SOUND SOURCE INTERACTIVE INC /DE/, 424B1, 1996-07-03

SOUND SOURCE INTERACTIVE INC /DE/
424B1, 1996-07-03
PREPACKAGED SOFTWARE

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PROSPECTUS

[SOUND SOURCE INTERACTIVE, INC. LOGO]

2,400,000 SHARES OF COMMON STOCK AND
1,200,000 REDEEMABLE WARRANTS
------------------

Sound Source Interactive, Inc. (the "Company") hereby offers 2,400,000
shares (the "Shares") of common stock, par value $.001 per share (the "Common
Stock"), and 1,200,000 redeemable warrants (the "Redeemable Warrants") (the
Shares and the Redeemable Warrants offered hereby by the Company are sometimes
collectively referred to herein as the "Securities"). The Shares and the
Redeemable Warrants may be purchased separately, and will be separately
tradeable immediately upon issuance. Each Redeemable Warrant entitles the holder
thereof to purchase one share of Common Stock at a purchase price equal to 110
percent of the initial public offering price per share, subject to adjustment,
at any time during the 54-month period commencing one year after the date of
this Prospectus, and is redeemable by the Company at a redemption price of $.25
per Redeemable Warrant, commencing one year after the date of this Prospectus,
provided that the average closing bid price of the Common Stock equals or
exceeds 140 percent of the initial public offering price per share for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption. See "Description of
Securities -- Redeemable Warrants."

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION.
SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 9 AND 25, RESPECTIVELY.

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $4.00 $.40 $3.60
Per Redeemable Warrant...................... $ .25 $.025 $ .225
Total (3)................................... $9,900,000.00 $990,000.00 $8,910,000.00
</TABLE>

(1) Does not include additional compensation to the Underwriters in the form of
a non-accountable expense allowance. For indemnification arrangements with,
and additional compensation payable to, the Underwriters, see
"Underwriting."

(2) Before deducting expenses of this offering payable by the Company, estimated
at approximately $732,000 in the aggregate, including the Underwriters'
non-accountable expense allowance.

(3) For the purpose of covering over-allotments, if any, the Company and an
affiliated selling stockholder have granted to the Underwriters an option,
exercisable within 45 days from the date of this Prospectus, to purchase up
to 360,000 additional shares of Common Stock and/or up to 180,000 additional
Redeemable Warrants. If such over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Proceeds to Company will
be $11,305,000 and $1,130,500 and $10,174,500, respectively.

The Securities are offered by the Underwriters, when, as and if delivered to
and accepted and subject to their right to withdraw, cancel or modify this
offering and to reject any orders in whole or in part. It is expected that
delivery of the Securities will be made on or about July 8, 1996.

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

THE BOSTON GROUP, L.P. JOSEPH STEVENS & COMPANY, L.P.

The date of this Prospectus is July 2, 1996

<PAGE>
[INSERT COVER ART]

Prior to this offering, there has been no public market for the Securities
and there can be no assurance that a market for the Securities will develop or,
if a market develops, that it will be sustained. The Common Stock and Redeemable
Warrants have been approved for quotation on the Nasdaq SmallCap Market under
the symbols SSII and SSIIW for the Common Stock and Redeemable Warrants,
respectively. The initial public offering prices for the Common Stock and
Redeemable Warrants and the exercise price of the Redeemable Warrants have been
determined by negotiation between the Company and The Boston Group, L.P. and
Joseph Stevens & Company, L.P., as underwriters (the "Underwriters") of the
several Underwriters, and are not necessarily related to the Company's asset
value, net worth or other established criteria of value. See "Risk Factors" and
"Underwriting."

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

The Company intends to furnish its stockholders with annual reports
containing audited financial statements, with a report thereof by its
independent certified public accountant, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Sound Source Interactive, Inc. (the "Company") is engaged primarily in
developing, publishing and marketing educational, interactive computer software
for children. INTERACTIVE MOVIEBOOKS-TM-, which combine text, photos, sound
clips and actual film footage of well recognized family films and cartoon
series, are the Company's major software products. INTERACTIVE MOVIEBOOKS-TM-
are developed and published by the Company on compact disk-read only memory
("CD-ROM") for multimedia personal computers ("Multimedia PCs") as entertaining,
interactive reading tools for young children. The Company also produces a
variety of entertainment computer software utilities which incorporate screen
savers, sound clips known as AUDIOCLIPS-Registered Trademark- and other content
based on licensed entertainment properties. The new entertainment utilities are
marketed as limited edition serialized collector editions. The Company is
currently developing another line of products which it refers to as creativity
centers. This product line combines learning activities such as painting,
drawing, matching, puzzles and mazes within a framework of three distinct skill
levels.

The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM- and other popular titles. The
Company also holds licenses for new products currently being developed for
release in 1996 on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-,
DRAGONHEART-TM- and I LOVE LUCY-TM-. The Company is continuing the negotiation
of additional licenses for its INTERACTIVE MOVIEBOOKS-TM-, entertainment
utilities and creativity centers. Management believes the Company is capable of
continuing to obtain new licenses for major motion pictures and television shows
and developing new, high quality software products using content from these
entertainment properties.

The powerful capabilities and declining price of Multimedia PCs have enabled
them to draw acceptance as all purpose, functional educational and entertainment
products for home and school use. Industry sources state that the installed base
of Multimedia PCs exceeds 9,000,000 units. The technological capabilities of
Multimedia PCs have allowed the Company to produce interactive software that is
"user friendly" while maintaining what management believes are high standards in
design, sound quality, three-dimensional sound effects and quality duplication
of motion picture footage. Management believes that the Company is well
positioned to participate in this market, not only through expansion of its
existing software products, but through development opportunities in other media
formats, such as interactive television and the Internet.

On June 1, 1996 the Company entered into a Distribution Services Agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS"). SSIDS is the
consumer software distribution unit of Simon & Schuster, Inc., the publishing
operation of Viacom Inc. Pursuant to this new distribution agreement, SSIDS will
provide distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. The Company believes that, pursuant to its previous
distribution arrangements, its products are in distribution to approximately
6,000 retail outlets. Retailers currently selling the Company's products include
Target, Tower Records, Sears, Wal-Mart,

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Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead, Electronics
Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam Goody, Sam's
Club, QVC, Musicland, Circuit City, Blockbuster Video and others.

The Company's objective is to be a leading publisher of high quality, value
priced, family- oriented software. To achieve this objective, the Company
intends to (i) focus primarily on developing products with educational and
entertainment value which are based on popular movies, television series and
comic book characters and are easy to use and install, (ii) develop a broad line
of products, upgrade successful products and develop product line extensions and
complementary products, (iii) leverage studio relationships to develop
cross-marketing promotional programs, (iv) promote tradename recognition, (v)
leverage its licensed content to develop products intended for the game market,
and (vi) pursue strategic alliances and acquisitions.

The Company is located at 2985 East Hillcrest Drive, Suite A, Westlake
Village, California 91362. Its telephone number is (805) 494-9996. Its facsimile
number is (805) 379-3446.

4
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THE OFFERING

<TABLE>
<S> <C>
Securities Offered by the 2,400,000 shares of Common Stock and 1,200,000 Redeem-
Company.......................... able Warrants. Each Redeemable Warrant entitles the
holder thereof to purchase one share of Common Stock.
The Common Stock and Redeemable Warrants may be
purchased separately, and will be separately tradeable
commencing on the date of this Prospectus. See
"Description of Securities."
Terms of the Redeemable
Warrants......................... Each Redeemable Warrant will entitle the holder to
purchase one share of Common Stock at a price of 110
percent of the initial public offering price per share,
subject to adjustment, during the 54-month period
commencing one year after the date of this Prospectus.
In the event that the Redeemable Warrants are called for
redemption, they will be exercisable for 30 days
preceding the applicable redemption date.
Redemption of the Redeemable
Warrants......................... Commencing one year after the date of this Prospectus,
the Redeemable Warrants will be subject to redemption at
$.25 per Redeemable Warrant if the average closing bid
price of the Common Stock equals or exceeds 140 percent
of the initial public offering price per share for any
20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to
the date of the notice of redemption. See "Description
of Securities -- Redeemable Warrants."
Shares of Common Stock
Outstanding:
Prior to the Offering........... 1,808,291 shares.
After the Offering.............. 4,208,291 shares, or 4,548,291 shares if the
Underwriters' over-allotment option is exercised. Of the
360,000 shares subject to the Underwriters'
over-allotment option, 340,000 are being offered by the
Company and 20,000 are being offered by an affiliated
stockholder. See "Principal and Selling Stockholders."
Up to 12,220,183 additional shares may be issued in the
future under the Redeemable Warrants offered hereby and
options and warrants that are outstanding or agreed to
be issued.
Use of Proceeds................... The Company intends to use the net proceeds of this
offering to repay notes issued to investors in the
Company's 1995 Private Placement (as defined below) in
the aggregate principal amount of $4,987,500 (plus
accrued interest estimated at $242,500 as of March 31,
1996), to repay a temporary financing provided by ASSI,
Inc. in the principal amount of $500,000, to obtain
additional licenses, to pay sales and marketing costs,
to make capital expenditures and for working capital.
See "Use of Proceeds" and "Certain Transactions -- 1995
Private Placement."
</TABLE>

5
<PAGE>

<TABLE>
<S> <C>
Nasdaq Symbols:
Common Stock.................... SSII
Redeemable Warrants............. SSIIW
Risk Factors...................... An investment in the Common Stock and Redeemable War-
rants involves a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution."
Agreements with ASSI, Inc. ....... On April 30, 1996, the Company entered into a consulting
agreement with ASSI, Inc., which also is a creditor of
the Company. Pursuant to that agreement, ASSI, Inc. has
provided and agreed to provide certain consulting
services to the Company, in consideration for which the
Company has issued to ASSI, Inc. warrants (the "ASSI
Warrants") to purchase 2,000,000 shares of Common Stock.
On April 30, 1996, the Company, Vincent J. Bitetti and
Eric H. Winston (who are currently executive officers
and the controlling stockholders of the Company) also
entered into a Stockholder Voting Agreement with ASSI,
Inc., pursuant to which each agreed to vote all of their
Common Stock for certain director nominees.
On May 30, 1996, the Company entered into an agreement
with ASSI, Inc. whereby ASSI, Inc. loaned the Company
$500,000 (the "ASSI Convertible Loan"). The ASSI
Convertible Loan is due on the earlier of September 1,
1996 or the completion of the Company's initial public
offering made hereby. Upon the closing of the Company's
initial public offering, ASSI, Inc. may convert all or
part of the ASSI Convertible Loan into warrants to
purchase Common Stock at a conversion price of $.25 per
warrant (the "ASSI Loan Warrants").
The terms of the ASSI Warrants and the ASSI Loan
Warrants (if any) will be substantially the same as
those of the Redeemable Warrants, except that for as
long as they are held by ASSI, Inc. such warrants will
be exercisable commencing October 1, 1996, will not be
mandatorily redeemable by the Company and will be
subject to separate registration rights. See "Certain
Transactions -- Agreements With ASSI, Inc."
</TABLE>

6
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<TABLE>
<S> <C>
Resale of Outstanding Securities;
Issuance of Common Stock
Underlying Redeemable Warrants... A separate Prospectus is being filed with the
Registration Statement of which this Prospectus is a
part which relates to the registration by the Company,
at its expense, for the account of certain security
holders (the "Selling Security Holders") of 107,500
shares of Common Stock and 5,689,665 warrants (unless
otherwise indicated, such warrants and the Redeemable
Warrants offered hereby by the Company are collectively
referred to as "Redeemable Warrants") previously issued
by the Company to the Selling Security Holders and
392,838 shares of Common Stock purchasable by a Selling
Security Holder upon exercise of presently exercisable
options, and to the registration for the account of the
Company of (i) 7,069,665 shares of Common Stock issuable
by the Company upon the exercise of the Redeemable
Warrants, (ii) 2,000,000 shares of Common Stock issuable
by the Company upon the exercise of the ASSI Warrants,
and (iii) up to 2,100,000 shares of Common Stock
issuable by the Company upon exercise of the ASSI Loan
Warrants (if any) issuable upon conversion of the ASSI
Convertible Loan. The 500,338 shares of Common Stock and
5,689,665 Redeemable Warrants being so offered for sale
by the Selling Security Holders are sometimes collec-
tively referred to as the "Selling Security Holders'
Securities." The Selling Security Holders' Securities
are not being underwritten in this offering and the
Company will not receive any proceeds from the sale of
the Selling Security Holders' Securities. The Common
Stock and Redeemable Warrants being registered for the
account of the Selling Security Holders may be sold by
the Selling Security Holders or their transferees
commencing on the date of this Prospectus. See "Risk
Factors -- Sale of Certain Securities," "Certain Trans-
actions" and "Resale of Outstanding Securities."
</TABLE>

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

UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS GIVES EFFECT TO A 9.25-FOR-1 STOCK SPLIT EFFECTED IN MAY 1994 AND A
1-FOR-5.976 REVERSE STOCK SPLIT EFFECTED IN SEPTEMBER 1995. UNLESS OTHERWISE
INDICATED, SUCH SHARE AND PER SHARE INFORMATION DOES NOT GIVE EFFECT TO: (I) THE
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 340,000
SHARES OF COMMON STOCK AND 180,000 REDEEMABLE WARRANTS FROM THE COMPANY; (II)
THE ISSUANCE OF 1,200,000 SHARES OF COMMON STOCK UNDERLYING THE REDEEMABLE
WARRANTS BEING OFFERED BY THE COMPANY; (III) THE ISSUANCE OF 5,689,665 SHARES OF
COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS, 2,000,000 SHARES OF COMMON
STOCK UNDERLYING THE ASSI WARRANTS AND UP TO 2,100,000 SHARES OF COMMON STOCK
UNDERLYING THE ASSI LOAN WARRANTS (IF ANY) ISSUABLE UPON CONVERSION OF THE ASSI
CONVERTIBLE LOAN BEING OFFERED BY THE SELLING SECURITY HOLDERS; (IV) THE
ISSUANCE OF 180,000 SHARES OF COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS
INCLUDED IN THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (V) THE EXERCISE OF A
WARRANT GRANTED TO THE UNDERWRITERS (THE "UNDERWRITERS' WARRANT") TO PURCHASE UP
TO 240,000 SHARES OF COMMON STOCK; (VI) THE ISSUANCE OF 384,070 SHARES OF COMMON
STOCK UNDERLYING OPTIONS GRANTED PURSUANT TO THE COMPANY'S 1992 STOCK OPTION
PLAN; (VII) 500,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO THE
COMPANY'S 1995 STOCK OPTION PLAN, AS TO WHICH THE COMPANY HAS GRANTED NO OPTIONS
AND HAS AGREED TO GRANT 13,610 OPTIONS; OR (VIII) THE ISSUANCE OF 292,838 SHARES
OF COMMON STOCK UNDERLYING OPTIONS HELD BY THE COMPANY'S PRESIDENT.

7
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SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------ -----------------------------
STATEMENT OF OPERATIONS DATA 1994 1995 1995 1996
- ----------------------------------------------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Retail software sales................................ $ 1,313,890 $ 1,255,230 $ 1,170,451 $ 1,874,734
OEM sales............................................ 5,500 479,675 370,409 32,237
Development agreement revenues....................... 112,520 343,250 217,250 --
Royalties............................................ 253,961 76,771 76,253 21,678
-------------- -------------- ------------- --------------
Net sales from continuing operations............... 1,685,871 2,154,926 1,834,363 1,928,649
Gross profit......................................... 505,068 1,082,235 780,698 813,544
Noncash compensation expense recorded in connection
with Common Stock and Common Stock options issued
for services........................................ 2,992,862 733,165 289,998 --
Other expenses....................................... 1,374,052 1,940,124 1,384,285 4,049,126
Loss from continuing operations...................... (3,861,846) (1,591,054) (893,629) (3,235,582)
Loss from discontinued operations.................... (115,887) (143,106) (49,046) --
Net loss............................................. (3,977,733) (1,734,160) (942,631) (3,235,582)
Loss per common share from continuing operations..... $ (2.38) $ (0.85) $ (0.48) $ (1.76)
Loss per common share from discontinued operations... $ (0.07) $ (0.08) $ (0.03) --
Net loss per common share............................ $ (2.45) $ (0.93) $ (0.51) $ (1.76)
Weighted average number of common shares
outstanding......................................... 1,626,107 1,862,908 1,859,150 1,842,638
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------
BALANCE SHEET DATA ACTUAL AS ADJUSTED(1)
- ---------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Working capital................................................................... $ (4,140,420) $ 3,576,665
Total assets...................................................................... 3,050,240 5,390,400
Current liabilities............................................................... 6,988,664 1,611,754
Long term debt.................................................................... 20,000 20,000
Stockholders' equity (deficit).................................................... (3,958,424) 3,758,661
</TABLE>

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

(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the Underwriter's discount and $732,000 for expenses, including
the Underwriters' nonaccountable expense allowance); (ii) the borrowing by
the Company pursuant to the ASSI Convertible Loan; and (iii) the repayment
of the ASSI Convertible Loan in the amount of $500,000 and all of the
Company's other funded indebtedness (estimated at $5,230,000 at March 31,
1996) with a portion of such proceeds. The as adjusted amounts do not
reflect the issuance of up to 340,000 shares of Common Stock and 180,000
Redeemable Warrants by the Company to cover over-allotments, if any, the
exercise of the Underwriters' Warrant to purchase up to 240,000 shares of
Common Stock, or the exercise of any other outstanding (or agreed to be
issued) options or warrants to purchase up to an additional 12,220,183
shares of Common Stock.

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<PAGE>
RISK FACTORS

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THE PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE MAKING AN INVESTMENT.

PRODUCT DISTRIBUTION. In June 1995, the Company entered into a Sales and
Distribution Agreement with Acclaim Distribution, Inc., a subsidiary of Acclaim
Entertainment, Inc. (collectively, "Acclaim"), a distributor of entertainment
software and related products. The Company had no sales to or through Acclaim
during its fiscal year ended June 30, 1995. During the nine-month period ended
March 31, 1996, of the Company's total revenues from retail software sales of
$1,874,734, a total of $1,617,839 (86 percent) were generated by Acclaim. Under
the terms of this agreement, Acclaim was the exclusive distributor of the
Company's products on a worldwide basis, subject to certain limited exceptions.
The Company was not satisfied with the distribution of its products through
Acclaim, and determined to terminate the Acclaim distribution agreement in March
1996. The Company and Acclaim terminated the distribution agreement as of April
30, 1996. See "Business -- Product Distribution -- Relationship With Acclaim."

On June 1, 1996 the Company entered into a new Distribution Services
Agreement with SSIDS. Pursuant to this new distribution agreement, SSIDS will
provide distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. See "Business -- Product Distribution -- Relationship
With SSIDS."

The SSIDS distribution agreement is for a term of two years. The Company
will be substantially dependent upon SSIDS for the distribution of its products
throughout North America during the term of the agreement. SSIDS, however, will
not be obligated to sell any specified minimum quantity of the Company's
products. There can be no assurance as to the volume of product sales that may
be achieved by SSIDS. Because the Company's rights to market its products
through channels other than SSIDS are limited, the Company's ability to realize
the cash flow necessary to fund its ongoing operations and to achieve
profitability will be largely dependent upon the success of SSIDS in marketing
its products. In addition, the Company may experience a loss of sales momentum
as a result of the transition from utilizing Acclaim to SSIDS as its exclusive
distributor.

PRODUCT RETURNS; COLLECTION OF ACCOUNTS RECEIVABLE; CREDIT RISK. On or
before June 30, 1996, Acclaim will render a final accounting to the Company
together with payment of the balance of any amounts due to the Company under the
distribution agreement. Acclaim has notified its accounts that it will not
accept returns of any of the Company's software products after June 30, 1996.
The Company, however, will remain liable for all such returns regardless of when
received by Acclaim. As of March 31, 1996, the Company had established a reserve
equal to 50 percent of the amount of its account receivable from Acclaim. The
Company believes that such reserve is sufficient to cover any foreseeable
returns to Acclaim. There can be no assurance, however, as to the adequacy of
the reserve. See "Business -- Product Distribution -- Relationship with
Acclaim."

Under the new SSIDS distribution agreement, SSIDS will be responsible for
collection of accounts and the Company will be responsible for product returns.
The Company intends to maintain an appropriate reserve for product returns based
upon its prior experience and current market conditions, which will approximate
15 percent of gross revenues, against which credits for actual returns will be
applied. Although the Company believes that these reserves will be adequate,
there can be no assurance that its actual losses due to returns will not exceed
the reserved amount. See "Business -- Product Distribution -- Relationship with
SSIDS."
PAST OPERATING LOSSES; GOING CONCERN QUALIFICATION. The Company sustained
net losses of $3,977,733 and $1,734,160 for the fiscal years ended June 30, 1994
and 1995, respectively, and a net

9
<PAGE>
loss of $3,235,582 for the nine months ended March 31, 1996. The Company's
losses include noncash charges attributable to Common Stock and options for the
purchase of Common Stock issued for services rendered of $2,992,862 and $733,165
for the fiscal years ended June 30, 1994 and 1995, respectively. See generally
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will continue to sustain losses unless it can further
increase product sales.

In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. The Company believes that its auditors will
delete such going concern qualification upon the completion of this offering and
repayment of the Company's funded indebtedness out of the proceeds hereof and
the Company's demonstration of its ability to realize sufficient cash flow to
sustain its operations for the foreseeable future. The Company believes that the
net proceeds of this offering, together with its cash on hand and anticipated
net cash flow from operations, will be sufficient to fund the Company's cash
requirements for at least the next 12 months. However, there can be no assurance
that additional unanticipated expenses will not arise which would require
additional financing. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Independent Auditors' Report."

LIMITED HISTORY OF BUSINESS OPERATIONS. The Company has limited operating
history. The Company conducted substantially no business prior to its
acquisition of the Subsidiary (as hereinafter defined) in 1994. The Subsidiary
itself commenced operations originally as a nonincorporated entity in 1988. The
Subsidiary's revenues originally were derived from the sale of sound patches for
music synthesizers. Since 1993, revenues and income have been predominately
derived from entertainment utilities software for Macintosh and IBM-compatible
computers incorporating content licensed from major motion picture studios. See
"The Company" and "Business."

NEW BUSINESS RISKS FOR THE LICENSED SOFTWARE PRODUCTS. The business of
creating and marketing licensed software derived from motion pictures is a new
and evolving industry, which will be subject to a number of risks, including
trends in personal computer sales, changes in available technology and changes
in the competition for licenses to develop software derived from motion
pictures. Changes in these factors could have a material adverse effect on the
Company's revenues and potential profitability. In 1994, the Company entered the
multimedia interactive educational software market. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of its
future performance. See generally "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."

COMPETITION. The market for the Company's consumer software products is
intensely and increasingly competitive. Existing consumer software companies may
broaden their product lines to compete with the Company's products, and
potential new competitors, including computer hardware or software
manufacturers, diversified media companies and book publishing companies, may
enter or increase their focus on the consumer software market, resulting in even
greater competition for the Company. Many of the companies with which the
Company currently competes or may compete in the future have greater financial,
technical, marketing, sales and customer support resources, as well as greater
name recognition and better access to consumers, than the Company. The
competition for retail shelf space is also likely to increase due to the
continued proliferation of consumer software products and companies. In
addition, to the extent that competitors achieve performance, price or other
selling advantages, the Company could be materially adversely affected. There
can be no assurance that the Company will have the resources required to respond
effectively to market or technological changes or to compete successfully in the
future. In addition, increasing competition in the consumer software market may
cause prices to fall, which may materially adversely affect the Company's
business, operating results and financial condition.

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The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), Lucasfilm Ltd., Warner Bros.
Consumer Products, CBS Entertainment, MCA/Universal Merchandising, Inc., Carolco
Pictures Inc., DC Comics, MGM/UA Merchandising, Inc. and others. Several of
these major motion picture studios now have captive software divisions. As these
types of software products become better known in the marketplace, these profit
centers may begin to vie for their studio's products. Management believes that
Disney, Lucasfilm and Paramount/ Viacom are currently the most active studios in
publishing their own product to create software packages. Fox, Universal
Pictures, Sony Pictures and Warner Bros. each have announced the formation of
their own interactive computer software divisions to publish software products
using their own licensed content, which could have a material adverse effect on
the Company's ability to renew existing licenses or obtain new licenses for
additional movie titles. The establishment of these divisions may limit the
Company's ability to obtain licenses from the studios involved, which in turn
could reduce the Company's potential product offerings. To date, the Company has
had ample product licensing opportunities, and management believes that even if
some sources are lost due to the establishment of interactive software divisions
by some motion picture studios, there will continue to be multiple sources of
licensing for the Company's new products. There can be no assurance, however,
that the Company will have sufficient product licensing opportunities in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality" and "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL; SUBSTANTIAL MANAGEMENT COMPENSATION. The
Company's success depends to a significant extent on the performance and
continued service of its senior management and certain key employees. In
particular, the loss of the services of Vincent J. Bitetti, Chairman of the
Board and Chief Executive Officer, could have a material adverse effect on the
Company. Mr. Bitetti has agreed to work full-time for the Company and has signed
an employment agreement for the period ending September 15, 1998. Competition
for highly skilled employees with technical, management, marketing, sales,
creative product development and other specialized training is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. In addition, there can be no assurance that employees
will not leave the Company or compete against the Company. The Company's failure
to attract additional qualified employees or to retain the services of key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. The Company is the beneficiary of a
$1,000,000 life insurance policy on Vincent J. Bitetti, Chairman of the Board
and Chief Executive Officer, a $2,000,000 life insurance policy on Eric H.
Winston, President and Chief Operating Officer, and a $500,000 life insurance
policy on Ulrich Gottschling, Chief Financial Officer, but does not currently
maintain life insurance on any of its other employees. See "Management --
Directors and Executive Officers" and "-- Employment Agreements." Following this
offering, the Company intends to obtain an additional $4,000,000 of life
insurance coverage on Vincent J. Bitetti.

The Company's Chairman of the Board and Chief Executive Officer currently
receives annual base compensation of $200,000, and its President and Chief
Operating Officer currently receives annual base compensation of $175,000. Such
base compensation, however, will be reduced by 20 percent on the date of this
Prospectus until such time as the Company generates net sales of $1,500,000 or
more for any three consecutive month period. In addition, each is entitled to
receive cash bonuses based upon the Company's performance. For fiscal 1995, each
received a salary of $150,000 and a bonus of $75,000. The Company's President
and Chief Operating Officer also has received options to purchase a total of
392,838 shares of Common Stock at nominal cost since April 1994 (including
options to purchase 292,838 shares granted by the Company and options to
purchase 100,000 shares granted by the Chairman of the Board and Chief Executive
Officer). See "Management -- Executive Compensation." Such compensation may be
considered excessive in view of the Company's size and history of operating
losses.

After the closing of this offering, the Company intends to hire a new Chief
Executive Officer upon terms to be negotiated. When the new Chief Executive
Officer is hired, Mr. Bitetti will resign as Chief

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Executive Officer and will continue to serve as Chairman of the Board and retain
his current salary, bonuses and benefits, provided that his salary will be
adjusted to an amount not less than that of the new Chief Executive Officer, up
to a maximum of $300,000.

NO OUTSIDE DIRECTORS. The Company currently has no independent directors.
Consequently, the Company's management is in a position to control the
operations of the Company and is not subject to independent review. Following
this offering, the Company intends to increase the size of its Board of
Directors from three to five, to include one director nominated by ASSI, Inc.
and two other independent directors. The Company has agreed to grant to each of
The Boston Group, L.P., Joseph Stevens & Company, L.P. and ASSI, Inc., the right
to nominate from time to time one director of the Company or to have an
individual designated thereby attend all meetings of the Board of Directors of
the Company as a nonvoting advisor. Upon such expansion, it is anticipated that
the Board will include three independent directors. See "Management -- Directors
and Executive Officers," "Underwriting" and "Certain Transactions -- Agreements
with ASSI, Inc."

LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION. The Company's
Certificate of Incorporation provides that a director of the Company, to the
maximum extent now or hereafter permitted by Section 102(b)(7) of the Delaware
General Corporation Law (the "Delaware GCL"), will have no personal liability to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. The Company's Bylaws generally require the Company to
indemnify and advance expenses to its directors, officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company also has
entered into indemnification agreements with each of its directors whereby the
Company will indemnify each such person against certain claims arising out of
certain past, present or future acts, omissions or breaches of duty committed by
an indemnitee while serving as a Company director. See "Management -- Limitation
of Liability and Indemnification of Directors."

CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer software
industry is undergoing rapid changes, including evolving industry standards,
frequent new product introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including operating systems
and media formats, could render the Company's existing products obsolete or
unmarketable. In 1993, for example, there was a significant shift in consumer
demand from DOS-based software to
Microsoft-Registered Trademark--Windows-Registered Trademark--based software.
More recently, consumer demand has been shifting from disk-based software to
software on CD-ROM. In addition, the recent introduction of the new Windows
'95-Registered Trademark- operating system may affect consumer preferences and
the demand for new consumer software in ways which cannot be foreseen. In the
future, there could be radical changes in software delivery systems, replacing
CD-ROM with on-line or other methods of distribution.

There can be no assurance that the current demand for the Company's
Windows-Registered Trademark- and CD-ROM products will continue or that the mix
of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences. The success of the Company
will be dependent upon its ability to develop, introduce and market products
which respond to such changes in a timely fashion. The Company intends to
maintain its products in accordance with industry standards. The development
cycle for products utilizing new operating systems or formats may be
significantly longer than the Company's current development cycle for products
on existing operating systems and formats and may require the Company to invest
resources in products that may not become profitable. Although the Company's
software is Windows '95-Registered Trademark- compatible, there can be no
assurance that the Company will be successful in developing and marketing
products for certain advanced and emerging operating systems and formats that
may arise in the future. Failure to develop and introduce new products and
product enhancements in a timely fashion could result in significant product
returns and inventory obsolescence and could impair the Company's business,
operating results and financial condition. See "Business -- Products" and "--
Development."

UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES. Consumer
preferences for software products are difficult to predict, and few consumer
software products achieve sustained

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<PAGE>
market acceptance. The Company believes that the highest sales of each of its
products will occur during the six- to nine-month periods following their
introduction, and that thereafter sales will diminish and pricing will be
reduced. Therefore, the Company's success is dependent upon the market
acceptance of its existing products and the continued development and
introduction of new products which achieve market acceptance. There can be no
assurance that the Company's existing products will continue to realize market
acceptance, or that new products introduced by the Company will achieve any
significant degree of market acceptance or sustain any such acceptance for any
significant period of time. Failure of the Company's new and existing products
to achieve and sustain market acceptance will have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Products" and "-- Development."

FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company has
experienced, and may continue to experience, fluctuations in operating results
due to a variety of factors, including the size and rate of growth of the
consumer software market, market acceptance of the Company's products and those
of its competitors, development and promotional expenses relating to the
introduction of new products or new versions of existing products, ability to
add new distribution channels, product returns, changes in pricing policies by
the Company and its competitors, the accuracy of retailers' forecasts of
consumer demand, the timing of the receipt of orders from major customers, and
account cancellations or delays in shipment. In response to competitive
pressures for new product introductions, the Company may take certain pricing or
marketing actions that could materially and adversely affect the Company's
business, operating results and financial condition. The Company's expense
levels are based, in part, on its expectations as to future sales. Therefore,
operating results could be disproportionately affected by a reduction in sales
or a failure to meet the Company's sales expectations. The Company may be
required to pay in advance or to guarantee royalties, which may be substantial,
to obtain licenses of intellectual properties from third parties before such
properties have been introduced or achieved market acceptance. Defective
products may result in higher customer support costs and product returns.

Additionally, the consumer software business traditionally has been
seasonal. Typically, net sales are highest during the fourth calendar quarter
and decline sequentially in the first and second calendar quarters. The seasonal
pattern is due primarily to the increased demand for consumer software during
the year-end holiday buying season. The Company expects its net sales and
operating results to continue to reflect seasonality. There can be no assurance
that the Company will achieve consistent profitability on a quarterly or annual
basis. Nevertheless, management believes that in the future its results may be
less subject to seasonal fluctuations because its products will be marketed in
conjunction with the releases of major motion pictures and home videos, which
occur throughout the year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" and "-- Seasonality."

DEPENDENCE ON RETAILERS. The Company's retail customers include computer
stores, office supply stores, warehouse clubs, consumer electronics stores,
bookstores, video stores and alternative channels. The Company's customers are
not contractually required to make future purchases of the Company's products
and therefore could discontinue carrying the Company's products in favor of a
competitor's product or for any other reason. Retailers compete in a volatile
industry that is subject to rapid change, consolidation, financial difficulty
and increasing competition from new distribution channels. Due to increased
competition for limited shelf space, retailers are increasingly in a better
position to negotiate favorable terms of sales, including price discounts and
product return policies. Retailers often require software publishers to pay fees
in exchange for preferred shelf space. Retailers may give higher priority to
products other than the Company's, thus reducing their efforts to sell the
Company's products. There can be no assurance that the Company will be able to
increase or sustain its current amount of retail shelf space or promotional
resources, and as a result, the Company's operating results could be materially
adversely affected. In addition, other types of retail outlets and

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<PAGE>
methods of product distribution may become important in the future, such as
on-line services. It is critical to the success of the Company that as these
changes occur, the Company gains access to those channels of distribution. See
"Business -- Sales and Marketing."

DEPENDENCE ON OUTSIDE SUPPLIERS. The Company contracts with third party
suppliers to provide programming and manufacturing of its products, which the
Company believes allows it to control effectively its costs of production. The
Company relies upon the ability of such suppliers to provide products which are
free of defects. To the extent that any supplier produced defective product
which was not discovered until the product was shipped, it could result in
liability of the Company for returned merchandise and a loss of its reputation
for high quality products. Although the Company would attempt to recoup any
expenses caused to it for defective products, there can be no assurance that it
would be fully compensated for any losses that resulted. See "Business --
Development" and "-- Operations."

RISK OF INABILITY TO MANAGE RAPID GROWTH. The Company is currently
experiencing a period of rapid growth that has placed, and could continue to
place, a significant strain on the Company's financial, management and other
resources. The Company's ability to manage its growth effectively will require
it to continue to improve its operational, financial and management information
systems, and to attract, train, motivate, manage and retain key employees. The
Company may make additional investments in capital equipment to expand into new
product lines. No assurances can be given that these new systems will be
implemented successfully, and the failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition. If
the Company's management becomes unable to manage growth effectively, the
Company's business, operating results and financial condition could be
materially adversely affected. See "Business -- Operations" and "Management --
Directors and Executive Officers."

RISKS ASSOCIATED WITH ACQUISITIONS. As part of its strategy to enhance
revenue growth and market presence, the Company continually evaluates
acquisitions of entertainment software companies and selected titles within
existing or new product categories. In considering an acquisition, the Company
may compete with other potential acquirors, many of which may have greater
financial and operational resources. Further, the evaluation, negotiation and
integration of such acquisitions may divert significant time and resources of
the Company, particularly management. There can be no assurance that suitable
acquisition candidates will be identified, that any acquisitions can be
consummated, or that any acquired businesses or products can be successfully
integrated into the Company's operations. In addition, there can be no assurance
that future acquisitions will not have a material adverse effect upon the
Company's business, operating results and financial condition, particularly in
the fiscal quarters immediately following the consummation of such transactions
due to unexpected expenses which may be associated with integrating such
acquisitions. See "Business -- Business Strategy -- Acquisitions."

LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The
Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be materially adversely affected. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. See "Business -- Proprietary Rights
and Licenses."

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<PAGE>
LIVE-TM- and STAR TREK-TM- titles. All of the Company's licenses with Warner
Bros. (including THE SECRET GARDEN-TM-, BLACK BEAUTY-TM-, FREE WILLY 2-TM- and
BABYLON 5-TM-) provide that a change in "management" will be deemed an
unauthorized assignment of the license. It is not clear under what circumstances
the Company might be deemed to have a change in management which could result in
the termination of these licenses, but the planned expansion of the Company's
Board of Directors to include three independent directors and/or its appointment
of a new Chief Executive Officer could be deemed to constitute such a change in
management. See "Management -- Directors and Executive Officers."

Any future change in ownership or control of the Company, including exercise
of the ASSI Warrants and/or the ASSI Loan Warrants (if any) (see "Certain
Transactions -- Agreements with ASSI, Inc."), could result in the termination of
the licenses referred to above. The potential terminability of such licenses
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may materially adversely affect the market
price of the Common Stock.

Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark and other intellectual property rights
involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.

LIMITED TIME PERIOD OF LICENSES. The Company's products are based upon
licensed content of major motion pictures and television shows under license
and/or development agreements with major entertainment studios. See "Business --
General" and "-- Products." All of such license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under each agreement will
extend its terms, provided that the Company is in compliance with all
requirements of each license, including most significantly that the Company has
satisfied the applicable minimum royalty guarantees. In the event that any
licensor fails to renew its license agreement, then the subject license will
terminate and the Company will no longer be entitled to sell the licensed
product. The loss of one or more of the licenses could have a material adverse
effect on the Company's revenues and operating results. There can be no
assurance that the Company will satisfy its performance obligations under any
license or development agreement or that even if such requirements are
satisfied, all material licenses will be renewed. See "Business -- Proprietary
Rights and Licenses."

DEPENDENCE ON NET PROCEEDS OF THIS OFFERING; POSSIBLE NEED FOR ADDITIONAL
FINANCING. The Company is dependent on the net proceeds of this offering or
other financing to repay the aggregate principal amount of $4,987,500 in Private
Notes issued to investors in the Company's 1995 Private Placement, plus accrued
interest estimated at $242,500 as of March 31, 1996. As of the date of this
Prospectus, the Company has been dependent on the net proceeds of approximately
$3,994,000 from its 1995 Private Placement, the net proceeds of approximately
$237,000 from its 1995 Bridge Financing (which was repaid out of the net
proceeds of the Company's 1995 Private Placement), $263,300 of proceeds from the
Private Warrants and the net proceeds of approximately $1,371,000 from its 1994
Private Placement, to fund its working capital requirements. The Company
believes that the proceeds of this offering, together with its cash on hand, and
anticipated net cash flow from operations, will be sufficient to fund the
Company's contemplated cash requirements for at least the next 12 months.

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<PAGE>
However, there can be no assurance that additional unanticipated expenses will
not arise which would require additional financing. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds to the Company from
the sale of the Securities offered hereby, after deducting underwriting
discounts and the estimated expenses of this offering of $732,000 (including the
Underwriters' non-accountable expense allowance), are estimated to be
approximately $8,178,000 (assuming the Underwriters' over-allotment option is
not exercised). The Company estimates that of such net proceeds, $1,098,000 will
be allocated to working capital. If the Underwriters exercise their
over-allotment in full, the Company will realize additional net proceeds of
approximately $1,183,200, all of which will be allocated to working capital. The
Company will have broad discretion in the use of funds allocated to working
capital. See "Use of Proceeds."

RISK OF LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS. As of June
30, 1995, the Company had net operating loss carryforwards of approximately
$2,513,000 for federal income tax purposes, which may be utilized from 1996 to
2011 (subject to certain limitations). It is possible that the consummation of
this offering, including the issuance of the Securities offered hereby and the
Underwriters' Warrant, and/or the exercise by ASSI, Inc. of the ASSI Warrants or
the ASSI Loan Warrants (if any) (see "Certain Transactions -- Agreements With
ASSI, Inc."), will result in an "ownership change" as defined in Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations promulgated thereunder, or that the issuance of warrants to
investors in the Company's 1995 Bridge Financing and 1995 Private Placement and
the reverse stock split effected by the Company in September 1995 may have
resulted in an ownership change under the Code and said Treasury Regulations. As
a result, the Company's use of its net operating loss carryforwards to offset
taxable income in any post-change period may be subject to certain specified
annual limitations. If there is any ownership change, there can be no assurance
as to the specific amount of net operating loss carryforwards available in any
post-change year since the calculation is based upon a fact-dependent formula.

CONTROL OF THE COMPANY BY OFFICERS AND DIRECTORS AND ASSI, INC. Upon the
consummation of this offering, the current officers and directors of the Company
including the current controlling stockholder, will, in the aggregate,
beneficially own approximately 40.2 percent of the Common Stock (16.1 percent
assuming exercise in full of the Redeemable Warrants and all other outstanding
warrants and options other than the ASSI Warrants and ASSI Loan Warrants, but
excluding issuance of any Common Stock and Redeemable Warrants pursuant to the
over-allotment option). As a result, it is anticipated that these individuals
will be in a position to influence materially, if not control, the outcome of
all matters requiring stockholder approval, including the election of directors.
See "Management," "Principal and Selling Stockholders," "Description of
Securities -- Common Stock" and "Underwriting." Such influence and control is
likely to continue for the foreseeable future.

ASSI, Inc. holds the ASSI Warrants to purchase 2,000,000 shares of Common
Stock, as well as 1,100,000 Redeemable Warrants and 40,000 shares of Common
Stock that it purchased in the 1995 Private Placement. In addition, ASSI, Inc.
may convert the $500,000 principal of and interest accrued as of the closing of
this offering on the ASSI Convertible Loan into ASSI Loan Warrants at the
conversion rate of $.25 per warrant, entitling it to purchase approximately
2,017,000 ASSI Loan Warrants assuming a closing of this offering on or about
June 30, 1996. All of the ASSI Warrants and ASSI Loan Warrants (if any) become
exercisable on October 1, 1996. Assuming ASSI, Inc. converts the principal of
and interest on the ASSI Convertible Loan into ASSI Loan Warrants on or about
June 30, 1996, it would hold warrants to purchase approximately 5,117,000 shares
of Common Stock. Commencing August 2, 1996 (60 days before October 1, 1996)
ASSI, Inc. therefore would beneficially own 5,157,000 shares of Common Stock.
Thereupon ASSI, Inc. will beneficially own approximately 55.3 percent of the
outstanding Common Stock (31.9 percent assuming exercise in full of the
Redeemable Warrants and all other outstanding warrants and options, but
excluding issuance of any Common Stock and Redeemable Warrants pursuant to the
over-allotment option). See "Certain Transactions -- Agreements With ASSI, Inc."

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<PAGE>
If ASSI, Inc. were to exercise all of the warrants that may be beneficially
owned by it as described above, ASSI, Inc. would be in a position to influence
materially, if not control, the outcome of all matters requiring stockholder
approval, including the election of directors. In addition, the voting power of
the Company's current officers and directors including the controlling
stockholder would be reduced to 19.0 percent of the outstanding Common Stock
(12.0 percent assuming exercise in full of the Redeemable Warrants and all other
outstanding warrants and options, but excluding issuance of any Common Stock and
Redeemable Warrants pursuant to the over-allotment option). ASSI, Inc. has not
indicated to the Company whether it intends to convert the ASSI Convertible Loan
to ASSI Loan Warrants, in whole or in part, or whether it intends to exercise
the ASSI Warrants or ASSI Loan Warrants (if any), in whole or in part.

The Company is, and upon consummation of this offering will be, a
QUASI-California corporation subject to certain provisions of the California
General Corporation Law (the "California GCL"). See "Description of Securities
- -- Application of California GCL." Among other consequences of the Company's
status as a QUASI-California corporation, at the request of any stockholder, the
election of the Company's directors will be determined by cumulative voting
procedures. Consequently, following this offering the Company's stockholders
other than its current officers and directors will have sufficient votes, if
cumulative voting is exercised, to elect two of its three directors (or three of
its five directors, upon expansion of the Board following this offering as
planned) assuming no exercise of the Redeemable Warrants and two of its three
(or four of its five, as applicable) directors assuming exercise of the
Redeemable Warrants in full.

The Company has agreed to allow each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc. to nominate one director following this
offering. In addition, Vincent J. Bitetti, the Chairman of the Board and Chief
Executive Officer, and Eric H. Winston, the President and Chief Operating
Officer, have entered into voting agreements with each of The Boston Group,
L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. Pursuant to these
agreements, Messrs. Bitetti and Winston have agreed to vote all of their Common
Stock for the three director nominees of The Boston Group, L.P., Joseph Stevens
& Company, L.P. and ASSI, Inc. In addition, ASSI, Inc. has agreed to vote all of
its shares of Common Stock for two directors nominated by Mr. Bitetti for as
long as he holds 20 percent or more of the issued and outstanding Common Stock,
and for one director nominated by Mr. Bitetti for as long as he holds at least
ten percent but less than 20 percent of the issued and outstanding Common Stock.
The voting agreements with ASSI, Inc. will terminate when Messrs. Bitetti and
Winston together cease to own at least ten percent of the issued and outstanding
Common Stock. See "Management -- Directors and Executive Officers."

Upon the consummation of this offering, Messrs. Bitetti and Winston together
will beneficially own approximately 41.1 percent of the outstanding Common Stock
(including all Common Stock issuable pursuant to a presently exercisable option
held by Mr. Winston, but excluding issuance of any Common Stock and Redeemable
Warrants pursuant to the over-allotment option). Assuming ASSI, Inc. elects to
convert the ASSI Convertible Loan into ASSI Loan Warrants and to exercise all of
the ASSI Warrants and ASSI Loan Warrants, upon such exercise ASSI, Inc. will own
approximately 53.4 percent of the Common Stock, and the beneficial ownership of
Messrs. Bitetti and Winston will be reduced to approximately 19.2 percent
(including all Common Stock issuable pursuant to a presently exercisable option
held by Mr. Winston, but excluding issuance of any Common Stock and Redeemable
Warrants pursuant to the over-allotment option).

IMMEDIATE SUBSTANTIAL DILUTION. This offering involves an immediate and
substantial dilution to investors in this offering of $3.17 per share of Common
Stock (79.25 percent) between the pro forma net tangible book value per share
after this offering and the initial public offering price of the shares of
Common Stock. See "Dilution."

RECENTLY FORMED UNDERWRITERS. Both of the Underwriters are recently formed,
and neither has extensive experience as an underwriter of securities. The Boston
Group, L.P., which was formed in March 1995, has acted as the managing
underwriter for three public offerings and has acted as a

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member of an underwriting syndicate on three occasions. Joseph Stevens &
Company, L.P., which was formed in May 1994, has acted as the managing
underwriter for four public offerings and as a member of an underwriting
syndicate on approximately seven occasions.

The Underwriters are relatively small firms. No assurance can be given that
either will be able to participate as a market maker in the Securities, or that
any other broker-dealer will do so. See "Underwriting."

UNDERWRITERS' POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that a
significant amount of the shares of Common Stock and substantially all of the
Redeemable Warrants being offered hereby will be sold to customers of the
Underwriters. Although the Underwriters have advised the Company that they
intend to make a market in the Securities following this offering, they will
have no legal obligation to do so. The Underwriters, if they become market
makers, could be a dominating influence in the market, if one develops. The
prices and the liquidity of the Common Stock and the Redeemable Warrants may be
significantly affected by the degree, if any, of the Underwriters' participation
in the market. No assurance can be given that any market making activities of
the Underwriters, if commenced, will be continued. See "Underwriting."

CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE WARRANTS. The
Redeemable Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Redeemable Warrants and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
jurisdiction of residence of the exercising holder of the Redeemable Warrants.
In addition, in the event that any holder of the Redeemable Warrants attempts to
exercise any Redeemable Warrants at any time after nine months from the date of
this Prospectus, the Company may be required to file a post-effective amendment
and deliver a current prospectus before the Redeemable Warrants may be
exercised. Although the Company has undertaken to use its best efforts to have
all the shares of Common Stock issuable upon exercise of the Redeemable Warrants
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the Redeemable Warrants,
there is no assurance that it will be able to do so. The value of the Redeemable
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Redeemable Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Redeemable Warrants then
reside.

The Redeemable Warrants will be separately tradeable immediately upon
issuance and may be purchased separately from the Common Stock. Although the
Securities will not knowingly be sold to purchasers in jurisdictions in which
the Securities are not registered or otherwise qualified for sale, investors may
purchase the Redeemable Warrants in the secondary market or may move to
jurisdictions in which the shares underlying the Redeemable Warrants are not
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company would be unable to issue shares to those
persons desiring to exercise their Redeemable Warrants unless and until the
shares could be qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions,
and holders of the Redeemable Warrants would have no choice but to attempt to
sell the Redeemable Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised. See "Description of Securities -- Redeemable
Warrants."

ADVERSE EFFECT TO HOLDERS OF POSSIBLE REDEMPTION OF REDEEMABLE
WARRANTS. The Redeemable Warrants are subject to redemption by the Company, at
any time, commencing one year after the date of this Prospectus, at a price of
$.25 per Redeemable Warrant if the average closing bid price for the Common
Stock equals or exceeds 140 percent of the initial public offering price per
share for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
If the Redeemable Warrants are redeemed prior to their exercise, the holders
thereof would lose their right to exercise Redeemable Warrants except during
such period

18
<PAGE>
of notice of redemption and the benefit of the difference between the market
price of the underlying Common Stock as of such date and the exercise price of
such Redeemable Warrants, as well as any possible future price appreciation in
the Common Stock. Upon the receipt of a notice of redemption of the Redeemable
Warrants, the holders thereof would be required to: (i) exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so; (ii) sell the Redeemable Warrants at the market price, if any,
when they might otherwise wish to hold the Redeemable Warrants; or (iii) accept
the redemption price, which is likely to be substantially less than the market
value of the Redeemable Warrants at the time of redemption. See "Description of
Securities -- Redeemable Warrants" and "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE. A total of 4,208,291 shares of Common
Stock will be issued and outstanding upon the consummation of this offering,
assuming no exercise of the Underwriters' over-allotment option and assuming
that the Underwriters' Warrants and all other options and warrants then to be
outstanding are not exercised. Of such shares, the 2,400,000 shares offered by
the Company and the 107,500 currently outstanding shares offered by the Selling
Security Holders will be freely tradeable without further registration under the
Securities Act, except for any such shares of Common Stock held by an
"affiliate" of the Company. Of the remaining 700,791 outstanding shares, 183,723
shares are freely tradeable and the remainder are "restricted shares" as defined
in Rule 144 under the Securities Act and may not be sold without registration
under the Securities Act unless pursuant to an applicable exemption therefrom.
See generally "Shares Eligible for Future Sale."

SALE OF CERTAIN SECURITIES. A separate Prospectus is being filed with the
Registration Statement of which this Prospectus is a part which relates to the
registration for the account of the Selling Security Holders of 107,500 shares
of Common Stock and 5,689,665 Redeemable Warrants previously issued by the
Company to the Selling Security Holders and 392,838 shares of Common Stock
purchasable by Eric H. Winston, the Company's President and Chief Executive
Officer, upon exercise of presently exercisable options (collectively, the
"Selling Security Holders' Securities," as previously defined) and to the
registration for the account of the Company of 11,169,665 shares of Common Stock
issuable upon exercise of the Redeemable Warrants, ASSI Warrants and ASSI Loan
Warrants (if any). The Selling Security Holders' Securities may be sold by the
Selling Security Holders or their transferees commencing on the date of this
Prospectus (provided that Mr. Winston has agreed not to sell more than 10,000
shares of Common Stock during the 18-month period following the date of this
Prospectus without the prior written consent of the Underwriters). Sales by the
Selling Security Holders or their transferees of the Selling Security Holders'
Securities may depress the price of the Common Stock or the Redeemable Warrants
in any market therefor that may develop. See "Certain Transactions," "Resale of
Outstanding Securities" and "Shares Eligible for Future Sale."

NO PRIOR MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE
VOLATILITY OF TRADING PRICES FOR SECURITIES. Prior to this offering, there has
been no public market for the Common Stock or the Redeemable Warrants, and there
can be no assurance that a public market for the Securities will develop or, if
developed, that it will be sustained after the offering. The initial public
offering prices of the Common Stock and Redeemable Warrants and the terms of the
Redeemable Warrants were determined arbitrarily by, among other things,
negotiations between the Company and the Underwriters and bear no relationship
to the Company's assets, net worth, results of operations or other established
criteria of value. See "Underwriting."

Pursuant to a separate Prospectus filed as a part of the Registration
Statement of which this Prospectus is a part, 107,500 shares of Common Stock and
5,689,665 Redeemable Warrants previously issued by the Company are being
registered for the account of the Selling Security Holders. See "Certain
Transactions -- 1995 Bridge Financing" and "-- 1995 Private Placement" and
"Principal and Selling Stockholders." All of such Common Stock and Redeemable
Warrants are expected to become freely tradeable on the date of this Prospectus.
An additional 292,338 shares of Common Stock issuable by the Company to Eric H.
Winston, the Company's President and Chief Operating Officer, pursuant to a
presently exercisable option, and 100,000 shares of outstanding Common Stock
saleable by Vincent J. Bitetti, the Company's Chairman of the Board and Chief
Executive Officer, to

19
<PAGE>

Mr. Winston pursuant to a presently exercisable option, also are being
registered pursuant to the separate Prospecuts filed as a part of the
Registration Statement of which this Prospectus is a part. Following exercise of
such options by Mr. Winston such shares may be freely resold (provided that Mr.
Winston has agreed not to sell more than 10,000 shares during the 18-month
period following the date of this Prospectus without the prior written consent
of the Underwriters). Pursuant to the separate Prospectus filed as a part of the
Registration Statement of which this Prospectus is a part, the 11,169,665 shares
of Common Stock issuable upon exercise of the 5,689,665 Redeemable Warrants
being registered for the account of the Selling Security Holders, the 2,000,000
ASSI Warrants, up to 2,100,000 ASSI Loan Warrants and the 1,380,000 Redeemable
Warrants being issued by the Company pursuant to this offering (assuming
exercise of the Underwriters' over-allotment option) all are being registered
and will become freely tradeable on the date of their issuance pursuant to the
exercise of such warrants.

Sales of the Common Stock and Redeemable Warrants being registered for the
account of the Selling Security Holders will likely have an adverse effect on
the market price of the shares of Common Stock and the Redeemable Warrants being
issued by the Company pursuant to this offering, and such adverse effect may be
material. In addition, the Common Stock underlying the Redeemable Warrants being
issued by the Company pursuant to this offering and being separately registered
for the account of the Selling Security Holders and the ASSI Warrants and ASSI
Loan Warrants (if any) also are expected to become freely tradeable on the
issuance thereof pursuant to conversion of the related warrants. Sales of such
Common Stock also will likely have an adverse effect on the market price of the
Common Stock and such adverse effect may be material. See "Resale of Outstanding
Securities" and "Shares Eligible for Future Sale."

The trading prices of the Securities could be subject to wide fluctuations
in respect to the Company's operating results announcements by the Company or
others of developments affecting the Company or its competitors or customers and
other events or factors. In addition, the stock market has experienced extreme
price and volume fluctuations in recent years, particularly in the securities of
small development companies. The fluctuations have had a substantial effect on
the market prices of many companies, often unrelated to the operating
performances of the specific companies, and similar events in the future may
materially adversely affect the market prices of the Securities.

ADVERSE EFFECT ON COMMON STOCK FROM EXERCISE OF WARRANTS AND OPTIONS. The
Company's Certificate of Incorporation authorizes the issuance of 20,000,000
shares of Common Stock. A total of 4,208,291 shares of Common Stock will be
outstanding after the completion of this offering, assuming no exercise of the
Underwriters' over-allotment option and assuming that the Underwriters' Warrant
and all other stock options and warrants then to be outstanding are not
exercised. A total of 8,889,665 shares of Common Stock are reserved for issuance
pursuant to the Redeemable Warrants being issued by the Company pursuant to this
offering (1,200,000 shares, assuming no exercise of the Underwriters'
over-allotment option) and being registered for the account of the Selling
Security Holders (5,689,665 shares) and for issuance under the ASSI Warrants
(2,000,000 shares). An additional 1,416,908 shares of Common Stock are reserved
for issuance pursuant to the Underwriters' Warrant (240,000 shares), options
previously granted by the Company to the President and Chief Operating Officer
(292,838 shares) and under the 1992 Stock Option Plan (384,070 shares) and
options that may be granted under the 1995 Stock Option Plan (500,000). An
additional 2,100,000 shares of Common Stock are reserved for issuance upon
exercise of the ASSI Loan Warrants (if any). Thus, an additional 3,385,136
shares of Common Stock remain available for issuance at the discretion of the
Board of Directors. The potential issuance of such authorized and unissued
Common Stock may have the effect of delaying, deferring or preventing a change
in control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may materially adversely affect
the market price of, and the voting and other rights of the holders of the
Common Stock. Although the Company has no present intention to issue any such
shares of its authorized and unissued Common Stock there can be no assurance the
Company will not do so in the future. See "Description of Securities -- Common
Stock."

20
<PAGE>
NO PREEMPTIVE RIGHTS; POSSIBLE DILUTIVE EVENT. The holders of Common Stock
do not have any subscription, redemption or conversion rights, nor do they have
any preemptive or other rights to acquire or subscribe for additional, unissued
or treasury shares. Accordingly, if the Company were to elect to sell additional
shares of Common Stock, or securities convertible into or exercisable to
purchase shares of Common Stock, following this offering, persons acquiring
Common Stock in this offering would have no right to purchase additional shares,
and as a result, their percentage equity interest in the Company would be
diluted. See "Description of Securities -- Common Stock."

NO DIVIDENDS. As of the date of this Prospectus, the Company has not paid
any cash dividends on its Common Stock and does not intend to declare any such
dividends in the foreseeable future. The Company's ability to pay dividends is
subject to limitations imposed by Delaware law and, as a QUASI-California
corporation, to the more restrictive provisions of California law. The sole
source of funds available to the Company for the payment of dividends is
dividends or loans advanced to it by the Subsidiary which is itself a California
corporation and therefore subject to the dividend payment provisions of the
California GCL.

Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if (i) the assets of the corporation exceed 1 1/4 times its
liabilities; and (ii) the current assets of the corporation equal or exceed its
current liabilities, but if the average pre-tax earnings of the corporation
before interest expense for the two years preceding the distribution was less
than the average interest expense of the corporation for those years, the
current assets of the corporation must exceed 1 1/4 times its current
liabilities. Under the foregoing requirements, the Company will not be able to
pay dividends for the foreseeable future. See "Dividend Policy" and "Description
of Securities."

QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES; RISK OF LOW PRICED
SECURITIES. Certain qualification requirements are established for the initial
and continued listing of securities on Nasdaq. The Common Stock and the
Redeemable Warrants will be eligible for initial listing on the Nasdaq SmallCap
Market under these rules upon consummation of this offering. Under the rules for
initial listing, a company must, among other things, have at least $4,000,000 in
total assets, at least $2,000,000 in total capital and surplus, and a minimum
bid price of $3.00 per share. For continued listing, a company must, among other
things, maintain at least $2,000,000 in total assets, at least $1,000,000 in
total capital and surplus, and a minimum bid price of $1.00 per share. The
Company has qualified for initial listing on the Nasdaq SmallCap Market and
expects to maintain its listing on Nasdaq; however, if the Company experiences
losses from operations or material adverse trading conditions, it may be unable
to maintain the standards for continued listing and the Securities could be
subject to delisting from Nasdaq. It is anticipated that if the Securities are
delisted from Nasdaq, trading, if any, in the Securities would be conducted in
the over-the-counter market on the NASD OTC Electronic Bulletin Board
established for securities that do not meet the Nasdaq listing requirements or
quoted in what are commonly referred to as the "pink sheets." In such event, an
investor may find it more difficult to dispose of, or to obtain accurate price
quotations and volume information concerning, the Securities.

In addition, if the Securities are delisted from Nasdaq, they might be
subject to the low priced security or so-called "penny stock" rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally defined as investors with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with a spouse). For any
transaction involving a penny stock, unless exempt, the rules require, among
other things, the delivery, prior to the transaction, of a disclosure schedule
required by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole

21
<PAGE>
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.

Although the Company believes that the Securities will not be defined as a
penny stock due to their anticipated continued listing on Nasdaq, in the event
the Securities subsequently become characterized as a penny stock, the market
liquidity for the Securities could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Securities and, thus, the ability of purchasers in this offering to
sell their Securities in the secondary market.

22
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts of $990,000 and estimated
expenses of $732,000 (including the Underwriters' non-accountable expense
allowance), are estimated to be approximately $8,178,000 ($9,400,350 if the
Underwriters' over-allotment option is exercised in full). The Company
anticipates that the estimated net proceeds of this offering initially will be
allocated substantially as follows:

<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- -------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Repayment of Notes (1).................................................... $ 5,230,000 64.0%
Repayment of ASSI Loan (2)................................................ 500,000 6.1
Marketing Expenses (3).................................................... 800,000 9.8
Licenses and Royalties (4)................................................ 450,000 5.5
Capital Expenditures (5).................................................. 100,000 1.2
Working capital (6)....................................................... 1,098,000 13.4
-------------- -----
Total..................................................................... $ 8,178,000 100.0%
-------------- -----
-------------- -----
</TABLE>

- ------------------------
(1) Represents repayment of all of the Company's outstanding Private Notes in
the aggregate principal amount of $4,987,500, plus accrued interest
estimated at $242,500 as of March 31, 1996. The Private Notes were issued in
connection with the Company's 1995 Private Placement (as defined below),
bear interest at the rate of ten percent per annum and are due on the
earlier of (i) September 1, 1996 or (ii) the completion of any initial
public offering by either the Company or the Subsidiary. See "Certain
Transactions -- 1995 Private Placement."

(2) Represents repayment of the ASSI Convertible Loan in the principal amount of
$500,000. The ASSI Convertible Loan was entered into on May 30, 1996, bears
interest at the rate of eight percent per annum and is due on the earlier of
(i) September 1, 1996 and (ii) the closing date of the Company's initial
public offering made hereby. Upon the closing of this offering, ASSI, Inc.
may convert the ASSI Convertible Loan into warrants to purchase Common Stock
at a purchase price of $.25 per warrant. Although ASSI, Inc. has not advised
the Company whether it intends to convert the ASSI Convertible Loan to
warrants, for purposes of this section it is assumed that the ASSI
Convertible Loan will be repaid in full out of the proceeds of this
offering. If ASSI, Inc. elects to convert the ASSI Convertible Loan to the
ASSI Convertible Warrants, the $500,000 allocated above to repayment of this
loan instead will be utilized for working capital purposes. See "Certain
Transactions -- Agreements with ASSI, Inc."

(3) Represents amounts expected to be expended in connection with product
marketing activities, including print and co-operative advertising,
promotions and contests, coupon inserts and in-store displays.

(4) Represents amounts expected to be paid to licensors in connection with the
obtaining of new licenses, and to licensors under the terms of existing
licenses.

(5) Represents amounts expected to be expended for purchases of equipment for
use in the Company's business.

(6) Working capital will be used, among other things, to fund operating
expenses, including rent and salaries.

If the Underwriters exercise their over-allotment option in full, the
Company will realize additional net proceeds of approximately $1,222,350 which
will be added to the Company's working capital. In addition, all net proceeds
received by the Company upon the exercise, if any, of the Redeemable Warrants
and the Underwriters' Warrant will be added to working capital.

23
<PAGE>
The Company anticipates that the net proceeds of this offering, together
with its cash on hand and anticipated net cash flow from operations, will be
sufficient to fund the Company's contemplated cash requirements for at least the
next 12 months. See "Risk Factors -- Dependence on Net Proceeds of this
Offering; Possible Need for Additional Financing." While the initial allocation
of the net proceeds of this offering, as set forth above, represents the
Company's best estimates of its future financing needs, the amounts actually
expended for each purpose may vary significantly from the specific allocation of
the net proceeds set forth above, depending on numerous factors. The Company,
therefore, reserves the right to reallocate the net proceeds of this offering
among the various categories set forth above as it, in its sole discretion,
deems necessary or advisable.

Part of the Company's strategy is to expand through acquisitions. After this
offering, the Company intends to seek to make such acquisitions, but it is not
currently a party to any discussion, agreement, arrangement or understanding in
connection with any such acquisition. See "Business -- Business Strategy --
Acquisitions."

Pending application, the net proceeds of this offering will be invested
principally in U.S. government securities, short-term certificates of deposit,
money market funds or other similar short-term interest-bearing investments.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its Common Stock
since its inception. It is the current policy of the Company that it will retain
its earnings, if any, for expansion of its operations and other corporate
purposes, and that it will not pay any dividends in respect of the Common Stock
in the foreseeable future. The payment of dividends, if any, is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, if any, its capital requirements and financial condition and such
other factors as the Board of Directors may consider.

The Company's ability to pay dividends is subject to the applicable
provisions of the General Corporation Law of Delaware, which is the Company's
jurisdiction of incorporation. As a QUASI-California corporation, the Company
also is subject to the relatively more restrictive provisions of the California
GCL. The sole source of funds available to the Company for the payment of
dividends is dividends and loans advanced to it by the Subsidiary, which is
itself a California corporation and therefore subject to the dividend payment
provisions of the California GCL.

Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if the assets of the corporation exceed 1 1/4 times its liabilities;
and (ii) the current assets of the corporation equal or exceed its current
liabilities, but if the average pre-tax earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1 1/4 times its current liabilities. Under the
foregoing requirements, the Company will not be able to pay dividends until it
achieves positive retained earnings, which management does not anticipate will
occur for the foreseeable future. See "Risk Factors -- No Dividends."

24
<PAGE>
DILUTION

At March 31, 1996, the Company had 1,808,291 shares of Common Stock
outstanding and at such date the net tangible book value of the Company was
$(3,958,424) or approximately ($2.19) per share of Common Stock. "Net tangible
book value per share" represents the total tangible assets of the Company, less
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt of the net proceeds (estimated to be
approximately $7,917,000 after deducting the Underwriters' discount and
estimated expenses, including the Underwriters' non-accountable expense
allowance) from the sale of the 2,400,000 shares of Common Stock offered by the
Company at an initial public offering price of $4.00 per share (without giving
any effect to the net proceeds from the sale of the Redeemable Warrants), the
pro forma net tangible book value of the Company at March 31, 1996 would have
been $3,497,661 or approximately $0.83 per share of Common Stock. This
represents an immediate increase in net tangible book value of $3.02 per share
of Common Stock to existing stockholders and an immediate dilution to new
investors of approximately $3.17 (79.25%) per share of Common Stock. Dilution
per share represents the difference between the offering price per share of
Common Stock and the net tangible book value per share after giving effect to
this offering.

The following table illustrates the per share dilution to be incurred by the
purchasers of Common Stock of this offering from the initial public offering
price of $4.00 per share:

<TABLE>
<CAPTION>
DESCRIPTION AMOUNT AMOUNT
- ----------------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Initial public offering price per share of Common Stock........................................ $ 4.00
Net tangible book value per share of Common stock before offering............................ $ (2.19)
Increase in net tangible book value per share of Common Stock attributable to the sale of the
Common Stock offered by the Company......................................................... 3.02
---------
Pro forma net tangible book value per share of Common Stock after offering..................... 0.83
-----
Dilution per share of Common Stock to public investors (1)(2).................................. $ 3.17
-----
-----
</TABLE>

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

(1) If the net proceeds of $261,000 from the sale of the Redeemable Warrants
offered by the Company (after deducting the Underwriters' discount and the
Underwriters' non-accountable expense allowance, but attributing no other
costs of this offering to the Redeemable Warrants) had been attributed to
the net tangible book value of the shares of Common Stock after this
offering, it would increase the pro forma net tangible book value after this
offering by $0.06 per share of Common Stock and decrease the dilution to new
public investors by approximately $0.06 per share of Common Stock.

(2) In the event that the Underwriters exercise their over-allotment option to
purchase 340,000 shares of Common Stock from the Company, the pro forma net
tangible book value of the Company after this offering (after deducting the
underwriters' discount and the Underwriters' non-accountable expense
allowance but no other costs of this offering) would be approximately
$4,941,861 (including the net proceeds of $261,000 from the sale of the
Redeemable Warrants) or $1.09 per share of Common Stock, which would result
in immediate dilution in net tangible book value to the public investors of
approximately $2.91 per share of Common Stock. In the event of the further
exercise of all 484,037 presently exercisable Common Stock purchase options
at the average exercise price of $.75 per share, and the sale and exercise
in full of the Underwriters' Warrant including the sale and exercise in full
of the Redeemable Warrants and the ASSI Warrants, and after giving effect to
all of the aforementioned transactions, the pro forma net tangible book
value of the Company would be approximately $5,304,903 or $1.05 per share,
which would result in immediate dilution in net tangible book value to the
public investors of approximately $2.95 per share of Common Stock.

25
<PAGE>

The exercise of the Redeemable Warrants and ASSI Warrants will be
antidilutive to the purchasers of Common Stock in this Offering. The following
table illustrates the effective net per share dilution to be incurred by the
purchasers of Common Stock in this offering upon the subsequent exercise of the
Redeemable Warrants and ASSI Warrants from the initial public offering price of
$4.00 per share:

<TABLE>
<CAPTION>
DESCRIPTION AMOUNT AMOUNT
- ------------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Initial public offering price per share of Common Stock.............................. $ 4.00
Pro forma net tangible book value per share of Common Stock before exercise of
Redeemable Warrants and ASSI Warrants (1)......................................... $ 1.05
Increase in net tangible book value per share of Common Stock attributable to the
sale of the Common Stock upon exercise of all Redeemable Warrants and ASSI
Warrants.......................................................................... 2.09
---------
Pro forma net tangible book value per share of Common Stock after exercise of all
Redeemable Warrants and ASSI Warrants............................................... 3.14
-----
Dilution per share of Common Stock to investors in this offering upon exercise of
Redeemable Warrants and ASSI Warrants............................................... $ .86
-----
-----
</TABLE>

- ------------------------
(1) Assumes the sale of 340,000 shares of Common Stock pursuant to the
over-allotment option, and the sale of 484,037 shares of Common Stock
pursuant to presently exercisable employee stock options.

The following table sets forth, as of March 31, 1996, the number and
percentage of shares of Common Stock purchased by, and the amount and percentage
of consideration paid by, the existing stockholders, by public investors in this
offering and the average price per share of Common Stock.

<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED -------------------------------------------
------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Current stockholders (1)....................... 1,808,291 43.0% $ 6,128,007 39.0% $ 3.39
Public investors (2)........................... 2,400,000 57.0 9,600,000 61.0 4.00
----------- ----- -------------- -----
Total...................................... 4,208,291 100.0% $ 15,728,007 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>

- ------------------------
(1) Includes: (i) $263,300 paid by the investors in the Company's 1995 Private
Placement and 1995 Bridge Financing for warrants to purchase 5,268,747
shares of Common Stock issued by the Company in such private placements; and
(ii) the nominal consideration of $50 paid by Financial West Group, Inc. for
the warrants to purchase up to 420,918 shares of Common Stock issued to it
in connection with such private placements as part of the total
consideration paid by existing stockholders. See "Certain Transactions."

(2) Does not include the $300,000 to be paid by public investors for the
1,200,000 Redeemable Warrants being offered by the Company. To the extent
that any of the Redeemable Warrants are exercised, there will be no further
dilution to the public investors.

The foregoing computations assume the exercise of no stock options after
March 31, 1996. As of March 31, 1996, 292,838 shares of Common Stock were
subject to presently exercisable options granted to the Company's President and
Chief Operating Officer at an exercise price of $.06 per share. As of March 31,
1996, additional options to purchase a total of 384,070 shares of Common Stock
were issued pursuant to the 1992 Stock Option Plan. All of such options are
non-qualified stock options having an exercise price of from $.06 to $4.00 per
share. Of the 384,070 options that have been granted pursuant to the 1992 Stock
Option Plan, 191,199 are presently exercisable, 45,840 will become exercisable
in fiscal 1997 and the balance will become exercisable in fiscal 1998. No
further options may be granted pursuant to the Company's 1992 Stock Option Plan.
An additional 500,000 shares of Common Stock are available for issuance under
the Company's 1995 Stock Option Plan, of which the Company has agreed to issue
13,610 options to its nonexecutive employees. See "Management -- Executive
Compensation," "-- 1995 Stock Option Plan" and "-- 1992 Stock Option Plan." The
Underwriters' Warrant entitles the Underwriters to purchase 240,000 shares of
Common Stock at 145 percent of the offering price of the Common Stock, in this
offering, and will become exercisable one year after the date of this
Prospectus. See "Underwriting."

26
<PAGE>
CAPITALIZATION

The following table sets forth, as of March 31, 1996, the short-term debt
and capitalization of the Company on an actual basis and as adjusted to reflect
the issuance and sale of the 2,400,000 shares of Common Stock and the 1,200,000
Redeemable Warrants offered by the Company and the initial application of the
estimated net proceeds therefrom. The table should be read in conjunction with
the financial statements and the notes to the financial statements which are
contained elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
<S> <C> <C>
Notes payable..................................................................... $ 4,987,500 $ --
-------------- --------------
Stockholders' equity (deficit)
Common Stock, $.001 par value; 20,000,000 shares authorized; 1,808,291 shares
issued and outstanding (actual); 4,208,291 shares issued and outstanding (as
adjusted)...................................................................... 1,808 4,208
Warrants........................................................................ 263,350 524,350
Additional paid-in capital........................................................ 5,124,576 13,039,176
Accumulated deficit............................................................... (9,348,158) (9,809,073)
-------------- --------------
Total stockholders' equity (deficiency)........................................... (3,958,424) 3,758,661
-------------- --------------
Total capitalization.......................................................... $ 1,029,076 $ 3,758,661
-------------- --------------
-------------- --------------
</TABLE>

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

(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an initial public offering price of $.25 per
Redeemable Warrant, net of anticipated expenses of the offering (estimated
at $990,000 for the Underwriters' discount and $732,000 for expenses,
including the Underwriters' non-accountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and all
of the Company's other funded indebtedness (estimated at $5,230,000 at March
31, 1996) with a portion of such proceeds. The as adjusted amounts do not
reflect the issuance of up to 340,000 shares of Common Stock and 180,000
Redeemable Warrants by the Company to cover over-allotments, if any, or the
exercise of the Underwriters' Warrant to purchase up to 240,000 shares of
Common Stock, or the exercise of any other outstanding (or agreed to be
issued) options or warrants to purchase up to an additional 12,220,183
shares of Common Stock.

27
<PAGE>
SELECTED FINANCIAL DATA

The following table of summary financial information is derived from and
should be read in conjunction with the Company's financial statements and the
footnotes thereto included elsewhere in this Prospectus. The financial data for
the fiscal years ended June 30, 1994 and 1995 has been derived from audited
financial statements prepared by Corbin & Wertz, certified public accountants,
who are the Company's independent auditors. The Company's losses for fiscal 1994
and 1995 include noncash charges of $2,992,862 and $733,165, respectively,
associated with the granting of certain compensatory stock options. The
financial data for the nine-month periods ended March 31, 1995 and 1996 are
derived from unaudited financial statements of the Company. The unaudited
financial statements include all adjustments consisting of normal recurring
accruals which the Company considers necessary for a fair presentation of the
financial position and the results of operations. Operating results for the
nine-month period are not necessarily indicative of the results that may be
expected for the entire year ending June 30, 1996. See "Risk Factors --
Fluctuations in Operating Results; Seasonality" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------ ----------------------
STATEMENT OF OPERATIONS DATA 1994 1995 1995 1996
- ------------------------------------------------------------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Retail software sales............................................. $ 1,313,890 $ 1,255,230 $1,170,451 $1,874,734
OEM sales......................................................... 5,500 479,675 370,409 32,237
Development agreement revenues.................................... 112,520 343,250 217,250 --
Royalties......................................................... 253,961 76,771 76,253 21,678
----------- ----------- ---------- ----------
Net sales from continuing operations............................ 1,685,871 2,154,926 1,834,363 1,928,649
Gross profit...................................................... 505,068 1,082,235 780,698 813,544
Noncash compensation expense recorded in connection with Common
Stock and Common Stock options issued for services............... 2,992,862 733,165 289,998 --
Other expenses.................................................... 1,374,052 1,940,124 1,384,285 4,049,126
Loss from continuing operations................................... (3,861,846) (1,591,054) (893,629) (3,235,582)
Loss from discontinued operations................................. (115,887) (143,106) (49,046) --
Net loss.......................................................... (3,977,733) (1,734,160) (942,631) (3,235,582)
Loss per common share from continuing operations.................. $ (2.38) $ (0.85) $ (0.48) $ (1.76)
Loss per common share from discontinued operations................ $ (0.07) $ (0.08) $ (0.03) --
Net loss per common share......................................... $ (2.45) $ (0.93) $ (0.51) $ (1.76)
Weighted average number of common shares.......................... 1,626,107 1,862,908 1,859,150 1,842,638
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------
BALANCE SHEET DATA ACTUAL AS ADJUSTED(1)
- ------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
Working capital...................................................................... $(4,140,420) $ 3,576,665
Total assets......................................................................... 3,050,240 5,390,415
Current liabilities.................................................................. 6,988,664 1,611,754
Long term debt....................................................................... 20,000 20,000
Stockholders' equity (deficit)....................................................... (3,958,424) 3,758,661
</TABLE>

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

(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the Underwriters' discount and $732,000 for expenses,
including the Underwriters' non-accountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and
all of the Company's other funded indebtedness (estimated at $5,230,000 at
March 31, 1996) with a portion of such proceeds. The as adjusted amounts do
not reflect the issuance of up to 340,000 shares of Common Stock and
180,000 Redeemable Warrants by the Company to cover over-allotments, if
any, or the exercise of the Underwriters' Warrant to purchase up to 240,000
shares of Common Stock, or the exercise of any other outstanding (or agreed
to be issued) options or warrants to purchase up to an additional
12,220,183 shares of Common Stock.

28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company derives substantially all of its revenues from sales of its
retail consumer software and original equipment manufacturer ("OEM") versions of
its retail consumer software. The Company designs, develops, markets and
supports a broad line of consumer software products. The Company focuses
primarily on family-oriented products with educational and entertainment value,
which are easy to use and install, using popular movies, television series and
comic book characters. See generally "Business."

In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software and related products. The Company had no sales to or through Acclaim
during its fiscal year ended June 30, 1995. During the nine-month period ended
March 31, 1996, of the Company's net sales of $1,928,649, a total of $1,617,839
(84 percent) were generated by Acclaim. Under the terms of this agreement,
Acclaim was the exclusive distributor of the Company's products on a worldwide
basis, subject to certain limited exceptions. The Company was not satisfied with
the distribution of its products through Acclaim, and determined to terminate
the Acclaim distribution agreement in March 1996. The Company and Acclaim have
terminated the distribution agreement as of April 30, 1996. On or before June
30, 1996, Acclaim will render a final accounting to the Company together with
payment of the balance of any amounts due to the Company under the distribution
agreement. Acclaim has notified its accounts that it will not accept returns of
any of the Company's software products after June 30, 1996. The Company,
however, will remain liable for all such returns regardless of when received by
Acclaim. As of March 31, 1996, the Company had established a reserve equal to 50
percent ($674,978) of the amount of its account receivable from Acclaim. See
"Business -- Product Distribution -- Relationship With Acclaim."

On June 1, 1996 the Company entered into a Distribution Services Agreement
with SSIDS. Pursuant to this new distribution agreement, SSIDS will provide
distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United States
and Canada. The Company's relationship with SSIDS is exclusive except as regards
the rights to distribute the Company's products in direct-to-the-customer
programs including direct mail, telemarketing and in-box coupon fulfillment,
which are nonexclusive. See "Business -- Product Distribution -- Relationship
With SSIDS."

Net sales consist of gross sales net of allowances for returns, credit
losses and other adjustments. The Company adjusts its allowance for returns as
it deems appropriate. The Company could be forced to accept substantial product
returns or other concessions to maintain its relationships with retailers and
distributors and its access to distributor channels. The Company is also exposed
to the risk of returns of defective, shelf-worn and damaged products from
retailers and distributors.

Costs of sales consist primarily of product cost, freight charges, royalties
to outside programmers and content providers, and an inventory provision for
damaged and obsolete products. Product costs consist of the costs to purchase
the underlying materials and print both boxes and manuals, media costs (disks
and CD-ROMs) and fulfillment (assembly and shipping).

From the Company's inception through October 24, 1995, the Company sold
synthesizer sound libraries. In July 1995, the Company's Board of Directors
approved a formal plan to license the proprietary assets related to such
revenues in exchange for royalties. The Results of Operations discussion and
analysis which follows includes only the continuing operations of the Company,
which is primarily comprised of software sales. The Company sustained losses
from these discontinued synthesizer operations of $143,106 in fiscal 1995 and
$115,887 in fiscal 1994.

29
<PAGE>
RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 1995 COMPARED TO NINE MONTHS ENDED MARCH 31,
1996

NET SALES. Net Sales from continuing operations increased by 5 percent from
$1,834,363 for the nine months ended March 31, 1995 to $1,928,649 for the nine
months ended March 31, 1996. In 1995, the Company determined to concentrate its
focus on development of its educational and entertainment utility interactive
CD-ROM software and to reduce its development work for third parties.
Consequently, total retail sales of the Company's software products increased
from $1,170,451 during the nine months ended March 31, 1995 to $1,874,734 during
the nine months ended March 31, 1996. However, the Company had no development
revenues during the period, as compared with $217,250 for the prior period.
Revenues from OEM sales declined from $370,409 to $32,237, reflecting a one-time
agreement with Acer in calendar 1994 that did not produce significant revenues
in calendar 1995. In addition, the Company's royalty fees declined from $76,253
to $21,678 during the corresponding periods. The higher royalty revenues for the
nine months ended March 31, 1995 resulted primarily from product introductions
incorporating content sublicensed by the Company that were not repeated in the
nine months ended March 31, 1996. This decline in royalty revenues also
reflected the Company's current strategy of focusing on developing all product
licenses itself rather than sublicensing them to third parties.

During the nine months ended March 31, 1996, of the Company's net sales of
$1,928,649, a total of $1,617,839 (84 percent) were generated by Acclaim. None
of the Company's net sales of $1,834,363 during the nine months ended March 31,
1995 were generated by Acclaim. As noted above, because of its disappointment
with the level of sales generated by Acclaim, the Company terminated its
distribution agreement with Acclaim effective April 30, 1996 and entered into a
new distribution agreement with SSIDS, effective June 1, 1996. See "Business --
Product Distribution -- Relationship With Acclaim" and "-- Relationship With
SSIDS."

COST OF SALES. Cost of Sales increased by 6 percent from $1,053,665 for the
nine months ended March 31, 1995 to $1,115,105 for the nine months ended March
31, 1996, representing 57 percent and 58 percent of net sales, respectively.
This increase is attributable to the above noted 60 percent increase in software
product sales partially offset by decreased production costs resulting from the
Company's switch from floppy disk to CD-ROM media for a majority of its products
, decreased royalty costs, and diminishing inventory writedowns and writeoffs.

MARKETING AND SALES. Marketing and sales expenses increased by 130 percent
from $400,149 for the nine months ended March 31, 1995 to $922,215 for the nine
months ended March 31, 1996, and increased as a percentage of net sales from 22
percent to 48 percent, respectively. These increases were primarily due to
increased marketing activities to promote the Company's products and brand name
among retail purchasers, and increased personnel costs. The Company intends to
continue to launch new and innovative marketing promotions and to hire
additional personnel.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 63 percent from $1,101,027 for the nine months ended March 31, 1995 to
$1,816,610 for the nine months ended March 31, 1996, and as a percentage of net
sales from 60 percent to 94 percent, respectively. The increase is primarily
attributable to costs incurred by the Company during the nine month period ended
March 31, 1996 related to the 1996 Bridge Financing and 1995 Private Placement
and increases in executive salaries related to the addition of a Chief Financial
Officer, partially offset by decreased noncash compensation incurred in
connection with issuance of Common Stock and Common Stock options. A total of
$289,998 of the general and administrative expenses for the nine months ended
March 31, 1995 relates to a noncash charge to earnings in connection with the
vesting of stock options granted to employees, determined as the difference
between the fair market value of the date of grant and the exercise price. No
such charge was incurred during the nine months ended March 31, 1996.

30
<PAGE>
An allowance for doubtful accounts receivable from Acclaim of $674,978 was
recorded during the nine months ended March 31, 1996. No such allowance was
recorded during the nine months ended March 31, 1995.

DEVELOPMENT. Development expenses increased by 202 percent from $161,875
for the nine months ended March 31, 1995 to $489,053 for the nine months ended
March 31, 1996, and increased as a percentage of net sales from 9 percent to 25
percent, respectively. These increases were primarily attributable to costs
related to product upgrades and new product development activities. The Company
believes that development expenses will increase in dollar amount in the future
as the Company continues to expand its development activities.

TAX PROVISION. The current period income tax provision is comprised of
minimum state franchise taxes for the states of Delaware and California of
$1,200. There is no provision for Federal income taxes as the Company has a loss
in the nine month periods ended March 31, 1995 and 1996, respectively.

OTHER. Other expense increased from $10,032 for the nine months ended March
31, 1995 to $820,048 for the nine months ended March 31, 1996, and increased as
a percentage of net sales from 1 percent to 43 percent, respectively. This
increase is primarily comprised of amortization of deferred loan costs of
$574,285 and interest expense of $244,679, both of which relate to the Company's
1995 Bridge Financing and 1995 Private Placement.

FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995

NET SALES. Net sales from continuing operations increased by 28 percent
from $1,685,871 for fiscal 1994 to $2,154,296 for fiscal 1995. Retail software
sales decreased by 5 percent from $1,313,890 for 1994 to $1,255,230 for 1995 due
principally to discounting and pricing declines for the Company's software
products. Development revenues increased by 205 percent from $112,520 for 1994
to $343,250 for 1995, primarily as a result of an agreement to develop
INTERACTIVE MOVIEBOOKS-TM- under a contract with a motion picture studio. OEM
sales increased from $5,500 for 1994 to $479,675 for 1995. This increase in OEM
sales resulted principally from sales pursuant to a software bundling agreement
with a PC manufacturer. Royalty fees decreased by 70 percent from $253,961 for
1994 to $76,771 for 1995. The decline in royalty revenues reflected the
Company's strategy of focusing on developing all product licenses itself rather
than sublicensing them to third parties.

The Company established a reserve for returns that it believes to be
adequate based upon historical return data and its analysis of current customer
inventory levels and sell through rates.

COST OF SALES. Costs of sales decreased by 9 percent from $1,180,803 for
fiscal 1994 to $1,072,691 for fiscal 1995, and decreased as a percentage of net
sales from 70 percent to 50 percent, respectively. This percentage decrease was
principally attributable to the substantially lower costs associated with the
sale of the single "golden master" for certain of the Company's products sold to
a PC manufacturer to install under an OEM bundling agreement in the first six
months of fiscal 1995, partially offset by a change in the product mix to higher
priced items and a decrease in OEM costs.

MARKETING AND SALES. Marketing and sales expenses increased by 45 percent
from $356,381 for fiscal 1994 to $516,886 for fiscal 1995, and increased as a
percentage of net sales from 21 percent to 24 percent, respectively. These
increases were primarily due to increased marketing activities to promote the
Company's product and brand name, and an increase in personnel. The Company
intends to continue to launch new and innovative marketing promotions and to
hire additional personnel.

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by 53 percent from $3,821,728 for fiscal 1994 to $1,783,023 for fiscal 1995, and
decreased as a percentage of net sales from 227 percent to 83 percent,
respectively. The decrease was primarily due to a decrease in noncash
compensation in connection with Common Stock issued for services provided,
partially offset by increased staffing and associated overhead expenses
necessary to manage and support the Company's growth. A total of $2,992,862 of
the 1994 general and administrative expenses and $733,165 of the

31
<PAGE>
1995 general and administrative expenses relates to noncash charges to earnings
in connection with the vesting of stock options granted to employees, determined
as the difference between the fair market value on the date of grant and the
exercise price.

DEVELOPMENT. Development expenses increased by 225 percent from $116,559
for fiscal 1994 to $378,471 for fiscal 1995, and increased as a percentage of
net sales from 7 percent to 18 percent, respectively. These increases were
primarily attributable to costs relating to product upgrade and new product
development activities. The Company developed its first four INTERACTIVE
MOVIEBOOKS-TM- in fiscal 1995, and to date has developed four INTERACTIVE
MOVIEBOOKS-TM- in fiscal 1996. The Company believes that development expenses
will increase in dollar amount and as a percentage of net sales in the future as
the Company expands its development activities.

TAX PROVISION. The income tax provision for 1994 and 1995 is comprised of
minimum State of California Franchise Taxes of $1,600. There is no provision for
Federal income taxes as the Company has a current year loss and has a $2,513,000
net operating loss carryforward. Depending upon future changes in ownership of
the Company, the use of this carryforward may be limited in the future.

QUARTERLY RESULTS OF OPERATIONS

The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including the size and rate of
growth of the consumer software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
products, product returns, changes in pricing policies by the Company and its
competitors, the accuracy of retailers' forecasts of consumer demand, the timing
of the receipt of orders from major customers, and account cancellations or
delays in shipment. The Company's expense levels are based, in part, on its
expectations as to future sales and, as a result, operating results could be
disproportionately affected by a reduction in sales or a failure to meet the
Company's sales expectations.

SEASONALITY

The consumer software business traditionally has been seasonal. Typically,
net sales are the highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern is
due primarily to the increased demand for consumer software during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect seasonality. Nevertheless, management believes that in
the future its results may be less subject to seasonal fluctuations because its
products will be marketed in connection with the releases of major motion
pictures and home videos, which occur throughout the year. See "Risk Factors --
Fluctuations in Operating Results; Seasonality."

LIQUIDITY AND CAPITAL RESOURCES

Since its formation, the Company has financed its operations and capital
expenditures primarily with cash provided by operating activities, securities
issuances and financing arrangements. As of March 31, 1996, the Company had
negative working capital of $4,140,420 and cash of $213,730. The Company is
dependent on the net proceeds of this offering or other financing to repay the
aggregate principal amount of $4,987,500 in Private Notes issued to investors in
the Company's 1995 Private Placement, plus accrued interest estimated at
$242,500 as of March 31, 1996. In the event that ASSI, Inc. requires that the
ASSI Convertible Loan be repaid in cash, the Company also will be dependent on
the net proceeds of this offering to repay the $500,000 aggregate principal
amount of such loan, plus interest from May 30, 1996. The Private Notes and ASSI
Convertible Loan both are due in full on the earlier of (i) September 1, 1996 or
(ii) the completion of any initial public offering by either the Company or the
Subsidiary. See "Certain Transactions -- 1995 Private Placement" and "--
Agreements With ASSI, Inc."

The Company invested approximately $46,000 during fiscal year 1995 and
currently anticipates investing approximately $100,000 during fiscal 1996 for
capital equipment to expand into new product lines and to address potential
capacity constraints created by the Company's growing unit sales

32
<PAGE>
volumes. From time to time, the Company evaluates acquisitions of products,
businesses and technologies that are complementary to the Company's business.
Presently, however, the Company does not have any understandings, commitments or
agreements with respect to any such acquisitions. See "Business -- Business
Strategy -- Acquisitions."

In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. Upon completion of this offering, on a pro forma
basis as of March 31, 1996 the Company's current assets will exceed its current
liabilities and it will have stockholders' equity of $3,758,661. The Company
therefore believes that its auditors will delete such going concern
qualification upon the completion of this offering and repayment of the
Company's funded indebtedness out of the proceeds hereof and the Company's
demonstration of its ability to realize sufficient cash flow to sustain its
operations for the foreseeable future.

The Company believes that the net proceeds from the offering, together with
its cash on hand, and anticipated net cash flow from operations, will be
sufficient to fund the Company's contemplated cash requirements for at least the
next 12 months. The Company currently plans to develop four to five INTERACTIVE
MOVIEBOOKS-TM- and at least one activity center per year, which management
estimates will cost approximately $150,000 per title, plus a licensing fee of
approximately $25,000 to $150,000 per title. If the Company can generate sales
of at least 40,000 units per title, management believes the Company will be able
to finance its business operations from net sales revenue. If the Company is
unable to generate the necessary volume of sales on its existing products
through March 31, 1997, the Company will be required to seek additional
financing to continue the development of new products for the next fiscal year.
There can be no assurance that the Company will achieve the necessary sales to
fund its future operations or that, if additional financing is necessary, such
financing will be available. See "Risk Factors -- Dependence on Net Proceeds of
this Offering; Possible Need for Additional Financing."

Management expects that in the future, cash in excess of current
requirements will be invested in investment-grade, interest-bearing securities.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high degree of complexity or risk, and
management does not intend to invest in these types of securities or financial
instruments in the future.

NEW ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a method of accounting
for stock compensation plans based on fair value of grants made under such plans
on the date of grant using certain option-pricing models. SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance with
APB opinion 25 "Accounting for Stock Issued to Employees," which provides for an
intrinsic valuation model that recognizes only the difference between the fair
market value of a company's stock and the price paid to acquire the stock under
the stock compensation plan. However, SFAS No. 123 encourages the adoption of
the fair value accounting method. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. The Company plans to use the intrinsic
valuation model and provide footnote disclosure with respect to the fair value
of options for fiscal years beginning after January 1, 1996.

33
<PAGE>
BUSINESS

GENERAL

The Company is engaged primarily in developing, publishing and marketing
educational, interactive computer software products for children. INTERACTIVE
MOVIEBOOKS-TM-, which combine text, photos, soundclips and actual film footage
of well recognized family films and cartoon series, are the Company's major
software products. INTERACTIVE MOVIEBOOKS-TM- are developed and published by the
Company on CD-ROM for Multimedia PCs as entertaining, interactive reading tools
for young children. The Company also produces a variety of entertainment
computer software utilities such as screen savers and sound clips known as
AUDIOCLIPS-Registered Trademark-. The Company is currently developing another
line of products which it refers to as creativity centers. This product line
combines learning activities such as painting, drawing, matching, puzzles and
mazes within a framework of three distinct skill levels.

The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM-, and other popular titles. The
Company also holds licenses for new products being developed for release in 1996
on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-, DRAGON HEART-TM-, and
I LOVE LUCY-TM-. The Company is continuing the negotiation of additional
licenses for its product line offerings. Management believes the Company is
capable of continuing to obtain new licenses for major motion pictures and
television shows and developing new, high quality software products using
content from these entertainment properties.

The Company believes that as of March 31, 1996, its products were in
distribution to approximately 6,000 retail outlets. Retailers currently selling
the Company's products include Target, Tower Records, Sears, Wal-Mart,
Price/Costco, CompUSA, Best Buy, BJ's, Computer City, Egghead, Electronics
Boutique, Babbages, Software, Etc., Kmart, Barnes & Noble, Sam Goody, Sam's
Club, QVC, Musicland, Circuit City and others.

INDUSTRY BACKGROUND

In recent years, the installed base of Multimedia PCs in households has
grown substantially as prices have declined significantly and as improvements in
computing power and capability have been achieved. There are a number of factors
driving the increased demand and use of Multimedia PCs in U.S. and foreign
households beyond the general impact of falling prices and increased
performance. Enabling technologies and standards, such as graphical user
interfaces and the Microsoft-Registered Trademark- Windows-Registered Trademark-
operating system, and the recent release of the Windows
'95-Registered Trademark- operating system, have made Multimedia PCs easier to
use for a broad range of applications, resulting in the transformation of
Multimedia PCs into general-purpose tools. In addition, today's Multimedia PCs
feature high-speed microprocessors, large amounts of memory, high-resolution
monitors and enhanced sound, speaker and graphics capabilities. These advanced
capabilities, along with the introduction of CD-ROM multimedia technology, have
allowed software developers to produce more engaging software with advanced
three-dimensional graphics, realistic sound and full-motion video. The Company
believes

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<PAGE>
that CD-ROM multimedia technology will continue to impact the growth of the
consumer software market as software developers take advantage of the multimedia
capabilities of this more advanced hardware technology.

The resulting increased penetration of Multimedia PCs into domestic
households has created a large and growing mass market for consumer software as
many consumers wish to maximize the utility of their Multimedia PCs. The
distribution of consumer software has also expanded beyond traditional software
retailers and computer stores to include general mass merchandisers.

In response to these developments, increasing numbers of consumer software
products are being developed to address a broad range of consumer interests and
everyday tasks. The Company believes that consumers are more frequently
purchasing software on impulse in the same way that they often buy books, music
compact discs ("CDs") and motion picture videos. With the increasing
consumerization of the software market, the Company believes that the prices for
consumer software products may fall. If this occurs, the distribution channels
for consumer software could continue to expand to include book and music stores,
video outlets and supermarkets.

As consumer software becomes more of a mass market product, the Company
believes it will become increasingly important for consumer software companies
to have direct relationships with retailers to effectively market their products
to consumers. Competition for retail shelf space is also likely to increase due
to the proliferation of consumer software products and companies. As a result,
the Company believes that in order to be successful, consumer software companies
must have a consumer-driven focus, a broad offering of category-leading
products, close relationships with retailers, a recognized brand name and a
cost-efficient business model.

BUSINESS STRATEGY

The Company's objective is to be a leading publisher of high quality,
value-priced family-oriented consumer software. The Company seeks to develop a
broad line of products in categories in which a substantial market share can be
attained. The Company also seeks to expand product franchises by upgrading
successful products and developing product line extensions and complementary
products. The Company believes that it may achieve its objectives utilizing the
following strategies:

- MAINTAIN CONSUMER-DRIVEN FOCUS. The Company develops what it believes are
creative and innovative products with mass market appeal, targeting
families who are familiar with the Company's licensed movie titles,
television series and comic book characters. The Company believes that
these consumers base their software purchasing decisions largely on
quality, value, ease of use, recognition and personal affinity for
recognizable motion picture and television productions upon which the
Company's products are based. As a result, the Company is committed to
providing products that are high quality, value-priced and which require
minimal computer experience to operate. The Company's consumer-oriented
marketing strategy combines attractive and informative shrink-wrap
packaging with high-impact promotional campaigns to encourage impulse
purchases. To enhance customer satisfaction, the Company also provides
technical support for all of its products. In addition, the Company
revises products in response to consumer feedback and upgrades products to
utilize new technologies as those technologies gain broader acceptance in
the consumer market. The Company receives consumer feedback primarily from
comments on product registration cards submitted to it by customers.

- DEVELOP DIVERSIFIED TITLES WITH STRONG FRANCHISE VALUE. The Company seeks
to develop a broad line of products in sustainable categories in which a
substantial market share can be achieved. The Company currently has 21
software products available for sale in stores in the education and
entertainment categories. Hollywood content such as motion pictures and
television shows will continue to be the foundation on which the products
are based. The Company seeks to build franchise value through its
merchandising programs and seeks to create franchises by upgrading
products and developing product line extensions and complementary

35
<PAGE>
products. Several of the Company's licenses permit it to produce multiple
software titles using the same proprietary subject matter. The Company
also seeks to create titles with extended lifecycles by upgrading
successful products to incorporate new features and to adapt to new
technologies.

- LEVERAGE DISTRIBUTION STRENGTHS. Pursuant to the new Distribution
Services Agreement between SSIDS and the Company, SSIDS will provide
distribution, warehousing and order fulfillment services for all of the
Company's products (subject to certain exceptions) throughout the United
States and Canada. The Company's relationship with SSIDS is exclusive
except as regards the rights to distribute the Company's products in
direct-to-the-customer programs including direct mail, telemarketing and
in-box coupon fulfillment, which are nonexclusive. See "Business --
Product Distribution -- Relationship With SSIDS." The Company's sales and
marketing department will work closely with SSIDS' sales force. The
Company believes that its broad product line and consumer-oriented
marketing programs enable it effectively to market its products. Through
co-operative marketing efforts, the Company intends to support marketing
efforts, promotions and merchandising displays at the market level.

- LEVERAGE STUDIO RELATIONSHIPS. The Company is developing a variety of
cross-marketing promotional programs with its movie studio licensors and
other licensees of movie titles licensed by the Company for its software
products. For example, the Company has worked with the MCA Home Video
Division to include discount coupons for the Company's BABE-TM-
INTERACTIVE MOVIEBOOK-TM- in video cassettes of BABE-TM-. The Company is
further working with MCA Home Video Division to include trailers for MCA
movie titles in the Company's software products. In addition, the Company
is working with the manufacturers of toy action figures to include rebate
coupons for the Company's products with the related action figures. The
Company has also developed a screen saver for Universal Studios Florida in
return for trip packages to be used for promotional contests. The
Company's goal is to run one special promotion, such as a contest, every
two to three months. Based on currently pending negotiations with its
movie studio licensors, management believes the Company will have the
opportunity to develop a variety of new cross-promotional programs that
may significantly enhance the Company's marketing efforts.

- PROMOTE TRADENAME RECOGNITION. The Company promotes its licensed
properties in conjunction with its brand name "Sound Source Interactive"
in order to encourage customer loyalty and repeat purchases. The Company
believes that its brand name products are recognized by consumers as high
quality, full-featured software. Drawing upon established consumer
marketing techniques, the Company uses its brand name and consistent
packaging style which emphasize high-impact design and recognizable motion
picture and television titles. The Company includes a mail-in order form
with each product it sells, which includes a list of the Company's other
available products to encourage repeat purchases. The Company believes
that by promoting a recognizable brand name and consistent packaging,
satisfied consumers are more likely to purchase additional
Company-produced products when faced with multiple options in a software
category. As the consumer software industry becomes more of a mass market,
the Company believes that tradename recognition will become an
increasingly important means of product differentiation among retailers
and consumers.

- DEVELOP GAME PRODUCTS. The Company intends to develop products intended
for the game market in the future. The Company believes that its access to
motion picture and related content will enable it to produce games that
can be successfully marketed. The Company intends to market its game
products in concert with studio releases and events.

- ACQUISITIONS. The Company intends to pursue acquisitions of entertainment
software companies and selected titles within existing or new product
categories. The Company believes that

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<PAGE>
acquisitions may provide diversification of revenues and enhanced revenues
growth. The Company is not currently a party to any discussion, agreement,
arrangement or understanding in connection with any such acquisition.

PRODUCTS

INTERACTIVE CD-ROM

The Company has created INTERACTIVE MOVIEBOOKS-TM- for children, which are
electronic storybooks with full-motion video based on the licensed property.
INTERACTIVE MOVIEBOOKS-TM- are marketed as reading aids for young children.
Research studies involving literacy have shown that children learn to read by
repetitive reading -- usually with the aid of a parent or teacher. This learning
process begins at about 18 months of age and continues through the first and
second grades for many children. The targeted ages for INTERACTIVE
MOVIEBOOKS-TM- are three through ten. The Company has released eight of its
INTERACTIVE MOVIEBOOKS-TM- on CD-ROM. This product provides options for
automatic reading by the computer, user reading, a dictionary invoked by
"clicking" on a dictionary book icon, actual full-motion video taken from the
motion picture that coincides with the text pages, high-quality sound, art and
animation as well as a quiz consisting of multiple choice questions on a related
topic to the story, reinforcement through a "jigsaw" puzzle which can be
printed, and a "bookmark" so the adventure can be stopped, put away and
restarted at the same point at a later date. More elaborate activities in the
INTERACTIVE MOVIEBOOK-TM- have been included in BABE-TM-, THE LITTLE
RASCALS-TM-, FREE WILLY 2-TM-, EXOSQUAD-TM- and THE ADVENTURES OF BATMAN AND
ROBIN-TM-, and will be further incorporated in the next generation of products.

The Company first introduced its INTERACTIVE MOVIEBOOK-TM- product line into
the marketplace in August 1994 with the release of THE SECRET GARDEN-TM- (Warner
Bros.). The Company released BLACK BEAUTY-TM- (Warner Bros.) in November 1994,
LASSIE-TM-" (Broadway Video, a Paramount Pictures release), in December 1994 and
LITTLE RASCALS-TM- (Universal Pictures) in June 1995. The Company released FREE
WILLY 2-TM- (Warner Bros.) in July 1995. During November 1995, three new
INTERACTIVE MOVIEBOOKS-TM- were completed and released: BABE-TM- (Universal
Pictures), EXOSQUAD-TM- (Universal Pictures) and THE ADVENTURES OF BATMAN &
ROBIN-TM- (DC Comics). These three products, however, did not receive widespread
distribution until the first calendar quarter of 1996. All products are Windows
'95-Registered Trademark- compatible. Currently, the products are sold at a
suggested retail price of up to $30 each, a price point intended to generate
impulse purchases among consumers at the retail level.

The Company intends to introduce four to five new INTERACTIVE MOVIEBOOKS-TM-
annually in the future. Each is expected to experience its highest sales prices
and volumes within the 12 months following its introduction. Although the
products may continue to be sold after 12 months, they typically will be sold on
a discounted basis.

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<PAGE>
The following is a listing of the Company's INTERACTIVE MOVIEBOOK-TM-
products which are currently existing or planned for release, all of which are
on CD-ROM:

<TABLE>
<CAPTION>
INTERACTIVE MOVIEBOOK-TM- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- -------------------------------- ---------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
THE SECRET GARDEN-TM- Warner Bros. August 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BLACK BEAUTY-TM- Warner Bros. November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
LASSIE-TM- Broadway Video December 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
THE LITTLE RASCALS-TM- Universal Pictures June 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
FREE WILLY 2-TM- Warner Bros. July 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BABE-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
EXOSQUAD-TM- Universal Pictures November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
THE ADVENTURES OF DC Comics November 1995 Windows-Registered Trademark- and
BATMAN AND ROBIN-TM- Windows '95-Registered Trademark-
LAND BEFORE TIME-TM- Universal Pictures July 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
ALL DOGS GO TO HEAVEN II-TM- MGM October 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BATMAN AND ROBIN II-TM- DC Comics March 1997 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>

The Company is currently developing another line of interactive CD-ROM based
products which it refers to as creativity centers. This product line combines
learning activities such as painting, drawing, matching, puzzles and images
within a framework of three distinct skill levels. The Company intends to
introduce its first creativity center product in June 1996, and to introduce one
or two new creativity centers annually thereafter.

The following creativity center products which are planned for release in
1996.

<TABLE>
<CAPTION>
CREATIVITY CENTER TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ------------------------ ---------------------- ---------------- ---------------------------
<S> <C> <C> <C>
DRAGONHEART-TM- Universal Pictures June 1996 Macintosh-Registered Trademark-,
Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
LAND BEFORE TIME-TM- Universal Pictures October 1996 Macintosh-Registered Trademark-,
Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
</TABLE>

ENTERTAINMENT UTILITIES

The Company was one of the first to license motion picture studio properties
to create entertainment utility software. The first product was Star Trek
AUDIOCLIPS-Registered Trademark- and the second was a sub-license for a STAR
TREK-TM- Screen Saver. The Company followed its STAR TREK-TM- products with STAR
WARS-TM-, THE WIZARD OF OZ-TM-, TERMINATOR 2: JUDGMENT DAY-TM- and others. The
Company's screen saver line-up now includes TERMINATOR 2: JUDGMENT DAY-TM-, THE
TWILIGHT ZONE-TM- and SATURDAY NIGHT LIVE-TM-. Additionally, the sub-license for
STAR TREK-TM- AUDIOCLIPS-Registered Trademark- now extends to STAR TREK: THE
NEXT GENERATION-TM-, STAR TREK: THE MOTION PICTURES-TM- and a Stardate Desktop
Calendar.

Entertainment utility products may include AUDIOCLIPS-Registered Trademark-,
screen savers based on animation, video and still images, and wallpaper,
VISUALCLIPS-Registered Trademark- and jigsaw puzzles.

- LIMITED EDITION ENTERTAINMENT UTILITIES. The Company's new entertainment
computer software utilities incorporate screen savers,
AUDIOCLIPS-Registered Trademark- and other content based on entertainment
properties. The new entertainment utilities are marketed as limited issue,
serialized collector editions. For Christmas 1995, the Company released a
Limited Edition BABYLON 5-TM- (Warner Bros.) Entertainment Utility which
contains screen savers and AUDIOCLIPS-Registered Trademark-. Limited

38
<PAGE>
edition products are serialized and retail at approximately $30 each. The
Company expects the limited edition products to replace stand alone screen
savers and AUDIOCLIPS-Registered Trademark- by Christmas of 1996. The
Company currently sells the following limited edition entertainment
utilities:

<TABLE>
<CAPTION>
TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- --------------------------- ---------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
STAR WARS TRILOGY-TM- Lucasfilm, Ltd. July 1995 Macintosh-Registered Trademark-,
Windows-Registered Trademark- and
Windows '95-Registered Trademark-
BABYLON 5-TM- Warner Bros. November 1995 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
TERMINATOR 2; Carolco Pictures July 1996 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
STAR TREK: DEEP SPACE Paramount/Viacom August 1996 Windows-Registered Trademark- and
NINE-TM- Windows '95-Registered Trademark-
STAR TREK: VOYAGER-TM- Paramount/Viacom November 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
I LOVE LUCY-TM- CBS November 1996 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>

- AUDIOCLIPS-Registered Trademark-. The Company's
AUDIOCLIPS-Registered Trademark- Desktop Diversion Utilities are audio
computer software utilities which utilize segments of dialogue, music or
sound effects from original soundtracks of major motion pictures and hit
television shows to provide complementary audio "cues" for certain
computer system functions. The AUDIOCLIPS-Registered Trademark- utilities
are packaged with default assignments to enable consumers to personalize
their computing environment. Thus, although
AUDIOCLIPS-Registered Trademark- are pre-programmed for use by the
computer novice, the technology enables the user to assign other sounds to
the computer function of their choice. AUDIOCLIPS-Registered Trademark-
products were first introduced into the marketplace in December 1991.
Currently, the products are sold at a suggested retail price of
approximately $15 each, a price point intended to generate impulse
purchases among consumers at the retail level. The Company currently sells
the following AUDIOCLIPS-Registered Trademark- products:

<TABLE>
<CAPTION>
AUDIOCLIPS-REGISTERED TRADEMARK- TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ------------------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
TERMINATOR 2: JUDGMENT DAY-TM- Carolco Pictures January 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
TOTAL RECALL-TM- Carolco Pictures February 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. October 1992 Macintosh-Registered Trademark-
STAR WARS-TM- Lucasfilm, Ltd. August 1993 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
THE EMPIRE STRIKES BACK-TM- Lucasfilm, Ltd. August 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
RETURN OF THE JEDI-TM- Lucasfilm, Ltd. October 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK-TM- (original TV show) Paramount/Viacom March 1995 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK: THE NEXT GENERATION-TM- Paramount/Viacom March 1995 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
STAR TREK: THE MOTION PICTURES-TM- Paramount/Viacom October 1994 Windows-Registered Trademark-
and Windows
'95-Registered Trademark-
</TABLE>

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<PAGE>
- SCREEN SAVERS. Originally developed as a utility to protect computer
monitors from image "burn-in," screen saver utilities have evolved into
desktop entertainment software. Market observers estimate the screen saver
market currently to exceed $80 million per annum. The Company first
introduced its screen saver product line into the marketplace in August
1993 with the release of its TERMINATOR 2: JUDGMENT DAY-TM- screen saver.
In November 1994, the Company released its THE TWILIGHT ZONE-TM- screen
saver and SATURDAY NIGHT LIVE-TM- screen saver.

Currently, the stand alone screen saver products are sold at a suggested
retail price of approximately $20 each, a price point intended to generate
impulse purchases among consumers at the retail level. The Company currently
sells the following screen saver products:

<TABLE>
<CAPTION>
SCREEN SAVERS TITLE LICENSOR RELEASE DATE CURRENT PLATFORM
- ---------------------------- ------------------- ------------------- ----------------------------------
<S> <C> <C> <C>
TERMINATOR 2: Carolco Pictures August 1993 Windows-Registered Trademark- and
JUDGMENT DAY-TM- Windows '95-Registered Trademark-
THE TWILIGHT ZONE-TM- CBS Television November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
SATURDAY NIGHT LIVE-TM- Broadway Video November 1994 Windows-Registered Trademark- and
Windows '95-Registered Trademark-
</TABLE>

MUSIC INDUSTRY PRODUCTS

The Company's original products were sound libraries for professional
musicians sold to musical instrument manufacturers, music stores and directly to
end users. Although sales of the hardware that utilize the products continue
today, software sales remain flat due to the limited consumer population. The
Company recently discontinued its music industry products operations in order to
focus entirely on the computer software market. The Company will continue to
utilize its sound laboratory facilities and its sound library as it exists today
for incorporation into multimedia products as necessary. Using its own sound
library, the Company is capable of providing all of its own music and sound
effects for its software products, and creating new sounds as required for each
project. The Company believes that the discontinuance of its music industry
business will not materially affect its future earnings.

DEVELOPMENT AGREEMENTS

The Company has entered into development agreements with MTV Music
Television, NBC Television and Fox Interactive, pursuant to which the Company is
entitled to receive fees for its development services and/or royalties on the
products sold by the contracting parties. The Company has developed or is in
current development with the following entities for the following titles:

<TABLE>
<CAPTION>
CLIENT CONTENT CATEGORY STATUS
- ------------------ ------------------- ----------------------------- ---------------------
<S> <C> <C> <C>
MTV Music DEAD AT 21-TM- Screen Saver Completed
Television
NBC Television HISTORIC Screen Saver Completed
PEACOCK-TM-
Fox Interactive EEK! THE CAT-TM- INTERACTIVE MOVIEBOOK-TM- In Final Approval
Fox Interactive THE TICK-TM- INTERACTIVE MOVIEBOOK-TM- In Final Approval
Fox Interactive BOBBY'S WORLD-TM- INTERACTIVE MOVIEBOOK-TM- In Development
Fox Interactive LIFE WITH LOUIE-TM- INTERACTIVE MOVIEBOOK-TM- In Development
</TABLE>

The Company currently does not intend to enter into additional development
agreements in the foreseeable future, because it intends to emphasize the
development of its own products.

40
<PAGE>
PRODUCT DISTRIBUTION

RELATIONSHIP WITH ACCLAIM

In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software. The Company had no sales to or through Acclaim during its fiscal year
ended June 30, 1995. During the nine-month period ended March 31, 1996, of the
Company's total revenues from retail software sales of $1,824,734, a total of
$1,617,839 (86 percent) were generated by Acclaim. Under the terms of this
agreement, Acclaim was the exclusive distributor of the Company's products on a
worldwide basis to retail accounts, resellers and distributors except with
respect to distribution in North America by direct mail, "infomercials,"
television home shopping channels or through "bundling" agreements with OEMs. As
a result of the foregoing, the Company was substantially dependent upon Acclaim
for the distribution and sale of its products through March 31, 1996. The
Company was not satisfied with the distribution of its products through Acclaim
and determined to terminate the Acclaim distribution agreement in March 1996.
The Company and Acclaim have terminated the distribution agreement as of April
30, 1996.

On or before June 30, 1996, Acclaim will render a final accounting to the
Company together with payment of the balance of any amounts due to the Company
under the distribution agreement. Acclaim has notified its accounts that it will
not accept returns of any of the Company's software products after June 30,
1996. The Company, however, will remain liable for all such returns regardless
of when received by Acclaim. As of March 31, 1996, the Company had established a
reserve equal to 50 percent of the amount of its account receivable from
Acclaim. The Company believes that such reserve is sufficient to cover any
foreseeable returns or uncollectible accounts of Acclaim. There can be no
assurance, however, as to the adequacy of the reserve.

RELATIONSHIP WITH SSIDS

On June 1, 1996 the Company entered into a Distribution Services Agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS", as previously
defined). SSIDS is the consumer software distribution unit of Simon & Schuster,
Inc., the publishing operation of Viacom Inc. Pursuant to this new distribution
agreement, SSIDS will provide distribution, warehousing and order fulfillment
services for all of the Company's products (subject to certain exceptions)
throughout the United States and Canada. The Company's relationship with SSIDS
is exclusive except as regards the rights to distribute the Company's products
in direct-to-the-customer programs including direct mail, telemarketing and
in-box coupon fulfillment, which are nonexclusive.

SSIDS will make a monthly payment to the Company in an amount equal to its
"gross revenues" during such month from the Company's products, less a
distribution fee and reserve for returns equal to stated percentages of the
gross revenues and less certain other items, including out-of-pocket costs
associated with inventory maintenance and order fulfillment. "Gross revenues"
are defined as amounts actually billed by SSIDS to its customers for Company
products sold by it. The payments by SSIDS will be due not later than 75 days
after the billing calendar month. Under the SSIDS distribution agreement, SSIDS
will be responsible for collection of accounts, whereas the Company will be
responsible for product returns. The Company intends to maintain an appropriate
reserve for product returns based upon its prior experience and current market
conditions, which will approximate 15 percent of gross revenues, against which
credits for actual returns will be applied.

The SSIDS distribution agreement provides that the Company may designate
whether SSIDS shall perform manufacturing and/or technical support services for
any of the licensed products. SSIDS shall have the exclusive right to duplicate,
assemble and manufacture all licensed products for which the Company requests
that it provide manufacturing services, and the exclusive right to provide
technical support for all licensed products for which the Company requests that
it provide technical support services. The Company will reimburse SSIDS for all
out-of-pocket costs incurred by it in performing such manufacturing and
technical support services. In addition, the Company will pay SSIDS a fee for
any manufacturing and technical support services it may provide.

41
<PAGE>
The SSIDS distribution agreement is for a term of two years. The Company
will be substantially dependent upon SSIDS for the distribution of its products
throughout North America during the term of the agreement. SSIDS, however, will
not be obligated to sell any specified minimum quantity of the Company's
products. There can be no assurance as to the volume of product sales that may
be achieved by SSIDS. Because the Company's rights to market its products
through channels other than SSIDS are limited, the Company's ability to realize
the cash flow necessary to fund its ongoing operations and to achieve
profitability will be largely dependent upon the success of SSIDS in marketing
its products. In addition, the Company may experience a loss of sales momentum
as a result of the transition from utilizing Acclaim to SSIDS as its exclusive
distributor.

GENERAL

The Company believes that its products currently are in distribution to
approximately 6,000 retail outlets, pursuant to its previous distribution
arrangements with Acclaim. Retailers currently selling the Company's products
include Target, Tower Records, Sears, Wal-Mart, Price/Costco, CompUSA, Best Buy,
BJ's, Computer City, Egghead, Electronics Boutique, Babbages, Software Etc.,
Kmart, Barnes & Noble, Sam Goody, Sam's Club, QVC, Musicland, Circuit City,
Blockbuster Video and others. The Company believes that mass market retailers
will increasingly be significant outlets for consumer software.

In fiscal 1994, the Company had four customers who collectively represented
29 percent of the Company's sales, including two distributors, Cameo Interactive
and Good Times Interactive, each of which accounted for ten percent or more of
the Company's sales. As a result of the Company's broader distribution to retail
customers during fiscal 1995, only one customer, Comp USA, accounted for 18
percent of the Company's gross sales, and no other customer accounted for ten
percent or more of the Company's gross sales. During the nine months ended March
31, 1996, Acclaim accounted for 84 percent of the Company's sales.
Significantly, all accounts receivable at March 31, 1996 is due from such
customer.

SALES AND MARKETING

By offering a wide variety of products, the Company can provide retailers
with an assortment of titles in categories of interest to consumers. The Company
also supports all its retailers by setting up special displays, end caps and
kiosks, executing targeted promotions and analyzing sales trends to help build
incremental sales. The Company is currently developing a variety of
cross-marketing promotional programs with its movie studio licensors and other
licensees of movie titles. These promotional programs will include discount
coupons for products in video cassettes, rebate coupons with action figures,
movie trailers in the Company's software products, and promotional contests with
various motion picture studios.

Drawing upon established consumer marketing techniques, the Company's
marketing department creates and executes high-impact merchandising programs
with the goal of maximizing each product's retail exposure. The Company believes
that its consumer-driven marketing, the high perceived value and competitive
price points of its products, and easily identifiable packaging which emphasizes
high-impact design and concise, nontechnical product information lead to higher
visibility and impulse purchases of its products in retail stores.

The Company provides technical support by telephone at no additional charge.
The Company has installed a telephone system and a call handling center to
facilitate its response to customer inquiries. Customer feedback is shared among
other support representatives and made available to product managers for
development of product enhancements and upgrades.

Under the new SSIDS distribution agreement, the Company's direct retail
accounts will be serviced by the SSIDS sales force with direction and assistance
from the Company. The Company will work closely with SSIDS to assure that
wholesale and retail accounts are adequately serviced and that inventory levels
are adequate and that merchandising programs are properly executed. See
"Business -- Product Distribution -- Relationship With SSIDS."

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<PAGE>
DEVELOPMENT

The Company develops a broad line of products in sustainable market
categories in which a leading market share can be obtained. The Company depends
on a flow of creative ideas to develop high-quality, value-priced products. The
Company believes that its efficient development model has certain key advantages
including consistent product quality, reliable delivery schedules, cost
containment and low investment risk.

The Company's product managers oversee the development of various products
from conception through completion, and control the content, design, scope and
development schedule. New product ideas are evaluated with each studio partner
based upon upcoming theatrical releases, detailed market research on the subject
matter, the type and demographics of the target consumer, and the existence and
characteristics of competitive products. The Company seeks to design new
products which incorporate all of the important functions and features of the
leading competitive products. Once a product is approved for development, a
detailed design specification is created that includes the product's features
and a user interface that is consistent with other Company products. Whenever
possible, the software is designed to incorporate technology used in existing
Company products in an effort to shorten the development cycle and improve
quality and consistency. The overall product, including documentation, is
designed to meet a manufacturing specification that will meet the Company's
margin requirements at consumer price points.

The product managers then execute the development project with a team that
includes programmers, sound engineers, artists, animators, designers, writers
and testers. The Company's internal development efforts are focused primarily on
product design and features, consistent user interfaces, and product quality
consistency. The Company supplements its internal product development resources
by utilizing existing technologies and externally developed programming when
such utilization can result in a more efficient method of creating a higher
quality product. Using this method, the Company maintains internal control over
the creative and market-driven aspects of product development while using
external resources to shorten development time and lower development risks.
Development costs associated with externally licensed technology are generally
paid by royalties based on net sales, which lowers the Company's investment
risk. The Company's agreements with its external developers typically grant the
Company an exclusive worldwide license to use the developers' software. The
agreements typically have three-year terms, with renewal provisions upon mutual
agreement of the parties.

The Company currently is the licensee under technology licenses with Apple
Computer, Inc., Iterated Systems, Inc., Qsound Labs, Inc., Rock Ridge
Enterprises, EchoMedia, Inc. and Rhode Island Soft Systems, Inc. The Company
utilizes technology provided by these licensors to develop and operate several
of its products. With the exception of the Apple Computer license, there are
alternative products for each of the technologies now licensed by the Company.
Therefore, the Company believes that it could readily obtain licenses to
comparable products from other sources at comparable costs.

Products under development are extensively tested by the quality assurance
department, and must be approved by the licensor before being released for
production. The department tests for bugs, functionality, ease-of-use and
compatibility with the many popular Multimedia PC configurations that are
available to consumers.

Product managers are also responsible for reviewing customer feedback,
competitive products, product performance and market positioning in order to
introduce upgrades that keep abreast of consumer tastes and trends. The Company
has increased its development of new CD-ROM products to address the shift to
CD-ROM-based products.

OPERATIONS

The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent

43
<PAGE>
contractors in accordance with the Company's specifications. The Company intends
to invest in management information systems and other capital equipment which it
believes are necessary to achieve operational efficiencies and support
increasing sales volumes.

The Company prepares master software disks, user manuals and packaging
designs. Disk and CD-ROM duplication, printing of documentation and packaging,
as well as the assembly of purchased components and the shipment of finished
products, are performed by third parties in accordance with the Company's
specifications. Under the new distribution agreement with SSIDS, the Company may
utilize SSIDS to provide manufacturing and related services. See "Business --
Product Distribution -- Relationship With SSIDS." The Company has multiple
sources for all components, with assembly and shipping currently performed by
three independent fulfillment houses. To date, the Company has not experienced
any material difficulties or delays in the production and assembly of its
products. To the extent that the Company's fulfillment houses do not continue to
perform assembly and shipping functions in a cost-efficient and timely manner,
and transition to substitute fulfillment houses is not completed in a timely
fashion, the Company's business, operating results and financial condition could
be adversely affected.

COMPETITION

The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. Existing consumer
software companies may broaden their product lines to compete with the Company's
licensed products, and potential new competitors, including computer hardware
and software manufacturers, diversified media companies and book publishing
companies, may enter or increase their focus on the consumer software market,
resulting in greater competition for the Company.

Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. Principal competitive
factors in marketing consumer software include product features, quality,
reliability, tradename and licensed title recognition, ease-of-use,
merchandising, access to distribution channels and retail shelf space,
marketing, price, and the availability and quality of support services. The
Company believes that it competes effectively in these areas, particularly in
the areas of quality, brand recognition, ease-of-use, merchandising, access to
distribution channels and retail shelf space and price. To the extent that
competitors achieve performance, price or other selling advantages, the Company
could be adversely affected. There can be no assurance that the Company will
have the resources required to respond to market or technological changes or to
compete successfully in the future. In addition, increasing competition in the
consumer software market may cause prices to fall, which could adversely affect
the Company's business, operating results and financial condition.

The Company considers Microsoft Corp., Broderbund, Inc., Knowledge
Adventure, Disney, Maxis, 7th Level, Inc. and A.D.A.M. Software, Inc. its chief
competitors in the interactive entertainment CD-ROM market. The Company
considers Microsoft, Inc. and Berkeley Systems its chief competitors in the
entertainment utility software market. Microsoft has introduced screen savers
and generic sounds, as well as licensed sounds from the MGM/Turner film library.
The Company considers Berkeley Systems its chief competitor in the screen saver
market. The Company developed the concept and provided the introductions that
led to the development of the STAR TREK-TM- series of screen savers by Berkeley
Systems. The Company has received over $300,000 in earnings from this sub-
license, which continues until 1997. The Company notes that there are a number
of other smaller entertainment utility publishers competing in this market.

The Company has entered into license agreements with Viacom Consumer
Products (as agent for Paramount Pictures Corp.), Lucasfilm Ltd., Warner Bros.
Consumer Products, CBS Entertainment, MCA/Universal Merchandising, Inc., Carolco
Pictures, Inc., DC Comics, MGM/UA Merchandising, Inc. and others. Several of the
major motion picture studios now have captive interactive software

44
<PAGE>
divisions. As these types of software become better known in the marketplace,
these profit centers may begin to vie for their studio's product. Management
believes that Disney, Lucasfilm and Paramount/Viacom are currently the most
active studios in publishing their own product to create software packages. Fox,
Universal Pictures, Sony Pictures and Warner Bros. each have announced the
formation of divisions to publish software products using their own license
content. See "Risk Factors -- Competition."

PROPRIETARY RIGHTS AND LICENSES

The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these products further
overlaps, software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products. Any such claims, with or without merit, can be time
consuming and expensive to defend and resolve.

Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors -- Limited Protection of Intellectual Property and
Proprietary Rights."

The Company's licenses and other intellectual property may not be
transferred to third parties without the consent of the licensors. Transfer of
ownership of stated percentages of the Common Stock could constitute a
prohibited transfer of the Company's licenses for the LASSIE-TM-, SATURDAY NITE
LIVE-TM- and STAR TREK-TM- titles. All of the Company's licenses with Warner
Bros. (including THE SECRET GARDEN-TM-, BLACK BEAUTY-TM-, FREE WILLY 2-TM- and
BABYLON 5-TM-) provided that a change in "management" will be deemed
unauthorized assignment of the license. It is not clear under what circumstances
the Company might be deemed to have experienced a change in management which
could result in the termination of these licenses, but the planned expansion of
the Company's Board of Directors to include three independent directors and/or
its appointment of a new Chief Executive Officer could be deemed to constitute
such a change. See "Management -- Directors and Executive Officers."

Any future change in ownership or control of the Company, including exercise
of the ASSI Warrants and/or the ASSI Loan Warrants (if any) (see "Certain
Transactions -- Agreements with ASSI, Inc."), could result in the termination of
the licenses referred to above. The potential terminability of such licenses
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock.

45
<PAGE>
The Company's products are based upon licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. See "Business -- General" and "-- Products." All of
such license and development agreements to which the Company currently is a
party are for fixed terms which will expire over the next one to five years. The
Company anticipates that the licensor under each agreement will extend its
terms, although no licensor is required to extend any license, provided that the
Company is in compliance with all requirements of each license, including most
significantly that the Company have satisfied the applicable minimum royalty
guarantees. In the event that any licensor failed to renew its license
agreement, then the subject license would terminate and the Company would no
longer be entitled to sell the licensed product. The loss of one or more of the
licenses could have a material adverse effect on the Company's revenues and
profits. There can be no assurance that the Company will satisfy its performance
obligations under any license or development agreement, or that, even if such
requirements are satisfied, all material licenses will be renewed.

EMPLOYEES

As of March 31, 1996, the Company had 30 full-time employees, including five
employees in sales and marketing, 20 employees in development and customer
support and five employees in administration and finance. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company has never experienced a work stoppage and
believes that its relations with its employees are good.

FACILITIES

The Company leases approximately 8,000 square feet of office and warehousing
space in Westlake Village, Ventura County, California. The lease for the
Company's current office space expires on March 31, 1997. The Company currently
expects that this facility will be sufficient for its needs at least through the
term of the lease. The Company may lease additional adjacent space as its needs
require, which it believes will be available on acceptable terms.

LEGAL MATTERS

The Company is, and in the future the Company and/or its officers and
directors may be, involved in suits and actions incidental to the Company's
business. The Company does not believe that the resolution of any of the current
suits or actions will result in any material adverse effect on the financial
condition or operations of the Company. At present there is no pending
litigation or proceeding involving any director or officer of the Company.

46
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, their ages and their
positions with the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Vincent J. Bitetti 41 Chairman of the Board, Chief Executive Officer and Director
Eric H. Winston 48 President, Chief Operating Officer and Director
Ulrich E. Gottschling 37 Chief Financial Officer, Treasurer, Secretary and Director
</TABLE>

VINCENT J. BITETTI founded Sound Source Interactive, Inc., a California
corporation (the "Subsidiary"), in 1989 and served as the President of the
Subsidiary from its formation. Since the Company acquired the Subsidiary in
1994, Mr. Bitetti has served as the Chairman of the Board and Chief Executive
Officer and as a director of the Company and the Subsidiary. Prior to founding
the Subsidiary, from 1986 to 1988 Mr. Bitetti was President of Fantastic Planet
Consultants, a sound and musical instrument design consulting company. Mr.
Bitetti is a published music composer and lyricist. From 1986 to 1993, Mr.
Bitetti was a consultant to manufacturers of keyboard synthesizers in the music
industry. Mr. Bitetti developed the concepts for the Company's INTERACTIVE
MOVIEBOOKS-TM-, AUDIOCLIPS-REGISTERED TRADEMARK-,
VISUALCLIPS-REGISTERED TRADEMARK-, limited edition and creativity center
products.

ERIC H. (RICK) WINSTON has served as President and director of the Company
and the Subsidiary since April 1994, and Chief Operating Officer of the Company
and the Subsidiary since October 1995. Prior to joining the Company, Mr. Winston
was President of E.H. Winston & Associates, a business consulting firm which he
established in 1991. Mr. Winston was President and Chief Executive Officer of
Computer Data Information Systems, Inc. from 1985 to 1989, when it was acquired
by NYNEX. As part of that acquisition, Mr. Winston was retained as Vice
President and General Manager of The DATAGROUP, a NYNEX subsidiary, and remained
with The DATAGROUP until 1991 when he departed to start E.H. Winston &
Associates.

ULRICH E. GOTTSCHLING was appointed as Chief Financial Officer, Treasurer
and director of the Company on October 9, 1995, and as Secretary of the Company
on November 17, 1995. Prior to joining the Company, Mr. Gottschling was employed
from June 1991 through September 1995 as a certified public accountant with
Corbin & Wertz, the Company's independent auditors. From 1987 through May 1991,
he was employed as a certified public accountant by Deloitte & Touche. From 1980
through 1986, Mr. Gottschling held various management positions with Westin
Hotels and Marriott Corporation.

The Company is currently conducting a search for a new Chief Executive
Officer. It is anticipated that such person will be appointed following the
closing of this offering. Upon the commencement of his or her employment by the
Company, Mr. Bitetti will resign his current position as Chief Executive
Officer.

It is also anticipated that the Board of Directors will be reconstituted
following this offering to comprise a total of five members. Mr. Gottschling
will resign as a director, and three independent directors are expected to be
appointed. Thereafter, all of the Company's directors will be elected annually
and will serve until the next annual meeting of stockholders or until the
election and qualification of their successors. The Board of Directors elects
the Company's officers and such officers serve at the discretion of the Board of
Directors. There are no family relationships between the directors and executive
officers of the Company. See generally "Risk Factors -- Dependence on Key
Personnel."

The Company has agreed to grant to each of The Boston Group, L.P., Joseph
Stevens & Company, L.P. and ASSI, Inc., the right to nominate from time to time
one director of the Company or to have an individual designated thereby attend
all meetings of the Board of Directors of the Company as a nonvoting advisor.
See "Underwriting" and "Certain Transactions -- Agreements With ASSI, Inc."

47
<PAGE>
Vincent J. Bitetti and Eric H. Winston have entered into voting agreements
with each of The Boston Group, L.P., Joseph Stevens & Company, L.P. and ASSI,
Inc. Pursuant to these agreements, Messrs. Bitetti and Winston have agreed to
vote all of their Common Stock for the three director nominees of The Boston
Group, L.P., Joseph Stevens & Company, L.P. and ASSI, Inc. In addition, ASSI,
Inc. has agreed to vote all of its shares of Common Stock for two directors
nominated by Mr. Bitetti for as long as he holds 20 percent or more of the
issued and outstanding Common Stock, and for one director nominated by Mr.
Bitetti for as long as he holds at least ten percent but less than 20 percent of
the issued and outstanding Common Stock. The voting agreements with ASSI, Inc.
will terminate when Messrs. Bitetti and Winston together cease to own at least
ten percent of the issued and outstanding Common Stock.

BOARD OF DIRECTORS AND COMMITTEES

The business of the Company's Board of Directors currently is conducted
through full meetings of the Board. Upon the expansion of the Board following
the completion of this offering, it is expected that the Board also will conduct
business through meetings of its committees. Set forth below is a description of
the committees of the Board.

The Audit Committee will review and report to the Board on various auditing
and accounting matters, including an annual audit report from the Company's
independent public accountants. The Chief Financial Officer, if a director, will
not be a member of the Audit Committee.

The Compensation Committee will establish compensation levels for the
Company's executive officers and will administer and determine appropriate
awards under the Company's 1995 Stock Option Plan. See "Management -- 1995 Stock
Option Plan." Two of the independent directors to be appointed by the Board of
Directors will serve on the Compensation Committee.

The Executive Committee will have the authority to act on behalf of the full
Board of Directors in between meetings of the Board, except that the Executive
Committee will not have the authority to amend the Certificate of Incorporation
or the Bylaws of the Company, adopt an agreement of merger or consolidation,
recommend to the stockholders a dissolution of the Company or a revocation of
dissolution or remove or indemnify a director. To the extent authorized by the
Board of Directors, the Executive Committee will also be authorized to declare
dividends of the Company and to issue shares of authorized and unissued Common
Stock of the Company. The Executive Committee will also act as the Nominating
Committee to nominate officers and directors of the Company for election. The
Executive Committee will consist of the Chairman of the Board, the new Chief
Executive Officer and an independent director.

COMPENSATION OF BOARD OF DIRECTORS

Directors previously have received no cash compensation for serving on the
Board of Directors. Beginning in December 1995, the Company adopted a policy
that will provide for payment of fees to its nonofficer directors for serving on
its Board of Directors and for their attendance at Board and committee meetings.
The Company will pay each nonofficer director an annual fee of $15,000. In
addition, each nonofficer director will receive options to purchase 10,000
shares of Common Stock annually.

48
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION. The following table sets forth information concerning
compensation of the Company's Chief Executive Officer and each of the Company's
other executive officers who received compensation from the Company and/or the
Subsidiary in excess of $100,000 for the fiscal year ended June 30, 1995 (the
"Named Executives"). No other executive officer's compensation exceeded $100,000
during fiscal year 1995.

<TABLE>
<CAPTION>
LONG-TERM
SUMMARY ANNUAL COMPENSATION
COMPENSATION -------------------------------------
NAME AND ---------------------- STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) (SHARES) COMPENSATION(2)
- ------------------------------------------------ --------- ----------- --------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti,
Chairman of the Board and Chief Executive
Officer 1995 $ 150,000 $ 75,000 0 $ 6,200
Eric H. Winston,
President and Chief Operating Officer 1995 150,000 75,000 0 9,600
</TABLE>

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

(1) The bonuses accrued for fiscal year 1995 were fully paid in December 1995.

(2) The amounts in this column for 1995 consist of the following: (a) personal
use of Company car (50 percent of payment for car expenses): Mr. Bitetti --
$4,800; Mr. Winston -- $4,800; (b) life insurance premiums: Mr. Bitetti --
$1,400; and (c) medical insurance premiums: Mr. Winston -- $4,800.

OPTION GRANTS. The following table provides information concerning options
granted by the Company to each of the Named Executives during its fiscal year
ended June 30, 1995 and to Ulrich E. Gottschling during its current fiscal year.

<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------
PERCENT OF
NUMBER OF SHARES TOTAL OPTIONS
SUBJECT TO COMMON GRANTED TO
STOCK OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
- --------------------------------------------------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Vincent J. Bitetti................................. 0 0.0% $ -- --
Eric H. Winston.................................... 0 0.0 -- --
Ulrich Gottschling (1)............................. 200,000 100.0 3.70 4/30/06
</TABLE>

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

(1) Mr. Gottschling became an executive officer and employee of the Company on
October 9, 1995. The information concerning Mr. Gottschling is as of April
30, 1996 and includes an option granted to Mr. Gottschling on April 30,
1996. The option is presently exercisable as to 100,000 shares of Common
Stock at an exercise price of $3.40 per share, and will become exercisable
as to an additional 100,000 shares of Common Stock at an exercise price of
$4.00 per share on September 30, 1997. The number of options granted and the
exercise price per share were established by negotiation between the Company
and Mr. Gottschling at the time of his hiring by the Company. See
"Management -- Employment Agreements."

49
<PAGE>
OPTION EXERCISES AND HOLDINGS. The following table sets forth information
concerning each exercise of a stock option during the fiscal year ended June 30,
1995 by each of the Named Executives and the number and value of unexercised
options granted by the Company held by each of the Named Executives on June 30,
1995.

<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-ENDED OPTION VALUES
----------------------------------------------------------------------------------------------
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN- THE-MONEY OPTIONS
OPTIONS AT 6/30/95(1) AT 6/30/95(1)
NUMBER OF SHARES ----------------------- -----------------------
NAME ACQUIRED ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- ----------------------- ------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Vincent J. Bitetti........... 0 $ 0 0/0 $ 0/0
Eric H. Winston (2).......... 0 0 292,838/0 1,153,782/0
</TABLE>

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

(1) Based on the fair market value of the Common Stock in this offering ($4.00
per share), less the option exercise price.

(2) Does not include a presently exercisable option held by Mr. Winston to
purchase 100,000 shares of Common Stock from Mr. Bitetti at $2.00 per share.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Vincent J.
Bitetti, Chairman of the Board and Chief Executive Officer, for a term ending on
September 15, 1998. Pursuant to that employment agreement, Mr. Bitetti is to
receive annual base compensation of $200,000, which will be reduced to $160,000
upon the date of this Prospectus. Mr. Bitetti's annual base compensation will be
increased by $40,000 at such time as the Company realizes net sales (gross sales
less returns and allowances) of $1,500,000 or more for any three consecutive
calendar months. Mr. Bitetti's salary also is subject to escalation annually in
accordance with the Consumer Price Index (the "CPI"). In addition, Mr. Bitetti's
employment agreement entitles him to receive bonuses based on three criteria:
attainment of specified gross revenues, attainment of specified gross profits,
and attainment of specified pre-tax profitability. If the Company acquires any
new businesses in the future, the related revenues and profits will not be taken
into account in determining entitlements to these bonuses.

The gross revenue bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross revenues are attained for the fiscal year ending
June 30, 1996.

<TABLE>
<CAPTION>
GROSS REVENUE CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
$7,500,000.................... $ 25,000
10,000,000.................... 75,000
15,000,000.................... 125,000
</TABLE>

The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year will be increased by 60 percent annually.

The gross profit bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross profit amounts (defined as annual sales revenue
less all costs of sales as determined by the Company's independent public
accountants) are attained for the fiscal year ending June 30, 1996:

<TABLE>
<CAPTION>
GROSS PROFIT CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
$2,000,000.................... $ 50,000
2,250,000..................... 75,000
2,500,000..................... 100,000
</TABLE>

The gross profit levels required to receive each bonus level for each
subsequent fiscal year will be increased by 60 percent annually.

The pre-tax profitability bonus would entitle Mr. Bitetti to the following
amounts if the following pre-tax profit amounts (defined as annual earnings
before interest, taxes, depreciation and amortization) are attained for each
fiscal year during the term of Mr. Bitetti's employment agreement:

<TABLE>
<CAPTION>
PROFITABILITY CUMULATIVE CASH BONUS
- ------------------------------ ----------------------
<S> <C>
10%........................... $ 50,000
15%........................... 100,000
</TABLE>

50
<PAGE>
Pursuant to his employment agreement, Mr. Bitetti is entitled to certain
other fringe benefits including use of a Company automobile or automobile
allowance, $5,000,000 in life insurance coverage (provided that in no event will
the Company be required to pay a premium for such insurance in excess of $7,500
per year) and the right to participate in the Company's customary benefit plans.
Mr. Bitetti's employment agreement further provides that following the voluntary
or involuntary termination of his employment by the Company, Mr. Bitetti is
entitled to two demand registration rights with respect to the Common Stock held
by or issuable to him. These registration rights will only become effective upon
the voluntary or involuntary termination of Mr. Bitetti's employment with the
Company. Mr. Bitetti's employment agreement further provides that his salary may
not be less than that of the Company's new Chief Executive Officer, up to a
maximum of $300,000.

The Company has entered into an employment agreement with Eric H. Winston,
President and Chief Operating Officer, for a term ending on September 15, 1998.
Pursuant to that employment agreement, Mr. Winston is to receive annual base
compensation of $175,000, which will be reduced to $140,000 upon the date of
this Prospectus. Mr. Winston's annual base compensation will be increased by
$35,000 at such time as the Company realizes net sales of $1,500,000 or more for
any three consecutive calendar months. Mr. Winston's salary also is subject to
escalation annually in accordance with the CPI. Mr. Winston's employment
agreement entitles him to receive three annual bonuses payable in accordance
with the same provisions described above with respect to Mr. Bitetti's
employment agreement. Mr. Winston is also entitled to the same fringe benefits
as Mr. Bitetti.

Pursuant to his employment agreement the Company has granted Mr. Winston
options to purchase 292,838 shares of Common Stock at an exercise price of $.06
per share. See "Management -- Executive Compensation." Mr. Winston's employment
agreement further provides that following the voluntary or involuntary
termination of his employment by the Company, Mr. Winston is entitled to two
demand registration rights with respect to the Common Stock held by or issuable
to him. The registration rights will only become effective upon the voluntary or
involuntary termination of Mr. Winston's employment with the Company. Mr.
Bitetti has separately granted Mr. Winston a presently exercisable option to
acquire 100,000 shares of Common Stock at a purchase price of $2.00 per share.

Pursuant to his employment agreement, Mr. Winston has granted Mr. Bitetti a
right of first refusal as to all Common Stock that Mr. Winston may from time to
time acquire. Such first offer right provides that before Mr. Winston offers to
sell any such Common Stock to any third party, he must first offer to sell such
shares to Mr. Bitetti on no less favorable terms than proposed to be offered to
the third party. If Mr. Bitetti rejects such offer, then Mr. Winston is free to
sell to the third party on terms no less favorable than offered to Mr. Bitetti.

The Company also separately agreed to pay each of Messrs. Bitetti and
Winston a bonus equal to the sum of three percent of the Company's net sales.
The entitlement to receive such bonuses ended November 30, 1995. A bonus of
$16,578 was paid to each of Messrs. Bitetti and Winston for the two-month period
ended November 30, 1995.

The Company entered into an employment agreement with Ulrich E. Gottschling,
Chief Financial Officer, Treasurer, Secretary and director, for a term ending
October 9, 1997. The employment agreement entitles Mr. Gottschling to receive
annual cash compensation of $110,000. Pursuant to his employment agreement, on
October 9, 1995 Mr. Gottschling also was granted options to purchase 100,000
shares of Common Stock at an exercise price of $5.00 per share. See "Management
- -- Executive Compensation" and "-- 1992 Stock Option Plan." On April 30, 1996,
Mr. Gottschling agreed to the termination of his existing 100,000 share option
in consideration for the Company's agreement to grant to him a new 200,000 share
option pursuant to the 1992 Stock Option Plan. The Company granted this option
to Mr. Gottschling on April 30, 1996. The option is exercisable upon the date of
its grant as to 100,000 shares at a purchase price of $3.40 per share, and will
become exercisable as to 100,000 shares on September 30, 1997 at a purchase
price of $4.00 per share.

51
<PAGE>
Mr. Gottschling's employment agreement further provides that following the
voluntary or involuntary termination of his employment by the Company, Mr.
Gottschling is entitled to a single demand registration right with respect to
the Common Stock held by or issuable to him pursuant to his option agreement.

1995 STOCK OPTION PLAN

GENERAL

On October 9, 1995, the Board of Directors of the Company adopted the
Company's 1995 Stock Option Plan. The Board of Directors adopted the Company's
Amended and Restated 1995 Stock Option Plan on May 15, 1996. The following
summary of the Company's 1995 Stock Option Plan is qualified in its entirety by
the 1995 Stock Option Plan, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

The 1995 Sound Source Interactive, Inc. Stock Option Plan (the "1995 Stock
Option Plan") is designed to promote and advance the interests of the Company
and its stockholders by (i) enabling the Company to attract, retain, and reward
managerial and other key employees and nonemployee directors, and (ii)
strengthening the mutuality of interests between participants in the 1995 Stock
Option Plan and the stockholders of the Company in its long term growth,
profitability and financial success by offering stock options.

The 1995 Stock Option Plan empowers the Company to award or grant from time
to time until September 30, 2005, to officers, directors and key employees of
the Company and its subsidiaries, Incentive and Non-Qualified Stock Options
("Options") authorized by the Compensation Committee of the Board of Directors
(the "Committee") which will administer the 1995 Stock Option Plan.

The Company has not yet granted any options under the 1995 Stock Option
Plan. The Board of Directors however, has resolved to grant 13,610 to
nonexecutive Company employees on the closing date of this offering at an
exercise price of $4.00 per share.

ADMINISTRATION

The 1995 Stock Option Plan will be administered by the Committee. The 1995
Stock Option Plan provides that the Committee must consist of at least two
directors of the Company who are "disinterested directors" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Committee has the sole authority to construe and interpret the 1995
Stock Option Plan, to make rules and procedures relating to the implementation
of the 1995 Stock Option Plan, to select participants, to establish the terms
and conditions of Options and to grant Options, with broad authority to delegate
its responsibilities to others, except with respect to the selection for
participation of, and the granting of Options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Members of the Committee will not be
eligible to receive discretionary Options under the 1995 Stock Option Plan.

ELIGIBILITY CONDITIONS

All officers and key employees of the Company and its subsidiaries and
nonemployee directors will be eligible to receive Options under the 1995 Stock
Option Plan. Nonemployee directors are only eligible to receive Non-Qualified
Stock Options under the 1995 Stock Option Plan. Except for Non-Qualified Stock
Options granted to nonemployee directors, the selection of recipients of, and
the nature and size of, Options granted under the 1995 Stock Option Plan will be
wholly within the discretion of the Committee. Subject to specific formula
provisions relating to the grant of options to nonemployee directors and except
with respect to the exercisability of Incentive Stock Options and the total
shares available for option grants under the 1995 Stock Option Plan, there is no
limit on the number of shares of Common Stock or type of option in respect of
which Options may be granted to or exercised by any person.

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SHARES SUBJECT TO 1995 STOCK OPTION PLAN

The maximum number of shares of Common Stock in respect of which Options may
be granted under the Plan (the "Plan Maximum") is 500,000. For the purpose of
computing the total number of shares of Common Stock available for Options under
the 1995 Stock Option Plan, the above limitations shall be reduced by the number
of shares of Common Stock subject to issuance upon exercise or settlement of
Options previously granted, determined at the date of the grant of such Options.
However, if any Options previously granted are forfeited, terminated, settled in
cash or exchanged for other Options or expire unexercised, the shares of Common
Stock previously subject to such Options shall again be available for further
grants under the 1995 Stock Option Plan. The shares of Common Stock which may be
issued to participants in the 1995 Stock Option Plan upon exercise of an Option
may be either authorized and unissued Common Stock or issued Common Stock
reacquired by the Company. No fractional shares may be issued under the 1995
Stock Option Plan.

The maximum number of shares of Common Stock issuable upon the exercise of
Options granted under the 1995 Stock Option Plan is subject to appropriate
equitable adjustment in the event of a reorganization, stock split, stock
dividend, combination of shares, merger, consolidation or other recapitalization
of the Company. The effect of such adjustment would be to provide customary
anti-dilution protection.

TRANSFERABILITY

No Option granted under the 1995 Stock Option Plan, and no right or interest
therein, shall be assignable or transferable by a participant except by will or
the laws of descent and distribution.

TERM, AMENDMENT AND TERMINATION

The 1995 Stock Option Plan will terminate on September 30, 2005 except with
respect to Options then outstanding. The Board of Directors of the Company may
amend or terminate the 1995 Stock Option Plan at any time, except that, to the
extent restricted by Rule 16b-3 promulgated under the Exchange Act, as amended
and in effect from time to time (or any successor rule), the Board of Directors
may not, without approval of the Stockholders of the Company, make any amendment
that would increase the total number of shares covered by the 1995 Stock Option
Plan, change the class of persons eligible to receive Options granted under the
1995 Stock Option Plan, reduce the exercise price of Options granted under the
1995 Stock Option Plan or extend the latest date upon which Options may be
exercised.

INCENTIVE STOCK OPTIONS

Options designated as Incentive Stock Options, within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), in respect of
up to the Plan Maximum may be granted under the 1995 Stock Option Plan. The
number of shares of Common Stock in respect of which Incentive Stock Options are
first exercisable by any participant in the 1995 Stock Option Plan during any
calendar year shall not have a fair market value (determined at the date of
grant) in excess of $100,000 (or such other limit as may be imposed by the
Code). To the extent the fair market value of the shares for which options are
designated as Incentive Stock Options that are first exercisable by any optionee
during any calendar year exceed $100,000, the excess amount shall be treated as
Non-Qualified Stock Options. Incentive Stock Options shall be exercisable for
such period or periods, not in excess of ten years after the date of grant, as
shall be determined by the Committee.

NON-QUALIFIED STOCK OPTIONS

Non-Qualified Stock Options may be granted for such number of shares of
Common Stock and will be exercisable for such period or periods as the Committee
shall determine.

OPTIONS TO NONEMPLOYEE DIRECTORS

The 1995 Stock Option Plan also provides for the grant of Options to
nonemployee directors of the Company without any action on the part of the Board
or the Committee, only upon the terms and conditions set forth in the 1995 Stock
Option Plan. Each nonemployee director shall automatically receive Non-Qualified
Options to acquire 10,000 shares of Common Stock upon appointment, and

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shall receive Non-Qualified Options to acquire an additional 10,000 shares of
Common Stock for each additional year that the nonemployee director continues to
serve on the Board of Directors. Each Option shall become exercisable as to 50
percent of the shares of Common Stock subject to the Option on the first
anniversary date of the grant and 50 percent on the second anniversary date of
the grant, and will expire on the earlier of ten years from the date the Option
was granted, upon expiration of the 1995 Stock Option Plan or three weeks after
the optionee ceases to be a director of the Company. The exercise price of such
Options shall be equal to 100 percent of the fair market value of the Common
Stock subject to the Option on the date on which such Options are granted. Each
option shall be subject to the other provisions of the 1995 Stock Option Plan.

OPTION EXERCISE PRICES

The exercise price of any Option granted under the 1995 Stock Option Plan
shall be at lest 100 percent of the fair market value of the Common Stock on the
date of grant, except that the exercise price of any Option granted to any
participant in the 1995 Stock Option Plan who owns in excess of ten percent of
the outstanding voting stock of the Company shall be 110 percent of the fair
market value of the Common Stock on the date of grant. Fair market value per
share of Common Stock is quoted by the Nasdaq SmallCap Market, or as the amount
determined in good faith by the Committee if the Common Stock is neither listed
for trading on an exchange or quoted by the Nasdaq SmallCap Market. Options
granted effective as of the closing date of this offering will have an exercise
price equal to the initial public offering price per share.

EXERCISE OF OPTIONS

No Option may be exercised, except as provided below, unless the holder
thereof remains in the continuous employ or service of the Company. Options
shall be exercisable upon the payment in full of the applicable option exercise
price in cash or, if approved by the Committee, by instruction to a broker
directing the broker to sell the Common Stock for which such Option is exercised
and remit to the Company the aggregate exercise price of the Option or upon such
terms as the Committee shall approve, in shares of the Common Stock then owned
by the optionee (at the fair market value thereof at exercise date).

1992 STOCK OPTION PLAN

On May 4, 1992, the Board of Directors adopted the Company's 1992 Stock
Option Plan. The Board of Directors has resolved that no further options are to
be granted pursuant to the 1992 Stock Option Plan. All existing options
previously issued under the 1992 Stock Option Plan will remain enforceable in
accordance with their respective terms.

Options to purchase a total of 384,070 shares of Common Stock currently are
issued pursuant to the 1992 Stock Option Plan. All of such options are
non-qualified stock options, and have exercise prices of from $.06 to $4.00 per
share. Of the 384,070 options that have been granted pursuant to the 1992 Stock
Option Plan, 191,199 are presently exercisable, 45,840 will become exercisable
in fiscal 1997 and the balance will become exercisable in fiscal 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company presently does not have a compensation committee or other
committee of the Board of Directors performing similar functions. Decisions
concerning compensation of executive officers have been made by the Board of
Directors.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS

DIRECTOR EXCULPATION

The Company's Certificate of Incorporation provides that a director of the
Company, to the maximum extent now or hereafter permitted by Section 102 (b)(7)
of the Delaware GCL will have no personal liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the Delaware GCL currently provides that directors of
corporations that have adopted such a provision will not be so liable, except
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) as provided under
Section 174 of the Delaware GCL for the payment of certain unlawful dividends
and the making of certain stock

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purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit. This provision would absolve directors of
personal liability for negligence in the performance of their duties, including
gross negligence. It would not permit a director to be exculpated, however, for
liability for actions involving conflicts of interest or breaches of the
traditional "duty of loyalty" to the Company and its stockholders, and it would
not affect the availability of injunctive or other equitable relief as a remedy.

This provision does not eliminate or alter the duty of the Company's
directors; it merely limits personal liability for monetary damages to the
maximum extent now or as may be permitted by the Delaware GCL. Moreover, it
applies only to claims against a director arising out of his role as a director;
it does not apply to claims arising out of his role as an officer (if he is also
an officer) or arising out of any other capacity in which he serves. While this
provision does not affect the availability of injunctive or other equitable
relief as a remedy for breach of duty by directors, it does limit the remedies
available to a stockholder who has an otherwise valid claim that a director
acted in violation of his duties, if the action is among those as to which
liability is limited. Because of this provision, stockholders will not have a
claim for monetary damages based on breach of the directors' duty, even if the
directors' conduct involved gross negligence (including a grossly negligent
business decision involving a takeover proposal for the Company), unless the
conduct is of a type for which the Delaware GCL does not permit limitation of
liability. If the stockholders do not have a claim for monetary damages, their
only remedy may be a suit to enjoin completion of the Board's action or to
rescind completed action. The stockholders may not be aware of a proposed
transaction that might otherwise give rise to a claim until the transaction is
completed or until it is too late to prevent its completion by injunction. In
such a case, the Company and its stockholders may have no effective remedy for
an injury resulting from the Board's action.

This provision may reduce the likelihood of stockholder derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duties,
even though such action, if successful, might otherwise have benefited the
Company and its stockholders. The Securities and Exchange Commission has taken
the position that similar provisions added to other corporations' certificates
of incorporation would not protect those corporations' directors from liability
for violations of the federal securities laws.

The Company included this exculpation provision in its Certificate of
Incorporation to provide its directors with the maximum protection from personal
liability made available by the Delaware GCL. It is believed that this provision
will help the Company to attract and retain as directors the persons most
qualified for those positions.

DIRECTOR INDEMNIFICATION

The Company's Bylaws generally require the Company to indemnify and advance
expenses to its directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. The Company also has entered into
indemnification agreements with each of its existing directors, and plans to
enter into indemnification agreements with directors appointed in the future,
whereby the Company will indemnify each such person against certain claims
arising out of certain past, present or future acts, omissions or breaches of
duty committed by an indemnitee while serving as a Company director. Such
indemnification does not apply to acts or omissions which are knowingly
fraudulent, deliberately dishonest or arise from willful misconduct.
Indemnification will only be provided to the extent that the indemnitee has not
already received payments in respect of a claim from the Company or from an
insurance company. Under certain circumstances, such indemnification (including
reimbursement of expenses incurred) will be allowed for liability arising under
the Securities Act.

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

The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the ownership
of the Common Stock, prior to the offering and immediately following completion
of the offering, by (i) each selling stockholder, (ii) each person who is known
to the Company to own, of record or beneficially, more than five percent of the
Common Stock; (iii) each of the Company's directors; and (iv) all directors, and
executive officers as a group. The Company and a selling stockholder have
granted the Underwriters an option to purchase up to an aggregate of 360,000
additional shares of Common Stock, exercisable within 30 days of the date
hereof, solely to cover over-allotments, if any. The Common Stock being offered
by the selling stockholder will be sold only if such over-allotment option is
exercised. See "Underwriting." Unless otherwise indicated, each of the
stockholders shown in the table below has sole voting and investment power with
respect to the shares beneficially owned.

<TABLE>
<CAPTION>
BEFORE OFFERING(2)-(3) AFTER OFFERING(2)-(3)
------------------------ NUMBER OF --------------------------
NUMBER SHARES BEING NUMBER
NAME(1) OF SHARES PERCENT OFFERED OF SHARES PERCENT(4)
- -------------------------------------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Vincent J. Bitetti (5)............................ 1,557,901 86.2% 20,000 1,537,901 36.5%
Eric H. Winston (6)............................... 392,838 18.7 392,838 8.7
Ulrich E. Gottschling (7)......................... 100,000 5.2 0 100,000 2.3
All directors and executive officers as a group
(three persons) (8).............................. 1,950,739 88.6 20,000 1,930,739 42.0
Mark Lane......................................... 122,323 6.8 0 122,323 2.9
GFL Ultra Fund Limited............................ 183,723 10.2 0 183,723 4.4
</TABLE>

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

(1) The address of each of Messrs. Bitetti, Winston and Gottschling is c/o the
Company, 2985 E. Hillcrest Drive, Suite A, Westlake Village, California
91362. The address of Mark Lane is 2818 Birch Creek Place, Thousand Oaks,
California 91360. The address of GFL Ultra Fund Limited is Kaya Flamboyan 9,
P.O. Box 812, Netherlands Antilles.

(2) Each person's beneficial ownership is determined by assuming that options
and warrants that are held by such person or entity (but not those held by
any other person or entity) and which are exercisable within 60 days have
been exercised.

(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to all
shares of stock beneficially owned by them.

(4) Reflects the sale of 2,400,000 shares of Common Stock by the Company, and
20,000 shares of Common Stock by Vincent J. Bitetti as part of the
Underwriter's over-allotment option, pursuant to this offering.

(5) Includes 73,394 and 122,323 shares of Common Stock owned of record by Martin
H. Meyer and Mark Lane, respectively, for which Vincent J. Bitetti holds a
right of first offer to purchase and an irrevocable voting proxy. See
"Certain Transactions -- 1994 Acquisition." Also includes 100,000 shares of
Common Stock which Mr. Winston is entitled to acquire from Mr. Bitetti
pursuant to a presently exercisable option. See "Certain Transactions --
Sales by Controlling Stockholder." Does not include up to 292,838 shares
that may be acquired by Mr. Winston from the Company pursuant to the options
described below, as to which Mr. Bitetti has a right of first refusal. See
"Management -- Employment Agreements."

(6) Includes 292,838 shares of Common Stock issuable under stock options granted
by the Company to Mr. Winston which are presently exercisable. See
"Management -- Executive Compensation." Also includes 100,000 shares of
Common Stock which Mr. Winston is entitled to acquire from Mr. Bitetti
pursuant to a presently exercisable option. See "Certain Transactions --
Sales by Controlling Stockholder."

(7) Includes 100,000 shares of Common Stock issuable to Mr. Gottschling under a
presently exercisable option. Excludes 100,000 shares of Common Stock
issuable to Mr. Gottschling under an option that is not presently
exercisable. See "Management -- Employment Agreements."

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(8) Includes 292,838 shares of Common Stock issuable to Mr. Winston and 100,000
shares of Common Stock issuable to Mr. Gottschling under presently
exercisable options. Excludes 100,000 shares of Common Stock issuable to Mr.
Gottschling under an option that is not presently exercisable.

RESALE OF OUTSTANDING SECURITIES

This Prospectus relates to the sale by the Company of 2,400,000 shares of
Common Stock and 1,200,000 Redeemable Warrants for aggregate gross consideration
of $9,900,000. A separate Prospectus is being filed with the Registration
Statement of which this Prospectus is a part which relates, in part, to the sale
by the Selling Security Holders of 500,338 shares of Common Stock (including
392,838 shares of Common Stock purchasable by Eric H. Winston, the Company's
President and Chief Operating Officer, pursuant to presently exercisable
options) and 5,689,665 Redeemable Warrants for aggregate gross consideration of
$3,423,768 (assumes an offering price of $4.00 per share of Common Stock and
$.25 per Redeemable Warrant). None of the Common Stock or Redeemable Warrants
being offered by the Selling Security Holders are being underwritten by the
Underwriters. The second Prospectus also will be used by the Company for the
issuance of Common Stock pursuant to the exercise of Redeemable Warrants, ASSI
Warrants and ASSI Loan Warrants (if any).

The Company will not receive any of the proceeds of the sale of the Common
Stock or Redeemable Warrants by the Selling Security Holders, although it will
receive the exercise price of such Redeemable Warrants when and if they are
exercised. None of the Selling Security Holders had any position, office or
material relationship with the Company or its affiliates during the last three
years except for Eric H. Winston, the Company's President and Chief Operating
Officer, and Larry Levenstone, Louie Ucciferri and Paradox Holdings, who are
affiliates of Financial West Group, Inc., which served as dealer manager for the
Company's 1995 Bridge Offering and its 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement."

Prior to this offering, the Selling Security Holders collectively held
500,338 shares of Common Stock (including 392,838 shares of Common Stock
purchasable by Eric H. Winston pursuant to presently exercisable options) and
Redeemable Warrants to purchase 5,689,665 of Common Stock. Assuming the sale of
all such Common Stock and Redeemable Warrants pursuant to the separate
Prospectus referred to above, the Selling Security Holders will not own any
securities of the Company after the completion of such offering. Eric H. Winston
has agreed with the Underwriters not to sell more than 10,000 shares of Common
Stock during the 18-month period following the date of this Prospectus without
the prior written consent of the Underwriters. See "Underwriting."

CERTAIN TRANSACTIONS

1994 ACQUISITION

On May 16, 1994, the Company consummated the 1994 Acquisition, whereby the
Company acquired all the issued and outstanding capital stock of the Subsidiary
in exchange for newly issued stock of the Company. The 1994 Acquisition was
accomplished by the issuance of 1,278,515 shares of Common Stock and 1,000,000
shares of the Company's Series A Preferred Stock to Vincent J. Bitetti, 73,394
shares of Common Stock to Martin H. Meyer and 122,323 shares of Common Stock to
Mark Lane, and the simultaneous cancellation of 60,241 shares of Common Stock
held by former directors and officers of the Company, the cancellation of an
option to purchase 3,347 shares of Common Stock held by a former director and
officer of the Company, which option was to become exercisable only upon the
satisfaction of certain contingencies, and the cancellation of an option to
purchase 3,347 shares of Common Stock held by a former director of the Company,
which option was to become exercisable only upon the satisfaction of certain
contingencies. Effective upon the closing of the 1994 Acquisition, all of the
Company's former directors and officers resigned and were replaced by Vincent J.
Bitetti, Joseph Urquidi, Eric H. Winston and Martin H. Meyer. Mr. Urquidi
resigned as an

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officer and director as of June 29, 1994. Mr. Meyer resigned as a director as of
August 5, 1994. Subsequent to the 1994 Acquisition, Mr. Bitetti exchanged his
1,000,000 shares of Series A Preferred Stock for 83,669 shares of Common Stock
issued by the Company.

Simultaneously with the 1994 Acquisition, Martin H. Meyer and Mark Lane each
granted to Vincent J. Bitetti a right of first offer to purchase their Common
Stock. Such first offer right provides that before Messrs. Meyer and Lane offer
all or any of their shares to any third party, they must first offer to sell
such shares to Mr. Bitetti at a price which Mr. Bitetti determines to be their
fair market value. If the selling party disagrees with Mr. Bitetti's
determination as to fair market value, then the issue will be resolved by an
arbitration procedure. If Mr. Bitetti does not elect to purchase the shares
proposed for sale, then they may be sold to third parties. Messrs. Meyer and
Lane also have granted Mr. Bitetti an irrevocable proxy to vote all their shares
of Common Stock on all matters coming before the holders of the Common Stock for
a vote. See "Risk Factors -- Control of the Company" and "Principal
Stockholders."

1994 PRIVATE PLACEMENT

During May through August 1994, the Company conducted a private offering of
its Common Stock (the "1994 Private Placement"). Pursuant to that offering, a
total of 113,036 shares of Common Stock were sold for total cash consideration
of approximately $1,492,000. An additional 1,841 shares were issued to the
brother of the Chief Executive Officer in payment of a $22,000 note payable. An
additional 81,997 shares of Common Stock were issued to the placement agent for
such offering in partial payment for its services as such. Subsequently, the
Company's founders, who also were affiliates of the placement agent, distributed
all 81,997 such shares plus an additional 26,772 shares held by them to the
investors in the 1994 Private Placement in settlement of litigation initiated by
one of such investors, and returned 15,120 shares of Common Stock to the
Company, which were cancelled. The Company agreed to register the Common Stock
issued in the 1994 private placement under the Securities Act by April 30, 1995.
The Company, however, has never registered such shares, which therefore may be
entitled to be registered, except to the extent their holders may have waived
their registration rights.

1995 BRIDGE FINANCING

During June through August of 1995, the Company conducted a private offering
(the "1995 Bridge Financing") of Units consisting of notes and warrants.
Pursuant to that offering, a total of 32 Units were sold at a price of $10,000
per Unit. Each Unit consisted of $9,975 principal amount of the Company's 10%
Secured Promissory Notes due August 15, 1995 (the "Bridge Notes") and warrants
to purchase 586 shares of Common Stock (the "Bridge Warrants"). The gross
offering proceeds of the 1995 Bridge Financing were $320,000. Pursuant to the
1995 Bridge Financing, $319,200 in aggregate principal amount of the Bridge
Notes were issued. The Bridge Notes were repaid in full out of the proceeds of
the 1995 Private Placement, and the related liens upon the assets of the Company
and the Subsidiary were extinguished. Such repayment was in the amount of
$332,320. Pursuant to the 1995 Bridge Financing, the Company also issued 18,747
Bridge Warrants to investors, and issued 20,918 Bridge Warrants to Financial
West Group, Inc. in partial consideration for its services as dealer manager for
the 1995 Bridge Offering.

Subsequent to the completion of the 1995 Bridge Offering, the Company and
the Subsidiary agreed with the holders of all of the Bridge Warrants as to
certain changes to the terms of the Bridge Warrants. As amended, the terms of
the Bridge Warrants, including the registration rights applicable thereto, are
identical to those of the Private Warrants as described below. See "Certain
Transactions -- 1995 Private Placement."

The terms of the Bridge Warrants provide that if the Company consummates an
initial public offering (an "IPO") which includes warrants to purchase shares of
Common Stock, then the Bridge Warrants shall automatically be converted into
warrants included in the IPO; such warrants into which the Bridge Warrants are
automatically converted shall be exercisable to purchase the same number of
shares as the Bridge Warrants, and shall contain the same terms (including
exercise price)

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as the warrants offered to the public. Accordingly, the Bridge Warrants, which
in the aggregate are exercisable to purchase 39,665 shares of Common Stock,
will, upon the consummation of this offering, be automatically converted into
Redeemable Warrants to purchase an aggregate of 39,665 shares of Common Stock
and such Redeemable Warrants, as well as the underlying shares of Common Stock,
have been included in the Registration Statement of which this Prospectus is a
part.

1995 PRIVATE PLACEMENT

In September and October 1995, the Company conducted a private offering (the
"1995 Private Placement"). Pursuant to that offering, a total of 52.5 Units were
sold at a price of $100,000 per Unit. Each Unit consisted of $95,000 principal
amount of the Company's 10% Secured Promissory Notes due 1996 (the "Private
Notes") and warrants to purchase 100,000 shares of Common Stock (the "Private
Warrants"). The gross offering proceeds of the 1995 Private Placement were
$5,250,000. Pursuant to the 1995 Private Placement, $4,987,500 in aggregate
principal amount of the Private Notes were issued. The Private Notes are secured
by a first priority lien on substantially all of the assets of the Company
(including a pledge of all capital stock of the Subsidiary) and are guaranteed
by the Subsidiary. The Private Notes are due and payable in the principal amount
plus accrued interest on the earlier of (i) September 1, 1996 or (ii) the
completion of any IPO by either the Company or the Subsidiary. Accordingly, the
aggregate principal amount of $4,987,500 of the Private Notes, and accrued
interest estimated at $242,500 as of March 31, 1996, will be repaid out of the
net proceeds of this offering. See "Use of Proceeds." Pursuant to the 1995
Private Placement, the Company issued 5,250,000 Private Warrants to investors
and issued 400,000 Private Warrants to Financial West Group, Inc. in partial
consideration for its services as dealer manager for the 1995 Private Placement.

The Private Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) one year following the completion by the Company or
the Subsidiary of any IPO, and expire on December 31, 2001. The exercise price
of the Private Warrants is 110 percent of the price per share of the Common
Stock (or the Subsidiary's common stock as applicable) in the IPO, or if the IPO
has not occurred by December 31, 1996, $4.50 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an IPO by
the Subsidiary is completed, the Private Warrants will be automatically
converted to warrants exercisable for shares of Subsidiary Common Stock on a
one-for-one basis, at an exercise price of $4.50 per share, for the period
commencing December 31, 1996 and ending on December 31, 2001. In addition, the
holders of the Private Warrants and Common Stock issued or issuable upon the
conversion of the Private Warrants have certain registration rights.
Concurrently with the registration of the Securities in this offering, the
Company is registering the Private Warrants and the underlying Common Stock as
part of the Registration Statement of which this Prospectus is a part,
satisfying the applicable rights.

The terms of the Private Warrants provide that, if the Company consummates
an IPO which includes warrants to purchase shares of Common Stock, then the
Private Warrants shall automatically be converted into warrants included in the
IPO; such warrants into which the Private Warrants are automatically converted
shall be exercisable to purchase the same number of shares as the Private
Warrants, and shall contain the same terms (including exercise price) as the
warrants offered to the public. Accordingly, the Private Warrants, which in the
aggregate were exercisable to purchase 5,650,000 shares of Common Stock, will,
upon the consummation of this offering, be automatically converted into
Redeemable Warrants exercisable to purchase an aggregate of 5,650,000 shares of
Common Stock and such Redeemable Warrants, as well as the underlying shares of
Common Stock, have been included in the Registration Statement of which this
Prospectus forms a part, and comprise a portion of the Selling Security Holders'
Securities. See "Selling Security Holders."

Contemporaneously with the 1995 Private Placement, Vincent J. Bitetti, the
Company's Chief Executive Officer, privately sold 107,500 shares of Common Stock
for total cash consideration of $537,500. Such shares of Common Stock have been
included in the Registration Statement of which this Prospectus is a part, and
comprise a portion of the Selling Security Holders' Securities. See "Selling
Security Holders."

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On April 3, 1995, Vincent J. Bitetti, for nominal consideration granted Eric
H. Winston, the Company's President, an option to purchase 100,000 shares of the
Common Stock owned by Mr. Bitetti at an exercise price of $2.00 per share, such
price determined to be the fair market value by management.

AGREEMENTS WITH ASSI, INC.

The Company has entered into a Consulting Agreement with ASSI, Inc. dated
April 30, 1996. Pursuant to that Agreement, ASSI, Inc. is to provide certain
consulting services to the Company, including advising the Company regarding
executive recruiting. In consideration of the services to be provided by ASSI,
Inc. pursuant to the Consulting Agreement, on April 30, 1996, the Company issued
to ASSI, Inc. warrants to purchase 2,000,000 shares of Common Stock at an
exercise price of $4.40 per share (the "ASSI Warrants," as previously defined).
Pursuant to the Consulting Agreement, the Company also agreed to certain changes
to the terms of the Private Warrants held by ASSI, Inc. as described below.

Pursuant to a Stockholder Voting Agreement dated April 30, 1996, the Company
has also agreed to grant ASSI, Inc. the right to nominate from time to time one
director of the Company, and Vincent J. Bitetti and Eric H. Winston have agreed
to vote all of their shares of Common Stock for the election of such nominee. In
addition, ASSI, Inc. has agreed to vote all of its shares of Common Stock for
two directors nominated by Mr. Bitetti for as long as he holds 20 percent or
more of the Common Stock, and for one director nominated by Mr. Bitetti for as
long as he holds at least ten percent but less than 20 percent of the issued and
outstanding Common Stock. The voting agreements with ASSI, Inc. will terminate
when Messrs. Bitetti and Winston together cease to own at least ten percent of
the Common Stock. See "Management -- Directors and Executive Officers."

On May 30, 1996, the Company entered into a Note Purchase Agreement with
ASSI, Inc. pursuant to which ASSI, Inc. loaned the Company $500,000 (the "ASSI
Convertible Loan," as previously defined). The ASSI Convertible Loan bears
interest at the rate of eight percent per annum. The principal of and all
accrued interest on the ASSI Convertible Loan is due in full on the earlier of
September 1, 1996 or the closing date of the Company's initial public offering
made hereby. Upon the closing of the Company's initial public offering, ASSI,
Inc. has the option to convert all or any part of the ASSI Convertible Loan into
warrants (the "ASSI Loan Warrants," as previously defined) to purchase Common
Stock at a conversion price of $.25 per warrant.

The terms of the ASSI Warrants and Private Warrants held by ASSI, Inc.
presently are substantially the same as those of the Private Warrants, subject
to the differences identified in clauses (i) to (iii) of the following sentence.
Upon the completion of the offering made hereby, the terms of the ASSI Warrants,
the Private Warrants held by ASSI, Inc. and the ASSI Loan Warrants (if any) will
become substantially the same as those of the Redeemable Warrants except that
(i) they will become exercisable October 1, 1996, (ii) they will not be
mandatorily redeemable by the Company and (iii) they will be subject to separate
registration rights, including one demand registration right and unlimited
piggyback registration rights for as long as they are held by ASSI, Inc. or one
of its affiliates. Upon a transfer of the ASSI Warrants or ASSI Loan Warrants to
any nonaffiliate of ASSI, Inc., the terms of such transferred ASSI Warrants and
ASSI Loan Warrants will become identical to those of the Redeemable Warrants.
The demand registration rights will expire on August 31, 2001. Until and unless
exercised, the holders of the ASSI Warrants and ASSI Loan Warrants will have no
voting, dividend or other rights as shareholders of the Company.

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<PAGE>
DESCRIPTION OF SECURITIES

GENERAL

The Securities consist of shares of Common Stock and Redeemable Warrants.
One Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock.

Under the Company's Restated Certificate of Incorporation, the authorized
capital stock of the Company consists of 20,000,000 shares of Common Stock. As
of March 31, 1996, the Company had 1,808,291 shares of Common Stock outstanding,
which were held by approximately 130 shareholders of record.

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote for each share on
all matters to be voted on by the stockholders. Holders of shares of Common
Stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the Board of Directors in its discretion, from funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive rights to purchase Common Stock.
There are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock. All of the outstanding shares of Common Stock
issuable upon exercise of the Warrants will be, when issued and delivered, fully
paid and non-assessable.

As a QUASI-California corporation, the Company will be subject to certain
provisions of the California GCL, as more fully described under "Description of
Securities -- Application of California GCL." Amongst other consequences of the
Company's status as a QUASI-California corporation, at the request of any
stockholder, the election of the Company's directors will be determined by
cumulative voting procedures. Consequently, following this offering the
Company's stockholders other than its current officers and directors will have
sufficient votes, if cumulative voting rights are exercised, to elect two of its
three directors (or three of its five directors, upon the anticipated expansion
of the Board following this offering) assuming no exercise of the Redeemable
Warrants and two of its three (or four of its five, as applicable) directors
assuming exercise of the Redeemable Warrants in full. See "Risk Factors --
Control of the Company by Officers and Directors" and "Management -- Directors
and Executive Officers."

REDEEMABLE WARRANTS

The following is a brief summary of certain provisions of the Redeemable
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 Corporate Stock Transfer Company as warrant agent (the "Warrant
Agreement"). A copy of the Warrant Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."

Each Redeemable Warrant entitles the holder thereof to purchase, at any time
during the 54-month period commencing one year after the date of this
Prospectus, one share of Common Stock at a price of 110 percent of the initial
public offering price per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below.

The Redeemable Warrants are subject to redemption by the Company, at any
time, commencing one year after the date of this Prospectus, at a price of $.25
per Redeemable Warrant if the average closing bid price of the Common Stock
equals or exceeds 140 percent of the initial public offering price per share for
any 20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of notice of redemption. If the Redeemable
Warrants were redeemed prior to their exercise, the holders thereof would lose
the benefit of the difference between the market price of the underlying Common
Stock as of such date and the exercise price of such Warrants, as well as any
possible future price appreciation in the Common Stock.

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<PAGE>
The exercise price and the terms of the Redeemable Warrants bear no relation
to any objective criteria of value and should in no event be regarded as an
indication of any future market price of the Securities offered hereby.

The exercise price and the number of shares of Common Stock purchasable upon
the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification on or of the common Stock and issuances of
shares of Common Stock for a consideration less than the exercise price of the
Redeemable Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable holders of Redeemable Warrants to
acquire the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares that might
otherwise have been purchased upon the exercise of the Redeemable Warrant. No
adjustments will be made unless such adjustment would require an increase or
decrease of at least $.10 or more in such exercise price. No adjustment to the
exercise price of the shares subject to the Redeemable Warrants will be made for
dividends (other than stock dividends), if any, paid on the Common Stock.

The Redeemable Warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of the Warrant
Agent, with the exercise form on the reverse side of the certificate completed
and executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
Redeemable Warrants being exercised. The holders of Redeemable Warrants do not
have the rights or privileges of holders of Common Stock.

No Redeemable Warrant will be exercisable unless at the time of exercise the
Company has filed a current prospectus with the Securities and Exchange
Commission (the "Commission") covering the shares of Common Stock issuable upon
exercise of such Redeemable Warrant and such shares have been registered or
qualified or deemed to be exempt under the securities laws of the jurisdiction
of residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.

The Bridge Warrants issued by the Company in the 1995 Bridge Financing and
the Private Warrants issued by the Company in the 1995 Private Placement provide
that, if the Company consummates a public offering of its securities which
includes warrants to purchase shares of Common Stock, then the Bridge Warrants
and the Private Warrants shall automatically be converted into warrants included
in the public offering; accordingly, the 39,665 Bridge Warrants issued in the
1995 Bridge Financing and the 5,650,000 Private Warrants issued in the 1995
Private Placement have been converted as of the date of this Prospectus into a
like number of Redeemable Warrants.

APPLICATION OF CALIFORNIA GCL

Although incorporated in Delaware, the business of the Company has been
conducted through its operating subsidiary which is domiciled and headquartered
in the State of California. Section 2115 of the California GCL ("Section 2115")
provides that certain provisions of the California GCL shall be applicable to a
corporation organized under the laws of another state to the exclusion of the
law of the state in which it is incorporated, if the corporation meets certain
tests regarding the business done in California and the number of its California
stockholders.

An entity such as the Company can be subject to Section 2115 even though it
does not itself transact business in California if, on a consolidated basis, the
average of the property factor, payroll factor and sales factor is more than 50
percent deemed to be in California during its latest full income year and more
than one-half of its outstanding voting securities are held of record by persons
having

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addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the Company currently would be deemed to
meet these factors and does not currently qualify as a national market security
on NASDAQ, it is subject to Section 2115.

During the period that the Company is subject to Section 2115, the
provisions of the California GCL regarding the following matters are made
applicable to the exclusion of the law of the State of Delaware: (i) general
provisions and definitions; (ii) annual election of directors; (iii) removal of
directors without cause; (iv) removal of directors by court proceedings; (v)
filling of director vacancies where less than a majority in office were elected
by the stockholders; (vi) directors' standard of care; (vii) liability of
directors for unlawful distributions; (viii) indemnification of directors,
officers and others; (ix) limitations on corporate distributions of cash or
property; (x) liability of a stockholder who receives an unlawful distribution;
(xi) requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on mergers;
(xvi) reorganizations; (xvii) dissenters' rights in connection with
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.

TRANSFER AGENT AND WARRANT AGENT

The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants is Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

The offering made by this Prospectus is the initial registered public
offering of the Securities. There is no public trading market for any of the
Company's securities at the present time. There can be no assurance that a
public trading market will ever develop or, if a market develops, that it will
be sustained. See "Risk Factors -- No Prior Market; Arbitrary Determination of
Offering Price; Possible Volatility of Trading Prices for Securities." Although
they have no legal obligation to do so, the Underwriters may from time to time
become market-makers or otherwise effect transactions in the Securities (and the
Underwriters have indicated to the Company that they intend to do so). The
Underwriters, if they participate in the market, may be a dominating influence
in any market that might develop for any of the Securities. The price and
liquidity of the Securities may be significantly affected by the degree, if any,
of the Underwriters' participation in the market. Such activities, if commenced,
may be discontinued at any time or from time to time. See "Risk Factors --
Underwriters' Potential Influence on the Market."

Upon the consummation of this offering, 4,208,291 shares of Common Stock
will be outstanding, assuming that the Underwriters' over-allotment option is
not exercised and excluding (a) 384,070 shares of Common Stock underlying
options granted pursuant to the Company's 1992 Stock Option Plan; (b) 500,000
shares of Common Stock underlying options which may be granted pursuant to the
Company's 1995 Stock Option Plan; (c) 292,838 shares of Common Stock underlying
options granted to the Company's President; and (d) an aggregate of 11,249,665
shares of Common Stock issuable upon the exercise of (i) the Redeemable Warrants
being offered by the Company (1,200,000 shares), (ii) the Redeemable Warrants
that were issued in connection with the 1995 Bridge Financing (39,665 shares),
(iii) the Redeemable Warrants that were issued in connection with the 1995
Private Placement (5,650,000 shares), (iv) the ASSI Warrants (2,000,000 shares),
(v) the Underwriters' Warrant (240,000 shares) and (vi) the ASSI Loan Warrants
(if any) (2,100,000 shares).

Of the 4,208,291 shares of Common Stock that will be issued and outstanding
upon the consummation of this offering (subject to the assumptions in the
preceding paragraph), the 2,400,000 shares offered by the Company and the
107,500 currently outstanding shares offered by the Selling Security Holders
will be freely tradeable without further registration under the Securities Act,
except for any such shares of Common Stock held by an "affiliate" of the
Company. Of the remaining 700,791 outstanding shares, 183,723 shares are freely
tradeable and the remainder are "restricted shares" as defined in Rule 144 under
the Securities Act and may not be sold without registration under the Securities
Act unless pursuant to an applicable exemption therefrom.

In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has satisfied a two-year holding period may, under certain
circumstances, commencing 90 days after the date hereof, sell within any
three-month period, in ordinary brokerage transactions or in transactions
directly with a market maker, a number of shares of Common Stock equal to the
aggregate of one percent of the then outstanding Common Stock or the average
weekly trading volume during the four calendar weeks prior to such sale. Rule
144 also permits the sale of shares of Common Stock without any quantity
limitations by a person who is not an "affiliate" of the Company and who has
owned the shares for at least three years. The foregoing summary of Rule 144 is
not intended to be a complete description thereof.

Vincent J. Bitetti, Eric H. Winston and Ulrich E. Gottschling have agreed
not to directly or indirectly offer, offer to sell, grant an option for the
purchase or sale of, transfer, assign, pledge hypothecate or otherwise encumber
(either pursuant to Rule 144 or otherwise) any of their securities for a period
of 18 months from the date of this Prospectus without the prior written consent
of the Company and the Underwriters (provided, that Eric H. Winston may sell up
to 10,000 shares of Common Stock during such period without the consent of the
Underwriters). The Company intends to make a public announcement in the event
that a material amount of securities subject to a lock-up arrangement described
in this paragraph are released prior to the expiration of the term of such
arrangement if such announcement is required by the federal securities laws.

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<PAGE>

The 1,200,000 Redeemable Warrants being offered by the Company (assuming
that the Underwriters' over-allotment option is not exercised) and the 5,689,665
Redeemable Warrants being registered for the account of the Selling Security
Holders entitle the holders of such Redeemable Warrants to purchase up to an
aggregate of 6,889,665 shares of Common Stock at any time during the 54-month
period commencing one year after the date of this Prospectus. An additional
4,100,000 shares are being registered that may be issued upon exercise of the
ASSI Warrants and the ASSI Loan Warrants (if any), which may be issued upon
exercise of these warrants at any time during the period from October 1, 1996
until the fifth anniversary of the date of this Prospectus. The Common Stock
underlying the Redeemable Warrants, ASSI Warrants and ASSI Loan Warrants (if
any) may be sold commencing upon the date of their issuance upon exercise of the
warrants. The Redeemable Warrants being registered for the account of the
Selling Security Holders may be sold by the Selling Security Holders or their
transferees commencing on the date of this Prospectus. Sales of either the
Redeemable Warrants, or the shares of Common Stock underlying the Redeemable
Warrants, ASSI Warrants and ASSI Loan Warrants, or even the existence of the
right to exercise such Redeemable Warrants, ASSI Warrants and ASSI Loan
Warrants, may depress the price of the Common Stock or the Redeemable Warrants
in any market that may develop for such Securities. See "Selling Security
Holders" and "Description of Securities."

In connection with this offering, the Company will grant to the Underwriters
an over-allotment option, exercisable within 45 days of the date of this
Prospectus, to purchase up to an additional 360,000 shares of Common Stock
and/or up to an additional 180,000 Redeemable Warrants and issue to the
Underwriters the Underwriters' Warrant to purchase up to 240,000 shares of
Common Stock. The Company has granted one demand and unlimited piggyback
registration rights to the holders of the Underwriters' Warrant. See
"Underwriting." In the event that any holder of warrants issued by the Company
exercises its warrants, the percentage of ownership of the Company by persons
who invest hereunder will be diluted and any sales of the securities acquired
thereby might have an adverse effect on the market price of the Common Stock and
Redeemable Warrants.

The Company has granted options for the purchase of 384,070 shares of Common
Stock to certain key employees, officers, directors and consultants pursuant to
the Company's 1992 Stock Option Plan. The Company has determined not to issue
any further options under its 1992 Stock Option Plan, but all outstanding
options under such plan will remain valid. Of the 384,070 options granted under
the 1992 Stock Option Plan, 191,199 are presently exercisable, 45,840 will
become exercisable in fiscal 1997 and the balance will become exercisable in
fiscal 1998. The Company also has reserved 500,000 shares of Common Stock for
issuance to key employees, officers, directors and consultants pursuant to the
Company's 1995 Stock Option Plan. All Common Stock issuable upon exercise of
such options will be "restricted stock" and will be subject to resale pursuant
to Rule 144 as described above. Following completion of this offering, however,
the Company intends to take action to register all such options and the
underlying Common Stock under the Securities Act. Upon the effectiveness of such
registration, the Common Stock issuable upon exercise of the options will be
freely tradeable. See "Management -- 1995 Stock Option Plan" and "-- 1992 Stock
Option Plan."

The holders of the Bridge Warrants issued in the 1995 Bridge Financing and
the Private Warrants issued in the 1995 Private Placement have certain
registration rights which will be satisfied by virtue of the registration of
such Bridge Warrants and Private Warrants (all of which will be converted to
Redeemable Warrants upon the consummation of this offering and will comprise a
portion of the Selling Security Holders' Securities) pursuant to the
Registration Statement of which this Prospectus is a part. The Company agreed to
register the Common Stock issued in the 1994 private placement under the
Securities Act by April 30, 1995. The Company, however, has never registered
such shares, which therefore may be entitled to be registered, except to the
extent their holders may have waived their registration rights. See "Certain
Transactions -- 1994 Private Placement," "-- 1995 Bridge Financing" and "-- 1995
Private Placement." Except for the registration rights of Vincent J. Bitetti

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and Eric H. Winston and ASSI, Inc. described below, following this offering no
other existing security holder of the Company will have registration rights with
respect to any Company security which it holds.

The Company has granted Eric H. Winston, President and Chief Operating
Officer, an option to purchase 292,838 shares of Common Stock which is presently
exercisable. Vincent J. Bitetti, Chairman of the Board and Chief Executive
Officer, has granted Mr. Winston an option to purchase 100,000 shares of Common
Stock which is presently exercisable. See "Management -- Employment Agreements."
Pursuant to a separate Prospectus filed as a part of the Registration Statement
of which this Prospectus is a part, all Common Stock purchasable by Mr. Winston
is being registered. Following exercise of such options such shares may be
freely resold (provided that Mr. Winston has agreed not to sell more than 10,000
shares of Common Stock during the 18-month period following the date of this
Prospectus without the prior written consent of the Underwriters). Following
termination of his employment with the Company, Mr. Winston is entitled to
certain registration rights with respect to the Common Stock issuable upon
exercise of this option. Following termination of his employment with the
Company, Vincent J. Bitetti also is entitled to certain registration rights with
respect to the Common Stock owned by him. Upon the effectiveness of such
registration, the Common Stock owned by Mr. Bitetti will be freely tradeable.
See "Management -- Employment Agreements."

The Company has issued to ASSI, Inc. the ASSI Warrants to purchase 2,000,000
shares of Common Stock. The Company also has entered into the $500,000 ASSI
Convertible Loan, which ASSI, Inc. may convert into ASSI Loan Warrants at a
conversion price of $.25 per warrant upon the closing of the Company's initial
public offering made hereby. All such ASSI Warrants and ASSI Loan Warrants (if
any) will be restricted securities and will be subject to resale pursuant to
Rule 144 as described above. The 2,000,000 shares of Common Stock underlying the
ASSI Warrants and up to 2,100,000 shares of Common Stock underlying the ASSI
Loan Warrants issuable upon conversion of the ASSI Convertible Loan are being
registered pursuant to the separate Prospectus filed as a part of the
Registration Statement of which this Prospectus is a part. ASSI, Inc. is
entitled to certain registration rights with respect to all such ASSI Warrants
and ASSI Loan Warrants (if any) and the Common Stock issuable upon exercise
thereof. Upon the effectiveness of such registration, all such warrants and the
underlying Common Stock will be freely tradeable. See "Certain Transactions --
Agreements with ASSI, Inc."

The Company is unable to predict the effect that any subsequent sales of the
Company's securities, under this Registration Statement, Rule 144 or otherwise,
may have on the then-prevailing market price of the Common Stock, although such
sales could have a depressive effect on such market price. See "Risk Factors --
Shares Eligible for Future Sale."

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UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
(the form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), the Underwriters named below (the
"Underwriters") have severally agreed to purchase from the Company the
respective number of shares of Common Stock and Redeemable Warrants set forth
opposite their name indicated below. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters will be obligated, as set forth in the Underwriting
Agreement, to purchase all of the 2,400,000 shares of Common Stock and 1,200,000
Redeemable Warrants being offered hereby, excluding shares of Common Stock and
Redeemable Warrants covered by the over-allotment options granted to the
Underwriters, if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER NUMBER OF SHARES REDEEMABLE WARRANTS
- -------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
The Boston Group, L.P......................................... 1,200,000 600,000
Joseph Stevens & Company, L.P................................. 1,200,000 600,000
----------------- ----------
Total................................................... 2,400,000 1,200,000
----------------- ----------
----------------- ----------
</TABLE>

Both of the Underwriters are recently formed, and neither has extensive
experience as an underwriter of securities. The Boston Group, L.P., which was
formed in March 1995, has acted as the managing underwriter for three public
offerings and has acted as a member of an underwriting syndicate on three
occasions. Joseph Stevens & Company, L.P., which was formed in May 1994, has
acted as the managing underwriter for four public offerings and as a member of
an underwriting syndicate on approximately seven occasions. After interviewing
various underwriters, the Company selected the Underwriters to act as
co-managers for this offering because it believes they have a thorough
understanding of its business.

The Underwriters have advised the Company that they propose to offer the
Common Stock and Redeemable Warrants to the public initially at the public
offering price set forth on the cover page of this Prospectus, and may offer the
Common Stock to selected dealers at such price less a concession of not more
than $.20 per share. No concession shall be granted to selected dealers with
respect to the Redeemable Warrants. The Underwriters may allow, and such dealers
may reallow, a concession of not more than $.10 per share on sales to certain
other dealers. After the initial public offering, the public offering price and
concessions and re-allowances to dealers may be changed by the Underwriters.

The Company has agreed to pay to the Underwriters a non-accountable expense
allowance equal to three percent of the gross proceeds from the sales of all
shares of Common Stock and Redeemable Warrants offered hereby, including shares
sold to cover over-allotments, if any.

The Underwriters have been granted the option, exercisable within 45 days
after the date of this Prospectus, to purchase up to an aggregate of an
additional 340,000 shares of Common Stock from the Company and up to 20,000
shares of Common Stock from Vincent J. Bitetti (see "Principal and Selling
Stockholders") and to purchase up to 180,000 Redeemable Warrants from the
Company to cover over-allotments, at the same price being paid by the
Underwriters for the other shares of Common Stock and Redeemable Warrants
offered hereby. To the extent that the Underwriters exercise such option, each
of the Underwriters will have, subject to certain conditions, a firm commitment,
as set forth in the Underwriting Agreement, to purchase approximately the same
percentage of the additional shares of Common Stock and Redeemable Warrants as
the percentage of Common Stock and Redeemable Warrants to be purchased by it
shown in the above table bear to 2,400,000 and 1,200,000, respectively, and the
Company and the affiliated selling stockholders will be obligated, pursuant to
the option, to sell such shares of Common Stock and Redeemable Warrants to the
Underwriters.

The Company has agreed to grant to each of the Underwriters, effective upon
the closing of the offering, the right to nominate from time to time one
director of the Company or to have an individual selected by each such
Underwriter attend all meetings of the Board of Directors of the Company as a

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non-voting advisor. Vincent J. Bitetti and Eric H. Winston have agreed to vote
their shares of Common Stock for the election of such nominees. The Company has
agreed to indemnify and hold harmless such directors or advisors to the maximum
extent permitted by law in connection with such individual's service as a
director or advisor. See "Management -- Directors and Executive Officers."

The Company has agreed to sell to the Underwriters for an aggregate of $50
the Underwriters' Warrant to purchase up to 240,000 shares of Common Stock at an
exercise price of 145 percent of the initial public offering price per share of
Common Stock. The Underwriters' Warrant may not be transferred for one year,
except basically to officers or partners of the Underwriters, any member of the
NASD participating in the offering hereunder, officers or partners of such
member or any successor of any of the foregoing, and is exercisable during the
four-year period commencing one year from the date of this Prospectus (the
"Underwriters' Warrant Exercise Term"). The Company has granted one demand and
unlimited piggyback registration rights to the holders of the Underwriters'
Warrant. The demand registration right requires the Company to file a
registration statement pertaining to the Underwriters' Warrant and the
underlying Common Stock and to maintain the effectiveness of such registration
statement for the period commencing one year after the date of this Prospectus
and continuing until the earlier of the sale of all the registered securities or
the fifth anniversary of the initial effectiveness of the registration
statement. The piggyback registration rights are applicable during the five-year
period commencing one year after the date of this Prospectus.

The Company has agreed, in connection with the exercise of Redeemable
Warrants pursuant to solicitation by the Underwriters (commencing one year from
the date of this Prospectus), to pay to the Underwriters a fee of five percent
of the Redeemable Warrant exercise price for each Redeemable Warrant exercised,
provided, however, that the Underwriters will not be entitled to receive such
compensation in any Redeemable Warrant exercise transactions in which (i) the
market price of the Common Stock of the Company at the time of exercise is lower
than the exercise price of the Redeemable Warrants; (ii) the Redeemable Warrants
are held in any discretionary account; (iii) disclosure of compensation
arrangements is not made, in addition to the disclosure provided in this
Prospectus, in documents provided to holders of the Redeemable Warrant at the
time of exercise; (iv) the exercise of the Redeemable Warrants is unsolicited;
(v) after the Company has called the Redeemable Warrants for redemption; or (vi)
the solicitation of exercise of the Redeemable Warrants was in violation of Rule
10b-6 promulgated under the Exchange Act. In addition, unless granted an
exemption by the Commission from Rule 10b-6, the Underwriters will be prohibited
from engaging in any market-making activities or solicited brokerage activities
with regard to the Company's securities during the period prescribed by Rule
10b-6 before the solicitation of the exercise of any Redeemable Warrant until
the later of (i) the termination of such solicitation activity, or (ii) the
termination by waiver or otherwise of any right the Underwriters may have to
receive a fee for the exercise of the Redeemable Warrants following such
solicitations. The Company has agreed not to solicit Warrant exercise other than
through the Underwriters.

The Company's officers and directors, including the controlling beneficial
stockholder, have agreed not to, directly or indirectly offer, offer to sell,
sell, grant an option to purchase or sell, transfer, assign, pledge, hypothecate
or otherwise encumber any shares of Common Stock owned by them for a period of
18 months from the date of this Prospectus without the prior written consent of
the Underwriters (provided, that Eric H. Winston may sell up to 10,000 shares of
Common Stock during such 18-month period without the consent of the
Underwriters).

The Underwriters have informed the Company that no sales to any accounts
over which they exercise discretionary authority will be made in this offering.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

Prior to this offering, there has not been an established public market for
the Common Stock or Redeemable Warrants of the Company. The initial public
offering price of the Company Securities and

68
<PAGE>

the exercise price and other terms of the Underwriters' Warrant have been
determined by negotiations between the Company and the Underwriters. The major
factors considered in determining the public offering price of the Common Stock
and the Redeemable Warrants were the prevailing market conditions, the market
prices relative to earnings, cash flow and assets for publicly traded Common
Stocks of comparable companies, the sales and earnings of the Company and
comparable companies in recent periods, the Company's earning potential, the
experience of its management and the position of the Company in the industry.

LEGAL MATTERS

The validity of the Securities offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Washington, D.C. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Jeffer,
Mangels, Butler & Marmaro LLP, Los Angeles, California. Robert G. Kalik, of
counsel to McDermott, Will & Emery, holds a presently exercisable option to
purchase 33,467 shares of Common Stock.

EXPERTS

The financial statements included in this Prospectus have been audited by
Corbin & Wertz, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. The Company is currently not a
reporting company under the Securities Exchange Act of 1934, as amended. This
Prospectus, filed as part of the Registration Statement, does not contain
certain information set forth in or annexed as exhibits to the Registration
Statement, and reference is made to such exhibits to the Registration Statement
for the complete text thereof. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as part thereof, which may be inspected at
the office of the Commission without charge, or copies thereof may be obtained
therefrom upon payment of a fee prescribed by the Commission. Statements
contained in this Prospectus and the contents of any contract or other document
are not necessarily complete, and in each instance reference is made to the
complete text of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Such Registration Statement may be inspected and copied at the
public facilities maintained by the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at the New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048 and at the Chicago Regional Office,
500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511.

69
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
SOUND SOURCE INTERACTIVE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Financial statements
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Stockholders' Deficit................................... F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
Sound Source Interactive, Inc.

We have audited the accompanying consolidated balance sheet of Sound Source
Interactive, Inc. (a Delaware corporation) and subsidiary (collectively referred
to as the "Company") as of June 30, 1995 and the related consolidated statements
of operations, stockholders' deficit and cash flows for each of the years in the
two-year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sound Source
Interactive, Inc. and subsidiary as of June 30, 1995, and the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses from
operations, its excess of current liabilities (which, as of March 31, 1996,
include notes payable of $4,987,500 plus accrued interest which come due
September 1, 1996) over current assets and its stockholders' deficit raises
substantial doubt about its ability to continue as a going concern. The Company
is currently funding operations from the proceeds of the 1995 Private Placement
and is in the process of filing a Registration Statement for an initial public
offering of its common stock as more fully described in Note 14. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

CORBIN & WERTZ

Irvine, California
September 8, 1995, except for
Note 7, which is as of October 9,
1995, Note 14, which is as of
May 30, 1996, and Note 15, which
is as of June 1, 1996

F-2
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

ASSETS (Note 14)

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash............................................................ $ 213,730 $ 478,585
Accounts receivable, net of allowances of $104,250 and
$1,038,148 (unaudited), as of June 30, 1995 and March 31, 1996,
respectively (Notes 5 and 11).................................. 60,828 708,792
Inventories (Note 2)............................................ 150,320 315,926
Prepaid royalties............................................... 481,412 714,355
Deferred financing costs, net of accumulated amortization of
$532,685 (unaudited) as of March 31, 1996 (Note 14)............ -- 460,915
Deferred offering costs (Note 14)............................... -- 146,890
Prepaid expenses and other...................................... -- 22,781
----------- -----------
Total current assets.......................................... 906,290 2,848,244
Property and equipment, net of accumulated depreciation of $84,724
and $118,019 (unaudited) as of June 30, 1995 and March 31, 1996,
respectively (Notes 3 and 7)..................................... 92,841 189,596
Other assets...................................................... 3,060 12,400
----------- -----------
$ 1,002,191 $ 3,050,240
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 14)......................................... $ -- $ 4,987,500
Accrued interest (Note 14)...................................... -- 242,520
Accounts payable and accrued expenses (Notes 7 and 12).......... 535,046 579,904
Accrued compensation and related taxes.......................... 244,039 89,990
Commissions payable (Note 7).................................... 159,593 --
Accrued royalties............................................... 542,513 578,617
Short-term advance (Note 5)..................................... 400,000 400,000
Deferred revenue (Note 6)....................................... 64,000 82,955
Notes payable to officers (Note 4).............................. 13,500 --
Current portion of capital lease obligations (Note 7)........... 12,921 27,178
----------- -----------
Total current liabilities..................................... 1,971,612 6,988,664
----------- -----------
Capital lease obligations, net of current portion (Note 7)........ 16,771 20,000
----------- -----------
Commitments and contingencies (Notes 5 and 7)
Stockholders' deficit (Notes 8, 9, 10 and 14):
Series A preferred common stock, $.001 par value; 1,000,000
shares authorized, no shares issued and outstanding;
liquidation value of $.001 per share........................... -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
1,859,182 and 1,808,291 shares issued and outstanding at June
30, 1995 and March 31, 1996 (unaudited), respectively.......... 1,859 1,808
Warrants (Note 14).............................................. -- 263,350
Additional paid-in capital...................................... 5,124,525 5,124,576
Accumulated deficit............................................. (6,112,576) (9,348,158)
----------- -----------
Total stockholders' deficit................................... (986,192) (3,958,424)
----------- -----------
$ 1,002,191 $ 3,050,240
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE FOR THE NINE MONTHS
30, ENDED MARCH 31,
------------------------ -----------------------
1994 1995 1995 1996
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Notes 6 and 11):
Product sales........................... $ 1,313,890 $ 1,255,230 $1,170,451 $ 1,874,734
Development fees........................ 112,520 343,250 217,250 --
Original equipment manufacturing........ 5,500 479,675 370,409 32,237
Royalties............................... 253,961 76,771 76,253 21,678
----------- ----------- ---------- -----------
Net revenues.......................... 1,685,871 2,154,926 1,834,363 1,928,649
Cost of sales............................. 1,180,803 1,072,691 1,053,665 1,115,105
----------- ----------- ---------- -----------
Gross profit.......................... 505,068 1,082,235 780,698 813,544
----------- ----------- ---------- -----------
Operating costs and expenses:
Marketing and sales (Note 7)............ 356,381 516,886 400,149 922,215
Compensation in connection with common
stock and common stock options issued
for services rendered (Note 10)........ 2,992,862 733,165 289,998 --
Other general and administrative........ 828,866 1,009,858 780,697 1,153,189
Reserve for bad debts................... -- 40,000 30,332 663,421
Research and development................ 116,559 378,471 161,875 489,053
----------- ----------- ---------- -----------
Total operating costs and expenses.... 4,294,668 2,678,380 1,663,051 3,227,878
----------- ----------- ---------- -----------
Operating loss........................ (3,789,600) (1,596,145) (882,353) (2,414,334)
Interest income........................... 855 8,550 522 34,011
Interest expense.......................... (38,513) (2,698) -- (244,679)
Amortization of deferred loan costs (Note
14)...................................... -- -- -- (574,285)
Other income (expense).................... (32,988) 839 (10,554) (35,095)
----------- ----------- ---------- -----------
Loss before provision for income
taxes................................ (3,860,246) (1,589,454) (892,385) (3,234,382)
Provision for income taxes (Note 13)...... 1,600 1,600 1,200 1,200
----------- ----------- ---------- -----------
Loss from continuing operations....... (3,861,846) (1,591,054) (893,585) (3,235,582)
----------- ----------- ---------- -----------
Discontinued operations (Note 12):
Loss from operations of discontinued
music division......................... (115,887) (111,106) (49,046) --
Estimated operating loss and loss on
disposal of discontinued music division
during phase-out period................ -- (32,000) -- --
----------- ----------- ---------- -----------
Loss from discontinued operations..... (115,887) (143,106) (49,046) --
----------- ----------- ---------- -----------
Net loss.............................. $(3,977,733) $(1,734,160) $ (942,631) $(3,235,582)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net loss per common share (Note 14):
Loss from continuing operations......... $ (2.38) $ (0.85) $ (0.48) $ (1.76)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Loss from discontinued operations....... $ (0.07) $ (0.08) $ (0.03) $ --
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net loss per common share............. $ (2.45) $ (0.93) $ (0.51) $ (1.76)
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Weighted average number of common shares
outstanding.............................. 1,626,107 1,862,908 1,859,150 1,842,638
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
AND FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT
---------- -------- --------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993................... 1,000,000 $ 1,000 1,474,463 $1,474 $ -- $ 27,526 $ (400,683)
Shares issued in connection with reverse
acquisition............................ 99,992 100 (100)
Issuance of stock options for services
(Note 10).............................. 2,347,862
Issuance of common stock in exchange for
preferred stock (Note 9)............... (1,000,000) (1,000) 83,669 84 644,916
Issuance of common stock in connection
with private offering, net of offering
costs of $58,312 (Note 8).............. 55,639 56 664,944
Shares issued for services performed in
connection with private offering (Note
8)..................................... 39,770 40 475,275
Offering costs (Note 8)................. (475,315)
Net loss................................ (3,977,733)
---------- -------- --------- ------- -------- ---------- ------------
Balance, June 30, 1994.................. -- -- 1,753,533 1,754 -- 3,685,108 (4,378,416)
Issuance of common stock in connection
with private offering, net of offering
costs of $61,759 (Note 8).............. 59,238 59 706,048
Shares issued for services performed in
connection with private offering (Note
8)..................................... 42,227 42 504,644
Offering costs (Note 8)................. (504,686)
Issuance of stock options for services
(Note 10).............................. 733,165
Issuance of common stock in connection
with exercise of options (Note 10)..... 4,184 4 246
Net loss................................ (1,734,160)
---------- -------- --------- ------- -------- ---------- ------------
Balance, June 30, 1995.................. -- -- 1,859,182 1,859 -- 5,124,525 (6,112,576)
Issuance of warrants in connection with
private offerings (Note 14)............ 263,350
Cancellation of shares in connection
with settlement (Note 7)............... (15,120) (15) 15
Cancellation of shares for which the
Company had not received valid
consideration (Note 8)................. (35,771) (36) 36
Net loss................................ (3,235,582)
---------- -------- --------- ------- -------- ---------- ------------
Balance, March 31, 1996................. -- $ -- 1,808,291 $1,808 $263,350 $5,124,576 $(9,348,158)
---------- -------- --------- ------- -------- ---------- ------------
---------- -------- --------- ------- -------- ---------- ------------

TOTAL
-----------
<S> <C>
Balance, July 1, 1993................... $ (370,683)
Shares issued in connection with reverse
acquisition............................
Issuance of stock options for services
(Note 10).............................. 2,347,862
Issuance of common stock in exchange for
preferred stock (Note 9)............... 644,000
Issuance of common stock in connection
with private offering, net of offering
costs of $58,312 (Note 8).............. 665,000
Shares issued for services performed in
connection with private offering (Note
8)..................................... 475,315
Offering costs (Note 8)................. (475,315)
Net loss................................ (3,977,733)
-----------
Balance, June 30, 1994.................. (691,554)
Issuance of common stock in connection
with private offering, net of offering
costs of $61,759 (Note 8).............. 706,107
Shares issued for services performed in
connection with private offering (Note
8)..................................... 504,686
Offering costs (Note 8)................. (504,686)
Issuance of stock options for services
(Note 10).............................. 733,165
Issuance of common stock in connection
with exercise of options (Note 10)..... 250
Net loss................................ (1,734,160)
-----------
Balance, June 30, 1995.................. (986,192)
Issuance of warrants in connection with
private offerings (Note 14)............ 263,350
Cancellation of shares in connection
with settlement (Note 7)...............
Cancellation of shares for which the
Company had not received valid
consideration (Note 8).................
Net loss................................ (3,235,582)
-----------
Balance, March 31, 1996................. $(3,958,424)
-----------
-----------
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
JUNE 30, ENDED MARCH 31,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations...................................... $(3,861,846) $(1,591,054) $(893,585) $(3,235,582)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization (Note 14)................................ 25,852 27,541 21,821 565,980
Allowance for sales returns............................................ (29,173) (8,732) (8,732) 998,148
Allowance for doubtful accounts........................................ 69,306 (56,566) (19,197) (64,250)
Common stock and stock options issued for services rendered............ 2,992,862 733,165 289,998 --
Changes in operating assets and liabilities:
Accounts receivable.................................................. (68,570) 66,352 (4,754) (1,581,862)
Inventories.......................................................... 83,006 (99,576) (142,549) (165,606)
Prepaid royalties.................................................... (146,903) 1,537 (44,819) (232,943)
Prepaid expenses and other........................................... 1,934 -- -- (22,781)
Other assets......................................................... -- -- -- (9,340)
Accrued interest (Note 14)........................................... -- -- -- 242,520
Accounts payable and accrued expenses................................ 83,186 (125,686) (91,082) 44,858
Accrued compensation and related taxes............................... 139,838 92,394 118,047 (154,049)
Commissions payable.................................................. 44,807 114,786 (17,847) (159,593)
Accrued royalties.................................................... 189,780 (20,697) -- 36,104
Deferred revenue..................................................... 72,795 (8,795) 129,431 18,955
----------- ----------- ----------- ------------
Net cash used by continuing operations..................................... (403,126) (875,331) (663,268) (3,719,441)
----------- ----------- ----------- ------------
Net loss from discontinued operations.................................... (115,887) (143,106) (49,046) --
Reserve for estimated loss on disposal................................... -- 32,000 8,878 --
Depreciation............................................................. 8,328 8,878 -- --
Changes in operating assets and liabilities of discontinued operations:
Accounts receivable.................................................... (5,007) (2,471) (2,118) --
Inventories............................................................ 12,248 1,351 (2,940) --
Accounts payable and accrued expenses.................................. 10,601 3,098 -- --
Accrued royalties...................................................... -- 3,415 (3,415) --
Commissions payable.................................................... -- 12,498 (616) --
----------- ----------- ----------- ------------
Net cash used by discontinued operations................................... (89,717) (84,337) (49,257) --
----------- ----------- ----------- ------------
Cash flows from investing activities of continuing operations --
Purchases of property and equipment...................................... (3,376) (38,876) (38,442) --
----------- ----------- ----------- ------------
Cash flows from investing activities of discontinued operations --
Purchases of property and equipment...................................... (1,036) (6,665) (6,665) (91,579)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock (Note 8).......................... 665,000 684,107 -- --
Proceeds from issuance of warrants (Note 14)............................. -- -- -- 263,350
Proceeds from issuance of notes payable (Note 14)........................ 22,000 -- -- 4,987,500
Notes payable to officers................................................ -- 13,500 -- (13,500)
Payments on note payable................................................. (16,999) (19,587) (19,587) --
Deferred financing costs (Note 14)....................................... -- -- -- (993,600)
Deferred offering costs (Note 14)........................................ -- -- -- (146,890)
Payments on capital lease obligation..................................... (18,257) (13,678) (4,253) (20,985)
Issuance of common stock................................................. -- -- 684,096 --
Short-term advance....................................................... -- 400,000 -- --
----------- ----------- ----------- ------------
Net cash provided by financing activities.................................. 651,744 1,064,342 660,256 4,075,875
----------- ----------- ----------- ------------
Net change in cash......................................................... 154,489 59,133 (97,376) 264,855
Cash, beginning of period.................................................. 108 154,597 154,597 213,730
----------- ----------- ----------- ------------
Cash, end of period........................................................ $ 154,597 $ 213,730 $ 57,221 $ 478,585
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest............................................................... $ 14,785 $ 9,742 $ 14,388 $ 15,279
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Income taxes........................................................... $ 1,800 $ 1,600 $ 1,200 $ 1,200
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>

Supplemental disclosure of noncash investing and financing activities:

During the fiscal years ended June 30, 1994 and 1995, the Company purchased
property and equipment valued at $5,653 and $8,979, respectively, through the
issuance of capital leases (Note 7).

During the fiscal year ended June 30, 1995, the Company repaid a note to an
affiliate of a stockholder totalling $22,000 through issuance of common stock
shares in connection with a private placement (Note 4).

During the nine months ended March 31, 1996, the Company purchased property
and equipment valued at $38,471 (unaudited) through issuance of capital
leases (Note 7).

See accompanying notes to consolidated financial statements

F-6
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Sound Source Interactive, Inc., (a California corporation) was incorporated
on March 5, 1990, under the name Sound Source Unlimited, Inc. On May 16, 1994,
Sound Source Interactive, Inc. ("SSI") consummated a stock-for-stock exchange
with Basic Science Associates, Inc. ("BSA"), a Delaware corporation. As part of
the exchange, BSA issued 1,474,232 shares of its common stock and 1,000,000
shares of its Series A preferred stock (see Note 11) in exchange for all of the
outstanding shares of SSI. The exchange has been accounted for as a reverse
acquisition because stockholders of SSI maintained control of the surviving
entity, BSA. Accordingly, for financial reporting purposes, the shares issued by
BSA are considered outstanding since the date of incorporation of SSI, and the
99,992 shares of common stock retained by the stockholders of BSA are reflected
as consideration issued to consummate the stock-for-stock exchange. No value was
ascribed to the shares of common stock retained by the stockholders of BSA since
as of the date of the exchange, BSA had nominal assets and stockholders' equity
and was an inactive company. Concurrent with the stock-for-stock exchange, BSA
changed its name to Sound Source Interactive, Inc. (a Delaware corporation) (the
"Company").

The Company, through its wholly-owned subsidiary (SSI), is in the business
of developing, publishing and distributing entertainment software, specializing
in interactive educational software, "screen savers" software and sound clips.

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying consolidated financial statements, at March 31, 1996,
the Company's current liabilities exceeded its current assets by $4,140,420
(unaudited) and the Company had a stockholders' deficit of $3,958,424
(unaudited). In addition, the Company has incurred net losses of $3,977,733,
$1,734,160, $942,631 (unaudited) and $3,235,582 (unaudited) for the years ended
June 30, 1994 and 1995 and for the nine months ended March 31, 1995 and 1996,
respectively. The Company is currently funding operations from the proceeds of
the 1995 Private Placement (see Note 14). The notes payable of $4,987,500 at
March 31, 1996 (unaudited) and related accrued interest of $242,520 is due
September 1, 1996. The Company has also not generated sufficient cash flows to
fund operations due in part to its problems with its major distributor, Acclaim
Entertainment, Inc. ("Acclaim") (see Note 15). The Company plans to effect an
initial public offering to raise proceeds to repay these notes payable and
related accrued interest and to fund its working capital requirements (see Note
14). These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

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

DISCONTINUED OPERATIONS

In July 1995, the Company approved a formal plan to license the rights to
its music division (which developed and sold sound patches for electronic
keyboards and synthesizers) and sold the

F-7
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related inventory and property and equipment to an unrelated third party (see
Note 12). Accordingly, the Company has classified such as discontinued
operations in the accompanying consolidated financial statements for all years
presented.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Sound Source Interactive, Inc. (a
California corporation). The results of operations of BSA, the acquired
business, have been consolidated with those of Sound Source Interactive, Inc.
commencing May 16, 1994. The results of operations of BSA for the period July 1,
1993 to May 16, 1994 were not material.

All significant intercompany transactions and balances have been eliminated
in consolidation.

INTERIM FINANCIAL STATEMENTS

The consolidated financial statements for the nine months ended March 31,
1995 and 1996 and the related notes thereto are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at March
31, 1996, and the results of operations and cash flows for the nine months ended
March 31, 1995 and 1996. Results for the interim period are not necessarily
indicative of the results to be expected for the fiscal year ended June 30,
1996.

ACCOUNTS RECEIVABLE

Accounts receivable are principally from distributors and retailers of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and returns. The
Company estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. As of June 30, 1995, reserves
for credit losses and returns totalled $40,000 and $64,250, respectively. As of
March 31, 1996, reserves for returns totalled $1,038,148 (unaudited). As of
March 31, 1996, reserves for credit losses were not deemed necessary by
management of the Company (see Note 5). The Company's accounts receivable at
March 31, 1996 are primarily from Acclaim. As of March 31, 1996, the Company has
not received any amounts due from Acclaim, except for the short-term advance
(see Note 5). Although the Company expects to collect such amounts due, actual
collections may differ from the estimated amounts. The Company is subject to
rapid changes in technology and shifts in consumer demand which could result in
product returns in excess of the Company's reserves at June 30, 1995 and March
31, 1996.

INVENTORIES

Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis. Provision has been made to
write-down obsolete inventories to market value.

Included in the accompanying consolidated balance sheet is inventories at a
carrying value of $315,026 as of March 31, 1996, which represents management's
estimate of its net realizable value. Such value is based on forecasts for sales
of such inventories in the ensuing years. The entertainment software industry is
characterized by rapid technological advancement and change. Should demand for
the Company's products prove to be significantly less than anticipated, the
ultimate realizable value of such products could be substantially less than the
amount shown in the consolidated balance sheet.

F-8
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets, generally ranging from five to
seven years.

Depreciation expense related to continuing operations totalled $25,852 and
$27,541 for the years ended June 30, 1994 and 1995, respectively, and totalled
$21,821 (unaudited) and $33,295 (unaudited), respectively, for the nine months
ended March 31, 1995 and 1996, and is included in other general and
administrative expense in the accompanying consolidated statements of
operations.

DEFERRED FINANCING COSTS

Deferred financing costs represent costs associated with the issuance of
debt. Deferred financing costs are amortized over the term of the related debt.
For the nine months ended March 31, 1996, amortization expense totalled
$532,685.

DEFERRED OFFERING COSTS

Deferred offering costs represent costs associated with the Company's
intended Initial Public Offering ("IPO") (see Note 14). Deferred offering costs
will be recorded as a reduction in proceeds upon completion of the intended IPO.
If the IPO is unsuccessful, such costs will be charged to operations.

REVENUE RECOGNITION

Sales are recognized at the time the products are shipped, in accordance
with the provisions of Statement of Position 91-1, "SOFTWARE REVENUE
RECOGNITION". While the Company has no obligations to perform future services
subsequent to shipment, the Company provides telephone customer support as an
accommodation to purchasers of its products for a limited time. Costs associated
with this effort are expensed as incurred (see Note 5).

The Company recognizes revenue, net of distribution fees, for product
shipped to Acclaim on the date that Acclaim purchases such product and ships it
to their customers. Acclaim is obligated to pay the Company on the earlier of
the month following the date of receipt of payment by it or 120 days following
the end of the month that the product was shipped. The Company is responsible
for product returns, and records a reserve for returns based on management's
evaluation of historical experience and current industry trends (see Note 15).

ROYALTIES

The Company enters into license agreements with movie studios, actors and
sound developers for recognizable movie and television properties which require
the Company to pay royalties to such movie studios, actors and sound developers.
The license agreements generally require the Company to pay a percentage of
sales of the products but no less than a specified amount (the minimum
guaranteed royalty). The Company records the minimum guaranteed royalty as a
liability and a related asset at the time the agreement is consummated. The
liability is extinguished as payments are made to the license holders and the
asset is amortized on a straight-line basis over the expected number of units to
be sold. Royalties are recognized upon the sale of the related product. Royalty
liabilities in excess of the minimum guaranteed amount are recorded when such
amounts are earned. Royalties for the years ended June 30, 1994 and 1995
amounted to $275,407 and $325,981, respectively. Royalties for the nine months
ended March 31, 1995 and 1996 amounted to $269,174 (unaudited) and $334,195
(unaudited), respectively, and are included in cost of sales in the accompanying
consolidated statements of operations.

F-9
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, the terms of a license agreement state that, upon any bankruptcy
or liquidation of the Company, licensing rights revert to the license holder.

The Company's products are based upon such licensed content of major motion
pictures and television shows under license and/or development agreements with
major entertainment studios. All of such license and development agreements to
which the Company currently is a party are for fixed terms which will expire
over the next one to five years. Although no licensor is required to extend any
license, the Company anticipates that the licensor under each agreement will
extend its terms, provided that the Company is in compliance with all
requirements of each license, including most significantly that the Company has
satisfied the applicable minimum royalty guarantees. In the event that any
licensor fails to renew its license agreement, then the subject license will
terminate and the Company will no longer be entitled to sell the licensed
product. The loss of one or more of the licenses could have a material adverse
effect on the Company's revenues and operating results. There can be no
assurance that the Company will satisfy its performance obligations under any
license or development agreement or, that even if such requirements are
satisfied, all material licenses will be renewed.

SOFTWARE DEVELOPMENT COSTS

In accordance with Statement of Financial Accounting Standards No. 86,
"ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED," ("SFAS No. 86"), the Company examines its software development costs
after technological feasibility has been established to determine if
capitalization is required. Through March 31, 1996, all software development
costs have been expensed.

INCOME TAXES

The Company accounts for income taxes under Statement on Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOMES TAXES" ("SFAS No. 109"),
which requires that deferred income taxes be recognized for the tax consequences
in future years of differences between the tax basis of assets and liabilities
and their financial reporting basis at rates based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.

Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes (see Note 13).

STOCK SPLIT

In September, 1995, the Company effectuated a 1-for-5.976 reverse stock
split of issued and outstanding common shares and common shares reserved for
options in connection with the August 1995 private placement (see Note 14). The
accompanying consolidated financial statements have been adjusted to reflect the
reverse stock split.

NET LOSS PER COMMON SHARE

Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective period. Common stock equivalents include
shares issuable upon the exercise of the Company's stock options. For the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1995
(unaudited) and 1996 (unaudited), common stock equivalents were excluded from
the computation of loss per common share because the effect of including such in
the computation would have been anti-dilutive (see Notes 10 and 14), except as
discussed below.

F-10
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to Securities and Exchange Commission Staff Bulletin No. 83, common
shares issued for consideration below an assumed initial public offering price
(estimated at $4.00 per share) and stock options granted (see Note 14) with
exercise prices below the IPO price during the twelve-month period preceding the
date of the filing of the Registration Statement have been included in the
calculation of common share equivalents, using the treasury stock method, as if
they were outstanding for all periods presented, including loss years where the
impact is anti-dilutive.

The only securities issued within twelve months of the registration
statement are options to purchase 100,000 shares granted at $3.40 per share (see
Note 14).

The computations of the weighted average common shares and equivalents
outstanding follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding during the
period...................................................... 1,611,107 1,847,908 1,844,150 1,827,638
Incremental shares assumed to be outstanding related to stock
options granted............................................. 15,000 15,000 15,000 15,000
----------- ----------- ----------- -----------
Weighted average common shares and equivalents outstanding... 1,626,107 1,862,908 1,859,150 1,842,638
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

SEASONALITY

The consumer software business traditionally has been seasonal. Typically,
net sales are highest during the fourth calendar quarter and decline
sequentially in the first and second calendar quarters. The seasonal pattern is
due primarily to the increased demand for consumer software during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect seasonality.

CONCENTRATION OF CREDIT RISK

The Company, at times, maintains cash balances at certain financial
institutions in excess of the federally insured maximum.

RECLASSIFICATIONS

Certain reclassifications have been made to 1994 amounts to conform to the
1995 presentation.

NOTE 2 -- INVENTORIES
Inventories consisted of the following:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Finished goods........................................................ $ 66,114 $ 266,306
Raw materials (components)............................................ 84,206 49,620
--------- -----------
$ 150,320 $ 315,926
--------- -----------
--------- -----------
</TABLE>

F-11
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Studio computers and equipment........................................ $ 118,496 $ 246,701
Office furniture and equipment........................................ 59,069 60,914
--------- ---------
177,565 307,615
Less accumulated depreciation......................................... (84,724) (118,019)
--------- ---------
$ 92,841 $ 189,596
--------- ---------
--------- ---------
</TABLE>

NOTE 4 -- NOTES PAYABLE
During the year ended June 30, 1995, the Company repaid a note due to a
stockholder amounting to $19,587. The Company also repaid a $22,000 note due to
an affiliate of a stockholder through issuance of shares in conjunction with the
1994 private placement.

As of June 30, 1995, the Company owed certain officers of the Company
$13,500 in the form of short-term non-interest bearing advances. In July 1995,
such advances were paid.

For discussion of notes payable issued in connection with the August 1995
private placement and with ASSI, Inc., see Note 14.

NOTE 5 -- SHORT-TERM ADVANCE
In June 1995, the Company entered into a five-year sales and distribution
agreement (the "Agreement") with a subsidiary of Acclaim, a distributor of
entertainment software. Under the terms of the Agreement, Acclaim was
responsible for the distribution of the Company's products on a world-wide basis
to retail accounts. The Company retained the rights to certain direct
distribution, such as direct mail and infomercials.

In conjunction with the signing of the Agreement, the Company received a
non-interest bearing advance from Acclaim in the amount of $400,000. The advance
was due in twelve monthly installments of $33,333 each, commencing no later than
90 days subsequent to first billing by the Company. The installments were to be
deducted from amounts due the Company from Acclaim related to product sales.
Management of the Company expects that this advance will be deducted in its
entirety from amounts due from Acclaim prior to June 30, 1996.

The Company is required under the terms of the Agreement to expend six
percent of the "projected sales revenues", as defined by Acclaim, related to
each product on the advertising and marketing of such product.

Under the Acclaim Distribution Agreement, all risks associated with
collection of accounts receivable with respect to all products sold by the
Company through Acclaim are solely the responsibility of Acclaim, whereas the
risk of product returns remains with the Company. The Company, however, is
exposed to the risk of credit collection from retailers and distributors other
than Acclaim. As discussed in Note 1, the Company establishes reserves for
returns that it believes to be adequate based upon historical return data and
its analysis of current customer inventory levels and sell through rates.
Nonetheless, the Company could be forced to accept substantial product returns
to maintain its relationships with retailers and its access to distribution
channels. The Company's policies also allow for returns of defective merchandise
for credit. Any significant amount of product returns could have a material
adverse effect on the Company's business, operating results and financial
condition.

In March 1996, such agreement was terminated (see Note 15).

F-12
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 -- DEFERRED REVENUE
In August 1994, the Company entered into a contract to develop computer
software for Fox Interactive, a division of Fox, Inc. In exchange, the Company
received nonrefundable advances based upon the attainment of certain milestones.
The Company recognizes these advances into revenues based upon the percentage of
completion method. As of June 30, 1995 and as of March 31, 1996 (unaudited), the
Company had received $24,000 of advances in excess of earnings and has therefore
recorded such amount as deferred revenue in the accompanying consolidated
balance sheet.

The Company has entered into various agreements with computer manufacturers
to sell and distribute certain of the Company's products. In exchange, the
Company receives royalties and advances against expected royalties. As of June
30, 1995, the Company received $40,000 of advances in excess of royalties
earned. Accordingly, the Company has recorded such amounts as deferred revenues
on the accompanying June 30, 1995 consolidated balance sheet. As of March 31,
1996, the Company had earned $15,000 (unaudited) of such advances. As of March
31, 1996, the Company received $12,000 (unaudited) of advance royalties in
connection with the licensing of the music division (see Note 12).

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

EMPLOYMENT CONTRACTS

The Company has entered into employment contracts with five of its
employees, including three officers, which expire on various dates through
April, 1998. Certain of the employment contracts provided for mandatory
increases in salary if the Company completed an initial public offering or a
secondary offering (see Note 14), provided for commissions based on net sales
and provide for automobile allowances.

On September 15, 1995, the employment contracts of two of the officers were
modified as follows:

i) The terms were extended through August 31, 1998 and 2000,
respectively.

ii) The contracts no longer provide for commissions after November
1995, or increases in base salaries other than cost of living increases.

iii) The contracts provide for bonuses based on the attainment of
certain milestones related to gross revenues, gross profits, and pre-tax
profit percentages.

Effective September 5, 1995, another officer of the Company with an
employment contract resigned from the Company.

Effective October 9, 1995, the Company entered into a two-year employment
contract with a new officer of the Company. The contract provides for a minimum
base salary and certain expense reimbursements.

Future minimum base salaries, by year and in the aggregate, after giving
effect to the modification of two of the contracts, the termination of another
due to resignation of the officer and the new contract, consist of the following
at June 30, 1995:

F-13
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commissions under employment contracts for the year ended June 30, 1994 and
1995, related to continuing operations amounted to $44,807 and $132,078,
respectively, and are included in marketing and sales costs in the accompanying
consolidated statements of operations. At June 30, 1995, $156,063 of such
amounts remain unpaid and are included as commissions payable in the
accompanying consolidated balance sheet.

Effective March 31, 1996, the employment contracts of the two officers were
modified (see Note 14).

OPERATING LEASES

The Company leases its facilities and certain equipment under noncancelable
operating leases which expire at various dates through February 1997.

The facility lease expense is being recognized on a straight-line basis over
the term of the related lease. The excess of the expense recognized over the
cost paid is included in accounts payable and accrued expenses in the
accompanying consolidated balance sheet.

Future minimum annual lease payments at June 30, 1995 are as follows:

Rent expense under operating lease agreements totalled $75,311 and $94,006
for the years ended June 30, 1994 and 1995, respectively, and $58,727
(unaudited) and $68,378 (unaudited) for the nine months ended March 31, 1995 and
1996, respectively, and is included in other general and administrative expenses
on the accompanying consolidated statements of operations.

CAPITAL LEASES

The Company leases certain equipment and computers under capital lease
obligations with interest rates ranging from 13.35% to 30.45% per annum.
Aggregate monthly principal and interest payments total $1,717 at June 30, 1995.

Future minimum lease payments, by year and in the aggregate, under capital
leases for equipment and computers with initial or remaining terms of one year
or more, consist of the following at June 30, 1995:

<TABLE>
<S> <C>
1996.................................................................... $ 17,387
1997.................................................................... 11,462
1998.................................................................... 6,513
1999.................................................................... 2,365
---------
37,727
Less amount representing interest....................................... (8,035)
---------
Present value of net minimum lease payments............................. 29,692
Less current portion.................................................... (12,921)
---------
$ 16,771
---------
---------
</TABLE>

During the nine months ended March 31, 1996, the Company entered into two
capital leases for certain office equipment aggregating $38,471 (unaudited) with
interest rates ranging from 17.38% to 27.93% (unaudited) per annum and which
expire through 1998 (unaudited).

F-14
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Interest expense under capital lease obligations amounted to $5,888 and
$7,045 for the years ended June 30, 1994 and 1995, respectively, and was
insignificant for the nine months ended March 31, 1995 (unaudited) and 1996
(unaudited) and is included in other income (expense) on the accompanying
consolidated statements of operations.

LITIGATION

In July 1995, a stockholder of the Company filed a complaint in the United
States District Court for the District of Washington, naming, among others, the
Company and its subsidiary, and Bentley Richards Investments (the "Placement
Agent") claiming federal and state securities violations, breach of contract,
and negligent misrepresentation related to the 1994 Private Placement (see Note
8). The complaint sought rescission of all monies paid to the Company and
unspecified amounts of punitive damages, attorney's fees and costs, prejudgment
and postjudgment interest and cost of suit.

In September 1995, the stockholder entered into a settlement agreement
whereby the stockholder dismissed all defendants, including the Company and its
subsidiary, upon delivery of certain shares of the Company's common stock owned
by the Placement Agent and its affiliates. A portion of these shares have been
distributed to the 1994 Private Placement holders and the balance are to be
canceled. Pursuant to the settlement, the Placement Agent's options also were
canceled. The Company was not required to pay any consideration as a part of the
settlement. The Company has been dismissed with prejudice from the complaint
(see Note 8).

NOTE 8 -- COMMON STOCK
During the fiscal year 1994, the Company engaged a Placement Agent to sell a
private placement of up to 125,502 shares of its common stock at $13.00 per
share. Through June 30, 1994, the Company issued 55,639 shares of its common
stock for $665,000 in cash, net of offering costs of $58,312.

During the fiscal year 1995, the Company issued an additional 59,238 shares
of its common stock in exchange for $706,107 in cash, net of costs of $61,759.

In accordance with the terms of the private offering, the Company agreed to
compensate the Placement Agent with up to 81,997 shares of its common stock and
an option to purchase up to 60,241 shares of its common stock at a price equal
to the closing bid price of the common stock on the first day of trading
following the stock-for-stock exchange (see Note 1). For the years ended June
30, 1994 and 1995, the Placement Agent earned 39,770 and 42,227 shares valued at
$475,315 and $504,686, respectively.

During September 1995, the Placement Agent notified the Company that all
shares held by the Placement Agent or its affiliates, or held in escrow for the
benefit of the Placement Agent or its affiliates, representing and aggregate of
108,769 shares of the Company's common stock, will be distributed to the holders
of the 1994 Private Placement shares and approximately 15,000 will be returned
to the Company for retirement (see Note 7).

CANCELLATION OF SHARES

In fiscal 1996, it has been determined by the Company that 35,771 shares of
common stock were improperly issued in 1992 due to the fact no consideration was
received. Accordingly, such common shares were canceled effective March 31,
1996.

NOTE 9 -- SERIES A PREFERRED STOCK
In connection with the Company's reverse acquisition of BSA (see Note 1) on
May 16, 1994, the Company issued to its major stockholder 1,000,000 shares of
Series A preferred stock, par value of $.001. The Series A preferred stockholder
was entitled to vote as a single class with the holders of the

F-15
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- SERIES A PREFERRED STOCK (CONTINUED)
Company's common stock on all matters coming before the Company's stockholders
for a vote. The holder of the Series A preferred stock was entitled to ten votes
per share whereas the holders of common stock are entitled to only one vote per
share. The Series A preferred stock was not redeemable or convertible, and the
holder of the Series A preferred stock was not entitled to receive any
dividends. The holder was entitled to a liquidation preference of $.001 per
share, provided the holder would not share any liquidating distribution except
to the extent of such preference. The Company did not ascribe any value to the
preferred shares.

Prior to June 30, 1994, the 1,000,000 shares of Series A preferred stock
were converted into 83,669 shares of the Company's common stock. The Company
ascribed a value to the 83,669 shares of common stock of $645,000 and included
such amount under operating costs and expenses in the 1994 accompanying
consolidated statement of operations.

Subsequent to June 30, 1995, the Company amended its articles of
incorporation and deleted the authorization to issued Series A preferred stock.

NOTE 10 -- STOCK OPTIONS
The Company adopted the 1992 Stock Option Plan (the "Plan") in May, 1992,
authorizing the issuance of up to 2,000,000 shares of common stock to employees,
officers and directors and to employees of companies who do business with the
Company.

Any shares which are subject to an award but are not used because the terms
and conditions of the award are not met, or any shares which are used by
participants to pay all or part of the purchase price of any option may again be
used for awards under the Plan. However, shares with respect to which a stock
appreciation right (see below) has been exercised may not again be made subject
to an award.

At the discretion of a committee comprised of directors, officers and key
employees of the Company and its subsidiaries or employees of companies with
which the Company does business may become participants in the Plan upon
receiving grants in the form of stock options or restricted stock.

Stock options may be granted as non-qualified stock options or incentive
stock options, upon stockholder approval as defined, but incentive stock options
may not be granted at a price less than 100% of the fair market value of the
stock as of the date of grant (110% as to any 10% stockholder at the time of
grant); non-qualified stock options may not be granted at a price less than 85%
of fair market value of the stock as of the date of grant. Restricted stock may
not be granted under the Plan in connection with incentive stock options.

Stock options granted under the Plan may include the right to acquire an
Accelerated Ownership Non-Qualified Stock Option ("AO"). All options granted to
date have included the AO feature. If an option grant contains the AO feature
and if a participant pays all or part of the purchase price of the option with
shares of the Company's common stock, then upon exercise of the option the
participant is granted an AO to purchase, at the fair market value as of the
date of the AO grant, the number of shares of common stock of the Company equal
to the sum of the number of whole shares used by the participant in payment of
the purchase price and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related.

Stock appreciation rights and/or restricted stock may be granted in
conjunction with, or may be unrelated to stock options. A stock appreciation
right entitles a participant to receive a payment, in

F-16
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK OPTIONS (CONTINUED)
cash or common stock or a combination thereof, in an amount equal to the excess
of fair market value of the stock at the time of exercise over the fair market
value of the date of grant. Stock appreciation rights may be exercised during a
period of time fixed by the Committee.

Restricted stock requires the recipient to continue in service as an
officer, director, employee or consultant for a fixed period of time for
ownership of the shares to vest. If restricted shares or stock appreciation
rights are issued in tandem with options, the restricted stock or stock
appreciation right is canceled upon exercise of the option and the option will
likewise terminate upon vesting of the restricted shares.

On April 6, 1994, the Company issued a non-qualified stock option outside of
the Plan to an officer of the Company to purchase an aggregate of 251,004 shares
of the Company's common stock for $.06 per share and subsequently in fiscal 1994
an option was granted to the officer to purchase 41,834 shares of the Company's
common stock for $.06 per share. All stock options issued to the officer were
immediately vested and are exercisable for a period of up to four years after
termination of employment from the Company. The difference between the fair
market value of the common stock underlying the options at the date of grant and
the exercise price has been included in operating costs and expenses in the
accompanying 1994 consolidated statement of operations.

On April 6, 1994, the Company issued options to purchase 199,130 shares of
the Company's common stock at $.06 per share to employees of the Company and to
certain consultants. The difference between fair market value of the common
stock underlying the options at the date of grant and the exercise price has
been included in operating costs and expenses in the accompanying consolidated
statement of operations. These options had an original vesting period of four
years. In connection with the offerings (see Note 14), the Company modified the
vesting period to 50% vested on the first year anniversary from the date of
grant, 25% on the third year anniversary and 25% on the fourth year anniversary
from the date of grant.

On September 5, 1995, in connection with the resignation of an officer of
the Company, 12,550 options were canceled in accordance with the Plan and the
officer's employment contract. In connection with the resignation of such
officer, 4,184 options were exercised effective June 30, 1995.

On October 9, 1995, the Company granted 100,000 options to an
employee/officer with an exercise price of $5.00, the fair market value of the
common stock as determined by the Company. The options vested immediately and
expire 10 years from the date of grant. On March 31, 1996, such options were
canceled and new options issued (see Note 14).

F-17
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- STOCK OPTIONS (CONTINUED)
The following table summarizes option transactions during the years ended
June 30, 1994 and 1995 and for the nine months ended March 31, 1996:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
---------- --------------
<S> <C> <C>
Balances at July 1, 1993.............................................................. -- --
Granted............................................................................. 491,642 $0.06
Exercised........................................................................... -- --
Canceled............................................................................ -- --
---------- --------------
Balances at June 30, 1994............................................................. 491,642 $0.06
Granted............................................................................. -- --
Exercised........................................................................... (4,184) $0.06
Canceled............................................................................ (12,550) $0.06
---------- --------------
Balances at June 30, 1995............................................................. 474,908 $0.06
Granted............................................................................. 300,000 $3.40-$5.00
Exercised........................................................................... -- --
Canceled............................................................................ (100,000) 5.00
---------- --------------
Balances at March 31, 1996 (unaudited)................................................ 674,908 $0.06-$5.00
---------- --------------
---------- --------------
Vested as of March 31, 1996 (unaudited)............................................... 484,037
----------
----------
</TABLE>

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
financial statements issued after fiscal year 1996.

NOTE 11 -- SIGNIFICANT CUSTOMERS
During the year ended June 30, 1994, four of the Company's customers
accounted for 29% of total revenues. A listing of revenues, as a percentage of
total revenues from continuing operations, for each of such customers for the
years ended June 30, 1994 is as follows:

<TABLE>
<S> <C>
Customer A........................................................................... 10%
Customer B........................................................................... 8%
Customer C........................................................................... 7%
Customer D........................................................................... 4%
--
29%
--
--
</TABLE>

During the year ended June 30, 1995, one customer accounted for 18% of total
revenues from continuing operations.

During the nine months ended March 31, 1995, three different customers
accounted for an aggregate 17% (unaudited) of total revenues from continuing
operations.

During the nine months ended March 31, 1996, one of the Company's customers,
a subsidiary of Acclaim (see Note 5), accounted for 84% (unaudited) of total
revenues from continuing operations. Significantly, all accounts receivable as
of March 31, 1996 is due from such customer.

F-18
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 -- DISCONTINUED OPERATIONS
In July 1995, the Company approved a formal plan to license certain
proprietary assets to Greytsounds Sound Development ("GSD") in exchange for
royalties, as defined. Upon commencement of a license agreement with GSD,
$15,000 is to be paid to the Company representing advance royalties. GSD also is
to guarantee $50,000 of royalties over the license term of two years. The
expected date of the agreement is to be no later than November 1, 1995. The
license agreement is to be exclusive and worldwide.

The proprietary assets licensed to GSD include the Company's musical
instrument sound library, all music related inventory and all music related
fixed assets owned and leased by the Company. As of June 30, 1995, the net
carrying value of these assets included on the accompanying consolidated balance
sheet amounted to $50,913. Net liabilities related to the Company's music
division not licensed to GSD totalled $32,722 as of June 30, 1995.

The Company recorded a liability of $32,000 as of June 30, 1995 representing
estimated losses on disposal and estimated operating losses from July 1, 1995 to
the date of disposal, net of guaranteed royalties of $50,000. The net
liabilities related to the disposal of the music division are included in
accounts payable and accrued expenses on the accompanying consolidated balance
sheet as of June 30, 1995.

The following summarized the assets and liabilities of the music division at
June 30, 1995:

<TABLE>
<S> <C>
Assets:
Accounts receivable............................................................. $ 4,458
Inventory....................................................................... 24,049
Property and equipment, net..................................................... 26,864
---------
$ 55,371
---------
---------

Liabilities:
Accounts payable and accrued expenses........................................... $ 21,267
Accrued royalties............................................................... 3,415
Commissions payable............................................................. 12,498
---------
$ 37,180
---------
---------
</TABLE>

As of March 31, 1996 (unaudited) no assets or liabilities of the music
division are included on the accompanying consolidated balance sheet. Included
in deferred revenue on the accompanying consolidated balance sheet is $12,000
(unaudited) as of March 31, 1996.

The following summarizes the results of operations for the discontinued
operations:

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
JUNE 30, MARCH 31,
-------------------- ------------------------
1994 1995 1995 1996
--------- --------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................................... $ 217,837 $ 220,937 $ 186,221 $ --
Costs and expenses............................ (333,724) (332,043) (235,267) --
--------- --------- --------- -----
Loss from operations.......................... $(115,887) $(111,106) $ (49,046) $ --
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>

NOTE 13 -- INCOME TAXES
The provision for income taxes from continuing operations for the years
ended June 30, 1994 and 1995 is comprised of minimum state taxes only.

F-19
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 -- INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes from continuing
operations with expected income tax benefit computed by applying the federal
statutory income tax rate to loss before provision for income taxes for the
years ended June 30, 1994 and 1995 is as follows:

<TABLE>
<CAPTION>
1994 1995
----------------------- ----------------------
$ % $ %
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Income tax benefit computed at federal statutory
tax rate.......................................... (1,312,484) (34.0)% (540,414) (34.0)%
State and local taxes.............................. 1,600 0.0 1,600 0.0
Expenses not deductible for income tax purposes.... 1,028,553 26.6 252,173 15.9
Change in the beginning-of-the-period balance of
the valuation allowance for deferred tax assets
allocated to income tax benefit................... 283,931 7.4 288,241 18.1
---------- ----- --------- -----
$ 1,600 0.0% $ 1,600 0.0%
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>

The components of the net deferred tax asset recorded in the accompanying
balance sheets for the year ended June 30, 1995 is as follows:

<TABLE>
<S> <C>
Accounts receivable, principally due to allowances for sales returns and
doubtful accounts............................................................. $ 48,104
Accrued liabilities, principally due to accrual for financial reporting
purposes...................................................................... 1,882,280
Net operating loss carryforwards............................................... 931,659
Less valuation allowance....................................................... (2,862,043)
-----------
$ --
-----------
-----------
</TABLE>

The valuation allowance increased $1,185,225 during the year ended June 30,
1995.

At June 30, 1995, the Company had federal and state net operating loss
carryforwards of approximately $2,513,000 and $1,248,000, respectively,
available to offset future taxable federal and state income. The federal and
state carryforward amounts expire in varying amounts through 2011 and 2000,
respectively.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for federal income tax reporting purposes are
subject to annual limitations. Should a change of ownership occur, net operating
loss carryforwards may be limited as to use in future years.

NOTE 14 -- SUBSEQUENT EVENTS

1995 BRIDGE FINANCING

During June through August 1995, the Company offered up to $700,000 of Units
(the "1995 Bridge Financing"), each consisting of $9,975 in principal amount of
the Company's 10% Secured Promissory Notes (the "Bridge Notes") and warrants to
purchase 586 shares of the Company's common stock (the "Bridge Warrants").
Pursuant to this offering, the Company sold 32 Units for aggregate proceeds to
the Company of $278,400, net of costs of $41,600. A total of 18,747 Bridge
Warrants were issued in connection therewith which are exercisable as indicated
below. The dealer/ manager received 20,918 Bridge Warrants for $50 as partial
consideration for services in connection with this offering which are
exercisable as indicated below.

During August 1995, the Company notified the dealer/manager to discontinue
offering additional units.

F-20
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
The principal and accrued interest on the Bridge Notes was due and payable
in full on August 15, 1995. The Company did not repay the Bridge Notes upon
their maturity. During the pendency of any such default, the Bridge Note holders
were entitled to receive a penalty of two percent per month in addition to the
interest otherwise payable on the Bridge Notes. These notes were repaid in full
during September 1995 in connection with the 1995 Private Placement (see below).

The obligations of the Company under the Bridge Notes were secured by a
security interest in all the assets of the Company, including a pledge of all of
the issued and outstanding capital stock of the Subsidiary.

Each Bridge Warrant entitles its holder to purchase one share of common
stock. The Bridge Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) the completion by the Company of an initial registered
public offering of its common stock (IPO). The Bridge Warrants will expire on
the earlier of (i) December 31, 2000 or (ii) the date 18 months after completion
of an IPO. The exercise price of the Bridge Warrants will equal 110% of the
price per share of the common stock in the IPO, or if the IPO has not occurred
by December 31, 1996, $5.98 per share. In November 1995, the Bridge Warrant
holders exchanged these Bridge Warrants for new warrants with the same terms as
the warrants issued in connection with the 1995 Private Placement (see below).

1995 PRIVATE PLACEMENT

In August 1995, the Company engaged two dealer/managers to assist in a
private placement (the "1995 Private Placement") to sell a minimum of $1,000,000
of Units to a maximum of $5,000,000 of Units, each consisting of $95,000 in
principal amount of the Company's 10% Secured Promissory Notes (the "Private
Notes") due on the earlier of September 1, 1996 or the completion by the Company
of an IPO, and 100,000 warrants (the "Private Warrants") to purchase one share
of the Company's common stock. A total of 5,250,000 Private Warrants were issued
in connection therewith which are exercisable as indicated below. As of March
31, 1996, the Company had sold 52.5 units for aggregate proceeds of $4,256,400,
of which $262,500 represents the Private Warrants, net of costs of $993,600. In
connection with this offering, the Company issued 400,000 Private Warrants as
partial consideration for services provided by a dealer/manager, which are
exercisable as indicated below.

The obligations of the Company under the Private Notes are secured by a
security interest in all the assets of the Company, including a pledge of all of
the issued and outstanding capital stock of its Subsidiary. A portion of the net
proceeds of this private placement were utilized to retire all of the
outstanding indebtedness of the 1995 Bridge Financing.

Each Private Warrant entitles its holder to purchase one share of common
stock. The Private Warrants become exercisable commencing on the earlier of (i)
December 31, 1996 or (ii) the completion by the Company of an IPO. The Private
Warrants expire on December 31, 2001. The exercise price of the Private Warrants
will equal 110% of the price per share of the common stock in the IPO, or if the
IPO has not occurred by December 31, 1996, $4.50 per share.

Upon completion of any IPO, each outstanding Private Warrant will be
converted into warrants included in the IPO (the "IPO Warrants"). The terms of
the IPO Warrants may not be any less favorable than the terms of the Private
Warrants, except that the IPO Warrants may be redeemable at the option of the
Company upon certain terms.

STOCKHOLDER PRIVATE PLACEMENT

Concurrent with the 1995 Private Placement, a current stockholder conducted
a private placement of up to 200,000 shares of common stock, held by such
stockholder, at a purchase price of $5.00 per share. If the Company has not
completed an IPO by the earlier of December 31, 1996 or the date that an initial
public offering of the Company's subsidiary's common stock is completed, the
common

F-21
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
stock purchased in this private placement will be exchanged for shares of the
Company's subsidiary's common stock on a one-for-one basis. Through March 31,
1996, the stockholder had sold 107,500 shares.

REGISTRATION STATEMENT

The Company has filed a registration statement on Form SB-2, as amended,
with the Securities and Exchange Commission for an initial public offering of
2,400,000 shares at an estimated offering price of $4.00 and 1,200,000
redeemable warrants at $.25 per warrant. In connection with the proposed
offering, the Company has incurred expenses amounting to $146,890. Such expenses
have been capitalized on the accompanying balance sheet as of March 31, 1996
(unaudited).

In connection therewith, the Company is also registering 340,000 shares of
its common stock and 20,000 shares of common stock held by a selling stockholder
to cover over-allotments and 107,500 shares of common stock registered for the
account of certain selling stockholders. The Company is also registering 180,000
redeemable warrants to cover over-allotments.

The Company will also, in connection with the IPO, sell the underwriters a
warrant, for $50, which will entitle the holders to purchase 20,000 shares of
common stock at 145 percent of the IPO price.

ASSI WARRANTS

On April 30, 1996, in consideration of certain financial and personnel
consulting service provided to the Company in 1996, including advising the
Company regarding capital raising alternatives and executive recruiting, the
company has entered into an agreement to issue to ASSI, Inc. warrants to
purchase 2,000,000 shares of common stock at an exercise price of $4.40 per
share (the "ASSI Warrants").

On May 30, 1996, ASSI, Inc. loaned the Company $500,000 (the "ASSI
Convertible Loan"). The ASSI Convertible Loan bears interest at 8% per annum and
principal and accrued interest is due on the earlier of September 1, 1996 or the
completion of the Company's initial public offering. Upon the closing of the
Company's initial public offering, ASSI, Inc. may convert all or part of the
ASSI Convertible Loan plus accrued interest into warrants to purchase common
stock (the "ASSI Loan Warrants") at a conversion price of $.25 per warrant.

The terms of the ASSI Warrants and ASSI Loan Warrants presently are
substantially the same as those of the Private Warrants, subject to the
differences identified in clauses (i) to (iii) of the following sentence. Upon
the completion of the offering made hereby, the terms of the ASSI Warrants and
the ASSI Loan Warrants (if any) will become substantially the same as those of
the Redeemable Warrants except that (i) they will become exercisable September
1, 1996, (ii) they will not be mandatorily redeemable by the Company and (iii)
they will be subject to separate registration rights, including one demand
registration right and unlimited piggyback registration rights for as long as
they are held by ASSI, Inc. or one of its affiliates. Upon a transfer of the
ASSI Warrants or ASSI Loan Warrants to any nonaffiliate of ASSI, Inc., the terms
of such transferred ASSI Warrants and ASSI Loan Warrants will become identical
to those of the Redeemable Warrants. The demand registration rights will expire
on August 31, 2001. Until and unless exercised, the holders of the ASSI Warrants
and ASSI Loan Warrants will have no voting, dividend or other rights as
shareholders of the Company.

OPTIONS

On October 9, 1995, the Company adopted the 1995 Stock Option Plan. On May
15, 1996, the Company adopted the Company's Restated 1995 Stock Option Plan
whereby the Company can grant up to 500,000 options for shares of the Company's
common stock. Currently, no options have been

F-22
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 -- SUBSEQUENT EVENTS (CONTINUED)
granted under this plan. On March 31, 1996, an employee/officer agreed to the
termination of his existing 100,000 share option in consideration for the
Company's agreement to grant to him a new 200,000 share option pursuant to the
1992 stock option plan. Such option will be vested and exercisable upon the date
of its grant as to 100,000 shares at a purchase price of $3.40 per share, and
will become vested and exercisable as to 100,000 shares ratably between June 30,
1996 and September 30, 1997 at a purchase price of $4.00 per share. The
employee/officer's employment agreement further provides that following the
voluntary or involuntary termination of his employment by the Company, the
employee/officer is entitled to a single demand registration right with respect
to the common stock held by or issuable to him pursuant to his option agreement.

The Company has also agreed to grant 13,610 options under the 1995 stock
option plan to other non-executive employees at an exercise price of $4.00 per
share.

EMPLOYMENT CONTRACTS

In April 1996, effective March 31, 1996, the Company modified the employment
contracts of two officers. Such modifications reduced the annual base
compensation by a specified amount. Upon the Company achieving specified sales
levels, the annual base compensation is increased by the amount of the specified
reduction. The Company also modified the employment contract of a third officer
in April 1996 to change the number and vesting period of options previously
granted and to grant additional options (see Note 1).

NOTE 15 -- DISTRIBUTION AGREEMENTS
The Company and Acclaim have terminated the distribution agreement as of
April 30, 1996. On or before June 30, 1996, Acclaim will render a final
accounting to the Company together with payment of the balances of any amounts
due to the Company under the distribution agreement. Acclaim has notified its
accounts that it will not accept returns of any of the Company's software
products after June 30, 1996. The Company, however, will remain liable for all
such returns regardless of when received by Acclaim.

On June 1, 1996, the Company entered into a distribution services agreement
with Simon & Schuster Interactive Distribution Services ("SSIDS"). SSIDS is the
consumer software distribution unit of Simon & Schuster, Inc., the publishing
operations of Viacom, Inc. Pursuant to this new distribution agreement, SSIDS
will provide distribution, warehousing and order fulfillment services for all of
the Company's products (subject to certain exceptions) throughout the United
States and Canada. The Company's relationship with SSIDS is exclusive except as
regards the rights to distribute the Company's products in
direct-to-the-customer programs including direct mail, telemarketing and in-box
coupon fulfillment, which are nonexclusive.

Pursuant to the agreement, SSIDS will make a monthly payment to the Company
in an amount equal to its gross revenues during such month from the Company's
products, less a distribution fee and reserve for returns equal to stated
percentages of the gross revenues and less certain other items, including
out-of-pocket costs associated with inventory maintenance and order fulfillment.
The payments will be due not later than 75 days after the billing calendar
month. Under the agreement with SSIDS, the Company will remain liable for
product returns. The Company intends to maintain a reserve of 15 percent of
gross revenues for product returns.

The agreement is for a term of two years. The Company will be substantially
dependent upon SSIDS for the distribution of its product throughout North
America during the term of the agreement. SSIDS, however, will not be obligated
to sell any specified minimum quantity of the Company's products. There can be
no assurance as to the volume of the product sales that may be achieved by
SSIDS. Because the Company's rights to market its products through channels
other than SSIDS are

F-23
<PAGE>
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- DISTRIBUTION AGREEMENTS (CONTINUED)
limited, the Company's ability to realize the cash flow necessary to fund its
ongoing operations and to achieve profitability will be largely dependent upon
the success of SSIDS in marketing its products. In addition, the Company may
experience a loss of sales momentum as a result of the transition from utilizing
Acclaim to SSIDS as its exclusive distributor.

F-24
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THE PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION 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................................... 9
Use of Proceeds................................ 23
Dividend Policy................................ 24
Dilution....................................... 25
Capitalization................................. 27
Selected Financial Data........................ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 29
Business....................................... 34
Management..................................... 47
Principal and Selling Stockholders............. 56
Resale of Outstanding Securities............... 57
Certain Transactions........................... 57
Description of Securities...................... 61
Shares Eligible for Future Sale................ 64
Underwriting................................... 67
Legal Matters.................................. 69
Experts........................................ 69
Additional Information......................... 69
Index to Consolidated Financial Statements..... F-1
</TABLE>

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

UNTIL JULY 27, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS OBLIGATION IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

2,400,000 SHARES
OF COMMON STOCK
AND
1,200,000 REDEEMABLE WARRANTS

[SOUND SOURCE
INTERACTIVE, INC.
LOGO]

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

PROSPECTUS

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

THE BOSTON GROUP, L.P.
JOSEPH STEVENS &
COMPANY, L.P.
JULY 2, 1996

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

PROSPECTUS

[SOUND SOURCE INTERACTIVE, INC. LOGO]

500,338 SHARES OF COMMON STOCK
5,689,665 REDEEMABLE WARRANTS
11,169,665 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF WARRANTS

This Prospectus relates to the registration by Sound Source Interactive,
Inc. (the "Company"), at its expense, for the account of certain security
holders (the "Selling Security Holders") of 500,338 shares of common stock, par
value $.001 (the "Common Stock"), and 5,689,665 Redeemable Warrants (the
"Redeemable Warrants") (the Common Stock and Redeemable Warrants offered by the
Selling Security Holders are sometimes collectively referred to herein as the
"Selling Security Holders' Securities"). The Selling Security Holders'
Securities are not being underwritten in this offering and the Company will not
receive any proceeds from the sale of the Selling Security Holders' Securities.
See "Selling Security Holders". The Selling Security Holders' Securities may be
sold by the Selling Security Holders or their respective transferees commencing
on the date of this Prospectus. Sales of the Selling Security Holders'
Securities may depress the price of the Common Stock and Redeemable Warrants in
any market that may develop for the Common Stock and Redeemable Warrants. See
"Prospectus Summary -- The Offering," "Selling Security Holders" and "Certain
Transactions."

This Prospectus also relates to the registration by the Company for its own
account of 11,169,665 shares of Common Stock issuable by the Company upon
exercise of the 5,689,665 Redeemable Warrants being registered for the account
of the Selling Security Holders as described in the preceding paragraph,
1,380,000 Redeemable Warrants issued by the Company pursuant to a separate
Prospectus (the "Primary Offering Prospectus") filed with the Registration
Statement of which this Prospectus is a part, 2,000,000 warrants which the
Company has issued, and up to 2,100,000 warrants which the Company may issue to
ASSI, Inc., a consultant to and creditor of the Company. This Prospectus, except
for this Cover Page, the back Cover Page and the information contained herein
under the heading "Selling Security Holders" and "Plan of Distribution," is
identical to the Primary Offering Prospectus. This Prospectus includes certain
information that may not be pertinent to the sale by the Selling Security
Holders.

Prior to this offering, there has been no public market for the Common Stock
or the Redeemable Warrants and there can be no assurance that such a market will
exist after this offering.

THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
AND "DILUTION" COMMENCING ON PAGES 9 AND 25, RESPECTIVELY.

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

The date of this Prospectus is July 2, 1996

<PAGE>
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. If any Selling Security
Holder sells his, her or its Selling Security Holders' Securities pursuant to
this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

The Company is located at 2985 East Hillcrest Drive, Suite A, Westlake
Village, California 91362. Its telephone number is (805) 494-9996. Its facsimile
number is (805) 379-3446.

4
<PAGE>
THE OFFERING

5
<PAGE>

6
<PAGE>

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

7
<PAGE>
SUMMARY FINANCIAL INFORMATION

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

8
<PAGE>
RISK FACTORS

PAST OPERATING LOSSES; GOING CONCERN QUALIFICATION. The Company sustained
net losses of $3,977,733 and $1,734,160 for the fiscal years ended June 30, 1994
and 1995, respectively, and a net

UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES. Consumer
preferences for software products are difficult to predict, and few consumer
software products achieve sustained

SHARES ELIGIBLE FOR FUTURE SALE. A total of 4,208,291 shares of Common
Stock will be issued and outstanding upon the consummation of this offering,
assuming no exercise of the Underwriters' over-allotment option and assuming
that the Underwriters' Warrant and all other options and warrants then to be
outstanding are not exercised. Of such shares, the 2,400,000 shares offered by
the Company and the 107,500 currently outstanding shares offered by the Selling
Security Holders will be freely tradeable without further registration under the
Securities Act, except for any such shares of Common Stock held by an
"affiliate" of the Company. Of the remaining 700,791 outstanding shares, 183,723
shares are freely tradeable and the remainder are "restricted shares" as defined
in Rule 144 under the Securities Act and may not be sold without registration
under the Securities Act unless pursuant to an applicable exemption therefrom.
See generally "Shares Eligible for Future Sale."

19
<PAGE>

22
<PAGE>
USE OF PROCEEDS

(4) Represents amounts expected to be paid to licensors in connection with the
obtaining of new licenses, and to licensors under the terms of existing
licenses.

(5) Represents amounts expected to be expended for purchases of equipment for
use in the Company's business.

(6) Working capital will be used, among other things, to fund operating
expenses, including rent and salaries.

DIVIDEND POLICY

Under Delaware law, dividends may be paid out of a corporation's capital
surplus, or if there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared or the preceding fiscal year.
California law generally prohibits a corporation from paying dividends unless
the retained earnings of the corporation immediately prior to the distribution
exceed the amount of the distribution. Alternatively, a corporation may pay
dividends if the assets of the corporation exceed 1 1/4 times its liabilities;
and (ii) the current assets of the corporation equal or exceed its current
liabilities, but if the average pre-tax earnings of the corporation before
interest expense for the two years preceding the distribution was less than the
average interest expense of the corporation for those years, the current assets
of the corporation must exceed 1 1/4 times its current liabilities. Under the
foregoing requirements, the Company will not be able to pay dividends until it
achieves positive retained earnings, which management does not anticipate will
occur for the foreseeable future. See "Risk Factors -- No Dividends."

24
<PAGE>
DILUTION

The following table illustrates the per share dilution to be incurred by the
purchasers of Common Stock of this offering from the initial public offering
price of $4.00 per share:

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

25
<PAGE>

26
<PAGE>
CAPITALIZATION

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

(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an initial public offering price of $.25 per
Redeemable Warrant, net of anticipated expenses of the offering (estimated
at $990,000 for the Underwriters' discount and $732,000 for expenses,
including the Underwriters' non-accountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and all
of the Company's other funded indebtedness (estimated at $5,230,000 at March
31, 1996) with a portion of such proceeds. The as adjusted amounts do not
reflect the issuance of up to 340,000 shares of Common Stock and 180,000
Redeemable Warrants by the Company to cover over-allotments, if any, or the
exercise of the Underwriters' Warrant to purchase up to 240,000 shares of
Common Stock, or the exercise of any other outstanding (or agreed to be
issued) options or warrants to purchase up to an additional 12,220,183
shares of Common Stock.

27
<PAGE>
SELECTED FINANCIAL DATA

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

(1) As adjusted to reflect (i) the issuance of 2,400,000 shares of Common Stock
at an initial public offering price of $4.00 per share and 1,200,000
Redeemable Warrants at an initial public offering price of $.25 per
Redeemable Warrant, net of the expenses of the offering (estimated at
$990,000 for the Underwriters' discount and $732,000 for expenses,
including the Underwriters' non-accountable expense allowance); (ii) the
borrowing by the Company pursuant to the ASSI Convertible Loan; and (iii)
the repayment of the ASSI Convertible Loan in the amount of $500,000 and
all of the Company's other funded indebtedness (estimated at $5,230,000 at
March 31, 1996) with a portion of such proceeds. The as adjusted amounts do
not reflect the issuance of up to 340,000 shares of Common Stock and
180,000 Redeemable Warrants by the Company to cover over-allotments, if
any, or the exercise of the Underwriters' Warrant to purchase up to 240,000
shares of Common Stock, or the exercise of any other outstanding (or agreed
to be issued) options or warrants to purchase up to an additional
12,220,183 shares of Common Stock.

28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

29
<PAGE>
RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 1995 COMPARED TO NINE MONTHS ENDED MARCH 31,
1996

FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995

The Company established a reserve for returns that it believes to be
adequate based upon historical return data and its analysis of current customer
inventory levels and sell through rates.

QUARTERLY RESULTS OF OPERATIONS

SEASONALITY

LIQUIDITY AND CAPITAL RESOURCES

In their report respecting the Company's results of operations for its
fiscal year ended June 30, 1995, the Company's auditors state that the Company's
recurring losses from operations, its excess of current liabilities over current
assets and its stockholders' deficit raise substantial doubt about its ability
to continue as a going concern. Upon completion of this offering, on a pro forma
basis as of March 31, 1996 the Company's current assets will exceed its current
liabilities and it will have stockholders' equity of $3,758,661. The Company
therefore believes that its auditors will delete such going concern
qualification upon the completion of this offering and repayment of the
Company's funded indebtedness out of the proceeds hereof and the Company's
demonstration of its ability to realize sufficient cash flow to sustain its
operations for the foreseeable future.

NEW ACCOUNTING STANDARDS

33
<PAGE>
BUSINESS

GENERAL

The Company's products are based on licensed content of major motion
pictures and television shows under agreement with major entertainment studios
including Viacom Consumer Products (as agent for Paramount Pictures Corp.),
Lucasfilm Ltd., Warner Bros. Consumer Products, CBS Entertainment, MCA/Universal
Merchandising, Inc., Carolco Pictures, Inc., DC Comics, MGM/UA Merchandising,
Inc. and others. The Company's license agreements for existing products include
BABE-TM-, LASSIE-TM-, THE LITTLE RASCALS-TM-, BLACK BEAUTY-TM-, THE ADVENTURES
OF BATMAN AND ROBIN-TM-, TERMINATOR 2: JUDGMENT DAY-TM-, the STAR WARS-TM-
trilogy, FREE WILLY 2-TM-, THE SECRET GARDEN-TM-, STAR TREK-TM-, SATURDAY NIGHT
LIVE-TM-, THE TWILIGHT ZONE-TM-, TOTAL RECALL-TM-, and other popular titles. The
Company also holds licenses for new products being developed for release in 1996
on ALL DOGS GO TO HEAVEN II-TM-, THE LAND BEFORE TIME-TM-, DRAGON HEART-TM-, and
I LOVE LUCY-TM-. The Company is continuing the negotiation of additional
licenses for its product line offerings. Management believes the Company is
capable of continuing to obtain new licenses for major motion pictures and
television shows and developing new, high quality software products using
content from these entertainment properties.

INDUSTRY BACKGROUND

BUSINESS STRATEGY

- ACQUISITIONS. The Company intends to pursue acquisitions of entertainment
software companies and selected titles within existing or new product
categories. The Company believes that

PRODUCTS

INTERACTIVE CD-ROM

37
<PAGE>
The following is a listing of the Company's INTERACTIVE MOVIEBOOK-TM-
products which are currently existing or planned for release, all of which are
on CD-ROM:

The following creativity center products which are planned for release in
1996.

ENTERTAINMENT UTILITIES

MUSIC INDUSTRY PRODUCTS

DEVELOPMENT AGREEMENTS

The Company currently does not intend to enter into additional development
agreements in the foreseeable future, because it intends to emphasize the
development of its own products.

40
<PAGE>
PRODUCT DISTRIBUTION

RELATIONSHIP WITH ACCLAIM

In June 1995, the Company entered into a Sales and Distribution Agreement
with Acclaim Distribution, Inc., a subsidiary of Acclaim Entertainment, Inc.
(collectively, "Acclaim," as previously defined), a distributor of entertainment
software. The Company had no sales to or through Acclaim during its fiscal year
ended June 30, 1995. During the nine-month period ended March 31, 1996, of the
Company's total revenues from retail software sales of $1,824,734, a total of
$1,617,839 (86 percent) were generated by Acclaim. Under the terms of this
agreement, Acclaim was the exclusive distributor of the Company's products on a
worldwide basis to retail accounts, resellers and distributors except with
respect to distribution in North America by direct mail, "infomercials,"
television home shopping channels or through "bundling" agreements with OEMs. As
a result of the foregoing, the Company was substantially dependent upon Acclaim
for the distribution and sale of its products through March 31, 1996. The
Company was not satisfied with the distribution of its products through Acclaim
and determined to terminate the Acclaim distribution agreement in March 1996.
The Company and Acclaim have terminated the distribution agreement as of April
30, 1996.

RELATIONSHIP WITH SSIDS

GENERAL

SALES AND MARKETING

42
<PAGE>
DEVELOPMENT

OPERATIONS

The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent

COMPETITION

PROPRIETARY RIGHTS AND LICENSES

The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. All of the Company's new products are CD-ROM based, and hence are
difficult to copy. However, unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. Any such claims, with or without
merit, can be time consuming and expensive to defend and resolve.

Although the Company has not been the subject of any actual, pending or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. In the future, litigation may be
necessary to enforce the Company's proprietary rights, to protect copyrights,
trademarks and trade secrets and other intellectual property rights owned by the
Company or its licensors, to defend the Company against claimed infringements of
the rights of others and to determine the scope and validity of the proprietary
rights of the Company and others. Any such litigation, with or without merit,
could be costly and result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or prevent
the Company from selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors -- Limited Protection of Intellectual Property and
Proprietary Rights."

Any future change in ownership or control of the Company, including exercise
of the ASSI Warrants and/or the ASSI Loan Warrants (if any) (see "Certain
Transactions -- Agreements with ASSI, Inc."), could result in the termination of
the licenses referred to above. The potential terminability of such licenses
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock.

EMPLOYEES

FACILITIES

LEGAL MATTERS

46
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company, their ages and their
positions with the Company are as follows:

BOARD OF DIRECTORS AND COMMITTEES

COMPENSATION OF BOARD OF DIRECTORS

48
<PAGE>
EXECUTIVE COMPENSATION

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

(1) The bonuses accrued for fiscal year 1995 were fully paid in December 1995.

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

(1) Based on the fair market value of the Common Stock in this offering ($4.00
per share), less the option exercise price.

(2) Does not include a presently exercisable option held by Mr. Winston to
purchase 100,000 shares of Common Stock from Mr. Bitetti at $2.00 per share.

EMPLOYMENT AGREEMENTS

The gross revenue bonus would entitle Mr. Bitetti to receive the following
amounts if the following gross revenues are attained for the fiscal year ending
June 30, 1996.

The gross revenue attainment levels required to receive each bonus level for
each subsequent fiscal year will be increased by 60 percent annually.

The gross profit levels required to receive each bonus level for each
subsequent fiscal year will be increased by 60 percent annually.

1995 STOCK OPTION PLAN

GENERAL

ADMINISTRATION

ELIGIBILITY CONDITIONS

52
<PAGE>
SHARES SUBJECT TO 1995 STOCK OPTION PLAN

TRANSFERABILITY

No Option granted under the 1995 Stock Option Plan, and no right or interest
therein, shall be assignable or transferable by a participant except by will or
the laws of descent and distribution.

TERM, AMENDMENT AND TERMINATION

INCENTIVE STOCK OPTIONS

NON-QUALIFIED STOCK OPTIONS

Non-Qualified Stock Options may be granted for such number of shares of
Common Stock and will be exercisable for such period or periods as the Committee
shall determine.

OPTIONS TO NONEMPLOYEE DIRECTORS

OPTION EXERCISE PRICES

EXERCISE OF OPTIONS

1992 STOCK OPTION PLAN

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS

DIRECTOR EXCULPATION

DIRECTOR INDEMNIFICATION

The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this offering.

55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

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

(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to all
shares of stock beneficially owned by them.

SELLING SECURITY HOLDERS

An aggregate of 500,338 shares of Common Stock and 5,689,665 Redeemable
Warrants are being registered in this offering for the account of the Selling
Security Holders. The Selling Security Holders' Securities may be sold by the
Selling Security Holders or their respective transferees commencing on the date
of this Prospectus. Sales of such shares of Common Stock by the Selling Security
Holders or their respective transferees may depress the price of the Common
Stock and Redeemable Warrants in any market that may develop for such
securities.

The following table sets forth certain information with respect to persons
for whom the Company is registering such shares of Common Stock and Redeemable
Warrants for resale to the public. The Company will not receive any of the
proceeds from the sale of such shares of Common Stock and Redeemable Warrants.
None of the Selling Security Holders has had any position, office or material
relationship with the Company or its affiliates during the last three years
except for Financial West Group, Inc., which served as dealer manager for the
Company's 1995 Bridge Offering and 1995 Private Placement. See "Certain
Transactions -- 1995 Bridge Offering" and "-- 1995 Private Placement." The
Selling Security Holders' Securities are not being underwritten by the
Underwriters. The Selling Security Holders, however, may sell the Selling
Security Holders' Securities through the Underwriters.

57
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
SHARES/WARRANTS SHARES/WARRANTS SHARES/WARRANTS
OWNED BEFORE BEING OWNED AFTER
NAME OF SELLING SECURITY HOLDER(1) OFFERING REGISTERED OFFERING(2)
- --------------------------------------- ----------------- ------------- ------------------
<S> <C> <C> <C>
Cliffdale Investments, Inc. 100,000(4) 100,000(wt) 0
Arlene Colman-Schwimmer, Grantor and 100,000(4) 100,000(wt) 0
Trustee for Arlene Colman-Schwimmer 5,000(5) 5,000(sh) 0
APC Profit Sharing Plan and Trust
David B. Coward and Linda J. Coward, 50,000(4) 50,000(wt) 0
Grantors and Trustees for David B. and 2,500(5) 2,500(sh)
Linda J. Coward Trust
Deller Capital Corporation 1,758(3) 1,758(wt) 0
Laura M. Durso 50,000(4) 50,000(wt) 0
Gerald F. Edelstein 50,000(4) 50,000(wt) 0
Robert Gault and Thelma Gault, Joint 100,000(4) 100,000(wt) 0
Tenants with Right of Survivorship 25,000(5) 25,000(sh) 0
Barbara Goldstein 100,000(4) 100,000(wt) 0
Larry R. Gordon 600,000(4) 600,000(wt) 0
Nicholas Gotten Jr. and Pamela Gotten, 2,929(3) 2,929(wt) 0
Joint Tenants with Right of
Survivorship
Donald B. Greenwood 50,000(4) 50,000(wt) 0
Prabhakar R. Guniganti 100,000(4) 100,000(wt) 0
W. Burns Hoffman 100,000(4) 100,000(wt) 0
Edward Hookstratten 100,000(4) 100,000(wt) 0
Richard Houlihan 100,000(4) 100,000(wt) 0
Edward Jones 50,000(4) 50,000(wt) 0
John Paul DeJoria 100,000(4) 100,000(wt) 0
Gabriel Kaplan 250,000(4) 250,000(wt) 0
10,000(5) 10,000(sh) 0
Gabriel Kaplan, P/ADM City National 250,000(4) 250,000(wt) 0
Bank C/F Rotunda Productions Inc. MPPP
Hazen Peter Kelley and Valerie Kelley, 50,000(4) 50,000(wt) 0
Joint Tenants with Right of
Survivorship
Honorata Knight 586(3) 586(wt) 0
Larry Levenstone 4,184(6) 4,184(wt)
Marc Levin 50,000(4) 50,000(wt) 0
Lexington Ventures, Inc. 100,000(6) 100,000(wt)
Fred Martell and Barbara Martell, Joint 100,000(4) 100,000(wt) 0
Tenants with Right of Survivorship
Edward I. Miller 586(3) 586(wt) 0
L.A. Moore 50,000(4) 50,000(wt) 0
Louis M. Mucci 100,000(4) 100,000(wt) 0
</TABLE>

58
<PAGE>

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

(1) Information set forth in the table regarding the Non-Affiliated Selling
Security Holders' Securities is provided to the best knowledge of the
Company based on information furnished to the Company by the respective
Non-Affiliated Selling Security Holders and/or available to the Company
through its stock ledgers.

(2) Assumes that each Selling Security Holder sells all of the Selling Security
Holders' Securities held by such Selling Security Holder.

(3) Represents warrants sold pursuant to the 1995 Bridge Financing, pursuant to
which 32 Units were sold, each Unit consisting in part of 586 Bridge
Warrants, each such warrant to purchase one share of Common Stock. See
"Certain Transactions -- 1995 Private Placement"

(4) Represents warrants sold pursuant to the 1995 Private Placement, pursuant to
which 52.5 Units were sold, each Unit consisting in part of 100,000 Private
Warrants, each such warrant to purchase one share of Common Stock. See
"Certain Transactions -- 1995 Private Placement."

(5) Represents Common Stock acquired in a private purchase from the Company's
controlling stockholder contemporaneously with the 1995 Private Placement.
See "Certain Transactions -- 1995 Private Placement."

(6) Dealer Manager Warrants.

(7) Includes 2,100,000 ASSI Loan Warrants issuable upon conversion of the ASSI
Convertible Loan. See "Certain Transactions -- Agreements with ASSI, Inc."

59
<PAGE>

(8) Includes 100,000 shares of Common Stock as to which Mr. Winston holds a
presently exercisable purchase option from Vincent J. Bitetti and 292,838
shares of Common Stock as to which Mr. Winston holds a presently exercisable
purchase option from the Company. See "Management -- Employment Agreements."

(sh) Shares of Common Stock.

(wt) Redeemable Warrants, each warrant to purchase one share of Common Stock.

PLAN OF DISTRIBUTION

The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its Selling Security Holders' Securities,
pursuant to this Prospectus at a fixed price or at a negotiated price which is,
in either case, other than the prevailing market price or in a block transaction
to a purchaser who resells, or if any Selling Security Holder pays compensation
to a broker-dealer that is other than the usual and customary discounts,
concessions or commissions, or if there are any arrangements either individually
or in the aggregate that would constitute a distribution of the Selling Security
Holders' Securities, a post-effective amendment to the Registration Statement of
which this Prospectus is a part would need to be filed and declared effective by
the Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.

The Selling Security Holders may effect transactions in their Selling
Security Holders' Securities by selling such securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Securities as
principals and thereafter sell such securities from time to time in the
over-the-counter market, in negotiated transactions, or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.

The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.

CERTAIN TRANSACTIONS

1994 ACQUISITION

60
<PAGE>
Acquisition, all of the Company's former directors and officers resigned and
were replaced by Vincent J. Bitetti, Joseph Urquidi, Eric H. Winston and Martin
H. Meyer. Mr. Urquidi resigned as an officer and director as of June 29, 1994.
Mr. Meyer resigned as a director as of August 5, 1994. Subsequent to the 1994
Acquisition, Mr. Bitetti exchanged his 1,000,000 shares of Series A Preferred
Stock for 83,669 shares of Common Stock issued by the Company.

1994 PRIVATE PLACEMENT

1995 BRIDGE FINANCING

61
<PAGE>
which the Bridge Warrants are automatically converted shall be exercisable to
purchase the same number of shares as the Bridge Warrants, and shall contain the
same terms (including exercise price) as the warrants offered to the public.
Accordingly, the Bridge Warrants, which in the aggregate are exercisable to
purchase 39,665 shares of Common Stock, will, upon the consummation of this
offering, be automatically converted into Redeemable Warrants to purchase an
aggregate of 39,665 shares of Common Stock and such Redeemable Warrants, as well
as the underlying shares of Common Stock, have been included in the Registration
Statement of which this Prospectus is a part.

1995 PRIVATE PLACEMENT

Contemporaneously with the 1995 Private Placement, Vincent J. Bitetti, the
Company's Chief Executive Officer, privately sold 107,500 shares of Common Stock
for total cash consideration of

62
<PAGE>
$537,500. Such shares of Common Stock have been included in the Registration
Statement of which this Prospectus is a part, and comprise a portion of the
Selling Security Holders' Securities. See "Selling Security Holders."

On April 3, 1995, Vincent J. Bitetti, for nominal consideration granted Eric
H. Winston, the Company's President, an option to purchase 100,000 shares of the
Common Stock owned by Mr. Bitetti at an exercise price of $2.00 per share, such
price determined to be the fair market value by management.

AGREEMENTS WITH ASSI, INC.

63
<PAGE>
DESCRIPTION OF SECURITIES

GENERAL

The Securities consist of shares of Common Stock and Redeemable Warrants.
One Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock.

COMMON STOCK

REDEEMABLE WARRANTS

64
<PAGE>
The exercise price and the terms of the Redeemable Warrants bear no relation
to any objective criteria of value and should in no event be regarded as an
indication of any future market price of the Securities offered hereby.

APPLICATION OF CALIFORNIA GCL

65
<PAGE>
addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the Company currently would be deemed to
meet these factors and does not currently qualify as a national market security
on NASDAQ, it is subject to Section 2115.

TRANSFER AGENT AND WARRANT AGENT

The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants is Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202.

66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

67
<PAGE>

68
<PAGE>
and Eric H. Winston and ASSI, Inc. described below, following this offering no
other existing security holder of the Company will have registration rights with
respect to any Company security which it holds.

LEGAL MATTERS

EXPERTS

69
<PAGE>
ADDITIONAL INFORMATION

70
<PAGE>
SOUND SOURCE INTERACTIVE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS