NOTIFY CORP, 424B3, 1997-08-29

NOTIFY CORP
424B3, 1997-08-29
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-23369
PROSPECTUS

[LOGO OF NOTIFY CORPORATION]

1,600,000 UNITS CONSISTING OF 1,600,000 SHARES OF COMMON STOCK
AND 1,600,000 REDEEMABLE CLASS A WARRANTS

Each unit ("Unit") offered by Notify Corporation (the "Company") consists of
one share of common stock, $.001 par value (the "Common Stock"), and one
redeemable Class A Warrant (a "Warrant" and collectively, the "Warrants"). The
Warrants will be transferable separately immediately upon issuance. Each
Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $6.50, subject to adjustment, through the fifth anniversary
of the date of this Prospectus. The Warrants are subject to redemption by the
Company commencing one year from the date of this Prospectus, at $.05 per
Warrant on 30 days' written notice if the closing bid price of the Common Stock
for 30 consecutive trading days ending within 15 days of the notice of
redemption of the Warrants averages in excess of $9.10 per share (subject to
adjustment). See "Description of Securities."

Prior to this offering (the "Offering") there has been no public market for
the Units, the Common Stock, or the Warrants, and there can be no assurance
that such a market will develop after the completion of the Offering. See
"Underwriting" for a discussion of factors considered in determining the
initial public offering price. The Units, Common Stock and Warants have been
approved for quotation on the Nasdaq SmallCap Market ("Nasdaq"). For
information concerning a Securities and Exchange Commission investigation
relating to the Underwriter, see "Risk Factors" and "Underwriting."

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 AND "DILUTION."

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

<TABLE>
<CAPTION>
===================================================================================================
UNDERWRITING
DISCOUNT PROCEEDS TO
PRICE TO PUBLIC AND COMMISSION(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit................................... $5.00 $.50 $4.50
- ---------------------------------------------------------------------------------------------------
Total(3)................................... $8,000,000 $800,000 $7,200,000
===================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a nonaccountable expense allowance equal to 3% of the
gross proceeds of the Offering and (ii) an option to purchase up to 160,000
Units at a price per unit equal to 140% of the initial public offering
price, exercisable at any time, in whole or in part, during the two year
period commencing three years from the date of this Prospectus (the "Unit
Purchase Option"). The Company has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at approximately
$730,000 ($766,000 if the over-allotment option is exercised in full),
including the Underwriter's nonaccountable expense allowance.

(3) The Company has granted the Underwriter an option exercisable within 30
days of the date of this Prospectus to purchase up to an additional 240,000
Units on the same terms and conditions set forth above, solely for the
purpose of covering over-allotments, if any. If the over-allotment option
is exercised in full, the Price to Public will be $9,200,000, the
Underwriting Discount and Commission will be $920,000 and the Proceeds to
Company will be $8,280,000 See "Underwriting."

-----------

THE UNITS ARE BEING OFFERED SUBJECT TO PRIOR SALE, WHEN, AS AND IF DELIVERED
TO AND ACCEPTED BY THE UNDERWRITER, SUBJECT TO OTHER CONDITIONS. THE
UNDERWRITER RESERVES 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
UNITS WILL BE MADE AT THE OFFICES OF D.H. BLAIR INVESTMENT BANKING CORP., NEW
YORK, NEW YORK ON OR ABOUT SEPTEMBER 3, 1997.

-----------

D.H. BLAIR INVESTMENT BANKING CORP.

-----------
THE DATE OF THIS PROSPECTUS IS AUGUST 28, 1997
<PAGE>

[INSIDE FRONT COVER]
A PICTURE OF SEVEN OF THE COMPANY'S MESSAGEALERT PRODUCT AND ONE OF ITS
CENTREX AUTO ATTENDANT PRODUCT. THE MESSAGEALERT PRODUCTS BEAR THE NAMES OF
CERTAIN TELEPHONE COMPANIES THAT SELL THE MESSAGEALERT UNDER THEIR NAME.

THE COMPANY INTENDS TO FURNISH ITS SHAREHOLDERS AND WARRANTHOLDERS WITH
ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT
AUDITORS.

NOTIFY AND CENTREX AUTO ATTENDANT ARE TRADEMARKS OF THE COMPANY. THE
PROSPECTUS ALSO CONTAINS TRADEMARKS AND REGISTERED TRADEMARKS OF OTHER
COMPANIES.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF UNITS, COMMON STOCK
OR WARRANTS INCLUDING STABILIZING BIDS OR SYNDICATE COVERING TRANSACTIONS. FOR
A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise noted, all information in this Prospectus (a)
assumes no exercise of (i) the Underwriter's over-allotment option, (ii) the
Warrants, (iii) the Underwriter's Unit Purchase Option, (iv) the Public
Warrants (as hereinafter defined), (v) options available for grant under the
Company's 1997 Stock Plan (the "Stock Option Plan") or (vi) other outstanding
warrants and options and (b) gives effect to the conversion, which will occur
upon the closing of the Offering, of (i) 425,000 bridge warrants (the "Bridge
Warrants") issued in connection with the Company's private placement completed
in March 1997 (the "Bridge Financing") into 425,000 warrants with identical
terms to the Warrants offered hereby (the "Public Warrants"); and (ii) all
outstanding shares of the Company's Series A Preferred Stock and Series B
Preferred Stock (collectively, the "Outstanding Preferred Stock") into shares
of Common Stock at an exchange ratio of 1 share of Common Stock for each 5.05
shares of Preferred Stock. All share, per share and other information contained
in this Prospectus has been adjusted to reflect a 1-for-5.05 reverse split of
the Company's Common Stock effected in February 1997. See "Capitalization,"
"Management--Stock Option Plan" and "Description of Securities."

THE COMPANY

The Company is engaged in the development, manufacture, marketing and sale of
computer telephony products for the business, Small Office Home Office ("SOHO")
and residential marketplaces. In recent years, the number of individuals and
businesses relying on their telephone company service provider to provide them
with services such as voice mail and CENTREX, a business-oriented service which
eliminates the need for on-premise telephone switching equipment, has increased
dramatically. The Company's products are designed to enhance the convenience
and utility of these services by providing customers with features which are
either not available or not included in standard service packages. The
Company's MessageAlert product increases the timeliness and ease of message
retrieval for voice mail subscribers by providing a visual indication that a
message has been received. The Company's Centrex Auto Attendant product gives
business and SOHO customers a cost-effective means of ensuring that incoming
calls are properly routed even when a human attendant is not available.

Over 14 million business and residential customers receive voice mail service
from their telephone company service provider. Telephone company provided voice
mail has several advantages over traditional answering machines including
better remote access, enhanced message management capabilities, support for
multiple calls and superior reliability. A major drawback to telephone company
provided voice mail is the lack of a visual indication that a message is
waiting; subscribers must pick up their phones and listen for a distinctive
dial tone to determine if they have a message. As a result, messages are often
received substantially later than if the blinking light of a traditional
answering machine had been available. Telephone company product managers
believe that the lack of a visual message indicator is a major reason for
cancellation of voice mail service. The Company has remedied this deficiency in
telephone company provided voice mail by developing an inexpensive, battery
operated device which gives subscribers a visual indication that a message is
waiting. The Company believes its MessageAlert product is the only battery
operated visual message indicator compatible with both of the signaling
standards currently used by U.S. telephone companies.

The Company's second product is designed to enhance the functionality of the
CENTREX services which many small businesses purchase from their telephone
service provider. CENTREX gives small businesses useful business-oriented
telephone capabilities such as extension dialing, conference calling, call
transfer capability and call-forwarding without the need to buy and maintain
expensive telephone switches. The Company's Centrex Auto Attendant product
expands this feature set by providing auto-attendant features such as automatic
call

3
<PAGE>

answering, menu-prompted call routing and an automated name directory. Small
businesses can use the Centrex Auto Attendant to answer and route calls
received by their main or 800 number, thereby eliminating the need for a human
receptionist. The Company has designed the Centrex Auto Attendant to be easy to
install and configure and believes it offers a cost-effective solution to small
businesses' call-management needs.

The Company intends to distribute both of these products through or in
conjunction with the large domestic telephone companies and certain of their
authorized resellers. To date, the Company has sold its MessageAlert product to
three of the seven Regional Bell Operating Companies and five of the
approximately 20 large local exchange carriers. The Company's strategy is to
encourage these telephone companies to bundle the MessageAlert product with
their voice mail services in order to increase retention of new subscribers. In
addition, the Company intends to encourage telephone companies and their
authorized resellers which focus on selling CENTREX services to market its
Centrex Auto Attendant as an enhancement to the basic CENTREX service. The
Company believes that the relationships with telephone companies it has formed
as a result of its marketing of the MessageAlert product will aid it in
developing the telephone companies as a distribution channel for the Centrex
Auto Attendant.

The Company intends to use a portion of the net proceeds from the Offering to
fund ongoing research and development of new products and product enhancements.
The Company expects to focus its efforts on four areas: cost reduction and
feature enhancement of the MessageAlert; enhancement of the Centrex Auto
Attendant platform to increase its capacity; expansion of the MessageAlert
architecture to create a combination Caller-ID/visual message waiting indicator
product; and completion of a product to provide remote telephone access to e-
mail.

The Company was incorporated in California in August 1994. Its address is
1054 S. DeAnza Blvd., Suite 105, San Jose, CA 95129. Its telephone number at
that address is 408-777-7920.

4
<PAGE>

THE OFFERING

Securities Offered................ 1,600,000 Units, each Unit consisting of
one share of Common Stock and one Warrant.
Each Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $6.50, subject to
adjustment, at any time through the fifth
anniversary of the date of this Prospectus.
The Warrants are subject to redemption in
certain circumstances on 30 days' written
notice. See "Description of Securities."

Common Stock Outstanding Before
the Offering...................... 2,160,000 shares(1)(2)

Common Stock Outstanding After
the Offering...................... 3,760,000 shares(1)(3)

Use of Proceeds................... The net proceeds of the Offering will be
used for product development, sales and
marketing efforts, repayment of $850,000
principal amount of 10% promissory notes
issued in the Bridge Financing (the "Bridge
Notes") and other indebtedness, additional
inventory, investment in fixed assets and
working capital and general corporate
purposes. See "Use of Proceeds."

Risk Factors...................... The Offering involves a high degree of risk
and immediate substantial dilution. See
"Risk Factors" and "Dilution."

Nasdaq Symbols(4):

Units............................. NTFYU

Common Stock...................... NTFY

Warrants.......................... NTFYW
- --------
(1) Includes warrants to purchase 212,786 shares of Common Stock, of which
warrants to purchase 126,759 shares will be placed in escrow by the holders
thereof (the "Escrow Warrants") and 1,247,786 shares of Common Stock which
the holders thereof have agreed to deposit into escrow (the "Escrow
Shares"). The Escrow Shares and Escrow Warrants are subject to cancellation
and will be contributed to the capital of the Company if the Company does
not attain certain earnings levels or the market price of the Company's
Common Stock does not achieve certain levels. If such earnings or market
price levels are met, the Company will record a substantial non-cash charge
to earnings, for financial reporting purposes, as compensation expense
relating to the value of the Escrow Shares and Escrow Warrants released to
Company officers, directors, employees and consultants. See
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Release of Escrow Securities" and
"Principal Shareholders--Escrow Securities."
(2) Does not include (i) 200,000 shares of Common Stock reserved for issuance
upon the exercise of options issuable under the Stock Option Plan, under
which no options were outstanding as of June 30, 1997, and (ii) 425,000
shares of Common Stock issuable upon exercise of the Bridge Warrants. See
"Capitalization" and "Management--Stock Option Plan."
(3) Does not include (i) 1,600,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 480,000
shares of Common Stock issuable upon exercise of the Underwriter's over-
allotment option and underlying Warrants; (iii) 320,000 shares of Common
Stock issuable upon exercise of the Unit Purchase Option and the underlying
Warrants; (iv) 425,000 shares of Common Stock issuable upon exercise of the
Public Warrants; or (v) 200,000 shares of Common Stock reserved for
issuance under the Stock Option Plan. See "Capitalization" and
"Management--Stock Option Plan".
(4) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained. See "Risk Factors--Possible Delisting
of Securities from the Nasdaq Stock Market."

5
<PAGE>

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
---------------------- -----------------------
1995 1996 1996 1997
--------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Product sales................. $ 9,333 $ 308,067 $ 194,418 $3,057,480
Cost of sales................. 7,929 428,112 200,096 2,157,903
--------- ----------- ----------- ----------
Gross profit (loss)........... 1,404 (120,045) (5,678) 899,577
Operating expenses:
Research and development..... 159,163 537,902 401,436 501,290
Sales and marketing.......... 122,884 549,916 407,711 509,340
General and administrative... 146,756 440,089 319,010 466,255
--------- ----------- ----------- ----------
Total operating expenses...... 428,803 1,527,907 1,128,157 1,476,885
--------- ----------- ----------- ----------
Loss from operations.......... (427,399) (1,647,952) (1,133,835) (577,308)
Interest income (expense) net. 1,337 (9,267) 19,017 (142,545)
--------- ----------- ----------- ----------
Net loss...................... $(426,062) $(1,657,219) $(1,114,818) $ (719,853)
========= =========== =========== ==========
Pro forma net loss per
share(1)..................... $ (2.12) $ (0.85)
=========== ==========
Shares used in computing pro
forma net loss per share(1).. 781,306 844,912
=========== ==========
</TABLE>
- --------
(1) The pro forma net loss per share computation gives retroactive effect to
the conversion of the Outstanding Preferred Stock into Common Stock upon
the closing of the Offering, and excludes the Escrow Securities. See Note 1
of Notes to Financial Statements for an explanation of the calculation for
pro forma net loss per share. See "Capitalization--Bridge Financing," "--
Restructuring," "Certain Relationships and Related Transactions," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ (622,936) $5,688,606
Total assets............ 2,323,818 7,453,818
Total liabilities....... 2,354,307 1,172,765
Total shareholders'
equity (net capital
deficiency)............ (30,489) 6,281,053
</TABLE>
- --------
(1) As adjusted to give effect to the sale of the 1,600,000 Units offered
hereby, the application of a portion of the net proceeds therefrom to repay
the Bridge Notes and other indebtedness and the corresponding non-recurring
charge which will be incurred upon the closing of the Offering of
approximately $158,000 representing the unamortized portion of debt
discount and debt issuance costs associated with the Bridge Financing. See
"Use of Proceeds," "Certain Relationships and Related Transactions" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

6
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements, including, without limitation,
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in
this Prospectus are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Company's business, prospective
investors should consider carefully the following factors in addition to the
other information set forth in this Prospectus.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; WORKING CAPITAL DEFICIT;
ANTICIPATION OF NEGATIVE CASH FLOW; NO ASSURANCE OF FUTURE PROFITABILITY

The Company commenced operations in August 1994 and through January 1996 was
engaged primarily in research and development. For the fiscal year ended
September 30, 1996, the Company incurred a net loss of $1,657,219. As of June
30, 1997, the Company had an accumulated deficit of $2,803,134 and a working
capital deficit of $622,936. The Company anticipates having a negative cash
flow from operating activities in future quarters and years. The Company
incurred a net loss of $719,853 for the nine-month period ended June 30, 1997
and expects to incur further operating losses in future quarters and years and
until such time, if ever, as there is a substantial increase in orders for the
Company's products and product sales generate sufficient revenue to fund its
continuing operations. There can be no assurance that sales of the Company's
products will ever generate significant revenue, that the Company will ever
generate positive cash flow from its operations or that the Company will
attain or thereafter sustain profitability in any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Sales, Marketing and Distribution."

POSSIBLE FLUCTUATIONS IN QUARTERLY RESULTS

The Company anticipates that it may experience significant fluctuations in
operating results in the future. Fluctuations in operating results may result
in volatility in the price of the Company's Common Stock, Units and Warrants.
Operating results may fluctuate as a result of many factors, including the
Company's level of research and development and sales and marketing
activities, announcements by the Company and its competitors, volume and
timing of orders received, if any, during the period, the timing of commercial
introduction of future products and enhancements or competitive products and
the impact of price competition on the Company's average selling prices.
Almost all of these factors are beyond the Company's control.

For example, during the third quarter of fiscal 1997, the Company recorded
revenue of approximately $2.1 million primarily as the result of one customer
conducting a particularly large marketing program using the Company's
MessageAlert product during that quarter. Though the Company anticipates that
the customer will run similar programs in the future, the customer is not
committed to doing so and the timing of any such additional programs is
uncertain. As a result, the Company currently anticipates that revenue for the
fourth quarter of fiscal 1997 will be substantially below that for the third
quarter of 1997 and possibly as low as $350,000.

Notwithstanding the difficulty in forecasting future sales, the Company
generally must undertake its research and development and sales and marketing
activities and other commitments months or years in advance. Accordingly, any
shortfall in product revenues in a given quarter may materially adversely
affect the Company's financial condition and results of operations due to the
inability to adjust expenses during the quarter to match the level of product
revenues, if any, for the quarter. Due to these and other factors, the Company
believes that quarter to quarter comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of the
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

7
<PAGE>

UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN AND AUDITOR'S REPORT
TO THAT EFFECT

The Company has received a report from its independent auditors containing
an explanatory paragraph that describes the uncertainty as to the ability of
the Company to continue as a going concern due to the Company's recurring
losses from operations. There can be no assurance that the Company will
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Statements--
Report of Ernst & Young LLP, Independent Auditors."

UNCERTAINTY OF PRODUCT ACCEPTANCE

The Company sold its first MessageAlert in January 1996 and its first
Centrex Auto Attendant in December 1996. To date, the Company has received
only limited revenue from the sale of these products. While the Company
believes that its products are commercially viable, developing products for
the consumer and business marketplaces is inherently difficult and uncertain.
The Company does not believe its sales to date are sufficient to determine
whether or not there is meaningful consumer or business demand for its
products. The Company intends to devote a significant portion of the proceeds
of the Offering to its sales and marketing efforts and to promote consumer and
business interest in its products. There can be no assurance that such efforts
will be successful or that significant market demand for the Company's
products will ever develop. See "Business--Products," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Use of
Proceeds."

DEPENDENCE ON LIMITED NUMBER OF POTENTIAL CUSTOMERS; NEED TO DEVELOP MARKETING
CHANNELS

The Company believes its success, if any, will be largely dependent on its
ability to either sell its products to or enter into joint marketing
arrangements with the seven Regional Bell Operating Companies ("RBOCs") and
approximately 20 large Local Exchange Carriers ("LECs") in the United States.
In particular, the Company believes that its MessageAlert product can be sold
profitably only if it is sold to or in conjunction with the RBOCs and LECs.
The Company also expects to rely significantly on the RBOCs and LECs as a
channel for its Centrex Auto Attendant product. To date, the Company has sold
its products to three RBOCs and seven LECs. Qualifying its product and
developing the marketing relationships necessary to make these sales took
substantially longer than the Company originally anticipated. RBOCs and LECs
tend to be hierarchical organizations characterized by distributed decision-
making authority and an institutional reluctance to take risks. Selling a
product to or entering into a marketing relationship with an RBOC or LEC is
generally a lengthy process requiring multiple meetings with numerous people
in the organization. A failure by the Company to develop significantly
enhanced relationships with the RBOCs and LECs would have a materially adverse
effect on the Company's business and operating results.

Sales to RBOCs and LECs constituted 69% and 93% of revenue for the fiscal
year ended September 30, 1996 and the nine-month period ended June 30, 1997,
respectively. In addition, three customers accounted for 30%, 18% and 16% of
sales in fiscal 1996, and one customer accounted for 69% of sales in the nine-
month period ended June 30, 1997.

The Company also intends to develop other distribution channels for its
products including certain authorized service resellers of the RBOCs and LECs,
retail stores and mail order catalogues. Development of any one of these
channels will require the expenditure of substantial time and effort by the
Company's management. Because the Company's marketing efforts have been
largely focused on the RBOCs and LECs, its management has had only limited
experience in selling the Company's products through these channels. There can
be no assurance that the Company will be able to implement such a marketing
and distribution program or that any marketing efforts undertaken by or on
behalf of the Company will be successful. See "Business--Sales, Marketing and
Distribution."

8
<PAGE>

RISK OF PRODUCT DEFECTS

The Company's products incorporate a combination of reasonably sophisticated
computer chip design, electric circuit design and telephony technology. The
Company has devoted substantial resources to researching and developing each
of these elements. In order to reduce the manufacturing costs, limit the power
consumption and otherwise enhance the operation of its products, the Company
has from time to time redesigned its products. The Company expects that in the
future it will engage in similar redesigns of its products. In addition, the
Company is in the process of developing new, similarly complex products.
Though the Company extensively tests its products before marketing them, any
new, redesigned or current product may contain design flaws which are
undetected by the Company's testing procedures. For example, in August 1996,
the Company recalled 6,500 of an earlier version of its MessageAlert product
as a result of a design flaw and, in November 1996, the Company recalled
14,000 of its MessageAlert product, also as a result of a design flaw. The
direct cost to re-work and repair the defective products in these instances
was approximately $29,000 and $13,000, respectively. In addition, the Company
relies on subcontractors to manufacture and assemble its products. Though the
Company has quality control procedures designed to detect manufacturing
errors, there can be no assurance that the Company will identify all defective
products. The Company believes that reliable operation will be an important
purchase consideration for both its consumer and business customers. A failure
by the Company to detect and prevent a design flaw or a widespread product
defect could materially adversely affect the sales of the affected product and
the Company's other products and materially adversely affect the Company's
business, financial condition and operating results. See "Business--Products"
and "--Manufacturing."

COMPETITION

The Company believes the market for its products is highly competitive and
that competition is likely to intensify. In the market for visual message
waiting indicators, the Company competes with Voicewaves, Inc., Consumerware,
Inc., SNI Innovation, Inc. and AASTRA TELECOM. Certain of these companies have
greater financial, technical and marketing resources than the Company. In
addition, there are several companies with substantially greater technical,
financial and marketing resources than the Company which could produce
competing products. These companies include telephone equipment manufacturers
such as CIDCO Incorporated, Intelidata, Inc., Northern Telecom, Inc., and
Lucent Technologies, Inc. In the market for auto-attendant products, the
Company competes directly with Bogen Communications, Inc. and Cobtyx
Corporation, Inc. In addition, the Company competes with alternative products
such as PC-based auto-attendant and voice mail products offered by companies
such as Active Voice Corporation, Altigen Communications, and Voice Systems
Research Corporation. The Company expects that to the extent that the market
for its products develops, competition will intensify and new competitors will
enter the market. There can be no assurance that the Company will be able to
compete successfully against existing and new competitors as the market for
its products evolves and the level of competition increases. A failure to
compete successfully against existing and new competitors would have a
materially adverse effect upon the Company's business and results of
operations. See "Business--Competition."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon certain key
management employees, including its Chairman, President and Chief Executive
Officer, Mr. Paul F. DePond, and its Vice President of Operations, Gaylan
Larson. The Company has applied for three-year key-man term life insurance on
Mr. DePond in the amount of $2,000,000 and has entered into employment
agreements with him along with Mr. Larson and Gerald Rice, the Company's Chief
Financial Officer. The loss of their services or those of any of the Company's
other key employees would have a materially adverse effect on the Company. The
Company's success, if any, will also be dependent on its ability to attract
and retain highly skilled technical personnel as well as marketing and sales
personnel. If the Company is unable to hire the necessary personnel, the
development of new products and enhancements to current products would likely
be delayed or prevented. Competition for highly-skilled technical, managerial,
sales, and marketing personnel is intense. There can be no assurance that the
Company will be successful in retaining its key personnel and in attracting
and retaining the personnel it requires for expansion. See "Business--
Employees" and "Management."

9
<PAGE>

RISKS OF LIMITED PROTECTION FOR COMPANY'S INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND INFRINGEMENT OF THIRD PARTIES' RIGHTS

The Company regards various features and design aspects of its products as
proprietary and relies primarily on a combination of trademark, copyright and
trade secret laws and employee and third-party nondisclosure agreements to
protect its proprietary rights. The Company has been issued one patent
covering the design of its MessageAlert products, has applied for a patent
covering the MultiSense technology used in its MessageAlert product and
intends to continue to apply for patents, as appropriate, for its future
technologies and products. There are few barriers to entry into the market for
the Company's products, and there can be no assurance that any patents applied
for by the Company will be granted or that the scope of the Company's patent
or any patents granted in the future will be broad enough to protect against
the use of similar technologies by the Company's competitors. There can be no
assurance, therefore, that any of the Company's competitors, some of whom have
far greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Further, the Company intends to distribute its products in a
number of foreign countries. The laws of those countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.

The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel. See "Business--
Proprietary Rights."

DEPENDENCE ON SINGLE SUPPLIER; NO CONTRACTS OR AGREEMENTS

Certain key components used in the Company's products are currently
available only from single or limited sources. The Company does not have long
term supply contracts with these or any other component vendors and purchases
all of its components on a purchase order basis. No assurance can be given
that component shortages will not occur or that the Company will be able to
obtain the components it needs in a timely manner and on a commercially
reasonable basis. In particular, the application specific integrated circuit
("ASIC") which forms the core of the Company's MessageAlert product is
manufactured only by Microchip Technology, Inc. From time to time, the
semiconductor industry has experienced extreme supply constraints. An
inability of the Company to obtain sufficient quantities of ASICs from
Microchip Technology, Inc. would have a materially adverse effect on the
Company's business and operating results.

The Company subcontracts the manufacture of its board level assemblies to
third parties, and there can be no assurance that these subcontractors will be
able to support the manufacturing requirements of the Company. An inability to
obtain sufficient quantities of sole-source components or subassemblies, or to
develop alternative sources as required in the future, could result in delays
or reductions in product shipments or could force the Company to redesign its
products, either of which could materially adversely effect the Company's
business and operating results. See "Business--Manufacturing."

COMPLIANCE WITH GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS

The Company's products must comply with a variety of regulations and
standards including regulations and standards set by the Federal
Communications Commission, Underwriters Laboratories, National Registered
Testing Laboratories, and Bell Communications Research. As the Company enters
international markets it will be required to comply with whatever governmental
regulations and industry standards exist in those markets. In addition, the
U.S. telecommunications market is evolving rapidly in part due to recently
enacted laws revamping the telecommunications regulatory structure. Additional
legislative or regulatory changes are possible. A failure by the Company to
comply with existing regulations and standards or to adapt to new regulations
and standards could have a material adverse effect on the Companies business
and operating results. See "Business--Governmental Regulation and Industry
Standards."

10
<PAGE>

DISCRETION TO REALLOCATE USE OF PROCEEDS; USE OF PROCEEDS TO BENEFIT INSIDERS

The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of proceeds based upon current operating plans
and certain assumptions, including those relating to the Company's future
revenue levels and expenditures, and assumptions regarding industry and
general economic conditions and other conditions. Future events, including
problems, delays, expenses, and complications frequently encountered by early-
stage companies, as well as changes in competitive conditions affecting the
Company's business and the success or lack thereof of the Company's research
and development or marketing efforts, may make it necessary or advisable for
the Company to reallocate the net proceeds among the described uses or use
portions of the net proceeds for other purposes. Any such shifts will be at
the discretion of the Company. Further, $1,515,000 of the net proceeds will be
used to repay certain indebtedness of the Company, including the principal and
interest outstanding on $850,000 principal amount of Bridge Notes (including
$50,000 principal amount of notes held by Paul F. DePond, the Company's
President and Chief Executive Officer), $200,000 principal amount of
Convertible Shareholder Notes, $90,000 principal amount of certain loans made
to the Company by Mr. DePond, $200,000 principal amount of the Ballard Note
(as hereinafter defined), held by Michael Ballard, a director of the Company,
and $175,000 principal amount of the Sutton Note (as hereinafter defined),
held by Sutton Partners, L.P., the limited partners of which are the
grandchildren of the sole stockholder of the Underwriter. In addition,
approximately $350,000 of the proceeds will be used over the next year to pay
executive salaries. See "Use of Proceeds," "Management--Employment Contracts,"
"Certain Relationships and Related Transactions" and "Underwriting."

RISKS ASSOCIATED WITH PLANNED GROWTH

The Company plans to expand significantly its operations during fiscal year
1998, which could place a significant strain on its limited personnel,
financial, management and other resources. In order to manage its planned
growth, the Company will need to significantly expand its product development
and sales and marketing capabilities and personnel. In addition, the Company
will need to adapt its financial planning, accounting systems and management
structure to accommodate such growth if it occurs. A failure by the Company to
properly anticipate or manage its growth, if any, could adversely affect its
business, operating results and financial condition. In the last quarter of
fiscal 1996, the Company over-estimated its growth rate and, as a result,
built-up excessive inventories of certain products and components. There can
be no assurance that the Company will not experience similar or more severe
difficulties in the future. See "Business."

CHARGES ARISING FROM DEBT ISSUANCE COSTS AND DEBT DISCOUNT

Upon completion of the Offering and repayment of the Bridge Notes, a non-
recurring charge representing the unamortized debt discount and debt issuance
costs incurred in connection with the Bridge Financing will be charged in the
quarter in which the Offering is completed. The aggregate unamortized debt
discount and debt issue costs associated with the Bridge Notes at June 30,
1997 is approximately $158,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS

Future sales of Common Stock by existing shareholders pursuant to Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise, could have an adverse effect on the price of the Company's
securities. Pursuant to the Bridge Financing, the Company has agreed to
register for resale 425,000 Public Warrants and the underlying securities upon
expiration of the one-year restriction on transferability to which the Bridge
Financing investors have agreed. In addition, upon the sale of the 1,600,000
Units offered hereby, the Company will have outstanding 3,547,214 shares of
Common Stock, 1,600,000 Class A Warrants, and other warrants to purchase
212,786 shares of Common Stock (3,787,214 shares of Common Stock and 1,840,000
Warrants if the Underwriter's over-allotment option is exercised in full). The
shares of Common Stock and Warrants sold in the Offering will be freely
tradeable without restriction under the Securities Act, unless acquired by
"affiliates" of the Company as that term is defined in the Securities Act. The
remaining 2,160,000

11
<PAGE>

outstanding shares of Common Stock and options and warrants to purchase Common
Stock are "restricted securities" within the meaning of Rule 144 under the
Securities Act. Pursuant to Rule 144, substantially all of these restricted
shares will be eligible for resale either immediately or commencing 90 days
following the date of this Prospectus subject to the restrictions on
transferability relating to the Escrow Shares. However, all the holders of the
shares of Common Stock outstanding prior to the Offering and all the holders
of options or warrants to purchase shares of Common Stock have agreed not to
sell or otherwise dispose of any securities of the Company for a period of 13
months from the date of this Prospectus without the prior written consent of
the Underwriter. The holder of the Unit Purchase Option has certain demand and
"piggy-back" registration rights covering its securities. The exercise of such
rights could involve substantial expense to the Company. Sales of Common
Stock, or the possibility of such sales, in the public market may adversely
affect the market price of the securities offered hereby. See "Description of
Securities," "Shares Eligible for Future Sale" and "Underwriting."

EFFECT OF OUTSTANDING OPTIONS AND WARRANTS

Upon sale of the 1,600,000 Units offered hereby, the Company will have
outstanding 1,600,000 Warrants to purchase 1,600,000 shares of Common Stock
for $6.50 per share (subject to adjustment in certain circumstances) (or
1,840,000 Warrants if the Underwriter's over-allotment option is exercised in
full). In addition, the Company will have outstanding 425,000 Public Warrants
to purchase 425,000 shares of Common Stock, the Unit Purchase Option to
purchase an aggregate of 320,000 shares of Common Stock assuming exercise of
the underlying Warrants, additional warrants to purchase 212,786 shares of
Common Stock and 200,000 shares of Common Stock reserved for issuance under
the Option Plan, under which no options were outstanding as of June 30, 1997.
Holders of such options and warrants may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company. Moreover, while these options are outstanding,
the Company's ability to obtain financing on favorable terms may be adversely
affected. See "Management" and "Description of Securities."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Units offered hereby will incur immediate and substantial
dilution in the net tangible book value of the Common Stock included in the
Units, estimated to be approximately $3.23 per share or approximately 65% of
the public offering price per share based on an initial public offering price
of $5.00 and allocating no value to the Warrants. Additional dilution to
public investors, if any, may result to the extent that the Warrants, the Unit
Purchase Option or outstanding options and warrants are exercised at a time
when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities. See "Dilution."

ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF
PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

The initial public offering price of the Units and the exercise prices and
other terms of the Warrants have been arbitrarily determined by negotiation
between the Company and the Underwriter and do not necessarily bear any
relationship to the Company's assets, net worth or other established criteria
of value. The exercise and redemption prices of the Warrants should not be
construed to imply or predict any increase in the market price of the Common
Stock. See "Underwriting." No public market for the securities has existed
prior to the Offering. No assurance can be given that an active trading market
in the Company's securities will develop after completion of the Offering or,
if developed, that it will be sustained. No assurance can be given that the
market price of the Company's securities will not fall below the initial
public offering price. The Company believes factors such as quarterly
fluctuations in financial results and announcements of new technology or
products or regulatory developments in the telephone industry may cause the
market price of the Company's securities to fluctuate, perhaps substantially.
These fluctuations, as well as general economic conditions, such as recessions
or high interest rates, may adversely affect the market price of the
securities.

12
<PAGE>

POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET

While the Company's Units, Common Stock and Warrants meet the current Nasdaq
listing requirements and will be initially included on the Nasdaq SmallCap
market, there can be no assurance that the Company will meet the criteria for
continued listing. Nasdaq has recently adopted more stringent financial
requirements for listing on Nasdaq. With respect to continued listing, such
new requirements are (i) either at least $2,000,000 in tangible assets, a
$35,000,000 market capitalization or net income of at least $500,000 in two of
the three prior years, (ii) at least 500,000 shares in the public float valued
at $1,000,000 or more, (iii) a minimum Common Stock bid price of $1.00, (iv)
at least two active market makers, and (v) at least 300 holders of the Common
Stock. If adopted, the Company will have to meet and maintain such new
requirements. If the Company is unable to satisfy Nasdaq's maintenance
requirements, its securities may be delisted from Nasdaq. In such event,
trading, if any, in the Units, Common Stock and Warrants would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." Consequently, the liquidity of the
Company's securities could be impaired, not only in the number of securities
which could be bought and sold, but also through delays in the timing of
transactions and lower prices for the Company's securities than might
otherwise be attained.

RISK OF LOW-PRICE ("PENNY") STOCKS

If the Company's securities were to be delisted from Nasdaq, they could
become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other
than established customers and "accredited investors" (generally, individuals
with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by this
rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of purchasers in the Offering to sell any of the securities acquired
hereby in the secondary market.

Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.

The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or if the
Company meets certain minimum net tangible assets or average revenue criteria.
There can be no assurance that the Company's securities will qualify for
exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's
securities were subject to the rules on penny stocks, the market liquidity for
the Company's securities could be severely adversely affected.

13
<PAGE>

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS

The Warrants included in the Units offered hereby will be immediately
detachable and separately tradeable. Although the Units will not knowingly be
sold to purchasers in jurisdictions in which the Units are not registered or
otherwise qualified for sale, purchasers who reside in or move to
jurisdictions in which the securities underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable
may buy Units (or the Warrants included therein) in the aftermarket. In this
event, the Company would be unable to issue shares to those persons desiring
to exercise their Warrants unless and until the underlying shares could be
registered or qualified for sale in the jurisdictions in which such purchasers
reside, or unless an exemption from such qualification exists in such
jurisdictions. No assurance can be given that the Company will be able to
effect any such required registration or qualification.

Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the shares
underlying the Warrants is then in effect under the Securities Act and such
shares are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to
use reasonable efforts to maintain the effectiveness of a current prospectus
covering the shares underlying the Warrants, no assurance can be given that
the Company will be able to do so. The value of the Warrants may be greatly
reduced if a current prospectus covering the shares issuable upon the exercise
of the Warrants is not kept effective or if such securities are not qualified
or exempt from qualification in the states in which the holders of the
Warrants then reside.

ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS

The Warrants are subject to redemption by the Company commencing one year
from the date of this Prospectus, on at least 30 days' prior written notice,
if the average closing bid price of the Common Stock for 30 consecutive
trading days ending within 15 days of the date on which the notice of
redemption is given exceeds $9.10 per share. If the Warrants are redeemed,
holders of Warrants will lose their right to exercise the Warrants, except
during such 30-day notice of redemption period. Upon the receipt of a notice
of redemption of the Warrants, the holders thereof would be required to: (i)
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, (ii) sell the Warrants at the then current
market price (if any) when they might otherwise wish to hold the 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. See
"Description of Securities--Redeemable Warrants."

POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES
DUE TO INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION
OF THE UNDERWRITER AND BLAIR & CO. AND RECENT SETTLEMENT BY
BLAIR & CO. WITH THE NASD

The Securities and Exchange Commission (the "Commission") is conducting an
investigation concerning various business activities of the Underwriter and
D.H. Blair & Co., Inc., a selling group member which will distribute a
substantial portion of the Units offered hereby ("Blair & Co."). The Company
has been advised by the Underwriter that the investigation has been ongoing
since at least 1989 and that it is cooperating with the investigation. The
Underwriter cannot predict whether this investigation will ever result in any
type of formal enforcement action against the Underwriter or Blair & Co. In
July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with
the NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers
regarding market-making activities of Blair & Co. in connection with certain
securities issues during the period from June 1993 through May 1995 where
Blair & Co. was the primary selling group member. NASDR alleged the firm
failed to accurately calculate the contemporaneous cost of securities in
instances where the firm dominated and controlled after-market trading,
thereby causing the firm to charge its customers excessive mark-ups. NASDR
also alleged the firm did not make adequate disclosure to customers about its
market-making activities in two

14
<PAGE>

issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2 million fine, make $2.4 million in restitution to
retail customers, employ an independent consultant for two years to review and
make recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more than 60% of the total securities sold
in any securities offering in which it participates as an underwriter or
selling group member. The Chief Executive Officer of Blair & Co. has agreed to
settle failure to supervise charges by consenting to a censure, the imposition
of a $225,000 fine and a 60-day suspension from associating with any NASD
member firm and to take a requalification examination. The firm's head trader
has agreed to settle charges against him by consenting to a censure, the
imposition of a $300,000 fine and a 90-day suspension from associating with
any member firm and has undertaken to take certain requalification
examinations. The settlement with NASDR does not involve or relate to the
Underwriter, its chief executive officer or any of its other officers or
directors.

The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution
of the Commission's investigation will have any effect on such firm's ability
to make a market in the Company's securities and, if so, whether the liquidity
or price of the Company's securities would be adversely affected. See
"Underwriting."

NO DIVIDENDS

The Company has paid no dividends to its shareholders since its inception
and does not plan to pay dividends in the foreseeable future. The Company
intends to reinvest earnings, if any, in the development and expansion of its
business. See "Dividend Policy."

SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS

Based upon the number of shares of Common Stock that will be outstanding
upon completion of this Offering (assuming no exercise of the Underwriter's
over-allotment option), the officers and directors of the Company as a group
will beneficially own approximately 20.8%, of the Company's outstanding Common
Stock after giving effect to the exercise of all outstanding options and
warrants held by such individuals. As a result, the officers and directors as
a group will be able to exert substantial influence over the election of the
Company's directors and the direction of the Company's policies. See
"Principal Shareholders."

CONTRACTUAL OBLIGATIONS TO UNDERWRITER FOLLOWING COMPLETION OF OFFERING

During the five-year period from the date of this Prospectus, in the event
the Underwriter originates financing or a merger, acquisition, or transaction
to which the Company is a party, the Company will be obligated to pay the
Underwriter a finder's fee in consideration for origination of such
transaction. The fee is based on a percentage of the consideration paid in the
transaction, ranging from 7% of the first $1,000,000 to 2 1/2% of any
consideration in excess of $9,000,000. In addition, the Underwriter has the
right to designate one director to the Company's Board of Directors for a
period of five years from the completion of the Offering, although it has not
yet selected any such designee. Such designee may be a director, officer,
partner, employee or affiliate of the Underwriter. See "Underwriting."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

The Company's Board of Directors has authority to issue up to 5,000,000
shares of Preferred Stock and determine the price, rights, preferences,
privileges and restrictions, including voting rights of such shares, without
any further vote or action by the Company's shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisition and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock. See "Description of Securities--
Preferred Stock."

15
<PAGE>

CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SECURITIES

In the event any Escrow Securities owned by securityholders of the Company
who are officers, directors, consultants or employees of the Company are
released from escrow, compensation expense will be recorded for financial
reporting purposes. Therefore, in the event the Company attains any of the
earnings or stock price thresholds required for the release of the Escrow
Securities, the release will be treated, for financial reporting purposes, as
compensation expense of the Company. Accordingly, the Company will, in the
event of the release of the Escrow Securities, recognize during the period
that the earnings or stock price thresholds are met a substantial noncash
charge to earnings that would increase the Company's loss or reduce or
eliminate earnings, if any, at such time. The amount of this charge will be
equal to the aggregate market price of such Escrow Securities at the time of
release from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total shareholders' equity or cash
flow, it may have a depressive effect on the market price of the Company's
securities. See "Principal Shareholders--Escrow Securities" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Release of Escrow Securities."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Articles of Incorporation eliminate in certain circumstances
the liability of directors of the Company for monetary damages for breach of
their fiduciary duty as directors. The Company has also entered into
indemnification agreements ("Indemnification Agreement(s)") with each of its
directors and officers. Each such Indemnification Agreement will provide that
the Company will indemnify the indemnitee against expenses, including
reasonable attorneys' fees, judgments, penalties, fines, and amounts paid in
settlement actually and reasonably incurred by them in connection with any
civil or criminal action or administrative proceeding arising out of their
performance of duties as a director or officer, other than an action
instituted by the director or officer. The Indemnification Agreements will
also require the Company to indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery of amounts due under the
Indemnification Agreement and to recover the expenses of such a suit if they
are successful. See "Management--Indemnification of Officers and Directors and
Related Matters."

16
<PAGE>

USE OF PROCEEDS

The net proceeds from the sale of the 1,600,000 Units to be sold in the
Offering, after deducting the underwriting discounts and commissions and other
estimated expenses of the Offering are anticipated to be approximately
$6,470,000 ($7,514,000 if the over-allotment option is exercised in full). The
Company expects the net proceeds to be utilized as follows:

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF PERCENTAGE OF
ANTICIPATED APPLICATION NET PROCEEDS NET PROCEEDS
----------------------- ------------ -------------
<S> <C> <C>
Repayment of indebtedness(1)..................... $1,515,000 23.4
Product development(2)........................... $1,000,000 15.5
Sales and marketing(3)........................... $1,000,000 15.5
Additional inventory(4).......................... $ 500,000 7.7
Fixed assets(5).................................. $ 250,000 3.9
Working capital and general corporate
purposes(6)..................................... $2,205,000 34.0
---------- ----
Total.......................................... $6,470,000 100%
========== ====
</TABLE>
- --------
(1) Represents repayment of (i) the $850,000 principal amount of Bridge Notes
issued in the Bridge Financing completed by the Company in March 1997,
(ii) the $200,000 principal amount of Outstanding Convertible Shareholder
Notes, (iii) $90,000 principal amount of notes issued to Mr. Paul DePond,
President and Chief Executive Officer of the Company (the "DePond Notes"),
(iv) $200,000 principal amount of a note issued to Michael Ballard, a
director of the Company (the "Ballard Note"), and (v) $175,000 principal
amount of a note issued to Sutton Partners, L.P., the limited partners of
which are the grandchildren of the sole stockholder of the Underwriter
(the "Sutton Note"). All of such loans were used for working capital.
(2) Represents costs for research and development of new products and
enhancements of current products.
(3) Represents funds required for the implementation of marketing programs,
sales materials, advertising, trade shows and the hiring, training and
employment of additional sales, marketing, and support personnel.
(4) Represents the cost of establishing manufacturing inventories for
projected sales of current products.
(5) Represents fixed asset requirements that are anticipated to support new
product development and to establish and maintain an adequate customer
service and warranty tracking system.
(6) Represents funds that are to be used for working capital and general
corporate purposes, including $350,000 for salaries for executive
officers, office expenses and other general overhead expenses.

The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of the proceeds based upon current operating
plans and certain assumptions, including those relating to the Company's
future revenue levels and expenditures, and assumptions regarding industry and
general economic conditions and other conditions. Future events, including
problems, delays, expenses and complications frequently encountered by early
stage companies, as well as changes in competitive conditions affecting the
Company's business and the success or lack thereof of the Company's research
and development or marketing and sales efforts, may make it necessary or
advisable for the Company to reallocate the net proceeds among the above uses
or use portions of the net proceeds for other purposes. Any such shifts will
be at the discretion of the Company.

The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds of the Offering, together
with projected cash flow from operations, will be sufficient to satisfy the
Company's contemplated cash requirements for the next 12 months. If the
Company's estimates prove incorrect, the Company will have to seek alternative
sources of financing during such period, including debt and equity financing
and the reduction of operating costs and projected growth plans. No assurance
can be given that such financing could be obtained by the Company on favorable
terms, if at all, and if the Company is unable to obtain needed financing, the
Company's business would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

17
<PAGE>

Pending application, the net proceeds of the Offering will be invested in
short-term, high grade interest-bearing savings accounts, certificates of
deposit, United States government obligations, money market accounts or short-
term interest bearing obligations. Any proceeds received upon exercise of the
Underwriter's over-allotment option, the Warrants, the Underwriter's Unit
Purchase Option, as well as income from investments, are currently intended to
be used for general corporate purposes.

DIVIDEND POLICY

The Company has never paid any cash dividends on its stock and anticipates
that, for the foreseeable future, it will continue to retain any earnings for
use in the operation of its business. Payment of cash dividends in the future
will depend upon the Company's earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements and
other factors deemed relevant by the Company's Board of Directors.

18
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
June 30, 1997 (after giving retroactive effect to a 1-for-5.05 reverse stock
split effected in February 1997); (ii) as adjusted to reflect the conversion
of the outstanding Preferred Stock into Common Stock upon completion of the
Offering and the sale of the Units offered hereby and the application of a
portion of the net proceeds therefrom to repay the Bridge Notes, the
outstanding Convertible Shareholder Notes, the DePond Notes, and the Ballard
Note. This table should be read in conjunction with the Financial Statements
and the Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Bridge Notes, net of discount(1)..................... $ 691,542 $ --
Ballard Note(2)...................................... 200,000 --
DePond Notes(2)...................................... 90,000 --
Convertible Shareholder Notes(2)..................... 200,000 --
Shareholders' equity (net capital deficiency):
Convertible Preferred Stock, no par value,
4,500,000 shares authorized, issued and
outstanding at June 30, 1997, aggregate
liquidation preference of $1,850,000; $.001 par
value, 5,000,000 shares authorized, none
outstanding, as adjusted(3)....................... 1,850,000 --
Common Stock, no par value, 12,100,000 shares
authorized, 1,080,906 shares issued and
outstanding; $.001 par value, 15,000,000 shares
authorized, 3,571,966 shares issued and
outstanding, as adjusted(3)(4)(5)................. 948,420 3,572
Additional paid-in capital......................... -- 9,264,848
Notes receivable from shareholders................. (25,775) (25,775)
Accumulated deficit(6)............................. (2,803,134) (2,961,592)
----------- -----------
Total shareholders' equity (net capital
deficiency)....................................... (30,489) 6,281,053
----------- -----------
Total capitalization............................. $ 1,151,053 $ 6,281,053
=========== ===========
</TABLE>
- --------
(1) The Bridge Notes are payable on the earlier of March 11, 1998 or the
completion of the Offering. See "Use of Proceeds."

(2) The DePond Notes and the Ballard Note are due on demand or upon the
completion of the Offering. The outstanding Convertible Shareholder Notes
are currently payable. See "Use of Proceeds" and "Certain Relationships
and Related Transactions."

(3) As adjusted shares authorized and par value of $.001 gives effect to the
Amended and Restated Articles of Incorporation which will be filed upon
the close of the Offering.

(4) Excludes (i) up to 480,000 shares of Common Stock issuable upon exercise
of the Underwriter's over-allotment option and the underlying warrants;
(ii) 1,600,000 shares of Common Stock issuable upon exercise of the
Warrants included in the Units offered hereby; (iii) 425,000 shares of
Common Stock issuable upon exercise of the Public Warrants; (iv) 320,000
shares of Common Stock issuable upon exercise of the Unit Purchase Option
and the Warrants included in such option; (v) 200,000 shares of Common
Stock reserved for issuance under the Stock Option Plan, (vi) 212,786
shares of Common Stock issuable upon exercise of outstanding warrants. See
"Management--Stock Option Plan," "Certain Relationships and Related
Transactions," and "Description of Securities."

(5) Includes the 1,247,786 Escrow Shares. See "Principal Shareholders--Escrow
Securities."

(6) As adjusted accumulated deficit gives effect to the recognition of
approximately $158,000 of expense which will be incurred upon the closing
of the Offering representing debt discount and debt issuance costs
relating to the Bridge Financing and repayment of the Bridge Notes. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

19
<PAGE>

RESTRUCTURING

As of December 31, 1996, the Company had issued and sold to certain of its
shareholders and other investors an aggregate of $932,125 principal amount of
convertible promissory notes (the "Convertible Shareholder Notes") and
warrants to purchase that number of shares of Common Stock of the Company
equal to 20% of the principal amount of the Convertible Shareholder Notes
divided by the price per share of the Company's next equity financing (the
"Shareholder Warrants"). The Convertible Shareholder Notes bore an interest
rate of 8% per annum and were convertible into equity of the Company at a
price equal to the price per share of the Company's next equity financing.
Subsequent to December 31, 1996, the Company completed a restructuring of the
Convertible Shareholder Notes and Shareholder Warrants (the "Restructuring").
Holders of an aggregate of $732,125 in principal amount of the Convertible
Shareholder Notes converted their notes into Common Stock of the Company at a
price per share of $4.55 and exchanged their accompanying Shareholder Warrants
for warrants to purchase an aggregate of 48,272 shares of the Company's Common
Stock at a price of $0.25 per share. Holders of the remaining $200,000
principal amount of Convertible Shareholder Notes will be repaid with the
proceeds of the Offering and exchanged their Shareholder Warrants for warrants
to purchase an aggregate of 7,920 shares of Common Stock at an exercise price
of $5.05 per share.

BRIDGE FINANCING

In March 1997, the Company completed the Bridge Financing in which it issued
an aggregate of $850,000 principal amount of Bridge Notes and 425,000 Bridge
Warrants and received net proceeds of approximately $725,000 (after expenses
of such offering). The Bridge Notes are payable, together with interest at the
rate of 10% per annum, on the earlier of one year from the issuance of the
Bridge Notes or the closing of the Offering. See "Use of Proceeds." The Bridge
Warrants entitle the holders thereof to purchase one share of Common Stock
commencing one year from the date of their issuance but will be exchanged
automatically on the closing of the Offering for the Public Warrants, each of
which will be identical to the Warrants included in the Units offered hereby.
The Bridge Financing investors have agreed not to exercise, sell, transfer,
assign, hypothecate or otherwise dispose of the Public Warrants for a period
of one year from the closing of the Offering. The Company has agreed to use
its best efforts to register the Public Warrants for resale upon expiration of
such lock-up period. See "Shares Eligible for Future Sale."

Upon repayment of the Bridge Notes, the Company will incur charges
aggregating approximately $158,000 relating to unamortized debt discount and
debt issuance costs attributable to the Bridge Warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

20
<PAGE>

DILUTION

The following discussion and tables allocate no value to the Warrants
contained in the Units.

Dilution represents the difference between the initial public offering price
per share paid by the purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. Net tangible
book value per share represents the net tangible assets of the Company (total
assets less total liabilities and intangible assets), divided by the number of
shares of Common Stock outstanding after giving effect to the conversion of
all outstanding shares of Preferred Stock into Common Stock upon completion of
the Offering and the repayment of the Bridge Notes. At June 30, 1997, the
Company had a net tangible book value of ($188,947), or approximately ($0.10)
per share ($0.27) per share if the Escrow Securities are excluded. After
giving effect to the issuance of the 1,600,000 Units offered hereby and the
Company's receipt of the estimated net proceeds therefrom and after deduction
of expenses aggregating approximately $730,000 the net tangible book value of
the Company, as adjusted at June 30, 1997 would have been $6,281,053, or
approximately $1.77 per share ($2.73 per share if the Escrow Securities were
excluded). This would result in an immediate dilution to investors in the
Offering of $3.23, or 65%, per share ($2.27 or 45%, per share if the Escrow
Securities were excluded), and the aggregate increase in the net tangible book
value to present shareholders would be $1.87 per share ($3.00 per share if
Escrow Securities are excluded), as illustrated by the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per Unit..................... $5.00
Net tangible book value per share before Offering........ $ (.10)
Increase per share attributable to new investors in the
Units..................................................... 1.87
------
Net tangible book value per share after the Offering....... 1.77
-----
Dilution per share to investors(1)......................... $3.23
=====
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, the net tangible book
value per share after the Offering would be approximately $1.93, resulting
in dilution to new investors in the Offering of $3.07, or 61% per share.

The following table sets forth on a pro forma basis the differences between
existing shareholders and new investors in the Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and by new investors:

<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF TOTAL AVERAGE
OUTSTANDING CONSIDERATION CONSIDERATION PRICE PER
NUMBER SHARES PAID(1) PAID SHARE
--------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing
Shareholders(2)........ 1,947,214 54.9% $2,792,170 25.9% $1.43
New Investors........... 1,600,000 45.1 8,000,000 74.1 $5.00
--------- ----- ----------- -----
Total................... 3,547,214 100.0% $10,792,170 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Prior to the deduction of costs of issuance.
(2) Includes the 1,247,786 Escrow Shares. See "Principal Shareholders--Escrow
Securities."

As of the date of this Prospectus, there were outstanding warrants to
purchase 212,786 shares of Common Stock exercisable at prices ranging from
$0.25 to $5.05 per share. To the extent that such outstanding warrants are
exercised in the future, there may be additional dilution to existing
shareholders.

21
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The statement of operations
data for the two years in the period ended September 30, 1996 are derived from
the audited financial statements of the Company included elsewhere in this
Prospectus. The report of Ernst & Young LLP which also appears herein contains
an explanatory paragraph relating to uncertainty as to the ability of the
Company to continue as a going concern. The selected financial data as of June
30, 1997 and for the nine-month periods ended June 30, 1996 and 1997 have been
derived from the Company's unaudited financial statements which, in the
opinion of Management, reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the results of
operations for such periods. The results of the interim periods are not
necessarily indicative of the results of a full year.

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
---------------------- -----------------------
1995 1996 1996 1997
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales................. $ 9,333 $ 308,067 $ 194,418 $3,057,480
Cost of sales................. 7,929 428,112 200,096 2,157,903
--------- ----------- ----------- ----------
Gross profit (loss)........... 1,404 (120,045) (5,678) 899,577
Operating expenses:
Research and development.... 159,163 537,902 401,436 501,290
Sales and marketing......... 122,884 549,916 407,711 509,340
General and administrative.. 146,756 440,089 319,010 466,255
--------- ----------- ----------- ----------
Total operating expenses...... 428,803 1,527,907 1,128,157 1,476,885
--------- ----------- ----------- ----------
Loss from operations.......... (427,399) (1,647,952) (1,133,835) (577,308)
Interest income (expense) net. 1,337 (9,267) 19,017 (142,545)
--------- ----------- ----------- ----------
Net loss...................... $(426,062) $(1,657,219) $(1,114,818) $ (719,853)
========= =========== =========== ==========
Net loss per share............ $ (1.05) $ (3.87) $ (2.56) $ (1.50)
========= =========== =========== ==========
Weighted average shares
outstanding.................. 406,358 428,764 435,875 479,605
========= =========== =========== ==========
Pro forma net loss per share.. $ (2.12) $ (0.85)
=========== ==========
Weighted average shares used
in computing pro forma net
loss per share............... 781,306 844,912
=========== ==========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................... $ (622,936)
Total assets...................................................... 2,323,818
Total liabilities................................................. 2,354,307
Total shareholders' equity (net capital deficiency)............... (30,489)
</TABLE>

22
<PAGE>

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

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. The
following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.

OVERVIEW

The Company was founded in August 1994 to develop, manufacture, market and
sell computer telephony products for the business, SOHO and residential
markets. From inception until January 1996, the Company was engaged primarily
in research and development. In January 1996, the Company shipped the first
version of its MessageAlert product and in December 1996 shipped its first
Centrex Auto Attendant product. Substantially all of the Company's revenue has
been derived from sales of its MessageAlert product.

To date, the Company's working capital requirements have been met through
the sale of equity and debt securities and, to a lesser extent, product
revenue and the Company's line of credit. The Company has sustained
significant operating losses in every fiscal period since inception and
expects to incur substantial quarterly operating losses in the future. The
Company's limited operating history makes the prediction of future operating
results difficult if not impossible. Accordingly, although the Company
experienced significant growth in revenue in the nine-month period ended June
30, 1997, such growth should not be considered to be indicative of future
revenue growth. In particular, the Company believes the results achieved in
the third quarter of fiscal 1997 will not be repeated in the fourth quarter of
fiscal 1997. See "--Results of Operations." Future operating results will
depend on many factors, including the demand for the Company's products, the
level of product and price competition, the ability of the Company to expand
its existing and to create new distribution channels, and the ability of the
Company to develop and market new products and control costs. There can be no
assurance that the Company's revenue will grow or be sustained in future
periods or that the Company will ever achieve profitability.

RESULTS OF OPERATIONS

Revenue

To date, substantially all of the Company's revenue has been derived from
the sale of its MessageAlert products. Revenue consists of gross revenue less
product returns. Revenue for the fiscal year ended September 30, 1996
increased to $308,067 from $9,333 for the fiscal year ended September 30,
1995. Revenue for the nine- month period ended June 30, 1997 increased to
$3,057,480 from $194,418 for the nine-month period ended June 30, 1996. Sales
to RBOCs and LECs constituted 69% and 93% of revenue for the fiscal year ended
September 30, 1996 and the nine-month period ended June 30, 1997,
respectively. In addition, three customers accounted for 30%, 18% and 16% of
sales in fiscal 1996, and one customer accounted for 69% of sales in the nine-
month period ended June 30, 1997.

During the third quarter of fiscal 1997, the Company recorded revenue of
approximately $2.1 million primarily as the result of one customer conducting
a particularly large marketing program using the Company's MessageAlert
product during that quarter. Though the Company anticipates that the customer
will run similar programs in the future, the customer is not committed to
doing so and the timing of any such additional programs is uncertain. As a
result, the Company currently anticipates that revenue for the fourth quarter
of fiscal 1997 will be substantially below that for the third quarter of
fiscal 1997 and possibly as low as $350,000.

Cost of Sales

Cost of sales consists primarily of the cost to manufacture the Company's
products. Cost of sales increased to $428,112 in the fiscal year ended
September 30, 1996 from $7,929 in the fiscal year ended September 30, 1995 and
to $2,157,903 for the nine-month period ended June 30, 1997 from $200,096 for
the nine-month period ended June 30, 1996. These increases were the result of
increased sales of the Company's products.

23
<PAGE>

Research and Development

Research and development expense consists principally of personnel costs,
supply expenses and equipment depreciation. Research and development expense
increased to $537,902 for the year ended September 30, 1996 from $159,163 for
the year ended September 30, 1995. This increase was primarily the result of
hiring additional engineers and outside consultants for product development.
Research and development expense for the nine-month period ended June 30, 1997
increased to $501,290 from $401,436 for the nine-month period ended June 30,
1996. This increase was due to increased spending on new product development.

The Company expects that research and development expenses will increase
significantly in future quarters as the Company attempts to develop new
products and enhance its current products. See "Use of Proceeds" and
"Business--Research and Development."

Sales and Marketing

Sales and marketing expense consists primarily of personnel, consulting and
travel costs and sales commissions related to the Company's sales and
marketing efforts. Sales and marketing expenses increased to $549,916 for the
year ended September 30, 1996 from $122,884 for the year ended September 30,
1995 and to $509,340 for the nine-month period ended June 30, 1997 from
$407,711 for the nine-month period ended June 30, 1996. These increases were
attributable primarily to the additional commissions paid to sales personnel.

The Company anticipates that sales and marketing expenses will increase
significantly in future quarters as the Company hires additional sales
personnel and attempts to expand its existing and create new distribution
channels. See "Use of Proceeds" and "Business-Sales, Marketing and
Distribution."

General and Administrative

General and administrative expense consists of general management and
finance personnel costs, rent, telephone and legal expenses for the Company.
General and administrative expenses increased to $440,089 for the year ended
September 30, 1996 from $146,756 for the year ended September 30, 1995 and to
$466,255 for the nine-month period ended June 30, 1997 from $319,010 for the
nine-month period ended June 30, 1996. These increases were primarily the
result of hiring additional personnel and the commencement of salary payments
to certain founders who previously had not been paid salaries. The Company
expects that it will need to hire additional accounting and financial
personnel in order to support anticipated growth and comply with the reporting
and investor relations obligations of a public company.

Income Taxes

There was no provision for federal or state income taxes in fiscal 1995 or
1996 or in the nine-month periods ended June 30, 1996 and 1997, as the Company
incurred net operating losses. The Company expects to incur a net operating
loss in future quarters and years. As of September 30, 1996, the Company had
federal and state net operating loss carryforwards of approximately
$1,800,000. The net loss carryforwards and credit carryforwards will expire in
tax years 2003 and 2011, if not utilized. Utilization of the net operating
losses and credits may be subject to a substantial annual limitation due to
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended (the "Code"), and similar state provisions. This Offering may result
in such an ownership change for purposes of Section 382 of the Code. If an
ownership change were to occur, net operating losses and credits could expire
before utilization. For financial reporting purposes, deferred tax assets
primarily related to the net operating carryforwards recognized under
Financial Accounting Standard No. 109, "Accounting for Income Taxes," have
been fully offset by a valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through private
sales of equity and debt securities and a now expired bank line of credit for
working capital. In the fiscal year ended September 30, 1996 and nine-month
period ended June 30, 1997, the Company's net cash used in operating
activities equaled $2,034,658 and $934,086, respectively. The Company
anticipates that it will have a negative cash flow from operating activities
in future quarters and years.

24
<PAGE>

In March 1997, the Company completed the Bridge Financing which consisted of
the sale of $850,000 principal amount of Bridge Notes bearing interest at an
annual rate of 10% and Bridge Warrants to purchase an aggregate of 425,000
shares of Common Stock. See "Capitalization--Bridge Financing." The net
proceeds of the Bridge Financing of approximately $735,000 have been utilized
by the Company to repay certain indebtedness and for working capital purposes
including general and administrative expense and expenses of the Offering. The
Company intends to repay the principal and accrued interest on the Bridge
Notes with a portion of the proceeds of the Offering. See "Use of Proceeds."
The Company will recognize a non-recurring charge of approximately $158,000
representing the aggregate debt discount and debt issuance costs associated
with the Bridge Financing at the time of repayment. See Note 7 of Notes to
Financial Statements.

From time to time, Mr. Paul F. DePond, President and Chief Executive Officer
of the Company, has funded the Company's working capital requirements. In
fiscal 1995, Mr. DePond made capital advances in the aggregate principal
amount of $75,000 of which $50,000 in principal amount, but not the accrued
interest thereon, was repaid through December 31, 1996 and the remaining
$25,000 in principal amount and the remaining accrued interest thereon will be
repaid upon the closing of the Offering. In February 1997, Mr. DePond advanced
the Company $65,000 which amount, including accrued interest, which will be
repaid upon closing of the Offering. See "Use of Proceeds" and "Certain
Relationships and Related Transactions."

In April 1997, one of the Company's directors loaned the Company $200,000 in
exchange for the Ballard Note and warrants to purchase 2,970 shares of the
Company's Common Stock at a price per share of $5.00. The Ballard Note bears
interest at the rate of 10% per annum and is payable in October 1997. See "Use
of Proceeds" and "Certain Relationships and Related Transactions."

In August 1997, the Company issued to Sutton Partners, L.P. the Sutton Note
with a principal amount of $175,000 which bears interest at the rate of 10%
per annum and is payable upon the closing of the Offering. The limited
partners of Sutton Partners, L.P. are the grandchildren of the sole
stockholder of the Underwriter. See "Use of Proceeds" and "Underwriting."

During the 12-month period following the Offering, the Company is committed
to pay approximately $350,000 in compensation to its current executive
officers. See "Management--Employment Contracts."

The Company believes that the proceeds from the Offering, together with
existing sources of liquidity, will satisfy the Company's anticipated cash
needs through at least the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's liquidity requirements,
the Company may attempt to sell additional equity or convertible debt
securities or obtain credit facilities. The sale of additional equity or
convertible debt securities would result in additional dilution the Company's
shareholders. There can be no assurance as to the availability or terms of any
required additional financing, when and if needed. In the event that the
Company fails to raise any funds it requires, it may be necessary for the
Company to significantly curtail its activities or cease operations.

RELEASE OF ESCROW SECURITIES

25
<PAGE>

BUSINESS

The Company is engaged in the development, manufacture, marketing and sale
of computer telephony products for the business, Small Office Home Office
("SOHO") and residential marketplaces. In recent years, the number of
individuals and businesses relying on their telephone company service provider
to provide them with services such as voice mail and CENTREX, a business-
oriented service which eliminates the need for on-premise telephone switching
equipment, has increased dramatically. The Company's products are designed to
enhance the convenience and utility of these services by providing customers
with features which are either not available or not included in standard
service packages. The Company's MessageAlert product increases the timeliness
and ease of message retrieval for voice mail subscribers by providing a visual
indication that a message has been received. The Company's Centrex Auto
Attendant product gives business and SOHO customers a cost-effective means of
ensuring that incoming calls are properly routed even when a human attendant
is not available.

INDUSTRY BACKGROUND

Voice Mail

In 1995, approximately 14 million residential and business customers
received voice mail services from their telephone service provider. The number
of customers subscribing to voice mail has increased at an annual rate of
almost 20% since 1990. Residential voice mail subscribers typically pay their
telephone service provider a monthly fee of $6 to $7 for voice mail services
whereas business voice mail subscribers generally pay from $15 to $20. Because
of its message management capabilities, reliability and remote access
features, voice mail is a significant improvement over traditional telephone
answering machines. However, voice mail subscribers know they have a message
waiting only if they remember to pick up their telephone and listen for the
distinctive stutter dial tone which indicates that a message has been
received. As a result, messages are often received substantially later than if
the blinking light of the traditional answering machine had been available.
Telephone company voice mail product managers believe that the lack of a
visual message waiting indicator is one of the major reasons that voice mail
subscribers cancel their service. In a survey conducted by Pacific Bell, 83%
of respondents stated that a voice mail indicator light either "enhanced" or
"greatly enhanced" their voice mail service.

Development of a visual indicator for telephone company provided voice mail
was impeded by governmental regulation and shifting telephony standards. For
many years, the Federal Communications Commission ("FCC") prohibited the use
of any device which would take a telephone line "off-hook" for a purpose other
than making a telephone call. As a result, it was illegal to sell a device
which would sample a telephone line to determine if the stutter dial tone was
present. In response to this restriction, the major domestic telephone
companies in 1992 and 1993 adopted a signaling standard (known as "CLASS")
which enabled a device which was attached to a telephone line to be alerted to
the presence of a voice mail message without taking the line off-hook. In
addition, in September 1995, the FCC issued a waiver to allow stutter tone
detection devices to be attached to telephone lines. See "Business--
Governmental Regulation and Industry Standards." Despite these changes, the
vast majority of subscribers to telephone company provided voice mail still do
not receive a visual indication that they have a message waiting.

The Notify Solution

The Company's MessageAlert product remedies this deficiency in voice mail
services by providing subscribers with a visual indication that a message has
been received. The MessageAlert is a small, battery-operated Visual Message
Waiting Indicator ("VMWI") which connects to a voice mail subscriber's
telephone line between the telephone jack and the telephone. The MessageAlert
is designed to work with either one or both of the signaling standards used by
telephone companies to indicate that voice mail has been received. When the
MessageAlert senses that a message has been received, its indicator light
begins to blink. Once the message has been retrieved, the light turns off. The
Company's believes the MessageAlert is the only battery operated VMWI
compatible with both stutter and CLASS signaling on the market today.

26
<PAGE>

Stutter dial tone, a normal dial tone turned on and off intermittently, is
still the most common signaling standard. This signal is initiated by a
communication from the voice mail platform to the central office switch. If a
subscriber has a message, the stutter dial tone is present; if there are no
messages, the dial tone is normal. Stutter compatible VMWIs work by checking
the telephone line whenever the customer completes a call and whenever a call
is placed to the customer's number but not picked up. The VMWI turns its
indicator light on or off based on the presence or absence of a stutter dial
tone when it checks the line.

CLASS signaling is emerging as a complement to, rather than a replacement
for, stutter signaling. CLASS signals are low speed signals transmitted over
the telephone line while the telephone is on hook. CLASS signals are used to
support Caller-ID as well as voice mail. With CLASS signaling, the voice mail
platform instructs the central office switch to notify the subscriber that
they have a message. If the subscriber's telephone line is not in use, the
CLASS signal is transmitted and picked up by the VMWI and the indicator light
on the VMWI begins to blink. When the subscriber retrieves his messages,
another CLASS signal is sent which causes the VMWI to cease blinking.

Both stutter signaling and CLASS signaling have limitations. Implementing
CLASS signaling often requires telephone companies to upgrade their switches
and other elements of their network. In addition, a CLASS signal cannot be
sent while the subscriber's phone is in use. If an attempt to transmit the
CLASS signal to the subscriber's VMWI is unsuccessful because the subscriber's
phone is in use, then the switch does not attempt to re-send the CLASS signal
again for a period of time, often from two to four hours. As a result, a
subscriber may not receive timely notification of messages received while they
are on the phone.

The stutter signal is deficient in two instances. First, if a subscriber
picks up his messages remotely, the stutter signal will turn off but the
VMWI's indicator light will stay on. Second, if a subscriber forwards a
message to another subscriber, a common occurrence in the office context, the
stutter signal will be implemented but the indicator light will not come on.
Both these failures occur because the VMWI samples the line only after
specified events; events which occur without the use of the subscriber's
telephone do not trigger a sampling of the line. FCC regulations prohibit the
sale or use of VMWIs which sample the line other than after the specific
events described above.

In order to overcome the deficiencies of stutter and CLASS signaling, the
Company developed its MessageAlert product, a VMWI which is compatible with
both standards. Combining stutter and CLASS signaling provides the advantages
of both methods and eliminates the disadvantages of each. The stutter is
immediate and never delayed, and CLASS signaling is not event driven. As a
result, subscribers are ensured of timely notification of new messages. Notify
believes it is the only company currently producing a battery-operated VMWI
which is compatible with both stutter and CLASS signaling. The Company has
filed a patent application covering the "MultiSense" technology which provides
dual signalling capability to its MessageAlert product.

The Company is working with certain Regional Bell Operating Companies
("RBOCs") and large Local Exchange Carriers ("LECs") to encourage the adoption
of dual signaling as the standard for voice mail services. The Company
estimates that currently 20% of voice mail subscribers are on systems which
support both stutter and CLASS signaling with the remaining 80% on systems
which support only stutter signaling. The Company expects that eventually all
telephone companies will offer both CLASS and stutter signaling throughout
their networks but that the migration to dual signaling will be slow because
of the expense of upgrading switches to handle CLASS signaling.

Nevertheless, the Company believes that products which support dual-
signaling will have a significant competitive advantage even in telephone
systems with limited or no support for CLASS signaling. Almost all RBOCs and
large LECs have announced their intention to implement CLASS signaling. Most
will do so on a piecemeal basis over a number of years. During that transition
period, tracking which customers have dual signaling and which only have
stutter signaling will be difficult for the telephone companies from both an
administrative and a technical standpoint. Distributing dual signal VMWIs to
all customers regardless of which

27
<PAGE>

signaling standard they are currently receiving would eliminate the need for
such tracking as well as the need to upgrade customers' VMWIs when their
switching is upgraded. The Company believes that when marketing to the RBOCs
and LECs the ability to support dual signaling is a significant competitive
advantage.

The Company also believes the type of power source a VMWI uses is an
important competitive feature. All of the Company's MessageAlert products are
powered by batteries and can operate for over a year on one set of four "AA"
batteries under normal operating conditions. Certain of the Company's
competitors' products require an AC power adapter. This approach is
disadvantageous because telephones are often not located near power outlets
and because the VMWI will cease to operate in the event of a power outage.
Other competitors' products are powered by the current in the telephone line.
While convenient, most large telephone companies disfavor this approach
because such devices may adversely affect telephone service when they go off-
hook to recharge their visual indicator circuit. In addition, a device
connected to the public telephone network is not allowed under current FCC
regulations to go off hook periodically for any reason other than to dial a
number and use the network services.

CENTREX

Many businesses today rely on telephone company provided CENTREX services to
handle their call processing needs rather than owning and maintaining their
own telephone switches. CENTREX provides companies with most of the benefits
of an internal system, such as call transferring, extension dialing,
conference call capability and voice mail without the burdens of hardware
ownership. There are currently over 10 million CENTREX lines in service in the
United States approximately 35% of which are in small businesses.

A major deficiency of CENTREX services for small businesses is that calls to
a business' main or 800 number generally must be answered by a human attendant
or they will go unanswered or be transferred into the business' general voice
mail mailbox. For many small businesses, their main and 800 numbers are
critical components of their operations yet they cannot afford to have a human
attendant available at all times. These businesses need some way to ensure
that all incoming calls are answered and properly routed. Some telephone
companies have attempted to add auto-attendant features to their CENTREX
services; such services have generally been expensive to purchase and
cumbersome to install and maintain and, as result, have not been widely
accepted. In addition, a number of companies offer computer-based systems;
these also are expensive because of the need to dedicate a personal computer
to answering the main or 800 number, and complicated to install and maintain.

The Notify Solution

The Company's Centrex Auto Attendant product responds to the needs of small
businesses or work groups which require an automated method of ensuring that
incoming calls are answered and properly routed. The Centrex Auto Attendant is
attached to the business' main or 800 number line and functions as an
automated substitute for a human receptionist. Incoming calls are answered by
the Centrex Auto Attendant which plays a greeting and provides the caller with
a set of options. These options can include transferring the caller to a
particular department, extension or person, providing the caller with pre-
recorded information (such as directions to the business), or providing the
caller with another set of menu options. The caller responds to the Centrex
Auto Attendant by pressing the buttons on his touch-tone phone. If the caller
chooses to be transferred to a specific extension or person, the Centrex Auto
Attendant works in conjunction with the business' CENTREX service to ensure
that the call is properly transferred.

The Centrex Auto Attendant was designed to give businesses a robust set of
features typically found on more expensive PC-based systems without the
complicated installation and configuration procedures typically associated
with such systems. The Centrex Auto Attendant can answer a business' phone,
play a greeting, provide a series of options to the caller, transfer the call
to a specified extension and transfer the call to another set of menu options.
Other features include multiple greetings for business hours and off business
hours, a name directory, and extension dialing. The Centrex Auto Attendant
also tracks a variety of call statistics, such as

28
<PAGE>

number of calls processed at different times of the day. A non-technical user
can configure the Centrex Auto Attendant by simply responding to the
interactive voice prompts which are imbedded in the system. Installation
requires nothing more than plugging standard telephone lines into the product.
The Company believes the Centrex Auto Attendant's suggested retail price of
under $2,000 makes it a cost-effective solution to the call-processing needs
of small business CENTREX users.

The Company believes that its current Centrex Auto Attendant which has a
port for one incoming telephone line can address the needs of most businesses
with two to 19 telephone lines. In addition, the Company is developing models
of the Centrex Auto Attendant with ports for two and four incoming lines to
address the needs of businesses with up to 50 lines. See "Business--Research
and Development."

BUSINESS STRATEGY

The Company's goal is to become a leading supplier of computer telephony
products to the business, SOHO, and residential marketplace. The Company's
strategy for achieving this objective includes the following key elements:

Position the MessageAlert as a "Bundled" Product

The Company intends to encourage RBOCs and LECs to provide the Company's
MessageAlert product to their customer as part of their voice mail service at
no additional charge. The Company believes that recent reductions in its cost
to manufacture its MessageAlert products will allow it to offer the products
to RBOCs and LECs at price where the expected revenues from an increased
retention rate for voice mail subscribers will be sufficient to justify
bundling it with their voice mail services.

Incorporate Proprietary Technology in New Products

The Company believes the proprietary technology in its MessageAlert and
Centrex Auto Attendant products can be leveraged to provide new and enhanced
telephony products for the business and SOHO market. For example, the
technology in the MessageAlert can be used to provide Caller-ID and call
waiting Caller-ID and the architecture of the Centrex Auto Attendant can be
expanded to support two or four incoming lines. The Company is also developing
a product that will provide remote e-mail access via the telephone. See
"Business--Research and Development."

Develop Telephone Company and Related Distribution Channels

The Company has established and is in the process of establishing OEM and
joint marketing relationships with the RBOCs and large LECs for its
MessageAlert product line. In addition, the Company believes that many of the
RBOCs' and LECs' authorized resellers would also be appropriate resellers of
its products. Though establishing these channels requires a substantial amount
of up front time and effort, the Company believes that, if it is able to
develop credibility in these channels, it will be able to use them to sell all
of its products including its Centrex Auto Attendant and any future products.

Expand into International Markets

The Company believes there is a significant market for its products in
European and Pacific Rim countries. Many of the telephone companies in these
countries are just now introducing voice mail to their residential customers.
By working with telephone companies as they begin implementation, the Company
believes it can increase the possibility that its products will become a
standard part of voice mail service in those countries. In addition, in those
countries where CENTREX service is available or planned, the Company intends
to use the telephone company, as well as other distributors, as a channel for
its Centrex Auto Attendant product.

29
<PAGE>

The Company's strategy includes plans for substantial growth in fiscal year
1998, which could place a significant strain on its limited personnel,
financial, management and other resources. In order to manage its planned
growth, the Company will need to significantly expand its product development
and sales and marketing capabilities and personnel. In addition, the Company
will need to adapt its financial planning, accounting systems and management
structure to accommodate such growth if it occurs. A failure by the Company to
properly anticipate or manage its growth, if any, could adversely affect its
business, operating results and financial conditions. In the last quarter of
fiscal 1996, the Company over-estimated its growth rate and, as a result,
built-up excessive inventories of certain products and components. There can
be no assurance that the Company will not experience similar or more severe
difficulties in the future.

PRODUCTS

MessageAlert

Introduced in January 1996, the MessageAlert is the only battery powered
stutter and CLASS compatible VMWI on the market. The Company has applied for a
patent on the MultiSense Technology incorporated in it which enables it to
work with both signaling standards. In addition the MessageAlert is the first
VMWI to include Autosensing Line Voltage Calibration ("ALVC"). ALVC allows the
MessageAlert to perform in a wide range of consumer environments by causing it
to calibrate itself automatically to whatever voltage is present on the
telephone line. This adaptability reduces the likelihood that a customer will
need telephone company support to install the product. The MessageAlert is
marketed by the Company and certain telephone companies under the name
"MessageAlert" and by certain other telephone companies under their own names.
In addition, the Company markets a version of the MessageAlert, "MessageAlert
PBX," which is specifically adapted for PBX environments.

Below is a table listing certain features of the MessageAlert and the
benefits the Company believes those features bring to customers and telephone
companies:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FEATURES CUSTOMER BENEFIT TELEPHONE COMPANY BENEFIT
- --------------------------------------------------------------------------------------
MultiSense Reliable indication of messages Customers use service more
Detection
- --------------------------------------------------------------------------------------
Autosense Reliability Works in almost all environments
line
voltage
- --------------------------------------------------------------------------------------
Battery No AC adapter--no need for an outlet Easy acceptance by the customer
Power Less desktop cabling mess
- --------------------------------------------------------------------------------------
Low Cost Easily affordable Quicker, broader market penetration
- --------------------------------------------------------------------------------------
Attractive Pleasing to have in living or work Provides a physical presence
Design areas including "brand" name
- --------------------------------------------------------------------------------------
Post-it(R) Added functionality Opportunities for pad-based
Notes promotions
Holder
- --------------------------------------------------------------------------------------
</TABLE>

Centrex Auto Attendant

The Centrex Auto Attendant is a stand-alone unit which provides the CENTREX
customer with automatic call answer and transfer capability 24 hours a day.
The Centrex Auto Attendant provides nine minutes of recorded announcement
time, special after hours or holiday announcements, and nine main menu items.
Each main menu item supports nine selections which can be either a transfer to
a telephone number or announcement. The Centrex Auto Attendant also provides
extension dialing, name directory services, call statistics and operator
assistance. The unit has a battery back-up that will last up to three days.
The Centrex Auto Attendant is programmable by a local or remote touch tone
telephone and has password protection for all administrative programming. The
current Centrex Auto Attendant model supports one incoming CENTREX line.
Multiple units may be used for multiple inbound lines. Future models of the
Centrex Auto Attendant will support two and four lines.

30
<PAGE>

Below is a table listing certain features of the Centrex Auto Attendant and
the benefits the Company believes those features bring to customers and
telephone companies.

- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FEATURES CUSTOMER BENEFIT TELEPHONE COMPANY BENEFIT
- -----------------------------------------------------------------------------------------
Works in a Enhances their CENTREX service Increased CENTREX customer
CENTREX retention
Environment
- -----------------------------------------------------------------------------------------
Two Levels More efficient call routing Works for different size businesses
of Menus
- -----------------------------------------------------------------------------------------
Name More flexible call processing Competitive feature for CENTREX
Directory competing against PBX
and
Extension
Dialing
- -----------------------------------------------------------------------------------------
Daily Call Allows tracking of call volumes, types Statistics can be used to justify
Statistics of calls, etc. additional CENTREX trunk lines
- -----------------------------------------------------------------------------------------
Voice Easy to configure Reduces customer support
Prompts
for Set-up
- -----------------------------------------------------------------------------------------
Large Allows for 9 minutes of recording Provides solution for a range of
Memory time of information business applications
Capacity
- -----------------------------------------------------------------------------------------
72 Hour Saves all configuration information Reduces customer support and
Battery during power failure enhances CENTREX reliability
Back-up
- -----------------------------------------------------------------------------------------
System Simple disaster recovery or Reduces customer support and
Copy/Back- duplication of system enhances CENTREX reliability
up
(optional)
- -----------------------------------------------------------------------------------------
</TABLE>

To date, the Company has received only limited revenue from the sale of its
products. While the Company believes that its products are commercially
viable, developing products for the consumer and business marketplaces is
inherently difficult and uncertain. The Company does not believe its sales to
date are sufficient to determine whether or not there is meaningful consumer
or business demand for its products. The Company intends to devote a
significant portion of the proceeds of the Offering to its sales and marketing
efforts and to promote consumer and business interest in its products. There
can be no assurance that such efforts will be successful or that significant
market demand for the Company's products will ever develop.

In order to reduce the manufacturing costs, limit the power consumption and
otherwise enhance the operation of its products, the Company has from time to
time redesigned its products. The Company expects that in the future it will
engage in similar redesigns of its products. In addition, the Company is in
the process of developing new, similarly complex products. Though the Company
extensively tests its products before marketing them, any new, redesigned or
current product may contain a design flaw which is undetected by the Company's
testing procedures. For example, in August 1996, the Company recalled 6,500 of
an earlier version of its MessageAlert product as a result of a design flaw
and, in November 1996, the Company recalled 14,000 of its MessageAlert product
also as a result of a design flaw. The direct cost to re-work and repair the
defective products in these instances was approximately $29,000 and $13,000,
respectively. In addition, the Company relies on subcontractors to manufacture
and assemble its products. Though the Company has quality control procedures
designed to detect manufacturing errors, there can be no assurance that the
Company will identify all defective products. The Company believes that
reliable operation will be an important purchase consideration for both its
consumer and business customers. A failure by the Company to detect and
prevent a design flaw or a widespread product defect could materially
adversely affect the sales of the affected product and the Company's other
products and materially adversely affect the Company's business, financial
condition and operating results.

SALES, MARKETING AND DISTRIBUTION

The Company's domestic and international marketing and sales activities for
the MessageAlert to date have been focused on direct sales to large telephone
companies. The MessageAlert is being either private labeled or joint marketed
by GTE Communication Systems Corporation, Pacific Bell, BellSouth Corporation,
Ameritech Corporation, Century Telephone Enterprises Inc., Commonwealth
Telephone Company, Puerto Rico Telephone Company, Standard Telephone Company
and Aliant Communications, Inc. Except with respect to Pacific Bell,

31
<PAGE>

the Company's relationship with these companies has not been reduced to a
formal agreement or contract and none of these companies is obligated to
purchase any product from the Company. The Company manufactures product based
on purchase orders and forecasts of purchases received from RBOCs and LECs.
The Company believes large telephone companies typically do business in this
manner and does not intend to seek long-term contractual commitments from its
telephone company customers.

Qualifying its product and developing the marketing relationships necessary
to enter into the foregoing relationships took substantially longer than the
Company originally anticipated. RBOCs and LECs tend to be hierarchical
organizations characterized by distributed decision-making authority and an
institutional reluctance to take risks. As a result, selling a product to or
entering into a marketing relationship with an RBOC or LEC is generally a
lengthy process. The Company believes its success, if any, will be largely
dependent on its ability to either sell its products to or enter into joint
marketing arrangements with the RBOCs and LECs. In particular, the Company
believes that its MessageAlert product can be sold profitably only if it is
sold to or in conjunction with the RBOCs and LECs. A failure by the Company to
develop significantly enhanced relationships with the RBOCs and LECs would
have a materially adverse effect on the Company's business and operating
results.

The Company is marketing the Centrex Auto Attendant to the same group of
large telephone companies it has targeted for the MessageAlert product. The
Company believes that having established itself as a qualified supplier or
joint marketing partner with respect to the MessageAlert product will help
shorten the sales cycle with respect to the Centrex Auto Attendant. In
particular, the Company believes the Centrex Auto Attendant and the
MessageAlert product can be marketed together by the telephone companies to
the business and SOHO market.

The Company is also in the process of establishing an authorized reseller
program for the Centrex Auto Attendant and MessageAlert products. Throughout
the United States, there are several hundred authorized resellers of the
RBOCs' and LECs' products and services. The Company intends to select those
authorized resellers which are focused on selling CENTREX services and recruit
them as the Company's authorized resellers. The Company expects to use a
portion of the proceeds of the Offering to hire regional sales managers to
recruit and manage these authorized resellers. Because the Company's marketing
efforts have been largely focused on the RBOCs and LECs, its management has
had only limited experience in selling the Company's products through other
channels. There can be no assurance that the Company will be able to implement
its marketing and distribution program or that any marketing efforts
undertaken by or on behalf of the Company will be successful.

The Company is marketing its products outside North America by using sales
representatives from various countries. The Company has entered into a sales
representative agreement covering France and another covering the United
Kingdom, Germany, Netherlands, Spain, Sweden, and Switzerland.

TECHNICAL AND MARKETING SUPPORT

The Company has developed product collateral and marketing programs for the
Centrex Auto Attendant and MessageAlert products. The Company intends to use a
portion of the proceeds of the Offering to expand its ongoing marketing
programs. These marketing programs will include augmentation of collateral
material, advertising and trade shows, supplemented with public relations
campaigns. The Company intends to establish channel marketing programs
consisting of collateral material, training and incentive programs for the
reseller sales force.

The Company provides back-up technical support to large telephone companies
and resellers. All technical support is performed by the Company's support
personnel. In the future, the Company's support organization will provide both
sales and technical support. Sales support consists of sales and marketing
training at the Company's home office training facility for its own sales
force and those of authorized resellers.

32
<PAGE>

RESEARCH AND DEVELOPMENT

Since its inception, the Company has incurred approximately $1,198,355 in
research and development expenses. The Company has had limited internal
engineering resources and uses contract engineering resources for a
significant portion of its research and development. The Company believes that
its future depends significantly on its ability to continue to enhance its
existing products and to develop new products, and the Company intends to use
a substantial portion of the proceeds of the Offering for research and
development. The Company's research and development efforts will be focused in
four areas: cost reduction and feature enhancement of the MessageAlert
product; the enhancement of the Centrex Auto Attendant platform to handle two-
and four-port trunk line connections; expansion of the MessageAlert
architecture to create a combination Caller-ID/visual message waiting
indicator product; and completion of a remote telephone access to e-mail
product. See "Use of Proceeds."

MANUFACTURING

The Company primarily uses domestic contract manufacturing to minimize
resources devoted to manufacturing and to maximum flexibility and response
time. At times, the Company uses offshore turnkey manufacturing when
production volume makes it a cost-effective alternative. To the extent
possible, the Company uses standard parts and components for its products
although certain components are custom designed and/or are available only from
a single source or limited sources.

The Company currently tests 100% of its products before shipping. It expects
to implement a sample testing program once a statistically sufficient history
has been established with respect to each of its manufacturing sources. The
MessageAlert and Centrex Auto Attendant products each have one-year
replacement warranties.

The Company subcontracts the manufacture of its board level assemblies to
third parties, and there can be no assurance that these subcontractors will be
able to support the manufacturing requirements of the Company. An inability to
obtain sufficient quantities of source components or subassemblies, or to
develop alternative sources as required in the future, could result in delays
or reductions in product shipments or could force the Company to redesign its
products, either of which could materially adversely effect the Company's
business and operating results.

GOVERNMENTAL REGULATION AND INDUSTRY STANDARDS

33
<PAGE>

COMPETITION

The Company currently has several direct competitors in the market for
VMWIs. Voicewaves, Inc. produces VoiceLite, a line-powered, stutter tone only
VMWI. The Company believes that the product does not have FCC approval and is
not marketed or resold by any large telephone company. Consumerware, Inc.
produces VoiceMail Lite, a battery powered, stutter tone only VMWI. The
Company believes the retail store unit of Southwestern Bell Communications is
the only telephone company which markets the VoiceMail Lite. SNI Innovation,
Inc. produces VisuAlert, a dual standard VMWI which requires an AC adapter.
The Company believes that no large telephone company is reselling or marketing
the VisuAlert product. AASTRA TELECOM of Canada produces Call Answer Lite, a
dual standard VMWI which requires an AC Adapter. The Company believes that no
domestic large telephone company is reselling or marketing the Call Answer
Lite product but that Aastra does have a marketing agreement with Bell Canada.
The Company believes competition in the VMWI market is based on support of
signaling standards, type of power source, other features, price and quality.
The Company believes it competes favorably with respect to all of these
factors.

Certain manufacturers of competing VMWI products have greater financial,
technical and marketing resources than the Company. In addition, there are
several companies with substantially greater technical, financial and
marketing resources than the Company which could produce competing products.
These companies include telephone equipment manufacturers such as CIDCO
Incorporated, Intelidata, Inc., Northern Telecom Limited, and Lucent
Technologies Inc.

The Company has two known direct competitors in the market for auto-
attendant products. Both Bogen Communications and Cobotyx Corporation, Inc.
produce auto-attendant products which have basic call answering and call
routing features but are missing features such as multiple levels of menus,
pre-recorded system prompts, interactive voice response for configuration,
name directory functionality and call statistics. The Company believes
competition in the autoattendant market is based on features (including ease
of use, availability of a name directory, amount of recording time and number
of menu levels), price and quality. The Company believes it competes favorably
with respect to all of these factors.

The Company also faces indirect competition from manufacturers of PC-based
call management systems. These systems are designed to provide voice mail
capability, auto-attendant features, and CENTREX-style functionality on a PC
platform. Such systems are typically significantly more expensive than the
Centrex Auto Attendant with prices ranging from $5,000 and up. The cost of
such systems is based on the price of the PC and whatever additional hardware
and software is required. There are many companies that provide PC-based call
management systems including Active Voice Corporation, Altigen Communications,
and Voice Systems Research, Inc. The Company believes that by combining its
Centrex Auto Attendant with a purchase of CENTREX services, a business can
achieve similar or better call management services than from a PC-based system
at a substantially lower up front cost.

The Company expects that to the extent that the market for either of its
products develops, competition will intensify and new competitors will enter
the market. There can be no assurance that the Company will be able to compete
successfully against existing and new competitors as the market for its
products evolves and the level of competition increases. A failure to compete
successfully against existing and new competitors would have a materially
adverse effect upon the Company's business and results of operations.

PROPRIETARY RIGHTS

The Company relies on a combination of patent, trade secret, copyright and
trademark law, nondisclosure agreements and technical measures to establish
and protect its proprietary rights in its products. The Company has a design
patent issued on the MessageAlert design. The MessageAlert design is unique in
that it provides a visual message waiting indicator light packaged in the form
of a 3M Post-it(R) Note holder. In addition, the Company filed a patent
application in July 1996 relating to the MultiSense technology used in the
MessageAlert product. The Company's MultiSense technology automatically
detects and reacts to either stutter or CLASS

34
<PAGE>

signaling. The Company intends to continue to apply for patents, as
appropriate, for its future technologies and products.

There are few barriers to entry into the market for the Company's products,
and there can be no assurance that any patents applied for by the Company will
be granted or that the scope of the Company's patent or any patents granted in
the future will be broad enough to protect against the use of similar
technologies by the Company's competitors. There can be no assurance,
therefore, that any of the Company's competitors, some of whom have far
greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Further, the Company intends to distribute its products in a
number of foreign countries. The laws of those countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.

The Company has entered into a non-exclusive license agreement with Active
Voice Corporation ("Active Voice") pursuant to which the Company has agreed to
pay an up-front fee and ongoing per unit royalties on sales of its
MessageAlert product in exchange for certain rights with respect to a patent
issued to Active Voice covering stutter dial tone detection.

EMPLOYEES

As of June 30, 1997, the Company employed 14 persons of whom two were
engaged in research and development, two in manufacturing, seven in sales,
marketing, and customer support, and three in general administration and
finance. During the first year following completion of the Offering, the
Company contemplates increasing its staff at a pace consistent with the
Company's business and growth. None of the Company's employees is currently
represented by a labor union. The Company considers its relations with its
employees to be good.

The Company's success, if any, will be dependent on its ability to attract
and retain highly skilled technical personnel as well as marketing and sales
personnel. If the Company is unable to hire the necessary personnel, the
development of new products and enhancements to current products would likely
be delayed or prevented. Competition for highly-skilled technical, managerial,
sales, and marketing personnel is intense. There can be no assurance that the
Company will be successful in retaining its key personnel and in attracting
and retaining the personnel it requires for expansion.

FACILITIES

The Company's principal executive offices are located at 1054 South DeAnza
Boulevard, Suite 105, San Jose, California 95129. The facilities consist of
approximately 3,500 square feet of office space pursuant to a lease that
expires March 31, 1999. The Company will either renew its lease and acquire
more space if available or enter into a lease for new premises in the local
area.

LEGAL PROCEEDINGS

The Company is not a party to any litigation.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
June 30, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul F. DePond(1)....... 44 President, Chief Executive Officer and Chairman of the Board of Directors
Gaylan I. Larson........ 56 Vice President of Operations and Director
Gerald W. Rice.......... 49 Chief Financial Officer and Secretary
Michael Ballard(1)(2)... 43 Director
Barry Bellue(1)......... 54 Director
Michael Smith(2)........ 50 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee

PAUL F. DEPOND, founder of the Company, has served as its President, Chief
Executive Officer and Chairman of the Board of Directors since the Company's
inception in August 1994. From September 1992 through May 1994, Mr. DePond
served as Vice President--Corporate Marketing of Telebit Corporation, a
supplier of high speed modems and dialup remote access products. From January
1991 through September 1992, Mr. DePond served as Vice President, Marketing,
of Alantec Corporation, a manufacturer of networking products. Mr. DePond
received a B.S. in Electrical Engineering and Computer Engineering in 1979,
and an M.A. in Computer Science in 1980, each from the University of Michigan
at Ann Arbor.

GERALD W. RICE has served as Chief Financial Officer and Secretary of the
Company since August 1994. From November 1993 to June 1996, he owned
Comprehensive Business Services, a financial services company franchise. From
April 1992 to April 1993, Mr. Rice served as Controller at Surface Science
Instruments, a manufacturer of capital equipment for surface chemical
analysis. From June 1990 to April 1992 Mr. Rice was Vice President of Finance
and Secretary of Applied Dielectrics, a manufacturer of microwave circuit
boards. Mr. Rice received an A.A. from Ohlone Community College in 1969 and a
B.A. in Accounting from California State College of Stanislaus in 1971.

GAYLAN I. LARSON has served as Vice President of Operations and as a
Director of the Company since August 1994. From January 1991 to August 1994,
Mr. Larson was Chief Operating Officer of SportSense, Inc., a manufacturer of
golf training equipment. Prior to SportSense, Mr. Larson served as General
Manager of the Data Systems Division of Hewlett-Packard Company, a company
with which he had an 18 year relationship. Mr. Larson received an A.A. from
Sacramento Junior College in 1959, a B.S. in Electrical Engineering from
University of California, Berkeley in 1961, and a M.S.E.E. in Engineering from
Newark College of Engineering in 1965.

BARRY BELLUE has served as a director of the Company since August 1995.
Since January 1996, Mr. Bellue has been the Chief Executive Officer of
Thinkstream, Inc., an imaging software company. From October 1993 to January
1995, Mr. Bellue served as Vice President of Symantec Corporation. From
December 1986 to October 1993, Mr. Bellue served as Chief Executive Officer of
Fifth Generation Systems, a security and data management software company. Mr.
Bellue received his B.S. in Accounting in 1965 from Southeastern University,
and his M.A. of Divinity from Southern Seminary in 1978.

MICHAEL BALLARD has served as a director of the Company since January 1996.
From May 1995 to October 1996, Mr. Ballard served as Executive Vice
President--Marketing of Telebit Corporation. From June 1993 to September 1994,
Mr. Ballard served as Chief of Operations of UUNet, Inc., an internet service
provider. From January 1986 to May 1993, Mr. Ballard served as Chief Executive
Officer of Telebit Corporation. Mr. Ballard has also been a product director
of Cisco Systems since October 1996. Mr. Ballard received his B.F.A. in 1978
from the University of Utah.

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<PAGE>

MICHAEL SMITH has served as a director of the Company since February 1996.
Since 1970, Mr. Smith has been the President and owner of COMAC, a literature
and product fulfillment company. Mr. Smith attended San Jose State University
from 1964 through 1969.

All directors are elected annually and serve until the next annual meeting
of shareholders or until the election and qualification of their successors.
All executive officers serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors or executive
officers of the Company.

The Company's success, if any, will be dependent to a significant extent
upon certain key management employees, including Messrs. DePond and Larson.
The Company has obtained three-year key-man term life insurance on Mr. DePond
in the amount of $2 million and has entered into employment agreements with
him and with Messrs. Larson, Rice and Yewell. See "Employment Contracts."

DIRECTOR COMPENSATION

Members of the Company's Board of Directors do not receive compensation for
their services as directors.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the fiscal year ended September 30, 1996, by (i) the
Company's Chief Executive Officer and (ii) the Company's most highly
compensated executive officers whose salary and bonus for such year exceeded
$100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
FISCAL 1996
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS ($) OPTIONS (#) COMPENSATION(1)
- --------------------------- ----------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Paul F. DePond........... 100,385 -- -- $7,146
President and Chief
Executive Officer
David P. Yewell(2)....... 101,345(3) -- -- 1,987
Vice President of Sales
and Marketing
</TABLE>
- --------
(1) Consists of health insurance premiums paid by the Company.
(2) Mr. Yewell resigned from his position at the Company on August 8, 1997.
(3) Includes amounts paid as consulting fees.

STOCK OPTION PLAN

The Company's 1997 Stock Option Plan (the "Stock Option Plan") provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights ("SPRs"). The Stock
Option Plan was approved by the Board of Directors and the shareholders in
January 1997. Unless terminated sooner, the Stock Option Plan will terminate
automatically in January 2007. A total of 200,000 shares of Common Stock are
currently reserved for issuance pursuant to the Stock Option Plan. The Company
has agreed to grant options to purchase an aggregate of 17,500 shares of
Common Stock to three employees at $5.00 per share on the date of this
Prospectus.

The Stock Option Plan may be administered by the Board of Directors or a
committee of the Board (the "Committee"), which Committee shall, in the case
of options intended to qualify as "performance-based

37
<PAGE>

compensation" within the meaning of Section 162(m) of the Code, consist of two
or more "outside directors" within the meaning of Section 162(m) of the Code.
The exercise price of incentive stock options must be at least equal to the
fair market value of the Company's Common Stock on the date of grant. The
exercise price of nonstatutory stock options and SPRs granted under the Stock
Option Plan is determined by the Committee, but with respect to nonstatutory
stock options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the exercise price must at least be
equal to the fair market value of the Common Stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the Stock Option Plan may not exceed ten years.

The Stock Option Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Committee shall provide for the Optionee to have the
right to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a merger or sale of
assets, the Administrator shall notify the optionee that the option or SPR
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and the option or SPR will terminate upon the expiration of such
period.

EMPLOYMENT CONTRACTS

In December 1996, the Company entered into an employment agreement with Paul
DePond, the Company's President and Chief Executive Officer. The agreement
provides for a base salary of $130,000, which increases to $150,000 thirteen
months following the Offering, and a $50,000 bonus contingent on the Company's
attainment of certain performance milestones. In addition, if the Company is
sold while Mr. DePond is employed by the Company, Mr. DePond will receive a
bonus equal to 2% of the price at which the Company is sold.

In the event that the Company terminates Mr. DePond without cause following
a change in control, Mr. DePond is entitled to receive severance compensation
equal to a continuation of his salary for a period of twenty-four (24) months.
In the event that the Company terminates Mr. DePond without cause apart from a
change of control, Mr. DePond is entitled to receive severance compensation
equal to a continuation of his salary for a period of eighteen (18) months.
Mr. DePond is not entitled to severance compensation in the event of a
termination for cause or voluntary resignation. In the event of a termination
due to disability, Mr. DePond is entitled to receive only those severance or
disability benefits as are established under the Company's then existing
severance and benefits plans and policies.

In December 1996, the Company entered into employment agreements with Mr.
Larson, the Company's Vice President of Operations and Mr. Rice, the Company's
Chief Financial Officer. The agreements provide for base salaries of $115,000
and $105,000 for Messrs. Larson and Rice, respectively. Under the agreements,
Messrs. Larson and Rice are eligible to receive annual bonuses based on an
earnings target approved by the board of directors of the Company.

In the event that the Company terminates Messrs. Larson or Rice without
cause following a change in control, the terminated officer is entitled to
receive severance compensation equal to a continuation of his salary for a
period of twelve (12) months. In the event that the Company terminates Messrs.
Larson or Rice without cause apart from a change of control, the terminated
officer is entitled to receive severance compensation equal to a continuation
of his salary for a period of six (6) months. Messrs. Larson and Rice are not
entitled to severance compensation in the event of a termination for cause or
voluntary resignation. In the event of a termination due to disability, the
terminated officer is entitled to receive only those severance or disability
benefits as are established under the Company's then existing severance and
benefits plans and policies.

38
<PAGE>

The foregoing agreements define a "change in control" as (i) the acquisition
of more than 30% of the voting securities of the Company by any person or
group; (ii) a change in a majority of the board of directors of the Company
occurring within a two-year period; or (iii) the approval by the shareholders
of the Company of a transaction which would result in a transfer of more than
50% of the Company's voting power provided, however, that an initial public
offering of the Company's common stock does not constitute a change of
control. The agreements define "cause" as an act of dishonesty in connection
with employment; a conviction of a felony which will detrimentally affect the
Company's reputation or business; willful and gross misconduct injurious to
the Company; and continued and willful failure to perform duties. The
agreements define "disability" as the inability to perform duties under the
agreement due to mental or physical illness determined to be total and
permanent by a physician.

INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS

The Company has adopted provisions in its Articles of Incorporation that
eliminate the personal liability of its directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the
fullest extent permitted by law and authorizes the Company to indemnify its
directors and officers to the fullest extent permitted by law. Such limitation
of liability does not affect the availability of equitable remedies such as
injunctive relief or rescision.

The Company's bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by California law. The Company
has entered into indemnification agreements with its officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.

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

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

39
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was founded in August 1994 by Paul DePond. David Welling was an
early employee and investor in the Company. Mr. DePond is President, Chief
Executive Officer and Chairman of the Board of Directors of the Company, and
Mr. Welling is a consultant to the Company. In August 1994, the Company issued
to Mr. DePond 550,000 shares of its Series A Preferred Stock (convertible into
108,909 shares of Common Stock) for an aggregate purchase price of $55,000,
and to Mr. Welling 450,000 shares of its Series A Preferred Stock (convertible
into 89,108 shares of Common Stock) for an aggregate purchase price of
$45,000. Also in August 1994 the Company issued to Mr. DePond 198,019 shares
of Common Stock for an aggregate purchase price of $10,000 and to Mr. Welling
108,910 shares of Common Stock for an aggregate purchase price of $5,500.

In November 1994, as a part of a larger sale of common stock to employees,
the Company issued to Mr. DePond 99,009 shares of Common Stock for an
aggregate purchase price of $5,000.

At various times in February and March 1995, the Company sold to Mr. DePond
convertible promissory notes with an aggregate principal amount of $75,000
bearing interest rates of 10% per annum and warrants to purchase 74,257 shares
of common stock of the Company at an exercise price of $1.01 per share for an
aggregate purchase price of $75,000. At various times between November 1995
and October 1996, the Company made payments on the notes totaling $50,000.
Additionally, in February 1997, the Company issued to Mr. DePond a 10%
subordinated promissory note with principal amount of $65,000 and warrants to
purchase 11,535 shares of the Company's Common Stock at a price per share of
$3.00 for an aggregate purchase price of $65,000. These notes (collectively,
the "DePond Notes"') will be repaid with a portion of the proceeds of the
Offering. See "Use of Proceeds."

In October 1995, the Company issued and sold a total of 3,500,000 shares of
its Series B Preferred Stock (convertible into 693,069 shares of Common Stock)
at a purchase price of $0.50 per share. The purchasers of the Series B
Preferred Stock included three directors of the Company, Michael Ballard,
Barry Bellue and Michael Smith, each of whom purchased 200,000 shares
(convertible into 39,603 shares of Common Stock).

In July 1996, pursuant to a Note Purchase Agreement, the Company issued
convertible promissory notes (the "Convertible Shareholder Notes") and
warrants to purchase shares of the Company's Common Stock for an aggregate
purchase price of $932,125. The Convertible Shareholder Notes accrued interest
at a rate of 8% per annum and were convertible into equity of the Company. Mr.
Ballard, a director of the Company, purchased a Convertible Shareholder Note
in the principal amount of $100,000 and the accompanying warrants for
aggregate consideration of $100,000. In January 1997, in connection with a
restructuring of the Convertible Shareholder Notes, Mr. Ballard converted his
note into 21,978 shares of Common Stock and exchanged his warrant for a
warrant to purchase 6,593 shares of Common Stock at a price of $0.25 per
share. See "Capitalization--Restructuring."

In March 1997, the Company issued and sold 17 bridge units ("Bridge Units")
at $50,000 per unit. Each Bridge Unit consisted of a Bridge Note in the
principal amount of $50,000 and Bridge Warrants to purchase 25,000 shares of
Common Stock at a purchase price of $3.00 per share. The Bridge Warrants
automatically convert into Public Warrants upon the closing of the Offering.
Paul DePond purchased one Bridge Unit in the Bridge Financing. See "Use of
Proceeds" and "Capitalization--Bridge Financing."

In April 1997, Michael Ballard, one of the Company's directors, loaned the
Company $200,000 in exchange for the Ballard Note in the principal amount of
$200,000 and warrants to purchase 2,970 shares of the Company's Common Stock
at a price per share of $5.00. The Company intends to use a portion of the
proceeds of the Offering to repay the Ballard Note. See "Use of Proceeds."

The Company has an ongoing business relationship with COMAC, a literature
and product fulfillment company owned by Michael Smith, its president and a
director of the Company. The Company uses COMAC, along with other fulfillment
companies, on a project by project basis to facilitate the distribution of its
products

40
<PAGE>

to telephone company customers. The Company has no contractual obligation to
use COMAC's services. In fiscal year 1996, the Company paid to COMAC $4,349 in
fees. During the nine-month period ended June 30, 1997, the Company paid to
COMAC $97,835 in fees.

The Company has entered into employment agreements with Messrs. DePond,
Larson and Rice, the terms of which call for base salaries of $130,000,
$115,000 and $105,000 per annum, respectively. Additionally, the Company has
entered into an agreement whereby it will pay Mr. Welling $48,000 over two
years for consulting services relating to home telephony products. See
"Management--Employment Contracts."

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors of the Board
of Directors, and will be on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.

41
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1997, and as adjusted
to reflect the sale of shares offered by this Prospectus, (i) by each person
(or group of affiliated persons) who is known by the Company to own
beneficially more than five percent of the Company's Common Stock, (ii) by
each of the Named Executive Officers, (iii) by each of the Company's
directors, and (iv) by all directors and executive officers as a group. The
Company believes that the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws, where
applicable.

<TABLE>
<CAPTION>
PERCENTAGE
SHARES -----------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Paul F. DePond(2)............................... 491,731 24.2 14.3
c/o Notify Corporation
1054 S. De Anza Blvd., Suite 105
San Jose, California 95129
Gaylan I. Larson................................ 198,019 10.2 5.9
c/o Notify Corporation
1054 S. De Anza Blvd., Suite 105
San Jose, California 95129
David Welling................................... 138,200 7.1 4.1
20 Shoshone Place
Portola Valley, CA 94028
SIPPL Macdonald Ventures, L.P.(3)............... 108,539 5.6 3.2
5 Elder Court
Menlo Park, CA 94025
Bayview Investors(4)............................ 108,154 5.5 3.2
555 California Street
San Francisco, CA 94104
Michael Ballard(5).............................. 71,905 3.7 2.1
c/o Notify Corporation
1054 S. De Anza Blvd., Suite 105
San Jose, California 95129
Michael Smith(6)................................ 54,269 2.8 1.6
c/o Notify Corporation
1054 S. De Anza Blvd., Suite 105
San Jose, California 95129
Barry Bellue.................................... 46,533 2.4 1.4
c/o Notify Corporation
1054 S. De Anza Blvd., Suite 105
San Jose, California 95129
David P. Yewell................................. 21,782 1.1 0.7
26885 Taaffe Road
Los Altos Hills, CA 94002
All directors and executive officers as a group
(6 persons).................................... 978,298 43.2 25.7
</TABLE>
- --------
(1) Applicable percentage of ownership is based on 1,947,214 shares of Common
Stock outstanding as of June 30, 1997 together with applicable options for
such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities Exchange Commission, and includes voting and
investment power with respect to shares. Shares of Common Stock subject to
warrants currently exercisable or exercisable within 60 days after June
30, 1997 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage of any other stockholder.
The above calculations do not include a warrant to purchase 24,753 shares
of the Company's Common Stock at an exercise price of $5.00 per share
which the Company plans to issue to Gerald W. Rice, the Company's Chief
Financial Officer.

42
<PAGE>

(2) Includes 85,792 shares issuable upon exercise of currently exercisable
warrants. Does not include 25,000 shares issuable upon exercise of Public
Warrants acquired in the Bridge Financing. See "Capitalization--Bridge
Financing."
(3) Includes 6,528 shares issuable upon exercise of currently exercisable
warrants. The general partners of SIPPL Macdonald Ventures, L.P. are
Jacqueline Macdonald and Roger Sippl.
(4) Includes 8,233 shares issuable upon exercise of currently exercisable
warrants. The general partner of Bayview Investors is Robertson Stephens &
Company Private Equity Group, L.L.P.
(5) Includes 9,498 shares issuable upon exercise of currently exercisable
warrants.
(6) Includes 3,264 shares issuable upon exercise of currently exercisable
warrants.

ESCROW SECURITIES

In connection with the Offering, the holders of the Company's Common Stock
and warrants to purchase Common Stock placed 1,247,786 Escrow Shares and
Escrow Warrants to purchase 126,759 shares of Common Stock into escrow
pursuant to an escrow agreement ("Escrow Agreement") with the Company's
transfer agent, American Stock Transfer and Trust, as escrow agent. The Escrow
Securities are not assignable or transferable; however, the Escrow Shares may
be voted. Holders of any Escrow Warrants in escrow may exercise their warrants
prior to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow as Escrow Shares pursuant to the
Escrow Agreement.

The Escrow Agreement provides that one-half of the Escrow Securities (i.e.
687,273 shares of issued or issuable Common Stock) will be released from
escrow, on a pro rata basis, if, and only if, one or more of the following
conditions are met:

1. the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $1.4 million for the fiscal year ending September 30,
1998 or September 30, 1999;

2. the Minimum Pretax Income amounts to at least $2.3 million for the
fiscal year ending September 30, 2000;

3. the Minimum Pretax Income amounts to at least $3.4 million for the
fiscal year ending on September 30, 2001;

4. the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending on September 30, 2002;

5. the Minimum Pretax Income amounts to at least $6.8 million for the
fiscal year ending on September 30, 2003;

6. commencing on the date of this Prospectus and ending 18 months after
the date of this Prospectus, the bid price of the Company's Common Stock
averages in excess of $12.00 per share (subject to adjustment in the event
of any reverse stock splits or other similar events) for 30 consecutive
business days;

7. commencing 18 months after the date of this Prospectus and ending 36
months after the date of this Prospectus, the bid price averages in excess
of $15.00 per share (subject to adjustment in the event of any reverse
stock splits or other similar events) for 30 consecutive business days; or

8. the Company is acquired by or merged into another entity in a
transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (6) above.

43
<PAGE>

The Escrow Agreement further provides that the remaining Escrow Securities
(i.e. 687,272 shares of issued or issuable shares of Common Stock) will be
released from escrow, on a pro rata basis, if, and only if, one or more of the
following conditions is met:

1. the Minimum Pretax Income amounts to at least $2.3 million for the
fiscal year ending September 30, 1998 or September 30, 1999;

2. the Minimum Pretax Income amounts to at least $3.4 million for the
fiscal year ending on September 30, 2000;

3. the Minimum Pretax Income amounts to at least $4.5 million for the
fiscal year ending on September 30, 2001;

4. the Minimum Pretax Income amounts to at least $5.6 million for the
fiscal year ending on September 30, 2002;

5. the Minimum Pretax Income amounts to at least $7.9 million for the
fiscal year ending on September 30, 2003;

6. commencing on the date of this Prospectus and ending 18 months after
the date of this Prospectus, the bid price of the Company's Common Stock
averages in excess of $13.30 per share (subject to adjustment in the event
of any reverse stock splits or other similar events) for 30 consecutive
business days;

7. commencing 18 months after the date of this Prospectus and ending 36
months after the date of this Prospectus, the bid price averages in excess
of $16.75 per share (subject to adjustment in the event of any reverse
stock splits or other similar events) for 30 consecutive business days; or

8. the Company is acquired by or merged into another entity in a
transaction in which shareholders of the Company receive per share
consideration at least equal to the level set forth in (6) above.

The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusive of any extraordinary earnings, including, but not limited to, any
charge to income resulting from release of the Escrow Securities and (ii)
shall be increased proportionately, with certain limitations, in the event
additional shares of Common Stock or securities convertible into, exchangeable
for or exercisable into Common Stock are issued after completion of the
Offering. The bid price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits, reverse stock splits or
other similar events.

Any money, securities, rights or property distributed in respect of the
Escrow Securities, including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the
Escrow Securities. If none of the applicable Minimum Pretax Income or bid
price levels set forth above have been met by December 31, 2003, the Escrow
Securities, as well as any dividends or other distributions made with respect
thereto, will be canceled and contributed to the capital of the Company. The
Company expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company, if it occurs, will be
deemed compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or
reduce or eliminate the Company's net income for financial reporting purposes
for the period or periods during which such shares are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity, it may have a negative effect on the market price of the Company's
securities.

The Minimum Pretax Income and bid price levels set forth above were
determined by negotiation between the Company and the Underwriter and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.

44
<PAGE>

DESCRIPTION OF SECURITIES

UNITS

Each Unit consists of one share of Common Stock and one Warrant. Each
Warrant entitles the holder thereof to purchase one share of Common Stock. The
Common Stock and Warrants included in the Units are immediately transferable
separately upon issuance.

COMMON STOCK

The Company has authorized 15,000,000 shares of Common Stock, par value
$.001 per share. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders.
The holders of Common Stock have the right to cumulate their votes with
respect to the election of directors. Subject to preferences that may be
applicable to any shares of Preferred Stock issued in the future, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
of any then outstanding Preferred Stock. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of the Offering will be,
fully paid and nonassessable.

REDEEMABLE WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company
and American Stock Transfer and Trust Company. A copy of the Warrant Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.

CLASS A WARRANTS

The holder of each Warrant is entitled, upon payment of the exercise price
of $6.50, to purchase one share of Common Stock. Unless previously redeemed,
the Warrants are exercisable at any time after issuance through August 28,
2002, provided that at such time a current prospectus relating to the
underlying Common Stock is in effect and the underlying Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws. The Warrants included in the Units offered hereby are
immediately transferable separately from the Common Stock issued with such
Warrants as part of the Units.

REDEMPTION

Commencing on the first anniversary of the effective date of the
Registration Statement, of which this Prospectus is a part, the Warrants are
subject to redemption by the Company, upon 30 days written notice, at a price
of $.05 per Warrant, if the average closing bid price of the Common Stock for
any 30 consecutive trading days ending within 15 days of the date on which the
notice of redemption is given shall have exceeded $9.10 per share. Holders of
Warrants will automatically forfeit their rights to purchase the shares of
Common Stock issuable upon exercise of such Warrants unless the Warrants are
exercised before the close of business on the business day immediately prior
to the date set for redemption. All of the outstanding Warrants of a class,
except for those underlying the Unit Purchase Option, must be redeemed if any
of that class are redeemed. A notice of redemption shall be mailed to each of
the registered holders of the Warrants by first class mail, postage prepaid,
upon 30 days' notice before the date fixed for redemption.

GENERAL

The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Company's warrant agent (the

45
<PAGE>

"Warrant Agent") with the Subscription Form on the reverse side of the
certificate or certificates completed and executed as indicated, accompanied
by payment (in the form of a certified or cashier's check payable to the order
of the Company) of the full exercise price for the number of Warrants being
exercised.

The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including issuances of Common Stock (or securities convertible, exchangeable
or exercisable into Common Stock) at less than market value, stock dividends,
stock splits, mergers, sale of substantially all of the Company's assets, and
for other extraordinary events; provided, however, that no such adjustment
shall be made upon, among other things, (i) the issuance or exercise of
options or other securities under the Stock Option Plan or other employee
benefit plans or (ii) the sale or exercise of outstanding options or warrants
or the Warrants offered hereby.

The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of the Warrants will not possess any
rights as a shareholder of the Company unless and until he exercises the
Warrants.

Upon notice to the Warrantholders, the Company has the right to reduce the
exercise price or extend the expiration date of the Warrants.

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS

The Warrants included in the Units offered hereby will be immediately
detachable and separately tradeable. Although the Units will not knowingly be
sold to purchasers in jurisdictions in which the Units are not registered or
otherwise qualified for sale, purchasers who reside in or move to
jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable
may buy Units (or the Warrants included therein) in the aftermarket. In this
event, the Company would be unable to issue shares to those persons desiring
to exercise their Warrants unless and until the underlying shares could be
registered or qualified for sale in the jurisdictions in which such purchasers
reside, or unless an exemption from such qualification exists in such
jurisdictions. No assurance can be given that the Company will be able to
effect any such required registration or qualification.

Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the shares
underlying the Warrants is then in effect under the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to
use reasonable efforts to maintain the effectiveness of a current prospectus
covering the securities underlying the Warrants, no assurance can be given
that the Company will be able to do so. The value of the Warrants may be
greatly reduced if a current prospectus covering the shares issuable upon the
exercise of the Warrants is not kept effective or if such shares are not
qualified or exempt from qualification in the states in which the holders of
the Warrants then reside.

PREFERRED STOCK

The Company has authorized 5,000,000 shares of Preferred Stock. Shares of
Preferred Stock may be issued without shareholder approval. The Board of
Directors is authorized to issue such shares in one or more series and to fix
the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. No shares of Preferred
Stock will be outstanding upon the closing of the Offering and the Company has
no present intention to issue any shares of Preferred Stock. Any Preferred
Stock to be issued could rank prior to the Common Stock with respect to
dividend rights and rights on liquidation. The Board of Directors, without
shareholder approval, may issue Preferred Stock with voting and conversion
rights which could

46
<PAGE>

adversely affect the voting power of holders of Common Stock and discourage,
delay or prevent a change in control of the Company.

UNIT PURCHASE OPTION

Upon the closing of the Offering, the Company has agreed to grant to the
Underwriter the Unit Purchase Option to purchase up to 160,000 Units. The
Units issuable upon exercise of the Unit Purchase Option will, when so issued,
be identical to the Units offered hereby. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for three years, except to any
officer of the Underwriter or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the two-year period commencing
three years from the date of this Prospectus at an exercise price of $7.00 per
Unit (140% of the initial public offering price) subject to adjustment in
certain events. The holders of the Unit Purchase Option have certain demand
and piggyback registration rights. See "Underwriting."

TRANSFER AGENT AND WARRANT AGENT

American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.

47
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has not been any public market for the Common
Stock. Sale of a substantial number of shares of Common Stock into the public
market following the offering could adversely affect prevailing market prices
for the Common Stock.

Following the Offering, the Company will have outstanding an aggregate of
3,547,214 shares of Common Stock, assuming no exercise of the Underwriter's
over-allotment option. In addition to the 1,600,000 shares of Common Stock
offered hereby, as of the date of this Prospectus, there will be 1,947,214
shares of Common Stock outstanding, all of which are Restricted Securities
under the Act. Approximately 1,068,656 of such shares will be eligible for
sale immediately following the Effective Date without restriction in reliance
on Rule 144(k) under the Act. Beginning 90 days after the Effective Date, an
additional 903,310 of such shares will become eligible for sale in the public
market pursuant to Rule 144, subject to the volume and other restrictions
under such rule. However, holders of all of the outstanding shares of Common
Stock of the Company have agreed not to sell or otherwise dispose of any
securities of the Company without the Underwriter's prior written consent for
a period of 13 months from the date of this Prospectus. In addition 1,247,786
of such shares are Escrow Shares subject to the Escrow Agreement. See
"Principal Shareholders--Escrow Securities."

In general under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of:
(i) 1% of the then outstanding shares of Common Stock (approximately 34,000
shares immediately after this offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the sale. Sales under Rule 144 are also subject to the filing of a Form 144
with respect to such sale and certain other limitations and restrictions.
Under Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the ninety (90) days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
would be entitled to sell such shares without having to comply with the manner
of sale, volume limitation or notice filing provisions described above.

Any employee of the Company who purchased his or her shares of Common Stock
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provision of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with the holding period restrictions of Rule 144.

Holders of the Warrants included in the Units sold in the Offering (assuming
no exercise of the Underwriter's over-allotment option) will be entitled to
purchase an aggregate of 1,600,000 shares of Common Stock upon exercise of the
Warrants at any time during the five-year period following the effective date
of the Registration Statement, of which this Prospectus is a part, provided
that the Company satisfies certain securities registration requirements with
respect to the securities underlying the Warrants.

Up to 320,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Unit Purchase Option and the Warrants
contained in the Unit Purchase Option. Any and all of such shares of Common
Stock will be tradeable without restriction, provided that the Company
satisfies certain securities registration requirements in accordance with the
terms of the Unit Purchase Option. The Underwriter has demand and "piggyback"
registration rights with respect to the securities underlying the Unit
Purchase Option. See "Underwriting."

The Bridge Financing investors have agreed with the Company not to exercise,
sell, transfer, assign, hypothecate or otherwise dispose of their Public
Warrants for a period of one year following the closing of the Offering. The
Company has agreed to register for resale on behalf of the Bridge Financing
investors the 425,000 Public Warrants and the shares of Common Stock
underlying such Public Warrants upon expiration of such one-year period.

48
<PAGE>

UNDERWRITING

D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the
1,600,000 Units offered hereby from the Company on a "firm commitment" basis,
if any are purchased. It is expected that Blair & Co. will distribute as a
selling group member a substantial portion of the Units offered hereby. Blair
& Co. is owned by a corporation which is substantially owned by family members
of J. Morton Davis. Mr. Davis is the sole stockholder of the Underwriter.

The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to selected dealers who are members of
the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $.275 per Unit, of which not in excess of $.10 per Unit may
be reallowed to other dealers who are members of the NASD. After the initial
offering, the public offering price, concession and the reallowance may be
changed by the Underwriter.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a nonaccountable expense allowance of 3%
of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriter's over-allotment
option, $40,000 of which has been paid as of the date of this Prospectus.

The Underwriter has informed the Company that it does not expect to make
sales to discretionary accounts.

The Company has granted to the Underwriter an option, exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and
commissions, up to 240,000 additional Units for the purpose of covering over-
allotments, if any.

The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 160,000
Units substantially identical to the Units being offered hereby, except that
the Warrants included therein are subject to redemption by the Company for
$.05 at any time after the Unit Purchase Option has been exercised and the
underlying Warrants are outstanding. The Unit Purchase Option will be
exercisable during the two-year period commencing three years from the date of
this Prospectus at an exercise price of $7.00 per Unit, subject to adjustment
in certain events to protect against dilution, and is not transferable for a
period of two years from the date of this Prospectus except to officers of the
Underwriter or to members of the Underwriter's selling group or the officers
of such selling group members. The Company has agreed to register the
securities issuable upon exercise thereof under the Securities Act on two
separate occasions (the first at the Company's expense and the second at the
expense of the holders of the Unit Purchase Option) during the five-year
period commencing one year from the date of this Prospectus. The Unit Purchase
Option includes a provision permitting the holder to elect a cashless exercise
of the option. The Company has also granted certain piggyback registration
rights to holders of the Unit Purchase Options.

The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee
may be a director, officer, partner, employee or affiliate of the Underwriter.

In connection with the Offering, the Underwriter and certain selling group
members may engage in certain transactions that stabilize, maintain or
otherwise affect the market price of the Units, the Common Stock and the Class
A Warrants. Such transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which such persons
may bid for or purchase the Units, the Common Stock and the Class A Warrants
for the purpose of pegging, fixing or maintaining the market price of such
securities. The Underwriter may also create a short position in the Units by
selling more Units in connection with the Offering than it is committed to
purchase from the Company, and in such case the Underwriter may reduce all or
a portion of that short position by purchasing the Units, the Common Stock and
the Class A Warrants in the open market. The Underwriter also may also elect
to reduce any short position by exercising all or any portion of the over-
allotment option described herein. In addition, the Underwriter may impose
"penalty bids" whereby selling commissions allowed to selling group members or
other broker-dealers in respect of the Units sold in the

49
<PAGE>

Offering for their account may be reclaimed by the Underwriter if the
securities comprising the Units are repurchased by the Underwriter or any
selling group member in stabilizing or covering transactions. Any of the
transactions described in this paragraph may stabilize or maintain the market
price of the Units, the Common Stock and the Class A Warrants at a level above
that which might otherwise prevail in the open market.

Neither the Company nor the Underwriter may make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Units, the Common
Stock and the Class A Warrants. In addition, neither the Company nor the
Underwriter makes any representation that the Underwriter or any selling group
member will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

The Underwriter acted as placement agent in connection with the Bridge
Financing in March 1997 and received a placement agent fee of $85,000 and a
non-accountable expense allowance of $25,500. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The directors and executive officers of the Company, and holders of the
shares of the Common Stock and warrants issued prior to the Offering, have
agreed not to sell or otherwise dispose of any of their shares of Common Stock
of the Company for a period of 13 months from the date of this Prospectus
without the prior written consent of the Underwriter.

The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation.
Upon any exercise of the Warrants after one year from the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price for Warrant exercises solicited by the Underwriter or its
representatives or agents, if (i) the market price of the Company's Common
Stock on the date the Warrant is exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrant was solicited in
writing by a member of the NASD; (iii) the Warrant is not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of the Warrants;
and (v) the solicitation of exercise of the Warrant was not in violation of
Regulation M promulgated under the Exchange Act.

The notice of redemption shall specify the redemption price, the date fixed
for redemption, the place where the Warrant certificates shall be delivered
and the redemption price to be paid, and that the right to exercise the
Warrants shall terminate at 5:00 p.m. (New York City time) on the business day
immediately preceding the date fixed for redemption.

The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The Company has been advised by
the Underwriter that the investigation has been ongoing since at least 1989
and that it is cooperating with the investigation. The Underwriter cannot
predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or Blair & Co.

In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with
the NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers
regarding market-making activities of Blair & Co. in connection with certain
securities issues during the period from June 1993 through May 1995 where
Blair & Co. was the primary selling group member. NASDR alleged the firm
failed to accurately calculate the

50
<PAGE>

contemporaneous cost of securities in instances where the firm dominated and
controlled after-market trading, thereby causing the firm to charge its
customers excessive mark-ups. NASDR also alleged the firm did not make
adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2 million fine, make $2.4 million in restitution to
retail customers, employ an independent consultant for two years to review and
make recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more than 60% of the total securities sold
in any securities offering in which it participates as an underwriter or
selling group member. The Chief Executive Officer of Blair & Co. has agreed to
settle failure to supervise charges by consenting to a censure, the imposition
of a $225,000 fine and a 60-day suspension from associating with any NASD
member firm and to take a requalification examination. The firm's head trader
has agreed to settle charges against him by consenting to a censure, the
imposition of a $300,000 fine and a 90-day suspension from associating with
any member firm and has undertaken to take certain requalification
examinations. The settlement with NASDR does not involve or relate to the
Underwriter, its chief executive officer or any of its other officers or
directors.

Prior to the Offering, there has been no market for any of the securities of
the Company. Accordingly, the initial public offering price of the Units and
the exercise prices and other terms of the Warrants have been determined by
negotiations between the Company and the Underwriter and are not necessarily
related to the Company's assets, net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of, and prospects for, the
industry in which the Company competes, the Company's management, the
Company's financial condition, the Company's capital structure and such other
factors as were deemed relevant.

In August 1997, Sutton Partners, L.P. loaned the Company $175,000 for
working capital. Such loan is evidenced by the Sutton Note which bears
interest at the rate of 10% per annum. The Company intends to use a portion of
the proceeds of the Offering to repay the Sutton Note. The limited partners of
Sutton Partners, L.P. are the grandchildren of the sole stockholder of the
Underwriter. See "Use of Proceeds."

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Bachner, Tally, Polevoy & Misher LLP, New York, New York,
has acted as counsel for the Underwriters.

EXPERTS

The financial statements of Notify Corporation at September 30, 1996, and
for each of the two years in the period ended September 30, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph with respect to the uncertainty surrounding
the Company's ability to continue as a going concern, as discussed in Note 1
of Notes to the Financial Statements) appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

51
<PAGE>

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission") with respect to the Common Stock offered
pursuant to this Prospectus. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information included in
the Registration Statement and amendments thereof and the exhibits thereto,
which are available for inspection without charge, and copies of which may be
obtained at prescribed rates, at the office of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at 7 World Trade Center, 13th Floor, New York, New York 10048, and
at the Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission (http://www.sec.gov).

The Company will provide, without charge, to each person who received a
Prospectus, upon written or oral request of such person to the Company at the
mailing address or telephone number listed below, a copy of any of the
information incorporated by reference. The mailing address of the Company's
principal executive offices is Notify Corporation, 1054 S. De Anza Blvd.,
Suite 105, San Jose, California 95129 and its telephone number is (408) 777-
7920.

52
<PAGE>

NOTIFY CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Financial Statements
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Shareholders' Equity (Net Capital Deficiency)................. F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Notify Corporation

We have audited the accompanying balance sheet of Notify Corporation as of
September 30, 1996, and the related statements of operations, shareholders'
equity (net capital deficiency), and cash flows for each of the two years in
the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Notify Corporation at
September 30, 1996, and results of its operations and its cash flows for each
of the two years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.

As discussed in Note 1 to the financial statements, Notify Corporation's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans as to these matters are also
described in Note 1. The 1996 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

San Jose, California
November 15, 1996, except as to Note 8, as to
which the date is May 21, 1997

F-2
<PAGE>

NOTIFY CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED
SHAREHOLDERS'
SEPTEMBER 30, JUNE 30, EQUITY AT
1996 1997 JUNE 30, 1997
------------- ----------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 8)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 260,380 $ 389,506
Accounts receivable, net of
allowance for doubtful
accounts of $2,106 and $22,898,
respectively....................... 134,682 433,059
Inventories......................... 579,929 908,806
----------- -----------
Total current assets.................. 974,991 1,731,371
Property and equipment, net........... 92,903 120,939
Other assets.......................... 8,765 471,508
----------- -----------
$ 1,076,659 $ 2,323,818
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Line of credit...................... $ 50,000 $ 44,998
Accounts payable.................... 116,797 640,312
Accrued liabilities................. 265,049 487,455
Notes payable to shareholder........ 30,000 290,000
Bridge notes........................ -- 691,542
Convertible promissory notes........ 807,125 200,000
----------- -----------
Total current liabilities............. 1,268,971 2,354,307
Commitments
Shareholders' equity (net capital
deficiency):
Convertible preferred stock, no par
value, 4,500,000
shares authorized, issued and
outstanding;
aggregate liquidation preference of
$1,850,000; none outstanding pro
forma--unaudited................... 1,850,000 1,850,000 $ --
Common stock, no par value,
12,100,000 shares authorized,
885,125 and 1,080,906 shares issued
and outstanding at September 30,
1996 and June 30, 1997,
respectively; 1,971,966 shares
issued and outstanding pro forma--
unaudited.......................... 58,619 948,420 2,798,420
Notes receivable from shareholders.. (17,650) (25,775) (25,775)
Accumulated deficit................. (2,083,281) (2,803,134) (2,803,134)
----------- ----------- -----------
Total shareholders' equity (net
capital deficiency).................. (192,312) (30,489) $ (30,489)
----------- ----------- ===========
$ 1,076,659 $ 2,323,818
=========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE>

NOTIFY CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
---------------------- -----------------------
1995 1996 1996 1997
--------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Product sales................. $ 9,333 $ 308,067 $ 194,418 $3,057,480
Cost of sales................. 7,929 428,112 200,096 2,157,903
--------- ----------- ----------- ----------
Gross profit (loss)........... 1,404 (120,045) (5,678) 899,577
Operating expenses:
Research and development.... 159,163 537,902 401,436 501,290
Sales and marketing......... 122,884 549,916 407,711 509,340
General and administrative.. 146,756 440,089 319,010 466,255
--------- ----------- ----------- ----------
Total operating expenses...... 428,803 1,527,907 1,128,157 1,476,885
--------- ----------- ----------- ----------
Loss from operations.......... (427,399) (1,647,952) (1,133,835) (577,308)
Interest expense.............. -- (32,811) (2,723) (145,295)
Other income and expense, net. 1,337 23,544 21,740 2,750
--------- ----------- ----------- ----------
Net loss...................... $(426,062) $(1,657,219) $(1,114,818) $ (719,853)
========= =========== =========== ==========
Net loss per share............ $ (1.05) $ (3.87) $ (2.56) $ (1.50)
========= =========== =========== ==========
Weighted average shares
outstanding.................. 406,358 428,764 435,875 479,605
========= =========== =========== ==========
Pro forma net loss per share.. $ (2.12) $ (0.85)
=========== ==========
Weighted average shares used
in computing pro forma net
loss per share............... 781,306 844,912
=========== ==========
</TABLE>

See accompanying notes.

F-4
<PAGE>

NOTIFY CORPORATION

STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE EQUITY (NET
-------------------- ------------------- FROM ACCUMULATED CAPITAL
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS DEFICIT DEFICIENCY)
--------- ---------- --------- -------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders for cash
and note receivable.... -- $ -- 789,398 $39,865 $(29,865) $ -- $ 10,000
Issuance of Series A
convertible preferred
stock.................. 1,000,000 100,000 -- -- -- -- 100,000
Issuances of common
stock in exchange for
note receivable........ -- -- 59,406 3,000 (3,000) -- --
Repayments of notes
receivable from
shareholders........... -- -- -- -- 13,065 -- 13,065
Net loss................ -- -- -- -- -- (426,062) (426,062)
--------- ---------- --------- -------- -------- ----------- ----------
Balances at September
30, 1995............... 1,000,000 100,000 848,804 42,865 (19,800) (426,062) (302,997)
Issuance of Series B
convertible preferred
stock.................. 3,500,000 1,750,000 -- -- -- -- 1,750,000
Repurchases of common
stock.................. -- -- (32,590) (1,646) 2,500 -- 854
Repayments of notes
receivable from
shareholders........... -- -- -- -- 12,800 -- 12,800
Issuances of common
stock in exchange for
notes receivable and
cash................... -- -- 68,911 17,400 (13,150) -- 4,250
Net loss................ -- -- -- -- -- (1,657,219) (1,657,219)
--------- ---------- --------- -------- -------- ----------- ----------
Balance at September 30,
1996................... 4,500,000 1,850,000 885,125 58,619 (17,650) (2,083,281) (192,312)
Repayments of notes
receivable from
shareholders
(unaudited)............ -- -- -- -- 325 -- 325
Issuances of common
stock (unaudited)...... -- -- 33,057 12,200 (9,200) -- 3,000
Repurchases of common
stock (unaudited)...... -- -- (2,970) (750) 750 -- --
Issuances of common
stock pursuant to
conversion of
convertible promissory
notes and accrued
interest (unaudited)... -- -- 165,694 761,476 -- -- 761,476
Issuance of bridge
warrants (unaudited)... -- -- -- 116,875 -- -- 116,875
Net loss (unaudited).... -- -- -- -- -- (719,853) (719,853)
--------- ---------- --------- -------- -------- ----------- ----------
Balance at June 30, 1997
(unaudited)............ 4,500,000 $1,850,000 1,080,906 $948,420 $(25,775) $(2,803,134) $ (30,489)
========= ========== ========= ======== ======== =========== ==========
</TABLE>

See accompanying notes.

F-5
<PAGE>

NOTIFY CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------- ------------------------
1995 1996 1996 1997
------------ ------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN
OPERATING ACTIVITIES
Net loss................. $(426,062) $(1,657,219) $ (1,114,818) $ (719,853)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 3,193 23,132 12,654 26,575
Amortization of debt
discount and issuance
costs.................. -- -- -- 73,917
Conversion of accrued
interest on convertible
notes to common stock.. -- -- -- 29,351
Changes in operating
assets and liabilities:
Accounts receivable.... (3,868) (130,814) (98,286) (298,377)
Inventory.............. (19,849) (560,080) (563,015) (328,877)
Other assets........... (5,609) (3,156) (4,128) (462,743)
Accounts payable....... 23,746 93,051 152,515 523,515
Accrued liabilities.... 64,621 200,428 6,847 222,406
----------- ------------- ------------ ----------
Net cash used in
operating activities.... (363,828) (2,034,658) (1,608,231) (934,086)
----------- ------------- ------------ ----------
CASH FLOWS USED IN
INVESTING ACTIVITIES
Expenditures for property
and equipment........... (30,662) (88,566) (69,650) (54,611)
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Proceeds from issuance of
preferred stock......... 100,000 1,450,000 1,450,000 --
Proceeds from issuance of
common stock............ 10,000 5,104 14,754 3,000
Proceeds from issuance of
convertible promissory
notes................... 300,000 807,125 420,000 125,000
Net proceeds from private
placement of bridge
notes................... -- -- -- 734,500
Advances under line of
credit.................. -- 50,000 180,000 193,500
Repayments under line of
credit.................. -- -- (198,502)
Proceeds from notes
payable to shareholder.. 75,000 -- -- 265,000
Payments on notes payable
to shareholder.......... -- (45,000) (35,000) (5,000)
Repayments of notes
receivable from
shareholders............ 13,065 12,800 3,150 325
----------- ------------- ------------ ----------
Net cash provided by
financing activities.... 498,065 2,280,029 2,032,904 1,117,823
----------- ------------- ------------ ----------
Net increase (decrease)
in cash and cash
equivalents............. 103,575 156,805 355,023 129,126
Cash and cash equivalents
at beginning of period.. -- 103,575 103,575 260,380
----------- ------------- ------------ ----------
Cash and cash equivalents
at end of period........ $ 103,575 $ 260,380 $ 458,598 $ 389,506
=========== ============= ============ ==========
NONCASH FINANCING
ACTIVITIES:
Common stock issued or
retired for notes
receivable
from shareholders....... $ 32,865 $ 13,150 $ 1,750 $ 9,200
=========== ============= ============ ==========
Conversion of convertible
notes payable to
preferred stock......... $ -- $ 300,000 $ 300,000 $ --
=========== ============= ============ ==========
Conversion of convertible
notes payable to
common stock............ $ -- $ -- $ -- $ 732,125
=========== ============= ============ ==========
Value ascribed to
warrants issued in
conjunction with Private
Placement............... $ -- $ -- $ -- $ 116,875
=========== ============= ============ ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for interest $ -- $ 8,817 $ -- $ 4,649
=========== ============= ============ ==========
</TABLE>

See accompanying notes.

F-6
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Notify Corporation (the "Company") was incorporated in the State of
California on August 12, 1994 to engage in the development and production of
phone message notification systems. As of September 30, 1995, the Company was
considered to be in the development stage as its main activities primarily
consisted of establishing its offices and research facilities, recruiting
personnel, conducting research and development, performing business and
financial planning and raising capital. This designation was no longer
applicable as of September 30, 1996 as the Company began the shipment of its
notification systems during the fiscal year. There were no operations of the
Company between August 12, 1994 (date of incorporation) and September 30,
1994.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net losses of approximately $2.8 million and has negative
working capital of approximately $623,000 as of June 30, 1997. Management
expects the Company to incur additional losses and recognizes the need for an
infusion of cash during fiscal 1998. As more fully discussed in Note 3, the
Company secured net proceeds of approximately $735,000 through a private
placement of notes payable and warrants in February 1997 and $200,000 through
the issuance of a promissory note payable and a warrant issued to a
shareholder in April 1997. The Company is also in the process of securing
additional financing through an offering of equity securities. If the Company
is unable to complete its proposed offering, substantial doubt about its
ability to continue as a going concern will remain.

INTERIM RESULTS

The accompanying balance sheet as of June 30, 1997 and the statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
the nine-month periods ended June 30, 1996 and 1997 are unaudited. In the
opinion of management, the statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statement for
these periods is also unaudited.

STOCK SPLIT

In January 1997, the Board of Directors approved a reverse stock split of
one-for-5.05 of all outstanding shares of common stock and changed the
conversion ratio of preferred stock to one share of common stock for every
5.05 preferred shares. All common share and per share information included in
the accompanying financial statements has been retroactively adjusted to give
effect to the stock split as well as the change in the preferred stock
conversion ratio.

CASH AND CASH EQUIVALENTS

The Company maintains it cash and cash equivalents in depository and money
market accounts with two financial institutions.

F-7
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lesser of actual cost, on a FIFO basis, or
fair market value and consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials......................................... $399,719 $694,030
Work-in-progress...................................... 47,166 117,170
Finished goods........................................ 133,044 97,606
-------- --------
$579,929 $908,806
======== ========
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and depreciated or amortized on a
straight-line basis of the lesser of the estimated useful lives of the asset
or the lease term. The estimated useful lives range from three to five years.

REVENUE RECOGNITION

Product sales are recognized upon product shipment. In fiscal 1996, three
customers accounted for 30%, 18% and 16% of sales, respectively. For the nine-
month period ended June 30, 1997, one customer accounted for 69% of sales.

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as incurred.
The Company does not currently develop software that is sold, licensed or
otherwise marketed.

INCOME TAXES

The Company follows Statement of Financial Accounts Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

The Company sells its products primarily to regional bell operating
companies and local exchange carriers in the United States. The Company
performs on-going credit evaluations and generally requires no collateral. The
Company maintains reserves for credit losses, and such losses have been within
management's expectations. As of September 30, 1996, two customers accounted
for 67% and 23% of accounts receivable, respectively. As of June 30, 1997, two
customers accounted for 73% and 13% of accounts receivable, respectively.

F-8
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NOTES PAYABLE

The carrying amounts of the Company's notes payable approximate their fair
value. The fair values of the Company's notes payable are estimated using
discounted cash flow analysis, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued and is
effective for the Company's fiscal 1997 year end. The Company intends to
account for employee stock options in accordance with APB Opinion No. 25 and
will make the pro forma disclosures required by SFAS 123 beginning in 1997.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets. The Company has adopted Statement
No. 121 in fiscal year 1996, which has not had a material impact.

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalent shares from convertible
preferred stock, convertible notes payable and warrants are not included as
the effect is antidilutive. In accordance with Securities and Exchange
Commission Staff Accounting Bulletins, common stock and common stock
equivalent shares issued by the Company at prices below the initial public
offering price during the period beginning one year prior to the initial
public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
estimated initial public offering price). The weighted average number of
common shares used in the net loss per share calculation was reduced by the
common stock, and common stock equivalent shares placed in escrow in
connection with the Company's initial public offering (see Note 8).

Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months prior to the initial
public offering date that will automatically convert upon completion of the
offering.

2. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
Furniture and office equipment........................ $116,982 $171,593
Leasehold improvements................................ 2,246 2,246
-------- --------
119,228 173,839
Less accumulated depreciation and amortization........ (26,325) (52,900)
-------- --------
$ 92,903 $120,939
======== ========
</TABLE>

F-9
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

3. PRIVATE PLACEMENT

In March 1997, the Company completed a private placement of an aggregate of
$850,000 principal amount of notes (the "Bridge Notes") and 425,000 warrants
(the "Bridge Warrants") in which it received net proceeds of approximately
$735,000 (after expenses of issuance). The Bridge Notes are payable, together
with interest at the rate of 10% per annum, on the earlier of one year from
the issuance of the Bridge Notes or the closing of the proposed public
offering discussed below. Each Bridge Warrant will be exercisable for a period
commencing one year from the date of issuance and expiring approximately two
years thereafter, and entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $3.00 per share if the Company does not
consummate the proposed public offering. In the event the Company completes
the proposed offering and such offering includes warrants or Class A warrants,
each Bridge Warrant will automatically convert on the closing date of the
public offering into one warrant or Class A warrant (a "Public Warrant") which
is identical in all respects to the Class A warrant sold in the public
offering, except that purchasers of the Bridge Notes acquiring the Bridge
Warrants have agreed not to exercise the Public Warrants for a period of one
year from the closing date of the public offering and not to sell publicly the
Public Warrants except as provided in certain lock-up provisions which expire
one year after the closing date of the public offering. The fair value of the
Bridge Warrants, amounting to approximately $117,000 together with the cost of
issuance (approximately $115,000) will be treated as additional interest
expense over the term of the Bridge Notes.

4. OTHER FINANCING ARRANGEMENTS

The Company had available a secured bank line of credit which allowed for
maximum borrowings and issuances of letters of credit of up to $500,000 at the
bank's prime rate plus 1.5% (9.75% at September 30, 1996) and expired in March
1997. At September 30, 1996, the Company had borrowings of $50,000 and standby
letters of credit of $20,000 outstanding under this facility. The Company was
not in compliance with certain covenants at September 30, 1996.

During fiscal 1996, the Company received proceeds of $807,125 from the
issuance of convertible promissory notes including $100,000 of proceeds
received from a director. The notes accrue interest at the rate of 8% per
annum and are due and payable in June 1997 unless earlier converted. In the
event that the Company issues and sells shares of capital stock for aggregate
proceeds of at least $1,500,000, the entire unpaid principal amount of these
notes and, at the option of the lender, unpaid interest, shall be converted
into shares of the Company's securities sold in such financing. Subsequent to
fiscal 1996, the Company received proceeds of $125,000 from the issuance of
additional convertible promissory notes with terms identical with those
described above. In January 1997, the Company completed a restructuring of the
convertible promissory notes whereby holders of an aggregate of $732,125 in
principal amount of convertible notes converted their notes and accrued
interest into 165,694 shares of common stock of the Company at a price per
share of approximately $4.55 and exchanged their warrants for new warrants to
purchase an aggregate of 48,272 shares of the Company's common stock at a
price of $0.25 per share. Holders of the remaining $200,000 principal amount
of notes agreed to defer repayment of the notes which are due on demand and
exchange their warrants for new warrants to purchase an aggregate of 7,920
shares of common stock at an exercise price of $5.05 per share.

During February 1997, the Company issued a $65,000 promissory note to a
shareholder which accrues interest at the rate of 8%. The shareholder also
received a warrant to purchase 11,535 shares of common stock of the Company at
$3.00 per share. The Company believes that the value of the warrant at the
date of issuance was not material and no value has been attributed to it in
these financial statements.

F-10
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

4. OTHER FINANCING ARRANGEMENTS (CONTINUED)

During December 1994, the Company issued a $75,000 promissory note to a
shareholder which accrues interest at the rate of 10% per annum and is due on
demand. The outstanding balance was $30,000 as of September 30, 1996 and
$25,000 as of June 30, 1997.

In April 1997, the Company issued a $200,000 promissory note to a
shareholder which accrues interest at 10% per annum and is due and payable in
October 1997. In conjunction with this promissory note, the Company also
issued the shareholder a warrant to purchase 2,970 shares of the Company's
common stock at an exercise price of $5.00 per share on or before April 3,
2002.

5. COMMITMENTS

The Company currently occupies a facility under an operating lease which
expires in March 1997 and contains renewal options to extend the lease term
for one two-year period. Future minimum payments under this lease at September
30, 1996 is $200,000.

Rent expense totaled $19,000, $44,000, 34,000 and 51,000 for the years ended
September 30, 1995 and 1996 and the nine-month periods ended June 30, 1996 and
1997, respectively.

6. SHAREHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

Authorized and outstanding convertible preferred stock and its principal
terms are as follows at September 30, 1996.

<TABLE>
<CAPTION>
LIQUIDATION
DIVIDEND PREFERENCE
DESIGNATED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A........................... 1,000,000 1,000,000 $0.01 $0.10
Series B........................... 3,500,000 3,500,000 $0.05 $0.50
</TABLE>

Dividends on the convertible preferred stock are payable when and if
declared by the board of directors. The dividend requirements of the preferred
stock must be satisfied prior to payment of any dividends or distributions
with respect to the Company's common stock. Dividend, redemption and
liquidation rights for Series B are senior to Series A. No dividends have been
declared.

The Company's board of directors has five members; as long as there are at
least 1,000,000 shares of Series B preferred stock issued and outstanding,
holders of Series B preferred stock, voting separately as a class, are
entitled to elect one director. Preferred shareholders are entitled to voting
rights equivalent to the number of common shares into which their shares are
convertible. Subject to certain antidilution provisions, every 5.05 shares of
Series A and B preferred stock is convertible at any time into one common
share. All preferred shares convert automatically to common stock (891,060
shares if converted at September 30, 1996 and June 30, 1997) in the event of a
firm commitment public offering of the Company's common stock.

WARRANTS

At September 30, 1996, warrants issued in connection with various financings
were outstanding to purchase 172,944 shares of the Company's common stock
(including 96,742 warrants held by two employees who are also shareholders) at
prices ranging from $1.01 to $5.05 per share. These warrants are exercisable
at any time and expire at dates ranging from April 2000 to February 2001.
During the three-month period ended

F-11
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

6. SHAREHOLDERS' EQUITY (CONTINUED)

December 31, 1996 the Company issued additional warrants in connection with
convertible notes payable to purchase 8,160 shares of the Company's common
stock. The Company believes that the value of the warrants at the date of
their issuance was not material, and no value has been attributed to them in
these financial statements.

In March 1996, and in conjunction with a line of credit agreement, the
Company issued a warrant that entitles the holder to purchase 3,960 shares of
common stock at an exercise price of $5.05 per share. This warrant is
exercisable at any time and expires in February 2001.

COMMON STOCK

The Company has outstanding 915,212 common shares issued to founders,
advisors and employees of the Company, of which certain shares are subject to
repurchase rights upon termination of service to the Company, which generally
expire ratably over four years from date of issuance. At June 30, 1997, 83,821
shares were subject to repurchase at their paid-in amounts.

1997 STOCK OPTION PLAN

In January 1997, the Company adopted the Notify Corporation 1997 Stock Plan
(the "Plan"). A total of 200,000 shares of the Company's common stock are
reserved for issuance under the Plan which provides for the grant of stock
options to employees, consultants and directors of the Company. No options
were granted as of June 30, 1997 under the Plan.

7. INCOME TAXES

At September 30, 1996, the Company had a net operating loss carryforward for
federal and state tax purposes of approximately $1,800,000, which will expire
in tax years 2003 and 2011, respectively. Due to the "change of ownership"
provisions of the Tax Reform Act of 1986, utilization of the net operating
loss carryforward will be significantly limited.

The Company had deferred tax assets of approximately $737,000 at September
30, 1996, which relate primarily to the future tax benefits of net operating
loss carryforwards. Due to the Company's lack of earnings history, the
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by approximately $565,000 for the fiscal year
ended September 30, 1996.

8. SUBSEQUENT EVENTS

INITIAL PUBLIC OFFERING OF UNITS AND RELATED MATTERS

In January 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
offering to the public units consisting of one share of common stock and one
Class A warrant. Additionally, the Company agreed to grant an option to an
underwriter to purchase up to 10% of the units sold in the offering which is
exercisable at a price of 140% of the price of the units sold in the offering
during a two-year period commencing three-years from the date of the offering.

F-12
<PAGE>

NOTIFY CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
(INFORMATION AT JUNE 30, 1997 AND FOR THE NINE-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED)

8. SUBSEQUENT EVENTS (CONTINUED)

ESCROW SECURITIES

In February 1997, the holders of the Company's common and preferred stock
agreed to place 1,263,537 of their shares into escrow subject to the
completion of the initial public offering of units. Additionally, the holders
of warrants agreed to place warrants to purchase 111,008 shares of common
stock into escrow subject to the completion of the initial public offering of
units. The securities will be released to the holders in the event specified
levels of pretax income of the Company for the years ended September 30, 1998
to 2002 are achieved, or the market price of the Company's common stock
attains specified targets during a 36-month period commencing from the
effective date of the registration statement relating to the Company's public
offering. Any securities remaining in escrow on September 30, 2002 will be
forfeited, which securities will then be contributed to the Company's capital.
The pretax income levels are subject to proportionate adjustment upon the
issuance of certain securities subsequent to the Company's initial public
offering.

In the event that the foregoing earnings or market price levels are attained
and the escrowed securities released, the Securities and Exchange Commission
has adopted the position that the release of escrowed securities to officers,
directors, employees and consultants of the Company will be compensatory and,
accordingly, will result in compensation expense for financial reporting
purposes. The expense will equal the fair market value of the escrowed
securities on the date of release and will result in a material charge to
operations.

PRO FORMA UNAUDITED SHAREHOLDERS' EQUITY

Pro forma unaudited shareholders' equity at June 30, 1997 reflects the
assumed conversion of convertible preferred stock, as set forth on the
accompanying balance sheet.

F-13
<PAGE>

INSIDE BACK COVER:

UPPER LEFT HAND CORNER:
[PICTURE OF COMPANY'S MESSAGEALERT PRODUCT ON A DESKTOP]

LOWER LEFT HAND CORNER:
[A PICTURE OF COMPANY'S CENTREX AUTO ATTENDANT PRODUCT NEXT TO A TELEPHONE].
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS
OR ANY SALE PURSUANT TO THIS PROSPECTUS CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF THIS PROSPECTUS.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 26
Management................................................................ 36
Certain Relationships and Related
Transactions............................................................. 40
Principal Shareholders.................................................... 42
Description of Securities................................................. 45
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 52
Index to Financial Statements............................................. F-1
</TABLE>

UNTIL SEPTEMBER 22, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

1,600,000 UNITS

[LOGO OF NOTIFY CORPORATION]

CONSISTING OF 1,600,000
SHARES OF COMMON STOCK AND
1,600,000 REDEEMABLE CLASS A WARRANTS

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

D.H. BLAIR INVESTMENT
BANKING CORP.

AUGUST 28, 1997

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