DUNN COMPUTER CORP /VA/, DEF 14A, 1999-05-04

DUNN COMPUTER CORP /VA/
DEF 14A, 1999-05-04
ELECTRONIC COMPUTERS

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<PAGE>

SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

DUNN COMPUTER CORPORATION
-------------------------
(Name of Registrant as Specified in its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1).

1) Title of each class of securities to which transaction applies:

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

2) Aggregate number of securities to which transaction applies:

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

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):

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

4) Proposed maximum aggregate value of transaction:

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

5) Total fee paid:

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[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

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

2) Form, Schedule or Registration Statement No.:

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3) Filing Party:

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4) Date Filed:

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<PAGE>

DUNN COMPUTER CORPORATION
1306 SQUIRE COURT
STERLING, VIRGINIA 20166

MAY 3, 1999

Dear Stockholder:

You are cordially invited to attend the annual meeting of the
shareholders of Dunn Computer Corporation, a Virginia corporation (the
"Company") to be held at 10:00 a.m. on June 15, 1999, at its offices at 1306
Squire Court, Sterling, Virginia. A Notice of Annual Meeting of Shareholders,
Proxy Statement and proxy card are enclosed for your review. All holders of
shares of common stock of the Company as of the close of business on May 3, 1999
(the record date) are entitled to notice of, and to vote at, the meeting.

The business of the meeting is to (i) elect the persons to serve as
Class I directors of the Company to serve a term of three years; (ii) vote on
the adoption of an Employee Stock Purchase Plan; (iii) vote on an amendment to
the Company's existing Stock Option Plan to increase the number of shares of
common stock issuable upon exercise of option granted pursuant to the Stock
Option Plan from 2,200,000 to 2,500,000; and (iv) approve the appointment of
Ernst & Young LLP as independent accountants of the Company for the fiscal year
ending October 31, 1999.

While shareholders may exercise their right to vote their shares in
person, we recognize that many shareholders may not be able to attend the Annual
Meeting. Accordingly, we have enclosed a proxy which will enable you to vote
your shares on the issues to be considered at the Annual Meeting even if you are
unable to attend. All you need to do is mark the proxy to indicate your vote,
date and sign the proxy, and return it in the enclosed postage-paid envelope as
soon as conveniently possible. If you desire to vote in accordance with
management's recommendations, you need not mark your votes on the proxy but need
only sign, date and return the proxy in the enclosed postage-paid envelope in
order to record your vote.

If you would like to attend the meeting and your shares are held by a
broker, bank or other nominee, you must bring to the meeting a recent brokerage
statement or a letter from the nominee confirming your beneficial ownership of
the shares. You must also bring a form of personal identification. In order to
vote your shares at the meeting, you must obtain from the nominee a proxy in
your name.

Sincerely,

/S/ Thomas P. Dunne

May 3, 1999 Chairman, Chief Executive Officer, and President

<PAGE>

Sterling, Virginia

<PAGE>

DUNN COMPUTER CORPORATION

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 15, 1999

TO THE SHAREHOLDERS OF DUNN COMPUTER CORPORATION:

NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the
"Annual Meeting") of Dunn Computer Corporation (the "Company"), will be held at
10:00 a.m. on June 15, 1999, at the offices of the Company at 1306 Squire Court,
Sterling Virginia 21066, for the following purposes:

1. To elect two Class I directors to serve for the following
three years and until their successors are duly elected;

2. To approve the Company's Employee Stock Purchase Plan;

3. To approve an amendment to the Dunn Computer Corporation 1997
Stock Option Plan to increase the number of shares of the
Company's common stock available for issuance under the plan
from 2,200,000 to 2,500,000;

4. To approve the appointment of Ernst & Young LLP as independent
accountants of the Company for the fiscal year ending October
31, 1999; and

5. To consider and transact such other business as may properly
and lawfully come before the Annual Meeting or any adjournment
thereof.

All of the foregoing is more fully set forth in the Proxy Statement
accompanying this Notice.

The Board of Directors has fixed the close of business on May 3, 1999
as the record date for the determination of the shareholders entitled to notice
of and to vote at the annual meeting and any adjournments or postponements
thereof. Only holders of record of the Company's common stock on the record date
are entitled to vote at the meeting. A list of such shareholders will be
available at the time and place of the meeting and, during the ten days prior to
the meeting, at the office of the Secretary of the Company at the above address.

You can ensure that your shares are voted at the meeting by signing and
dating the enclosed proxy and returning it in the envelope provided. Sending in
a signed proxy will not affect your right to attend the meeting and to vote in
person. You may revoke your proxy at any time before it is voted by notifying
Continental Stock Transfer & Trust Company in writing before the meeting, or by
executing a subsequent proxy, which revokes your previously executed proxy. The
address for the Continental Stock Transfer & Trust Company is 2 Broadway, New
York, New York 10004.

<PAGE>

WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.

By Order of the Board of Directors

/S/ Thomas P. Dunne
May 3, 1999 Chairman, Chief Executive Officer and
Sterling, Virginia President

<PAGE>

[LOGO]

ANNUAL MEETING OF SHAREHOLDERS
JUNE 15, 1999

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

PROXY STATEMENT

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

The enclosed proxy is solicited on behalf of the Board of Directors of
Dunn Computer Corporation (the "Company") for the annual meeting of shareholders
(the "Annual Meeting") to be held at 10:00 a.m. on June 15, 1999 at the
Company's headquarters, located at 1306 Squire Court, Sterling, Virginia 20166,
or any adjournment or adjournments thereof, for the purposes set forth herein
and in the accompanying Notice of Annual Meeting. These proxy solicitation
materials were mailed on or about May 3, 1999 to all shareholders entitled to
vote at the meeting.

GENERAL INFORMATION

RECORD DATE; OUTSTANDING SHARES

Only shareholders of record at the close of business on May 3, 1999
(the "Record Date"), are entitled to receive notice of and to vote at the Annual
Meeting. The outstanding voting securities of the Company as of such date
consisted of 8,991,493 shares of common stock, $.001 par value. For information
regarding stock ownership by management and holders of more than 5% of the
outstanding common stock, see "Securities Ownership of Certain Beneficial Owners
and Management."

VOTING OF PROXIES AND REVOCABILITY

All shares presented by properly executed proxies will be voted in
accordance with the specifications on the proxy. IF NO SUCH SPECIFICATIONS ARE
MADE ON AN EXECUTED PROXY, THE PROXY WILL BE VOTED FOR THE ELECTION OF THE
NOMINESS FOR DIRECTORS LISTED UNDER THE CAPTION "ELECTION OF DIRECTORS," FOR THE
APPROVAL OF THE EMPLOYEE STOCK PURCHASE PLAN, FOR THE AMENDMENT TO THE 1997
STOCK OPTION PLAN AND FOR THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999.
A stockholder who has given a proxy pursuant to this proxy solicitation may
revoke it at any time before it is exercised by giving written notice thereof
prior to the meeting to the

<PAGE>

Company's transfer agent, Continental Stock Transfer & Trust Company, or by
signing and returning a later dated proxy, or by voting in person at the
meeting. Sending in a signed proxy will not affect a stockholder's right to
attend the meeting and vote in person. However, mere attendance at the meeting
will not, in and of itself, have the effect of revoking the proxy.

The Company has not received any shareholder proposals for inclusion in
this proxy statement. If any other matter or matters are properly presented for
action at the meeting, the persons named in the enclosed proxy card and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment, unless such authorization is withheld.

REQUIRED VOTE

The holder of each outstanding share of common stock as of the record
date is entitled to one vote on each matter to be voted on at the Annual
Meeting. With respect to the election of directors, the holder of each
outstanding share of common stock as of the record date is entitled to one vote
for as many persons as there are directors to be elected, however shareholders
do not have a right to cumulate their votes for directors. The candidates for
election as directors will be elected by the affirmative vote of a plurality of
the shares of common stock present in person or by proxy and actually voting at
the meeting. The affirmative vote of a majority of shares of common stock of the
Company voted at the meeting in person or by proxy is required for the adoption
of the Employee Stock Purchase Plan, the amendment of the Company's 1997 Stock
Option Plan, and any other matter that may properly come before the meeting.

THE MATTERS TO BE CONSIDERED AT THE MEETING ARE OF GREAT IMPORTANCE AND
THE SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION
PRESENTED IN THIS PROXY AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

SOLICITATION OF PROXIES

The cost of soliciting proxies will be borne by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees, without
additional compensation personally or by telephone, telecopy, or electronic
mail. We have hired Continental Stock Transfer & Trust Company to assist in the
solicitation process. The Company estimates the cost of solicitation to be
$1,800.00.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

Votes cast by proxy or in person at the meeting will be tabulated by
the election inspectors appointed for the meeting, who will determine whether or
not a quorum is present. The presence in person or by proxy of shareholders
entitled to vote a majority of the outstanding shares of common

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<PAGE>

stock will constitute a quorum. Shares represented by a proxy or in person at
the meeting, including shares represented by proxies that reflect abstentions,
will be counted as present in the determination of a quorum. An abstention as to
any particular matter, however, does not constitute a vote "for" or "against"
such matter. "Broker non-votes" (i.e. where a broker or nominee submits a proxy
specifically indicating the lack of discretionary authority to vote on a matter)
will be treated in the same manner as abstentions.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS

Proposals of shareholders of the Company which are intended to be
presented by such shareholders at the Company's 2000 annual meeting must be
received by the Company no later than January 3, 2000 in order to be included in
the proxy statement and form of proxy relating to that meeting. Any such
proposal should be addressed to the Company's Chief Financial Officer and
delivered to the Company's principal executive offices at 1306 Squire Court,
Sterling, Virginia 21066. Pursuant to the Company's BI Laws any proposal
received by the Company after February 2, 2000 will be considered untimely and
may not be presented to the shareholders at the Company's 2000 annual meeting.

ANNUAL REPORT

The Company's Annual Report to Shareholders, which includes its Annual
Report on Form 10-K for the fiscal year ended October 31, 1998, is enclosed with
this Proxy Statement. The Annual Report contains financial and other information
about the activities of the Company, but is not incorporated into this Proxy
Statement and should not be considered part of this proxy soliciting materials.

ELECTION OF DIRECTORS
(PROPOSAL 1)
GENERAL

The Directors of the Company are divided into three classes with
staggered terms. Two Directors, the Class I Directors, are to be elected at the
1999 Annual Meeting to serve for three-year terms and until their successors are
elected and duly qualified. John D. Vazzana and Claudia N. Dunne have been
nominated by the Board of Directors for re-election to the Board of Directors at
the Annual Meeting. Unless authorization is withheld, the persons named, as
proxies will vote FOR the election of the nominees of the Board of Directors
named above. Each nominee has agreed to serve if elected. In the event that any
nominee shall unexpectedly be unable to serve, the proxies will be voted for
such other person as the Board of Directors may designate.

In fiscal year 1998, the Board of Directors met 7 times. All directors
attended at least 75% of the meetings.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" EACH OF
THE NOMINEES.

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<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information regarding the directors,
including the nominees, and executive officers of the Company:

NAME AGE POSITION
- ---- --- --------

<S> <C> <C>
Thomas P. Dunne 56 Chairman of the Board, Chief Executive Officer, and
President

John D. Vazzana 55 Executive Vice President, Chief Financial Officer, Director

Claudia N. Dunne 39 Vice President, Director

VADM E. A. Burkhalter, Jr. USN 69 Director

Daniel Sinnott 64 Director
</TABLE>

All Directors are elected to staggered three-year terms. Each Director
holds office until a successor is elected and qualified unless the Director
dies, resigns, or is removed from office. Executive officers hold office until
their successors are chosen and qualified, subject to earlier removal by the
Board of Directors. There are currently five Directors on the Company's Board of
Directors. Set forth below is a biographical description of each executive
officer and Director of the Company:

THOMAS P. DUNNE has been Chairman, Chief Executive Officer and President of Dunn
since he founded the company in 1987. As a Class III director, the current term
of Mr. Dunne on the Board of Directors is until the first annual meeting after
fiscal year 2000. From 1982 to 1987, Mr. Dunne was the Director of Sales of
Syntrex, Inc., a corporation that supplies computer hardware and software to the
legal profession. Prior thereto, Mr. Dunne spent 12 years with the computer
division of Perkin Elmer Corporation, where he held several positions, including
Director of North American Sales. Mr. Dunne also served in the United States
Army for two years where he was a Senior Instructor with the Army Electronics
Command. Mr. Dunne is married to Claudia N. Dunne, the Vice President of the
Company.

JOHN D. VAZZANA has been the Executive Vice President, Chief Financial Officer,
and a Director of Dunn since 1994. From 1992 to 1994, Mr. Vazzana was the Chief
Executive Officer of Hitchler Industry; a manufacturer of plastic lumber made
from recycled plastic. From 1986 to 1992, Mr. Vazzana was founder and Chief
Executive Officer of NRM Steelastic, a company engaged in the manufacture of
capital equipment for the tire industry. Prior thereto, Mr. Vazzana was
Executive Vice President of C3, Inc., a federal computer systems integrating
company, which he joined in 1974.

CLAUDIA N. DUNNE, a co-founder of Dunn, has been Vice President and a Director
of Dunn since its inception. From 1985 to 1987, Ms. Dunne was a Federal Proposal
Manger for Syntrex, Inc. From 1983 to 1985, Ms. Dunne was Proposal Manager for
Harris and Paulson, which also sold minicomputers and proprietary time and
accounting software for law firms. Ms. Dunne is married to Thomas P. Dunne, the
President of the Company.

VICE ADMIRAL E. A. BURKHALTER, JR., USN (RET.) has been a Director of Dunn since
January 1997. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc.; a consulting firm providing

4
<PAGE>

services in the areas of international and domestic strategy, management policy
and technology applications, for both government and industry. Mr. Burkhalter
spent 40 years as a member of the United Stated Navy, during which time he held
several positions, including Director of Strategic Operations for the Chairman
of the Joint Chiefs of Staff. He is currently the Chairman of the Attorney
General's Policy Advisory Panel for Law Enforcement Technology, a member of the
Director of Central Intelligence (DCI) Military Advisory Panel and an advisor to
the Defense Intelligence Agency. He is also an Officer and Director of the Navy
Submarine League.

DANIEL SINNOTT has been a Director of Dunn since January, 1997. As a Class II
director, Mr. Sinnott's term is until the first annual meeting after fiscal year
1999. Mr. Sinnott is currently a consultant with Worldwide Internet Solutions,
Inc. ("WIZnet"). WIZnet provides electronic catalogs and adaptive recognition
search technology and facilitates electronic commerce linking buyers and sellers
via secure mail. From 1995 until March 1998, Mr. Sinnott was Chief Executive
Officer of WIZnet. In 1991 Mr. Sinnott was a founder of Sinnott Bruno & Company
("SB&C"). SB&C is a management consulting firm providing advisory services to
executive and management organizations that are in the emerging transition
stages of development. Mr. Sinnott worked full time with SB&C from 1991 until
joining WIZnet in 1995.

COMMITTEES OF THE BOARD

The Company's Board of Directors has an Audit Committee, comprised of
the two outside Directors. In fiscal year 1998, the Audit Committee met 2 times.
The Audit Committee reviews and approves the scope of the annual audit
undertaken by the Company's independent certified public accountants and meets
with them on a regular basis to review the progress and results of their work as
well as any recommendations they may make. The Company's Board of Directors also
has a Compensation Committee, comprised of the two outside Directors and Thomas
P. Dunne. In fiscal year 1998, the Compensation Committee met 2 times. All of
the members of each committee attended at least 75% of the meeting held by each
committee on which he served.

COMPENSATION OF DIRECTORS

Dunn has not paid, and the Company does not presently propose to pay,
compensation to any Director for acting in such capacity, except for nominal
sums for attending Board of Directors meetings and reimbursement for reasonable
expenses in attending those meetings. In January 1997, Dunn granted each of its
two outside Directors a stock option to purchase 20,000 shares of Dunn's common
stock at an exercise price of $4.15 per share. The Company believes the exercise
price of $4.15 per share was the fair market value at the time of the grants. In
January 1999, Dunn granted each of its two outside Directors a stock option to
purchase an additional 10,000 shares of Dunn's common stock at an exercise price
of $5.375 per share. The Company believes the exercise price of $5.375 per share
was the fair market value at the time of the grants. All of the options granted
to the outside directors were pursuant to the Company's 1997 Stock Option Plan
described below. See "Executive Compensation - Incentive Stock Option Plan".

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding
compensation paid by the Company during each of the last two fiscal years to the
Company's Chief Executive Officer and to each of the Company's executive
officers who earned in excess of $100,000 ("Named Officers").

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<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
---------------------- NUMBER OF OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) GRANTED
- -------------------------------------------------------------- --------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
Thomas P. Dunne............................................... 1996 $ 240,000 $ 275,000 -0-
Chairman, Chief Executive 1997 $ 240,000 -0- -0-
Officer and President 1998 $ 240,000 -0- -0-
John D. Vazzana............................................... 1996 $ 240,000 $ 275,000 -0-
Executive Vice President, Chief 1997 $ 240,000 -0- -0-
Financial Officer, and Director 1998 $ 240,000 -0- -0-
George D. Fuster.............................................. 1996 -0- -0- -0-
President of IDP and Director 1997 -0- -0- -0-
1998 $ 100,000 300,000
D. Oscar Fuster............................................... 1996 -0- -0- -0-
Executive Vice President of 1997 -0- -0- -0-
IDP and Director 1998 $ 100,000 -0- 300,000
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information related to options granted to
the Named Officers during fiscal 1998.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
- -----------------------------------------------------------------------------------------------------
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF APPRECIATION FOR
UNDERLYING TOTAL OPTIONS/ EXERCISE
OPTIONS/ SAR'S GRANTED TO OR BASE OPTION TERM
SAR'S GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
(A) (B) (C) (D) (E) (F) (G)
- ---------------------------------------- -------------- ----------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
D. Oscar Fuster......................... 300,000 34.7% 8.75 5/1/2008 14.25 22.70
George D. Fuster........................ 300,000 34.7% 8.75 5/1/2008 14.25 22.70

<CAPTION>
ALTERNATIVE
TO (F) AND
- ---------------------------------------- (G): GRANT
DATE VALUE
-----------
GRANT DATE
PRESENT
VALUE
NAME $
(A) (H)
- ---------------------------------------- -----------
<S> <C>
D. Oscar Fuster.........................
George D. Fuster........................
</TABLE>

<PAGE>

EMPLOYMENT AGREEMENTS

The Company has employment agreements with Thomas P. Dunne and John D.
Vazzana. The agreements for Mr. Vazzana and Mr. Dunne run for a term of three
years commencing April 1997 and automatically renew for additional one year
terms unless terminated by either Dunn or the employee. Both agreements provide
for a $240,000 salary and a bonus at the discretion of Dunn's Board of
Directors. The bonus may not exceed the lesser of 5% of the Company's pre-tax
income for the preceding fiscal year or $250,000.

The Company entered into employment agreements with George D. Fuster
and D. Oscar Fuster on May 1, 1998, the date of the IDP Acquisition. Each
agreement had a three year term and provided for a $200,000 annual salary, an
annual bonus, and a stock option to purchase up to 300,000 shares, under certain
conditions, of the Company's common stock, at $8.50 per share, exercisable as to
50% of the shares subject to the Option on November 1, 1998, and as to the
remaining 50% on May 1, 1999. The employment agreements with the Fusters were
terminated by agreement between the Company and each of the Fusters on November
23, 1998. The termination agreements provided that the Company pay each of the
Fusters $250,000 in severance pay.

INCENTIVE STOCK OPTION PLAN

Under Dunn's 1997 Stock Option Plan (the "Option Plan"), options to
purchase a maximum of 2,200,000 shares of common stock of Dunn (subject to
adjustments in the event of stock splits, stock dividends, recapitalizations and
other capital adjustments) may be granted to employees, officers and directors
of Dunn and certain other persons who provide services to Dunn. A description of
the Option Plan is set forth below under the heading "Proposal to Amend the 1997
Stock Option Plan."

EMPLOYEE STOCK PURCHASE PLAN

In August, 1998, the Board adopted an Employee Stock Purchase Plan (the
"Purchase Plan") whereby employees may purchase Company stock through a payroll
deduction plan. The purchase price of the stock is 85% of the market price. All
employees, including officers but not directors, are eligible to participate in
this plan. None of the Named Officers participated in this plan during fiscal
1998. The current executive officers are presently ineligible to participate in
the plan because their stock ownership exceeds five percent of the outstanding
common stock. This plan is subject to the approval of the shareholders and is
summarized below under the heading "Proposal to Adopt the Employee Stock
Purchase Plan."

RETIREMENT PLANS

Dunn established a discretionary contribution plan effective November
1, 1995 (the "401(k) Plan") for its employees who have completed one month of
service with Dunn. The 401(k) Plan is administered by Benefit Plan Services,
Inc. and permits pre-tax contributions by participants pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), up to the
maximum allowable contributions as determined by the Code. Dunn may match
participants' contributions on a discretionary basis. In fiscal 1995 and 1996,
Dunn contributed $0.25 for each $1.00 contributed by the employee. The Company
contributed $1,800 in fiscal 1998 with respect to each of Mr. Dunne and Mr.
Vazzana in connection with their participation in the 401(k) Plan.

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<PAGE>

Effective November 1, 1995, Dunn established a defined benefit plan
covering substantially all salaried employees who have completed twelve months
of service with Dunn (the "Pension Plan"). The Pension Plan benefits are based
on the years of service and the employee's compensation. Dunn contributes, on an
annual basis, amounts sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974 ("ERISA").
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. The
assets of the Pension Plan are invested in money markets and investment-grade
corporate debt and equity instruments. Dunn contributed an aggregate of
approximately $250,000 for the Pension Plan years ending October 31, 1995, 1996,
1997, 1998, which amount met the minimum funding requirements under ERISA. Dunn
has accrued, but not yet paid, $64,400, which amount represents its minimum
funding requirements under ERISA for fiscal 1998.

A participant's benefit under the Pension Plan is calculated as the
lesser of (i) the average of such participant's last three years' salary
multiplied by 40 percent, or (ii) $60,000. The estimated annual benefits under
the Pension Plan payable upon retirement at normal retirement age for each of
Dunn's Executive Officers is $60,000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Board of Directors has a Compensation Committee comprised
of VADM Burkhalter, Mr. Sinnott and Mr. Dunne. Mr. Dunne is the Chief Executive
Officer and Chairman of the Board of the Company.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's officer compensation policy is to offer a package that
includes a competitive salary, an incentive bonus based upon achievement of the
Company's financial objectives and of individual performance goals, and
competitive benefits. The Company also encourages broad-based employee ownership
of Company stock through a stock option program in which key employees, who own
less than 5% of the outstanding stock, are eligible to participate. The
Company's compensation policy for officers is similar to that for other
employees, and is designed to promote continued performance and attainment of
corporate and personal goals. None of the executive officers are eligible for
employee stock options.

The Compensation Committee of the Board of Directors (comprised of two
non-employee directors and the CEO) reviews and approves individual officer
salaries, bonus plan financial performance goals and bonus plan allocations. The
Committee also reviews guidelines for compensation, bonus, and stock option
grants for all employees. Officers of the Company are paid salaries in line with
their responsibilities and experience. These salaries are structured to be
within the range of salaries paid by competitors in the computer and other
relevant industries.

Executive officers also participate in a cash bonus plan. Each
executive officer is eligible for financial performance bonuses of up to 5% of
pre-tax income of the Company, not to exceed $250,000, or 104% of base salary.

The Compensation Committee annually reviews and approves the
compensation of Thomas Dunne, the Chief Executive Officer. Mr. Dunne
participates in the bonus plan, with his bonus tied to pre-tax income goals. His
maximum possible bonus for fiscal 1998 was 104% of his base salary. Based on the
Company's performance for fiscal 1998, Mr. Dunne was awarded no cash bonus for
fiscal 1998.

8
<PAGE>

COMPENSATION COMMITTEE
Thomas P. Dunne
Daniel E. Sinnott
VADM E.A. Burkhalter, Jr., USN (Ret.)

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return on the
Company's common stock since its public offering with the Russell 2000 Index and
the Nasdaq Computer and Data Index during the same period. The graph shows the
value, at the end of each fiscal quarter, or $100 invested in the Company's
common stock or the indices on April 28, 1997, the date of the Company's initial
public offering, and assumes reinvestment of all dividends. The graph depicts
the change in the value of the Company's common stock relative to the noted
indices as of the end of each fiscal quarter and not for any interim period.
Historical stock price performance is not necessarily indicative of future stock
performance.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
DNCC RUSSEL 3000 INDEX NASDAQ INDEX
<S> <C> <C> <C>
May-97 100.00 100.00 594.750
Aug-97 80.88 107.24 687.550
Nov-97 97.06 113.26 664.950
Feb-98 97.80 123.99 761.300
May-98 94.86 127.71 742.880
Aug-98 41.18 109.35 713.800
Oct-98 33.82 125.37 857.760
</TABLE>

DUNN COMPUTER CORPORATION STOCK PERFORMANCE CHART

<TABLE>
<CAPTION>
MEASUREMENT PERIOD DUNN CLOSING PRICE* NASDAQ INDEX
- ---------------------------------------------------------- ------------------- -------------
<S> <C> <C>
May-97................................................. 8.50 100.00
Aug-97................................................ 6.88 115.60
Nov-97................................................ 8.25 111.80
Feb-98................................................ 8.31 128.00
May-98................................................ 8.06 124.91
Aug-98................................................ 3.50 120.02
Oct-98................................................ 2.88 144.22

Amount invested........................................... 100.00
IPO Price............................................... 8.50
</TABLE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of the date
hereof, with respect to the beneficial ownership of the common stock by each
beneficial owner of more than 5% of the outstanding shares thereof, by each
director, each nominee to become a director and each executive named in the
Summary Compensation Table and by all executive officers, directors and nominees
to become directors of the Company.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
- ------------------------------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
Thomas P. Dunne (1)........................................................... 2,474,375(2) 27.5%
John D. Vazzana (1)........................................................... 1,064,875 11.8%
Claudia N. Dunne (1).......................................................... 2,474,375(3) 27.5%
VADM E.A. Burkhalter (1)...................................................... 20,000(4) *
Daniel Sinnott (1)............................................................ 20,000(4) *
D. Oscar Fuster............................................................... 525,000(6) 5.8%
George D. Fuster.............................................................. 175,000(6) 1.9%
All Executive Officers and Directors as a Group............................... 4,239,250(5) 47.0%
</TABLE>

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

* persons less than 1%

(1) The address of each of such individuals is c/o Dunn Computer Corporation,
1306 Squire Court, Sterling Virginia 21066.

(2) Includes 560,000 shares of Common Stock held by Claudia Dunne, the Company's
Vice President, and Mr. Dunne's wife, of which Mr. Dunne disclaims
beneficial ownership.

(3) Includes 1,914,375 shares of Common Stock held by Thomas Dunne, the
Company's President and CEO, and Ms. Dunne's husband, of which Ms. Dunne
disclaims beneficial ownership.

(4) Represents shares of the Company's Common Stock underlying stock options
granted pursuant to the 1997 Stock Option Plan.

(5) Does not include 40,000 shares of Common Stock underlying options which are
held by the Company's two outside directors. Does include 150,000 shares of
common stock underlying options which are held by each of D. Oscar Fuster
and George D. Fuster exercisable within 60 days.

(6) Includes 150,000 shares of Common Stock underlying options which are held by
each of D. Oscar Fuster and George D. Fuster which are exercisable within 60
days.

9
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company leases its 35,000 foot facility from C&T Partnerships, an
entity owned and controlled by Thomas and Claudia Dunne, both affiliates of the
Company. The lease agreement terminates in October 1999. Rent expense under this
lease was $154,000 for each of the years ended October 31, 1997 and 1998. In
addition, the mortgage on the facility of approximately $1,000,000, which has a
25 year term and bears interest at 2% over prime, was guaranteed by the Company
in fiscal 1997.

Future transactions with affiliates will be on terms no less favorable
than could be obtained from unaffiliated parties and will be approved by a
majority of the independent and/or disinterested members of the Board of
Directors.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than 10% of the Company's common stock to file reports of ownership and
changes in ownership of the Company's common stock with the Securities and
Exchange Commission and Nasdaq. Based solely on a review of the copies of such
reports and written representations from the reporting persons that no other
reports were required, the Company believes that during the fiscal year ended
October 31, 1998, its executive officers, directors and greater than ten percent
shareholders filed on a timely basis all reports due under Section 16(a) of the
Exchange Act, with the following exception: George D. Fuster who served as
President of IDP and a Director of Dunn until November 23, 1998 and D. Oscar
Fuster who served as Executive Vice President of IDP and a Director of Dunn
until November 23, 1998 should both have filed Forms 4 and 5 and, to the
Company's knowledge, are presently delinquent in doing so.

APPROVAL OF THE
EMPLOYEE STOCK PURCHASE PLAN
(PROPOSAL 2)

In August, 1998, the Board of Directors of the Company first adopted
the Dunn Computer Corporation Employee Stock Purchase Plan (the "Stock Purchase
Plan"). The Stock Purchase Plan provides a method whereby employees of the
Company and its subsidiary corporations have the opportunity to acquire a
proprietary interest in the Company through the purchase of shares of the common
stock of the Company. The Stock Purchase Plan is subject to the approval of the
shareholders.

The Board of Directors believes that it is in the best interests of the
Company to adopt the Stock Purchase Plan and recommends that the shareholders
approve the proposed plan. The affirmative vote of the majority of votes cast at
the Annual Meeting will be required to approve the Stock Purchase Plan.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO ADOPT
THE EMPLOYEE STOCK PURCHASE PLAN.

10
<PAGE>

SUMMARY OF THE EMPLOYEE
STOCK PURCHASE PLAN

The essential terms of the Stock Purchase Plan are summarized below but
the discussion is qualified in its entirety by reference to the Stock Purchase
Plan, the full text of which is attached as Appendix A.

GENERAL INFORMATION

The Stock Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code (the "Code"), permits eligible employees to
purchase the Company's common stock through payroll deductions at a price equal
to 85% of the lower of the fair market value of the common stock on the first
business day or on the last business day of each six-month offering period.

PURPOSE

The purpose of the Stock Purchase Plan is to promote the long-range
success of the Company. The Stock Purchase Plan gives eligible employees of the
Company and certain designated subsidiaries (each a "Designated Subsidiary") an
opportunity to purchase common stock of the Company through payroll deductions
in order to provide them with a personal stake in the Company and to assist the
Company in securing new employees and retaining the services of existing
employees.

ADMINISTRATION

The Stock Purchase Plan is administered by the Compensation Committee
of the Board of Directors. All questions of interpretation or application of the
Stock Purchase Plan are determined by the Compensation Committee.

ELIGIBILITY AND PARTICIPATION

The Stock Purchase Plan provides that employees are eligible if they
are employed by the Company or a Designated Subsidiary on the first day of a
six-month offering period (and continue to be employed on the last day of such
offering period). No person who owns stock and/or holds options (including under
the Stock Purchase Plan) for in excess of 5% of the total combined voting power
or value of all classes of stock of the Company is eligible to participate in
the Stock Purchase Plan.

SHARES SUBJECT TO THE STOCK PURCHASE PLAN

Up to a maximum of 300,000 shares of the Company's common stock may be
sold pursuant to options granted under the Stock Purchase Plan. If any option
granted under the Stock Purchase Plan terminates without having been exercised,
the stock not purchased under the option shall again become available for the
Stock Purchase Plan. The stock subject to the Stock Purchase Plan may be
unissued shares, reacquired shares bought on the market or otherwise or shares
purchased by a designated broker.

GRANTS OF OPTIONS AND PURCHASE PRICE

Prior to the beginning of each six-month offering period, the Company
grants to eligible employees options to purchase shares of the Company's common
stock under the Stock Purchase Plan

11
<PAGE>

through an after-tax payroll deduction program. Offering periods commence on
February 15th and August 15th of each year. The purchase price is 85% of the
fair market value of the common stock on the first business day (the
"Commencement Date") or on the last business day (the "Exercise Date") of the
six-month offering period, whichever is less.

EXERCISE OF OPTIONS

Under the Stock Purchase Plan, an eligible employee's option to
purchase common stock will be exercised automatically on the Exercise Date
unless the employee has notified the Company, in writing on such form as the
Compensation Committee prescribes, that the employee wishes to withdraw his or
her account prior to that date.

LIMITATION ON NUMBER OF SHARES AND TREATMENT OF DIVIDENDS

No eligible employee may purchase more than 2,500 shares of the common
stock under the Stock Purchase Plan in any one six-month offering period.
Additionally, the maximum number of shares that may be purchased by all
employees during an offering period is 75,000, plus any carryover from a prior
period. If the total number of shares for which options are exercised on any
exercise date exceeds the maximum number of shares for the applicable offering,
the Company shall make a pro rata allocation of the shares available for
distribution among eligible participants in a uniform and equitable manner, as
determined by the Committee. Any cash in an employee's payroll deduction account
in excess of the amount needed to purchase the maximum number of shares
available to him or her in an offering will be refunded following the offering
period.

WITHDRAWAL AND TERMINATION

An employee's participation in the Stock Purchase Plan will be
terminated when he or she (i) voluntarily withdraws from the Stock Purchase Plan
by giving written notice to the Human Resources Department, or (ii) terminates
employment with the Company or a Designated Subsidiary for any reason. Upon such
termination, all payroll deductions in a participant's account which have not
been used to purchase stock will be refunded without interest to the
participant. In the event of the participant's death, such refund will be made
to his or her designated beneficiary, if any, or otherwise to the participant's
estate. A participant who voluntarily withdraws from the current offering period
will be eligible to participate again in the next offering period, if such
participant is otherwise eligible.

TRANSFER AND ASSIGNMENT

A participant may not assign, transfer, pledge or otherwise dispose of
in any way any rights to purchase common stock under the Stock Purchase Plan,
except by will or the laws of descent and distribution. Any such attempt may be
treated by the Company as an election to withdraw from the Stock Purchase Plan.

ADJUSTMENT UPON CHANGES IN CAPITALIZATION

If the outstanding shares of common stock of the Company have
increased, decreased, changed into, or been exchanged for a different number or
kind of shares or securities of the Company as a result of reorganization,
merger, recapitalization, reclassification, stock split, reverse stock split or
similar transaction, appropriate and proportionate adjustments may be made by
the Compensation Committee in the number and/or kind of shares which are subject
to purchase under outstanding options and on the option exercise price or prices
applicable to such outstanding options. In addition,

12
<PAGE>

in any such event, the maximum number and/or kind of shares which may be offered
in the offerings may also be proportionately adjusted by the Compensation
Committee. No adjustments shall be made for stock dividends. For this purpose,
any distribution of shares to shareholders in an amount aggregating 20% or more
of the outstanding shares shall be deemed a stock split and any distributions of
shares aggregating less than 20% of the outstanding shares shall be deemed a
stock dividend.

Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the Compensation Committee may take such action as it deems
appropriate and equitable, including any of the following: (i) refund of payroll
deductions for such offering period; (ii) shortening of the offering period or
(iii) entitling each option holder to receive at the next Exercise Date upon the
exercise of such option, the cash, securities and/or property which a holder of
a like number of shares of the common stock was entitled to receive in such
transaction.

AMENDMENT AND TERMINATION OF THE STOCK PURCHASE PLAN

The Board of Directors of the Company may amend or terminate the Stock
Purchase Plan at any time. Unless sooner terminated, the Stock Purchase Plan
will continue in effect only so long as shares authorized by the shareholders
remain available for issuance thereunder, but no later than August 4, 2008. No
amendment may be made to the Stock Purchase Plan without approval of the
shareholders of the Company if the amendment would (i) change the class of
employees eligible to participate in the Stock Purchase Plan or (ii) except as
provided under the section entitled "Adjustment Upon Changes in Capitalization,"
increase the maximum number of shares available under the Stock Purchase Plan.
Upon termination, the Stock Purchase Plan permits the Company to refund payroll
deductions or accelerate the grant and exercise date of options. Except as
provided above, the termination or amendment of the Stock Purchase Plan will not
adversely affect an employee's rights under an outstanding option without his or
her consent.

ERISA AND OTHER QUALIFICATIONS

The Stock Purchase Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 and is not qualified as a
pension or a profit-sharing plan under Section 401(a) of the Code.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of certain of the federal income tax
consequences to individuals acquiring stock under the Stock Purchase Plan. The
following summary is based upon federal income tax laws in effect on April 30,
1999 and is not intended to be complete or describe any state or local tax
consequences. Participants are encouraged to seek advice from their own tax
counsel with respect to their own particular tax consequences.

No income will be taxable to a participant until the shares purchased
under the Stock Purchase Plan are sold or otherwise disposed of. Upon sale or
other disposition of the shares, the participant will generally be subject to
tax and the amount of the tax will depend upon the holding period. If the shares
are sold or otherwise disposed of more than two (2) years from the first day of
the offering period and more than one (1) year from the date of transfer of the
stock to the participant (the "Statutory Holding Periods"), then the participant
will recognize ordinary income measured as the lesser of (i) the excess of the
fair market value of the shares at the time of such sale or disposition

13
<PAGE>

over the purchase price, or (ii) an amount equal to 15% of the fair market value
of the shares as of the first day of the offering period. Any additional gain
will be treated as long-term capital gain, currently taxed at a maximum federal
rate of 20%. If the shares were sold after the Statutory Holding Period for less
than the purchase price, any loss recognized would be a long term capital loss.
If the shares are sold or otherwise disposed of before the expiration of the
Statutory Holding Periods, the participant will recognize ordinary income
generally measured as the excess of the fair market value of the shares on the
date the shares are purchased over the purchase price. Any additional gain or
loss on such sale or disposition will be long-term if the stock was held for
more than 12 months and short term if not. The Company is not entitled to a
deduction for amounts taxed as ordinary income or capital gain to a participant
except to the extent ordinary income is recognized by participants upon a sale
or disposition of shares prior to the expiration of the Statutory Holding
Periods described above.

PLAN BENEFITS

Non-executive employees commenced participation in the Purchase Plan on
August 15, 1998. None of the Named Officers are presently eligible to
participate in the Purchase Plan due to the large percentage of the outstanding
stock beneficially owned by each such officer. Directors are not eligible to
participate in the Plan. The initial six-month offering period under the plan
ended on February 12, 1999 at which time the Company sold 16,549 shares of
common stock to the participants at a price per share of $3.82. The closing bid
price on such date for the common stock as reported on the Nasdaq National
Market was $4.50. Accordingly, the value to the non-executive participants as a
group of their participation in the Purchase Plan for the six-month period ended
February 12, 1999 was approximately $74,470.50.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE STOCK PURCHASE PLAN.

PROPOSAL TO AMEND
THE 1997 STOCK OPTION PLAN
(PROPOSAL 3)

On January 6, 1997, the Board of Directors and the shareholders of the
Company first adopted the Dunn Computer Corporation 1997 Stock Option Plan (the
"Option Plan"). The Option Plan provides for the granting of options to acquire
common stock to officers and other employees of Dunn and its subsidiaries and to
non-employee directors, consultants, advisors and other persons who may perform
significant services for or on behalf of Dunn. At the last Annual Meeting of
shareholders on April 31, 1998, the shareholders approved the increase of the
number of shares of common stock subject to issuance under the Option Plan from
600,000 to 2,200,000. On April 7,1999, the Board of Directors approved the
further increase of the number of shares of common stock subject to issuance
under the Option Plan to 2,500,000. This further increase is subject to
stockholder approval.

The Board of Directors believes that it is in the best interests of the
Company to continue the Option Plan and recommends that the shareholders approve
an amendment to the 1997 Stock Option Plan to increase the cumulative aggregate
number of shares of common stock subject to issuance thereunder from a maximum
of 2,200,000 to 2,500,000.

The affirmative vote of the holders of a majority of the outstanding
shares of common stock present in person or by proxy at the annual meeting will
be required to approve the amendment of the 1997 Stock Option Plan.

14
<PAGE>

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND
THE 1997 STOCK OPTION PLAN.

STOCK OPTION PLAN SUMMARY

The following is a brief description of material features of the Option
Plan of the Company. The following summary is qualified in its entirely by
reference to the Option Plan which is attached as Appendix B hereto and
incorporated herein by reference.

ADMINISTRATION

The Option Plan provides that it is to be administered by the Board of
Directors or a committee of the Board of Directors comprised of "non-employee
directors" within the meaning of Rule 16b-3 promulgated by the Commission
pursuant to the Exchange Act (the "Plan Committee"). To date, all actions with
respect to the Option Plan have been taken by the full Board of Directors of
Dunn.

OPTIONS AUTHORIZED

The Option Plan authorizes the grant of both incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Code, and
stock options that do not qualify for treatment as Incentive Stock Options
("Non-qualified Options"). The exercise price of each Incentive Stock Option
granted under the Option Plan is to be not less than 100% of the fair market
value of the stock subject to the option on the date the option is granted (or
110% in the case of an Incentive Stock Option granted to an employee owning more
than 10% of the voting stock of the company granting the option). The exercise
price of each Non-qualified Option granted under the Option Plan is to be not
less than 85% of the fair market value of the stock subject to the option on the
date the option is granted.

Each option granted under the Plan is to be evidenced by a written
stock option agreement between the company granting the option and the option
holder. Each stock option agreement is to set forth, among other terms not
inconsistent with the Option Plan, when the option subject thereto is to be
exercisable and when it will expire. An Incentive Stock Option granted under the
Option Plan may not be exercisable after the expiration of ten years after the
date such option is granted. Each option granted under the Option Plan must
become exercisable in full no later than ten years after such option is granted,
and each option must become exercisable as to at least 10% of the shares covered
thereby on each anniversary of the date such option is granted.

If the shares covered by the Option Plan are changed into, or exchanged
for, cash or a different number or kind of shares or securities of any
corporation through a reorganization, merger, recapitalization,
reclassification, stock split-up, reverse stock split, stock dividend, stock
consolidation, stock combination, stock reclassification or similar transaction,
an appropriate adjustment shall be made by the Committee in the number and kind
of shares as to which options may be granted.

In the discretion of the Board of Directors or the Plan Committee at
the time an option granted under the Plan is exercised, the exercise price may
be paid in full (1) in cash or by check, (2) by interest-bearing promissory note
of the option holder (subject to any limitations of applicable state
corporations law) delivered at the time of exercise, or (3) subject to certain
limitations, by delivery of

15
<PAGE>

shares of the company's stock or other property. The Board of Directors or the
Plan Committee may permit, subject to certain regulatory limitations, so-called
cashless exercises, which involve the payment of the exercise price from the
proceeds of the contemporaneous sale of the shares being issued pursuant to the
exercise of the option.

The Board of Directors or the Plan Committee may at any time suspend,
amend or terminate the Plan, except that without approval of the shareholders
given within twelve months before or after such action, no action of the Board
of Directors or the Plan Committee may materially increase the benefits accruing
to participants under the Option Plan, materially increase the number of
securities that may be issued under the Option Plan, or materially modify the
requirements as to eligibility for participation in the Plan.

ELIGIBILITY

Officers and other employees of the Company, non-employee directors,
consultants and advisors and other persons who may perform significant services
on behalf of the Company are eligible to be granted options under the Option
Plan. Incentive Stock Options may be granted only to persons who are "employees"
within the meaning of Section 3401(c) of the Code.

FEDERAL INCOME TAX CONSEQUENCES

The following is a brief summary of certain of the federal income tax
consequences to individuals receiving grants of awards under the Option Plan.
The following summary is based upon federal income tax laws in effect in April,
1999 and is not intended to be complete or describe any state or local tax
consequences.

NON-QUALIFIED STOCK OPTIONS. In general, (i) no income will be
recognized by an optionee at the time a non-qualified stock option is granted;
(ii) at exercise, ordinary income will be recognized by the optionee in an
amount equal to the difference between the option price paid for the shares and
the fair market value of the shares, if unrestricted, on the date of exercise;
and (iii) at sale, appreciation (or depreciation) after the date of exercise
will be treated as a capital gain (or loss).

INCENTIVE STOCK OPTIONS. No income generally will be recognized by an
optionee upon the grant or exercise of an Incentive Stock Option. If shares of
common stock are issued to the optionee pursuant to the exercise of an Incentive
Stock Option, and if no disqualifying disposition of such shares is made by such
optionee within two years after the date of grant or within one year after the
transfer of such shares to the optionee, then upon sale of such shares, any
amount realized in excess of the option price will be taxed to the optionee as a
capital gain and any loss sustained will be a capital loss.

If shares of common stock acquired upon the exercise of an incentive
stock option are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to the excess (if any) of the fair market
value of such shares at the time of exercise (or, if less, the amount realized
on the disposition of such shares if a sale or exchange) over the option price
paid for such shares. Any further gain (or loss) realized by the optionee
generally will be treated as a capital gain (or loss).

TAX CONSEQUENCES TO THE COMPANY. To the extent that a participant
recognizes ordinary income in the circumstances described above, the Company
should be entitled to a corresponding deduction, provided, among other things,
such income meets the test of reasonableness, is an ordinary

16
<PAGE>

and necessary business expense, is not an "excess parachute payment" within the
meaning of Section 280G of the Code and is not disallowed by the $1million
limitation on certain executive compensation.

PLAN BENEFITS

The proposed amendment to the Option Plan, had it been in effect for
fiscal year ended October 31, 1998, would not have changed the awards that were
actually made thereunder in fiscal 1998. The Company cannot determine at this
time the allocation of options to any participants for fiscal 1999.

The Company granted no options to any of the Named Executive Officers
or any of its directors under the Option Plan during fiscal 1998. The Company
awarded 720,250 options to all non-executive officer employees as a group in
fiscal 1998 at exercise prices equal to or exceeding the fair market value of
the common stock subject to the option on the date of grant. The actual value,
if any, a person may realize will depend on the excess of the stock price of the
exercise price on the date the option is exercised. The weighted average
exercise price of the 720,250 stock options granted to employees during fiscal
1998 is $4.50 per share. On April 28, 1999, the last reported closing price of
the common stock on the Nasdaq National Market was $2.125.

RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
ACCOUNTANTS (PROPOSAL 4)

Management has selected Ernst & Young LLP as the independent
accountants to audit the books, record and accounts of the Company for the
current fiscal year ending October 31, 1999. Ernst & Young LLP has audited the
Company's financial statements since 1996.

The affirmative vote of the holders of a majority of the Company's
common stock represented and voting at the meeting will be required to ratify
the Board of Director's selection of Ernst & Young LLP.

A representative of Ernst & Young LLP is expected to be present at the
Annual Meeting and will have the opportunity to make a statement, and will be
available to answer questions from shareholders.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS.

OTHER MATTERS

There is no reason to believe that any other business will be presented
at the Annual Meeting; however, if any other business should properly and
lawfully come before the Annual Meeting, the proxies will vote in accordance
with their best judgment.

BY ORDER OF THE BOARD OF DIRECTORS

May 3, 1999 /S/ Thomas P. Dunne

17
<PAGE>

Sterling, Virginia Chairman, Chief Executive Officer and
President

<PAGE>

APPENDIX A

DUNN COMPUTER CORPORATION
EMPLOYEE STOCK PURCHASE PLAN

ARTICLE I
PURPOSE

1.01. PURPOSE. The DUNN COMPUTER CORPORATION Employee Stock Purchase
Plan is intended to provide a method whereby employees of DUNN COMPUTER
CORPORATION (the "Company") and its subsidiary corporations will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of the Common Stock of the Company. It is the intention of
the Company to have the Plan qualify as an "employee stock purchase plan" under
ss.423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.

ARTICLE II
DEFINITIONS

2.01 BASE PAY. "Base Pay" means regular straight-time earnings
excluding payments for overtime, shift premium, bonuses and other special
payments, commissions and other marketing incentive payments.

2.02 BOARD. "Board of Directors" or "Board" means the Board of
Directors of the Company.

2.03 COMMITTEE. "Committee" means the individuals described in Article
XI.

2.04 COMMON STOCK. "Common Stock" means the common stock of the
Company.

2.05 DESIGNATED SUBSIDIARY CORPORATION. "Designated Subsidiary
Corporation" means a Subsidiary Corporation which is designated by the Company's
Board of Directors to participate in the Plan.

2.06 EMPLOYEE. "Employee" means any person who is employed by the
Company or a Designated Subsidiary Corporation.

2.07 SUBSIDIARY CORPORATION. "Subsidiary Corporation" means any present
or future corporation which would be a "subsidiary corporation" of the Company
as that term is defined in ss.424 of the Code.

A-1
<PAGE>

ARTICLE III
ELIGIBILITY AND PARTICIPATION

3.01 INITIAL ELIGIBILITY. All Employees are eligible to participate
hereunder, commencing on any Offering Commencement Date.

3.02 COMMENCEMENT OF PARTICIPATION. An eligible Employee may become a
participant by completing an authorization for a payroll deduction on the form
provided by the Company and filing it with the office of the Human Resources
Director of the Company on or before the date set therefor by the Committee,
which date shall be prior to the Offering Commencement Date for the Offering (as
such terms are defined below). Payroll deductions for a participant shall
commence on the applicable Offering Commencement Date when his authorization for
a payroll deduction becomes effective and shall end on the Offering Termination
Date of the Offering to which such authorization is applicable unless sooner
terminated by the participant as provided in Article VIII.

3.03 RESTRICTIONS ON PARTICIPATION. Notwithstanding any provision of
the Plan to the contrary, no Employee shall be granted an option to participate
in the Plan:

(a) if, immediately after the grant, such Employee would own
stock, and/or hold outstanding options to purchase stock, possessing 5% or more
of the total combined voting power or value of all classes of stock of the
Company or any Subsidiary Corporation. (For purposes of this paragraph, the
rules of ss.424(d) of the Code shall apply in determining stock ownership of any
Employee); or

(b) which permits his rights to purchase stock under all
employee stock purchase plans of the Company and its Subsidiary Corporations to
accrue at a rate which exceeds $25,000 in fair market value of the stock
(determined at the time such option is granted) for each calendar year in which
such option is outstanding.

3.04 LEAVE OF ABSENCE. For purposes of participation in the Plan, a
person on leave of absence shall be deemed to be an Employee for the first 90
days of such leave of absence and such Employee's employment shall be deemed to
have terminated at the close of business on the 90th day of such leave of
absence unless such Employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business on such
90th day. Termination by the Company of any Employee's leave of absence, other
than termination of such leave of absence on return to full time or part time
employment, shall terminate an Employee's employment for all purposes of the
Plan and shall terminate such Employee's participation in the Plan and right to
exercise any option.

ARTICLE IV
OFFERINGS

4.01 SEMI-ANNUAL OFFERING PERIODS.

(a) Offering Periods. The Plan will be implemented by
Offerings in consecutive Offering Periods, each constituting a six month period.
Such Offering Periods shall continue until the termination of the Plan in
accordance with Section 12.05. The first such Offering

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Period shall be the six month period beginning on August 15, 1998, and ending on
February 14, 1999. (Provided, however, that the first Offering Period will not
begin before the effective date of the registration statement filed by the
Company for the Plan with the Securities and Exchange Commission.) Subsequent
Offering Periods will begin on February 15th and August 15th of each year.

(b) Offering Commencement Date. The Offering Commencement Date
is the first day of an Offering Period during which the NASDAQ system is open
for trading.

(c) Offering Termination Date. The Offering Termination Date
is the last day of an Offering Period during which the NASDAQ System is open for
trading.

4.02 REVISED OFFERING PERIODS. In the discretion of the Committee,
semi-annual Offering Periods may be divided into quarterly Offering Periods or
combined into annual Offering Periods. The maximum number of shares available
during an Offering Period under Section 10.01 shall be adjusted appropriately.

ARTICLE V
PAYROLL DEDUCTIONS

5.01 AMOUNT OF DEDUCTION. At the time a participant files his
authorization for payroll deduction, he shall elect to have deductions made from
his pay on each payday during the Offering Period at the rate of 1, 2, 3, 4, 5,
6, 7, 8, 9 or 10% of his base pay in effect at any such payday.

5.02 PARTICIPANT'S ACCOUNT. All payroll deductions made for a
participant shall be credited to his account under the Plan. A participant may
not make any separate cash payment into such account except when on leave of
absence and then only as provided in ss.5.04.

5.03 CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue his
participation in the Plan as provided in Article VIII, but no other change can
be made during an Offering and, specifically, a participant may not alter the
amount of his payroll deductions for that Offering. The payroll deduction form
may provide that it shall continue from Offering Period to Offering Period
unless changed by a participant before the beginning of a subsequent Offering
Period.

5.04 LEAVE OF ABSENCE. If a participant goes on a leave of absence,
such participant shall have the right to elect: (a) to withdraw the balance in
his or her account pursuant to ss.7.02, (b) to discontinue contributions to the
Plan but remain a participant in the Plan, or (c) remain a participant in the
Plan during such leave of absence (provided the individual was eligible to
participate at the Offering Commencement Date), authorizing deductions to be
made from payments by the Company or its Designated Subsidiary Corporations to
the participant during such leave of absence and undertaking to make cash
payments to the Plan at the end of each payroll period to the extent that
amounts payable by the Company and its Designated Subsidiary Corporations to
such participant are insufficient to meet such participant's authorized Plan
deductions.

ARTICLE VI
GRANTING OF OPTION

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6.01 NUMBER OF OPTION SHARES. On the Offering Commencement Date of each
Offering, a participating Employee shall be deemed to have been granted a
qualified option to purchase on the Offering Termination Date of such Offering
Period (at the Option Price in Section 6.02) the number of shares of the
Company's Common Stock determined by dividing such Employee's payroll deductions
accumulated during such Offering Period and retained in the participant's
account as of the Offering Termination Date by the applicable Option Price.

6.02 OPTION PRICE. The Option Price of Common Stock purchased with
payroll deductions made during an Offering Period for a participant therein
shall be the lower of:

(a) 85% of the closing price of the stock on the Offering
Commencement Date, or (in the event the stock was not traded on such date) the
nearest prior business day on which trading of the Company's Common Stock
occurred, on the NASDAQ National Market System; or

(b) 85% of the closing price of the stock on the Offering
Termination Date, or (in the event the stock was not traded on such date) the
nearest prior business day on which trading of the Company's Common Stock
occurred, on the NASDAQ National Market System. If the Company's Common Stock is
not admitted to trading on the NASDAQ National Market System on any of the
aforesaid dates for which closing prices of the stock are to be determined, then
reference shall be made to the fair market value of the stock on that date, as
determined on such basis as shall be established or specified for the purpose by
the Committee.

ARTICLE VII
EXERCISE OF OPTION

7.01 AUTOMATIC EXERCISE. Unless a participant gives written notice to
the Company as hereinafter provided, his option for the purchase of stock with
payroll deductions made during any Offering will be deemed to have been
exercised automatically on the Offering Termination Date applicable to such
Offering, for the purchase of the number of full shares of Common Stock which
the accumulated payroll deductions in his account at that time will purchase at
the applicable Option Price, subject to the maximum stated in Section 10.01.
Except as provided in Section 7.03, any excess in his account at that time will
be refunded to him.

7.02 WITHDRAWAL OF ACCOUNT. By written notice to the Human Resources
Director of the Company, at any time prior to the Offering Termination Date
applicable to any Offering, a participant may elect to withdraw all of the
accumulated payroll deductions in his account at such time.

7.03 FRACTIONAL SHARES. Fractional shares will not be issued under the
Plan. Any accumulated payroll deductions which would have been used to purchase
fractional shares will be carried over and applied to purchase shares in the
succeeding Offering Period, if the Employee elects to participate in such
Offering Period. If not, such excess payroll deductions will be promptly
returned to the Employee.

7.04 TRANSFERABILITY OF OPTION. During a participant's lifetime,
options held by such participant shall be exercisable only by that participant.

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7.05 DELIVERY OF STOCK. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each participant,
as appropriate, the stock purchased upon exercise of his option.

ARTICLE VIII
WITHDRAWAL

8.01 IN GENERAL. As indicated in ss.7.02, a participant may withdraw
payroll deductions credited to his account under the Plan at any time prior to
an Offering Termination Date by giving written notice to the Human Resources
Director of the Company. All of the participant's payroll deductions credited to
his account will be paid to him promptly after receipt of his notice of
withdrawal, and no further payroll deductions will be made from his pay during
such Offering. The Company may, at its option, treat any attempt to borrow by an
Employee on the security of his accumulated payroll deductions as an election,
under ss.7.02, to withdraw such deductions.

8.02 EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal
from any Offering will not have any effect upon his eligibility to participate
in any succeeding Offering or in any similar plan which may hereafter be adopted
by the Company.

8.03 TERMINATION OF EMPLOYMENT. Upon termination of the participant's
employment for any reason, including retirement or death (but excluding
continuation of a leave of absence for a period beyond 90 days), the payroll
deductions credited to his account will be returned to him, or, in the case of
his death, to the person or persons entitled thereto under ss.12.01.

ARTICLE IX
INTEREST

9.01 NO PAYMENT OF INTEREST. No interest will be paid or allowed on any
money paid into the Plan or credited to the account of any participating
Employee.

ARTICLE X
STOCK

10.01 SHARES SUBJECT TO PLAN. The stock subject to the Plan shall be
shares of the Company's Common Stock, which may be (i) authorized but unissued
shares, (ii) treasury shares and/or (iii) shares purchased on the open market by
a broker designated by the Company. The maximum number of shares of Common Stock
which shall be issued under the Plan, subject to adjustment upon changes in
capitalization of the Company as provided in ss.12.04, shall be 75,000 shares in
each Offering plus in each Offering all unissued shares from prior Offerings,
whether offered or not, not to exceed 300,000 shares for all Offerings. No
participant may purchase more than 2,500 shares in any one Offering Period. If
the total number of shares for which options are exercised on any Offering
Termination Date in accordance with Article VI exceeds the maximum number of
shares for the applicable offering, the Company shall make a pro rata allocation
of the shares available for delivery and distribution in as nearly a uniform
manner as shall be practicable and as it shall determine to be equitable, and
the balance of payroll deductions credited to the account of each participant
under the Plan shall be returned to him as promptly as possible.

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10.02 PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have
no interest in stock covered by his option until such option has been exercised.

10.03 ISSUANCE OF STOCK. Stock purchased under the Plan will be issued
in the name of the participant, or, if the participant so directs by written
notice to the Human Resources Director of the Company prior to the Offering
Termination Date applicable thereto, in the names of the participant and one
such other person as may be designated by the participant, as joint tenants with
rights of survivorship or as tenants by the entireties, to the extent permitted
by applicable law.

10.04 RESTRICTIONS ON EXERCISE. The Board of Directors may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved for issuance upon the exercise of the option shall have
been duly listed, upon official notice of issuance, upon a stock exchange, and
that either:

(a) a registration statement under the Securities Act of 1933,
as amended, with respect to said shares shall be effective, or

(b) the participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company, that it is his
intention to purchase the shares for investment and not for resale or
distribution.

ARTICLE XI
ADMINISTRATION

11.01 APPOINTMENT OF COMMITTEE. The Board of Directors shall appoint a
committee (the "Committee") to administer the Plan, which shall consist of
either (a) the full Board of Directors or (b) no fewer than two members of the
Board of Directors.

11.02 AUTHORITY OF COMMITTEE. Subject to the express provisions of the
Plan, the Committee shall have plenary authority in its discretion to interpret
and construe any and all provisions of the Plan, to adopt rules and regulations
for administering the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan. The Committee's determination
on the foregoing matters shall be conclusive.

11.03 RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. The Board of
Directors may from time to time appoint members of the Committee in substitution
for or in addition to members previously appointed and may fill vacancies,
however caused, in the Committee. The Committee may select one of its members as
its Chairman and shall hold its meetings at such times and places as it shall
deem advisable and may hold telephonic meetings. A majority of its members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. The Committee may correct any defect or omission or
reconcile any inconsistency in the Plan, in the manner and to the extent it
shall deem desirable. Any decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.

11.04 LIMITED LIABILITY; INDEMNIFICATION. To the maximum extent
permitted by Virginia law, neither the Company, Board or Committee nor any of
its members shall be liable for any action or determination made in good faith
with respect to this Plan. In addition to such other rights of

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indemnification that they may have, the members of the Board and Committee shall
be indemnified by the Company to the maximum extent permitted by Virginia law
against any and all liabilities and expenses incurred in connection with their
service in connection with the Plan in such capacity.

ARTICLE XII
MISCELLANEOUS

12.01 DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any Common Stock which has not
been issued or cash which is in the participant's account at the time of the
participant's death. Such designation of beneficiary may be changed by the
participant at any time by written notice to the Human Resources Director of the
Company. Upon the death of a participant and upon receipt by the Company of
proof of identity and existence at the participant's death of a beneficiary
validly designated by him under the Plan, the Company shall deliver such stock
and/or cash to such beneficiary. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such stock
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such stock and/or cash
to the spouse or to any one or more dependents of the participant as the Company
may designate. No beneficiary shall, prior to the death of the participant by
whom he has been designated, acquire any interest in the stock or cash credited
to the participant under the Plan.

12.02 TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with ss.7.02.

12.03 USE OF FUNDS. All payroll deductions received or held by the
Company under this Plan may be used by the Company for any corporate purpose and
the Company shall not be obligated to segregate such payroll deductions.

12.04 ADJUSTMENT UPON CHANGES IN CAPITALIZATION.

(a) If, while any options are outstanding, the outstanding
shares of Common Stock of the Company have increased, decreased, changed into,
or been exchanged for a different number or kind of shares or securities of the
Company through reorganization, merger, recapitalization, reclassification,
stock split, reverse stock split or similar transaction, appropriate and
proportionate adjustments may be made by the Committee in the number and/or kind
of shares which are subject to purchase under outstanding options and on the
option exercise price or prices applicable to such outstanding options. In
addition, in any such event, the maximum number and/or kind of shares which may
be offered in the Offerings described in Articles IV and Section 10.01 hereof
shall also be proportionately adjusted. No adjustments shall be made for stock
dividends. For the purposes of this Paragraph, any distribution of shares to
shareholders in an amount aggregating 20% or more of the outstanding shares
shall be deemed a stock split and any distributions of shares aggregating less
than 20% of the outstanding shares shall be deemed a stock dividend.

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(b) Upon the dissolution or liquidation of the Company, or
upon a reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the Committee shall take such action as it deems
appropriate and equitable, which action may include, without limitation, one of
the following: (i) refund of payroll deductions for such Offering Period; (ii)
shortening of the Offering Period or (iii) providing that the holder of each
option then outstanding under the Plan will thereafter be entitled to receive at
the next Offering Termination Date upon the exercise of such option for each
share as to which such option shall be exercised, as nearly as reasonably may be
determined, the cash, securities and/or property which a holder of one share of
the Common Stock was entitled to receive upon and at the time of such
transaction. In the event the Plan is continued after such event, the Board of
Directors shall take such steps in connection with such transactions as the
Board shall deem necessary to assure that the provisions of this ss.12.04 shall
thereafter be applicable, as nearly as reasonably may be determined, in relation
to the said cash, securities and/or property as to which such holder of such
option might thereafter be entitled to receive.

12.05 AMENDMENT AND TERMINATION.

(a) Action by Board. The Board of Directors shall have
complete power and authority to terminate or amend the Plan; provided, however,
that the Board of Directors shall not, without the approval of the shareholders
of the Company (i) increase the maximum number of shares which may be issued
under the Plan or under any Offering (except pursuant to ss.ss.4.02 and 12.04);
or (ii) amend the requirements as to the class of employees eligible to purchase
stock under the Plan. Upon termination of the Plan during an Offering Period, at
the discretion of the Committee, cash balances in participants accounts may be
refunded or the Offering Termination Date may be accelerated. No termination,
modification, or amendment of the Plan may otherwise, without the consent of an
Employee then having an option under the Plan to purchase stock, adversely
affect the rights of such Employee under such option.

(b) Automatic Termination. The Plan shall automatically
terminate on the earlier of August 4, 2008, or the issuance of the maximum
number of shares available under the Plan pursuant to Section 10.01.

12.06 TAX WITHHOLDING. At the time an option is exercised or at the
time some or all of the Company's Common Stock issued under the Plan is disposed
of, the participant must make adequate provision for the Company's federal,
state, or other tax withholding obligations, if any, which arise upon the
exercise of the option or the disposition of the Common Stock. At any time, the
Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations.

12.07 DISQUALIFYING DISPOSITION. The Committee may require that a
participant notify the Company of any disposition of shares of Common Stock
purchased under the Plan within a period of two (2) years subsequent to the
respective Offering Commencement Date or one (1) year from the Offering
Termination Date.

12.08 EFFECTIVE DATE. The Plan shall become effective as of August 5,
1998, subject to approval by the holders of the majority of the Common Stock
present and represented at a special or annual meeting of the shareholders held
on or before August 4, 1999. If the Plan is not so approved, the Plan shall be
discontinued, any options which had been issued shall be considered nonqualified

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options and any payroll deductions then held by the Company shall be refunded to
the respective Employees.

12.09 NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly,
create in any Employee or class of Employees any right with respect to
continuation of employment by the Company, and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise modify,
an Employee's employment at any time.

12.10 EXCLUSION FROM RETIREMENT AND FRINGE BENEFIT COMPUTATION. No
portion of the award of options under this Plan, or the proceeds from the sale
of stock purchased under the Plan, shall be taken into account as "wages,"
"salary" or "compensation" for any purpose, whether in determining eligibility,
benefits or otherwise, under (i) any pension, retirement, profit sharing or
other qualified or non-qualified plan of deferred compensation, (ii) any
employee welfare or fringe benefit plan including, but not limited to, group
insurance, hospitalization, medical, and disability, or (iii) any form of
extraordinary pay including, but not limited to, bonuses, sick pay and vacation
pay.

12.11 EFFECT OF PLAN. The provisions of the Plan shall, in accordance
with its terms, be binding upon, and inure to the benefit of, all successors of
each Employee participating in the Plan, including, without limitation, such
Employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Employee.

12.12 EXPENSES. Expenses of administering the Plan shall be borne by
the Company except that brokerage expenses incurred in connection with the
purchase of shares shall be included as part of the cost of the shares to
participating Employees.

12.13 GOVERNING LAW. The law of the Commonwealth of Virginia will
govern all matters relating to this Plan except to the extent it is superseded
by the laws of the United States.

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APPENDIX B

DUNN COMPUTER CORPORATION
(A VIRGINIA CORPORATION)

STOCK OPTION PLAN

APRIL 1998

1. PURPOSE OF PLAN; ADMINISTRATION

1.1 PURPOSE.

The Dunn Computer Corporation Stock Option Plan (hereinafter, the
"Plan") is hereby established to grant to officers and employees of Dunn
Computer Corporation, a Virginia corporation (the "Company") or of its parents
or subsidiaries (as defined in Sections 424(e) and (f), respectively, of the
Internal Revenue Code of 1986, as amended (the "Code")), if any, and to
non-employees directors, consultants and advisors and other persons who may
perform significant services for or on behalf of the Company, a favorable
opportunity to acquire common stock, $.001 par value ("Common Stock"), of the
Company and, thereby, to create an incentive for such persons to remain in the
employ of or provide services to the Company and to contribute to its success.

The Company may grant under the Plan both incentive stock options
within the meaning of Section 422 of the Code ("Incentive Stock Options") and
stock options that do not qualify for treatment as Incentive Stock Options
("Nonstatutory Options"). Unless expressly provided to the contrary herein, all
references herein to "options," shall include both incentive Stock Options and
Nonstatutory Options.

This Plan is being adopted in connection with the merger of Dunn Merger
Corp., a Delaware corporation wholly owned by the Company, with Dunn Computer
Corporation, a Delaware corporation ("Dunn"), in which each outstanding share of
common stock of Dunn will be exchanged for a share of common stock of the
Company and each outstanding option under Dunn's 1997 Option Plan will be
converted into an option under this Plan. This Plan is, and will be interpreted
and applied as, the successor in such merger to Dunn's 1997 Stock Option Plan.

1.2 ADMINISTRATION.

The Plan shall be administered by the Board of Directors of the Company
(the "Board") if each member is a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
or a committee (the "Committee") of two or more directors, each of whom is a
Non-Employee

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Director. Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.

A majority of the members of the Committee shall constitute a quorum
for the purposes of the Plan. Provided a quorum is present, the Committee may
take action by affirmative vote or consent of a majority of its members present
at a meeting. Meetings may be held telephonically as long as all members are
able to hear one another, and a member of the Committee shall be deemed to be
present for this purpose if he or she is in simultaneous communication by
telephone with the other members who are able to hear on another. In lieu of
action at a meeting, the Committee may act by written consent of a majority of
its members.

Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option Agreements
(as defined in Section 3.4) entered into pursuant hereto and to define the terms
used therein, to prescribe, adopt, amend and rescind rules and regulations
relating to the administration of the Plan and to make all other determinations
necessary or advisable for the administration of the Plan; provided, however,
that the Committee may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper; and, provided, further, in its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under the Plan. Subject to the
express limitations of the Plan, the Committee shall designate the individuals
from among the class of persons eligible to participate as provided in Section
1.3 who shall receive options, whether an optionee will receive Incentive Stock
Options or Nonstatutory Options, or both, and the amount, price, restrictions
and all other terms and provisions of such options (which need not be
identical).

Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or the
Board shall be personally liable for any action, determination or interpretation
made in good faith with respect to the Plan, and all members of the Committee
shall be fully protected by the Company in respect of any such action,
determination or interpretation.

1.3 PARTICIPATION.

Officers and other employees of the Company, non-employee directors,
consultants and advisors and other persons who may perform significant services
on behalf of the Company shall be eligible for selection to participate in the
Plan upon approval by the Committee; provided, however, that only "employees"
(within the

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meaning of Section 3401(c) of the Code) of the Company shall be eligible for the
grant of Incentive Stock Options. An individual who has been granted an option
may, if otherwise eligible, be granted additional options if the Committee shall
so determine. No person is eligible to participate in the Plan by matter of
right; only those eligible persons who are selected by the Committee in its
discretion shall participate in the Plan.

1.4 STOCK SUBJECT TO THE PLAN.

Subject to the adjustment as provided in Section 3.5, the stock to be
offered under the Plan shall be shares of authorized but unissued Common Stock,
including any shares repurchased under the terms of the Plan or any Stock Option
Agreement entered into pursuant hereto. The cumulative aggregate number of
shares of Common Stock to be issued under the Plan shall not exceed 2,200,000,
subject to the adjustment as set forth in Section 3.5.

If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
this Section 1.4, where the exercise price of options is paid by means of the
grantee's surrender of previously owned shares of Common Stock, only the net
number of additional shares issued and which remain outstanding in connection
with such exercise shall be deemed "issued" for purposes of the Plan.

2. STOCK OPTIONS

2.1 EXERCISE PRICE; PAYMENT.

(a) The exercise price of each Incentive Stock Option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who at the time such
option is granted owns (within the meaning of section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of capital stock of
the Company, the option exercise price shall be at least 110% of the Fair Market
Value of Common Stock on the date of grant. The exercise price of each
Nonstatutory Option also shall be determined by the Committee, but shall not be
less than 85% of the Fair Market Value of Common Stock on the date of grant. The
status of each option granted under the Plan as either an Incentive Stock Option
or a Nonstatutory Option shall be determined by the Committee at the time the
Committee acts to grant the option, and shall be clearly identified as such in
the Stock Option Agreement relating thereto.

"Fair Market Value" for purposes of the Plan shall mean: (i) the
closing price of a share of Common Stock on the principal exchange on which
shares of Common Stock are then trading, if any, on the day immediately
preceding the date of grant, or, if shares were not traded on the day preceding
such date of grant, then on the next preceding trading day

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during which a sale occurred; or (ii) if Common Stock is not traded on an
exchange but is quoted on Nasdaq or a successor quotation system, (1) the last
sales price (if Common Stock is then listed on the Nasdaq Stock Market) or (2)
the mean between the closing representative bid and asked price (in all other
cases) for Common Stock on the day prior to the date of grant as reported by
Nasdaq or such successor quotation system; or (iii) if there is no listing or
trading of Common Stock either on a national exchange or over-the-counter, that
price determined in good faith by the Committee to be the fair value per share
of Common Stock, based upon such evidence as it deems necessary or advisable.

(b) In the discretion of the Committee at the time the option is
exercised, the exercise price of any option granted under the Plan shall be paid
in full in cash, by check or by the optionee's interest-bearing promissory note
(subject to any limitations of applicable state corporations law) delivered at
the time of exercise; provided, however, that subject to the timing requirements
of Section 2.7, in the discretion of the Committee and upon receipt of all
regulatory approvals, the person exercising the option may deliver as payment in
whole or in part of such exercise price certificates for Common Stock of the
Company (duly endorsed or with duly executed stock powers attached), which shall
be valued at its Fair Market Value on the day of exercise of the option, or
other property deemed appropriate by the Committee; and, provided further, that,
subject to Section 422 of the Code, so-called cashless exercises as permitted
under applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board shall be permitted in the discretion of the
Committee. Without limiting the Committee's discretion in this regard,
consecutive book entry stock-for-stock exercises of options (or "pyramiding")
also are permitted in the Committee's discretion.

Irrespective of the form of payment, the delivery of shares issuable
upon the exercise of an option shall be conditioned upon payment by the optionee
to the Company of amounts sufficient to enable the Company to pay all federal,
state, and local withholding taxes resulting, in the Company's judgment, from
the exercise. In the discretion of the Committee, such payment to the Company
may be effected through (i) the Company's withholding from the number of shares
of Common Stock that would otherwise be delivered to the optionee by the Company
on exercise of the option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of the exercise)
to the aggregate withholding taxes, (ii) payment by the optionee to the Company
of the aggregate withholding taxes in cash, (iii) withholding by the Company
from other amounts contemporaneously owned by the Company to the optionee, or
(iv) any combination of these three methods, as determined by the Committee in
its discretion.

2.2 OPTION PERIOD.

(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be

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exercisable after the expiration of ten years from the date it is granted.
Without limiting the generality of the foregoing, the Committee may provide in
the Stock Option Agreement that the option subject thereto expires 30 days
following a Termination of Employment (as defined in Section 3.2 hereof) for any
reason other than death or disability, or six months following a Termination of
Employment for disability or following an optionee's death.

(b) Outside Date for Exercise. Notwithstanding any provisions to this
Section 2.2. in no event shall any option granted under the Plan be exercised
after the expiration date of such option set forth in the applicable Stock
Option Agreement.

2.3 EXERCISE OF OPTIONS.

Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
if the holder of an option shall not in any given installment period purchase
all of the shares which such holder is entitled to purchase in such installment
period, such holder's right to purchase any share not purchased in such
installment period shall continue until the expiration or sooner termination of
such holder's option. The Committee may, at any time after grant of the option
and from time to time, increase the number of shares purchasable in any
installment, subject to the total number of shares subject to the option and the
limitations set forth in Section 2.5. At any time and from time to time prior to
the time when any exercisable option or exercisable portion thereof becomes
unexercisable under the Plan or the applicable Stock Option Agreement, such
option, or portion thereof may be exercised in whole or in part; provided,
however, that the Committee may, by the terms of the option, require any partial
exercise to be with respect to a specific minimum number of shares. No option or
installment thereof shall be exercisable except with respect to whole shares.
Fractional share interests shall be disregarded, except that they may be
accumulated as provided above and except that if such a fractional share
interest constitutes the total shares of Common Stock remaining available for
purchase under an option at the time of exercise, the optionee shall be entitled
to receive on exercise a certified or bank cashier's check in an amount equal to
the Fair Market Value of such fractional shares of stock.

2.4 TRANSFERABILITY OF OPTIONS.

Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined by the Code), and shall be exercisable
during the optionee's lifetime only by the optionee or by his or her guardian or
legal representative. More particularly, but without limiting

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the generality of the immediately preceding sentence, an option may not be
assigned, transferred (except as provided in the preceding sentence), pledged or
hypothecated (whether by operation of law or otherwise), and shall not be
subject to execution, attachment or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of any option contrary to
the provisions of the Plan and the applicable Stock Option Agreement, and any
levy of any attachment or similar process upon an option, shall be null and
void, and otherwise without effect, and the Committee may, in its sole
discretion, upon the happening of any such event, terminate such option
forthwith.

2.5 LIMITATION ON EXERCISE OF INCENTIVE STOCK OPTIONS.

To the extent the aggregate Fair Market Value (determined on the date
of grant as provided in Section 2.1 above) of the Common Stock with respect to
which Incentive Stock Options granted hereunder (together with all other
Incentive Stock Option plans of the Company) are exercisable for the first time
by an optionee in any calendar year under the Plan exceeds $100,000, such
options granted hereunder shall be treated as Nonstatutory Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted.

2.6 DISQUALIFYING DISPOSITIONS OF INCENTIVE STOCK OPTIONS.

If Common Stock acquired upon exercise of any Incentive Stock Option is
disposed of in a disposition that, under Section 422 of the Code, disqualifies
the option holder from the application of Section 421(a) of the Code, the holder
of the Common Stock immediately before the disposition shall comply with any
requirements imposed by the Company in order to enable the Company to secure the
related income tax deduction to which it is entitled in such event.

2.7 CERTAIN TIMING REQUIREMENTS.

At the discretion of the Committee, shares of Common Stock issuable to
the optionee upon exercise of an option may be used to satisfy the option
exercise price or the tax withholding consequences of such exercise, in the case
of persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date, or (ii) pursuant to an irrevocable written election by the
optionee to use shares of Common Stock issuable to the optionee upon exercise of
the option to pay all or part of the option price or the withholding taxes made
at least six months prior to the payment of such option price or withholding
taxes.

2.8 NO EFFECT ON EMPLOYMENT.

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Nothing in the Plan or in any Stock Option Agreement hereunder shall
confer upon any optionee any right to continue in the employ of the Company, any
Parent Corporation or any subsidiary or shall interfere with or restrict in any
way the rights of the Company, its Parent Corporation and its Subsidiaries,
which are hereby expressly reserved, to discharge any optionee at any time for
any reason whatsoever, with or without cause.

For purposes of the Plan, "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. For purposes of the Plan, "Subsidiary" shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.

3. OTHER PROVISIONS

3.1 SICK LEAVE AND LEAVE OF ABSENCE.

Unless otherwise provided in the Stock Option Agreement, and to the
extent permitted by Section 422 of the Code, an optionee's employment shall not
be deemed to terminate by reason of sick leave, military leave or other leave of
absence approved by the Company if the period of any such leave does not exceed
a period approved by the Company, or, if longer, if the optionee's right to
reemployment by the Company is guaranteed either contractually or by statute. A
Stock Option Agreement may contain such additional or different provisions with
respect to leave of absence as the Committee may approve, either at the time of
grant of an option or at a later time.

3.2 TERMINATION OF EMPLOYMENT.

For purposes of the Plan "Termination of Employment," shall mean the
time when the employee-employer relationship between the optionee and the
Company, any Subsidiary or any Parent Corporation is terminated for any reason,
including, but not by way of limitation, a termination by resignation,
discharge, disability or retirement; but excluding (i) terminations where there
is a simultaneous reemployment or continuing employment of an optionee by the
Company, any Subsidiary or any Parent Corporation, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company, a Subsidiary or any Parent Corporation
with the former employee. Subject to Section 3.1, the Committee, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, a leave of absence or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that such leave of absence or

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other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and then-applicable regulations and
revenue ruling under said Section.

3.3 ISSUANCE OF STOCK CERTIFICATES.

Upon exercise of an option, the Company shall deliver to the person
exercising such option of stock certificate evidencing the shares of Common
Stock acquired upon exercise. Notwithstanding the foregoing, the Committee in
its discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.

3.4 TERMS AND CONDITIONS OF OPTIONS.

Each option granted under the Plan shall be evidenced by a written
Stock Option Agreement ("Stock Option Agreement") between the option holder and
the Company providing that the option is subject to the terms and conditions of
the Plan and to such other terms and conditions not inconsistent therewith as
the Committee may deem appropriate in each case.

3.5 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; MERGER AND
CONSOLIDATION.

If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options may be granted. In the event
of such a change or exchange, other than for shares or securities of another
corporation or by reason of reorganization, the Committee shall also make a
corresponding adjustment changing the number of kind of shares and the exercise
price per share allocated to unexercised options or portions thereof, which
shall have been granted prior to any such change, shall likewise be made. Any
such adjustment, however, shall be made without change in the total price
applicable to the unexercised portion of the option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices).

In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.

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<PAGE>

Where an adjustment under this Section 3.5 of the type described is
made to an Incentive Stock Option, the adjustment will be made in a manner which
will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.

In connection with the dissolution or liquidation of the Company or a
partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
a security of another entity, a sale of more than 50% of the Company's assets,
or a similar event that the Committee determines, in its discretion, would
materially alter the structure of the Company or its ownership, the Committee,
upon 30 days prior written notice to the option holders, may, in its discretion,
do one or more of the following: (i) shorten the period during which options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices; or (iv) cancel options upon payment to the option
holders in cash, with respect to each option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), or any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the Committee
may, in considering the advisability or the terms and conditions of any
acceleration of the exercisability of any option pursuant to this Section 3.5,
take into account the penalties that may result directly or indirectly from such
acceleration to either the Company or the option holder, or both, under Section
280G of the Code, and may decide to limit such acceleration to the extent
necessary to avoid or mitigate such penalties or their effects.

No fractional share of Common Stock shall be issued under the Plan on
account of any adjustment under this Section 3.5.

3.6 RIGHTS OF PARTICIPANTS AND BENEFICIARIES.

The Company shall pay all amounts payable hereunder only to the option
holder or beneficiaries entitled thereto pursuant to the Plan. The Company shall
not be liable for the debts, contracts or engagements of any optionee or his or
her beneficiaries, and rights to cash payments under the Plan may not be taken
in execution by attachment or garnishment, or by any other legal or equitable
proceeding while in the hands of the Company.

3.7 GOVERNMENT REGULATIONS.

The Plan, and the grant and exercise of options and the issuance and
delivery of shares of Common Stock under options granted hereunder, shall be
subject to compliance

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<PAGE>

with all applicable federal and state laws, rules and regulations (including but
not limited to state and federal securities law) and federal margin requirements
and to such approvals by any listing, regulatory or governmental authority as
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under the Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Company, provide such assurances and representations to the
Company as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable law,
the Plan and options granted hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.

3.8 AMENDMENT AND TERMINATION.

The Board or the Committee may at any time suspend, amend or terminate
the Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option may be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.

3.9 TIME OF GRANT AND EXERCISE OF OPTION.

An option shall be deemed to be exercised when the Secretary of the
Company receives written notice from an option holder of such exercise, payment
of the exercise price determined pursuant to Section 2.1 of the Plan and set
forth in the Stock Option Agreement, and all representations, indemnifications
and documents reasonably requested by the Committee.

3.10 PRIVILEGES OF STOCK OWNERSHIP - NON-DISTRIBUTIVE INTENT;
REPORTS TO OPTION HOLDERS.

A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of

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<PAGE>

Section 10(a)(3) of said Act, the optionee shall represent and warrant in
writing to the Company that the shares purchased are being acquired for
investment and not with a view to the distribution thereof.

The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.

3.11 LEGENDING SHARE CERTIFICATES.

In order to enforce any restrictions imposed upon Common Stock issued
upon exercise of an option granted under the Plan or to which such Common Stock
may be subject, the Committee may cause a legend or legends to be placed on any
share certificates representing such Common Stock, which legend or legends shall
make appropriate reference to such restrictions, including, but not limited to,
a restriction against sale of such Common Stock for any period of time as may be
required by applicable laws or regulations. If any restriction with respect to
which a legend was placed on any certificate ceases to apply to Common Stock
represented by such certificate, the owner of the Common Stock represented by
such certificate may require the Company to cause the issuance of a new
certificate not bearing the legend.

Additionally, and not by way of limitation, the Committee may impose
such restrictions on any Common Stock issued pursuant to the Plan as it may deem
advisable, including, without limitation, restrictions under the requirements of
any stock exchange upon which Common Stock is then traded.

3.12 USE OF PROCEEDS.

Proceeds realized pursuant to the exercise of options under the Plan
shall constitute general funds of the Company.

3.13 CHANGES IN CAPITAL STRUCTURE; NO IMPEDIMENT TO CORPORATE
TRANSACTION.

The existence of outstanding options under the Plan shall not affect
the Company's right to effect adjustments, recapitalization, reorganizations or
other changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the dissolution or
liquidation of the Company's or any other corporation's assets or business, or
any other corporate act, whether similar to the events described above or
otherwise,

3.14 EFFECTIVE DATE OF THE PLAN.

The Plan shall be effective as of the date of its approval by the
stockholders of the Company within twelve months after the date of the Board's
initial adoption of the Plan.

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Options may be granted but not exercised prior to stockholder approval of the
Plan. If any options are so granted and stockholder approval shall not have been
obtained within twelve months of the date of adoption of this Plan by the Board
of Directors, such options shall terminate retroactively as of the date they
were granted.

3.15 TERMINATION.

The Plan shall terminate automatically as of the close of business on
January 5, 2007 or earlier as provided in Section 3.8. Unless otherwise provided
herein, the termination of the Plan shall not affect the validity of any option
agreement outstanding at the date of such termination.

3.16 NO EFFECT ON OTHER PLANS.

The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Subsidiary or any Parent
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company (i) to establish any other forms of incentives or compensation for
employees of the Company, any Subsidiary or any Parent Corporation or (ii) to
grant or assume options or other rights otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.

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<PAGE>

DUNN COMPUTER CORPORATION
ANNUAL MEETING OF STOCKHOLDERS--JUNE 15, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints John D. Vazzana and Claudia N.
Dunne and each of them as Proxies and authorizes them to represent and vote all
the shares of common stock of Dunn Computer Corporation, a Virginia corporation,
that the undersigned may be entitled to vote at the Annual Meeting of
Stockholders to be held on June 15, 1999 and at any adjournment thereof, as
designated for the items set forth on the reverse side hereof and in the Notice
of Annual Meeting of Stockholders and the Proxy Statement dated May 3, 1999.

IF PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS SPECIFIED HEREIN OR,
IF NOT SPECIFIED, WILL BE VOTED FOR THE PROPOSALS IN ITEMS 2 THROUGH 4 WHICH ARE
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AND FOR THE ELECTION AS DIRECTOR
OF THE NOMINEES NAMED IN ITEM 1. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED
TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT THEREOF. AT THIS TIME, MANAGEMENT KNOWS OF NO SUCH OTHER BUSINESS.

The Board of Directors recommends a vote FOR the election of the
Directors set forth below and FOR the proposals in Items 2 through 4.

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

1. Election of Directors
FOR all nominees listed below WITHHOLD AUTHORITY to
vote for all nominees listed below

Nominees: John D. Vazzana and Claudia N. Dunne

Instruction: To withhold authority to vote for any individual nominee,
write the nominee's name in the space provided below:

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

2. Proposal to approve the Company's Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)

<PAGE>

(CONTINUED FROM OTHER SIDE)

3. Proposal to amend Dunn's 1997 Stock Option Plan to increase the
number of shares subject to issuance under the plan from $2,200,000 to
2,500,000.
FOR AGAINST ABSTAIN

4. Proposal to approve the appointment of Ernst & Young LLP as
independent accountants of the Company for the fiscal year ended October 31,
1999
FOR AGAINST ABSTAIN

Dated: , 1999
---------------------------------

--------------------------------------------
Signature

--------------------------------------------
Signature (if held jointly)

IMPORTANT: Please date and sign exactly as
the name appears herein and return this
proxy in the enclosed envelope. Persons
signing as executors, administrators,
trustees, etc. should so indicate. If shares
are held jointly, each joint owner should
sign. In the case of a corporation or
partnership, the full name of the
organization should be used and the
signature should be that of a duly
authorized officer or partner.

PLEASE MARK, DATE, SIGN AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.