APEX PC SOLUTIONS INC, 424B1, 1997-08-08

APEX PC SOLUTIONS INC
424B1, 1997-08-08
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE>
Filed Pursuant to Rule 424(b)1
Registration No. 333-31697

4,000,000 SHARES

[LOGO]

COMMON STOCK

OF THE 4,000,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,250,000 SHARES ARE
BEING SOLD BY APEX PC SOLUTIONS, INC. ("APEX" OR THE "COMPANY") AND 2,750,000
SHARES ARE BEING SOLD BY CERTAIN OF THE COMPANY'S SHAREHOLDERS (THE "SELLING
SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE
OF SHARES BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS."
THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "APEX." ON AUGUST 7, 1997, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $26 3/4 PER SHARE. SEE "PRICE RANGE OF
COMMON STOCK."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------

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>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
PER SHARE......................... $26.00 $1.43 $24.57 $24.57
TOTAL (3)......................... $104,000,000 $5,720,000 $30,712,500 $67,567,500
</TABLE>

(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $375,000.

(3) CERTAIN OF THE SELLING SHAREHOLDERS HAVE GRANTED THE UNDERWRITERS A 30-DAY
OPTION TO PURCHASE UP TO 600,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO
COVER OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN
FULL, THE PRICE TO PUBLIC WILL TOTAL $119,600,000, THE UNDERWRITING DISCOUNT
WILL TOTAL $6,578,000, AND THE PROCEEDS TO SELLING SHAREHOLDERS WILL TOTAL
$82,309,500. SEE "UNDERWRITING."

THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT AUGUST 13, 1997.
-------------------

MONTGOMERY SECURITIES
DAIN BOSWORTH
INCORPORATED
COWEN & COMPANY

AUGUST 7, 1997
<PAGE>
FOR INSIDE FRONT COVER:

Beginning at the top of this page, the following text cascades from right to
left down the page:

"The proliferation of distributed network computing using a
client/server architecture of interconnected PCs has created significant
network administration and space problems for the organizations that
rely on them. International Data Corporation projects that worldwide
shipments of PC servers will reach approximately 3.1 million units in
the year 2000.

Apex's product family combines sophisticated switching technology and
customized cabinet systems to aid network administrators in managing
their organizations' complex and growing server populations."

The Company's logo ("Company Logo") appears beneath the foregoing text on
the left side of the page.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE
"UNDERWRITING."

FOR GATEFOLD:

The following text is centered on the top of the left page of the gatefold.
"Apex products allow corporations adopting client/server architectures to
consolidate servers and improve physical and administrative access, resulting in
savings in terms of space, time and money." Below this statement is a graphic,
the left side of which is an illustration of 24 dispersed servers, each with its
own keyboard, video monitor and mouse console. Above this illustration is the
heading "Before Apex" and below this illustration is the description
"Disorganized collection of servers, each with its own keyboard, video monitor
and mouse (a "console")". The right side of the graphic is an illustration
depicting the same number of servers consolidated into six centralized DensePack
cabinets. By combining one primary OutLook switch with three secondary OutLook
switches, access and control of the same number of servers is consolidated into
one keyboard, video monitor and mouse console. Above this illustration is the
heading "After Apex" and below this illustration is the description "Organized
collection of servers housed in Apex cabinets, controlled from a single console
via Apex switches".

On the left half of the right page of the gatefold are three different
graphical images (the "Problem Graphics") organized top to bottom underneath the
phrase "Client/Server Problems". The top Problem Graphic consists of a depiction
of approximately eight different desktop and tower servers, each with its own
video monitor and keyboard, cabled together, followed by the following text:
"Small Networks--Client/ server networks typically utilize multiple servers
designed to operate as stand-alone systems, each with a console consisting of a
keyboard, video monitor and mouse." The middle Problem Graphic consists of a
depiction of approximately thirty-two servers, each with its own video monitor
and keyboard, cabled together, followed by the following text: "Space and
Equipment Management--Without efficient storage and configuration, network
hardware consumes substantial and often expensive floor space and creates
clutter that hampers network administration." The bottom Problem Graphic
consists of a depiction of numerous servers, each with its own video monitor and
keyboard, cabled together and stored on large tables, followed by the following
text: "Large Networks When a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures."
<PAGE>
On the right half of the right page of the gatefold, are three different
graphical images (the "Apex Solution Graphics") organized top to bottom. The top
Apex Solution Graphic (which is paired with the top Problem Graphic Solution
described above) consists of a graphical representation of an Apex switch (over
which the word "OutLook" is superimposed), to the left of which is a column of
eight attached servers and to the right of which is a column of four attached
keyboard, video monitor and mouse consoles (with the top console in full-tone to
depict a configuration using an OutLook switch and the bottom three consoles
shaded to depict a configuration using an OutLook(4) switch) followed by the
following text: "Apex Outlook switching systems consolidate the control and
monitoring of multiple network servers to a centralized command center
consisting of one or more console positions. Apex switching products provide
connectivity to virtually all major server platforms." The middle Apex Solution
Graphic (which is paired with the middle Problem Graphic) is similar to the top
Apex Solution Graphic described above, except that the word "ViewPoint" is
superimposed over the graphical representation of the Apex switch and the words
"Up to 32 Networked Servers" are above the column of attached servers and the
words "Up to 16 Users" are above the column of attached consoles. This Apex
Solution Graphic is followed by the following text: "Apex's ViewPoint provides
direct connections to network servers, enabling network administrators to access
individual servers from up to a thousand feet away as if they were physically
present at that server, even if the network is down." The bottom Apex Solution
Graphic (which is paired with the bottom Problem Graphic) depicts four DensePack
cabinets with the same graphical representation of an Apex switch in front of
the middle two cabinets and the word "DensePack" superimposed over the top of
that representation. The DensePack cabinet depictions in the bottom Apex
Solution Graphic represent different physical configurations of different types
of servers, and over the DensePack cabinet depictions, from left to right, are
the phrases "Rack Mount Systems," "Tower Systems," "Desktop Systems" and
"Combination." This Apex Solution Graphic is followed by the following text:
"Apex integrated cabinet solutions consolidate servers and other hardware in a
single location to facilitate more efficient physical access for hardware
maintenance tasks. Apex provides customized solutions for the storage of
heterogeneous server populations."
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS PROSPECTUS
THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO FUTURE OPERATING RESULTS,
OEM CUSTOMERS, COMPETITION, NEW PRODUCT INTRODUCTIONS, COMPONENT SUPPLIERS,
RESELLER CHANNELS, KEY PERSONNEL, MANAGEMENT OF GROWTH, WARRANTY POLICIES,
PROPRIETARY RIGHTS, CUSTOMER SUPPORT, INTERNATIONAL SALES, THE APEX STRATEGY,
FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE NET SALES, FUTURE SALES AND
MARKETING EXPENDITURES, FUTURE GENERAL AND ADMINISTRATIVE EXPENDITURES AND
FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Apex PC Solutions, Inc. (the "Company" or "Apex") designs, manufactures and
markets stand-alone switching systems and integrated server cabinet solutions
for the client/server computing market. The Company's switching systems enable
client/server network administrators to manage multiple servers from a single
keyboard, video monitor and mouse configuration (a "console"). Designed to
address space, cost, administration and maintenance issues that organizations
increasingly face when adopting client/server architecture, the Company's
sophisticated switching and integrated cabinet systems enable network
administrators to manage more efficiently their organizations' complex and
growing server populations.

The desire of many organizations to decentralize computing power while
sharing technology resources and providing broad access to enterprise data has
resulted in the widespread adoption of distributed network computing
environments using a client/server architecture of interconnected PCs. According
to International Data Corporation, a market research firm, worldwide shipments
of PC servers are expected to grow 21.0% on a compounded annual basis from 1997
to 2000, reaching approximately 3.1 million units shipped in the year 2000.

The growing adoption of client/server architecture has created significant
network administration and space problems for organizations. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console. Thus, to perform network administration and
management tasks, network administrators must deal with an unwieldy number of
consoles, whether centrally located or dispersed throughout the organization. In
addition, constant availability of the network has become increasingly
important. When a network fails, an administrator's ability to quickly and
efficiently diagnose and correct the problem is often hampered because the
administrator is not able to access the software tools that reside on the
network which would otherwise be relied upon to rectify network failures. As
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates, creating storage and configuration problems.
The increased use of "heterogeneous" server configurations using different
platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC
Alpha and Sun Sparc, and different operating systems, such as Windows NT, Unix,
NetWare and OS/2, compounds the administration and storage problems faced by
network administrators.

3
<PAGE>
the Company's switching products utilize the Company's proprietary On Screen
Configuration And Reporting ("OSCAR") interface. OSCAR allows network
administrators to immediately identify and access servers according to the
administrators' own naming conventions. The Company also offers server cabinet
solutions to consolidate and store heterogeneous servers and related hardware in
a single cabinet that facilitates more efficient physical access for hardware
maintenance tasks.

The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems on a
private label basis to Compaq Computer Corporation and Hewlett-Packard Company
for integration into their product offerings. Sales to Compaq represented
approximately 52% of the Company's net sales for the six months ended June 27,
1997. Sales to Compaq and Hewlett-Packard represented approximately 30% and 15%,
respectively, of net sales for 1996, and approximately 54% and 6% of net sales,
respectively, for 1995. According to International Data Corporation, Compaq and
Hewlett-Packard shipped 41.7% of all PC servers shipped worldwide in 1996.
Customers of the Company's branded products in 1996 or the first half of 1997
included Advanced Logic Research, Inc., Data General Corporation, Dell Computer
Corporation, McAfee Associates, Inc., Microsoft Corporation, the National
Association of Securities Dealers, Inc., Owens Corning, NEC USA, Inc.,
Peoplesoft, Inc., Unisys Corporation and Wells Fargo Bank, N.A.

The Company's objective is to be the leading provider of hardware solutions
for the administration, management and storage challenges inherent in the
client/server network environment. Key elements of the Company's strategy for
achieving this objective are to (i) continue to develop innovative products and
enhancements to existing products, (ii) leverage its OEM experience to enter
into new relationships with other server manufacturers in the U.S. and Europe,
(iii) increase market penetration for its branded products through direct sales
and reseller channels, and (iv) create an international distribution network for
the Company's branded switching products.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......................... 1,250,000 shares
Common Stock offered by the Selling Shareholders............ 2,750,000 shares
Common Stock to be outstanding after this offering.......... 13,413,328 shares (1)
Use of proceeds............................................. For general corporate
purposes, including working
capital. See "Use of
Proceeds."
Nasdaq National Market symbol............................... APEX
</TABLE>

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

(1) Based on shares outstanding as of June 27, 1997. Excludes (i) 951,564 shares
of Common Stock reserved for issuance upon the exercise of options
outstanding at June 27, 1997, at a weighted average exercise price of
$4.7655 per share, (ii) 550,180 additional shares reserved for future
issuance pursuant to the Company's 1995 Employee Stock Plan and (iii)
246,688 shares reserved for future issuance pursuant to the Company's
Employee Stock Purchase Plan. See "Capitalization," "Management-- Employee
Stock Plan; --Employee Stock Purchase Plan" and "Description of Capital
Stock."

4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, ------------------------
------------------------------- JUNE 30, JUNE 27,
1994 1995 1996 1996 1997 (1)
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $ 7,310 $ 19,671 $ 33,622 $ 14,002 $ 23,681
Gross profit................................................. 2,817 9,035 14,383 5,659 10,690
Income from operations....................................... 933 3,737 7,328 3,147 6,174
Interest income (expense), net............................... 7 (186) (1,859) (947) (123)
Other income................................................. -- -- -- -- 146
Income from continuing operations before income taxes and
extraordinary item......................................... 940 3,551 5,469 2,200 6,197
Income from continuing operations before extraordinary
item....................................................... 940 3,603 3,608 1,452 4,082
Extraordinary item--loss on early extinguishment of debt, net
of applicable income taxes................................. -- -- -- -- (141)
Income from discontinued service operations.................. 601 -- -- -- --
Net income................................................... $ 1,541 $ 3,603 $ 3,608 $ 1,452 $ 3,941

PRO FORMA DATA (2):
Net income (pro forma through 1995).......................... $ 1,017 $ 2,344 $ 3,608 $ 1,452 $ 3,941
Pro forma income per share................................... $ 0.20 $ 0.40 $ 0.16 $ 0.33
Weighted average shares used in computing pro forma
income per share (3)....................................... 11,492 9,092 9,092 11,839
</TABLE>

<TABLE>
<CAPTION>
JUNE 27, 1997
----------------------------
ACTUAL AS ADJUSTED (4)
----------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 7,956 $ 38,294
Working capital................................................................... 15,212 45,550
Total assets...................................................................... 18,896 49,234
Shareholders' equity.............................................................. 15,852 46,190
</TABLE>

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

(1) The Company's interim periods in years prior to 1997 are reported on a
calendar quarter basis. Commencing in 1997, the Company reports its interim
period results for the first three interim periods ending on the last Friday
of March, June and September, respectively, and for the fourth interim
period ending on December 31. The difference between quarterly results
reported on this basis and quarterly results reported on the basis of
calendar quarters for years prior to 1997 is not material. The Company
formed a foreign sales corporation subsidiary in the first quarter of 1997.
Consequently, the Company's financial statements as of June 27, 1997 and for
the six months then ended are presented on a consolidated basis.

(2) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflects an
estimate of income tax expense as if the Company were taxable as a C
Corporation for the years ended December 31, 1994 and 1995. See Notes 1 and
11 of Notes to Financial Statements.

(3) See Note 1 of Notes to Financial Statements.

(4) Adjusted to reflect the sale and issuance of the 1,250,000 shares of Common
Stock offered by the Company hereby at the public offering price of $26.00
per share, after deduction of the underwriting discount and estimated
offering expenses payable by the Company. See "Use of Proceeds."

The executive office of the Company is located at 20031 142nd Avenue, N.E.,
Woodinville, Washington 98072, and its telephone number is (425) 402-9393.
- ------------------------

APEX PC SOLUTIONS, OSCAR, OUTLOOK, OUTLOOK(4), SUNDIAL, VIEWPOINT,
SWITCHBACK, A-1000 AND S-1000 ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS
ALSO INCLUDES TRADEMARKS OF OTHER COMPANIES.

UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

5
<PAGE>
RISK FACTORS

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED HEREBY.

FLUCTUATIONS IN OPERATING RESULTS

The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from original equipment manufacturers that purchase the Company's
switching systems on a private label basis ("OEMs"); the timing of shipments;
the timing of new product introductions and enhancements by the Company and its
competitors; changes in product or distribution channel mixes; changes in
pricing policies or price reductions by the Company or its competitors; the
availability and cost of supplies and components; sales and marketing expenses
related to entering into new markets, introducing new products and retaining
current OEM and other large customers; seasonal customer demand; and
fluctuations in sales of servers due to changes in economic conditions or
capital spending levels.

In general, the Company's sales cycle varies substantially and may be
lengthy, making net sales difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales (i.e.,
sales to customers other than OEMs) as a percentage of net sales, the Company's
quarterly sales and operating results will become more dependent upon the volume
and timing of branded product orders received during the quarter. Because
customers of the Company's branded products (including resellers) typically
place orders shortly before their requested shipment date, revenues from branded
sales are difficult to forecast. The failure of the Company to accurately
forecast the timing and volume of orders for branded products during any given
quarter could adversely affect the Company's operating results for such quarter
and, potentially, for future periods.

Gross margins may vary significantly from period to period depending on a
number of factors, including: the ratio of OEM sales to branded sales, as OEM
sales typically have lower gross margins than branded sales; product mix,
including the percentage of cabinet system sales, which generally have lower
gross margins than sales of stand-alone switching systems; raw materials and
labor costs; new product introductions by the Company and its competitors; and
the level of outsourcing of manufacturing and assembly services by the Company.
The Company expects that its gross margins will decline in the future primarily
due to increased competition and the introduction of new technologies which may
affect the prices of the Company's products. The Company expects that its
operating results will be affected by seasonal trends and by general conditions
in the server market. The Company believes that it has experienced and will
continue to experience some degree of seasonality due to customer buying cycles.
The Company has historically experienced higher levels of net sales in the
fourth quarter. The Company believes that this seasonality is a result of
customer budgeting and procurement cycles, which correspondingly may depress net
sales in other quarters, and the Company expects this seasonality to continue in
the future. Because the Company's business and operating results depend to a
significant extent on the general conditions in the server market, any adverse
change in the server market due to adverse economic

6
<PAGE>
conditions, declining capital spending levels or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE UPON A LIMITED NUMBER OF OEM CUSTOMERS

A substantial portion of the Company's sales is concentrated among a limited
number of OEM customers. For 1994, 1995, 1996 and the six months ended June 27,
1997, sales to OEMs represented approximately 38%, 69%, 71% and 66% of the
Company's net sales, respectively. For 1994, 1995, 1996 and the six months ended
June 27, 1997, sales to Compaq Computer Corporation ("Compaq") represented
approximately 36%, 54%, 30% and 52%, respectively, of the Company's net sales.
Sales to Hewlett-Packard Company ("Hewlett-Packard") represented 15% of the
Company's net sales for 1996. The Company's OEM business is subject to risks
such as contract termination, reduced or delayed orders, adoption of competing
products developed by third parties for the OEM or by the OEM's internal
development team, and change in corporate ownership, financial condition,
business direction or product mix by the OEM, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has experienced, and may continue to experience,
significant reductions or delays in orders from its OEM customers, which have
had and may in the future have a material adverse effect on the Company's
quarterly sales and operating results. See "--Fluctuations in Operating Results"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." For example, in late 1995, one of the Company's OEM customers
determined that its orders in the last half of 1995 exceeded its needs.
Accordingly, at such customer's request, the Company delayed its scheduled
deliveries to such OEM for the first half of 1996. The loss of any one of the
Company's OEM customers could have a material adverse effect on the Company's
business, financial condition and results of operations. For example, in October
1995, the Company entered into an OEM arrangement with International Business
Machines Corporation ("IBM") for the production of an integrated server cabinet
system incorporating the Company's switching products. While the products
supplied by the Company met IBM's requirements, IBM concluded that its program
had not achieved IBM's desired results and sought to terminate the program in
mid-1996 after the Company had expended significant financial, product
development and operational resources in connection with this OEM arrangement.
Although the Company negotiated a settlement with IBM that reimbursed the
Company for its product costs and for its direct costs associated with
discontinuing the program, the Company's branded product development efforts
were delayed as a result of the Company's commitment of substantial product
development resources to the IBM program in the third and fourth quarters of
1995 and the first quarter of 1996. For 1996, sales to IBM represented 18% of
the Company's net sales. While the Company has contracts with certain of its
existing OEM customers, none of the Company's OEM customers is obligated to
purchase products from the Company except pursuant to binding purchase orders.
Consequently, any OEM customer could cease doing business with the Company at
any time. The Company's dependence upon its OEMs also results in a significant
concentration of credit risk, as a substantial portion of the Company's trade
receivables outstanding from time to time is concentrated among a limited number
of customers. See Note 1 of Notes to Financial Statements.

INTENSE COMPETITION

The markets for the Company's products are highly fragmented and intensely
competitive. The Company's business is becoming increasingly sensitive to new
product introductions, price changes and marketing efforts by its competitors.
Accordingly, the Company's future success will be highly dependent upon timely
completion and introduction of new products and product features at competitive
price and performance levels which address the evolving needs of the Company's
customers. The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinets and expects that pricing pressures will increase in the future.
Increased competition could result in price reductions and loss of market share,
which would adversely affect the Company's business, financial condition and
results of operations. In the market for integrated switching

7
<PAGE>
systems, the Company competes with independent third parties such as Cybex
Computer Products Corporation, Raritan Computer Inc., Rose Electronics, Elsner
ComputerTechnik GmbH and StarTech Computer Accessories Ltd. In addition, certain
of the Company's OEM customers, such as Hewlett-Packard and Compaq, could choose
to internally manufacture switch products or offer those supplied by the
Company's competitors. In the market for server cabinets, the Company competes
with a significant number of regional manufacturers. Moreover, each of the
Company's current OEM customers sells its own branded integrated server
cabinets. The Company's server cabinets also compete with other types of lower
density, unenclosed technology storage systems. The market for enclosed server
cabinets and other technology storage systems is characterized by intense price
competition and low barriers to entry, and many of the Company's competitors in
this market offer products at significantly lower price points. The Company's
ability to compete successfully in this market will depend in part upon the
Company's ability to continue to differentiate its cabinet systems from
competing products. See "Business--Competition."

The Company's current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
the Company, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties that enhance the ability of
their products to address the needs of the Company's prospective customers.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressure faced by the
Company will not have a material adverse effect on the Company's business,
financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE; NEED FOR NEW PRODUCT INTRODUCTIONS

The market for the Company's switching products is characterized by rapid
technological advances, frequent new product introductions and enhancements, and
significant price competition. The introduction of products incorporating
superior or alternative technologies, the emergence of new industry standards or
changes in the market's pricing structure could render the Company's existing
products and products under development obsolete or unmarketable. The Company's
switching systems combine components, such as printed circuit boards,
connectors, cable assemblies, power supplies and enclosures, that are
manufactured by other companies and are generally available to the Company's
competitors and potential competitors. The Company's future success will depend
in large part upon its continued innovative application of such commercially
available components to the expansion and enhancement of its existing products
and the development and introduction of new products which address changing
customer needs on a cost-effective and timely basis. The successful introduction
of new products involves a number of risks and uncertainties. There can be no
assurance that the Company will be able to successfully develop planned products
or that there will not be delays in product introductions. In addition, newly
introduced products have in the past experienced, and are likely in the future
to experience, reliability or compatibility problems, which can lead to customer
dissatisfaction, increased customer service and research and development
expenses, and loss of sales. The Company's failure to respond on a timely basis
to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction
could have a material adverse effect on the Company's business, financial
condition and results of operations. Due to the Company's significant reliance
on OEM relationships, the Company's product development efforts are often
focused on developing new products or enhancements for OEM customers. At times,
these new products or enhancements may not be readily marketable to other
customers without significant modification. The termination or significant
disruption of the Company's relationship with any OEM or other customer for whom
the Company has devoted significant product development resources is likely to
result in lost opportunities with respect to the development of other products
or enhancements. See "--Dependence Upon a Limited Number of OEM Customers."

8
<PAGE>
DEPENDENCE UPON SUPPLIERS AND OUTSOURCED MANUFACTURING

The principal components of the Company's switching products are power
supplies, cable assemblies, line filters, enclosures and printed circuit boards,
all of which are purchased from outside vendors. The Company buys components
under purchase orders and generally does not have long-term agreements with its
suppliers. Any termination of or significant disruption in the Company's
relationship with suppliers of its switching product components may prevent the
Company from filling customer orders in a timely manner, as the Company
generally does not maintain large inventories of its products or components. The
Company purchases a number of the components for its switching products from
sole or a limited number of suppliers. For example, the Company currently
obtains printed circuit boards included in, and the partial assembly of,
concentrator switches from a single source. In addition, the frames for the
Company's server cabinet systems are obtained from a single source and the sheet
metal components are purchased locally from a small number of manufacturers. The
Company has occasionally experienced and may in the future experience delays in
delivery of such components. Although alternate suppliers are available for most
of the components and services needed to produce the Company's products, the
number of suppliers of some components is limited, and qualifying a replacement
supplier and receiving components from alternate suppliers could take several
months. The Company depends upon its suppliers to deliver components that are
free from defects, competitive in functionality and cost and in compliance with
the Company's specifications and delivery schedules. Disruption in supply, a
significant increase in the cost of one or more components, failure of a third
party supplier to remain competitive in functionality or price, or the failure
of a supplier to comply with any of the Company's procurement needs could delay
or interrupt the Company's ability to manufacture and deliver its products to
customers on a timely basis, thereby adversely affecting the Company's business,
financial condition and results of operations.

The Company relies on third party manufacturers for subassembly of the
Company's products. These outsourcing arrangements, and any future outsourcing
arrangements involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields and costs. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains primarily
responsible to its customers for warranty obligations.

RELIANCE ON CLIENT/SERVER MARKET; IMPROVING NETWORK RELIABILITY AND TOOLS

The Company's business is dependent upon the continued acceptance of the
PC-based client/server model of network computing. Although distributed network
computing utilizing client/server architecture has gained increasing acceptance,
there can be no assurance that use of this networking model will continue to
grow or that it will not be replaced by new technologies for network computing,
thereby rendering the Company's products obsolete. In addition, the market for
the Company's switching products is driven in part by the inherent unreliability
of client/server networks. As client/server networks continue to proliferate,
however, server manufacturers and software providers may develop greater
reliability and better tools for managing networks. To the extent that greater
reliability and better network management tools are successfully developed, the
Company's switching products could be rendered obsolete, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

RISKS RELATING TO DEVELOPMENT OF EXPANDED RESELLER CHANNEL

The Company expects to rely increasingly on resellers, including value added
resellers and systems integrators, to sell its branded products, and the
Company's strategy contemplates the expansion of its reseller channel both
domestically and internationally. The Company's future success will depend in
part on its ability to attract, train and motivate such resellers. There can be
no assurance that the Company will be successful in expanding its reseller
channel. The Company will be required to invest significant additional resources
in order to expand its reseller channel, and there can be no assurance that the
cost of the Company's investment in further developing this channel will not
exceed the revenues generated from such investment. The Company provides and
expects to continue providing discounts and other special pricing

9
<PAGE>
arrangements to its resellers. As a result of such discounts and other
arrangements, the Company's gross margins on sales through resellers are
expected to be lower than gross margins on direct sales. Although the Company's
existing reseller arrangements generally do not afford material rights of
return, as the Company expands its reseller channel, the Company expects that
certain resellers will have significant rights of return. There can be no
assurance that actual returns in the future will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "--Product Returns and Warranty Claims." The Company's agreements with its
resellers generally are nonexclusive and may be terminated on short notice by
either party without cause. The Company's resellers are not within the control
of the Company, are not obligated to purchase products from the Company and
frequently offer products of several different manufacturers, including products
competitive with the Company's products. There can be no assurance that these
resellers will not give higher priority to the sale of such other products. A
reduction in sales efforts by the Company's resellers could lead to reduced
sales by the Company and could materially adversely affect the Company's
business, financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent in large part upon its ability to retain its key
management and technical personnel, including Kevin Hafer, President and Chief
Executive Officer, and Chris Sirianni, Vice President, Sales and Marketing. The
future success of the Company will be highly dependent upon the personal efforts
of Mr. Hafer, Mr. Sirianni and other key management and technical personnel, and
the loss of services of any one of them could have a material adverse effect on
the Company's business, financial condition and results of operations. Mr. Hafer
is the only executive officer or employee with whom the Company has entered into
an employment agreement and the only executive officer upon whom the Company
maintains "key-man" life insurance. The Company's success will also be dependent
in part upon its ability to attract, retain and motivate highly skilled
employees. Competition for employees with the skills required by the Company,
particularly engineering and other technical personnel, is intense, and there
can be no assurance that the Company will be able to attract and retain highly
skilled employees in sufficient numbers to sustain its current business or to
support future growth.

MANAGEMENT OF GROWTH

In recent periods, the Company has experienced rapid revenue and customer
growth and expansion in the number of its employees, its product offerings and
the scope and complexity of its financial systems. This growth has placed
significant strain on the Company's management, operational and financial
resources and has resulted in new and increased responsibilities for management
personnel. The Company's officers have had limited or no experience in managing
companies larger than the Company, and, in addition, the Company's Chief
Financial Officer was hired in September 1996. There can be no assurance that
the Company's management, personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. The Company's
ability to effectively manage its recent growth and any future growth will
require the Company to continue to implement and improve its operational,
financial and information systems and will likely require additional management
personnel. In addition, the Company believes that it must develop greater
engineering, marketing, sales and customer support capabilities in order to
develop new products and product enhancements, secure new customers at a rate
necessary to achieve desired growth and effectively serve the evolving needs of
present and future customers. There can be no assurance that the Company will be
successful in strengthening these capabilities. Without adequate management,
engineering, product development, marketing and sales and customer support
capabilities, the Company's ability to effectively manage its growth, expand and
enhance its product line, further penetrate its existing markets and develop new
markets will be significantly limited. If the Company's management is unable to
effectively manage the Company's growth, the business, financial condition and
results of operations of the Company will be materially adversely affected.

10
<PAGE>
PRODUCT RETURNS AND WARRANTY CLAIMS

The Company's products carry warranties for parts and service. Although the
Company's historical product return and warranty claims have not been
significant, the Company's business, financial condition and results of
operations could be materially adversely affected should the rate of product
returns or warranty claims increase in the future. In addition, the Company may
change its warranty policies in the future as a result of competitive pressures.

LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS OF THIRD PARTY INFRINGEMENTS

The Company's future success will depend in part upon its ability to protect
its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application and a corresponding application under
the provisions of the Patent Cooperation Treaty (which permits the filing of
corresponding foreign patent applications in numerous foreign countries within a
limited time period) with respect to various aspects of its OUTLOOK and
VIEWPOINT products and its On Screen Configuration And Reporting ("OSCAR")
interface. There can be no assurance that patents will issue from any of the
Company's pending applications or that any claims allowed from pending
applications will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, or provide meaningful
protection or any commercial advantage to the Company. Moreover, competitors of
the Company may be able to design around the Company's patents if any are
issued. The laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus increase the likelihood of piracy of the Company's
technology and products. Although the Company is not aware of any current
infringement of its intellectual property rights, or any violation of its trade
secrets or nondisclosure or licensing arrangements, there can be no assurance
that the steps taken by the Company to protect its intellectual property rights
will be adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.

The network server, electronics and related industries are characterized by
vigorous pursuit and protection of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. The Company may from time to time be subject to proceedings alleging
infringement by the Company of intellectual property rights owned by third
parties. If necessary or desirable, the Company may seek licenses under such
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any offered license will be acceptable to
the Company. The failure to obtain a license from a third party for technology
used by the Company could cause the Company to incur substantial liabilities and
to suspend or cease the manufacture of products requiring such technology.

Further, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in any such litigation, the Company could be required to pay
substantial damages, suspend or cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. In the
event that any third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, the

11
<PAGE>
Company's business, financial condition and results of operations would be
adversely affected. See "Business--Proprietary Technology."

INCREASED DEMANDS ON CUSTOMER SUPPORT OPERATIONS

The Company has, in recent periods, experienced increased demands on its
customer support resources. Growth of the Company's branded sales, should it
occur, is likely to be accompanied by further increasing demands on the
Company's customer support operations. As a result of the Company's commitment
to a high level of customer support, the Company is likely to need to invest
significant resources in the maintenance and improvement of its customer support
resources. Any failure to maintain adequate customer support could cause
customer dissatisfaction, result in reduced sales of the Company's products and,
accordingly, materially adversely affect the Company's business, financial
condition and results of operations.

RISKS RELATING TO DEVELOPMENT OF INTERNATIONAL DISTRIBUTION NETWORK AND
INTERNATIONAL SALES

The Company's strategy contemplates the development of an international
distribution network in an effort to increase international sales of its branded
switching products. See "Business--The Apex Strategy; --Sales and Marketing."
There can be no assurance that the Company will be successful in creating an
international distribution network or in marketing and selling its products in
foreign markets. If the revenues generated by international sales are not
adequate to recover the expense of establishing, expanding and maintaining an
international distribution network, the Company's business, financial condition
and results of operations will be materially adversely affected. If
international sales become a more significant component of the Company's net
sales, the Company's business will become more vulnerable to the risks inherent
in doing business on an international level, including difficulties in managing
foreign resellers, longer payment cycles and problems in collecting accounts
receivable, the effects of seasonal customer demand, changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
fluctuations in currency exchange rates, potentially adverse tax consequences
and political instability. The existence or occurrence of any one of these
factors could have a material adverse effect on the Company's business,
financial condition and results of operations.

LIMITED INDEPENDENT OPERATING HISTORY

The business of the Company was operated as a division of, and was provided
financial and operational support by, Apex Computer Company (the "Predecessor")
through January 1993. In February 1993, the net assets of that division were
spun off as a dividend to the sole shareholder of the Predecessor, who
contributed those assets to the Company as its initial capital. The historical
core business of the Company, computer maintenance services, was discontinued in
mid-1994. As a company with limited independent operating history, the Company
is subject to the risks inherent in a new business enterprise, including limited
predictability of future operating results, competition from more established
businesses, limited financial resources, limited management resources, limited
sales and distribution capabilities, limited technical personnel resources and
vulnerability to adverse economic conditions. Although the Company achieved
profitability for the eleven months ended December 31, 1993 and was profitable
in 1994, 1995, 1996 and the six months ended June 27, 1997, there can be no
assurance that growth in net sales will continue or that the Company will be
able to achieve or sustain profitability on a quarterly or annual basis in the
future.

DISCRETIONARY USE OF PROCEEDS OF OFFERING

The Company has no current specific plans for use of the net proceeds of
this offering. As a consequence, the Company's management will have the ability
to allocate the net proceeds of the offering in its discretion. There can be no
assurance that the net proceeds will be utilized in a manner that the

12
<PAGE>
shareholders deem optimal or that the net proceeds can or will be invested to
yield a significant return following the completion of the offering. See "Use of
Proceeds."

CONTROL BY EXISTING SHAREHOLDERS

Following this offering, the Company's executive officers, directors and
principal shareholders will beneficially own approximately 38.0% of the
Company's outstanding shares of Common Stock (33.5% if the Underwriters'
over-allotment option is exercised in full). As a result of their securities
ownership and positions with the Company, such shareholders, acting in concert,
will be in a position to significantly affect the election of the members of the
Board of Directors and the outcome of the vote on substantially all matters
requiring approval by the shareholders of the Company. This concentration of
ownership under certain circumstances could have the effect of preventing or
delaying a change in control of the Company. See "Principal and Selling
Shareholders."

EFFECT OF ANTI-TAKEOVER PROVISIONS

Pursuant to the Company's Amended and Restated Articles of Incorporation,
the Company's Board of Directors has the authority to issue shares of preferred
stock ("Preferred Stock") and to determine the designations, preferences and
rights and the qualifications and restrictions of those shares without any
further vote or action by the shareholders. The issuance of Preferred Stock, as
well as certain provisions of Washington law and the Company's bylaws, could
have the effect of making it more difficult or expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales, and the potential for sales, of substantial amounts of the Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. Upon consummation of this offering, there will be
13,413,328 shares of Common Stock outstanding, based on the number of shares
outstanding as of June 27, 1997. Of that number, 4,200,829 shares are currently
traded or available for sale in the open market, the 4,000,000 shares offered
hereby (4,600,000 shares if the Underwriters' over-allotment option is exercised
in full) will be immediately eligible for sale in the public market without
restriction unless acquired by an "affiliate" of the Company as that term is
defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as amended
(the "Securities Act") and the remaining 5,212,499 shares (4,612,499 shares if
the Underwriters' over-allotment option is exercised in full) are "restricted
securities" (the "Restricted Shares") under the Securities Act. The holders of
all of the Restricted Shares, including all of the Selling Shareholders and the
Company's directors, officers, certain employees and major shareholders, have
agreed pursuant to certain lock-up agreements entered into in connection with
this offering not to sell their shares without the consent of Montgomery
Securities until October 20, 1997, except that certain of these holders may sell
an aggregate amount of up to 30,000 shares on or after August 19, 1997. All of
such shares will be eligible for sale in the public market after expiration of
these lock-up agreements, subject to the provisions of Rule 144. Moreover, after
October 19, 1997, holders of approximately 2,437,500 Restricted Shares
(2,362,500 Restricted Shares if the Underwriters' over-allotment option is
exercised in full) are entitled to certain rights with respect to registration
of such shares for offer or sale to the public. To the extent that such
registration rights are exercised, the number of shares freely tradeable in the
public market will increase which could adversely affect the market price of the
Common Stock. See "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."

VOLATILITY OF STOCK PRICE

The stock market has from time to time experienced extreme price and volume
fluctuations, and such fluctuations have been particularly acute with respect to
the securities of companies in the computer and

13
<PAGE>
other technology industries, especially those with small and middle market
capitalizations. The market price for the Common Stock has been subject to
significant fluctuation to date and is expected to be subject to wide
fluctuations in the future as a result of a number of factors, including, but
not limited to, fluctuations in operating results by the Company and its
competitors, any failure by the Company or its competitors to meet analysts'
expectations, changes in analysts' estimates, the state of the national economy,
stock market conditions, actions by governmental agencies, litigation involving
the Company, announcements of technological innovations or product introductions
or delays by the Company or its competitors, and general conditions in the
client/server industry. Many of such factors are beyond the Company's control.

14
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered by the Company hereby are estimated to be $30,337,500 after
deduction of the underwriting discount and estimated offering expenses payable
by the Company. The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Shareholders. The net proceeds of the
offering are expected to be used for working capital and other general corporate
purposes. However, the Company has not allocated any specific portion of the net
proceeds to such general corporate purposes, and management will have the
ability to allocate all proceeds in its discretion. See "Risk
Factors--Discretionary Use of Proceeds of Offering." A portion of the net
proceeds may also be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies; however, the
Company has no present plans, agreements or commitments and is not currently
engaged in any negotiations with respect to any such transactions.

Pending the uses described above, the Company intends to invest the net
proceeds from this offering in short-term, interest bearing, investment-grade
securities.

DIVIDEND POLICY

For the foreseeable future, the Company expects to retain earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements and operating and financial condition of the
Company, among other factors. In addition, the Company's line of credit facility
prohibits the payment of dividends if any loans are outstanding under such
facility.

From its inception through October 31, 1995, the Company was treated for
federal income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended. As a result, the Company's earnings
from its inception through October 31, 1995 (the "Termination Date") were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. Subsequent
to the Termination Date, the Company was no longer treated as an S Corporation
and, accordingly, has been subject to federal income taxes on its earnings after
October 31, 1995. In 1995, prior to the Termination Date, the Company's Board of
Directors declared dividends in the aggregate amount of $4,614,322. See "Certain
Transactions."

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded publicly on the Nasdaq National Market
under the symbol "APEX" since February 19, 1997. The Company's initial public
offering price was $9.00 per share. The following table lists the high and low
sales prices for the Company's Common Stock for the periods indicated as
reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ending December 31, 1997:
Third Quarter (through August 7, 1997)..................................................... $ 29 1/4 $ 19
Second Quarter (ended June 27, 1997)....................................................... 21 1/8 6 5/8
First Quarter (beginning February 19, 1997 and ended March 28, 1997)....................... 10 1/2 8 1/8
</TABLE>

On August 7, 1997, the last reported sales price of the Company's Common
Stock on the Nasdaq National Market was $26 3/4 per share. As of June 27, there
were approximately 37 record holders of the Company's Common Stock.

15
<PAGE>
CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
as of June 27, 1997 and (ii) the capitalization of the Company as adjusted to
give effect to the sale and issuance of the 1,250,000 shares of Common Stock
offered by the Company hereby at the public offering price of $26.00 per share,
after deduction of the underwriting discount and estimated offering expenses
payable by the Company. The information in the table below is qualified in its
entirety by, and should be read in conjunction with, the financial statements
and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 27, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares authorized, no shares outstanding as
adjusted............................................................................ $ -- $ --
Common Stock, no par value; 100,000,000 shares authorized; 12,163,328 shares
outstanding actual; 13,413,328 shares outstanding as adjusted (1)................... 31,527 61,865
Deferred compensation................................................................. (181) (181)
Accumulated deficit................................................................... (15,494) (15,494)
----------- -----------
Total shareholders' equity.......................................................... 15,852 46,190
----------- -----------
Total capitalization.................................................................. $ 15,852 $ 46,190
----------- -----------
----------- -----------
</TABLE>

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

(1) Based on shares outstanding as of June 27, 1997. Excludes (i) 951,564 shares
of Common Stock reserved for issuance upon the exercise of options
outstanding at June 27, 1997, at a weighted average exercise price of
$4.7655 per share, (ii) 550,180 additional shares reserved for future
issuance pursuant to the Company's 1995 Employee Stock Plan and (iii)
246,688 shares reserved for future issuance pursuant to the Company's
Employee Stock Purchase Plan. See "Management--Employee Stock Plan;
--Employee Stock Purchase Plan."

16
<PAGE>
SELECTED FINANCIAL DATA

The statement of operations data for the years ended December 31, 1994, 1995
and 1996 and the balance sheet data as of December 31, 1995 and 1996 are derived
from financial statements of the Company which have been audited by Coopers &
Lybrand L.L.P., independent accountants, and which are contained elsewhere in
this Prospectus. The balance sheet data as of December 31, 1994 are derived from
financial statements of the Company which have been audited by Coopers & Lybrand
L.L.P., independent accountants, and are not included in this Prospectus. The
statement of operations data for the six months ended June 30, 1996 and June 27,
1997 and the consolidated balance sheet data at June 27, 1997 are derived from
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information. The results
of operations for the six months ended June 27, 1997 are not necessarily
indicative of the results to be expected for the entire year. The following
selected financial data should be read in conjunction with the Company's
financial statements and the related notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------- ----------------------------
1994 1995 1996 JUNE 30, 1996 JUNE 27, 1997
--------- --------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 7,310 $ 19,671 $ 33,622 $ 14,002 $ 23,681
Cost of sales........................................ 4,493 10,636 19,239 8,343 12,991
--------- --------- --------- ------------- -------------
Gross profit......................................... 2,817 9,035 14,383 5,659 10,690
--------- --------- --------- ------------- -------------
Operating expenses:
Research and development........................... 278 913 965 464 936
Sales and marketing................................ 370 1,631 2,481 1,117 1,877
General and administrative......................... 1,236 2,754 3,609 931 1,703
--------- --------- --------- ------------- -------------
Total operating expenses....................... 1,884 5,298 7,055 2,512 4,516
--------- --------- --------- ------------- -------------
Income from operations............................... 933 3,737 7,328 3,147 6,174
Interest income (expense), net....................... 7 (186) (1,859) (947) (123)
Other income......................................... -- -- -- -- 146
--------- --------- --------- ------------- -------------
Income from continuing operations before income taxes
and extraordinary item.............................. 940 3,551 5,469 2,200 6,197
Benefit (provision) for income taxes................. -- 52 (1,861) (748) (2,115)
--------- --------- --------- ------------- -------------
Income from continuing operations before
extraordinary item.................................. 940 3,603 3,608 1,452 4,082
Extraordinary item--loss on extinguishment of debt,
net of applicable income taxes...................... -- -- -- -- (141)
Income from discontinued service operations.......... 601 -- -- -- --
--------- --------- --------- ------------- -------------
Net income........................................... $ 1,541 $ 3,603 $ 3,608 $ 1,452 $ 3,941
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
PRO FORMA DATA (1):
Historical income before provision for income
taxes............................................... $ 1,541 $ 3,551 $ 5,469 $ 2,200 $ 5,983
Provision for income taxes (pro forma through
1995)............................................... (524) (1,207) (1,861) (748) (2,042)
--------- --------- --------- ------------- -------------
Net income (pro forma through 1995).................. $ 1,017 $ 2,344 $ 3,608 $ 1,452 $ 3,941
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Pro forma income per share........................... $ 0.20 $ 0.40 $ 0.16 $ 0.33
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Weighted average shares used in computing pro forma
income per share (2)................................ 11,492 9,092 9,092 11,839
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 27,
1994 1995 1996 1997
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 388 $ 2,676 $ 2,119 $ 7,956
Working capital..................................................... 1,603 4,650 8,372 15,212
Total assets........................................................ 2,338 9,048 11,953 18,896
Subordinated debt................................................... 0 20,000 20,000 --
Long-term debt, less current portion................................ 225 5,615 5,111 --
Series A Redeemable and Convertible Preferred Stock................. 0 2,205 2,205 --
Series B Redeemable Preferred Stock................................. 0 1,000 1,000 --
Shareholders' equity (deficit)...................................... 1,462 (23,748) (18,880) 15,852
</TABLE>

- ------------------------
(1) From inception through October 31, 1995, the Company was treated as an S
Corporation for federal income tax purposes. The pro forma data reflect an
estimate of income tax expense as if the Company was taxable as a C
Corporation for each of the years ended December 31, 1995 and 1994. See
Notes 1 and 11 of Notes to Financial Statements.

(2) See Note 1 of Notes to Financial Statements for calculation of weighted
average shares used in computing pro forma income per share.

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS RELATING TO FUTURE OPERATING RESULTS, OEM
CUSTOMERS, COMPETITION, NEW PRODUCT INTRODUCTIONS, COMPONENT SUPPLIERS, RESELLER
CHANNELS, KEY PERSONNEL, MANAGEMENT OF GROWTH, WARRANTY POLICIES, PROPRIETARY
RIGHTS, CUSTOMER SUPPORT, INTERNATIONAL SALES, THE APEX STRATEGY, FUTURE
RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE NET SALES, FUTURE SALES AND
MARKETING EXPENDITURES, FUTURE GENERAL AND ADMINISTRATIVE EXPENDITURES AND
FUTURE LIQUIDITY AND CAPITAL RESOURCES. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS PROSPECTUS ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, IN "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company operated as a division of Apex Computer Company (the "Predecessor")
through January 1993, providing computer maintenance services to Microsoft
Corporation ("Microsoft") and selling integrated server cabinets and, to a
limited extent, stand-alone switching systems, primarily to Microsoft. In
February 1993, the assets of that division were spun off as a dividend to the
sole shareholder of the Predecessor, who contributed those assets as the initial
capital of the Company. See "Certain Transactions." Throughout 1993, the Company
derived revenue primarily from the provision of computer maintenance services to
Microsoft. In May 1994, the Company began selling stand-alone switching systems
to Compaq for integration into server cabinets. In June 1994, the Company
discontinued its computer maintenance service business and determined to
concentrate on sales of stand-alone switching products and server cabinets,
including server cabinets with integrated switching systems.

In December 1995, the Company effected a leveraged recapitalization (the
"Leveraged Recapitalization") pursuant to which (i) the Company redeemed from
one of its shareholders Common Stock representing a 50% voting interest in the
Company prior to the Leveraged Recapitalization for approximately $12.5 million
in cash and a Class B Subordinated Promissory Note in the principal amount of
$10.0 million, and (ii) the Company sold to a group of entities affiliated with
TA Associates, Inc. (the "TA Group") Common Stock and Series A Redeemable and
Convertible Preferred Stock representing a 50% voting interest in the Company
after the Leveraged Recapitalization for $2.5 million and sold to the TA Group
Class A Subordinated Promissory Notes in the aggregate principal amount of $10.0
million. The value of the Company prior to the Leveraged Recapitalization, as
determined by an independent appraisal obtained in advance of the transaction,
was approximately $23.7 million. The Company effected the Leveraged
Recapitalization for a number of reasons, including the redemption of shares of
a majority shareholder who desired liquidity and the addition of the expertise
of a venture capital investor to the Company's Board of Directors. Moreover, the
Company believes that the addition of this expertise and the willingness of the
TA Group to invest substantial sums in the Company in the form of equity and
subordinated indebtedness helped the Company obtain long-term bank financing at
that time. The subordinated promissory notes issued in connection with the
Leveraged Recapitalization were repaid in accordance with their terms in
February 1997 using the proceeds of the Company's initial public offering (the
"IPO"). See "Certain Transactions."

From its inception through October 31, 1995 (the "Termination Date"), the
Company was treated for federal income tax purposes as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result, the
Company's earnings from its inception through the Termination Date

19
<PAGE>
were for federal income tax purposes taxed directly to the Company's sole
shareholder, at his individual federal income tax rate, rather than to the
Company. The pro forma provision for income taxes reflects an estimate of income
tax expense at federal statutory rates as if the Company were taxable as a C
Corporation for each of the years ended December 31, 1994 and 1995. See Notes 1
and 11 of Notes to Financial Statements.

A substantial portion of the Company's sales are concentrated among a
limited number of OEM customers. For 1994, 1995, 1996, and the six months ended
June 27, 1997, sales to the Company's OEM customers, represented approximately
38%, 69%, 71% and 66% of the Company's net sales, respectively. The Company's
OEM business is subject to risks such as contract termination, reduced or
delayed orders, adoption of competing products developed by third parties for
the OEM or by the OEM's internal development team, and change in corporate
ownership, financial condition, business direction or product mix by the OEM,
any of which could have a material adverse effect on the Company's results of
operations. The Company has experienced, and may continue to experience,
significant reductions or delays in orders from its OEM customers which have had
and may in the future have a material adverse effect on the Company's quarterly
sales and operating results. See "Risk Factors--Fluctuations in Operating
Results." In December 1995, one of the Company's OEM customers determined that
its orders of Company switches in late 1995 exceeded its needs. Accordingly, at
such customer's request, the Company delayed its scheduled deliveries to such
OEM for additional switches in the first half of 1996. While the Company has
contracts with certain of its existing OEM customers, none of the Company's OEM
customers is obligated to purchase products from the Company except pursuant to
binding purchase orders. The failure of any of the Company's OEMs to continue to
place orders at current or anticipated levels would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Dependence Upon a Limited Number of OEM
Customers."

In 1995, the Company entered into an OEM arrangement with IBM for the
production of an integrated server cabinet system incorporating the Company's
switching products. While the products supplied by the Company met IBM's
requirements, IBM concluded that its program had not achieved desired results
and sought to terminate the program in mid-1996 after the Company had expended
significant product development and operational resources in connection with
this OEM arrangement. Although the Company negotiated a settlement that covered
its product costs and its direct costs associated with discontinuing the
program, the Company's branded product development efforts were delayed as a
result of the Company's commitment of substantial product development resources
to the IBM program in the third and fourth quarters of 1995 and the first
quarter of 1996. IBM accounted for 1% of the Company's net sales in 1995 and 18%
of the Company's net sales in 1996.

The Company is currently experiencing increased price competition in both
the market for stand-alone switching systems and the market for integrated
server cabinet systems and expects that pricing pressures will increase in the
future. Increased competition could result in price reduction and loss of market
share which would adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors--Intense Competition."

20
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, ------------------------
------------------------------------- JUNE 30, JUNE 27,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 61.5 54.1 57.2 59.6 54.9
----- ----- ----- ----- -----
Gross margin................................................ 38.5 45.9 42.8 40.4 45.1
----- ----- ----- ----- -----
Operating expenses:
Research and development.................................. 3.8 4.6 2.9 3.3 4.0
Sales and marketing....................................... 5.0 8.3 7.4 8.0 7.9
General and administrative................................ 16.9 14.0 10.7 6.6 7.2
----- ----- ----- ----- -----
Total operating expenses................................ 25.7 26.9 21.0 17.9 19.1
----- ----- ----- ----- -----
Income from operations...................................... 12.8 19.0 21.8 22.5 26.0
Interest income (expense), net.............................. 0.1 (0.9) (5.6) (6.8) (0.5)
Other income................................................ -- -- -- -- 0.6
----- ----- ----- ----- -----
Income from continuing operations before income taxes and
extraordinary item........................................ 12.9 18.1 16.2 15.7 26.1
Provision for income taxes (pro forma through December 31,
1995)..................................................... 4.4 6.2 5.5 5.3 8.9
----- ----- ----- ----- -----
Income from continuing operations before extraordinary item
(pro forma through December 31, 1995)..................... 8.5 11.9 10.7 10.4 17.2
Extraordinary item--loss on early extinguishment of debt,
net of applicable income taxes............................ -- -- -- -- 0.6
Income from discontinued service operations (net of pro
forma taxes).............................................. 5.4 -- -- -- --
----- ----- ----- ----- -----
Net income (pro forma through December 31, 1995)............ 13.9% 11.9% 10.7% 10.4% 16.6%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>

SIX MONTHS ENDED JUNE 27, 1997 AND JUNE 30, 1996

NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated server cabinets. Net sales increased 69% to
$23.7 million for the six months ended June 27, 1997 from $14.0 million for the
six months ended June 30, 1996. This increase was due primarily to growth in
sales of stand-alone switching systems to OEM customers and, to a lesser extent,
to increased sales of Apex branded switching systems and cabinets.

GROSS MARGIN. Gross margin is affected by a variety of factors, including:
the ratio of OEM sales to branded sales, as OEM sales typically have lower gross
margins than branded sales; product mix, including the percentage of integrated
cabinet systems sales, which generally have lower gross margins than sales of
stand-alone switching systems; raw materials and labor costs; new product
introductions by the Company and its competitors; and the level of outsourcing
of manufacturing and assembly services by the Company. Gross margin increased to
45.1% for the six months ended June 27, 1997 from 40.4% for the six months ended
June 30, 1996, due primarily to shifts in the Company's product mix to a larger
percentage of branded switching systems and integrated cabinet systems sales.
The Company expects that increased price competition may affect pricing and
therefore erode the Company's gross margins in the future. See "Risk
Factors--Intense Competition."

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs and are expensed as they
are incurred. Research and development expenses increased to $936,000 for the
six months ended June 27, 1997 from $464,000 for the six months ended June 30,
1996, due primarily to increased compensation expense associated with increased
staffing levels

21
<PAGE>
and, to a lesser extent, to increased project spending. As a percentage of net
sales, research and development expenses were 4.0% for the six months ended June
27, 1997 compared to 3.3% for the six months ended June 30, 1996. The Company
believes that the timely development of innovative products and enhancements to
existing products is essential to maintaining its competitive position and,
therefore, expects research and development expenditures to increase in absolute
dollars.

SALES AND MARKETING EXPENSES. Sales and marketing expenses include
promotional material, trade show expenses and sales and marketing personnel
costs, including sales commissions and travel. Sales and marketing expenses
increased to $1.9 million for the six months ended June 27, 1997 from $1.1
million for the six months ended June 30, 1996. As a percentage of net sales,
sales and marketing expenses decreased to 7.9% for the six months ended June 27,
1997 from 8.0% for the six months ended June 30, 1996. The increase in absolute
dollars was due primarily to increased compensation expense associated with
increased staffing levels and to increased advertising and trade show expenses,
including expenses relating to market entry and advertising strategies for
Europe. The Company expects these expenditures to increase in absolute dollars
as it seeks to increase its branded sales, in general, and its international
sales, in particular.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include personnel costs for administration, finance, human resources and general
management, as well as rent, utilities and legal and accounting expenses, and
provision for Washington State's gross receipts tax. General and administrative
expenses increased to $1.7 million for the six months ended June 27, 1997 from
$931,000 for the six months ended June 30, 1996. As a percentage of net sales,
general and administrative expenses increased to 7.2% for the six months ended
June 27, 1997 from 6.6% for the six months ended June 30, 1996. The increase was
due primarily to increased personnel costs, including the addition of a Chief
Financial Officer and a Corporate Controller, and, to a lesser extent, to
increased costs relating to the Company's transition to a public company. The
Company expects that general and administrative expenses will increase in
absolute dollars to support the growth of operations and sales functions.

NET INTEREST EXPENSE (INCOME). Net interest expense decreased to $123,000
for the six months ended June 27, 1997 from $947,000 for the six months ended
June 30, 1996. The decrease in net interest expense resulted primarily from the
elimination of all indebtedness incurred in the Leveraged Recapitalization, as
well as the elimination of all long-term bank indebtedness, using the proceeds
of the IPO.

PROVISION FOR INCOME TAXES. The provision for income taxes was $2.1 million
for the six months ended June 27, 1997 compared to $748,000 for the six months
ended June 30, 1996. The effective federal tax rate for each of these periods
was approximately 34%.

NET INCOME. Net income increased 171% to $3.9 million for the six month
period ended June 27, 1997 from net income of $1.45 million for the six months
ended June 30, 1996. This increase was due primarily to increased net sales and
related gross profits and decreased net interest expense resulting from the
elimination of long-term indebtedness using the proceeds of the IPO and, to a
lesser extent, increased gross margin. As a percentage of net sales, net income
increased to 16.6% for the six months ended June 27, 1997 from 10.4% for the six
months ended June 30, 1996.

YEARS ENDED DECEMBER 31, 1996 AND 1995

NET SALES. Net sales increased 71% to $33.6 million for 1996 from $19.7
million for 1995. This increase was due primarily to increased sales of
stand-alone switching systems to OEMs, sales of integrated server cabinet
systems to IBM in the first half of 1996, and, to a lesser extent, sales of
branded switching systems to resellers.

GROSS MARGIN. Gross margin declined to 42.8% for 1996 from 45.9% for 1995,
due to increased OEM sales as a percentage of net sales, including sales of
cabinet systems to IBM in the first half of 1996, as well as increased
outsourcing by the Company of component assembly to meet customer demand. In
addition, the Company accrued $630,000 and $215,000, respectively, in warranty
and inventory reserves in 1996. To date, the Company has not experienced
significant product returns. The increase in warranty reserves in

22
<PAGE>
1996 was the result of the Company's evaluation of the composition of its
current product mix and the Company's increased sales of OEM and branded
switching systems which the Company believes increased its warranty exposure.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $965,000 for 1996 from $913,000 for 1995, but decreased as a
percentage of net sales to 2.9% for 1996 from 4.6% for 1995.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.5 million for 1996 from $1.6 million for 1995, but declined as a percentage
of net sales to 7.4% for 1996 from 8.3% for 1995. The increase in absolute
dollars was primarily due to increased advertising and trade show expenses,
including travel, and to a lesser extent, increased personnel costs.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.6 million for 1996 from $2.8 million for 1995. As a percentage
of net sales, general and administrative expenses declined to 10.7% for 1996
from 14.0% for 1995. The increase in absolute dollars was primarily due to the
move to larger facilities by the Company in September 1995 which increased rent,
an increase in the Company's allowance for doubtful accounts, state tax
increases associated with increased net sales and, to a lesser extent, increased
legal and accounting costs and the addition of corporate infrastructure to
support the Company's growth in net sales.

NET INTEREST EXPENSE (INCOME). Net interest expense increased to $1.9
million for 1996 from $186,000 for 1995. The increase in net interest expense
resulted from indebtedness incurred in the Leveraged Recapitalization.

PROVISION FOR INCOME TAXES. The provision for income taxes was $1.9 million
for 1996. The effective federal tax rate for 1996 was approximately 34%.

NET INCOME. Net income increased to $3.6 million for 1996 from pro forma
net income of $2.3 million for 1995 due primarily to increased sales and related
gross profits offset in part by increased interest expense associated with the
Leveraged Recapitalization. As a percentage of net sales, net income declined to
10.7% for 1996 from 11.9% (pro forma) for 1995. The increase in absolute dollars
and the decrease as a percentage of net sales was due to the factors discussed
above.

YEARS ENDED DECEMBER 31, 1995 AND 1994

NET SALES. Net sales increased 169% to $19.7 million for 1995 from $7.3
million for 1994. This increase was primarily due to the initiation and growth
of sales of stand-alone switching systems to OEM customers and, to a lesser
extent, an increase in sales of branded stand-alone switching systems.

GROSS MARGIN. Gross margin increased to 45.9% for 1995 from 38.5% for 1994,
primarily due to greater sales of stand-alone switching systems, which generally
have higher gross margins than server cabinets, and, to a lesser extent,
increases in branded sales with higher gross margins and economies of scale
gained from volume increases.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $913,000 for 1995 from $278,000 for 1994. As a percentage of net
sales, research and development expenses increased to 4.6% in 1995 from 3.8% in
1994. The increases in absolute dollars and as a percentage of net sales were
primarily due to the addition of new engineers and the development of OUTLOOK
and VIEWPOINT prototypes.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$1.6 million for 1995 from $370,000 for 1994. As a percentage of net sales,
sales and marketing expenses increased to 8.3% in 1995 from 5.0% in 1994. The
increases in absolute dollars and as a percentage of net sales were primarily
due to increased advertising and tradeshow expenses and, to a lesser extent,
sales commissions and personnel costs.

23
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.8 million for 1995 from $1.2 million for 1994. As a percentage
of net sales, general and administrative expenses declined to 14.0% in 1995 from
16.9% in 1994. The increase in absolute dollars was primarily due to
approximately $1.4 million incurred in December 1995 for transaction costs and
bonuses associated with the Leveraged Recapitalization.

NET INTEREST EXPENSE (INCOME). Net interest expense was $186,000 in 1995.
The Company earned interest income of $7,000 in 1994. The increase in interest
expense from 1994 to 1995 resulted from certain loans made to the Company by its
founder and former sole shareholder.

NET INCOME. Pro forma net income increased to $2.3 million for 1995 from
$1.0 million for 1994. As a percentage of net sales, pro forma net income
declined to 11.9% in 1995 from 13.9% in 1994. The increase in absolute dollars
and the decline as a percentage of net sales were due to the factors discussed
above.

24
<PAGE>
QUARTERLY INFORMATION

The following tables set forth certain unaudited statement of operations
data for the ten quarters ended June 27, 1997, as well as such data expressed as
a percentage of net sales for the periods indicated. Such data have been derived
from unaudited condensed financial statements that, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. Such data should be
read in conjunction with the Company's audited financial statements and the
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 3,166 $ 4,011 $ 4,606 $ 7,888 $ 7,916 $ 6,086 $ 9,265
Cost of sales...................... 1,681 2,121 2,385 4,449 4,668 3,675 5,173
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit....................... 1,485 1,890 2,221 3,439 3,248 2,411 4,092
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development......... 158 189 298 268 258 206 191
Sales and marketing.............. 295 316 392 628 577 540 641
General and administrative....... 248 242 307 1,957 449 482 773
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 701 747 997 2,853 1,284 1,228 1,605
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations............. 784 1,143 1,224 586 1,964 1,183 2,487
Interest income (expense), net..... 4 (10) (26) (154) (472) (475) (472)
Other income....................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations before
income taxes and extraordinary
item............................. 788 1,133 1,198 432 1,492 708 2,015
Provision for income taxes (pro
forma through December 1995)..... 268 385 408 146 508 241 686
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before extraordinary item... 520 748 790 286 984 467 1,329
Extraordinary item--loss on early
extinguishment of debt, net of
applicable income taxes.......... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through
December 1995)................... $ 520 $ 748 $ 790 $ 286 $ 984 $ 467 $ 1,329
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma income per share......... $ 0.05 $ 0.07 $ 0.07 $ 0.02 $ 0.11 $ 0.05 $ 0.15
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma weighted average shares
outstanding...................... 11,492 11,492 11,492 11,492 9,092 9,092 9,092

QUARTERS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 53.1 52.9 51.8 56.4 59.0 60.4 55.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin....................... 46.9 47.1 48.2 43.6 41.0 39.6 44.2
Operating expenses:
Research and development......... 5.0 4.7 6.5 3.4 3.3 3.4 2.1
Sales and marketing.............. 9.3 7.9 8.5 8.0 7.3 8.9 6.9
General and administrative....... 7.8 6.0 6.6 24.8 5.6 7.9 8.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 22.1 18.6 21.6 36.2 16.2 20.2 17.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations............. 24.8 28.5 26.6 7.4 24.8 19.4 26.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense), net..... 0.1 (0.3) (0.6) (1.9) (6.0) (7.8) (5.1)
Other income....................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations before
income taxes and extraordinary
item............................. 24.9 28.2 26.0 5.5 18.8 11.6 21.7
Provision for income taxes (pro
forma through December 1995)..... 8.5 9.6 8.8 1.9 6.4 4.0 7.4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before extraordinary item... 16.4 18.6 17.2 3.6 12.4 7.6 14.3
Extraordinary item--loss on early
extinguishment of debt, net of
applicable income taxes.......... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (pro forma through
December 1995)................... 16.4% 18.6% 17.2% 3.6% 12.4% 7.6% 14.3%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------

DEC. 31, MAR. 28, JUNE 27,
1996 1997 1997
----------- ----------- -----------

<S> <C> <C> <C>
Net sales.......................... $ 10,355 $ 11,587 $ 12,094
Cost of sales...................... 5,723 6,383 6,609
----------- ----------- -----------
Gross profit....................... 4,632 5,204 5,485
----------- ----------- -----------
Operating expenses:
Research and development......... 310 442 494
Sales and marketing.............. 723 885 991
General and administrative....... 1,905 781 922
----------- ----------- -----------
Total operating expenses....... 2,938 2,108 2,407
----------- ----------- -----------
Income from operations............. 1,694 3,096 3,078
Interest income (expense), net..... (440) (240) 117
Other income....................... -- 146 --
----------- ----------- -----------
Income from operations before
income taxes and extraordinary
item............................. 1,254 3,002 3,195
Provision for income taxes (pro
forma through December 1995)..... 426 1,025 1,090
----------- ----------- -----------
Income before extraordinary item... 828 1,977 2,105
Extraordinary item--loss on early
extinguishment of debt, net of
applicable income taxes.......... -- (141) --
----------- ----------- -----------
Net income (pro forma through
December 1995)................... $ 828 $ 1,836 $ 2,105
----------- ----------- -----------
----------- ----------- -----------
Pro forma income per share......... $ 0.09 $ 0.17 $ 0.16
----------- ----------- -----------
----------- ----------- -----------
Pro forma weighted average shares
outstanding...................... 9,092 10,736 12,861

DEC. 31, MAR. 28, JUNE 27,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0%
Cost of sales...................... 55.3 55.1 54.6
----------- ----------- -----------
Gross margin....................... 44.7 44.9 45.4
Operating expenses:
Research and development......... 3.0 3.8 4.1
Sales and marketing.............. 7.0 7.6 8.3
General and administrative....... 18.4 6.8 7.6
----------- ----------- -----------
Total operating expenses....... 28.4 18.2 20.0
----------- ----------- -----------
Income from operations............. 16.3 26.7 25.4
----------- ----------- -----------
Interest income (expense), net..... (4.2) (2.1) 1.0
Other income....................... -- 1.3 --
----------- ----------- -----------
Income from operations before
income taxes and extraordinary
item............................. 12.1 25.9 26.4
Provision for income taxes (pro
forma through December 1995)..... 4.1 8.9 9.0
----------- ----------- -----------
Income before extraordinary item... 8.0 17.0 17.4
Extraordinary item--loss on early
extinguishment of debt, net of
applicable income taxes.......... -- 1.2 --
----------- ----------- -----------
Net income (pro forma through
December 1995)................... 8.0% 15.8% 17.4%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

25
<PAGE>
Net sales for the second quarter of 1996 decreased from the first quarter of
1996 primarily as a result of a reduction in orders of switches by one of the
Company's OEM customers, which had determined that its orders for the Company's
switches in late 1995 had exceeded its needs.

The fluctuations in gross margin from quarter to quarter in 1996 resulted
from shifts in the Company's product mix between stand-alone switching systems
and integrated cabinets. The reductions in research and development expenses as
a percentage of net sales from the last quarter of 1995 to the first and
subsequent quarters of 1996 resulted from a significant increase in the
Company's net sales for 1996 as compared to 1995. The increases in research and
development expenses in the first and second quarters of 1997 in absolute
dollars and as a percentage of net sales over the prior four quarters in 1996
were attributable primarily to increased compensation costs relating to
increased staffing levels. The significant increases in sales and marketing
expenses in the first and second quarters of 1997 in absolute dollars over the
prior four quarters in 1996 were attributable primarily to increased
compensation costs related to increased staffing levels. The significant
increase in general and administrative expenses in absolute dollars and as a
percentage of net sales in the fourth quarter of 1995 over the prior three
quarters was attributable to the transactional expenses of the Leveraged
Recapitalization, and the compensation expenses associated with Mr. Hafer's 1995
bonus. See "Certain Transactions." The significant increase in general and
administrative expenses in absolute dollars and as a percentage of net sales in
the fourth quarter of 1996 over the prior three quarters was attributable to
compensation expense of approximately $875,000 incurred as a result of the
acceleration of the vesting of the Series B Redeemable Preferred Stock issued to
Mr. Hafer in connection with the Leveraged Recapitalization and a $206,000
increase in the Company's allowance for doubtful accounts. The Company concluded
that the increase in allowance for doubtful accounts was appropriate primarily
based upon increased amounts and concentrations of branded sales, including
sales to new resellers. The significant change in net interest income (expense)
in the second quarter of 1997 over the prior six quarters resulted from the
repayment of subordinated indebtedness incurred in the Leveraged
Recapitalization and long-term bank debt using the proceeds of the IPO in
February 1997.

The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from OEM customers; the timing of shipments; the timing of new
product introductions and enhancements by the Company and its competitors;
changes in product or distribution channel mixes; changes in pricing policies or
price reductions by the Company or its competitors; the availability and cost of
supplies and components; sales and marketing expenses related to entering into
new markets, introducing new products and retaining current OEM and other large
customers; seasonal customer demand; and fluctuations in sales of servers due to
changes in economic conditions or capital spending levels.

In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products several months prior to scheduled shipment
dates, these orders are subject to cancellation up to eight weeks prior to the
scheduled shipment date. The Company generally must plan production, order
components and undertake its manufacturing activities prior to the time that
these orders become firm. In addition, the Company's OEM customers have in the
past requested, and will likely continue to request from time to time, that the
Company delay shipment dates or cancel orders for products that are subject to
firm orders. Accordingly, sales to OEMs for future quarters are difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales as a
percentage of net sales, the Company's quarterly sales and operating results
will become more dependent upon the volume and timing of branded product orders
received during the quarter. Because customers of the Company's branded products
(including resellers) typically place orders shortly before their requested
shipment date, revenues from branded sales are difficult to forecast. The
failure of the Company to accurately forecast the timing and volume of orders
for branded products during any given quarter could adversely affect the
Company's operating results for such quarter and, potentially, for future
periods.

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<PAGE>
The Company has historically experienced higher levels of net sales in the
fourth quarter. The Company believes that this seasonality is a result of
customer budgeting and procurement cycles, which correspondingly may depress net
sales in other quarters, and the Company expects this seasonality to continue in
the future.

LIQUIDITY AND CAPITAL RESOURCES

As of June 27, 1997, the Company's principal sources of liquidity consisted
of approximately $7.9 million in cash and cash equivalents. In addition, since
December 1995, the Company has maintained a combined line of credit and letter
of credit facility with a bank. In early April 1997, this facility was renewed,
providing a final maturity date of April 30, 1998 and increasing the aggregate
borrowing capacity from $3.0 million to $5.0 million. Under the line of credit,
the Company may borrow up to a specified amount based upon its accounts
receivable. Under the letter of credit arrangement, the bank will issue
commercial letters of credit up to $5.0 million (less any amounts outstanding
under the line of credit) at prime. There were no borrowings under the line of
credit and the letter of credit facility through June 1997. Thus, all $3.0
million was available through March 1997, and all $5.0 million thereafter.

The Company's operating activities generated cash of approximately $1.4
million, $2.2 million, $725,000 for 1994, 1995 and 1996, respectively. The
decrease in cash flow from operations in 1996 when compared with 1995 resulted
from increased interest expense and payments of accrued expenses. Cash generated
from operating activities increased to $3.8 million in the six months ended June
27, 1997 from $770,000 in the comparable period of 1996. This increase in cash
flow was primarily due to increased net income, decreased bonus payments and an
increase in accounts payable, partially offset by increases in accounts
receivable and inventories. At June 27, 1997, the Company's OEM customers
accounted for 65% of the Company's accounts receivable. See "Risk
Factors--Dependence Upon a Limited Number of OEM Customers" and Note 1 of Notes
to Financial Statements.

In December 1995, the Company effected the Leveraged Recapitalization
pursuant to which the Company sold 1.6 million shares of Common Stock for a
total price of approximately $294,000, 300,000 shares of Series A Redeemable and
Convertible Preferred Stock for a total price of approximately $2.2 million and
$10.0 million in aggregate principal amount of Class A Subordinated Promissory
Notes. In connection therewith, the Company redeemed from one of its
shareholders 4.0 million shares of Common Stock for an aggregate price of
approximately $22.5 million, consisting of cash of approximately $12.5 million
and the issuance of a Class B Subordinated Promissory Note in the aggregate
principal amount of $10.0 million.

In February 1997, the Company consummated its IPO. The net proceeds to the
Company from the IPO were approximately $28.4 million, after deducting
approximately $190,000 of directors and officers insurance premium. Of that
amount, $20.0 million was used to repay the indebtedness evidenced by the Class
A and Class B Subordinated Promissory Notes issued in the Leveraged
Recapitalization, approximately $5.6 million was used to repay long-term bank
debt incurred by the Company in December 1995, and $600,000 was used to redeem
shares of Series B Redeemable Preferred Stock issued to Kevin J. Hafer, the
Company's President and Chief Executive Officer, in connection with the
Leveraged Recapitalization. See "Certain Transactions." After application of the
net proceeds of the IPO to the foregoing items and payment of IPO expenses,
including $190,000 of directors and officers insurance premium, which is being
expensed in 1997 as a period cost, the remaining proceeds from the IPO were
approximately $2.2 million.

The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities, together with
the proceeds from this offering, will be sufficient to fund its operations
through 1998.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

See Note 1 of Notes to Financial Statements for a discussion of the impact
of new accounting pronouncements.

27
<PAGE>
BUSINESS

OVERVIEW

The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, video monitor and mouse
configuration (a "console"). Designed to address space, cost, administration and
maintenance issues that organizations increasingly face when adopting
client/server architecture, the Company's sophisticated switching and integrated
cabinet systems enable network administrators to manage more efficiently their
organizations' complex and growing server populations.

The Company provides "plug and play" switching systems and integrated server
cabinet solutions for many of the network administration, management and storage
problems faced by organizations using client/server architecture. The Company's
switching products, including OUTLOOK, OUTLOOK(4) and VIEWPOINT, enable network
administrators to access multiple servers from one or more centralized consoles,
consolidate hardware requirements, and provide direct hardwired connections
between the switch and the attached server which facilitate access to servers
even when the network is down. In addition, the Company's switching systems are
able to work with heterogeneous server populations. All of the Company's
switching products utilize the Company's proprietary On Screen Configuration And
Reporting ("OSCAR") interface. OSCAR allows network administrators to
immediately identify and access servers according to the administrators' own
naming conventions. The Company also offers server cabinet solutions to
consolidate and store heterogeneous servers and related hardware in a single
cabinet that facilitates more efficient physical access and safer performance of
hardware maintenance tasks.

The Company markets and sells its products through a direct sales force and
various distribution channels. Apex supplies stand-alone switching systems on a
private label basis to Compaq and Hewlett-Packard for integration into their
product offerings. Sales to Compaq represented approximately 52% of the
Company's net sales for the six months ended June 27, 1997. Sales to Compaq and
Hewlett-Packard represented approximately 30% and 15%, respectively, of the
Company's net sales for 1996, and 54% and 6% of net sales, respectively, for
1995. According to International Data Corporation, Compaq and Hewlett-Packard
shipped 41.7% of all PC servers shipped worldwide in 1996. Customers of the
Company's branded products in 1996 or the first half of 1997 included Advanced
Logic Research, Inc., Data General Corporation, Dell Computer Corporation,
McAfee Associates, Inc., Microsoft Corporation, the National Association of
Securities Dealers, Inc., Owens Corning, NEC USA, Inc., Peoplesoft, Inc., Unisys
Corporation and Wells Fargo Bank, N.A.

INDUSTRY BACKGROUND

Information technology has become increasingly critical to the operation of
most businesses as computers are utilized to perform multiple and diverse
functions throughout organizations. The desire of many organizations to
decentralize computing power while sharing technology resources and providing
broad access to enterprise data has resulted in the widespread adoption of
distributed network computing environments using a client/server architecture of
interconnected PCs. The typical client/server installation consists of a local
area network ("LAN") with multiple centralized PCs operating as "servers"
dedicated to performing specific functions for the many "client" PCs connected
to the LAN. According to International Data Corporation, worldwide shipments of
PC servers are expected to grow 21.0% on a compounded annual basis from 1997 to
2000, reaching approximately 3.1 million units shipped in the year 2000.

The proliferation of PC-based LANs and wide-area networks ("WANs") has
created significant network administration and space problems for the
organizations that rely on them. Network administrators, who may supervise up to
a thousand servers, must identify and access relevant servers to add or delete
users, to add, change or upgrade applications, to tune systems for better
optimization, and to diagnose and correct network failures. Client/server
networks utilize servers that were designed to operate as stand-

28
<PAGE>
alone systems, each with its own console consisting of a keyboard, video monitor
and mouse. Thus, to perform network administration and management tasks, network
administrators must deal with an unwieldy number of consoles, whether centrally
located or dispersed throughout the organization. In addition, inadvertent
access to network servers can be difficult to prevent when there are many
consoles, and, therefore, multiple access points, available.

As network resources become more critical to organizations, constant
availability of the network becomes increasingly important. The time that a
network is down or degraded can cause significant inconvenience, loss of
productivity and financial loss. Because diagnosis and correction of anomalous
network behavior often requires the network staff to physically access each
affected server through its own console, quick and efficient "fault" management
can be difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.

In addition to these network administration and management problems, as
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates. Without efficient storage and configuration,
network hardware consumes substantial and often expensive floor space, creates
clutter that hampers network administration and management, and increases the
risk of physical damage to expensive hardware. The typical individual keyboard,
monitor and mouse console architecture of servers exacerbates this space
problem, as multiple consoles consume valuable and costly space. The increased
use of "heterogeneous" server configurations using different platforms, such as
Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc,
and different operating systems, such as Windows NT, Unix, NetWare and O/S 2,
compounds the storage and administration problems faced by network
administrators.

The advent of console switching technology has facilitated more effective
network management by giving administrators the ability to control a larger
number of servers through fewer consoles. To date, however, most console
switching solutions have been difficult to install and configure, and many have
used proprietary cabling that has made network administrators reluctant to
embrace a solution that may restrict them from expanding or using a different
solution in the future. In addition, there have been a limited number of
solutions available for those users who want to control computers from a
distance, such as those who need access to computer resources in, but do not
want to expose those expensive resources to, harsh operating environments. The
space management solutions available to network administrators have generally
consisted of racks or cabinets designed to house only one type of server, and
most have not been technically designed for ease of access. Those with
distributed, heterogeneous client/server networks have often been left with no
customized solution.

THE APEX SOLUTION

The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions for many of the network administration,
management and storage problems faced by organizations with client/server
networks. By providing both console switching and cabinet systems, the Company
offers a comprehensive solution to the space and administrative issues related
to client/server networks. The Company's products allow organizations to:

- ACCESS MULTIPLE SERVERS FROM A CENTRAL LOCATION. Apex products allow
network administrators to manage multiple platforms from a centralized
console, to identify and access servers from a single screen according to
the administrator's own naming conventions, and to solve distance problems
by providing end-to-end connections of up to 1,000 feet.

29
<PAGE>
- CONSOLIDATE HARDWARE REQUIREMENTS. Apex products reduce the need for
multiple keyboards, monitors and mice by allowing direct access to
multiple servers from a single console, thereby facilitating more
efficient network management and administration and reducing hardware
costs.

- PROVIDE "OUT-OF-BAND" ACCESS TO SERVERS. By providing direct hardwired
connections to network servers, Apex products enable network
administrators to access each server as if they were physically present at
that server, even when the network is down. Moreover, unlike the
connectivity approach of many competitive products, which connect numerous
switches to other switches in a continuous chain, the Company's switching
products are designed so that each server has its own connection to the
master switch in a two-tiered system. This direct linkage makes it easier
for network administrators to isolate problems with individual servers.

- PROVIDE CONNECTIVITY TO VIRTUALLY ALL MAJOR PLATFORMS. Apex switching
products work in heterogeneous server environments, providing connectivity
with Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and
Sun Sparc platforms.

- MAXIMIZE SPACE EFFICIENCY. Apex integrated cabinet solutions consolidate
servers and other hardware in a single location to facilitate more
efficient physical access for hardware maintenance tasks. The Company also
provides customized solutions for the storage of heterogeneous server
populations.

The following diagram illustrates how the Company's switching and cabinet
systems solve many of the network administration, management and storage
problems of client/server environments.

There follows a graphic on the left side of which there is an illustration
of 24 dispersed servers, each with its own keyboard, video monitor and mouse
console. Above this illustration is the heading "Before Apex" and below this
illustration is the description "Disorganized Collection of Servers, each with
its own keyboard, video monitor and mouse (a "console")". The right side of the
graphic is an illustration depicting the same number of servers consolidated
into six centralized DensePack cabinets. By combining one primary OutLook switch
with three secondary OutLook switches, access and control of the same number of
servers is consolidated into one keyboard, video monitor and mouse console.
Above this illustration is the heading "After Apex," and below this illustration
is the description "Organized collection of servers housed in Apex cabinets,
controlled from a single console via Apex switches".

THE APEX STRATEGY

- CONTINUE INNOVATIVE PRODUCT DEVELOPMENT. The Company believes that the
continued, timely development of innovative products and enhancements to
existing products is essential to maintaining its

30
<PAGE>
leadership position. By maintaining close contact with key customers who
are often early-adopters of leading technologies, the Company seeks to
develop new products, as well as modifications and improvements to
existing products. Many of the Company's products are designed to
accommodate future modifications and additional features, which the
Company believes facilitates the development and integration of
modifications and features if a market need is perceived.

- LEVERAGE OEM EXPERIENCE TO INCREASE OEM SALES. The Company intends to
leverage its significant experience in working with OEM customers to enter
into new relationships with other manufacturers of servers in the United
States and in Europe. The Company believes that the architecture, quality
and reliability of its products, together with the Company's commitment to
customer support, are attractive to OEMs.

- INCREASE BRANDED SALES. To increase its market penetration, the Company
intends to aggressively market its branded products to end users through a
direct sales force and through a variety of reseller channels. The Company
believes that its comprehensive and customized solutions appeal to many
organizations that, because of heterogeneous server populations and for
other reasons, have problems that are not effectively solved by competing
switching and cabinet products. For the years ended December 31, 1995 and
1996 and the six months ended June 27, 1997, sales of Apex branded
products represented approximately 32%, 29% and 34%, respectively, of the
Company's net sales.

- CREATE AN INTERNATIONAL DISTRIBUTION NETWORK. The Company intends to
create an international sales distribution network for the Company's
branded switching products, focusing initially on the network computing
market in Europe because of its large installed server base. The Company
is currently shipping its switching systems to OEMs with facilities in
Europe and the Company has begun efforts to build an international
third-party distribution network.

PRODUCTS

The Company provides comprehensive solutions to many of the network
administration, management and storage problems inherent in client/server
network environments by offering a family of stand-alone switching systems
together with integrated cabinet systems designed to store servers efficiently.

SWITCHING SYSTEMS

The Company's console switching systems consolidate the control and
monitoring of multiple network servers to a centralized command center
consisting of one or more console positions. The Company's console switching
products can work with heterogeneous server populations that use different
platforms, such as Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC
Alpha and Sun Sparc, and different operating systems, such as Windows NT, Unix,
NetWare and O/S 2. The Company's console switching products utilize the
Company's proprietary On Screen Configuration And Reporting ("OSCAR") interface
that enables network administrators to immediately identify and access servers
according to the administrators' own naming conventions, as opposed to
predesignated numbers. The Company's console switching products operate on an
out-of-band basis, meaning there is a direct hardwired connection between the
console and the attached servers through the switch. This direct connection
enables network administrators to access network servers and locate the problem
server even when the network is down. The Company also recently began
manufacturing two new switching products designed to provide a more efficient,
cost-effective and convenient way to consolidate and manage other peripherals,
such as multimedia input/output devices and modems, printers, touchscreens and
serial mice.

OUTLOOK, introduced in September 1995, enables administrators to control up
to eight servers using a single console and, by integrating additional OUTLOOK
switches, can be expanded to provide centralized control of up to 64 servers.
OUTLOOK offers programmable scanning to allow users to vary the frequency and
duration of monitoring individual servers. OUTLOOK also enables network managers
to reduce

31
<PAGE>
inadvertent access to the system by eliminating additional consoles. OUTLOOK
provides access to a wide range of network elements such as file servers, PBX
monitors and database engines from a single console.

OUTLOOK(4), introduced in March 1996, includes the same features as OUTLOOK,
except that this multi-user system allows network administrators to administer
up to 64 servers from up to four console positions.

VIEWPOINT, introduced in September 1995 to address the needs of very large
server-intensive organizations with large network administrative staffs,
includes all of the attributes of OUTLOOK except that it enables network
administration staff to control up to 32 servers from as many as 16 console
positions. Total capacity can be expanded to as many as 256 servers by
integrating the VIEWPOINT switch with multiple OUTLOOK switches, and VIEWPOINT's
technology allows access to a server up to 1,000 feet away. VIEWPOINT also
supports remote diagnostics via a serial port.

SUNDIAL, introduced in March 1996, enables administrators to control up to
10 Sun Sparc workstations from a single console and, by integrating additional
SUNDIAL switches, can be expanded to provide centralized control of up to 100
workstations. The SUNDIAL switch maintains communications with attached
workstations and, if power is interrupted, the unit's nonvolatile memory helps
restore the system's established settings. The SUNDIAL switch is designed to
work with the OUTLOOK, OUTLOOK(4) and VIEWPOINT switches.

SWITCHBACK, introduced in March 1995, consists of a local unit and a remote
unit that allow users to control the attached server from either a primary
console position or a remote console position linked by a single cable.
SWITCHBACK'S intelligent circuits were recently enhanced to enable 100 mhz
transmission of high resolution video signals up to 600 feet away from the
attached servers using industry-standard Category 5 cabling. The SWITCHBACK
system includes a lock-out feature that prevents system capture. The SWITCHBACK
system can be combined with the OUTLOOK and OUTLOOK(4) switches.

The A-1000, introduced in June 1997, connects to a PC's multimedia ports,
providing switching capabilities for multimedia peripherals such as sound cards,
speakers and microphones. The A-1000 can be used as a companion to OUTLOOK or as
a stand-alone device using a separate keypad.

The S-1000, introduced in June 1997, connects to a server's serial ports,
providing switching capabilities for devices such as modems, printers,
touchscreens and serial mice. Like the A-1000, the S-1000 can be used with
OUTLOOK or as a stand-alone device. To date, neither the A-1000 nor the S-1000
has achieved commercially significant sales.

The U.S. list prices of the Company's switching systems as of July 17, 1997
were as set forth below. The list prices of the Company's products have changed
in the past, and the prices set forth below are likely to change in the future.

<TABLE>
<CAPTION>
PRODUCT U.S. LIST PRICE
- -------------------------------------- ---------------
<S> <C>
OUTLOOK (4 PORT) $839
OUTLOOK (8 PORT) $995
OUTLOOK(4) $3,725
VIEWPOINT (DEPENDING ON CONFIGURATION) $12,000-$44,000
SUNDIAL $1,929
SWITCHBACK $895
A-1000 $748
S-1000 $864
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
The Company's current switching products are described in the table below:
<S> <C> <C>
PRODUCT NAME KEY FEATURES BENEFITS
OutLook - ports: 1 X 4 and 1 X 8 - reduces required space and hardware needs by allowing one
- capacity: 64 servers console to control up to four or eight servers per switch
- multi-platform compatibility
- OSCAR interface - multiple switches can be used to support up to 64 servers
- supports major server platforms
- OSCAR interface permits easy on-screen control of switch
OutLook(4) - ports: 4 X 8 - offers the benefits of OUTLOOK as well as permits up to
- capacity: 64 servers four administrator consoles to control up to eight servers
- multi-platform compatibility
- OSCAR interface
ViewPoint - ports: 16 X 32 - in addition to benefits of OUTLOOK and OUTLOOK(4), allows
- capacity: 256 servers up to 16 network administrator consoles to access up to 32
- 1000 ft. extension servers
- multi-platform compatibility - administrator consoles can be up to 1000 ft. away from
- OSCAR interface server
SunDial - ports: 1 X 10 - enables control of large Sun Sparc workstation networks
- capacity: 100 servers using a single console
- OSCAR interface - may be combined with OUTLOOK, OUTLOOK(4) and VIEWPOINT
switches
SwitchBack - 600 ft. extension product - 100 mhz bandwidth transmission over industry-standard
Cat-5 cabling
- allows the addition of a remote console up to 600 feet
away
- remote lock-out feature
- may be combined with OUTLOOK and OUTLOOK(4) switches
A-1000 - multimedia peripherals switch - provides switching capabilities for sound cards, speakers
and microphones
- may be used with OUTLOOK or as a stand-alone device
S-1000 - serial device switch - provides switching capabilities for modems, printers,
touchscreens and serial mice
- may be used with OUTLOOK or as a stand-alone device
</TABLE>

DENSEPACK CABINET SYSTEMS

DENSEPACK cabinets are specifically designed to house network servers and
communication equipment, improve system administration and facilitate CPU
maintenance. DENSEPACK cabinets are typically customized to meet specific
customer needs and are pre-cabled to allow network administrators to quickly
install hardware and connect to their networks. DENSEPACK cabinets incorporate
the Company's OUTLOOK switching technology, as well as built-in ventilator fans,
large rear doors and optional slide-out shelves to

33
<PAGE>
facilitate access to cables, connectors and servers. The DENSEPACK MODEL RS is a
scaled-down version of the Company's DENSEPACK and is designed for small
businesses and stand-alone departments. The DENSEPACK MODEL RS can be used in
combination with full-sized DensePack cabinets.

CUSTOMERS

To date, a substantial portion of the Company's net sales have been
generated from private label sales of switches to OEMs for integration into
their product offerings. For 1994, 1995, 1996 and the six months ended June 27,
1997, sales to the Company's OEM customers represented approximately 38%, 69%,
71% and 66% of the Company's net sales, respectively. The following is a list of
the Company's OEM customers and representative branded product customers.

<TABLE>
<CAPTION>
PRIVATE LABEL OEM CUSTOMERS BRANDED PRODUCT CUSTOMERS
- ---------------------------- ------------------------------------------
<S> <C>
Compaq Advanced Logic Research, Inc.
Hewlett-Packard Countrywide Home Loans
Wright Line, Inc. Data General Corporation
Dell Computer Corporation
IBM
McAfee Associates, Inc.
Microsoft
National Association of Securities
Dealers, Inc.
NEC USA, Inc.
Owens Corning
Peoplesoft, Inc.
Unisys Corporation
Visa International
Wells Fargo Bank, N.A.
</TABLE>

For 1994, 1995, 1996 and the six months ended June 27, 1997, sales to Compaq
represented approximately 36%, 54%, 30% and 52% of the Company's net sales,
respectively. In addition, for 1996, sales to Hewlett-Packard and IBM
represented approximately 15% and 18%, respectively, of the Company's net sales.
In 1995, the Company entered into an OEM arrangement with IBM for the production
of an integrated server cabinet system incorporating the Company's switching
products. While the products supplied by the Company met IBM's requirements, IBM
concluded that its program had not achieved desired results and sought to
terminate the program in mid-1996 after the Company had expended significant
product development and operational resources in connection with this OEM
arrangement. Although the Company negotiated a settlement that covered its
product costs and its direct costs associated with discontinuing the program,
the Company's branded product development efforts were delayed as a result of
the Company's commitment of substantial product development resources to the IBM
program in the third and fourth quarters of 1995 and the first quarter of 1996.
IBM accounted for 1% of the Company's net sales in 1995 and accounted for 18% of
the Company's net sales in 1996. The loss or material decline in orders from any
of the Company's current OEM customers would have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Fluctuations in Operating Results; --Dependence Upon a Limited Number
of OEM Customers."

BACKLOG

The Company's backlog was $10.9 million at June 27, 1997, $9.2 million at
December 31, 1996 and $4.2 million at June 30, 1996. Backlog consists of
purchase orders with delivery dates scheduled within the next six months. None
of the Company's customers is obligated to purchase products from the Company

34
<PAGE>
except pursuant to binding purchase orders. Because of the timing of orders and
the possibility of customer changes to delivery schedules, the Company's backlog
as of any particular date may not be representative of actual sales for any
succeeding period.

SALES AND MARKETING

The Company markets and sells its products through an internal sales force
and various distribution channels, including OEM and reseller arrangements. To
date, the Company has marketed its products primarily through advertisements in
trade publications, participation in major industry trade shows and the
Company's home page on the World Wide Web. As of June 27, 1997 the Company had a
sales and marketing staff of 13 employees. The Company's sales personnel process
written and telephonic orders, support existing customers and respond to
telephone inquiries.

The Company currently sells various switching products to Compaq,
Hewlett-Packard and Wright Line pursuant to private label arrangements. These
private label OEM customers integrate and sell the Company's switches with their
own networking products, including network servers and integrated server
cabinets. The Company devotes significant sales and customer support resources
to its OEM accounts. The Company also sells its branded switching products to
various manufacturers of servers and other networking products, such as Advanced
Logic Research, Inc., Data General Corporation, Dell Computer Corporation, NEC
USA, Inc. and Unisys Corporation. These customers integrate and sell Apex
branded switches with their own networking products. The Company intends to
leverage its significant experience in working with its OEM customers and other
server manufacturer customers to enter into new relationships with other
manufacturers of servers in the United States and Europe. The Company believes
that the architecture, quality and reliability of its products, together with
the Company's commitment to customer support, are attractive to OEMs. There can,
however, be no assurance that the Company will be successful in its attempts
gain additional OEM customers.

The Company has relationships with a variety of resellers, including
distributors, value-added resellers and systems integrators, for the
distribution and sale of Apex branded switching and cabinet products in the
United States. The Company devotes resources to educating its resellers as to
the benefits of the Company's products and training them in the proper
installation and support of the Company's products. The Company's strategy
contemplates devoting additional resources to increase branded sales, and to
that end the Company intends to pursue additional relationships with resellers
in the United States. The Company has focused and expects to continue to focus
on contracting with local and regional resellers who have the technical
capability and market presence to assist end-user customers in developing
network space management and access and control solutions to meet their
particular needs. There can be no assurance that the Company will be successful
in expanding its reseller channel. See "Risk Factors--Risks Relating to
Development of Expanded Reseller Channel."

Compaq, Hewlett-Packard and, the Company believes, many other manufacturers
of servers market and sell their own branded server cabinets. Accordingly, the
Company believes it has limited opportunities to sell its own server cabinets to
new purchasers of servers. Instead, the Company believes that sales of its
server cabinets have been and will continue to be limited primarily to end-user
customers who have a need to more efficiently configure and manage existing
network systems.

To date, the Company's international sales have not been significant. The
Company's strategy is to create an international sales distribution network for
the Company's branded switching products focusing initially on the network
computing market in Europe because of its large installed server base. The
Company is currently shipping its switching systems to OEMs with facilities in
Europe and has hired a representative located in France in order to begin
efforts to build a third party distribution network. There can be no assurance
that the Company will be successful in creating an international distribution
network or successfully market and sell its products in foreign markets. In
addition, if international sales become a more significant component of the
Company's total sales, the Company's business will become more

35
<PAGE>
vulnerable to the risks inherent in doing business on an international level,
including the effects of seasonality, unexpected changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in managing foreign resellers, longer payment cycles and problems
in collecting accounts receivable, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences. See "Risk
Factors--Risks Relating to Development of International Distribution Network and
International Sales."

CUSTOMER SUPPORT

The Company emphasizes customer support by developing innovative, high
quality products, encouraging customer feedback through contact with key
customers, and providing a customer hot-line that offers technical support for
the life of the Company's products. The Company's switches have a "plug and
play" design and do not require extensive configuration. The Company seeks to
respond quickly to customers' requests for technical support and service, and
the Company's engineering department often works with individual customers to
troubleshoot problems and develop custom solutions. The Company has, in recent
periods, experienced increased demands on its customer support operations.
Growth of the Company's branded sales, should it occur, is likely to be
accompanied by further increasing demands on the customer support operations.
See "Risk Factors--Increased Demands on Customer Support Operations." The
Company offers warranties for parts and service on all of its products. To date,
the Company has not experienced significant product returns. There can be no
assurance, however, that the Company's rate of product returns will not increase
or that the Company's customer support operations will be sufficient to meet the
needs of the Company's customers. In addition, the Company may, as a result of
competitive pressures, change its warranty policies in the future to provide
warranty coverage that is greater in scope and duration than that currently
offered. To the extent that the Company were to increase its warranty coverage,
its risk of warranty claims and therefore its warranty reserves would likely
increase. See "Risk Factors--Product Returns and Warranty Claims; --Increased
Demands on Customer Support Operations."

PRODUCT DEVELOPMENT

The Company believes that the continued, timely development of new products
and enhancements to its existing products is essential to maintaining its
competitive position. The market for the Company's switching products in
particular is characterized by rapid technological advances, frequent new
product introductions and enhancements, and significant price competition. The
introduction of products incorporating superior or alternative technologies, the
emergence of new industry standards or changes in the market's pricing structure
could render the Company's existing products and products under development
obsolete or unmarketable. The Company's switching systems combine components,
such as printed circuit boards, connectors, cable assemblies, power supplies and
enclosures, that are manufactured by other companies and are generally available
to the Company's competitors and potential competitors. The Company's future
success will depend in large part upon its continued innovative application of
such commercially available components to the expansion and enhancement of its
existing products and the development and introduction of new products which
address changing customer needs on a cost-effective and timely basis. The
successful introduction of new products involves a number of risks and
uncertainties. There can be no assurance that the Company will be able to
successfully develop planned products or that there will not be delays in
product introductions. In addition, newly introduced products have in the past
experienced, and are likely in the future to experience, reliability and
compatibility problems, which can lead to customer dissatisfaction, increased
customer service and research and development expenses, and loss of sales. The
Company's failure to respond on a timely basis to technological developments,
changes in industry standards or customer requirements, or any significant delay
in product development or introduction could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Rapid Technological Change; Need for New Product Introductions."

36
<PAGE>
The Company's engineering and product development efforts focus on
responding to the needs of its customers by providing practical, marketable
products that have immediate applications in their markets. By maintaining
contact with customers throughout the installation and technical support
process, the Company is able to identify and test potential design modifications
and improvements as well as new applications and extensions for existing
products. The Company anticipates that this process will enable the development
of new product categories and applications based on existing technology
developed to meet specific customer needs. Many of the Company's products are
designed to accommodate future modifications and additional features, which it
believes facilitates the development and integration of modifications and
features if a market need is perceived.

For 1994, 1995, 1996 and the six months ended June 27, 1997, the Company's
engineering and product development expenditures were $278,000, $913,000,
$965,000 and $936,000, respectively. As of June 27, 1997, the Company's
engineering staff consisted of 11 employees. To meet the challenges of the
rapidly changing technology in the computer industry, the Company expects to
make substantial investments in product development in the future.

MANUFACTURING

The Company performs final assembly, quality assurance and testing of its
products. In order to avoid the capital investment required to establish and
maintain in-house manufacturing capabilities, the Company generally relies on
subcontractors in the United States for the assembly of printed circuit board
assemblies, subassemblies, chassis and equipment enclosures. The Company
believes that such assembly can typically be done by subcontractors at a lower
cost than if the Company assembled such items internally. Outsourcing
manufacturing operations allows the Company to concentrate its resources on
research and development, product design, quality assurance, marketing and
customer support. Prior to shipping, the Company subjects its finished products
to quality and regulatory screenings and functional testing to assure quality
and reliability.

The Company relies on various third party manufacturers, including Technical
Services, Inc., for subassembly of the Company's products. These outsourcing
arrangements and any future outsourcing arrangements involve several risks,
including reduced control over product quality, delivery schedules,
manufacturing yields and costs. Moreover, although arrangements with such
manufacturers may contain provisions for warranty obligations on the part of
such manufacturers, the Company remains primarily responsible to its customers
for warranty obligations. See "Risk Factors--Dependence Upon Suppliers and
Outsourced Manufacturing."

The Company purchases industry-standard parts and components for the
assembly of its products from multiple vendors and suppliers through a worldwide
sourcing program. No custom integrated circuits are currently used in any
product in production, although custom integrated circuits may be used in the
Company's products in the future. Circuit boards are currently obtained from a
number of sources, including Technical Services, Inc. Certain of the components
for the Company's switching products are available from a limited number of
suppliers. For example, Pioneer Standard Electronics, Inc. supplies the Company
with power supply components, Redmond Cable, Inc. supplies the Company with
cable components and Kent Electronics, Inc. supplies the Company with various
electronic components. In addition, the frames for the Company's server cabinet
systems are obtained from a single source, Everest Electronics Equipment (a
division of Wright Line), and the sheet metal components are purchased locally
from a small number of manufacturers, including Northwest Manufacturing. In the
past, the Company has experienced delays in the receipt of certain of its
switching and cabinet components, which have resulted in delays in related
product deliveries. The Company is attempting to manage such risks by qualifying
alternative sources and maintaining quality relationships and close personal
contact with each of its suppliers. Although the Company believes that there are
adequate alternative sources for its components, there can be no assurance that
delays in component and product deliveries will not occur in the future or that
the Company's reliance on sole or limited sources of supply for its components
will not otherwise adversely

37
<PAGE>
affect the Company's business. The inability to obtain sufficient components as
required or to develop alternative sources if and as required in the future
could result in delays or reductions in product shipments, which, in turn, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Dependence Upon Suppliers and
Outsourced Manufacturing."

COMPETITION

The market for the Company's products is highly fragmented and competitive,
and the Company expects competition to increase in the future. In the market for
integrated switching systems, the Company competes with independent third
parties such as Cybex Computer Products Corporation, Raritan Computer Inc., Rose
Electronics, Elsner ComputerTechnik GmbH and StarTech Computer Accessories Ltd.,
many of which have substantially greater financial, marketing and technical
resources than the Company. In addition, certain of the Company's OEM customers,
such as Hewlett-Packard and Compaq, could determine to internally manufacture
switch products or offer those supplied by the Company's competitors. In the
market for server cabinets, the Company competes with a significant number of
regional cabinet manufactures including Zero Stantron Cabinets, Ergotron Inc.,
Rittal Corporation, Hergo Corp. and Engineered Data Products Inc., many of which
have substantially greater financial, marketing and technical resources than the
Company. In addition, Compaq, Hewlett-Packard and Wright Line, all of whom are
OEM customers for certain of the Company's switching products, sell their own
branded integrated server cabinets. The Company's cabinet systems also compete
with other types of lower density, unenclosed technology storage systems.

In the market for integrated switches, the Company competes primarily on the
basis of technological advances, performance in relation to price, quality,
reliability, development capabilities and customer support. In the market for
enclosed server cabinets, the Company competes primarily on the basis of
available product features, quality, reliability, development capabilities and
customer support. In addition, the market for enclosed server cabinets and other
technology storage systems is characterized by intense price competition, and
many of the Company's competitors in this market offer products at significantly
lower price points. The Company's ability to compete successfully in this market
will depend in part upon the Company's ability to continue to differentiate its
cabinet systems from competing products.

The Company's future success will be highly dependent upon timely completion
and introduction of new products and product features at competitive price and
performance levels which address the evolving needs of the Company's customers.
The Company is currently experiencing increased price competition in both the
market for stand-alone switching systems and the market for integrated cabinet
systems and expects that pricing pressures will increase in the future.
Increased competition could result in price reduction and loss of market share
which would adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors--Intense Competition."

PROPRIETARY TECHNOLOGY

The Company's future success is dependent in part upon its ability to
protect its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. While the Company has no patents granted, it has
filed a United States patent application and a corresponding application under
the provisions of the Patent Cooperation Treaty (which permits the filing of
corresponding foreign patent applications in numerous foreign countries within a
limited time period) with respect to various aspects of its OUTLOOK and
VIEWPOINT products and its OSCAR interface. There can be no assurance that
patents will issue from any of the Company's pending applications or that any
claims allowed from pending applications will be of sufficient scope or
strength, or be issued in all countries where the Company's products can be
sold, or provide meaningful protection or any commercial advantage to the
Company. Also, competitors of the Company may be able to design

38
<PAGE>
around the Company's patents if any are issued. The laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, may not protect the Company's products or intellectual property rights
to the same extent as do the laws of the United States and thus increase the
likelihood of piracy of the Company's technology and products. Although the
Company is not aware of any current infringement of its intellectual property
rights, or any violation of its trade secrets, nondisclosure or licensing
arrangements, there can be no assurance that the steps taken by the Company to
protect its intellectual property rights will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.

EMPLOYEES

As of June 27, 1997, the Company employed 58 persons, 16 of whom were in
administration and management, 11 of whom were in engineering and product
development, 3 of whom were in service and technical support, 15 of whom were in
manufacturing and 13 of whom were in sales and marketing. The Company's
employees are not covered by any collective bargaining agreements with respect
to their employment by the Company. The Company believes that its employee
relations are good.

FACILITIES

The Company entered into a three-year lease in March 1995 and occupies
approximately 25,000 square feet in an industrial office building in
Woodinville, Washington. In March 1997, the Company's lease was extended to
cover the remaining 11,000 additional square feet in the same industrial office
building. The rent for the Company's facilities is approximately $25,000 per
month plus taxes, insurance and normal maintenance for the entire 36,000 square
feet. The Company believes that its facilities are adequate for its current
needs.

39
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
June 27, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kevin J. Hafer............................. 40 President, Chief Executive Officer and Director
Douglas A. Bevis........................... 51 Vice President, Chief Financial Officer and Secretary
Christopher L. Sirianni.................... 43 Vice President, Sales and Marketing
Sterling Crum.............................. 42 Director
Jeffrey T. Chambers........................ 42 Director
William McAleer............................ 46 Director
Edwin L. Harper............................ 52 Director
</TABLE>

Kevin J. Hafer has been the President of the Company since June 1995, and
has served as the Chief Executive Officer of the Company since December 1995 and
as a Director of the Company since January 1996. From February 1993 to June
1995, Mr. Hafer served as the General Manager of the Company, and from December
1989 to January 1993 he served as the Manager and Technical Operations Director
of the Predecessor. Prior to joining the Company's predecessor, Mr. Hafer was
employed at Harris Corporation from May 1979 to September 1989, serving in
various management capacities.

Douglas A. Bevis has been the Vice President and Chief Financial Officer of
the Company since September 1996, and Secretary since December 1996. From
September 1990 to February 1996, Mr. Bevis was employed at CH2M HILL, Inc., a
national environmental engineering consulting firm, where he served as Vice
President and Treasurer from September 1990 to April 1993 and as Senior Vice
President and Chief Financial Officer from April 1993 to February 1996.

Christopher L. Sirianni has been the Vice President, Sales and Marketing of
the Company since August 1996. From March 1994 to August 1996, Mr. Sirianni
served as the Company's Director of Sales and Marketing. From August 1992 to
February 1994, Mr. Sirianni served as the Director of Sales of Coastal
Manufacturing, a metal fabrication company. Mr. Sirianni served as a
consultant/sales executive for National Precision Bearing, a distributor, from
November 1991 to June 1992. From September 1982 to October 1991, Mr. Sirianni
served in various capacities, including Vice President of Sales and Marketing
for Augat Communications, a telecommunications company.

Sterling Crum has served as a Director of the Company since its inception.
From the Company's inception until June 1995, Mr. Crum served as the Company's
President. From May 1985 to February 1993 Mr. Crum served in various capacities
for the Predecessor, including as President and as Director. In addition, from
November 1993 until December 1996, Mr. Crum served as President and sole
director of Water Sports, Inc., a water sports recreation company.

Jeffrey T. Chambers has served as a Director of the Company since January
1996. Mr. Chambers has been employed by TA Associates, Inc., a venture capital
firm, or its predecessor, since 1980, has been a partner of affiliated venture
funds since 1984 and is currently a Managing Director of TA Associates, Inc. Mr.
Chambers is also a director of Diamond Multimedia Systems, Inc.

William McAleer has served as a Director of the Company since June 1996. Mr.
McAleer is currently Managing Director of Voyager Capital, which provides
venture financing and advisory services to information technology companies.
From 1988 through 1994, he was Vice President Finance, Chief Financial Officer
and Secretary with Aldus Corporation, a publicly held software company. Prior to
joining Aldus, he was Vice President, Finance and Administration from 1987 to
1988 of Ecova Corporation and also served

40
<PAGE>
as a Vice President with Westin Hotels Company from 1984 through 1987. Mr.
McAleer is also a Director of FourGen Software Technologies, Primus
Communications Corporation and Truevision, Inc.

Edwin L. Harper has served as a Director of the Company since October 1996.
Since June 1996 Mr. Harper has served as President and Chief Executive Officer
of SyQuest Technology, a computer hardware company. From July 1993 to June 1996
Mr. Harper was employed as President and Chief Executive Officer of ComByte,
Inc., and from June 1988 to May 1993 Mr. Harper served in various capacities,
including President and Chief Executive Officer, at Colorado Memory Systems,
Inc. Mr. Harper is also a Director of SyQuest Technology and McAfee Associates,
a network security management company.

All members of the Board of Directors are elected to serve until their
respective successors have been elected and qualified or until their earlier
death, resignation or removal in the manner specified in the Company's Bylaws.
The officers are appointed to hold their respective offices until their
respective successors have been elected, or their earlier death, resignation or
removal in the manner specified by the Company's Bylaws.

OTHER KEY EMPLOYEES

In addition to directors and executive officers, the Company has the
following key employees:

Danny L. Beasley has served as the Company's Director of Engineering since
March 1994. From December 1992 to March 1994, Mr. Beasley served as a Research
and Development Engineer for the Company and the Predecessor. Mr. Beasley served
as the Director of Engineering for Spectralogic, Inc., an engineering design and
product development firm, from April 1989 to October 1992.

Stephen J. McCarthy has served as the Company's Director of Product
Development since July 1995. From February 1994 to July 1995, Mr. McCarthy
served as the Company's Research and Development Manager, and from November 1987
to February 1994 he served as the Account Manager for the Company and for the
Predecessor's on-site service division.

COMMITTEES

The Board of Directors has an Audit Committee, currently comprised of
Messrs. McAleer and Chambers, which meets with the Company's independent
auditors and reviews the Company's annual audit, internal controls and financial
management practices. The Board also has a Compensation Committee, currently
comprised of Messrs. Harper, Chambers and Crum, which meets with the Company's
officers and oversees the Company's compensation and benefits practices and
programs.

41
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table summarizes all compensation
earned by the Company's Chief Executive Officer and by the Company's other most
highly compensated executive officer whose total annual salary and bonus
exceeded $100,000 (collectively, the "Named Executive Officers") for services
rendered in all capacities during the fiscal year ended December 31, 1996.

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------
------------------------ STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------------- --------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Kevin J. Hafer..................................... 1996 $ 157,692 $ 564,707(1) 24,000 $ 9,619(2)
President and Chief Executive Officer

Christopher L. Sirianni............................ 1996 $ 89,123 $ 148,396(3) 132,000 $ 4,456(4)
Vice President, Sales and Marketing
</TABLE>

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

(1) Includes $480,000 bonus earned in 1996 and paid in 1997.

(2) Represents matching contributions in the aggregate amount of $7,500 made by
the Company in 1996 to its 401(k) Profit Sharing Plan and Trust on behalf of
Mr. Hafer and premium payments in the aggregate amount of $2,119 paid by the
Company in 1996 towards Mr. Hafer's life insurance policy. See "--Employment
Agreement" and "Certain Transactions."

(3) Includes $54,894 bonus earned in 1996 and paid in 1997.

(4) Represents matching contributions made by the Company to its 401(k) Profit
Sharing Plan and Trust on behalf of Mr. Sirianni.

OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information with respect to grants to the Named Executive Officers of options to
purchase Common Stock of the Company made during the fiscal year ended December
31, 1996.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR SHARE DATE
- -------------------------------------------------- ------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Kevin J. Hafer(2)................................. 24,000 3.8% $ 0.18375 06/10/06
Christopher L. Sirianni(3)........................ 132,000 20.7% $ 0.18375 01/22/06
</TABLE>

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

(1) Stock options have an exercise price equal to the fair market value of the
underlying Common Stock on the date of grant. The Company granted options to
purchase an aggregate of 638,000 shares of Common Stock to employees and
non-employee directors in 1996.

(2) Mr. Hafer was granted options to purchase an additional 705,880 shares of
Common Stock in 1995. As of December 31, 1996, options to purchase 404,844
shares of Common Stock had vested and been exercised by Mr. Hafer. Of the
remaining 325,036 shares subject to options as of December 31, 1996, options
to purchase 666 shares will vest on January 1, 1998, options to purchase
approximately 16,458 shares will vest on the first day of each month from
February 1998 through June 1999, and options to purchase approximately 6,372
shares will vest on the first day of each month from July 1999 through
January 2000.

(3) As of December 31, 1996, options to purchase 66,000 shares of Common Stock
had vested, of which options to purchase 54,424 shares had been exercised by
Mr. Sirianni. Of the remaining 66,000 shares subject to options as of
December 31, 1996, options to purchase approximately 2,750 shares will vest
on the first day of each month from March 1998 through February 2000.

42
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information with respect to option
exercises during the fiscal year ended December 31, 1996 by the Named Executive
Officers and 1996 year-end option values.

<TABLE>
<CAPTION>
VALUE
REALIZED NUMBER OF SECURITIES
(MARKET PRICE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF AT EXERCISE OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED LESS EXERCISE END FISCAL YEAR END
NAME ON EXERCISE PRICE) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- -------------------------------- --------------- ------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Kevin J. Hafer.................. 81,296 --(2) 0/325,036 --/$1,971,750
323,548 $ 102,322(3)
Christopher L. Sirianni......... 54,424 $ 17,212(4) 11,576/66,000 $70,223/$400,373
</TABLE>

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

(1) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at fiscal year end of $6.25 per share less the exercise price
payable for such shares.

(2) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at February 12, 1996, May 15, 1996, June 1, 1996, July 1, 1996
and August 16, 1996 of $0.18375 per share less the exercise price payable
for such shares.

(3) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at September 1, 1996, October 1, 1996 and October 14, 1996 of
$0.50 per share less the exercise price payable for such shares.

(4) Based upon the Company's estimate of the fair market value of the Company's
Common Stock at October 14, 1996 of $0.50 per share less the exercise price
payable for such shares.

DIRECTOR COMPENSATION

Mr. Harper and Mr. McAleer receive annual cash compensation of $6,000 for
their services as directors. In addition, each of the directors was granted
options in 1996 and 1997 to purchase 24,000 shares and 4,000 shares of Common
Stock, respectively. In October 1996, the Company accelerated the vesting of up
to 50% of options previously granted to directors. All directors are reimbursed
for travel and other expenses incurred in attending meetings of the Board of
Directors.

EMPLOYEE STOCK PLAN

The Company's 1995 Employee Stock Plan (the "Employee Stock Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company in December 1995. The purposes of the Employee Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility in the Company, to provide additional incentives to officers,
employees and non-employee directors of the Company, and to promote the success
of the Company's business.

The Employee Stock Plan provides for the granting to officers and employees
of the Company of options that qualify as "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and options that do not so qualify ("NQSOs"). Non-employee
directors of the Company are eligible to receive NQSOs. As of the date of this
Prospectus, all grants of options under the Employee Stock Plan have been NQSOs.

The Employee Stock Plan is currently administered by the Board of Directors,
which has the discretion to determine, among other matters, the persons to whom
options will be granted; the number of shares purchasable upon exercise of each
option; whether options will be ISOs or NQSOs; the purchase price of the shares
issuable pursuant to options (which price for ISOs may not be less than 100% of
the fair market value of the Common Stock, as determined in good faith by the
Board of Directors, on the date the option is granted); and the period during
which each option may be exercised (not to exceed ten years for ISOs). The
purchase price of the shares issued pursuant to each option must be paid, as
determined by the

43
<PAGE>
Board of Directors, (i) in cash, (ii) by promissory note, (iii) by surrender of
shares of Common Stock held by the participant or a combination of cash and
shares, or (iv) any combination of the foregoing methods of payment. The
aggregate fair market value of the shares of Common Stock for which ISOs may
first be exercisable by a participant during any one calendar year may not
exceed $100,000.

Generally, upon termination of a participant's employment with the Company
by reason of the participant's death or "permanent and total disability" (as
defined in Section 22(e)(3) of the Code), each option held by the participant on
the date of termination shall terminate on the earlier of the fixed expiration
date of such option, or the date that is one year after the date of termination
of employment. Upon termination of a participant's employment with the Company
by reason of disability that is not permanent and total, each option held by the
participant on the date of termination shall terminate on the earlier of the
fixed expiration date of such option, or the date that is ninety (90) days after
the date of termination of employment. Upon termination of a participant's
employment with the Company by any reason other than death or disability, each
option held by the participant on the date of termination shall terminate on the
earlier of the date that is ninety (90) days after the date of termination of
employment, or the fixed expiration date of such option. In the case of Kevin J.
Hafer, the Company's President and Chief Executive Officer, Mr. Hafer continues
to vest in options for a period of one year so long as his termination is
without cause (as defined in his Employment Agreement), and options that vest
within such one-year period must be exercised within ninety (90) days following
the end of such one-year period. See "Certain Transactions."

In the event that the Company enters into an agreement to dispose of all or
substantially all of its assets or if the Company's shareholders dispose or
agree to dispose of 50% or more of the outstanding shares of Common Stock (an
"Acceleration Event"), each outstanding option will be exercisable immediately
preceding such Acceleration Event. Upon consummation of the Acceleration Event,
all outstanding options, whether or not so accelerated, will terminate and cease
to be exercisable, unless assumed by the successor corporation.

In 1996, the Company granted to Messrs. Hafer, Sirianni and Bevis options to
purchase 24,000, 132,000 and 103,000 shares of Common Stock, respectively, and
to each of its non-employee directors, except Mr. Harper, options to purchase
24,000 shares of Common Stock, in all cases at an exercise price of $0.18375 per
share. In 1996, Mr. Harper was granted options to purchase 24,000 shares of
Common Stock at an exercise price of $0.50 per share. In October 1996, the
Company accelerated the vesting of up to 50% of the options previously granted
by the Company to its employees and non-employee directors. In 1996, Messrs.
Hafer, Sirianni, Bevis, Crum, Harper and McAleer exercised options for 404,844,
54,424, 25,748, 12,000, 12,000 and 12,000 shares of Common Stock, respectively.
In June 1997, the Company granted to Messrs. Hafer, Sirianni, Bevis, Crum,
Harper, Chambers and McAleer options to purchase 79,000, 22,000, 17,000, 4,000,
4,000, 4,000 and 4,000 shares of Common Stock, respectively.

A total of 2,161,760 shares of Common Stock has been reserved for issuance
under the Employee Stock Plan. As of June 27, 1997, the Company had options
outstanding to purchase an aggregate of 951,564 shares at a weighted average
exercise price of $4.7655 per share pursuant to the Employee Stock Plan. If
options expire without having been exercised, the unused shares revert to the
pool available for future option grants.

EMPLOYMENT AGREEMENT

In December 1995, the Company entered into an Employment Agreement (the
"Employment Agreement") with Mr. Hafer for a term of one year, subject to
automatic one-year renewal thereafter. Under the Employment Agreement, Mr. Hafer
in 1996 received a salary of $160,000 and received certain bonus payments upon
the achievement by Mr. Hafer and the Company of certain performance objectives.
Pursuant to the Employment Agreement, Mr. Hafer also received a one-time cash
bonus in the aggregate amount of approximately $1.4 million and a one-time stock
bonus of 200,000 shares of the Company's Series B Redeemable Preferred Stock
redeemable upon the occurrence of certain events, including the

44
<PAGE>
consummation of the IPO. Mr. Hafer also received under the Employment Agreement
quarterly performance bonuses of $17,500 in each quarter that the Company made
the required payments of interest on the Company's Class A and Class B
Subordinated Promissory Notes. Pursuant to the Employment Agreement, Mr. Hafer
was also granted options to purchase 705,880 shares of Common Stock at an
exercise price of $0.18375 per share. If Mr. Hafer is terminated without cause,
as defined in the Employment Agreement, he is entitled to receive his salary,
benefits, bonus and accelerated vesting of his stock options for a period of one
year, during which time and for an additional one year thereafter Mr. Hafer has
agreed not to compete, directly or indirectly, with the Company. See "Certain
Transactions." The Company was also obligated to maintain, at its expense, a
$1.0 million life insurance policy on Mr. Hafer's life, payable to his wife or
estate (or as otherwise directed by Mr. Hafer), until all shares of Series B
Redeemable Preferred Stock were redeemed at the time of the IPO.

In December 1996, the Employment Agreement was amended to accelerate the
vesting of all 200,000 shares of Series B Redeemable Preferred Stock to January
1, 1997, and to require the Company to redeem 80,000 shares on January 1, 1997
for $5.00 per share (an aggregate of $400,000). The balance of the shares were
redeemed for $5.00 per share upon the consummation of the IPO.

Pursuant to the terms of the Employment Agreement, for 1997 the Compensation
Committee of the Board of Directors has awarded Mr. Hafer a base salary of
$200,000, certain bonus payments of up to fifty percent (50%) of his annual base
salary upon the achievement of certain performance objectives, and the
possibility of certain additional bonus payments of up to twenty-five percent
(25%) of his annual base salary upon the achievement of certain other
performance objectives, in the latter case in the sole discretion of the
Compensation Committee.

401(k) PROFIT SHARING PLAN AND TRUST

In February 1993, the Company established the Apex PC Solutions, Inc. 401(k)
Profit Sharing Plan and Trust (the "401(k) Plan") under Section 401(k) of the
Code. Under the 401(k) Plan, employees may contribute up to $9,500 of their
compensation per year subject to the elective limits as defined by guidelines of
the Internal Revenue Service (the "IRS"), and the Company may make matching
contributions in amounts not to exceed 5% of each employee's annual
compensation. The Company's contributions to the 401(k) Plan during the years
ended December 31, 1994, 1995 and 1996 aggregated $19,603, $35,217 and $58,968,
respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Board of Directors adopted the Apex PC Solutions, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") in December
1996, which was approved by the Company's shareholders in January 1997 and
became effective upon consummation of the IPO. Pursuant to the Employee Stock
Purchase Plan, a total of 250,000 shares of the Company's Common Stock was
reserved for sale to employees at a discount. The Employee Stock Purchase Plan
is designed to comply with Section 423 of the Code and allows participating
employees to gain certain tax advantages, provided the participant meets certain
holding requirements.

All employees, including officers and employee-directors, are eligible to
participate in the Employee Stock Purchase Plan if they are regularly scheduled
to work 20 or more hours per week, and customarily work for more than five
months each calendar year. Independent contractors (such as non-employee
directors) and consultants not considered Company "employees" for tax purposes
are not eligible to participate. In addition, the Employee Stock Purchase Plan
excludes any employee who already owns 5% or more of the Company's stock.
Employees participate by directing the Company to withhold a specified amount
from each of their regular paychecks (in no event more than 10% of pay). At the
end of each calendar quarter, the Company uses each participant's withholdings
to purchase Company Common Stock on behalf of the participant. The purchase
price for each share is the lesser of (i) 85% of the fair market

45
<PAGE>
value of a share on the first business day of the calendar quarter, or (ii) 85%
of the fair market value of a share on the last business day of the calendar
quarter. In no event may a participant acquire more than $25,000 worth of
Company Common Stock in a calendar year.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Articles of Incorporation limit the
liability of its directors for monetary damages arising from their conduct as
directors, except for liability relating to acts or omissions that involve
intentional misconduct, a knowing violation of law or the authorization of
unlawful distributions, and liability relating to transactions in which the
directors derive a personal benefit to which they are not legally entitled. Such
limitation does not affect the availability of equitable remedies. The Company's
Amended and Restated Articles of Incorporation also provide that the Company
will indemnify its directors and officers to the fullest extent permitted by
Washington law. In particular, each officer and director of the Company is
entitled to indemnification against all liability, loss and expense reasonably
incurred by such officer or director in connection with any civil, criminal,
administrative or investigative proceeding in which he or she is involved
(whether in his or her official capacity or otherwise) by reason of the fact
that he or she is or was serving as an officer or director of the Company.
Washington law currently provides that a corporation may indemnify an officer or
director against liability if the individual acted in good faith and, in the
case of a non-criminal proceeding, if such individual reasonably believed he or
she was acting in the best interests of the corporation, or, in the case of a
criminal proceeding, if such individual had no reasonable cause to believe his
or her conduct was unlawful. In the case of a proceeding against an officer or
director brought by or on behalf of the corporation, Washington law does not
permit a corporation to indemnify an officer or director if he or she is found
liable in such proceeding. In all other proceedings, indemnification is not
permitted where the officer or director is found liable on the basis that he or
she improperly received a personal benefit. The Company maintains directors' and
officers' insurance. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that 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.

CERTAIN TRANSACTIONS

The Company operated as a division of Apex Computer Company through January
1993. In February 1993, the assets and liabilities of that division were spun
off as a dividend to Sterling Crum, who contributed those assets and liabilities
to the Company as its initial capitalization in return for the issuance by the
Company of 8.0 million shares of Common Stock. At that time, the assets were
valued by Mr. Crum, who was the sole director of the Company, at approximately
$776,000, and the liabilities were valued at approximately $189,000, for a net
value of approximately $587,000.

During 1994 and 1995, Mr. Crum advanced funds (by foregoing distributions)
for the operation of the Company in exchange for unsecured promissory notes
totaling approximately $225,000 for 1994 and $4.6 million for 1995. All of these
notes bore interest at the rate of 12% per annum except for two notes totaling
approximately $270,000 that bore interest at a rate equal to 100% of the
discounts taken by the Company for its early payments to suppliers (the "Net-10
Notes"). All principal and accrued and unpaid interest under these notes was
paid at or shortly after the closing of the Leveraged Recapitalization. At the
time of repayment, accrued interest on these notes (other than the Net-10 Notes)
totaled approximately $112,000, and accrued interest on the two Net-10 Notes
totaled less than $20,000.

During 1994 and 1995 when the Company was an S Corporation, the Company
distributed $792,279 and $992,815, respectively, to Mr. Crum as dividends. In
1993 and 1994 Mr. Crum received $101,534 and $3,000, respectively, as
compensation.

46
<PAGE>
In connection with the Leveraged Recapitalization in December 1995, the
Company sold to several entities affiliated with TA Associates, Inc. (the "TA
Group") 1.6 million shares of Common Stock at a price of $0.18375 per share,
300,000 shares of Series A Redeemable and Convertible Preferred Stock at a price
of $7.35 per share, and $10.0 million in aggregate principal amount of Class A
Subordinated Promissory Notes, for an aggregate purchase price of approximately
$12.5 million. Jeffrey T. Chambers, a director of the Company, is a Managing
Director of TA Associates, Inc. The shares of Series A Redeemable and
Convertible Preferred Stock issued to the TA Group converted into 2.4 million
shares of Common Stock upon the closing of the IPO. The Class A Subordinated
Promissory Notes issued to the TA Group provided for the quarterly payment of
interest at 7% per annum and the repayment of the principal amount and any
accrued and unpaid interest upon consummation of the IPO. In connection with the
Leveraged Recapitalization, the Company, the TA Group, Sterling Crum, Kevin J.
Hafer, the Chief Executive Officer and a director of the Company, and Britannia
Holdings Limited ("Britannia"), a major shareholder of the Company, entered into
a Shareholders' Agreement pursuant to which, among other things, the TA Group
was granted certain preemptive rights, co-sale rights and rights of refusal on
transfers of shares by the other shareholder parties, and the Company granted
the TA Group certain registration rights pursuant to a Registration Rights
Agreement. See "Description of Capital Stock--Registration Rights." The
Shareholders' Agreement terminated by its terms upon consummation of the IPO.

In connection with the Leveraged Recapitalization, the Company redeemed from
Britannia 4.0 million shares of Common Stock for an aggregate price of
approximately $22.5 million, consisting of cash in the amount of $12.5 million
and the Class B Subordinated Promissory Note in the aggregate principal amount
of $10.0 million. The Class B Subordinated Promissory Note issued to Britannia
provided for the quarterly payment of interest at 7% per annum and the repayment
of the principal amount and any accrued and unpaid interest on the consummation
of the IPO. Of the approximately $12.5 million payable to Britannia, $2.5
million was placed in escrow by the Company to secure certain representations
and warranties made to the TA Group by the Company, Sterling Crum, the Company's
founder and a director, and Britannia in connection with the Leveraged
Recapitalization. This escrow arrangement expired on the 30th day after audited
financial statements for the year ended December 31, 1996 were provided to the
TA Group.

Simultaneously with the Leveraged Recapitalization, Mr. Crum entered into an
S Corporation Indemnification Agreement with the Company indemnifying the
Company from and against any federal or state income tax liability resulting
from the Company's failure to qualify as an S Corporation under Internal Revenue
Code Section 1361(a)(1) for any taxable year ending or prior to October 31,
1995, the date on which the Company's status as an S Corporation was terminated.

In connection with the Leveraged Recapitalization, Kevin J. Hafer, the
Company's President and Chief Executive Officer, entered into an Employment
Agreement with the Company for calendar year 1996, subject to automatic one-year
renewals thereafter. Pursuant to the Employment Agreement, Mr. Hafer received,
among other things, 200,000 shares of nonvoting Series B Redeemable Preferred
Stock. In December 1996, the Employment Agreement was amended so that the Series
B Redeemable Preferred Stock vested in Mr. Hafer on January 1, 1997, and the
Company was obligated to redeem 80,000 of such shares on January 1, 1997 for
$5.00 per share and to redeem the remaining 120,000 shares for $5.00 per share
upon consummation of the IPO. All of the shares of Series B Redeemable Preferred
Stock were redeemed in accordance with the Employment Agreement, as amended. See
"Management--Employment Agreement."

47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth as of June 27, 1997, and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby,
certain information with respect to the ownership of the Common Stock of the
Company by (i) each person (or group of affiliated persons) known by the Company
to be the beneficial owner of more than 5% of the Company's outstanding Common
Stock, (ii) each director of the Company, (iii) each of the Company's executive
officers named under "Management-- Executive Officers and Directors," (iv) all
executive officers and directors of the Company as a group and (v) each Selling
Shareholder. Unless otherwise noted, each person or group identified possesses
sole voting and investment power with respect to such shares, subject to
community property laws, where applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
-------------------------- SHARES -------------------------
NAME OF BENEFICIAL OWNER(1) SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
- -------------------------------------------------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
TA Group(2) ...................................... 3,769,000 31.0% 1,331,500 2,437,500 18.2%
c/o TA Associates, Inc.
125 High Street
High Street Tower, Suite 2500
Boston, MA 02110
Sterling Crum(3).................................. 3,617,500 29.7 1,331,500 2,286,000 17.0
Britannia Holdings Limited(4) .................... 2,574,000 21.2 1,331,500 1,242,500 9.3
P.O. Box 556
Main Street
Charleston, Nevis
Crum Family Trust dated 8/18/93,
Sterling Crum and Jane E. Crum,
Trustors and/or Trustees ......................... 1,043,500 8.6 1,043,500 7.8
c/o Sterling Crum
Kevin J. Hafer.................................... 331,844 2.7 72,000 259,844 1.9
Christopher L. Sirianni(5)........................ 66,000 * 15,000 51,000 *
Douglas A. Bevis(6)............................... 26,150 * 26,150 *
Jeffrey T. Chambers(7)............................ 16,740 * 1,675 15,065 *
William McAleer................................... 12,000 * 12,000 *
Edwin L. Harper................................... 12,000 * 12,000 *
All directors and executive officers as a group (7
persons)(8)..................................... 4,082,234 33.5% 1,420,175 2,662,059 19.8%
</TABLE>

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

* Less than 1%.

(1) Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of the Company appearing
elsewhere in this Prospectus.

(2) Includes (i) 2,262,319 shares of Common Stock owned by Advent VII L.P., (ii)
1,240,981 shares of Common Stock owned by Advent Atlantic and Pacific II
L.P., (iii) 226,238 shares of Common Stock owned by Advent New York L.P. and
(iv) 39,462 shares of Common Stock owned by TA Venture Investors Limited
Partnership. Advent VII L.P., Advent Atlantic and Pacific II L.P., Advent
New York L.P. and TA Venture Investors Limited Partnership are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Group. The general partner of Advent VII L.P. is TA Associates VII
L.P. The general partner of Advent Atlantic and Pacific II L.P. is TA
Associates AAP II Partners L.P. The general partner of Advent New York L.P.
is TA Associates VI L.P. The general partner of each of TA Associates VII
L.P., TA Associates AAP II Partners L.P. and TA Associates VI L.P. is TA
Associates, Inc. In such capacity, TA Associates, Inc. exercises sole voting
and investment power with respect to all of the shares held of record by the
named investment partnerships, with the

48
<PAGE>
exception of those shares held by TA Venture Investors Limited Partnership;
individually, no stockholder, director or officer of TA Associates, Inc. is
deemed to have or share such voting or investment power. Principals and
employees of TA Associates, Inc. (including Mr. Chambers, a director of the
Company) comprise the general partners of TA Venture Investors Limited
Partnership. In such capacity, Mr. Chambers may be deemed to share voting
and investment power with respect to the 39,462 shares of Common Stock held
of record by TA Venture Investors Limited Partnership. Mr. Chambers
disclaims beneficial ownership of such shares, except to the extent of the
4,740 shares as to which he holds a pecuniary interest. If the Underwriters'
over-allotment option is exercised in full, collectively the TA Group will
sell 300,000 additional shares of Common Stock and after this offering will
beneficially own 2,137,500 shares or 15.9% of the total number of shares of
Common Stock outstanding.

(3) Includes 2,574,000 shares beneficially owned by Britannia Holdings Limited,
whose sole shareholder is The Duvall Trust, an irrevocable trust for the
benefit of Mr. Crum and certain members of his family. Mr. Crum disclaims
beneficial ownership with respect to all of such 2,574,000 shares. Also
includes 1,043,500 shares beneficially owned by the Crum Family Trust, a
revocable trust for the benefit of Mr. Crum and certain members of his
family.

(4) If the Underwriters' over-allotment option is exercised in full, Britannia
will sell 300,000 additional shares of Common Stock and after this offering
will beneficially own 942,500 shares or 7.0% of the total number of shares
of Common Stock outstanding.

(5) Includes 11,576 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share.

(6) Includes 2 shares of Common Stock issuable upon exercise of stock options
currently exercisable at $0.18375 per share.

(7) Includes 12,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share and 4,740 shares
beneficially owned by Mr. Chambers through TA Venture Investors Limited
Partnership, of which the 4,740 shares beneficially owned by Mr. Chambers
through TA Venture Investors Limited Partnership are included in the
3,769,000 shares described in Note (2) above. Does not include any shares
beneficially owned by Advent VII L.P., Advent Atlantic and Pacific II L.P.
or Advent New York L.P., of which Mr. Chambers disclaims beneficial
ownership. If the Underwriters' over-allotment option is exercised in full,
TA Venture Investors Limited Partnership will sell 3,141 shares of Common
Stock, and after this offering Mr. Chambers will beneficially own 14,688
shares or 0.1% of the total number of shares of Common Stock outstanding.

(8) Includes 23,578 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share. Also includes 2,574,000
shares held by Britannia, 1,043,500 shares held by the Crum Family Trust and
4,740 shares held by TA Venture Investors Limited Partnership. See Notes
(2), (3), (5), (6) and (7) above. If the Underwriters' over-allotment option
is exercised in full, all directors and executive officers of the Company as
a group will beneficially own 2,586,682 shares or 19.3% of the total number
of shares of Common Stock outstanding after this offering.

49
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value, and 1,000,000 shares of Preferred Stock, no par
value.

COMMON STOCK

As of June 27, 1997, there were 12,163,328 shares of Common Stock
outstanding and held of record by 37 shareholders. Based upon such number of
shares deemed outstanding as of that date and giving effect to the issuance of
the 1,250,000 shares of Common Stock offered by the Company hereby, there will
be 13,413,328 shares outstanding upon the consummation of this offering.

Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the shareholders and do not
have cumulative voting rights. Subject to the preferences that may be applicable
to any outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors of the Company out of funds legally available
therefor. All outstanding shares of Common Stock are, and the shares to be sold
in the offering when issued and paid for will be, fully paid and nonassessable.
In the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock.

PREFERRED STOCK

The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to 1,000,000 shares of Preferred Stock in one or more series. Each
series of Preferred Stock shall have such designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof as the Board of Directors shall determine. The
preferences, powers, rights and restrictions of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund provisions
and other matters. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock or
affect adversely the rights and powers, including voting rights, of the holders
of Common Stock, and may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan or intent to
issue any shares of Preferred Stock. Upon consummation of this offering, there
will be no shares of Preferred Stock outstanding.

REGISTRATION RIGHTS

After October 19, 1997, the holders ("Holders") of an aggregate of
approximately 2,437,500 shares of Common Stock (2,362,500 shares if the
Underwriters' over-allotment option is exercised in full) (the "Registrable
Shares") are entitled to certain rights with respect to the registration of such
shares for offer and sale to the public under the Securities Act. Under these
provisions, the Holders of at least 40% of the Registrable Shares may request
that the Company file up to two registration statements under the Securities Act
with respect to such shares. Upon receipt of such a request, the Company is
required to notify all other Holders and to use all reasonable efforts to effect
such registration, subject to certain conditions. In addition, upon the request
of holders of at least 20% of the Registrable Shares, the Company may be
required to effect an unlimited number of registrations on Form S-3. Further,
whenever the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of other security holders,
the Company is required to notify each Holder of the proposed registration and
include all Registrable Shares which such Holder may request to be included in
such

50
<PAGE>
registration, subject to certain limitations. Generally, the Company is required
to bear all expenses (except underwriting discounts, selling commissions and
stock transfer taxes) of all registrations.

ANTITAKEOVER PROVISIONS

STATUTORY PROVISIONS. Washington law contains certain provisions that may
have the effect of delaying, deterring or preventing a change in control of the
Company. Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA")
prohibits, subject to certain exceptions, a merger, sale of assets or
liquidation of the Company involving an "interested shareholder" (defined as a
person who owns beneficially 20% or more of the Company's voting securities)
unless the transaction is determined to be at a "fair price" or otherwise
approved by a majority of the Company's disinterested directors or is approved
by holders of two-thirds of the Company's outstanding voting securities, other
than those held by the interested shareholder. A Washington corporation may, in
its articles of incorporation, exempt itself from coverage of this provision,
but the Company has not done so. In addition, Chapter 23B.19 of the WBCA
prohibits the Company, with certain exceptions, from engaging in certain
significant business transactions with an "acquiring person" (defined as a
person who acquires 10% or more of the Company's voting securities without the
prior approval of the Company's Board of Directors) for a period of five years
after such acquisition. If the Company moves its principal executive offices
outside Washington State or if neither a majority nor 1,000 of the Company's
employees are residents of Washington State, the protections afforded by Chapter
23B.19 would no longer be available. The prohibited transactions include, among
others, a merger with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, or otherwise allowing the acquiring
person to receive any disproportionate benefit as a shareholder. The Leveraged
Recapitalization pursuant to which the TA Group became a greater-than-10%
shareholder was approved by the Company's Board of Directors, and as a result
the TA Group is not considered an "acquiring person" for purposes of Chapter
23B.19. The Company may not exempt itself from coverage of this statute. These
statutory provisions may have the effect of delaying, deterring or preventing a
change in control of the Company.

ARTICLES OF INCORPORATION AND BYLAW PROVISIONS. The Company's Amended and
Restated Articles of Incorporation authorize the Board of Directors to issue up
to 1,000,000 shares of Preferred Stock with such rights and preferences as the
Board of Directors may determine. The issuance of such shares may have the
effect of delaying, deterring or preventing a change in control of the Company.
See "--Preferred Stock."

The Amended and Restated Articles of Incorporation provide that holders of
the Company's voting securities are not entitled to cumulate votes in the
election of directors. As a result, holders of a majority of the Company's
voting securities may elect the entire Board of Directors, subject to the voting
rights of holders of Preferred Stock. See "--Common Stock."

In addition, the Company's Amended and Restated Bylaws provide that
shareholders may not raise new matters or nominate directors at a meeting of
shareholders unless certain advance notice requirements are satisfied.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.

51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, the Company will have 13,413,328 shares of
Common Stock outstanding. Of these shares, 4,200,829 shares are currently traded
or available for sale in the open market, and all of the 4,000,000 shares sold
in the offering (4,600,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act, unless acquired by an "affiliate" of the
Company as that term is defined in Rule 144 ("Rule 144") under the Securities
Act, which shares will then be subject to the resale limitations of Rule 144
described below. The remaining 5,212,499 shares (4,612,499 shares if the
Underwriters' over-allotment option is exercised in full) will be "restricted
securities" within the meaning of Rule 144 (the "Restricted Shares"). The
holders of all of the Restricted Shares, including all of the Selling
Shareholders and the Company's directors, officers, certain employees and major
shareholders, have agreed pursuant to certain lock-up agreements entered into in
connection with this offering not to sell their shares without the consent of
Montgomery Securities until October 20, 1997, except that certain of these
holders may sell an aggregate amount of up to 30,000 shares on or after August
19, 1997. All of such shares will become eligible for sale in the public market
after expiration of these lock-up agreements, subject to the provisions of Rule
144. In addition, after such time the holders of 2,437,500 shares of Common
Stock (2,362,500 shares if the Underwriters' over allotment option is exercised
in full) may require that a portion of such shares be registered under the
Securities Act. See "Description of Capital Stock--Registration Rights."

In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least one year shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in registered
transactions, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the outstanding shares of
the Common Stock (approximately 134,133 shares immediately after completion of
the offering); or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements relating to the manner and notice of sale
and the availability of current public information about the Company.

The Company also has agreed with the Underwriters not to offer, sell or
otherwise dispose of any shares of Common Stock or securities convertible into
or exercisable or exchangeable for such shares until October 20, 1997 without
the prior written consent of Montgomery Securities, except that the Company,
without such consent, may grant options or issue stock upon exercise of new or
outstanding options pursuant to the Employee Stock Plan.

The Company has reserved 2,161,760 shares of Common Stock for issuance under
the Employee Stock Plan and 250,000 shares of Common Stock for issuance under
the Employee Stock Purchase Plan. Shares issued under the Employee Stock Plan
and the Employee Stock Purchase Plan are freely tradeable without restriction or
further registration under the Securities Act, unless acquired by affiliates of
the Company.

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<PAGE>
UNDERWRITING

Montgomery Securities, Dain Bosworth Incorporated and Cowen & Company (the
"Underwriters") have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement (the "Underwriting Agreement") by and
among the Company, the Selling Shareholders and the Underwriters, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock indicated below opposite their respective names, at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares of Common Stock, if
any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities...................................................................... 1,700,000
Dain Bosworth Incorporated................................................................. 1,400,000
Cowen & Company............................................................................ 900,000
----------
Total................................................................................ 4,000,000
----------
----------
</TABLE>

The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the shares of Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $0.82
per share, and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. After this
offering, the offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.

Certain Selling Shareholders have granted the Underwriters an option
exercisable during the 30-day period after the date of this Prospectus to
purchase up to a maximum of 600,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial 4,000,000
shares to be purchased by the Underwriters. To the extent that the Underwriters
exercise this over-allotment option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table.

The Company, the Selling Shareholders and the Company's directors, executive
officers, certain employees and major shareholders have agreed that, until
October 20, 1997, they will not, without the prior written consent of Montgomery
Securities, offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for any shares of
Common Stock, except that the Company, without such consent, may grant options
or issue stock upon exercise of new or outstanding options pursuant to the
Employee Stock Plan and issue stock pursuant to the Employee Stock Purchase Plan
and except that certain employees may sell an aggregate amount of up to 30,000
shares on or after August 19, 1997.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act of 1933, as amended, or
will contribute to payments the Underwriters may be required to make in respect
thereof.

Montgomery Securities and Dain Bosworth Incorporated were the
representatives of the several underwriters in the Company's initial public
offering of 3,500,000 shares of Common Stock in February 1997, for which they
received customary underwriting discounts and commissions.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or

53
<PAGE>
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Underwriters may also
impose a penalty bid on certain Underwriters and selling group members. This
means that if the Underwriters purchase shares of Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.

The Underwriters have advised the Company that the Underwriters and dealers
may engage in passive market making transactions in the Common Stock in
accordance with rules promulgated by the Commission. In general, a passive
market maker may not bid for or purchase the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two-month prior period or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may have the effect of stabilizing or maintaining
the market price of the Common Stock at a level above that which might otherwise
prevail in the open market. Underwriters and dealers are not required to engage
in passive market making and may discontinue such activities at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Davis Wright Tremaine LLP,
Seattle, Washington. Certain legal matters relating to this offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Samuel F. Saracino, a partner
in Davis Wright Tremaine LLP, owns 2,000 shares of Common Stock.

EXPERTS

The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
years ended December 31, 1994, 1995 and 1996 included in this Prospectus have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed a registration statement on Form SB-2 (together with
any amendments thereto, the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") under the Securities Act with respect to
the Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement and
reference is made to the Registration Statement and the exhibits and schedules
thereto for further

54
<PAGE>
information with respect to the Company and the Common Stock offered hereby.
This Prospectus contains summaries of the material terms and provisions of
certain documents and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.

The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by the Company with the
Commission may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York, and Chicago, Illinois, at prescribed rates.
The Registration Statement and such exhibits and schedules are also available at
the Commission's Web site (http://www.sec.gov).

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied (at prescribed rates) at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, as well as the New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601. In
addition, the Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov. Quotations relating to the Company's Common Stock appear on
the Nasdaq National Market, and such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

55
<PAGE>
APEX PC SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Report of Independent Accountants................................................................... F-2

Financial Statements:

Balance Sheets.................................................................................... F-3

Statements of Operations.......................................................................... F-4

Statement of Changes in Shareholders' Equity (Deficit)............................................ F-5

Statements of Cash Flows.......................................................................... F-6

Notes to Financial Statements..................................................................... F-7 - F-20
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Apex PC Solutions, Inc.

We have audited the accompanying balance sheets of Apex PC Solutions, Inc.
(the "Company") as of December 31, 1995 and 1996 and the related statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Apex PC Solutions, Inc. as
of December 31, 1995 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

Coopers & Lybrand L.L.P.

Seattle, Washington
January 17, 1997,

except for note 14, as to which
the date is July 10, 1997

F-2
<PAGE>
APEX PC SOLUTIONS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1996
----------- ----------- JUNE 27,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 2,676,290 $ 2,118,887 $ 7,956,172
Accounts receivable, net of allowance for doubtful accounts............ 4,499,404 6,170,193 6,983,029
Inventories............................................................ 1,257,772 1,653,011 2,393,250
Prepaid expenses....................................................... 124,047 130,218 382,695
Deferred tax assets.................................................... 60,000 800,700 519,320
----------- ----------- -----------
Total current assets................................................. 8,617,513 10,873,009 18,234,466
----------- ----------- -----------
Property and equipment, at cost:
Leasehold improvements................................................. -- 4,677 12,239
Furniture and office equipment......................................... 125,846 273,831 359,030
Computer and other equipment........................................... 159,330 380,334 556,480
----------- ----------- -----------
285,176 658,842 927,749
Less accumulated depreciation.......................................... 86,089 195,959 283,812
----------- ----------- -----------
199,087 462,883 643,937
----------- ----------- -----------
Other assets............................................................. 231,400 617,255 17,672
----------- ----------- -----------
Total assets............................................................. $ 9,048,000 $11,953,147 $18,896,075
----------- ----------- -----------
----------- ----------- -----------

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt...................................... $ 674,125 $ 504,349 $ --
Accounts payable....................................................... 930,265 530,525 1,206,589
Accrued wages and commissions.......................................... 1,739,703 554,352 525,166
Accrued warranty costs................................................. -- 630,000 745,000
Other accrued expenses................................................. 343,337 282,040 546,175
Deferred revenue....................................................... 280,302 -- --
----------- ----------- -----------
Total current liabilities............................................ 3,967,732 2,501,266 3,022,930
Subordinated debt...................................................... 20,000,000 20,000,000 --
Long-term debt, less current portion................................... 5,614,988 5,110,549 --
Deferred taxes......................................................... 8,000 16,500 21,250
----------- ----------- -----------
Total liabilities...................................................... 29,590,720 27,628,315 3,044,180
----------- ----------- -----------
Commitments and contingencies
Preferred stock, Series A redeemable and convertible, no par value,
300,000 shares authorized, issued and outstanding at December 31,
1995 and 1996........................................................ 2,205,000 2,205,000 --
Preferred stock, Series B redeemable, no par value; 200,000 shares
authorized, issued and outstanding at December 31, 1995 and 1996..... 1,000,000 1,000,000 --
----------- ----------- -----------
Shareholders' equity (deficit):
Preferred stock, 100,000 shares authorized at December 31, 1995 and
1996 and 1,000,000 shares authorized at June 27, 1997; no shares issued
and outstanding........................................................ -- -- --
Common stock, no par value; 10,000,000 shares authorized at December
31, 1995 and 1996 and 100,000,000 authorized at July 27, 1997;
5,600,000, 6,260,016 and 12,163,328 shares issued and outstanding...... 295,000 648,260 31,526,508
Deferred compensation.................................................. (1,000,000) (93,431) (180,581)
Accumulated deficit.................................................... (23,042,720) (19,434,997) (15,494,032)
----------- ----------- -----------
Total shareholders' equity (deficit)................................... (23,747,720) (18,880,168) 15,851,895
----------- ----------- -----------
Total liabilities and shareholders' equity (deficit)................... $ 9,048,000 $11,953,147 $18,896,075
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

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

F-3
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 27,
------------------------------------------ 1996 1997
1994 1995 1996 (UNAUDITED) (UNAUDITED)
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................. $ 7,310,565 $ 19,670,619 $ 33,621,936 $ 14,001,937 $ 23,681,366
Cost of sales......................... 4,493,275 10,635,672 19,238,965 8,343,392 12,991,830
------------ ------------- ------------- ------------- -------------
Gross profit...................... 2,817,290 9,034,947 14,382,971 5,658,545 10,689,536
------------ ------------- ------------- ------------- -------------
Research and development.............. 277,878 913,027 965,030 463,622 935,986
Sales and marketing................... 370,264 1,631,075 2,481,356 1,117,036 1,876,528
General and administrative............ 1,235,657 2,753,763 3,608,897 931,175 1,703,320
------------ ------------- ------------- ------------- -------------
Total operating expenses.......... 1,883,799 5,297,865 7,055,283 2,511,833 4,515,834
------------ ------------- ------------- ------------- -------------
Income from operations............ 933,491 3,737,082 7,327,688 3,146,712 6,173,702
Interest income (expense), net........ 7,023 (186,302) (1,859,170) (946,875) (123,344)
Other income.......................... -- -- -- -- 146,324
------------ ------------- ------------- ------------- -------------
Income from continuing operations
before income taxes and
extraordinary item.................. 940,514 3,550,780 5,468,518 2,199,837 6,196,682
Benefit (provision) for income
taxes............................... -- 52,000 (1,860,795) (748,185) (2,114,954)
------------ ------------- ------------- ------------- -------------
Income from continuing operations
before extraordinary item........... 940,514 3,602,780 3,607,723 1,451,652 4,081,728
Extraordinary item--loss on early
extinguishment of debt, net of
$72,513 of income taxes............. -- -- -- -- (140,763)
Income from discontinued service
operations.......................... 601,064 -- -- -- --
------------ ------------- ------------- ------------- -------------
Net income........................ $ 1,541,578 $ 3,602,780 $ 3,607,723 $ 1,451,652 $ 3,940,965
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro forma data (Note 1):
Historical income before taxes...... $ 1,541,578 $ 3,550,780 $ 5,468,518 $ 2,199,837 $ 5,983,406
Provision for income taxes (pro
forma through 1995)............... 524,137 1,207,265 1,860,795 748,185 2,042,441
------------ ------------- ------------- ------------- -------------
Net income (pro forma through
1995)............................. $ 1,017,441 $ 2,343,515 $ 3,607,723 $ 1,451,652 $ 3,940,965
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro forma per share amounts:
Income before extraordinary
item............................ $ 0.20 $ 0.40 $ 0.16 $ 0.34
Extraordinary item................ -- -- -- (0.01)
------------- ------------- ------------- -------------
Pro forma income per share........ $ 0.20 $ 0.40 $ 0.16 $ 0.33
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares used in
computing pro forma per share
amounts........................... 11,491,932 9,091,932 9,091,932 11,839,388
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

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

F-4
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------------- DEFERRED EARNINGS
SHARES AMOUNT COMPENSATION (DEFICIT) TOTAL
------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994.................. 8,000,000 586,075 -- 371,108 957,183
Net income................................. -- -- -- 1,541,578 1,541,578
Distribution to shareholder................ -- -- -- (1,037,124) (1,037,124)
------------ ------------- ------------- -------------- --------------
Balances, December 31, 1994................ 8,000,000 586,075 -- 875,562 1,461,637
Net income................................. -- -- -- 3,602,780 3,602,780
Distributions (cash and notes) to
shareholder.............................. -- (585,075) -- (5,022,062) (5,607,137)
Deferred compensation related to issuance
of Series B redeemable preferred stock... -- -- (1,000,000) -- (1,000,000)
Issuance of common stock................... 1,600,000 294,000 -- -- 294,000
Redemption of common stock................. (4,000,000) -- -- (22,499,000) (22,499,000)
------------ ------------- ------------- -------------- --------------
Balances, December 31, 1995................ 5,600,000 295,000 (1,000,000) (23,042,720) (23,747,720)
Net income................................. -- -- -- 3,607,723 3,607,723
Issuance of common stock options........... -- 170,574 (170,574) -- --
Tax benefit of common stock options
exercised................................ -- 56,002 -- -- 56,002
Exercise of common stock options........... 660,016 126,684 -- -- 126,684
Amortization of deferred
compensation............................. -- -- 1,077,143 -- 1,077,143
------------ ------------- ------------- -------------- --------------
Balances, December 31, 1996................ 6,260,016 648,260 (93,431) (19,434,997) (18,880,168)
Net income (unaudited)..................... -- -- -- 3,940,965 3,940,965
Proceeds from initial public offering of
common stock............................. 3,500,000 28,550,762 -- -- 28,550,762
Proceeds from issuance of common stock to
employee stock purchase plan............. 3,312 22,886 -- -- 22,886
Conversion of Series A redeemable and
convertible preferred stock to common
stock.................................... 2,400,000 2,205,000 -- -- 2,205,000
Deferred compensation related to issuance
of stock options......................... -- 99,600 (99,600) -- --
Amortization of deferred compensation...... -- -- 12,450 -- 12,450
------------ ------------- ------------- -------------- --------------
Balances, June 27, 1997 (unaudited)........ 12,163,328 $ 31,526,508 $ (180,581) $ (15,494,032) $ 15,851,895
------------ ------------- ------------- -------------- --------------
------------ ------------- ------------- -------------- --------------
</TABLE>

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

F-5
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
YEARS ENDED DECEMBER 31, JUNE 30, JUNE 27,
-------------------------------- 1996 1997
1994 1995 1996 (UNAUDITED) (UNAUDITED)
--------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $1,541,578 $3,602,780 $3,607,723 $1,451,652 $ 3,940,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 43,530 60,288 154,225 71,658 94,239
Amortization of deferred compensation.............. -- -- 1,077,143 83,334 12,450
Loss on disposal of equipment...................... 2,583 10,614 -- -- --
Deferred taxes..................................... -- (52,000) (732,200) (104,000) 286,130
Tax benefit of common stock options exercised...... -- -- 56,002 -- --
Provision for obsolete and slow moving inventory... -- -- 215,000 -- --
Provision for doubtful accounts.................... -- 30,000 305,893 -- --
Extraordinary item--loss on early extinguishment of
debt............................................. -- -- -- -- 213,276
Changes in:
Accounts receivable.............................. (163,136) (3,052,603) (1,976,682) 995,591 (812,836)
Inventories...................................... (197,083) (919,748) (610,239) (130,181) (740,239)
Prepaid expenses................................. (45,346) (71,579) (6,171) 36,808 (252,477)
Other assets..................................... -- (10,922) (69,231) -- 63,942
Accounts payable................................. 294,061 543,079 (399,740) (313,195) 676,064
Accrued wages and commissions.................... 19,796 1,592,713 (1,185,351) (1,504,534) (29,186)
Accrued warranty costs........................... -- -- 630,000 240,000 115,000
Other accrued expenses........................... (52,495) 226,028 (61,297) 222,702 264,135
Deferred revenue................................. -- 280,302 (280,302) (280,302) --
--------- ---------- --------- ----------- -----------
Total adjustments.............................. (98,090) (1,363,828) (2,882,950) (682,119) (109,502)
--------- ---------- --------- ----------- -----------
Net cash provided by operating activities...... 1,443,488 2,238,952 724,773 769,533 3,831,463
--------- ---------- --------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment...................... 1,839 -- -- -- --
Purchases of equipment............................... (25,718) (166,217) (373,666) (231,141) (268,907)
--------- ---------- --------- ----------- -----------
Net cash used in investing activities.......... (23,879) (166,217) (373,666) (231,141) (268,907)
--------- ---------- --------- ----------- -----------
Cash flows from financing activities:
Distributions paid................................... (792,279) (992,815) -- -- --
Principal payments on notes to shareholder........... (249,845) (4,569,322) (270,000) (270,000) --
Proceeds from the issuance of long-term debt......... -- 16,000,000 -- -- --
Repayments of long-term debt......................... -- (1,347) (404,215) (2,074) (25,614,898)
Payment of loan fees................................. -- (220,478) (45,000) (45,000) --
Proceeds from issuance of Series A redeemable and
convertible preferred stock........................ -- 2,205,000 -- -- --
Proceeds from initial public offering of common
stock.............................................. -- -- -- -- 28,866,741
Proceeds from issuance of common stock and exercise
of common stock options............................ -- 294,000 126,684 9,508 22,886
Payment of deferred offering costs................... -- -- (315,979) -- --
Redemption of Series B redeemable preferred stock.... -- -- -- -- (1,000,000)
Redemption of common stock........................... -- (12,499,000) -- -- --
--------- ---------- --------- ----------- -----------
Net cash provided by (used in) financing
activities................................... (1,042,124) 216,038 (908,510) (307,566) 2,274,729
--------- ---------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... 377,485 2,288,773 (557,403) 230,826 5,837,285
Cash and cash equivalents at beginning of period....... 10,032 387,517 2,676,290 2,676,290 2,118,887
--------- ---------- --------- ----------- -----------
Cash and cash equivalents at end of period............. $ 387,517 $2,676,290 $2,118,887 $2,907,116 $ 7,956,172
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............... $ 23,295 $ 186,817 $1,912,583 $ 956,018 $ 328,854
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Cash paid for Federal income taxes................... $ -- $ -- $2,531,962 $ 763,375 $ 1,760,000
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Equipment obtained through capital lease............. $ -- $ 20,460 $ -- $ -- $ --
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Distributions to shareholder evidenced by notes
payable............................................ $ 244,845 $4,614,322 $ -- $ -- $ --
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Redemption of common stock evidenced by note
payable............................................ $ -- $10,000,000 $ -- $ -- $ --
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
Conversion of Series A preferred stock to common
stock.............................................. $ -- $ -- $ -- $ -- $ 2,205,000
--------- ---------- --------- ----------- -----------
--------- ---------- --------- ----------- -----------
</TABLE>

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

F-6
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

Apex PC Solutions, Inc. (the "Company") was incorporated in December 1992.
Through January of 1993, the Company operated as a division of another entity
owned by the Company's shareholder. In February 1993, $586,075 in net assets
were spun off from the related entity and represent the Company's initial
capitalization. The predecessor bases of assets and liabilities contributed in
the initial capitalization and recorded as contributed capital (common stock)
were as follows:

<TABLE>
<S> <C>
Cash............................................................. $ 131,200
Accounts receivable.............................................. 410,340
Inventories...................................................... 165,938
Plant and equipment.............................................. 68,044
Accounts payable................................................. (143,472)
Accrued liabilities.............................................. (45,975)
---------
$ 586,075
---------
---------
</TABLE>

The Company designs, manufactures and markets stand-alone switching systems
and integrated server cabinet solutions for the client/server computing market.
The Company's switching systems enable client/ server network administrators to
manage multiple servers from a single keyboard, monitor and mouse configuration,
facilitating more efficient network management and administration. The Company
purchases material component parts for the manufacture of switching systems and
integrated server cabinets from domestic suppliers, and generally contracts with
third parties for the subassembly of products.

RECAPITALIZATION OF THE COMPANY

During 1995, the Company was recapitalized through a series of transactions
whereby a portion of the interest of one of its shareholders was redeemed for
cash and a note. Concurrently, new shareholders purchased shares of common and
preferred stock and provided additional financing to the Company. Immediately
prior to the recapitalization, the Company declared dividends to the shareholder
of $992,815 (including redemption of common stock with a basis of $585,075). The
significant components of the leveraged recapitalization were as follows:

The Company split its common stock 1000 shares for 1.

A shareholder of the Company received $4,569,322 from the Company for
repayments of existing notes.

The Company redeemed 4,000,000 shares (adjusted for all stock splits)
from a shareholder through payment of $12,499,000 in cash and issuance of a
$10,000,000 subordinated note ("Class B Subordinated Promissory Note").

The Company issued 1,600,000 shares (adjusted for all stock splits) of
common stock and 300,000 shares of Series A Redeemable and Convertible
Preferred Stock for $294,000 and $2,205,000,

F-7
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
respectively, to a group of investors. At the same time, the investors
loaned the Company $10,000,000 evidenced by Class A Subordinated Notes.

The Company issued 200,000 shares of Series B Redeemable Preferred Stock
to an officer of the Company.

The new investors did not acquire substantially all of the shares
representing voting interests of the Company. The voting interests of new
investors represented 50% of the voting interests of the Company after the
leveraged capitalization. Accordingly, the transaction has been recorded as a
recapitalization with amounts distributed to the selling shareholder recorded as
charges to shareholders' equity (deficit). The transaction did not result in a
new basis of accounting for the assets and liabilities of the Company because it
would not have been appropriate under EITF Issue No. 88-16, "Basis in Leveraged
Buyout Transactions" or pushdown accounting guidelines of the Securities and
Exchange Commission ("SEC").

PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements as of June 27, 1997
and for the six month periods ended June 30, 1996 and June 27, 1997 have been
prepared in conformity with generally accepted accounting principles and reflect
all adjustments, consisting of normal recurring adjustments, which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period.

The Company reports its annual results based on years ending December 31.
Interim periods in years prior to 1997 are reported on a calendar quarter basis.
Commencing in 1997, the Company reports its quarterly results for the first
three interim periods ending on the last Friday of March, June and September and
for the fourth interim period ending on December 31. The difference between
quarterly results reported on this basis and quarterly results reported on the
basis of calendar quarters for years prior to 1997 is not material.

The Company formed a foreign sales corporation subsidiary in the first
quarter of 1997. Consequently, beginning in 1997 the Company's financial
statements are presented on a consolidated basis.

CASH AND CASH EQUIVALENTS

The Company considers cash and short-term investments which are highly
liquid, with maturities of three months or less, to be cash equivalents.

INVENTORIES

Inventories are recorded at the lower of cost (as determined by the
first-in, first-out method) or market.

PROPERTY AND EQUIPMENT

Depreciation of property and equipment is computed on the basis of estimated
useful lives ranging from three to seven years using the straight-line method.
Maintenance and repairs are charged to expense

F-8
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
as incurred. Significant betterments are capitalized. Upon retirement or sale,
the cost of the assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in the
statement of operations.

OTHER ASSETS

Other assets consist primarily of financing costs and costs incurred in
connection with the Company's initial public offering. Financing costs are
amortized using the effective interest method.

REVENUE RECOGNITION

Revenue on equipment sales is recognized upon shipment, net of allowances
for potential returns. Certain customer contracts require equipment installation
at the customer's location and in those circumstances, revenue is recognized
after completion of the installation.

INCOME TAXES

On October 31, 1995, the Company's status as an S Corporation for Federal
income tax purposes was automatically terminated due to a sale of stock to an
entity not eligible to be a shareholder of a subchapter S Corporation. Taxable
income prior to the change in status was taxed directly to the former sole
shareholder and financial statements for periods through this date reflected no
provision for income taxes. Subsequent to October 31, 1995 the Company has been
taxed as a C Corporation for Federal income tax purposes. The Company has
provided for these income taxes under the principles of Statement of Financial
Accounting Standards No. 109 (SFAS No. 109).

PRO FORMA INCOME PER SHARE

The pro forma income per share is based on the weighted average number of
shares of common stock and common equivalent shares outstanding, adjusted for
stock splits retroactively applied to all periods presented (see Note 8).
Pursuant to certain SEC Staff Accounting Bulletins, common stock and common
stock equivalents issued at prices below the initial public offering ("IPO")
price of $9 during the 12 months immediately preceding the date of the initial
filing of the Registration Statement have been included in the calculation of
income per share, using the treasury stock method based on the assumed IPO
price, as if the common stock equivalents were outstanding for all periods
through the date of the company's initial public offering.

PRO FORMA DATA

Pro forma provisions for income taxes, net income and per share data
represent the results of operations for the two years ended December 31, 1994
and 1995, adjusted to reflect a provision for income taxes, calculated as if the
Company had been taxed as a C Corporation.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets

F-9
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.

The estimated fair value of notes payable approximates their recorded
amounts because these instruments bear interest either at market rates or at
floating rates which approximate market rates for similar instruments.

CONCENTRATIONS OF CUSTOMER BASE AND CREDIT RISK

A major customer accounted for 36%, 54%, and 30% of the Company's net sales
(excluding service sales) for the years ended December 31, 1994, 1995 and 1996,
respectively. The receivable from this customer totaled approximately 67% and
57% of trade receivables at December 31, 1995 and 1996, respectively. For the
year ended December 31, 1996, the Company had sales to two other major customers
which accounted for 18% and 15% of net sales. The aggregate receivables from
these two customers totaled 18% of trade accounts receivable at December 31,
1996. The customer which accounted for 18% of net sales for the year ended
December 31, 1996 accounted for 1% of the Company's sales in 1995 and cancelled
its 1996 OEM arrangement with the Company in mid-1996.

For the remaining customers, management believes concentrations of credit
risk with respect to trade receivables are limited due to the nature of the
customers comprising the Company's customer base. The Company performs credit
reviews on major new customers, but rarely requires collateral.

The Company maintains its cash in a bank in amounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.

MAJOR VENDORS

The Company purchases all server cabinets from one vendor and has another
vendor sub-assemble its switching systems. Although there are a limited number
of vendors able to assemble concentrator switches, management believes that
other vendors could provide similar services on comparable terms. A change in
vendors, however, could cause a delay in manufacturing and possible loss of
sales, which would adversely affect operating results.

WARRANTY COSTS

The Company provides, by a current charge to operations, an amount it
estimates will be needed to cover future warranty obligations for products sold
during the period.

F-10
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RESEARCH AND DEVELOPMENT

The Company makes significant investments in research for the development of
new technologies and products, including both switching systems and server
cabinets. Research and development costs are charged to expense as incurred.

ADVERTISING

The Company expenses advertising costs as incurred. Advertising expense was
$309,936, $772,484 and $1,044,737 for the years ended December 31, 1994, 1995
and 1996, respectively.

RECLASSIFICATIONS

Because redemption of the Series A Redeemable and Convertible Preferred
Stock and Series B Redeemable Preferred Stock is controlled by the holders of
the stock, in accordance with certain financial statement requirements of the
SEC, such stock has been reclassified from shareholders' equity (deficit).

Certain other reclassifications were made to the 1994 and 1995 financial
statements to conform with the 1996 presentation. The reclassifications do not
affect net income, shareholders' equity (deficit) or cash flows as previously
reported.

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." This statement specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"), to simplify the existing
computational guidelines and increase comparability on an international basis.
The statement will be effective for interim and annual reporting periods ending
after December 15, 1997. This statement will replace "primary" EPS with "basic"
EPS, the principal difference being the exclusion of common stock equivalents in
the computation of basic EPS. In addition, this statement will require the dual
presentation of basic and diluted EPS on the face of the consolidated statements
of operations. Basic EPS computed pursuant to this statement will differ from
historical net income per share previously reported due to the exclusion of
common stock equivalents from the computation. Diluted EPS computed pursuant to
this statement is not expected to be materially different from the historical
net income per share previously presented.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This statement requires that changes
in comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The statement will be
effective for fiscal years beginning after December 15, 1997. Reclassification
for earlier periods is required for comparative purposes. The Company is
currently evaluating the impact this statement will have on its financial
statements; however, because the statement requires only additional disclosure,
the Company does not expect the statement to have a material impact on its
financial position or results of operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." This

F-11
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
statement includes requirements to report selected segment information quarterly
and entity-wide disclosures about products and services, major customers, and
the material countries in which the entity holds assets and reports revenues.
The statement will be effective for fiscal years beginning after December 15,
1997. Reclassification for earlier periods is required, unless impracticable,
for comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the statement
requires only additional disclosure, the Company does not expect the statement
to have a material impact on its financial position or results of operations.

2. ACCOUNTS RECEIVABLE:

Accounts receivable consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Trade receivables................................................. $ 4,529,404 $ 6,506,086
Less allowance for doubtful accounts.............................. (30,000) (335,893)
------------ ------------
$ 4,499,404 $ 6,170,193
------------ ------------
------------ ------------
</TABLE>

3. INVENTORIES:

Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 688,855 $ 1,086,142
Work-in-process................................................... 243,790 260,356
Finished goods.................................................... 325,127 521,513
------------ ------------
1,257,772 1,868,011
Less reserve for obsolescence..................................... -- (215,000)
------------ ------------
$ 1,257,772 $ 1,653,011
------------ ------------
------------ ------------
</TABLE>

4. LINE OF CREDIT AND LETTERS OF CREDIT:

Under the terms of a credit agreement with a bank (Note 5), the Company has
an operating line of credit allowing it to borrow up to a specified amount based
upon eligible accounts receivable, as defined in the agreement. The agreement
also states that the bank will issue commercial letters of credit on the
Company's behalf such that the aggregate amount of borrowings under the
operating line and letter of credit arrangements does not exceed $3,000,000. The
operating line and letter of credit facility expire on April 15, 1997 and bear
interest at prime (8.25% at December 31, 1996) plus 1.5%. There were no
borrowings on the line of credit facility as of December 31, 1996, nor at any
time during 1996.

F-12
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

5. SUBORDINATED AND LONG-TERM DEBT:

Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Note payable to bank, collateralized by substantially all of
the Company's assets, interest payable monthly at prime
(8.25%, at December 31, 1996) plus 1.5%, principal payment of
$500,000 is required at December 31, 1997, matures December
2002. The note payable was paid in full in February 1997...... $ 6,000,000 $ 5,600,000
Uncollateralized notes payable to shareholder, interest payable
monthly at 12%, paid in full in January, 1996................. 270,000 --
Notes payable to shareholders subordinated to borrowings from
the bank under note payable and line of credit and letter of
credit facility, principal payments of $10,000,000 in December
2000 and $10,000,000 in December 2001, and interest payable
quarterly at 7.0%. Unpaid interest and principal payable in
full on the consummation of a Qualified Liquidity Event as
defined in note agreements. The notes payable were paid in
full in February 1997......................................... 20,000,000 20,000,000
Capital lease obligation for the purchase of equipment totaling
$20,460, interest at 6.28%, monthly principal and interest
payments of $442, due in 1999. The lease obligation was paid
in full in March 1997......................................... 19,113 14,898
------------- -------------
26,289,113 25,614,898
Less current portion........................................... 674,125 504,349
------------- -------------
$ 25,614,988 $ 25,110,549
------------- -------------
------------- -------------
</TABLE>

The aggregate amount of required principal payments as of December 31, 1996
were as follows:

<TABLE>
<S> <C>
Period Ended December 31:
1997......................................................... $ 504,349
1998......................................................... 4,777
1999......................................................... 5,772
2000......................................................... 10,000,000
2001......................................................... 10,000,000
Thereafter................................................... 5,100,000
----------
$25,614,898
----------
----------
</TABLE>

The Company is party to an agreement with a bank for short-term (Note 4) and
long-term credit facilities, all as described above. Borrowings are
collateralized by substantially all assets of the Company.

F-13
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

5. SUBORDINATED AND LONG-TERM DEBT, CONTINUED:
The agreement includes various restrictive covenants which, among other things,
restrict the payment of dividends and indebtedness and require the Company to
maintain minimum debt service coverage ratios, minimum working capital amounts
and limit capital expenditures. The agreement also specifies that, so long as
there are amounts outstanding pursuant to the credit facility, on May 1 of each
year, beginning in 1997, the Company will pay the bank 25% of its excess cash
flow, as defined in the agreement, unless the ratio of cash flow to debt service
is greater than 1:1.

6. OPERATING LEASE COMMITMENTS:

The Company leases its facilities for $18,074 per month under an operating
lease expiring September 30, 1998. The Company pays taxes, insurance, normal
maintenance and certain other operating expenses. The lease includes provisions
for rent escalation based on increases in the consumer price index. The Company
has two consecutive two year renewal options on this lease.

Future minimum payments as of December 31, 1996 under the non-cancelable
operating lease were as follows:

<TABLE>
<S> <C>
Year Ended December 31:
1997............................................................ $ 216,888
1998............................................................ 162,666
---------
$ 379,554
---------
---------
</TABLE>

Rent expense totaled $53,397, $125,238 and $216,888 for the years ended
December 31, 1994, 1995 and 1996, respectively.

7. EMPLOYEE BENEFIT PLAN:

The Company sponsors a 401(k) plan that covers eligible full-time employees.
Employer matching contributions are made at the discretion of the Board of
Directors. Employer contributions totaled $19,603, $35,217 and $58,968 for the
years ended December 31, 1994, 1995 and 1996, respectively.

8. SHAREHOLDERS' EQUITY (DEFICIT):

The Company is authorized to issue 10,000,000 shares of voting common stock,
no par value. At its discretion, the Board of Directors may declare dividends on
shares of common stock. Upon liquidation or dissolution, holders of common stock
will be paid only after Series A and Series B Preferred Stock preferences have
been satisfied.

On December 27, 1995 all outstanding shares of common stock were split 1,000
for one. On January 22, 1996 all outstanding shares of common stock were split
two for one. On December 9, 1996, all outstanding shares of common stock were
split four for one. All common stock share amounts have been restated to reflect
these stock splits.

During 1995 the Company authorized and issued 300,000 shares of Series A
Redeemable and Convertible Preferred Stock, no par value. All holders of Series
A Redeemable and Convertible Preferred Stock are entitled to vote on all matters
except election of directors with the holders of the common stock

F-14
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

8. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
on an "as if converted" basis. The holders of the Series A Redeemable and
Convertible Preferred Stock are entitled to elect two directors voting
separately as a class, the holders of the common stock are entitled to elect two
directors, voting separately as a class and the holders of the Series A
Redeemable and Convertible Preferred Stock and the holders of the common stock
vote together to elect the fifth director. The holders of the Series A
Redeemable and Convertible Preferred Stock are entitled to receive any dividends
on an "as if converted" basis when, as and if dividends are declared by the
Board of Directors on the common stock or the Company's Series B Redeemable
Preferred Stock and to such additional dividends payable only to the holders of
the Series A Redeemable and Convertible Preferred Stock as may be declared by
the Board of Directors. Each share of Series A Redeemable and Convertible
Preferred Stock is convertible into that number of shares as is determined by
dividing the original per share purchase price by a conversion price. The Series
A Redeemable and Convertible Preferred Stock is convertible at the option of the
holder or automatically upon sale of the Company's common stock in a Qualified
Public Offering as defined in the Restated Articles of Incorporation or upon the
vote of the holders of 2/3 of the outstanding Series A Redeemable and
Convertible Preferred Stock in favor of conversion. The conversion price is
subject to weighted average anti-dilution protection and proportional
adjustments in the event of stock splits and similar events. Consequently, as a
result of the common stock splits in 1996, the shares of Series A Redeemable and
Convertible Preferred Stock are convertible into 2,400,000 shares of common
stock. The Series A Redeemable and Convertible Preferred Stock is redeemable, at
the option of the holders of 50% of the outstanding shares thereof, either upon
a change in control of the Company or in two installments on the fifth and sixth
anniversaries of the original issue date of such stock. To the extent that the
Series A Redeemable and Convertible Preferred Stock is not redeemed when
required, the Company is obligated to redeem such shares when, as and if
permitted by law, and the shares not so redeemed are entitled to cumulative
preferred dividends at an annual rate equal to the greater of (i) 12% or (ii)
prime plus 4% until redeemed or converted. The redemption price for each share
of Series A Redeemable and Convertible Preferred Stock shall be the original
issue price plus all accrued and unpaid dividends. Upon liquidation or
dissolution, holders of Series A Redeemable and Convertible Preferred Stock will
receive preference over holders of common stock and Series B Redeemable
Preferred Stock.

During 1995, the Company authorized and issued 200,000 shares of Series B
Redeemable Preferred Stock, no par value, to an officer as compensation for
future service. The Series B Redeemable Preferred Stock has no voting rights. At
its discretion, the Board of Directors can declare dividends on shares of Series
B Redeemable Preferred Stock. Upon liquidation or dissolution, after payment in
full of the liquidation preferences to holders of Series A Redeemable and
Convertible Preferred Stock, the holder of Series B Redeemable Preferred Stock
is entitled to the redemption value of the shares plus all accrued and unpaid
dividends. Under the terms of the officer's employment agreement, the shares
vested ratably over a period of six years. On December 9, 1996, the employment
agreement was modified whereby all 200,000 shares become fully vested on January
1, 1997. Under the terms of the amendment, 80,000 shares became redeemable at a
price of $5 per share on January 1, 1997. The remaining 120,000 shares become
redeemable at a price of $5 per share on the earlier of the closing of a
qualified public offering of the Company's stock, or if no such qualified public
offering has occurred, 60,000 shares in each of December 2000 and 2001. The
Series B Redeemable Preferred Stock has been recorded at its redemption price of
$5 per share with a corresponding charge to shareholders' equity (deficit) for
deferred compensation. Pursuant to the amendment, deferred compensation of
$1,000,000 was fully amortized to expense in 1996.

F-15
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

9. STOCK OPTIONS:

The Company has adopted an employee stock option plan (the "Plan"), which
provides for nonqualified and incentive stock options for officers, directors,
employees, and consultants, and reserved a total of 2,161,760 shares of common
stock for issuance pursuant to the Plan. Options under the Plan will generally
expire 10 years from the date of grant, or 5 years in the case of an optionee
owning more than 10% of the voting power of all classes of stock. Under the
Plan, the Plan administrator will fix the conditions for the exercise of the
options. Purchase prices for common stock subject to options issued under the
Plan generally approximate fair market value of the related shares at the date
of grant. Generally, options vest over four years.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation" for the year ended December 31, 1996. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.

Information regarding activity of the option plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1995............................ -- --
Options granted--December 29, 1995.............................. 705,880 $0.184
----------
Options outstanding, December 31, 1995.......................... 705,880 $0.184
Options granted--February 1996.................................. 405,000 $0.184
Options granted--June 1996...................................... 106,000 $0.184
Options granted--September 1996................................. 103,000 $0.184
Options granted--October 1996................................... 24,000 $0.500
Options exercised............................................... (660,016) $0.1895
----------
Options outstanding, December 31, 1996.......................... 683,864 $0.1893
----------
----------
Options available for grant at December 31, 1996................ 817,880
----------
----------
Weighted average fair value of options granted in 1996 whose
exercise price was equal to the fair value of the stock on the
date of grant.................................................. $0.078
------
------
Weighted average fair value of options granted in 1996 whose
exercise price was less than the fair value of the stock on the
date of grant.................................................. $1.450
------
------
</TABLE>

No compensation expense has been recorded for options granted in December
1995, February 1996 and June 1996 because the options granted during these
periods were for prices equal to the fair value of the related shares, based on
the price of the shares of common stock purchased by investors in December 1995
(see Note 1) and independent appraisals of the Company's common stock. For
options

F-16
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

9. STOCK OPTIONS, CONTINUED:
issued in September and October, 1996, deferred compensation expense of $32,574
and $138,000 respectively was recorded in the amounts of the excess of the
values of the underlying common stock based on an independent appraisal, over
the option prices. Vesting of 25% of the options granted in September 1996 was
accelerated in October 1996. In addition, 50% of the options granted in October
1996 were immediately exercisable. Remaining options granted in September and
October 1996 vest over four years. Deferred compensation expense is amortized as
the related options vest or become exercisable.

The following table summarizes information about fixed-price options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.184 671,864 9 Years $ 0.184 $ 109,408 $ 0.184
0.500 12,000 10 Years 0.500 -- --
</TABLE>

The following table presents net income and per share amounts for the years
ended December 31, 1995 and 1996, as if the Company accounted for compensation
expense related to stock options under the fair value method prescribed by SFAS
123:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
PRO FORMA PRO FORMA
------------ -------------
<S> <C> <C>
Net income--as reported......................................... $2,343,515 $ 3,607,723
------------ -------------
------------ -------------
Net income--pro forma........................................... $2,343,515 $ 3,476,338
------------ -------------
------------ -------------
Earnings per share--as reported................................. $ 0.20 $ 0.40
------------ -------------
------------ -------------
Earnings per share--pro forma................................... $ 0.20 $ 0.38
------------ -------------
------------ -------------
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1995 and 1996:

<TABLE>
<S> <C>
Risk free interest rate.................................... 5.38% to 6.77%
Expected lives............................................. 10 years
</TABLE>

10. EMPLOYEE STOCK PURCHASE PLAN:

On December 9, 1996, the Company adopted an employee stock purchase plan
(the "Plan"), which provides a means through which employees of the Company may
participate in stock ownership of the Company. Shares of common stock reserved
for the Plan total 250,000. Employees who have worked for the Company longer
than five months and a minimum of 20 hours per week are eligible to participate
in the Plan. Participants shall become ineligible if employment with the Company
terminates or the participant owns greater than 5% of the combined voting power
or value of all classes of stock of the Company. The price of shares purchased
under the Plan will be the lower of 85% of the fair market value

F-17
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

10. EMPLOYEE STOCK PURCHASE PLAN, CONTINUED:
of the shares on the first day of each quarterly offering period or 85% of the
fair market value of the shares on any purchase date in the offering period.
Under the Plan, the Plan administrator will administer and interpret all rules
and regulations applicable to the Plan. No shares were issued pursuant to this
Plan in 1996.

11. INCOME TAXES:

The Company's status as an S Corporation was automatically terminated on
October 31, 1995 as a result of the sale by the former sole shareholder of stock
to an entity that is not eligible to be a shareholder in a subchapter S
Corporation. For the period from January 1, 1995 through October 31, 1995 the
former sole shareholder was taxed on the Company's taxable income. The sole
shareholder of the Company for the periods in which the Company was taxed as an
S Corporation has indemnified and agreed to hold the Company harmless from any
federal or state income tax liability, including interest and penalties (if
any), resulting from the Company failing to qualify as an S Corporation from
inception through October 31, 1995.

For the income earned after the termination of its status as an S
Corporation, the Company will provide for income taxes under the principles of
SFAS No. 109. This statement requires that income taxes be provided for taxes
currently due and for expected future tax effects of the temporary differences
between the book and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Deferred tax assets are reduced by valuation allowances when
management determines that their realization is not likely.

The significant components of the Company's deferred tax assets and
liabilities were as follows on December 31:

<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards............................................... $ 28,000 $ --
Allowance for doubtful accounts...................................... 10,200 114,200
Inventory capitalization............................................. 9,500 40,400
Inventory reserve.................................................... -- 73,100
Accrued warranty costs............................................... -- 214,200
Amortization of deferred compensation................................ -- 340,000
Other accrued liabilities............................................ 12,300 18,800
--------- ----------
Deferred income tax assets......................................... 60,000 800,700
--------- ----------
Deferred income tax liability:
Depreciation......................................................... 8,000 16,500
--------- ----------
Deferred income tax liability...................................... 8,000 16,500
--------- ----------
Net deferred tax asset............................................. $ 52,000 $ 784,200
--------- ----------
--------- ----------
</TABLE>

F-18
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

11. INCOME TAXES, CONTINUED:
Although realization is not assured, management believes that it is more
likely than not that all of the net deferred tax asset will be realized through
future taxable income.

The income tax (benefit) provision consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Current.......................................................... $ -- $2,592,995
Deferred......................................................... (25,000) (732,200)
Change in tax status............................................. (27,000) --
------------ ------------
$ (52,000) $1,860,795
------------ ------------
------------ ------------
</TABLE>

Reconciliations of the effective income tax rate on income before taxes with
the Federal statutory rate of 34% were as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
------------ -----------
<S> <C> <C>
Statutory Rate........................................................... 34.0% 34.0%
Change in tax status:
Effect of earnings attributable to S Corporation shareholder........... (35.0) --
Effect of establishment of deferred taxes.............................. (0.76) --
Other.................................................................... 0.30 --
----- ---
Effective tax rate....................................................... (1.46)% 34.0%
----- ---
----- ---
</TABLE>

The 1994 statement of operations does not reflect a provision for income
taxes due to the Company's status as an S Corporation. The pro forma provisions
for income taxes for the years ended December 31, 1994 and 1995 was based on the
statutory tax rate of 34%. In accordance with generally accepted accounting
principles, a tax benefit realized upon exercise of common stock options of
$56,002 for the year ended December 31, 1996 has been accounted for as an
increase to shareholders' equity (deficit).

12. COMMITMENTS AND CONTINGENCIES:

PURCHASE COMMITMENT

In October 1996, the Company signed a 12-month commitment to purchase
certain product components. The total commitment will range from $600,000 to
$950,000. Although future prices and demand for these components cannot be
predicted in advance with certainty, management does not anticipate that this
commitment will result in the recognition of gross losses for the Company.

F-19
<PAGE>
APEX PC SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS, CONTINUED

(INFORMATION AS OF JUNE 27, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND JUNE 27, 1997 IS UNAUDITED)

13. DISCONTINUED OPERATIONS:

In June 1994, the Company discontinued its computer maintenance service
business. Revenues from the discontinued operation were $1,776,070 for the year
ended December 31, 1994. There were no net gains or losses recorded on
disposition of the segment.

14. SUBSEQUENT EVENTS:

In January 1997, the Company issued options to purchase 24,000 shares of
common stock at an exercise price of $2.10 per share. The Company recorded
deferred compensation of $99,600 related to those options in January 1997.

In February and June 1997, the Company issued options to purchase 22,000
shares and 221,700 shares, respectively, of common stock at exercise prices of
$9.00 and $18.75 per share, respectively. No compensation expense was recorded
with respect to these options because the option exercise prices were equal to
the fair market value of the common stock at the time of grant.

In April 1997, the combined line of credit and letter of credit facility was
renewed, providing a final maturity date of April 30, 1998 and increasing the
aggregate borrowing capacity from $3.0 million to $5.0 million. There were no
borrowings under the line of credit and the letter of credit facility through
June 1997.

In February 1997, the Company consummated its IPO. The net proceeds to the
Company from the IPO were approximately $28.4 million, after deducting
approximately $190,000 of directors and officers insurance premium. Of that
amount, $20.0 million was used to repay the indebtedness evidenced by the Class
A and Class B Subordinated Promissory Notes issued in the Leveraged
Recapitalization, approximately $5.6 million was used to repay long-term bank
debt incurred by the Company in December 1995, and $600,000 was used to redeem
shares of Series B Redeemable Preferred Stock. After application of the net
proceeds of the IPO to the foregoing items, and payment of IPO expenses,
including $190,000 of directors and officers insurance premium which is being
expensed in 1997 as a period cost, the remaining proceeds from the IPO were
approximately $2.2 million.

In February 1997, the Company increased its number of authorized shares of
common stock and preferred stock to 100,000,000 and 1,000,000 shares,
respectively.

F-20
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

----------------------
TABLE OF CONTENTS
----------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................................................................................. 3
RISK FACTORS........................................................................................ 6
USE OF PROCEEDS..................................................................................... 15
DIVIDEND POLICY..................................................................................... 15
PRICE RANGE OF COMMON STOCK......................................................................... 15
CAPITALIZATION...................................................................................... 16
SELECTED FINANCIAL DATA............................................................................. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 19
BUSINESS............................................................................................ 28
MANAGEMENT.......................................................................................... 40
CERTAIN TRANSACTIONS................................................................................ 46
PRINCIPAL AND SELLING SHAREHOLDERS.................................................................. 48
DESCRIPTION OF CAPITAL STOCK........................................................................ 50
SHARES ELIGIBLE FOR FUTURE SALE..................................................................... 52
UNDERWRITING........................................................................................ 53
LEGAL MATTERS....................................................................................... 54
EXPERTS............................................................................................. 54
ADDITIONAL INFORMATION.............................................................................. 54
AVAILABLE INFORMATION............................................................................... 55
INDEX TO FINANCIAL STATEMENTS....................................................................... F-1
</TABLE>

4,000,000 SHARES

[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MONTGOMERY SECURITIES

DAIN BOSWORTH
INCORPORATED
<PAGE>
COWEN & COMPANY
AUGUST 7, 1997
<PAGE>