described under 'Management Discussion and Analysis of Financial Condition
and Results of Operations--Bridge Financing,' the aggregate number of
shares of Common Stock issuable upon exercise of the Bridge Warrants will
be a function of the price that is established as the initial public
offering price per share of Common Stock in the Offering. The indicated
number of shares assumes an initial public offering price per share of
Common Stock of $7.00.

(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) See footnote 12 below for information concerning 163,653 shares of Common
Stock the beneficial ownership of which is disclaimed by Mr. Smith.

(11) Does not include 163,653 shares that Mr. Smith disclaims beneficial
ownership of as described in footnote 12 below.

(12) Consists of 163,653 currently outstanding shares held by the Brook Road
Nominee Trust, nominee for the Morris Smith Family Trust. 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.

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.

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 the date of this Prospectus, there were outstanding 2,930,178 shares
of Common Stock. These shares were held of record by approximately 54 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

<PAGE>

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. In the event the Company were to
elect to sell additional shares of its Common Stock following the Offering,
investors in the Offering would have no preemptive right to purchase such
additional shares. As a result, their percentage equity interest in the Company
could be diluted. 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.

WARRANTS

The following is a brief summary of certain provisions of the Warrants. For
a more complete description of the 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 to the Registration Statement of which this Prospectus is a part. See
'Additional Information.'

Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time during the four year period commencing one year
after the date of this Prospectus, one share of Common Stock at a price of
$ per share [150% of the initial public offering price per share of
Common Stock], subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any 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 one year after the date
of this Prospectus, the Warrants may be exercised at any time in whole or in
part at the applicable exercise price until expiration of the 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 Warrants are subject to adjustment upon the
occurrence of certain events, including stock 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 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 Warrant.

Redemption Provisions. Commencing 18 months after the date of this
Prospectus, the 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

<PAGE>

exceeds $ per share [250% of the initial public offering price per share
of Common Stock] (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 Warrants, such 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 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.

Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.

Warrantholder Not a Stockholder. The Warrants do not confer upon holders
thereof any voting, dividends, or other rights as stockholders of the Company.

Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the
warrantholders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price (other than
lowering the exercise price as provided in the preceding sentence) and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrantholders. No other modifications may be made to the Warrants,
without the consent of two-thirds of the warrantholders.

The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified

or deemed to be exempt under the securities or 'blue sky' laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its reasonable best efforts to have all of the shares of
Common Stock issuable upon exercise of the Warrants registered or qualified on
or before the exercise date and to maintain a current prospectus relating
thereto until the expiration of the Warrants, there can be no assurance that it
will be able to do so.

The Warrants are separately transferable immediately upon issuance.
Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, investors in such jurisdictions may purchase Warrants in the secondary
market or investors may move to jurisdictions in which the shares underlying the
Warrants are not so registered or qualified during the period that the Warrants
are exercisable. In such event, the Company would be unable to issue shares to
those persons desiring to exercise their Warrants, and holders of Warrants would
have no choice but to attempt to sell Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.

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. The aggregate number of
shares issuable upon exercise of the Bridge Warrants will be determined by
dividing (x) $1,195,000 by (y) the initial public offering price per share of
Common Stock in the Offering, and the exercise price per share will equal 10% of
such initial public offering price. Assuming an initial public offering price
per share of Common Stock of $7.00 (the midpoint of the range of such initial
public offering price stated on the cover page hereof), the aggregate number of
shares issuable upon exercise of the Bridge Warrants would be 170,715 and the
exercise price per share would be $0.70.

51
<PAGE>

REPRESENTATIVE'S WARRANTS

In connection with the Offering, the Company has agreed to sell 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
'Underwriting.'

OPTIONS

There are currently outstanding options to purchase an aggregate of 403,189
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 12,756 of which provide for an exercise price
of approximately $2.74 per share. All outstanding options are currently
exercisable or will become exercisable upon completion of the Offering. Prior to
the Offering, the Company intends to grant options to purchase an additional
548,333 shares under the Company's Stock Option Plan. Such options will provide
for an exercise price per share equal to the initial public offering price per
share of Common Stock in the Offering and will vest in two installments
(one-half in November 1997 and one-half in February 1999). The Company has also
reserved 285,000 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 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 effect prevailing market prices for the Securities. Set forth below is
certain information concerning certain shares of Common Stock that will
potentially be available for sale following the Offering.

Shares of Common Stock Sold in the Offering. The 3,000,000 shares of
Common Stock sold in the Offering will be immediately 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 will be subject to the
resale limitations of Rule 144 under the Act. For information concerning Rule
144, see '--Rule 144.'

Shares Underlying Warrants sold in the Offering. The Warrants are not
exercisable until the first anniversary date of this Prospectus. Thereafter, up
to 3,000,000 shares may be issued upon exercise of the Warrants (subject to
adjustment as described under 'Description of Securities--Warrants'). Any shares
of Common Stock acquired upon exercise of the Warrants will generally be freely
tradeable to the same extent as the shares of Common Stock sold in the Offering
(as described above).

Currently Outstanding Shares of Common Stock. There are currently
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 the date of this Prospectus.
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.

<PAGE>

Shares Underlying Options. Upon completion of the Offering, there will be
outstanding options to purchase an aggregate of 951,522 shares of Common Stock.
Of such options, 403,189 will be fully vested upon completion of the Offering
and 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.'
Shortly after the completion of the Offering, the Company plans to file a
Registration Statement on Form S-8 registering (i) the issuance by the Company
of up to 1,236,522 shares of Common Stock that may be issued upon exercise of
the stock options (representing the 951,522 shares underlying the currently
outstanding options plus 285,000 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 Bridge Warrants. As described under 'Management
Discussion and Analysis of Financial Condition and Results of Operations--Bridge
Financing,' the aggregate number of shares of Common Stock issuable upon
exercise of the Bridge Warrants will be a function of the price that is
established as the initial public offering price per share of Common Stock in
the Offering. Assuming an initial public offering price per share of Common
Stock of $7.00 (the midpoint of the range of such initial public offering price
stated on the cover page hereof), there would be an aggregate of 170,715 shares
issuable upon exercise of the Bridge Warrants. Prior to the completion of the
Offering, the Company plans to file a Registration Statement registering the
resale of the shares issuable upon exercise of the Bridge Warrants. Subject to
the lock-up agreement described in the following sentence, shares of Common
Stock issued upon exercise of Bridge Warrants will be eligible for resale in the
public market pursuant to such Registration Statement. Each holder of Bridge
Warrants has agreed that, during the three-month period commencing on the date
of this Prospectus, 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.

Shares Underlying Representative's Warrants. The Representative's Warrants
are not exercisable until the first anniversary of the date of this Prospectus.
Thereafter, up to 300,000 shares of Common Stock may be issued upon exercise of
the Representative's Warrants (subject to adjustment as described under
'Underwriting') and up to an additional 300,000 shares may be issued (subject to
adjustment as described under 'Description of Securities--Warrants') 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 (59,302 shares immediately after completion of the Offering) 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 the date of this Prospectus).
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 Offering). 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

<PAGE>

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.

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 this
Prospectus contemplates will be granted prior to completion of the Offering or
that are hereafter granted in accordance with clause (ii) immediately above.

Two-Percent Holders. Each Two-Percent Holder (as hereinafter defined) has
agreed that, until the first anniversary of the date on which the Registration
Statement (as defined under 'Available Information') is declared effective (the
'Effective Date') under the Securities Act, 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 the Effective Date, 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 the Effective Date. (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). The Two-Percent Holders that have
entered into the foregoing agreement hold in the aggregate 1,782,561 shares of
Common Stock and options to purchase 751,973 shares of Common Stock (including
the options that this Prospectus contemplates will be issued prior to completion
of the Offering). As used herein, a 'Two-Percent Holder' means any person or
entity that immediately prior to the Offering owns a number of shares of Common
Stock (calculated on a pro forma basis giving effect to the exercise of all
outstanding options and options that this Prospectus contemplates will be
granted prior to completion of the Offering) that constitutes 2% or more of the
outstanding Common Stock immediately prior to the Offering (calculated on a pro
forma basis as aforesaid).

Other Holders of Common Stock or Options. The Company has agreed to cause
each holder of Common Stock and/or options who is not a Two-Percent Holder to
agree that, until the 270th day following the Effective Date, 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. Such holders hold in the
aggregate 1,147,617 shares of Common Stock and options to purchase 199,549
shares of Common Stock (including the options that this Propectus contemplates
will be issued prior to completion of the Offering).

Holders of Bridge Warrants. For information concerning certain lock-up
agreements applicable to holders of Bridge Warrants, see '--General--Shares
Underlying Bridge Warrants.'

<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.

<PAGE>

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.

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,

<PAGE>

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.

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 27% of the Company's consolidated net
assets as of December 31, 1995, and the net capital deficiency of the Israeli
Subsidiaries accounted for approximately 71% of the Company's consolidated net
capital deficiency as of June 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.

<PAGE>

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 two quarters 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%); first quarter of
1996 (the inflation rate was 2.76%, not annualized, while the NIS appreciated by
0.77%); and second quarter of 1996 (the inflation rate was 4.14%, not
annualized, while the NIS was devalued by 2.87%). 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 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.

<PAGE>

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.

UNDERWRITING

The Underwriters named below (the 'Underwriters') have agreed, subject to
the terms and conditions of the Underwriting Agreement between the Company and
National Securities Corporation, as the Representative of the several
Underwriters (the 'Underwriting Agreement'), to purchase from the Company, and
the Company has agreed to sell to the Underwriters on a firm commitment basis,
the respective number of Shares of Common Stock and Warrants set forth opposite
their names:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NUMBER OF
UNDERWRITER COMMON STOCK WARRANTS
- ----------------------------------- ------------ ---------
<S> <C> <C>
National Securities Corporation....

------------ ---------
Total............................ 3,000,000 3,000,000
------------ ---------
------------ ---------
</TABLE>

The Underwriters are committed to purchase all the Shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.

The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions of not in excess of $ per share of
Common Stock and $ per Warrant. Such dealers may re-allow a concession not
in excess of $ per share of Common Stock and $ per Warrant to certain
other dealers. After the commencement of the Offering, the public offering
prices, concession and reallowance may be changed by the Representative.

The Representative has informed the Company that it does not expect sales

to discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative an expense allowance on a nonaccountable
basis equal to 2.5% of the gross proceeds derived from the sale of the
Securities underwritten, of which $25,000 has been paid to date.

The Company has granted to the Underwriters an over-allotment option,
exercisable within 45 days of the date of this Prospectus, to purchase up to an
additional 450,000 shares of Common Stock and/or 450,000 additional Warrants at
the public offering price per share of Common Stock and Warrant, respectively,
offered hereby, less underwriting discounts and the non-accountable expense
allowance. Such option may be exercised only for the purpose of covering
over-allotments, if any, incurred in the sale of the Securities offered hereby.
To

<PAGE>

the extent such option is exercised, in whole or in part, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the number of
the additional Securities proportionate to its initial commitment.

In connection with the Offering the Company has agreed to sell 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 $ per share of Common Stock [165% of the initial
public offering price per share of Common Stock] and $0.16 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 Warrants offered hereby, except that they are exercisable at
a price of $ per share of Common Stock (165% of the exercise price of the
Warrants offered hereby). The Representative's Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year following the
date of this Prospectus, except to officers or directors 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 and certain holders of its Common Stock and other securities
have entered into lock-up agreements. See 'Shares Eligible for Future Sale.'

The Company has agreed that, for a period of three years after the date of

this Prospectus, 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
Directors of the Company. Such person may be a director, officer, employee or
affiliate of the Representative. It is anticipated that Nicole R. Kubin will be
the individual initially designated by the Representative to be elected to the
Board of Directors of the Company. 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 Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering price of the
Securities has been 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,
include 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.

LEGAL MATTERS

The validity of the Common Stock and the Warrants offered hereby will be
passed upon for the Company by Ehrenreich & Krause, New York, New York, who have
acted as counsel to the Company in connection with the Offering. Certain legal
matters in connection with the Offering with respect to Israeli law will be
passed upon for the Company by Silber, Schottenfels, Gerber & Lewin, Jerusalem,
Israel. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Camhy, Karlinsky & Stein LLP, New York, New York,
with respect to matters of United States law, and by Herzog, Fox & Neeman, Tel
Aviv, Israel with respect to matters of Israeli law.

<PAGE>

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 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 Securities 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 Securities 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 June 30,
1996 (Unaudited)....................................................... F-3
Consolidated Statement of Operations for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 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 six-month period ended
June 30, 1996 (Unaudited).............................................. F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the six-month periods ended June 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 statement 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

F-2

<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 893,997 $ 33,473 $ 28,275
Accounts receivable (net of allowance
for doubtful accounts and sales
returns of approximately $11,000,
$17,000 and $12,000 at December 31,
1994 and 1995 and June 30, 1996,
respectively)...................... 18,105 146,875 120,710
Inventories........................... 212,234 467,562 356,676
Deferred financing costs.............. -- -- 41,905
Prepaid expenses and other current
assets............................. 25,410 34,514 17,263
---------- ---------- -----------
Total current assets.......... 1,149,746 682,424 564,829
Fixed assets, net..................... 142,120 127,109 102,577
Security deposits..................... 20,163 20,013 21,299
---------- ---------- -----------
Total assets.................. $1,312,029 $ 829,546 $ 688,705
---------- ---------- -----------
---------- ---------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft and short-term loans... $ 10,173 $ 21,026 $ 51,269
Accounts payable...................... 204,816 239,015 104,410
Notes payable......................... -- -- 334,000
Payables to officers.................. 6,499 30,949 --
Customer deposits..................... -- -- 17,450
Accrued expenses...................... 128,529 199,258 379,706
Other current liabilities............. 19,711 12,682 17,392
---------- ---------- -----------
Total current liabilities..... 369,728 502,930 904,227
Provision for severance payments........ 30,330 28,392 76,731
---------- ---------- -----------
Total liabilities............. 400,058 531,322 980,958
---------- ---------- -----------

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 June
30, 1996, respectively............. 24,818 29,812 29,812
Additional paid-in capital............ 4,524,924 5,535,863 5,852,471
Treasury stock........................ (165,000) (165,000) (165,000)
Accumulated deficit................... (3,517,544) (5,200,608) (6,149,765)
Cumulative translation adjustment..... 44,773 98,157 140,229
---------- ---------- -----------
Total stockholders' equity
(net capital deficiency).... 911,971 298,224 (292,253)
---------- ---------- -----------
Total liabilities and
stockholders' equity........ $1,312,029 $ 829,546 $ 688,705
---------- ---------- -----------
---------- ---------- -----------
</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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 355,202 $ 208,462

Cost of products sold......... 72,767 80,874 491,315 198,384 112,822
---------- ----------- ----------- ---------- ----------

Gross profit........ 4,110 4,736 312,390 156,818 95,640

Operating expenses:

Selling, general and
administrative.............. 595,004 1,723,929 1,634,164 814,046 816,300

Research and development,
net......................... 30,023 291,970 357,117 118,949 151,499
---------- ----------- ----------- ---------- ----------

Total costs and
expenses............ 625,027 2,015,899 1,991,281 932,995 967,799
---------- ----------- ----------- ---------- ----------

Loss from
operations.......... (620,917) (2,011,163) (1,678,891) (776,177) (872,159)

Interest income (expense),
net......................... (935) 33,535 (4,173) 27,047 (76,998)
---------- ----------- ----------- ---------- ----------
Net loss............ $ (621,852) $(1,977,628) $(1,683,064) $ (749,130) $ (949,157)
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------

Net loss per share............ $ (.34) $ (.71) $ (.54) $ (.24) $ (.30)
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------

Weighted average shares
outstanding................. 1,846,237 2,798,907 3,095,361 3,109,093 3,132,214
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
</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.............. -- -- 135,403 -- -- -- -- 135,403
Proceeds from issuance of
Bridge Warrants, net of
expenses............... -- -- 181,205 -- -- -- -- 181,205
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 42,072 42,072
Net loss for the six
months ended June 30,
1996................... -- -- -- -- -- (949,157 ) -- (949,157)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT JUNE 30, 1996
(Unaudited)............ 2,930,178 $29,812 $5,852,471 -- $(165,000) $(6,149,765) $140,229 $ (292,253)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
</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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 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) $ (749,130) $(949,157)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and
amortization................ 2,235 24,465 41,541 21,504 25,239
Amortization of loan
discount.................... -- -- -- -- 33,300
Non-cash compensation
expense..................... -- 587,754 195,673 80,380 135,403
Changes in assets and
liabilities:
Accounts receivable........... (22,444) 9,768 (128,760) (189,871) 27,832
Inventories................... 3,573 (158,187) (256,790) (322,051) 116,899
Deferred financing costs...... -- -- -- -- (25,000)
Customer deposits............. -- -- -- -- 17,450
Other assets.................. (46,887) 3,877 (5,557) (44,563) 13,222
Accounts payable.............. (29,419) 113,964 35,314 (73,161) (134,045)
Accrued expenses and other
liabilities................. 122,993 6,566 83,486 1,497 206,711
--------- ----------- ----------- ----------- ---------
Net cash used for
operating activities... (591,801) (1,389,421) (1,718,157) (1,275,395) (532,146)
--------- ----------- ----------- ----------- ---------
Cash flows used for investing
activities:
Capital expenditures............. (18,150) (145,400) (30,872) (27,908) (2,914)
--------- ----------- ----------- ----------- ---------
Net cash used for
investing activities... (18,150) (145,400) (30,872) (27,908) (2,914)
--------- ----------- ----------- ----------- ---------
Cash flows from financing
activities:
Increase (decrease) in bank
overdraft..................... 41,878 (31,606) 11,695 15,572 31,028
Proceeds from bridge financing
net of expenses............... -- -- -- -- 465,000
Repurchase of treasury stock..... (35,000) (130,000) -- -- --
Proceeds from issuance of stock,

net of expenses............... 510,035 2,570,071 820,260 769,280 --
--------- ----------- ----------- ----------- ---------
Net cash provided by
financing activities... 516,913 2,408,465 831,955 784,852 496,028
--------- ----------- ----------- ----------- ---------
Effect of exchange rate changes on
cash............................. 16,067 5,027 56,550 (25,434) 33,834
Net increase (decrease) in cash and
cash equivalents................. (76,971) 878,671 (860,524) (543,885) (5,198)
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 $ 350,112 $ 28,275
--------- ----------- ----------- ----------- ---------
--------- ----------- ----------- ----------- ---------
Supplemental schedule of cash paid
during the period for interest... $ 1,481 $ 4,029 $ 14,014 $ 307 $ 1,704
</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 JUNE 30, 1996 AND 1995
AND FOR EACH SIX 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. To date the Company has generated
revenues from the sale of its products, CompuPhone 2000(Registered) and a
predecessor product (the 'products'), which integrate a computer keyboard and a
telephone. 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 10% of consolidated net sales for the year ended
December 31, 1995 and for the six months ended June 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 six months ended June 30, 1996.
The net assets of the Company's Israeli subsidiaries accounted for 35%, 31%,

19%, of the consolidated net assets at December 31, 1994, 1995 and June 30,
1995, respectively. The net capital deficiency of the Company's Israeli
subsidiaries accounted for 69% of the consolidated net capital deficiency at
June 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 CompuPhone 2000(Registered) with certain
warranties. The Company covers the potential costs associated with such
warranties by obtaining corresponding warranties from the contract manufacturer
that manufactures CompuPhone 2000(Registered) for the Company.

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 $7,988 of time deposits at
December 31, 1994 and June 30, 1995 and 1996, respectively.

F-7

<PAGE>

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

(UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND 1995
AND FOR EACH SIX 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 and is principally
comprised of CompuPhone 2000(Registered) units. 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 six months ended June 30, 1995, respectively. There were
no contributions for the six month period ended June 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 proposed 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 assumed initial
public offering price of $7.00 per share in the proposed IPO. 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.

F-8

<PAGE>

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

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

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').

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
June 30, 1996, trade receivables from retailers accounted for approximately 25%,
63% and 93% of total trade receivables, respectively.

Interim Financial Information

The consolidated financial information presented as of June 30, 1996 and
for each of the six months ended June 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,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Computer equipment................. $140,253 $155,231 $157,010
Furniture and fixtures............. 19,603 32,229 31,629
Vehicles........................... 41,753 40,195 39,341
Leasehold improvements............. 52,043 50,101 49,037
-------- -------- --------
253,652 277,756 277,017
Less: accumulated depreciation..... 111,532 150,647 174,440
-------- -------- --------
$142,120 $127,109 $102,577
-------- -------- --------
-------- -------- --------
</TABLE>

Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 was $2,235, $24,465, $41,541,

$21,504 and $25,239, respectively.

F-9

<PAGE>

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

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

4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Accrued payroll and benefits....... $ 44,552 $ 75,431 $189,431
Accrued professional fees.......... 40,000 83,828 131,446
Finders fee payable................ 40,000 40,000 30,000
Other.............................. 23,688 12,681 46,221
-------- -------- --------
$148,240 $211,940 $397,098
-------- -------- --------
-------- -------- --------
</TABLE>

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 six months ended June 30,
1995 and 1996, estimated expenses/(recoveries) relating to employees' severance
rights were $10,698, $20,140, $(1,203), $(837) and $55,494, respectively.

6. INCOME TAXES

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

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

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ JUNE 30,
1993 1994 1995 1996
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
United States...................... 395,757 1,347,761 1,014,362 376,835
Israel............................. 226,095 629,867 691,679 568,835
-------- ---------- ---------- --------
621,852 1,977,628 1,706,041 945,670
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>

Deferred income tax assets comprise the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 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 1,265,022
Net operating loss
carryforwards--Israel............ 284,000 315,000 480,000
Other.............................. 83,490 119,378 94,895
---------- ---------- ----------
1,379,952 1,834,285 2,153,325
Valuation allowance................ (1,379,952) (1,834,285) (2,153,325)
---------- ---------- ----------
-- -- --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Net operating loss carryforwards of approximately $3,000,000 at June 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

F-10

<PAGE>

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

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

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 June 30, 1996, the net operating loss carryforwards for Innovative and
Compuprint in the State of Israel, which do not expire, amounted to $772,000 and
$560,000, 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 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 June 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 June 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 June 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 proposed
IPO and January 1, 1997.

For options granted in 1996, fair value of such options approximated the
market value (equal to 75% of the proposed 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 proposed IPO (see Note 9).

The Company recognized $587,754, $195,673, $80,380 and $135,403 in non-cash
compensation expense with respect to the granting of stock options for the years
ended December 31, 1994 and 1995, and the six months ended June 30, 1995 and
1996, respectively.

F-11

<PAGE>

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

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

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 six months ended June 30, 1995 sales to two customers were 11%
and 9% of consolidated net sales. For the six months ended June 30, 1996 sales
to three customers were 11%, 11% and 12% of consolidated net sales.

Export sales, excluding sales by the Company's Israeli subsidiaries,
Innovative and Compuprint, aggregated approximately 28%, 16%, 16%, 16% and 34%
of consolidated net sales for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996, respectively.

9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

Purchase Commitments

At December 31, 1995 and June 30, 1996, the Company had outstanding
purchase orders for the Compuphone 2000(Registered) 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 June
30, 1996 as follows:

Rent expense for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996 was $24,479, $42,912, $75,713, $38,900
and $43,794, 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 June 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 March 27, 1996, the Company entered into a letter of intent with an
underwriter to sell shares, and warrants to acquire shares, of the Company's
common stock in a public offering (the 'IPO'). There is no assurance that the
IPO will be consummated. In connection therewith, the Company anticipates
incurring expenses which, if the IPO is not consummated, will be charged to
operations in 1996.

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.

F-12

<PAGE>

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

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

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 ($597,000 of which was received
subsequent to June 30, 1996).

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 are due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the IPO or (ii) December 15, 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 a number of shares of Common Stock determined by dividing (i) the
aggregate principal amount of the Bridge Note issued to such recipient by (ii)
the IPO price. 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 will be determined by dividing (i) $20,000 by (ii) the IPO
price. The Bridge Warrants provide for an exercise price per share equal to 10%
of the IPO price 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 assumed 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 is no
assurance that the IPO will 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 six months ended June 30, 1996, the
Company recognized approximately $33,000 of non-cash interest expense. Upon
repayment of the Bridge Notes from the net proceeds of the IPO, the unamortized
portion of the loan discount and deferred financing costs will be recognized as
an extraordinary loss.

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 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 plans to grant
options to purchase approximately 548,333 shares under the Stock Option Plan
immediately prior to completion of the proposed IPO, including an aggregate of
approximately 405,001 options to executive officers and directors of the
Company. These options will have an exercise price equal to the IPO price.

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

F-13

<PAGE>

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

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

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.

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 AGREEMENT

The Company entered into an employment agreement (the 'Employment
Agreement') with an officer of the Company, contingent upon the completion of
the IPO prior to December 31, 1996. 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.

SETTLEMENT OF CLAIMS

On September 26, 1996, the Company entered into an agreement with a
stockholder pursuant to which the Company agreed to pay to 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.

F-14

<PAGE>

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

No Underwriter, dealer, salesperson or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale 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 or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 9
Use of Proceeds.................................. 20
Dividend Policy.................................. 21
Capitalization................................... 21
Dilution......................................... 23
Selected Consolidated Financial Data............. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 26
Business......................................... 32
Management....................................... 42
Certain Transactions............................. 47
Principal Stockholders........................... 47
Description of Securities........................ 49
Shares Eligible for Future Sale.................. 52
Israeli Taxation................................. 55
Conditions in Israel............................. 57
Underwriting..................................... 59
Legal Matters.................................... 60
Experts.......................................... 61
Available Information............................ 61
Index to Consolidated Financial Statements....... F-1
</TABLE>

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

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

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

INTEGRATED
TECHNOLOGY USA, INC.

3,000,000 SHARES OF
COMMON STOCK
AND
3,000,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS

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

PROSPECTUS

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

NATIONAL SECURITIES
CORPORATION

, 1996

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

<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 Registrant's
Certificate of Incorporation and the Registrant's By-laws both provide for
indemnification of its officers and directors to the full extent permitted by
the DGCL.

The foregoing description of certain provisions of the Registrant's
Certificate of Incorporation and By-laws gives effect to certain amendments
thereto to be effected prior to completion of the Offering.

The Company may seek to obtain 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.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration

Statement contains representations and warranties by the Company as to the
accuracy of the Registration Statement and the Prospectus included therein and
provides for indemnification and contribution by the Underwriters with respect
to certain liabilities of directors, officers and controlling persons of the
Registrant.

II-1

<PAGE>

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 and
the NASD filing fee are estimates. Items which are not included will be supplied
by amendment.

<S> <C>

SEC registration fee............................................. $ 26,030
NASD filing fee.................................................. 8,083
American Stock Exchange listing fee.............................. 50,000
Blue Sky fees and expenses....................................... 25,000
Transfer Agent's fees and expenses............................... 5,000
Printing and engraving expenses.................................. 90,000
Accounting fees and expenses..................................... 225,000
Legal fees and expenses (other than Blue Sky fees and
expenses)...................................................... 225,000
Travel and road show expenses.................................... 200,000
Miscellaneous.................................................... 95,887
--------
Total.......................................................... $950,000
--------
--------
</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 prior to completion of the Offering. 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.

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>

<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
</TABLE>

II-2

<PAGE>

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

- ---- --------- ------------ ---------
<S> <C> <C> <C> <C>
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
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
</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.

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>
<CAPTION>
PRINCIPAL AMOUNT OF NOTES PURCHASED PURCHASER
- ---------------------------------- ---------
<S> <C>

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

II-3

<PAGE>

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, 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
403,189 shares of Common Stock to directors, employees and consultants.

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative')*
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*
4.2 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*
4.3 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer & Trust

Company, including form of Warrant 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)*
10.3 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*
11.1 Statement re: computation of per share earnings*
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)*
23.3 Consent of Simon Kahn*
23.4 Consent of Nicole R. Kubin*
23.5 Consent of Morton L. Landowne*
23.6 Consent of Noah Perlman*
23.7 Consent of William Spier*
27.1 Financial Data Schedule*
</TABLE>

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

* Previously filed.

** Filed herewith.

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) Equity offerings of nonreporting small business issuers.

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

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.

(d) Reliance upon Rule 430A under the Securities Act.

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. 3 to Registration Statement to be signed on its behalf by the undersigned in
Jerusalem, Israel, on the 30th day of September, 1996.

INTEGRATED TECHNOLOGY USA, INC.

By: /s/ ALAN P. HABER
----------------------------------
Alan P. Haber
President and Chief Executive
Officer

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ ALAN P. HABER Chairman of the Board; President; September 30, 1996
- ------------------------------------------ Chief Executive Officer and Director
Alan P. Haber (Principal Executive Officer)

/s/ BARRY L. EISENBERG Director September 30, 1996
- ------------------------------------------
Barry L. Eisenberg
Director September , 1996
- ------------------------------------------
Bernard S. Appel

/s/ MORRIS J. SMITH Director September 30, 1996
- ------------------------------------------
Morris J. Smith

/s/ SIMON KAHN Chief Financial Officer September 30, 1996
- ------------------------------------------ (Principal Financial and Principal
Simon Kahn Accounting Officer)
</TABLE>

II-6

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------------------------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative')*
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*
4.2 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*
4.3 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer &
Trust Company, including form of Warrant 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)*
10.3 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*
11.1 Statement re: computation of per share earnings*
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)*
23.3 Consent of Simon Kahn*
23.4 Consent of Nicole R. Kubin*
23.5 Consent of Morton L. Landowne*
23.6 Consent of Noah Perlman*
23.7 Consent of William Spier*
27.1 Financial Data Schedule*
</TABLE>

- ------------------
* Previously filed.

** Filed herewith.

<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) 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
September 30, 1996