APEX PC SOLUTIONS INC, 10KSB, 1997-04-22

APEX PC SOLUTIONS INC
10KSB, 1997-04-22
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE>

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996

/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (NO FEE REQUIRED) For the transition period from
to .
-------------------- ---------------------

Commission file number: 000-21959

APEX PC SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)

Washington 91-1577634
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

20031 142nd Avenue, N.E.
Woodinville, Washington 98072
(Address of Principal Executive Offices) (Zip Code)

206-402-9393
(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value per share

Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
----- -----

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/

The registrant's revenues for fiscal 1996 were $33,621,936.

The aggregate market value of the voting stock held by non-affiliates of
the registrant on April 21, 1997 was $31,750,500.

The number of shares outstanding of the registrant's common stock as of
April 21, 1997 was 12,160,016.

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits are incorporated by reference into Item 13 of Part III
of this Report from registrant's Registration Statement on Form SB-2
(Registration No. 333-17753).

Transitional Small Business Disclosure Format (check one).
Yes No X
----- -----

<PAGE>

THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN THE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, STATEMENTS RELATING TO THE COMPANY'S STRATEGIES AND
PROSPECTS FOR INCREASING OEM AND BRANDED SALES, INCREASING INTERNATIONAL SALES,
AND EXPANDING ITS RESELLER CHANNEL AND STATEMENTS RELATING TO THE COMPANY'S
FUTURE BUSINESS PROSPECTS, REVENUES, EXPENSES, MARGINS, LIQUIDITY AND CAPITAL
NEEDS. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, AND IN OTHER WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY FROM TIME TO TIME, ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "DESCRIPTION OF BUSINESS - RISK FACTORS."

READERS SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
SUBSEQUENT EVENTS OR CIRCUMSTANCES. READERS SHOULD ALSO CAREFULLY REVIEW THE
RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

Apex PC Solutions, Inc. (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 to
Compaq Computer Corporation ("Compaq") and Hewlett-Packard Company
("Hewlett-Packard") under private label arrangements for integration into their
product offerings. 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 43% of all PC servers and
66% of all super servers (servers with one or more processors and more memory
and disk storage than PC servers) shipped worldwide in 1995. The Company's
branded sales customers for 1996 included Microsoft, Wells Fargo Bank, Owens
Corning, Peoplesoft and the National Association of Securities Dealers.

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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 and super servers are expected to grow 21.8% on a compounded annual
basis from 1996 to 2000, reaching approximately 2.6 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-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.

-3-

<PAGE>

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.

- 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 APEX STRATEGY

The Company's objective is to become the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. To achieve this objective, the Company
is implementing the following strategies:

- 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
competitive 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.

-4-

<PAGE>

- 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 will 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, sales of
Apex branded products represented approximately 32% and 29%
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 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 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 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.

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 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.

-5-

<PAGE>

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.
Intelligent circuits in SWITCHBACK enable the transmission of high resolution
video up to 500 feet away from the attached servers. 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 U.S. list prices of the Company's switching systems as of December 31,
1996 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.

PRODUCT U.S. LIST PRICE
------- ---------------

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

The Company's current switching products are described below:

<TABLE>
<CAPTION>
PRODUCT NAME KEY FEATURES BENEFITS
- ------------ ------------ --------
<S> <C> <C>
OutLook - ports: 1 x 4 and 1 x 8 - reduces required space and hardware needs by allowing
- capacity: 64 servers one console to control up to four or eight servers per
- multi-platform compatibility switch
- 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
- multi-platform compatibility servers
- 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
- 1000 ft. extension 32 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 - 500 ft. extension product - allows the addition of a remote console up to 500 feet
away
- remote lock-out feature
- may be combined with OUTLOOK and OUTLOOK(4) switches

</TABLE>

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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 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.

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. The Company maintains a sales and
marketing staff of nine 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, Inc. ("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 also sells its branded switching
products to various other OEM customers, including Dell Computer Corporation
("Dell"), NEC USA, Inc. and Unisys Corporation. These OEMs integrate and sell
the Company's branded switches in conjunction with their own networking
products. The Company devotes significant sales and customer support resources
to its OEM accounts. 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. 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
Europe. There can be no assurance that the Company will be successful in its
attempts gain additional OEM customers. See "- Risk Factors."

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 these branded sales, and
to that end the Company intends to pursue additional relationships with
resellers both domestically and internationally. 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. 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
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. 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.

-7-

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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. 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. In addition, 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. See "- Risk Factors - Risks Relating to Development of
International Distribution Network and International Sales."

CUSTOMERS

To date, a substantial portion of the Company's net sales have been
generated from sales of switches to OEMs for integration into their product
offerings. For 1994, 1995 and 1996, sales to the Company's private label OEM
customers represented approximately 38%, 69% and 71% of the Company's net sales,
respectively. While the Company has contracts with certain of its existing
private label 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 loss or material decline in orders from any of the Company's
current private label OEM customers would have a material adverse effect on the
Company's business, financial condition and results of operations. The
following is a list of the Company's private label OEM customers and
representative end-user branded product customers as of March 28, 1997:

OEM CUSTOMERS BRANDED PRODUCT CUSTOMERS
------------- -------------------------

Hewlett-Packard Microsoft
Compaq Wells Fargo Bank
Wright Line Owens Corning
Peoplesoft
National Association of Securities
Dealers
Countrywide Home Loans
Visa International

For 1994, 1995 and 1996, sales to Compaq represented approximately 36%, 54%
and 30%, respectively, of the Company's net sales. In addition, for 1996, sales
to Hewlett-Packard and International Business Machines Corporation ("IBM")
represented approximately 15% and 18%, respectively, of the Company's net sales.
In March 1997, Apex was selected by Dell to provide Apex brand switching systems
to Dell for integration into one of Dell's new server lines. Dell will not be
obligated to purchase switching systems except pursuant to binding purchase
orders.

-8-

<PAGE>

In October 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 IBM's
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 direct costs associated with 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 only 1% of the Company's net sales in 1995, but accounted for
18% of the Company's net sales in 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 "- Risk Factors" and "Management's Discussion and Analysis or Plan
of Operation."

The Company's backlog was $9.2 million at December 31, 1996 and $6.0
million at December 31, 1995. 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 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.

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 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."

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 "- Risk Factors - Product Returns and Warranty
Claims."

Growth of the Company's branded sales, should it occur, is likely to be
accompanied by 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. See "- Risk
Factors - Increased Demands on Customer Support Operations."

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<PAGE>

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
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.

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 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.

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 and 1996, the Company's engineering and product development
expenditures were $278,000, $913,000 and $965,000, respectively. As of
December 31 , 1996, the Company's engineering staff consisted of nine 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.

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<PAGE>
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
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.

The Company purchases industry-standard parts and components, including
power supplies, cable assemblies, line filters, enclosures and printed circuit
boards for the assembly of its products from multiple vendors and suppliers
through a worldwide sourcing program. The Company buys components under
purchase orders and generally does not have long-term agreements with its
suppliers. 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. 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. 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 affect the Company's business.

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.

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

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<PAGE>
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.

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 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. See "- Risk Factors - Limited Protection of Proprietary Rights;
Risks of Third Party Infringement."

EMPLOYEES

As of December 31, 1996, the Company employed 53 persons, 15 of whom were
in administration and management, nine of whom were in engineering and product
development, two of whom were in service and technical support, 16 of whom were
in manufacturing and 11 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.

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<PAGE>
RISK FACTORS

THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
VARY MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE
FOLLOWING:

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 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 (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 believes that the fourth quarter has generally higher net sales
levels due to customer budgeting and procurement cycles, which correspondingly
may depress net sales in other quarters. 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 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 and 1996, sales to OEMs
represented approximately 38%, 69% and 71% of the Company's net sales,

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<PAGE>
respectively. For 1994, 1995 and 1996, sales to Compaq represented approximately
36%, 54% and 30% respectively, of the Company's net sales. Sales to
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
Plan of Operation." 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 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 direct costs associated
with 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 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.

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

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<PAGE>
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

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.

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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
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

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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.

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.

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<PAGE>
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 Company's business, financial condition and results of
operations would be adversely affected.

INCREASED DEMANDS ON CUSTOMER SUPPORT 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. 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 and 1996, 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.

ITEM 2. DESCRIPTION OF PROPERTY.

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. The rent for the Company's facilities is approximately

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<PAGE>
$18,000 per month plus taxes, insurance and normal maintenance. Although the
Company believes that its facilities are adequate for its current needs, it has
signed a lease amendment to add approximately 11,000-12,000 square feet in the
same industrial office building by mid-1997. These additional facilities will
increase monthly rent by approximately $7,000 plus taxes, insurance and normal
maintenance.

ITEM 3. LEGAL PROCEEDINGS.

The Registrant is not involved in any material litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

(a) The Company's shareholders acted by unanimous written consent
effective October 28, 1996.

(b) The shareholders elected Edwin L. Harper as a director of the
Company. Kevin J. Hafer, Sterling Crum, Jeffrey T. Chambers and William McAleer
continued in their capacities as directors after the effective date of the
shareholder consent.

(c) The election of Mr. Harper as a director was the only matter
solicited for consent. All of the Company's outstanding shares were voted in
favor of Mr. Harper's election, none were voted against, and none were withheld.

-19-

<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK; HOLDERS OF RECORD

The Company's Common Stock has been quoted on the Nasdaq National Market
System under the symbol "APEX" since February 19, 1997. The following table
shows the high and low closing sales prices for the Common Stock for the periods
indicated, as reported by the Nasdaq National Market System.

Quarter ended March 31, 1997 High Low
---- ---
(February 19, 1997 through March 31, 1997) $10.50 $8.13

The closing sales price of the Company's Common Stock as reported on the
Nasdaq National Market System on April 21, 1997 was $7.50 per share. As of
April 21, 1997 there were 27 holders of record of the Company's Common Stock.

DIVIDEND POLICY

No cash dividends were declared or paid in 1996, and, 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 and state 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.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

THE INFORMATION IN THIS ITEM 6 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS RELATING TO THE COMPANY'S REVENUES, EXPENSES, MARGINS,
LIQUIDITY AND CAPITAL NEEDS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "DESCRIPTION OF BUSINESS - RISK FACTORS."

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 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. 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

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<PAGE>
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.

In February 1997, the Company consummated an initial public offering of its
Common Stock (the "IPO") and received net proceeds of approximately $28.4
million. Approximately $20.0 million of such proceeds was used to repay the
subordinated promissory notes issued by the Company in connection with the
Leveraged Recapitalization. In connection with the IPO, all of the Series A
Redeemable and Convertible Preferred Stock was converted into shares of the
Company's Common Stock.

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 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 and 1996, sales to the
Company's OEM customers, represented approximately 38%, 69% and 71% 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. 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.

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 direct costs associated with 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 only
1% of the Company's net sales in 1995, but accounted for 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

-21-

<PAGE>

affect the Company's business, financial condition and results of operations.
See "Description of Business - Risk Factors."

-22-

<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>
Years Ended
December 31,
------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Net sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.5 54.1 57.2
-------- -------- -------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.5 45.9 42.8
-------- -------- -------
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 4.6 2.9
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 8.3 7.4
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . 16.9 14.0 10.7
-------- -------- -------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . 25.7 26.9 21.0
-------- -------- -------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 19.0 21.8
-------- -------- -------
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . 0.1 (0.9) (5.6)
-------- -------- -------
Income from continuing operations before provision for income taxes. . . . . . 12.9 18.1 16.2
Provision for income taxes (pro forma through December 31, 1995) . . . . . 4.4 6.2 5.5
-------- -------- -------
Income from continuing operations (pro forma through December 31, 1995). . . . 8.5 11.9 10.7
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%
-------- -------- -------
-------- -------- -------
</TABLE>

YEARS ENDED DECEMBER 31, 1996 AND 1995

NET SALES. The Company's net sales consist of sales of stand-alone switching
systems and integrated server cabinets. 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 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 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. 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
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.
The Company expects that increased competition may affect pricing and therefore
erode the Company's gross margins in the future. See "Description of Business -
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 $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. 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 and as a percentage of
net sales.

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<PAGE>

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 $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. The Company expects
these expenditures to increase in absolute dollars as it seeks to increase its
branded sales.

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 $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. The addition of
personnel in the Company's finance and administration departments, together with
expenses such as legal and accounting fees associated with being a public
company, are expected to increase general and administrative costs in the
future.

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 approximately
$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.

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.

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<PAGE>

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.

-25-

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996 the Company's principal sources of liquidity
consisted of approximately $2.1 million in cash and cash equivalents.

In addition, the Company has, since December 1995, had a line of credit
with a bank that allows it to borrow up to a specified amount based upon its
accounts receivable. The Company also has a letter of credit arrangement
pursuant to which the bank will issue commercial letters of credit up to an
aggregate of $3.0 million (less any amounts outstanding under the line of
credit) at prime plus 1.5%. The combined line of credit and letter of credit
facility was renewed in early April 1997 (with a maturity date of April 30,
1998), in connection with which the aggregate borrowing capacity was
increased from $3.0 million to $5.0 million and the interest rate was reduced
from prime plus 1.5% to prime. There were no borrowings under the line of
credit and the letter of credit facility throughout 1996 and through March
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 $725,000 for 1996,
$2.2 million for 1995 and $1.4 million for 1994. See Note 1 of Notes to
Financial Statements and "Certain Relationships and Related Transactions." The
decrease in cash flow from operations in 1996 when compared with 1995 resulted
from increased interest expense and payments of accrued expenses. At
December 31, 1996, the Company's OEM customers (including IBM) accounted for 75%
of the accounts receivable. See 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. The Class A and Class B Subordinated
Promissory Notes bore interest at a rate of 7% per annum, provided for quarterly
interest payments and required the repayment of all principal and any accrued
and unpaid interest upon the consummation of certain liquidity events, including
the Company's IPO. As of December 31, 1996 the Company had outstanding
indebtedness of $20.0 million in principal amount of Class A and Class B
Subordinated Promissory Notes.

As part of the Leveraged Recapitalization, Kevin J. Hafer, the Company's
President and Chief Executive Officer, received 200,000 shares of the Company's
Series B Redeemable Preferred Stock. This Series B Redeemable Preferred Stock
was fully vested on January 1, 1997. The Company redeemed 80,000 shares of such
Series B Redeemable Preferred Stock on January 1, 1997 for $5.00 per share (an
aggregate of $400,000) and redeemed the balance of such shares for $5.00 per
share (an aggregate of $600,000) upon the consummation of the Company's IPO.

In February 1997, the Company consummated the IPO. The net proceeds to
the Company from the IPO were approximately $28.4 million. Of that amount,
$20.0 million were used to repay the indebtedness evidenced by the Class A
and Class B Subordinated Promissory Notes, and $600,000 were used to redeem
the balance of Mr. Hafer's Series B Redeemable Preferred Stock. Approximately
$5.6 million of the net proceeds from the IPO were used by the Company in
February 1997 to repay long-term bank debt of the Company incurred in
connection with the Leveraged Recapitalization. Because of the early
retirement of the long-term debt, the Company's statement of operations in
the first quarter of 1997 (and for the year ended December 31, 1997) will
reflect an extraordinary loss for the write-off of deferred financing costs
of approximately $220,000 associated with the subordinated promissory notes
and long-term bank debt.

After repayment of the Class A and Class B Subordinated Promissory Notes
and long-term bank debt, redemption of 120,000 shares of Series B Redeemable
Preferred Stock from Mr. Hafer and payment of IPO expenses (including $190,000
of Directors and Officers insurance policy 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 remaining proceeds from the IPO, will be sufficient to fund its
operations through 1997.

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<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

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-17
</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

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

BALANCE SHEETS

DECEMBER 31, 1995 AND 1996

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 2,676,290 $ 2,118,887
Accounts receivable, net of allowance for doubtful accounts.......................... 4,499,404 6,170,193
Inventories.......................................................................... 1,257,772 1,653,011
Prepaid expenses..................................................................... 124,047 130,218
Deferred tax assets.................................................................. 60,000 800,700
----------- -----------
Total current assets............................................................... 8,617,513 10,873,009
----------- -----------
Property and equipment, at cost:
Leasehold improvements............................................................... -- 4,677
Furniture and office equipment....................................................... 125,846 273,831
Computer and other equipment......................................................... 159,330 380,334
----------- -----------
285,176 658,842
Less accumulated depreciation........................................................ 86,089 195,959
----------- -----------
199,087 462,883
----------- -----------
Other assets........................................................................... 231,400 617,255
----------- -----------
Total assets........................................................................... $ 9,048,000 $11,953,147
----------- -----------
----------- -----------

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.................................................... $ 674,125 $ 504,349
Accounts payable..................................................................... 930,265 530,525
Accrued wages and commissions........................................................ 1,739,703 554,352
Accrued warranty costs............................................................... -- 630,000
Other accrued expenses............................................................... 343,337 282,040
Deferred revenue..................................................................... 280,302 --
----------- -----------
Total current liabilities.......................................................... 3,967,732 2,501,266
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
----------- -----------
Total liabilities.................................................................... 29,590,720 27,628,315
----------- -----------
Commitments and contingencies
Preferred stock, Series A redeemable and convertible, no par value, 300,000 shares
authorized, issued and outstanding................................................. 2,205,000 2,205,000
Preferred stock, Series B redeemable, no par value; 200,000 shares authorized, issued
and outstanding.................................................................... 1,000,000 1,000,000
----------- -----------
Shareholders' equity (deficit):
Preferred stock, 100,000 shares authorized, no shares issued and outstanding
Common stock, no par value; 10,000,000 shares authorized; 5,600,000 and 6,260,016
shares issued and outstanding........................................................ 295,000 648,260
Deferred compensation................................................................ (1,000,000) (93,431)
Accumulated deficit.................................................................. (23,042,720) (19,434,997)
----------- -----------
Total shareholders' equity (deficit)................................................. (23,747,720) (18,880,168)
----------- -----------
Total liabilities and shareholders' equity (deficit)................................. $ 9,048,000 $11,953,147
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 7,310,565 $ 19,670,619 $ 33,621,936
Cost of sales........................................................ 4,493,275 10,635,672 19,238,965
------------ ------------- -------------
Gross profit..................................................... 2,817,290 9,034,947 14,382,971
------------ ------------- -------------
Research and development............................................. 277,878 913,027 965,030
Sales and marketing.................................................. 370,264 1,631,075 2,481,356
General and administrative........................................... 1,235,657 2,753,763 3,608,897
------------ ------------- -------------
Total operating expenses......................................... 1,883,799 5,297,865 7,055,283
------------ ------------- -------------
Income from operations........................................... 933,491 3,737,082 7,327,688
------------ ------------- -------------
Interest income (expense), net....................................... 7,023 (186,302) (1,859,170)
------------ ------------- -------------
Income from continuing operations before income taxes................ 940,514 3,550,780 5,468,518
Benefit (provision) for income taxes................................. -- 52,000 (1,860,795)
------------ ------------- -------------
Income from continuing operations................................ 940,514 3,602,780 3,607,723
Discontinued operations:
Income from discontinued service operations........................ 601,064 -- --
------------ ------------- -------------
Net income....................................................... $ 1,541,578 $ 3,602,780 $ 3,607,723
------------ ------------- -------------
------------ ------------- -------------
Pro forma data (Note 1):
Historical net income.............................................. $ 1,541,578 $ 3,550,780 $ 5,468,518
Pro forma provision for income taxes............................... 524,137 1,207,265 1,860,795
------------ ------------- -------------
Pro forma net income............................................... $ 1,017,441 $ 2,343,515 $ 3,607,723
------------ ------------- -------------
------------ ------------- -------------
Pro forma income per share......................................... $ 0.20 $ 0.40
------------- -------------
------------- -------------
Weighted average shares used in computing pro forma net income per
share............................................................ 11,491,932 9,091,932
------------- -------------
------------- -------------
</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)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<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)
----------- ------------- ------------- -------------- --------------
----------- ------------- ------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
APEX PC SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $1,541,578 $3,602,780 $3,607,723
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 43,530 60,288 154,225
Amortization of deferred compensation.................................... -- -- 1,077,143
Loss on disposal of equipment............................................ 2,583 10,614 --
Deferred taxes........................................................... -- (52,000) (732,200)
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
Changes in:
Accounts receivable.................................................... (163,136) (3,052,603) (1,976,682)
Inventories............................................................ (197,083) (919,748) (610,239)
Prepaid expenses....................................................... (45,346) (71,579) (6,171)
Other assets........................................................... -- (10,922) (69,231)
Accounts payable....................................................... 294,061 543,079 (399,740)
Accrued wages and commissions.......................................... 19,796 1,592,713 (1,185,351)
Accrued warranty costs................................................. -- -- 630,000
Other accrued expenses................................................. (52,495) 226,028 (61,297)
Deferred revenue....................................................... -- 280,302 (280,302)
--------- ---------- ---------
Total adjustments.................................................... (98,090) (1,363,828) (2,882,950)
--------- ---------- ---------
Net cash provided by operating activities............................ 1,443,488 2,238,952 724,773
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment............................................ 1,839 -- --
Purchases of equipment..................................................... (25,718) (166,217) (373,666)
--------- ---------- ---------
Net cash used in investing activities................................ (23,879) (166,217) (373,666)
--------- ---------- ---------
Cash flows from financing activities:
Distributions paid......................................................... (792,279) (992,815) --
Principal payments on notes to shareholder................................. (249,845) (4,569,322) (270,000)
Proceeds from the issuance of long-term debt............................... -- 16,000,000 --
Payment of long-term debt.................................................. -- (1,347) (404,215)
Payment of loan fees....................................................... -- (220,478) (45,000)
Proceeds from issuance of Series A redeemable and convertible preferred
stock.................................................................... 2,205,000 --
Proceeds from issuance of common stock and exercise of common stock
options.................................................................. -- 294,000 126,684
Payment of deferred offering costs......................................... -- (315,979)
Redemption of common stock................................................. -- (12,499,000) --
--------- ---------- ---------
Net cash provided by (used in) financing activities.................. (1,042,124) 216,038 (908,510)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................... 377,485 2,288,773 (557,403)
Cash and cash equivalents at beginning of period............................. 10,032 387,517 2,676,290
--------- ---------- ---------
Cash and cash equivalents at end of period................................... $ 387,517 $2,676,290 $2,118,887
--------- ---------- ---------
--------- ---------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................................... $ 23,295 $ 186,817 $1,912,583
--------- ---------- ---------
--------- ---------- ---------
Cash paid for Federal income taxes......................................... $ -- $ -- $2,531,962
--------- ---------- ---------
--------- ---------- ---------
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 $ --
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.

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

NOTES TO FINANCIAL STATEMENTS

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, respectively, to a group of
investors. At the same time, the investors loaned the Company $10,000,000
evidenced by Class A Subordinated Notes.

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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").

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 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).

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 $9.00 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 presented.

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 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.

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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

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.

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>

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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.

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.......................................................... $ 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.................................... 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................................. 19,113 14,898
------------- -------------
26,289,113 25,614,898
Less current portion........................................... 674,125 504,349
------------- -------------
$ 25,614,988 $ 25,110,549
------------- -------------
------------- -------------
</TABLE>

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

5. SUBORDINATED AND LONG-TERM DEBT, CONTINUED:
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. 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.

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

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 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

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

8. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
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.

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.

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. STOCK OPTIONS, CONTINUED:
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, 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 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-
WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE
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>

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

9. STOCK OPTIONS, CONTINUED:
The following table presents net income and per share amounts for the year
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"), 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 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

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. INCOME TAXES, CONTINUED:
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>

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>

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

NOTES TO FINANCIAL STATEMENTS, CONTINUED

11. INCOME TAXES, CONTINUED:
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 provision
for income taxes 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.

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 EVENT:

Subsequent to December 31, 1996, 24,000 options to purchase common stock
were issued at an exercise price of $2.10 per share. The Company recorded
deferred compensation of $99,600 related to those options in January 1997.

F-18

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

-27-

<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Executive Officers and Directors

The executive officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------ --- --------
<S> <C> <C>
Kevin J. Hafer . . . . . . . . . . . . . . . . . . . 39 President, Chief Executive Officer and Director
Douglas A. Bevis . . . . . . . . . . . . . . . . . . 51 Vice President, Chief Financial Officer and Secretary
Christopher L. Sirianni. . . . . . . . . . . . . . . 42 Vice President, Sales and Marketing
Sterling Crum. . . . . . . . . . . . . . . . . . . . 42 Director
Jeffrey T. Chambers. . . . . . . . . . . . . . . . . 42 Director
William McAleer. . . . . . . . . . . . . . . . . . . 45 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, since
November 1993 Mr. Crum has 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 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.

-28-

<PAGE>

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.

-29-

<PAGE>

ITEM 10. 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>
ANNUAL COMPENSATION LONG-TERM 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 "Certain Relationships and Related 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
NAME NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE EXPIRATION
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE PER DATE
GRANTED(#)(1) IN FISCAL YEAR SHARE ----------
------------- -------------- ------
<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 were vested and had been exercised by Mr. Hafer. Of
the remaining 325,036 shares subject to options, 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.

-30-

<PAGE>

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

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 VALUE OF UNEXERCISED
NUMBER OF (MARKET PRICE AT UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
SHARES ACQUIRED EXERCISE LESS OPTIONS AT FISCAL YEAR END YEAR END
NAME ON EXERCISE 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.

-31-

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth as of March 15, 1997 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 "Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act Executive Officers
and Directors" and (iv) all executive officers and directors of the Company as a
group. 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>
NAME OF BENEFICIAL OWNER(1) SHARES PERCENTAGE
- ---------------------------- ------ -----------
<S> <C> <C>
Sterling Crum(2) . . . . . . . . . . . . . . . . . . . . . . . . . 3,786,000 31.1%

TA Group(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,774,000 31.0
c/o TA Associates, Inc.
125 High Street
High Street Tower, Suite 2500
Boston, MA 02110
Britannia Holdings Limited . . . . . . . . . . . . . . . . . . . . 2,574,000 21.2
P.O. Box 556
Main Street
Charleston, Nevis
Kevin J. Hafer . . . . . . . . . . . . . . . . . . . . . . . . . . 331,844 2.7
Christopher L. Sirianni(4) . . . . . . . . . . . . . . . . . . . . 66,000 *
Douglas A. Bevis(5). . . . . . . . . . . . . . . . . . . . . . . . 25,750 *
Jeffrey T. Chambers(6) . . . . . . . . . . . . . . . . . . . . . . 17,032 *
William McAleer. . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 *
Edwin L. Harper. . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 *
All directors and executive officers as a group (7 persons)(7) . . 4,250,626 34.9%
</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, 20031 142nd
Avenue, N.E., Woodinville, Washington 98072.

(2) Includes 2,574,000 shares beneficially owned by Britannia Holdings Limited
("Britannia"), 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.

(3) Includes (i) 2,265,321 shares of Common Stock owned by Advent VII L.P.,
(ii) 1,242,627 shares of Common Stock owned by Advent Atlantic and Pacific
II L.P., (iii) 226,538 shares of Common Stock owned by Advent New York L.P.
and (iv) 39,514 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
exception of those shares held by TA Venture Investors Limited Partnership;
individually, no stockholder, director or officer of TA Associates, Inc. is

-32-

<PAGE>

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 39,514 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
5,032 shares as to which he holds a pecuniary interest.

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

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

(6) Includes 12,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable at $0.18375 per share and 5,032 shares
beneficially owned by Mr. Chambers through TA Venture Investors Limited
Partnership, of which the 5,032 shares beneficially owned by Mr. Chambers
through TA Venture Investors Limited Partnership are included in the
3,774,000 shares described in Note (3) 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.

(7) Includes 23,576 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. See Notes (2), (4) and (6) above.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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.

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
certain "Qualified Liquidity Events," which included the IPO. In connection
with the Leveraged Recapitalization, the Company, the TA Group, Sterling Crum,
Kevin J. Hafer, the

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<PAGE>

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. 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 certain "Qualified Liquidity Events," which included 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. This escrow arrangement expired in February 1997, and
all escrowed funds were disbursed.

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 a "Qualified Public Offering," including the IPO.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS.

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------
3.1 Amended and Restated Articles of Incorporation. Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration No. 333-17753).
3.2 Amended and Restated Bylaws. Incorporated by reference to the Company's
Registration Statement on Form S-8 (Registration No. 333-24011).
4.1 See Article III of Exhibit 3.1 and Articles II, IV and IX of Exhibit 3.2
10.1 Registration Rights Agreement dated December 29, 1995. Incorporated by
reference to the Company's Registration Statement on Form SB-2
(Registration No. 333-17753).
10.2 S Corporation Indemnification Agreement dated December 29, 1995.
Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-17753).
10.3 Employment Agreement dated December 29, 1995 by and between the Company
and Kevin J. Hafer. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).
10.4 Credit Agreement dated December 28, 1995 by and between the Company and
U.S. Bank of Washington, National Association. Incorporated by reference
to the Company's Registration Statement on Form SB-2 (Registration No.
333-17753).
10.5 Lease Agreement dated March 22, 1995 by and between the Company and
Christopher L. Clark. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).

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<PAGE>

10.6 Purchase Agreement dated September 19, 1994 by and between the Company
and Compaq Computer Corporation. Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration No.
333-17753).+
10.7 Private Label Agreement dated September 8, 1994 by and between the
Company and Wright Line, Inc. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).+
10.8 Form of the Company's Proprietary Information and Noncompetition
Agreement. Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 333-17753).
10.9 1995 Employee Stock Plan. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).
10.10 Form of Nonstatutory Stock Option Letter Agreement related to 1995
Employee Stock Plan. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).
10.11 Employee Stock Purchase Plan. Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-17753).
10.12 Letter Agreements dated October 16, 1996 and October 24, 1996 by and
between the Company and Pioneer Standard Electronics, Inc. Incorporated
by reference to the Company's Registration Statement on Form SB-2
(Registration No. 333-17753).+
10.13 Stock and Subordinated Note Purchase Agreement dated December 29, 1995.
Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-17753).
10.14 Class A Subordinated Promissory Notes dated December 29, 1995.
Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-17753).
10.15 Class B Subordinated Promissory Note dated December 29, 1995.
Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-17753).
11.1 Computation of Pro Forma Income Per Share. Incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration No. 333-
17753).
24.1 Power of Attorney (set forth on pages 51 and 52 and incorporated herein
by reference).
- -----------

+ Confidential treatment requested for portions of these agreements.

(b) REPORTS ON FORM 8-K.

None.

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<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

APEX PC SOLUTIONS, INC.
By:

/s/ Kevin J. Hafer
------------------------------
Kevin J. Hafer
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: April 21, 1997

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Apex PC Solutions, Inc. do
hereby constitute and appoint Kevin J. Hafer, and Douglas A. Bevis, and each of
them, the lawful attorney and agent or attorneys and agents with power and
authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable Apex PC Solutions, Inc. to comply
with the Securities Exchange Act of 1934, as amended, and any rules or
regulations or requirements of the Securities Exchange Act of 1934, as amended,
and any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Form 10-KSB Report. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned officers and directors
in the capacities indicated below to this Form 10-KSB Report of amendments or
supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.

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<PAGE>

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ----- -----
<S> <C> <C>
/s/ Kevin J. Hafer
- --------------------------- President and Chief Executive Officer
Kevin J. Hafer and Director (Principal Executive Officer) April 21, 1997

/s/ Douglas A. Bevis
- --------------------------- Vice President, Chief Financial Officer
Douglas A. Bevis (Principal Financial and Accounting Officer) April 21, 1997

/s/ Jeffrey T. Chambers
- ---------------------------
Jeffrey T. Chambers Director April 21, 1997

/s/ Sterling Crum
- ---------------------------
Sterling Crum Director April 21, 1997

/s/ Edwin L. Harper
- ---------------------------
Edwin L. Harper Director April 21, 1997

/s/ William McAleer
- ---------------------------
William McAleer Director April 21, 1997

</TABLE>

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