WESTERN MICRO TECHNOLOGY INC, 10-K, 1997-03-31

WESTERN MICRO TECHNOLOGY INC
10-K, 1997-03-31
ELECTRONIC PARTS & EQUIPMENT, NEC

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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended ....................................December 31, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ____________________ to ______________________

Commission File Number 0-11560
-----------

WESTERN MICRO TECHNOLOGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

California 94-2414428
------------------ --------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

254 E. Hacienda Avenue, 95008
--------------------------- --------
Campbell, CA (Zip Code)
--------------
(Address of principal executive offices)

(408) 379-0177
-----------------------
(Registrant's telephone number,
including area code)

Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.

YES /X/ NO / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $44,759,567 on February 28, 1997.

The aggregate number of outstanding shares of Common Stock, without par
value, of the registrant was 4,509,244 shares as of February 28, 1997.

DOCUMENTS INCORPORATED BY REFERENCE

None.

<PAGE>

When used in this Report, the words "estimate," "project," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain of such
risks, see "Business--Factors That May Affect Future Results." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
INDEX TO 1996 FORM 10-K

Item No. Page
- -------- ----

PART I ................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 5
ITEM 3. LEGAL PROCEEDINGS........................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 6

PART II ................................................................... 7
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS......................................... 7
ITEM 6. SELECTED FINANCIAL DATA..................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 34

PART III ................................................................... 35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 35
ITEM 11. EXECUTIVE COMPENSATION...................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 43

PART IV ................................................................... 44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................. 44

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PART I

ITEM 1. BUSINESS
--------

General
- -------

Western Micro Technology, Inc. (the "Company") is a distributor of
commercial mid-range computer systems, peripheral equipment, software and
attendant services, with its headquarters in Northern California's "Silicon
Valley." The Company was incorporated under the name of Silicon Valley Services,
Inc. on December 30, 1975 in the State of California.

As a distributor of computer systems and peripheral equipment, the Company
sells mid-range file servers and workstations, integrated personal computers and
a full range of storage products and software. In addition, the Company sells
installation and technical services.

The Company maintains three distribution centers, three integration centers
and nine sales offices, and its geographic market coverage is the entire United
States.

On January 2, 1996, the Company acquired the assets of R&D Hardware Systems
Company of Colorado ("R&D"), a privately held company, for $1,000,000 in cash
and 125,000 shares of the Company's common stock. The agreement between the
Company and R&D (the "Agreement") contains an earn-out provision which allows
R&D to earn up to an additional 125,000 shares of the Company's common stock
based on attainment of gross profit targets for certain fiscal year 1996 and
1997 sales (as defined in the Agreement) up to a cumulative value not to exceed
$855,000. As of December 31, 1996, approximately 33,000 shares, at an average
price of $9.98, have been earned under this provision. The assets purchased
primarily consisted of certain inventories and trade accounts receivable of R&D.
The acquisition has been accounted for as a purchase with the result that R&D
operations are included in the Company's financial statements since the date of
purchase. In connection with the acquisition, the Company recorded approximately
$1,400,000 of goodwill and other intangible assets. For the year ended December
31, 1995, R&D had revenues of approximately $9,557,000 with net income of
approximately $446,000.

On November 7, 1996, the Company acquired the net assets of Star
Technologies, Inc. ("Star"), a privately held company, for $950,000, which was
paid in 113,263 shares of the Company's common stock at a per share price of
$8.38. The agreement between the Company and Star (the "Agreement") contains an
earn-out provision which allows Star to earn up to an additional $2,400,000 of
the Company's common stock based on the attainment of gross profit targets for
certain fiscal year 1997 and 1998 sales (as defined in the Agreement). An
additional 89,418 shares were issued by the Company on November 7, 1996 and
placed in escrow for this earn-out provision. If Star does not meet the earn-out
provision targets, the appropriate number of shares will be returned to the
Company. The assets purchased primarily consisted of certain inventories and
trade accounts receivable of Star. The acquisition has been accounted for as a
purchase with the result that Star operations are included in the Company's
financial statements since the date of purchase. In connection with the
acquisition, the Company recorded approximately $400,000 of goodwill and other
intangible assets

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recorded approximately $400,000 of goodwill and other intangible assets.
For the year ended June 30, 1996, Star had revenues of approximately $7,500,000
with net income of approximately $40,000.

On November 29, 1996, the Company acquired the net assets of International
Data Products, LLC ("IDP"), a privately held company, for $265,000 in cash and
assumed net liabilities of $424,000. The agreement between the Company and IDP
(the "Agreement") contains an earn out provision which allows IDP to earn up to
140,000 shares of the Company's common stock based on the attainment of gross
profit targets for certain fiscal year 1997 and 1998 sales (as defined in the
Agreement). The value of the shares will be based on the average daily closing
price of the Company's common stock at the end of the earn out period, December
31, 1998. The assets purchased primarily consisted of certain inventories and
trade accounts receivable of IDP. The acquisition has been accounted for as a
purchase with the result that IDP operations are included in the Company's
financial statements since the date of purchase. In connection with the
acquisition, the Company recorded approximately $780,000 of goodwill and other
intangible assets. For the year ended December 31, 1995, IDP had unaudited
revenues of approximately $4,611,000 with net income of approximately $2,000.

Distribution Activities
- -----------------------

The Company is a specialty distributor of mid-range computer systems,
peripheral equipment, software and attendant services. Manufacturers of these
products generally consider master distributors, such as the Company, to be an
important extension of their sales and marketing activities and are moving more
of their business into this channel. As a distributor, the Company sells,
processes orders, delivers, and services (if necessary) the manufacturers'
products, relieving the manufacturer of a portion of the costs associated with
such functions, including the investment in accounts receivable and inventory,
while offering customers off-the- shelf delivery.

The Company has a broad base of customers in the computer, industrial,
financial, instrumentation, telecommunication and consumer products markets. No
single distribution customer accounted for more than 10% of the Company's net
distribution sales during the year ended December 31, 1996. Distribution is
presently conducted from the Company's major distribution center in Campbell,
California and its facilities in Burr Ridge, Illinois and Framingham,
Massachusetts. The Company also has nine sales offices located in: Irvine,
Laguna Hills and Campbell, California; Burr Ridge, Illinois; Mt. Laurel, New
Jersey; San Antonio, Texas; Colorado Springs, Colorado; Framingham,
Massachusetts and Phoenix, Arizona.

Mid-range systems distribution is one of the fastest growing segments of
the computer industry. As prices for computer systems and peripheral equipment
have declined and as the systems themselves have become more complex, the market
for these systems has increased and the cost to manufacturers of providing a
field sales force of skilled personnel for on-site customer presentation has
become uneconomical except with respect to large customers. Accordingly,
manufacturers of such equipment are beginning to rely on distributors to augment
and supplement their sales and marketing efforts.

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The Company specializes in selling commercial multi-user computer systems
(file servers) and a full range of disk drives, optical and board-level
products, software, and attendant services. The major customers for these
products are VARs (value-added resellers) who purchase computer hardware from
the Company, generally incorporate vertical market software, and sell an
integrated computer system to an end-user customer or original equipment
manufacturers (OEM). In addition, other value-added functions are conducted in
the Company's technology and integration centers located in Campbell,
California, Burr Ridge, Illinois and Laguna Hills, California, which offer
"turnkey" systems assembly, bundling and construction, primarily to OEM. The
Company offers such organizations a single source for hardware, software, and
service needs and makes available to its systems customers a wide range of pre-
and post-sales support from its technical support group. During the year ended
December 31, 1996, the Company estimates that OEMs accounted for 25% of the
Company's systems sales and VARs accounted for 75%.

The Company offers customers in-warranty and out-of-warranty service
options under which all repairs and maintenance services, including parts and
labor, are performed at Company premises for vendors with which the Company has
service agreements. Because the Company generally performs these services more
rapidly than manufacturers under their warranties, many customers elect this
option. To date, revenue from these services has not been significant.

Currently, the Company acts as a distributor for approximately 30
manufacturers of computer systems, peripheral equipment and software. The
Company maintains an on-going program for evaluation of new and existing
products and suppliers through market research and customer and supplier
consultations. During the year ended December 31, 1996, approximately 80% of the
Company's net sales were from systems products manufactured by International
Business Machines Corporation ("IBM"), Data General Corporation, NCR
Corporation, and Unisys Corporation. The Company estimates that typical orders
for integrated computer systems range from approximately $10,000 to $300,000.

Marketing of computer systems, peripheral equipment and software is
currently conducted from all of the Company's locations, with branch offices
electronically linked to the Company's central computer in Campbell, California.
This enables financial and operational information to be monitored on a
real-time basis.

To become an authorized distributor, the Company normally enters into a
nonexclusive agreement with a manufacturer that is typically cancelable by
either party upon 30 to 120 days' prior written notice. Several of the franchise
agreements with the manufacturers provide (i) that the manufacturer is
obligated, in the event of cancellation by the manufacturer, to repurchase all
of the products in the Company's inventory, (ii) that the Company has the right
to return discontinued products and, to a specified percentage, inventory, in
exchange for other products and (iii) that the Company has price protection in
the form of credits for inventory items, where the price has been reduced by the
manufacturer. Those manufacturers that do not have explicit provisions affording
such protection in their franchise agreements with distributors such as the
Company have, as a matter of policy, generally extended such protection to their
distributors. However, in the absence of explicit provisions, there can be no
assurance that such protection

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will continue to be extended in the future. If such protection were
discontinued, the potential for inventory write-downs by the Company could be
increased substantially.

Nature of Business and Competition
- ----------------------------------

Although the Company's business is not seasonal to any material extent, its
business is influenced by trends affecting the electronics industry in general
and mid-range computer markets in particular. For example, the Company's largest
vendor sells approximately 40% of its products in the last calendar quarter,
which in the future could have an affect on the Company's revenues from quarter
to quarter.

The Company competes with national, regional, and local distributors in its
marketing areas, some of which have substantially greater financial and
marketing resources than the Company. These competitors can be generally
classified into two types: fulfillment distributors and value-added
distributors. The Company considers itself to be a value-added distributor. In
some limited circumstances, the Company also competes with its own suppliers.
Competition is based primarily on product availability, availability of trade
credit, price, level of service, and the reputation of the manufacturer.

Marketing and Backlog
- ---------------------

Systems and computer products are sold by sales personnel who regularly
call on customers in assigned market areas and by inside telephone sales
personnel. Sales are coordinated by sales managers and product managers whose
responsibilities include supplier and product selection and pricing.
Compensation for sales and marketing personnel is based primarily on attainment
of specified gross profit margins, return on assets and inventory turns.

Although the Company receives volume purchase orders, not all such orders
will necessarily result in sales, as most orders are subject to revision or
cancellation without penalty. Consequently, the Company does not believe backlog
is necessarily a meaningful indicator of sales for future periods.

Employees
- ---------

As of December 31, 1996, the Company had 180 full-time employees, 135 of
whom were in operations, and the balance of whom were in corporate
administration. Approximately 70 of the employees engaged in operations were
sales personnel, all of whom participate in ongoing training to keep current on
the latest technological advances in their respective areas.

The Company is not a party to any collective bargaining agreement and
considers its employee relations to be good.

Impact of Environmental Restrictions
- ------------------------------------

The Company believes that compliance with federal, state, and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection

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of the environment will not have a material effect upon its capital
expenditures, operations, or competitive position.

Insurance
- ---------

The Company presently carries broad insurance coverage including property
damage, business interruption, earthquake, general liability, product liability
and directors and officers coverage. As a result of reduced availability of
certain types of coverage offered by the insurance industry and increased
premium costs, the Company may, in the future, be forced or may elect to become
self insured for certain risks.

Factors Affecting Future Results
- --------------------------------

The Company's past operating results have been, and its future operating
results will be, subject to a variety of uncertainties. The Company's quarterly
operating results may be subject to fluctuations as a result of a number of
factors, including the addition or loss of key suppliers or customers, price
competition and changes in the supply and demand for computer products. The
Company's revenues are concentrated with a relatively limited number of
customers and the Company's suppliers of systems representing substantially all
of the Company's revenues are concentrated among a few manufacturers. The
Company extends trade credit to its customers and generally does not require
supporting collateral. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers, maintains an allowance for doubtful
accounts and has credit insurance. No single customer accounted for more than
10% of the outstanding accounts receivable balance at December 31, 1996 and
1995. The loss of a major customer or the interruption of certain supplier
relationships could adversely effect operating results. During the year ended
December 31, 1996, approximately 50% of the Company's revenue was generated from
the sales of products purchased from one of the Company's vendors, International
Business Machines Corporation ("IBM"). Price competition in the industries in
which the Company competes is intense and could result in gross margin declines,
which could have a material adverse impact on the Company's profitability. The
Company's future success depends in part on the continued service of its key
personnel, and its ability to identify and hire additional personnel. Loss of
the services of, or failure to recruit, key sales and management personnel could
be significantly detrimental to the Company.

ITEM 2. PROPERTIES
----------

The Company's executive, administrative, principal sales office, main
distribution warehouse and technology and integration center are located in a
35,563 square foot one-story facility located in Campbell, California. The
facility is occupied under a lease for a monthly rent and other commitments of
$24,183. This rent will increase effective July 1997, to $26,656 per month
through the end of the lease term, June 2000.

A total of 2,500 square feet of space is leased by the Company for its
sales office in San Antonio, Texas, for a monthly rent of $1,750. The lease
expires in November 1997.

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The leases for the Irvine and Laguna Hills, California offices, containing
approximately 2,000 square feet and 10,000 square feet, respectively, provide
for monthly rents and other commitments aggregating $11,550 per month. The
Irvine lease expires in September 1997 and the Laguna Hills lease expires in
March 1997.

The lease for the Company's Framingham, Massachusetts facility covers
11,200 square feet, with a monthly rent in the amount of $6,864. The lease on
this facility expires in March 2000.

Approximately 2,500 square feet of space is leased by the Company for its
sales office in Colorado Springs, Colorado, at a monthly rent of $1,927. The
lease expires in December 1999.

Approximately 16,900 square feet of space is leased by the Company for its
sales, integration and stocking office in Burr Ridge, Illinois, at a monthly
rent of $10,485. This rent will increase effective March 1997, to $11,600 per
month through the end of the lease term, February 2003. There is a six-year
renewal option at the end of the lease term.

In addition to the leases described above, the Company also rents
professional office space, on a month-to-month or quarter-to-quarter basis, for
sales offices in Phoenix, Arizona and Mt. Laurel, New Jersey.

The Company also leases various vehicles and other equipment.

The Company believes its facilities are adequate for its current
operations.

ITEM 3. LEGAL PROCEEDINGS
-----------------

None.

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

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
------------------------------------------------
STOCKHOLDER MATTERS
-------------------

(a) Common Stock Price Range
------------------------

The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol WSTM. The following table sets forth, for the periods indicated, high and
low sales price information as reported by The Nasdaq Stock Market.

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995
------------------ -----------------
High Low High Low
---- --- ---- ---

<S> <C> <C> <C> <C>
First Quarter $ 7.00 $ 4.63 $ 7.50 $ 4.00
Second Quarter $ 10.75 $ 6.50 $ 6.38 $ 2.25
Third Quarter $ 9.00 $ 5.88 $ 6.00 $ 2.94
Fourth Quarter $ 12.25 $ 8.13 $ 6.25 $ 5.00
</TABLE>

(b) As of February 28, 1997, there were approximately 1,450 beneficial
shareholders and 195 shareholders of record. The Company has never paid a
dividend and has no current plans to do so.

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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
-----------------------

<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
Income Statement Data 1996 1995 1994 1993 1992
- --------------------- ---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
Net sales $ 31,697 $106,462 $119,285 $ 96,843 $ 80,478
Selling, general and administrative
expense 14,123 13,703 16,968 16,768 15,165
Restructuring costs -- 3,600 -- 1,510 --
Income (loss) from continuing
operations 2,614 (5,098) (1,002) (1,091) (385)
Discontinued operations, net of tax -- -- 387 524 427
Net income (loss) $ 2,338 $ (5,098) $ (615) $ (567) $ 42

Per share:
Income (loss) from continuing
operations
-Primary $ .51 $ (1.36) $ (0.27) $ (0.31) $ (0.12)
-Fully Diluted .50 (1.36) (0.27) (0.31) (0.11)
Income (loss) from discontinued
operations
-Primary $ -- $ -- $ 0.10 $ 0.15 $ 0.13
-Fully Diluted -- -- 0.10 0.15 0.12
Net income (loss) per share:
-Primary $ .51 $ (1.36) $ (0.17) $ (0.16) $ 0.01
-Fully diluted .50 (1.36) (0.17) (0.16) 0.01
Number of shares used in per share calculation:
-Primary 4,510 3,756 3,669 3,474 3,320
-Fully diluted 4,663 3,756 3,669 3,474 3,418
</TABLE>

<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
Balance Sheet Data 1996 1995 1994 1993 1992
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 7,448 $ 7,312 $ 12,334 $ 12,021 $ 10,836
Net trade accounts receivable $ 25,943 $ 14,258 $ 15,170 $ 13,365 $ 10,035
Inventories $ 26,142 $ 15,251 $ 18,959 $ 17,467 $ 13,391
Total assets $ 63,276 $ 35,899 $ 37,898 $ 34,975 $ 27,426
Capital lease obligations, less current portion $ 53 $ 117 $ 65 $ 52 $ 96
Shareholders' equity $ 15,714 $ 11,004 $ 14,424 $ 13,976 $ 13,635
</TABLE>

Amounts for 1993 and 1992 have been restated to reflect the 1994
discontinuation of the Testing Division (see Note 7 of the Notes to Financial
Statements) and the 1994 acquisition of First Computer Corporation accounted for
as a pooling of interests (see Note 11 of the Notes to Financial Statements).

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

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

On November 18, 1995, the Company acquired all of the common stock of
International Parts, Inc. ("IPI"), a privately held company for 300,000 shares
of the Company's common stock. The agreement between the Company and IPI (the
"Agreement") contains an earn-out provision which allows for IPI to earn up to
an additional 300,000 shares of the Company's common stock based on 30% of gross
profit dollars generated for certain fiscal year 1996 and 1997 sales (as defined
in the Agreement) in excess of $418,550 per quarter. The stock so issued is
valued at an average of prevailing market closing stock prices at each quarterly
payment date. During 1996 the Company issued 39,108 shares, valued at $320,000,
related to this earn out provision. The acquisition has been accounted for as a
purchase with the result that IPI operations are included in the Company's
financial statements since the date of purchase. In connection with this
purchase, the Company has recorded approximately $2,600,000 of goodwill. For the
fiscal year ended December 31, 1994, IPI had revenues of approximately
$15,200,000 with net income of approximately $90,000.

On July 26, 1995, the Company sold its electronics components distribution
assets to Reptron Electronics Inc. ("Reptron"). The transaction, valued at
approximately $12,500,000, consisted of a $9,200,000 payment in cash and the
assumption of $3,300,000 in accounts payable. Of the $9,200,000 cash payment,
$1,000,000 was held back in escrow for six months to serve as a source of
certain specified rights within the purchase agreement with Reptron. The sale,
which was approved by the Company's shareholders, included the Company's
semi-conductor component inventory, certain receivables, furniture and
equipment. In addition, Reptron assumed certain building and equipment lease
obligations. As a result of this sale, the Company recorded a restructuring
charge of $3,600,000. Of this amount, $2,376,000 was for non-cash write-offs
comprised of $1,353,000 in goodwill and a $1,023,000 increase to long-term
inventory related reserves. Severance and other exit related charges related to
the sale comprised the remaining $1,224,000. In February 1996, approximately
$211,000 was distributed from the escrow to the Company and the balance was paid
to Reptron. Concurrent with the distribution of the escrow funds, Reptron
returned approximately $789,000 of designated assets, valued at historical cost,
to the Company. These designated assets were primarily comprised of
semiconductor inventories. As of December 31, 1996, the Company did not have any
inventory related to the Reptron transaction.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------

The Company's net sales and gross profits for the year ended December 31,
1996 were generated entirely from the computer systems distribution business, as
the Company sold its components distribution business in July 1995.

Net sales for the year ended December 31, 1996 of $131,697,000 were 24%
higher than net sales of $106,462,000 for the year ended December 31, 1995.
Gross profit as a percentage of net sales for the years ended December 31, 1996
and 1995 was 13% and 12%, respectively. Prior period results include
semiconductor distribution sales of approximately $28,248,000 and

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

computer system sales of approximately $78,214,000, resulting in a
year-to-year 68% increase in computer system sales. Computer system sales rose
due to the expansion of the Company's computer systems distribution business,
general market demand for mid-range computer systems and the acquisitions of
IPI, R&D, Star and IDP. The gross profit percentage increased in 1996 versus
1995 primarily due to the fact that the Company has been able to secure
increased purchase discounts from its vendors as a result of higher sales
volume.

Selling, general and administrative expense increased 3% in the year ended
December 31, 1996 versus the year ended 1995 due to higher labor expense, from
necessary personnel increases as a result of increased sales, higher
depreciation expense, as a result of additions to Company infrastructure and
higher amortization expense as a result of increased goodwill related to
acquisitions. As a percentage of net sales, selling, general and administrative
expense decreased from 13% in 1995 to 11% in 1996. The decrease is a result of
rapid revenue growth, expense management and economies of scale.

The Company's effective tax rate is 11% versus the statutory rate of 34%.
This reduction is due primarily to the utilization of net operating loss
carryforwards.

Interest expense increased 15% in the fiscal year ended December 31, 1996
as compared with the year ended December 31, 1995. The increase was due
primarily to an increase in borrowings required to fund the Company's growth and
acquisitions. A decrease in the interest rate partially offset the effect of
increased borrowings.

The increase in other income in 1996 is primarily due to commissions
generated from assisting customers in finding lease financing for acquired
computer systems as well as a gain recognized on the sale of equipment.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
- ---------------------------------------------------------------------

Net sales for the year ended December 31, 1995 of $106,462,000 were 11%
lower than the net sales of $119,285,000 for the year ended December 31, 1994.
Gross profit as a percentage of net sales was 12% and 14%, respectively, for the
years ended December 31, 1995 and 1994. Net sales decreased in 1995 due to the
sale of the Company's semiconductor component business to Reptron in July 1995.
Net sales related to the ongoing computer systems business were $78,214,000 for
the year ended December 31, 1995 as compared to $59,934,000 for the same period
in 1994, an increase of 31%. Semiconductor component sales, representing the
balance of the reported consolidated net sales, decreased 53% as a result of the
sale of the net assets of the semiconductor distribution business in July 1995
and the continued loss of semiconductor component lines in the 19 month period
ending with the date of the sale of the Company's component assets. The decrease
in gross profit was attributable to the lower average gross profit of systems
products sold at the time as well as a decrease in average component selling
prices prior to the sale of the Company's components assets. The Reptron

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

sale early in the third quarter of 1995 allowed for a significant increase
in the mid-range computer systems sales, as the Company focused its efforts
solely on this business.

Selling, general and administrative expense as a percentage of net sales
decreased to 13% in the year ended December 31, 1995 from 14% in the year ended
December 31, 1994. The decrease in selling, general and administrative expense
is due to several factors, of which the most significant is the sale of the
Company's component distribution assets and the transfer of employees and
infrastructure associated with that business to Reptron. In the management of
its ongoing computer systems business, the Company had a reduction in force,
consolidated its executive, administrative, distribution and integration
facilities into one location, and aggressively cut back controllable sales
related expenses, which included the modification of management compensation
plans with such compensation determined as a function of return on assets. For
the year ended December 31, 1994, the Company recorded a non-recurring, non-cash
charge of $393,000 to account for the compensation element of certain First
Computer Corporation ("FCC") restricted stock awards exchanged for publicly
traded shares of the Company's stock when FCC was acquired on December 1, 1994.

As a result of the sale of the Company's component distribution assets to
Reptron, the Company recorded a restructuring charge of $3,600,000. Of this
amount $2,376,000 was for non-cash write-offs comprised of $1,353,000 in
goodwill and a $1,023,000 increase to inventory reserves. Severance and other
exit related charges related to the sale comprised the remaining $1,224,000.

Interest expense decreased 4% in the fiscal year ended December 31, 1995 as
compared with the year ended December 31, 1994, mainly due to a decrease in
general bank borrowings for the year as the proceeds received from the sale of
the semiconductor distribution assets were used to reduce short-term debt.

Effective September 30, 1994, the Company discontinued its Testing Division
operations in North Carolina, as a result of its sole customer, Mitsubishi,
discontinuing its testing business with the Company. For the period ended
December 31, 1994, income from discontinued operations, net of income tax, of
$450,000 was reduced by a $63,000 estimated loss on disposition, consisting
primarily of expense related to an employment agreement offset by gains on the
sale of testing equipment.

Liquidity and Capital Resources
- -------------------------------

Net cash used in operating activities during the year ended December 31,
1996 totaled $1,017,000 compared to net cash provided by operations of
$3,719,000 for the same period one year ago. The use of cash was a result of
significant increases in accounts receivable and inventory ($9,648,000 and
$9,831,000, respectively), as a result of increased sales volume and
acquisitions, which were only partially offset by an increase in accounts
payable ($15,591,000).

-12-

<PAGE>

The fiscal year ended December 31, 1995 had positive cash flow from
operating activities due to the sale of the component assets to Reptron, which
reduced, at the time of sale, accounts receivable and inventory by approximately
$9,200,000 and accounts payable by approximately $3,300,000.

Net cash used in investing activities totaled $2,818,000 for fiscal year
1996 compared to $1,172,000 in the prior year. The investing activities for 1996
consisted of the R&D and IDP asset purchases as well as continuing leasehold,
internal computer hardware and internal software investments made at the
Company's headquarters and sales offices.

Net cash provided by financing activities totaled $3,673,000 during 1996
compared to net cash used of $2,139,000 for 1995. Short term borrowings
increased due to the need to fund increased working capital requirement as a
result of increased sales and acquisitions.

The Company has available a $25,000,000 line of credit with a financial
institution that bears interest at the financial institution's prime lending
rate (8.25% as of December 31, 1996) plus 1.50%. Borrowings under the line of
credit are based on eligible accounts receivable and inventory, as defined, and
are collateralized by substantially all assets of the Company. The facility is
renewable annually and contains restrictive covenants which include the
maintenance of minimum revenue, profit and tangible net worth ratios, as
defined. The Company was not in compliance with the tangible net worth covenant
at December 31, 1996. The financial institution granted a waiver as of December
31, 1996 for the specific violation. Borrowings under this line of credit were
$11,277,000 at December 31, 1996. Based on eligible assets, as of December 31,
1996, the Company had borrowings available of approximately $5,300,000. The
weighted average interest rates for the Company's borrowings during 1996 and
1995 were 9.2% and 10.6%, respectively.

The Company has required substantial working capital to finance accounts
receivable, inventories and capital expenditures and has financed its working
capital requirements, capital expenditures and acquisitions primarily through
bank borrowings. The Company believes that its existing cash and available bank
borrowings are sufficient to fund the Company's operations through the end of
1997. The Company is actively considering other alternatives for raising
additional cash including a public or private equity or debt financing or other
credit arrangement. There can be no assurance that the Company will be able to
obtain additional financing on acceptable terms or at sufficient levels.

-13-

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Western Micro Technology, Inc.
Campbell, California

We have audited the accompanying consolidated balance sheets of Western Micro
Technology, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

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

COOPERS & LYBRAND L.L.P.

San Jose, California
January 31, 1997

-14-

<PAGE>

<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
----------
<CAPTION>
December 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash $ 384 $ 546
Trade accounts receivable, net of allowance for doubtful
accounts of $411 in 1996 and $380 in 1995 25,943 14,258
Inventories 26,142 15,251
Other current assets 2,254 1,705
------------------ -----------------
Total current assets 54,723 31,760

Property and equipment, net 3,276 1,720
Goodwill, net of accumulated amortization of $293 in
1996 and $12 in 1995 4,937 2,206
Other assets 340 213
------------------ -----------------

Total assets $ 63,276 $ 35,899
================== =================

LIABILITIES
Current liabilities:
Notes payable $ 11,277 $ 7,040
Current portion of capital lease obligations 58 86
Accounts payable 33,956 15,950
Accrued expenses 1,984 1,372
------------------ -----------------
Total current liabilities 47,275 24,448

Capital lease obligations, less current portion 53 117
Other 234 330
------------------ -----------------
47,562 24,895
Commitments and contingencies (Notes 4, 9 and 11)

SHAREHOLDERS' EQUITY
Preferred stock, without par value:
Authorized: 10,000,000 shares;
Issued and outstanding: none
Common stock, without par value:
Authorized: 10,000,000 shares;
Issued and outstanding: 4,488,131 shares in 1996 and
4,009,988 shares in 1995 17,959 15,587
Retained deficit (2,245) (4,583)
----------------- -----------------
Total shareholders' equity 15,714 11,004
----------------- -----------------

Total liabilities and shareholders' equity $ 63,276 $ 35,899
================= =================

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

-15-

<PAGE>

<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
----------

<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 131,697 $ 106,462 $ 119,285
Cost of goods sold 114,389 93,416 102,662
------------- ------------- ------------
Gross profit 17,308 13,046 16,623

Selling, general and administrative expenses 14,123 13,703 16,968
Restructuring costs 3,600
Interest expense 978 850 884
Other income (407) (9) (10)
------------- ------------- ------------
Income (loss) from continuing
operations before income taxes 2,614 (5,098) (1,219)

Income tax (expense) benefit (276) 217
------------- ------------- ------------
Income (loss) from continuing
operations 2,338 (5,098) (1,002)

Discontinued operations:
Income from operations, net of income tax 450
Estimated loss on disposition (63)
Net income (loss) $ 2,338 $ (5,098) $ (615)
============= ============= ============

Net income (loss) per common share:
Continuing operations $ 0.50 $ (1.36) $ (0.27)
Discontinued operations 0.10
------------- ------------- ------------
Net income (loss) per share $ 0.50 $ (1.36) $ (0.17)
============= ============= ============

Number of shares used in per share
calculations 4,663 3,756 3,669
============== ============= ============

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

-16-

<PAGE>

<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
----------

<CAPTION>
Common Stock Retained
----------------------------------- Earnings
Shares Amount (Deficit) Total
-------------- --------------- -------------- ----------------

<S> <C> <C> <C> <C>
Balances, January 1, 1994 3,618,076 $ 12,831 $ 1,145 $ 13,976
Exercise of stock options 51,513 150 150
Stock compensation 393 393
Issuance of common stock 35,004 254 254
Retirement of shares (2,586) (61) (15) (76)
Tax benefit from the exercise of
stock options 342 342
Net loss (615) (615)
--------------- --------------- -------------- ----------------

Balances, December 31, 1994 3,702,007 13,909 515 14,424
Exercise of stock options 7,981 18 18
Issuance of common stock 300,000 1,660 1,660
Net loss (5,098) (5,098)
--------------- --------------- -------------- ----------------

Balances, December 31, 1995 4,009,988 15,587 (4,583) 11,004
Exercise of stock options 92,157 331 331
Issuance of common stock 366,789 1,949 1,949
Issuance under employee stock
purchase plan 19,197 92 92
Net income 2,338 2,338
---------------- ---------------- -------------- ----------------

Balances, December 31, 1996 4,488,131 $ 17,959 $ (2,245) $ 15,714
================ ================ ============== ================

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

-17-

<PAGE>

<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
----------
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,338 $ (5,098) $ (615)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
(Gain) loss on disposal of property and equipment (11) (68) 87
Depreciation and amortization 983 527 557
Provision for doubtful accounts receivable 120 291 302
Provision for restructuring costs 3,600
Compensation associated with restricted stock grants 393
Change in assets and liabilities:
Trade accounts receivable (9,648) 421 (1,819)
Inventories (9,831) 2,035 (1,430)
Other current assets (478) (110) 178
Other assets (484) (154) 4
Accounts payable 15,591 4,001 (443)
Accrued expenses and other liabilities 403 (1,726) (459)
--------------- ------------- ---------------

Net cash (used in) provided by operating activities (1,017) 3,719 (3,245)
--------------- ------------- ---------------

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (640)
Acquisitions of property and equipment (2,200) (1,364) (575)
Proceeds from sale of property and equipment 22 192
--------------- ------------- ---------------

Net cash used in investing activities (2,818) (1,172) (575)
--------------- ------------- ---------------

Cash flows from financing activities:
Net proceeds (repayments) under notes payable 3,434 (2,135) 3,087
Proceeds from exercise of stock options 331 18 74
Proceeds from employee stock purchase plan 92
Repayment of capital leases and equipment loan (184) (123) (75)
Proceeds from equipment loan 101 115
Tax benefit from the exercise of stock options 342
--------------- ------------- ---------------

Net cash provided by (used in) financing activities 3,673 (2,139) 3,543

Net increase (decrease) in cash (162) 408 (277)

Cash, beginning of year 546 138 415
--------------- ------------- ---------------

Cash, end of year $ 384 $ 546 $ 138
=============== ============= ===============

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

-18-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

1. Summary of Significant Accounting Policies:
------------------------------------------

Nature of Operations:

Western Micro Technology, Inc. (the Company) is a distributor of commercial
mid-range computer systems, peripheral equipment, software and attendant
services. Prior to July 26, 1995, the Company's operations also included
distribution of electronic components (see Note 12). The Company's primary
sales office and distribution center, from which it ships to customers
throughout the United States, is located in Northern California. In
addition to the Northern California location, the Company has distribution
centers in Massachusetts and Illinois and has sales offices throughout the
United States. The principal customers of the Company are
value-added-resellers, computer system integrators and original equipment
manufacturers located in the U.S.

Financial Statement Presentation:

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. During 1994, the Company acquired
First Computer Corporation (FCC) in a business combination accounted for as
a pooling of interests. Accordingly, 1994 financial information herein has
been restated to reflect the combined operations of these companies (see
Note 11).

Estimates:

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

Certain Risks and Concentrations:

The Company maintains cash balances with four major financial institutions.
The Company sells its products to a broad geographic and demographic base
of customers, extends trade credit, and generally does not require
supporting collateral. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers, maintains an allowance for doubtful
accounts and has credit insurance. No single customer accounted for more
than 10% of the outstanding accounts receivable balance at December 31,
1996 and 1995.

-19-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

1. Summary of Significant Accounting Policies (Continued):
------------------------------------------

Revenues are concentrated with a relatively limited number of customers and
the providers of certain systems are concentrated among a few
manufacturers. The loss of a major customer or the interruption of certain
supplier relationships could adversely effect operating results. During the
years ended December 31, 1996, 1995 and 1994, approximately 50%, 30% and
10%, respectively, of the Company's revenue was generated from the sales of
products purchased from one of the Company's vendors.

Fair Value of Financial Instruments:

Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable
and other accrued liabilities approximate fair value due to their short
maturities. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of capital lease obligations
and notes payable obligations also approximate fair value.

Revenue Recognition:

The Company records revenue, net of allowance for estimated returns, at the
time of product shipment.

Inventories:

Inventories, consisting primarily of purchased product held for resale, are
stated at the lower of cost (first-in, first-out) or net realizable value.
The Company's inventories include high technology computer systems that may
be specialized in nature and subject to rapid technological obsolescence.
The Company does, however, have certain return privileges with many of its
vendors. While the Company attempts to minimize the required inventories on
hand and considers technological obsolescence when estimating required
reserves to reduce recorded amounts to market values, it is reasonably
possible that such estimates could change in the near term.

Property and Equipment:

Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives, typically two to ten
years. Leasehold improvements are amortized over the useful lives of the
improvements or lease term, whichever is shorter.

-20-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

1. Summary of Significant Accounting Policies (Continued):
------------------------------------------

When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or
losses are included in income.

Goodwill:

Goodwill represents the excess cost over the fair value of identifiable net
assets of businesses acquired and is being amortized on a straight-line
basis over fifteen years.

Income Taxes:

The Company accounts for its income taxes using the liability method under
which deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to
amounts expected to be realized.

Market Development Funds:

Primary vendors provide the Company with market development funds in an
amount that is generally based on purchases of the vendors' products and
services. These funds typically range from 1% to 3% of such purchases and
are required to be used to market and promote the vendors' products and
services. The Company applies these funds to offset direct costs of
selling, general, and administrative expenses.

Stock-Based Compensation:

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation," which is effective for the Company's financial
statements for fiscal years beginning after December 15, 1995. SFAS No. 123
allows companies to either account for stock-based compensation under the
new provisions of SFAS No. 123 or under the provisions of Accounting
Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued
to Employees," but requires pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company accounts for its stock-based compensation in
accordance with the provisions of APB No. 25 and presents disclosures
required by SFAS No. 123.

-21-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

1. Summary of Significant Accounting Policies (Continued):
------------------------------------------

Long-Lived Assets:

In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," was issued. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. During 1996, the Company adopted this statement and
determined that no impairment loss need be recognized for applicable assets
of continuing operations.

Net Income (Loss) Per Share:

Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares (when dilutive) outstanding during
each period.

2. Property and Equipment:
----------------------

<TABLE>
Property and equipment consist of the following (in thousands):

<CAPTION>
December 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Computer and office equipment $ 4,728 $ 4,112
Leasehold improvements 682 812
------------ -----------
5,410 4,924
Accumulated depreciation and amortization (2,134) (3,204)
------------ -----------
$ 3,276 $ 1,720
============ ===========
</TABLE>

The Company leases various equipment and vehicles under capital leases, all
of which have been accounted for as installment purchases (Note 3).
Accordingly, capitalized costs of $357,000 and $310,000, net of accumulated
amortization of $253,000 and $163,000 at December 31, 1996 and 1995,
respectively, are included in property and equipment.

-22-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

3. Notes Payable and Capital Lease Obligations:
-------------------------------------------

Notes Payable:

The Company has available a $25,000,000 line of credit with a financial
institution that bears interest at the financial institution's prime
lending rate (8.25% as of December 31, 1996) plus 1.50%. Borrowings under
the line of credit are based on eligible accounts receivable and inventory,
as defined, and are collateralized by substantially all assets of the
Company. The facility is renewable annually and contains restrictive
covenants which include the maintenance of minimum revenue, profit and
tangible net worth ratios, as defined. The Company was not in compliance
with the tangible net worth covenant at December 31, 1996. The financial
institution granted a waiver as of December 31, 1996 for the specific
violation. Borrowings under this line of credit were $11,277,000 at
December 31, 1996. Based on eligible assets, as of December 31, 1996, the
Company had borrowings available of approximately $5,300,000. The weighted
average interest rates for the Company's borrowings during 1996 and 1995
were 9.2% and 10.6%, respectively.

Capital Lease Obligations:

<TABLE>
The Company leases property and equipment under capital leases which expire
through 2000. At December 31, 1996, future minimum payments under capital
leases are as follows (in thousands):

<S> <C>
1997 $ 71
1998 24
1999 20
2000 12
----------
Minimum lease payments 127
Less amount representing interest 16
----------
Present value of minimum lease payments 111
Less current portion 58
----------
$ 53
==========
</TABLE>

4. Operating Lease Commitments:
---------------------------

The Company leases its warehouse and office space under operating leases.
These leases expire through 2003 and provide for payment of insurance,
maintenance and property taxes. In addition, the Company leases certain
equipment under operating leases and rental arrangements extending for
periods of up to five years.

-23-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

4. Operating Lease Commitments (Continued):
---------------------------

The total rent expense, net of sublease income, was $722,000, $934,000 and
$1,222,000 for 1996, 1995 and 1994, respectively.

Future minimum rental commitments for all noncancelable operating leases
are as follows (in thousands):

<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------

<S> <C>
1997 $ 621
1998 567
1999 570
2000 320
2001 139
Thereafter 162
----------
$ 2,379
==========
</TABLE>

5. Income Taxes:
------------

<TABLE>
The provision for (benefit from) income taxes consist of the following (in
thousands):

<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1996:
Current $ 223 $ 53 $ 276
Deferred
--------- -------- --------
$ 223 $ 53 $ 276
========= ======== ========
1995:
Current
Deferred
--------- -------- --------
$ - $ - $ -
========= ======== ========
1994:
Current $ 41 $ $ 41
Deferred
--------- -------- --------
$ 41 $ - $ 41
========= ======== ========
</TABLE>

The 1994 provision for income taxes consists of a benefit of $217,000 for
continuing operations and a provision of $258,000 for discontinued
operations.

-24-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

5. Income Taxes (Continued):
------------

<TABLE>
The Company's effective tax expense (benefit) rate differs from the U.S.
federal statutory tax rate as follows:

<CAPTION>
Year Ended
December 31,
------------------------------
1996 1995 1994
---- ---- ----

<S> <C> <C> <C>
Statutory tax (benefit) rate 34 % (34)% (34)%
Goodwill and other nondeductible expenses 4 11 14
Benefit resulting from utilization of federal NOL (33) (3)
State taxes, net of federal benefit 6
Change in valuation reserve 23 30
---- ---- ----
11 % - % 7 %
==== ==== ====
</TABLE>

<TABLE>
The components of the net deferred tax asset are as follows (in thousands):

<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve $ 93 $ 154
Accumulated depreciation 83 61
Uniform inventory capitalization 248 119
Inventory reserve 314 475
Other nondeductible reserves 124 418
Other 111 276
Federal and state NOL 915 1,679
Valuation allowance (1,888) (3,182)
----------- -----------

$ - $ -
=========== ===========

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $2,400,000 and $1,900,000 available to offset future taxable
income for federal and state tax purposes, respectively. Excluded from the
above amounts are net operating losses generated by the
exercise/dispositions of stock options of $2,000,000 and $1,000,000 for
federal and state tax purposes, respectively. The operating loss
carryforwards expire from 1997 to 2010, if not utilized.
</TABLE>

-25-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

6. Shareholders' Equity:
--------------------

Stock Option Plan:

Under the terms of the 1987 and 1994 Stock Option Plans, the Company may
grant nonqualified or incentive stock options at prices not less than 85%
and 100% of the market value at the grant date, respectively. To date, most
options have been granted at 100% of the market value as of the date of
grant. Generally, options vest and become exercisable in equal annual
increments over four years beginning one year after the date of grant and
expire five years after they become exercisable.

<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------
Shares Number Price Total
Available of per (in
for Grant Shares Share thousands)

<S> <C> <C> <C> <C>
Balances, January 1, 1994 225,998 305,298 $2.00-$9.25 $ 1,158
Additional shares reserved 150,000
Options granted (635,000) 635,000 $6.00-$8.13 4,288
Options exercised (51,513) $2.13-$3.00 (150)
Options terminated 294,441 (294,441) $2.13-$9.25 (2,058)
------------ ------------- -----------
Balances, December 31, 1994 35,439 594,344 $2.00-$8.75 3,238
Options granted (342,500) 342,500 $2.25-$5.63 1,151
Options exercised (7,981) $2.00-$2.50 (18)
Options terminated 324,375 (324,375) $2.25-$8.25 (1,869)
------------ ------------- -----------
Balances, December 31, 1995 17,314 604,488 $2.00-$8.75 2,502
Additional shares reserved 400,000
Options granted (441,000) 441,000 $5.00-$10.34 3,367
Options exercised (92,157) $2.00-$6.13 (331)
Options terminated 23,750 (23,750) $3.38-$8.25 (108)
------------ ------------- -----------
Balances, December 31, 1996 64 929,581 $2.00-$10.34 $ 5,430
============ ============= ===========
</TABLE>

At December 31, 1996, there were 929,645 shares of common stock reserved
for issuance under the Company's stock option plans and outstanding options
for 187,956 shares of common stock were exercisable. In June 1994, the
Board of Directors gave certain employees the right to cancel certain
outstanding stock options and receive new options with an exercise prices
of $6.00 per share (the fair market value as of the date of grant). Options
for 200,000 shares of common stock at original exercise prices ranging from
$8.13 to $8.50 per share were canceled, and new options for a like number
of shares were issued in fiscal 1994. The new options retained the vesting
of the canceled options. Income tax benefits related to the exercise of
nonqualified stock options, to the extent recognized, have been recorded as
additional proceeds.

-26-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

6. Shareholders' Equity (Continued):
--------------------

Employee Stock Purchase Plan:

The Company implemented an Employee Stock Purchase Plan (the Plan) in
November 1995, under which 175,000 shares of common stock have been
reserved for issuance. The Plan is qualified under Section 423 of the
Internal Revenue Code. The Plan allows for the purchase of stock at 85% of
the lower of the closing stock price at the beginning or the end of each
six-month purchase period. As of December 31, 1996, 19,197 shares have been
issued under this Plan.

The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock- Based Compensation." The Company accounts for such
plans in accordance with APB No. 25 and related Interpretations.

<TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1996:

<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding at Contractual Exercise Exercisable at Average
Exercise Prices 12/31/96 Life (Years) Price 12/31/96 Exercise Price
- ----------------------------------------------------------------------------------------------------------

The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995:

-27-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

6. Shareholders' Equity (Continued):
--------------------

<TABLE>
<CAPTION>
Group A Group B
-------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ----------- ---------

<S> <C> <C> <C> <C>
Risk-free Interest Rates 5.17 7.68 5.25 7.64
Expected Life 5 years 5 years 4 years 4 years
Volatility 87.42% 87.42% 87.42% 87.42%
</TABLE>

The weighted average expected life was calculated based on the exercise
behavior of each group. Group A represents officers and directors who are a
smaller group holding a greater average number of options than other option
holders and who tend to exercise later in the vesting period. Group B are
all other option holders, virtually all of whom are employees. This group
tends to exercise earlier in the vesting period.

The weighted average fair value of those options granted in 1996 and 1995
was $7.64 and $3.34 respectively.

The Company has also estimated the fair value for the purchase rights
issued under the Company's Employee Stock Purchase Plan under the
Black-Scholes valuation model using the following assumptions for 1996:

Risk-free Interest Rates 5.25%
Expected Life 2 years
Volatility 87.42%

The weighted average fair value of those purchase rights granted in 1996
was $4.80.

<TABLE>
The following pro forma income (loss) information has been prepared
following the provisions of SFAS No. 123 (amounts in thousands except per
share data):

<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Net income (loss) - pro forma $ 1,750 $ (5,213)
=========== ==========

Net income (loss) per share - pro forma $ 0.38 $ (1.39)
=========== ==========

The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
</TABLE>

-28-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

7. Discontinued Operations:
-----------------------

As of September 30, 1994, the Company reported its Testing Division as
discontinued operations. Operating results of these divisions are included
in the Consolidated Statements of Operations under the caption
"Discontinued Operations: Income from Operations, Net of Income Tax." The
related net assets are immaterial. Operating results for the discontinued
operations were as follows (in thousands):

<TABLE>
<CAPTION>
Year Ended
December 31, 1994
-----------------

<S> <C>
Net sales $2,116
Income tax provision $ 258
Income from operations $ 450
</TABLE>

8. Supplemental Cash Flow Information (in thousands):
----------------------------------

Supplemental Disclosures of Cash Flow Information:

<TABLE>
Cash paid for interest and income taxes was:

<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----

<S> <C> <C> <C>
Interest $ 1,021 $ 895 $ 762
Income taxes $ 66 $ $ 37
</TABLE>

<TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities:

<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----

<S> <C> <C> <C>
Capital lease obligations $ $ 79 $ 16
Common stock issued in connection
with acquisitions $ 1,949 $ 1,660 $ 254
Retirement of shares $ $ $ 76
</TABLE>

-29-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

9. Contingencies:
-------------

The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims
which are pending or known to be threatened, will not have a material
adverse effect on the Company's consolidated financial position or results
of operations.

The Company has employment agreements with nine employees which provide for
aggregate cash severance payments of up to $1,321,000 in the event of
termination without cause, or pursuant to a change in control.

10. Savings and Retirement Plan:
---------------------------

The Company maintains the "Western Micro Technology Savings and Retirement
Plan," qualified under section 401(a) of the Internal Revenue Code. The
Plan provides for tax deferred automatic salary deductions and alternative
investment options. Employees are eligible to participate after completion
of six months of employment. Participants may apply for loans from their
accounts.

The Plan permits Company contributions determined quarterly by the Board of
Directors. No contributions were made in the years ended December 31, 1996,
1995 or 1994.

11. Business Combinations:
---------------------

On November 29, 1996, the Company acquired the net assets of International
Data Products, LLC ("IDP"), a privately held company, for $265,000 in cash
and assumed net liabilities of $424,000. The agreement between the Company
and IDP (the "Agreement") contains an earn out provision which allows IDP
to earn up to 140,000 shares of the Company's common stock based on the
attainment of gross profit targets for certain fiscal year 1997 and 1998
sales (as defined in the Agreement). The value of the shares will be based
on the average daily closing price of the Company's common stock at the end
of the earn out period, December 31, 1998. The assets purchased primarily
consisted of certain inventories and trade accounts receivable of IDP. The
acquisition has been accounted for as a purchase with the result that IDP
operations are included in the Company's financial statements since the
date of purchase. In connection with the acquisition, the Company recorded
approximately $780,000 of goodwill and other intangible assets. For the
year ended December 31, 1995, IDP had unaudited revenues of approximately
$4,611,000 with net income of approximately $2,000.

-30-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

11. Business Combinations (Continued):
---------------------

On November 7, 1996, the Company acquired the net assets of Star
Technologies, Inc. ("Star"), a privately held company, for $950,000, which
was paid in 113,263 shares of the Company's common stock at an average
price of $8.38. The agreement between the Company and Star (the
"Agreement") contains an earn-out provision which allows Star to earn up to
an additional $2,400,000 of the Company's common stock based on the
attainment of gross profit targets for certain fiscal year 1997 and 1998
sales (as defined in the Agreement). An additional 89,418 shares were
issued by the Company on November 7, 1996 and placed in escrow for the
earn-out provision. If Star does not meet the earn-out provision targets,
the appropriate amount of shares will be returned to the Company. The
assets purchased primarily consisted of certain inventories and trade
accounts receivable of Star. The acquisition has been accounted for as a
purchase with the result that Star operations are included in the Company's
financial statements since the date of purchase. In connection with the
acquisition, the Company recorded approximately $400,000 of goodwill and
other intangible assets. For the year ended June 30, 1996, Star had
revenues of approximately $7,500,000 with net income of approximately
$40,000.

On January 2, 1996, the Company acquired the assets of R&D Hardware Systems
Company of Colorado ("R&D"), a privately held company, for $1,000,000 and
125,000 shares of the Company's common stock. The agreement between the
Company and R&D (the "Agreement") contains an earn-out provision which
allows R&D to earn up to an additional 125,000 shares of the Company's
common stock based on attainment of gross profit targets for certain fiscal
year 1996 and 1997 sales (as defined in the Agreement) up to a cumulative
value not to exceed $855,000. As of December 31, 1996, approximately 33,000
shares, at an average price of $9.98, have been earned under this
provision. The assets purchased primarily consisted of certain inventories
and trade accounts receivable of R&D. The acquisition has been accounted
for as a purchase with the result that R&D operations are included in the
Company's financial statements since the date of purchase. In connection
with the acquisition, the Company recorded approximately $1,400,000 of
goodwill and other intangible assets. For the year ended December 31, 1995,
R&D had revenues of approximately $9,557,000 with net income of
approximately $446,000.

-31-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

11. Business Combinations (Continued):
---------------------

$418,550 per quarter. The stock so issued is valued at an average of
prevailing market closing stock prices at each quarterly payment date.
During 1996 the Company issued 39,108 shares, valued at $320,000, related
to this earn out provision. The acquisition has been accounted for as a
purchase with the result that IPI operations are included in the Company's
financial statements since the date of purchase. In connection with this
purchase, the Company has recorded approximately $2,600,000 of goodwill.
For the fiscal year ended December 31, 1994, IPI had revenues of
approximately $15,200,000 with net income of approximately $90,000.

On December 1, 1994, the Company acquired all of the common stock of First
Computer Corporation ("FCC"), a privately held company, for 328,943 shares
of the Company's common stock. FCC was also involved in the distribution of
midrange computer systems. Under terms of the merger agreement, FCC
stockholders received for each of their shares of common stock .741485
shares of the Company's common stock. The merger has been accounted for as
a pooling of interests and, accordingly, the consolidated financial
statements have been restated to include the amounts and results of the
operations of FCC for the year ended December 31, 1994.

<TABLE>
Revenue and net income (loss) from the continuing and discontinued
operations of the separate companies for the eleven months ended December
1, 1994 and the year ended December 31, 1993 are presented below:

<CAPTION>
Eleven
Months
Ended Year Ended
December 1, December 31,
1994 1993
------ -----
(unaudited)
<S> <C> <C>
Revenue:
Western Micro Technology, Inc. $ 103,996 $ 93,623
FCC 6,886 6,129
----------- -----------
Combined $ 110,882 $ 99,752
=========== ===========

Net income (loss):
Western Micro Technology, Inc. $ (405) $ (590)
FCC (258) 23
----------- -----------
Combined $ (663) $ (567)
=========== ===========
</TABLE>

-32-

<PAGE>

WESTERN MICRO TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------

12. Sale of Components Business and Restructuring Charge:
----------------------------------------------------

On July 26, 1995, the Company sold its electronics components distribution
assets to Reptron Electronics Inc. ("Reptron"). The transaction, valued at
approximately $12,500,000, consisted of a $9,200,000 payment in cash and
the assumption of $3,300,000 in accounts payable. Of the $9,200,000 cash
payment, $1,000,000 was held back in escrow for six months to serve as a
source of certain specified rights within the purchase agreement with
Reptron. The sale, which was approved by the Company's shareholders,
included the Company's semiconductor component inventory, certain
receivables, furniture and equipment. In addition, Reptron assumed certain
building and equipment lease obligations. As a result of this sale, the
Company recorded a restructuring charge of $3,600,000. Of this amount,
$2,376,000 was for non-cash write-offs comprised of $1,353,000 in goodwill
and a $1,023,000 increase to long-term inventory related reserves.
Severance and other exit related charges related to the sale comprised the
remaining $1,224,000. In February 1996, approximately $211,000 was
distributed from the escrow to the Company and the balance was paid to
Reptron. Concurrent with the distribution of the escrow funds, Reptron
returned approximately $789,000 of designated assets, valued at historical
cost, to the Company. These designated assets were primarily comprised of
semiconductor inventories. As of December 31, 1996 the Company did not have
any inventory related to the Reptron transaction.

13. Subsequent Event.
----------------

On March 17, 1997, the Company acquired all of the common stock of Target
Solutions, Inc. ("TSI"), a privately held company, for approximately
$2,200,000, paid in common stock of the Company. Additional consideration
can be earned by TSI by meeting certain defined gross profit targets
through fiscal year 2000. The acquisition will be accounted for as a
purchase with the result that future TSI operations will be included in the
Company's financial statements from the date of purchase. In connection
with the acquisition, the Company expects to record approximately
$2,500,000 of goodwill and other intangible assets. For the year ended
December 31, 1996, TSI had unaudited revenues of approximately $16,000,000
with net income of approximately $200,000.

-33-

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------

None.

-34-

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------

Directors and Executive Officers.

(a) Directors
---------

James J. Heffernan, 55, was elected as a Director of the Company in October
1995. Since January 1996 he has been Chief Financial Officer and a Director of
US Web Corporation, a franchisor of World Wide Web developers. He was Chief
Financial Officer of Interlink Computer Sciences, a software company, from March
1995 to January 1996. Prior to such time, Mr. Heffernan was Chairman of the
Board and Chief Financial Officer of Panoramic, Inc., a software company.
Panoramic filed for Chapter 11 bankruptcy in May 1991 and all of its assets were
sold to Computer Associates, Inc. From June 1994 to June 1995, Mr. Heffernan was
a board member of International Microcomputer Software, Inc. He was Vice
President of Finance and Chief Financial Officer of Software Publishing, Inc., a
position he held from 1987 through 1989.

Jerome A. Martin, 56, was elected as a Director of the Company in October
1995 and has been active in the business development of the Company since
December 1, 1994. Mr. Martin was President and Chairman of the Board of First
Computer Corporation, a systems distributor ("FCC") founded by Mr. Martin in
1976. On December 1, 1994, the Company acquired FCC, which became a wholly owned
subsidiary of the Company.

P. Scott Munro, 40, was appointed as a Director of the Company in July 1995
and has been the President, Chief Executive Officer and Secretary of the Company
since July 1995. From January 1993 to July 1995, Mr. Munro was President,
Computer Systems Division of the Company and from July 1990 to January 1993
Senior Vice President, Computer Systems Division of the Company.

K. William Sickler, 47, was elected as a Director of the Company in July
1993. Currently, Mr. Sickler is Chief Executive Officer and President of Gadzoox
Microsystems, Inc., a provider of gigabit fibre channel networking products.
Prior to April 1996, he was Executive Director of Software Business Development
for Seagate Technology, a manufacturer of disk drives and software developer,
with responsibility for analysis of potential software company acquisitions.
Until July 1995, Mr. Sickler was President and Chief Executive Officer of
Network Computing, Inc., a provider of network management software for local
area networks. From 1980 to 1992, he was employed by Ungermann-Bass, Inc., a
provider of networking products and services. His most recent position was that
of Chief Operating Officer. Prior to that, he held the positions of Vice
President of Operations and Vice President of Manufacturing and Quality.

J. Larry Smart, 49, was elected as a Director of the Company and was
appointed as Chairman of the Board in October 1995. He has been Chairman of the
Board, President and Chief Executive Officer of StreamLogic Corporation, a data
storage company, since July 1995.

-35-

<PAGE>

From March 1994 to February 1995, Mr. Smart was President and Chief
Executive Officer of Maxtor Corporation, a data storage company. From July 1991
to February 1995, Mr. Smart was President and Chief Executive Officer of
Southwall Technologies, Inc., a material science company.

William H. Welling, 63, was appointed a Director of the Company in April
1993. Since September 1989, he has served as Chairman of the Board and Chief
Executive Officer of Xiox Corporation, a telecommunications software company.
Since September 1983, he has been Managing Partner of Venture Growth Associates
partnerships, investment partnerships.

(b) Executive Officers
------------------

P. Scott Munro, 40, see "Directors" above.

James Dorst, 42, joined the Company in May 1995 as Chief Financial Officer.
From 1994 to 1995, Mr. Dorst was Chief Financial Officer of Accolade, Inc., an
entertainment software developer. From 1986 through 1993 he was the Chief
Financial Officer of Drypers, Corp., a manufacturer of consumer disposable
products, and prior to 1986 he was employed by the public accounting firm of
Coopers & Lybrand L.L.P.

Donald A. Cochrane, 41, was promoted to the position of Senior Vice
President, Sales and Marketing in July 1995. Mr. Cochrane joined the Company in
March 1993 as General Manager, Reseller Division and was promoted in February
1994 to Vice President, Reseller Division. From 1989 to 1993 he was Director,
Reseller Sales, at NeXT Computer, a software company; from 1985 to 1988, he was
Manager of Peripherals Product Marketing for Apple Computer; from 1983 to 1985
he was Vice President of Sales and Marketing for Mountain Computer; and from
1982 to 1983, he was Western Regional Sales Manager for Mountain Computer.

Michael E. Merriman, 54, was appointed Vice President of Information
Technology in September, 1996. Mr. Merriman joined the Company in 1994 with the
acquisition of First Computer Corporation. As one of the founders of First
Computer, Mr. Merriman held several positions in his eighteen year tenure,
including President. Prior to that, he was an executive officer of a systems
consulting firm, Applied Information Development, which he co-founded in 1968.

Scott Robertson, 40, joined the Company in September 1995 as Director of
Logistics and was appointed Vice President of Operations in April 1996. Prior to
joining the Company, Mr. Robertson was General Manager of the Custom Computer
Products Group of Arrow Electronics, Inc.

Robert O'Reilly, 44, joined the Company in February 1996 as Director of
Human Resources and was appointed Vice President of Human Resources in May 1996.
Prior to joining the Company, Mr. O'Reilly was a Director of Human Resources,
with special emphasis

-36-

<PAGE>

on recruitment, training and development during his 10-year career with
Future Electronics, Inc. Mr. O'Reilly has also worked in the academic field and
played professional hockey.

Fred J. Cuen, 39, joined the Company in January 1996 as General Manager,
IBM Business Unit and was appointed Vice President and General Manager, IBM
Business Unit in October 1996. Prior to joining the Company, Mr. Cuen held
management positions in research, manufacturing, sales and marketing in his
20-year career with IBM.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules of the Securities and Exchange Commission (the "Commission") thereunder
require the Company's directors and executive officers to file reports of their
ownership and change in ownership of the Company's common stock with the
Commission. Based solely upon a review of such reports, the Company believes
that all reports required by Section 16(a) of the Exchange Act to be filed by
its directors and executive officers during the last fiscal year were filed on
time, except that Jerome Martin reported the sale of 10,000 shares of Common
Stock approximately ten months late and Messrs. Munro and Cochrane reported the
purchase of 2,019 and 1,133 shares, respectively, of Common Stock under the
Company's employee stock purchase plan approximately nine months late.

-37-

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
----------------------

SUMMARY COMPENSATION TABLE

<TABLE>
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer and of the Company's
two other executive officers (the "named executive officers"), for the fiscal
years ended December 31, 1996, 1995 and 1994.

<CAPTION>
Summary Compensation Table
Long-Term
Compensa-
Annual Compensation tion Awards
---------------------------------------- -----------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ---- ------ ----- ------------ ------- ------------

<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro 1996 $221,286 $122,564 - 125,000 -
President, Chief Executive 1995 $173,660 $152,530 - 60,000 -
Officer and Secretary 1994 $161,234 $75,550 - 100,000(1) $3,414(2)

James W. Dorst(3) 1996 $150,000 $47,867 - 20,000 -
Chief Financial Officer 1995 $100,000 $30,640 $20,833 50,000 -

Donald A. Cochrane(4) 1996 $150,000 $66,384 - 40,000 -
Senior Vice President, Sales 1995 $106,980 $82,629 - 37,500 -
and Marketing

- ----------

(1) Certain of the Company's executive officers received stock options in 1994,
which options were subsequently repriced later in the year. The rules of
the Commission require that both the original option grant and the repriced
option be reported as separate grants of stock options. However, since the
original options received in 1994 were canceled at the time of repricing,
the grantees were entitled only to the amount of the shares covered by the
repriced options. See also "Change in Control" at page .

(2) Consists of medical costs covered by the Company's medical reimbursement
plan.

(3) Mr. Dorst served as a consultant to the Company until he was hired in May
1995. During his consultancy with the Company, he was paid $20,833.

(4) Mr. Cochrane became an executive officer in July 1995.
</TABLE>

-38-

<PAGE>

<TABLE>
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 to the Company's named
executive officers.

<CAPTION>
Option Grants in Last Fiscal Year(1)
Potential Realized Value of
Percent of Assumed Annual Rates of Stock
Number of Total Options Price Appreciation For Option
Securities Granted to Exercise or Term
Underlying Employees in Base Price Expiration ----
Name Options Granted Fiscal Year ($/Share) Date 5% 10%
---- --------------- ----------- --------- ---- -- ---

<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro 40,000 9.6% $5.00 01/18/06 $125,778.93 $ 318,748.49

85,000 20.3% $9.00 09/27/06 $481,104.49 $1,219,212.98

James W. Dorst 20,000 4.8% $9.00 09/27/06 $113,201.03 $ 286,873.64

Donald A. Cochrane 20,000 4.8% $5.00 01/18/06 $ 62,889.46 $ 159,374.25

20,000 4.8% $9.00 09/27/06 $113,201.03 $ 286,873.64
- ---------

(1) These options vest twenty-five percent (25%) over a four (4) year period,
except for the options granted in January 1996 to Messrs. Munro and
Cochrane, which vest over four years beginning two years from the date of
grant. See also "Change in Control" at page 40.
</TABLE>

<TABLE>
The following table shows the number of shares of Common Stock represented
by outstanding stock options held by each of the named executive officers as of
December 31, 1996. The Company's Common Stock price as at close of business on
December 31, 1996 was $12.25.

FY-End Option Values(1)
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at FY-End # Options at FY-End #
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------

<S> <C> <C>
P. Scott Munro 79,218 / 207,500 $633,957.25 / $1,250,625.00

James W. Dorst 12,500 / 57,500 $125,000.00 / $440,000.00

Donald A. Cochrane 24,375 / 78,125 $187,500.00 / $553,750.00

- ---------

(1) None of the Company's named executive officers exercised options during
1996.
</TABLE>

Compensation of Directors

Outside directors (i.e., those who are not employees of the Company)
receive an annual retainer of $20,000, plus $750 for each board meeting
attended. The Company pays for directors' liability insurance and has entered
into indemnification agreements with each of the directors.

-39-

<PAGE>

At the 1994 Annual Meeting, the Company approved the adoption of the
Company's 1994 Stock Option Plan, which was amended at the Company's 1996 Annual
Meeting of Stockholders. Among many other benefits, the 1994 Stock Option Plan,
as amended, provides for the grant of an option of 10,000 shares of the
Company's Common Stock to certain directors who are not employees following
their initial election or appointment and an option for 2,500 shares at every
regular annual meeting thereafter at which they are elected. The exercise price
is the fair market value of the shares on the date of each respective grant and
the options vest over a four-year period.

Change in Control

Stock options held by the Company's directors and named executive officers
under the Company's Stock Option Plans will become fully vested and exercisable
following a change in control of the Company. A "change in control" means the
occurrence of any of the following events: (1) shareholder approval of a merger
or consolidation of the Company with any other corporation resulting in a change
in fifty percent (50%) or more of the total voting power of the Company; (2)
shareholder approval of a plan of complete liquidation of the Company or an
agreement for the sale or disposition of all or substantially all of the
Company's assets; or (3) any person becomes the beneficial owner of more than
fifty percent (50%) of the Company's total outstanding securities.

Employment Agreements

The Company entered into an Employment Agreement with P. Scott Munro dated
January 1, 1996. Pursuant to the terms of the Agreement, Mr. Munro receives a
base salary of $203,000 per year and is eligible to receive a bonus of up to
$125,000 a year (up to $25,000 of which is payable quarterly pursuant to certain
quarterly performance goals and $25,000 of which is payable annually pursuant to
certain annual performance goals). Effective July, 1, 1996, Mr. Munro's base
salary was increased to $260,000 and his annual incentive bonus was increased to
$30,000. If Mr. Munro is terminated for cause, he will be entitled to receive
his base salary and bonus due through the date of his termination. If Mr. Munro
is terminated without cause, he will be entitled to receive his base salary for
twelve (12) months following his termination. If Mr. Munro's responsibilities
are reduced within twelve (12) months following a change in control, as defined
above, and such reduction in responsibilities is not for cause, any resignation
of employment by Mr. Munro as a consequence of such reduction in
responsibilities will be treated as a termination of employment without cause.

The Company entered into an Employment Agreement with James W. Dorst dated
June 12, 1995. Pursuant to the terms of the Agreement, Mr. Dorst receives a base
salary of $150,000 per year and is eligible to receive a bonus of up to $50,000
per year, subject to certain performance goals. If Mr. Dorst is terminated for
cause, he will be entitled to receive his base salary and bonus due through the
date of his termination. If Mr. Dorst is terminated without cause, he will be
entitled to receive his base salary for nine (9) months following his
termination in accordance with the Company's severance policy. If Mr. Dorst's
responsibilities are reduced within twelve (12) months following a change in
control, as defined above, and such reduction in responsibilities is not for
cause, any resignation of employment by Mr. Dorst

-40-

<PAGE>

as a consequence of such reduction in responsibilities will be treated as a
termination of employment without cause.

The Company entered into an Employment Agreement with Donald A. Cochrane
dated January 1, 1996. Pursuant to the terms of the Agreement, Mr. Cochrane
receives a base salary of $150,000 per year and is eligible to receive a bonus
of up to $70,000 a year, (up to $15,000 of which is payable quarterly pursuant
to certain quarterly performance goals and up to $10,000 of which is payable
annually based on the achievement of certain annual performance goals). If Mr.
Cochrane is terminated for cause, he will be entitled to receive his base salary
and bonus due through the date of his termination. If Mr. Cochrane is terminated
without cause, he will be entitled to receive his base salary for nine (9)
months following his termination. If Mr. Cochrane's responsibilities are reduced
within twelve (12) months following a change in control, as defined above, and
such reduction in responsibilities is not for cause, any resignation of
employment by Mr. Cochrane as a consequence of such reduction in
responsibilities will be treated as a termination of employment without cause.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------

The following table sets forth information as to the beneficial ownership
of the Company's Common Stock as of March 25, 1997 (unless otherwise indicated),
of each person known to the Company to be the beneficial owner of more than five
percent (5%) of its Common Stock, no par value, and the number of shares owned
by each director, each named executive officer and all executive officers and
directors as a group.

-41-

<PAGE>

<TABLE>
<CAPTION>
Shares
Beneficially
Name of Beneficial Owner(1) Owned Percent
------------------------ ----- -------

<S> <C> <C>
Bernard T. Marren 371,400 7.8%
20823 Stevens Creek Blvd., Ste. 400
Cupertino, CA 95014

ROI Capital Management, Inc. ("ROI") 323,600 6.8%
and affiliates(2)
One Bush Street, Ste. 1150
San Francisco, CA 94104

Donald A. Cochrane 38,723(3) *

James W. Dorst 28,812(3) *

James J. Heffernan 3,125(3) *

Jerome A. Martin 31,842(3) *

P. Scott Munro 87,598(3) 1.9%

K. William Sickler 16,875(3) *

J. Larry Smart 17,125 *

William H. Welling 16,165(3) *

All Executive Officers and Directors as a Group 240,264(4) 5.1%
(8 persons)

- ----------

* Less than one percent (1%).

(1) Unless otherwise indicated, the beneficial owner has sole voting and
dispositive power over the shares reported in the table.

(2) Based on a Schedule 13D amendment number 1 dated January 26, 1996 filed
jointly by ROI, ROI Partners, L.P. ("PTRS"), ROI & Lane, L.P. ("R&L"), Mark
T. Boyer and Mitchell J. Soboleski reporting beneficial ownership as
follows:

Shares Shared Voting and
Beneficially Owned Dispositive Power
------------------ -----------------

<S> <C> <C>
ROI 323,600 323,600
PTRS 201,000 201,000
R&L 24,000 24,000
Mr. Boyer 201,000 201,000
Mr. Soboleski 201,000 201,000

Messrs. Boyer and Soboleski are the sole shareholders of ROI and
respectively, President and Secretary. Messrs. Boyer and Soboleski and ROI
are the general partners of PTRS, which is an investment limited
partnership. ROI is the managing general partner of R&L, which is an
investment partnership.

-42-

<PAGE>

(3) Includes shares purchasable under the Company's Stock Option Plans, as of
March 25, 1997 or within sixty (60) days thereafter as set forth below. See
also "Change in Control" at page 40.

Donald A. Cochrane: 17,500 shares at $6.00
9,375 shares at $2.25

James W. Dorst: 12,500 shares at $2.25

James J. Heffernan 2,500 shares at $5.63
625 shares at $10.34

Jerome A. Martin: 3,125 shares at $10.34

P. Scott Munro: 2,968 shares at $2.13
22,500 shares at $2.25
5,000 shares at $2.75
11,250 shares at $3.63
37,500 shares at $6.00

K. William Sickler: 7,500 shares at $8.25
3,750 shares at $5.00
625 shares at $10.34

J. Larry Smart: 2,500 shares at $5.63
625 shares at $10.34

William H. Welling: 7,500 shares at $8.25
3,750 shares at $5.00
625 shares at $10.34

(4) Includes 151,718 shares subject to outstanding options held by executive
officers and directors.
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

(a) Transactions with Management and Others
---------------------------------------

None.

(b) Certain Business Relationships
------------------------------

None.

-43-

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
-------------------------------------------------------
FORM 8-K
--------

(a) 1. Financial Statements
--------------------

The financial statements listed below appear on the pages indicated:

Page Number
-----------

Consolidated Balance Sheets, December 31, 1996 and
1995 15

Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 16

Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 17

Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 18

Notes to Consolidated Financial Statements 19

2. Financial Statement Schedules
-----------------------------

The financial statement schedules listed below appear on the pages
indicated:

Page Number
-----------
Schedule II - Valuation and Qualifying Accounts and
Reserves 49

Report of Independent Accountants on Financial
Statement Schedules 50

3. Exhibits
--------

The exhibits listed under Item 14(c) are filed or incorporated by
reference herein.

(b) Reports on Form 8-K
-------------------

None.

The Exhibits listed below are filed or incorporated by reference herein.

-44-

<PAGE>

INDEX TO EXHIBITS

Number Description
- ------ -----------

3.1(a) Articles of Incorporation for Silicon Valley Services, Inc. filed with
the California Secretary of State on December 30, 1975, filed as
Exhibit 3-A to the Company's Form S-1, Registration No. 2-86846, is
hereby incorporated by reference.

3.1(b) Certificate of Amendment of Articles of Incorporation of Silicon
Valley Services, Inc. (part of which changed the name of the Company
to Western Micro Technology, Inc.) filed with the California Secretary
of State on April 1, 1977, filed as Exhibit 4.2 to the Company's Form
S-8, Registration No. 33-60778, is hereby incorporated by reference.

3.1(c) Certificate of Amendment of Articles of Incorporation filed with the
California Secretary of State on August 30, 1983, filed as Exhibit 4.3
to the Company's Form S-8, Registration No. 33-60778, is hereby
incorporated by reference.

3.1(d) Certificate of Amendment of Articles of Incorporation filed with the
California Secretary of State on April 5, 1988, filed as Exhibit 3.1
to the Company's Form 10-K for the year ended March 31, 1988, is
hereby incorporated by reference.

3.2 Amended Bylaws dated June 15, 1994, filed as Exhibit A to the
Company's Definitive Proxy Statement dated May 23, 1994 as filed with
the Commission on May 24, 1994, are hereby incorporated by reference.

*10.1 Amended and Restated Incentive and Non-Incentive Stock Option Plan,
filed as Exhibit 10.1 with Form 10-K for the year ending December 31,
1990, is hereby incorporated by reference.

10.2 Amended and Restated 1994 Stock Option Plan of Western Micro
Technology, Inc., filed as Exhibit B to the Company's Definitive Proxy
Statement dated May 23, 1994 as filed with the Commission on May 24,
1994, is hereby incorporated by reference.

10.3 Lease for Saratoga, California facility filed as Exhibit 10.5 with
Form 10-K for the year ending March 31, 1987 is hereby incorporated by
reference.

10.4 Amended Lease for Saratoga, California facility dated January 21,
1992, filed as Exhibit 10.3 with Form 10-K for the year ending
December 31, 1991, is hereby incorporated by reference.

10.5 Master Lease Commitment dated September 25, 1989 and Supplements 8.01
and 8.02 thereto, filed as Exhibit 10.5 with Form 10-K for the year
ending March 31, 1990 is hereby incorporated by reference.

-45-

<PAGE>

Number Description
- ----- -----------

10.6 Loan and Security Agreement with Coastfed Business Credit Corporation
of California dated January 29, 1992, filed as Exhibit 10.9 with Form
10-K for the year ending December 31, 1991, is hereby incorporated by
reference.

10.7 Amendment to Loan Documents between the Company and Coastfed Business
Credit March 27, 1994, filed as Exhibit 10.23 with Form 10-Q for the
period ending June 30, 1994, is hereby incorporated by reference.

10.8 Lease for Irvine, California facility dated October 29, 1993, filed as
Exhibit 10.18 with Form 10-K for the period ending December 31, 1993,
is hereby incorporated by reference.

*10.9 Promissory Note from Ronald H. Mabry dated March 31, 1994, filed as
Exhibit 10.21 with Form 10-Q for the period ending March 31, 1994, is
hereby incorporated by reference.

*10.10 Employment Agreement between the Company and Ronald H. Mabry dated
April 1, 1994, filed as Exhibit 10.21 with Form 10-Q for the period
ending March 31, 1994, is hereby incorporated by reference.

10.11 Business Partner (Redistributor) Agreement between the Company and
International Business Machines Corporation dated October 1, 1992
filed as Exhibit 10.27 with Form 10-K for the period ending December
31, 1994, is hereby incorporated by reference.

10.12 Business Partner (Redistributor) Agreement between the Company and
International Business Machines Corporation dated February 28, 1994
filed as Exhibit 10.28 with Form 10-K for the period ending December
31, 1994, is hereby incorporated by reference.

*10.13 Employment Agreement between the Company and P. Scott Munro dated June
1, 1994 filed as Exhibit 10.29 with Form 10-K for the period ending
December 31, 1994, is hereby incorporated by reference.

*10.14 Employment Agreement between the Company and John Ashbaugh dated July
29, 1994 filed as Exhibit 10.30 with Form 10-K for the period ending
December 31, 1994, is hereby incorporated by reference.

10.15 Asset Purchase Agreement dated May 5, 1995 between the Company and
Reptron Electronics, Inc., filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on August 9,
1995, is hereby incorporated by reference.

10.16 Agreement and Plan of Reorganization dated November 18, 1995 between
the Company and International Parts, Inc., filed as Exhibit 2.1 to the
Company's

-46-

<PAGE>

Number Description
- ------ -----------

Current Report on Form 8-K filed with the Commission on December 4,
1995 is hereby incorporated by reference.

10.17 Asset Purchase Agreement dated January 2, 1996 between the Company and
R&D Hardware Systems Company of Colorado, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on
January 17, 1996, is hereby incorporated by reference.

*10.18 Employment Letter between the Company and P. Scott Munro dated January
18, 1996, filed as exhibit 10.18 to the Company's Form 10-K for the
year ended December 31, 1995, is hereby incorporated by reference.

*10.19 Employment Letter between the Company and Donald A. Cochrane dated
January 18, 1996, filed as exhibit 10.19 to the Company's Form 10-K
for the year ended December 31, 1995, is hereby incorporated by
reference.

*10.20 Employment Letter between the Company and James W. Dorst dated June
12, 1995, filed as exhibit 10.20 to the Company's Form 10-K for the
year ended December 31, 1995, is hereby incorporated by reference.

10.21 Lease Agreement between MP Hacienda, Inc. and the Company dated July
15, 1995, filed as exhibit 10.21 to the Company's Form 10-K for the
year ended December 31, 1995, is hereby incorporated by reference.

10.22 Amendment to Loan Documents dated November 20, 1995 between the
Company and Coast Business Credit, filed as exhibit 10.22 to the
Company's Form 10-K for the year ended December 31, 1995, is hereby
incorporated by reference.

10.23 Inventory and Working Capital Financing Agreement dated December 1,
1996 by and between IBM Credit Corporation and the Company, and
Amendment #1 thereto.

10.24 Asset Purchase Agreement dated November 7, 1996 by and among the
Company, Star Technologies, Inc. and the Shareholders of Star
Technologies, Inc. Schedules to this Agreement omitted from this
report will be furnished to the Securities and Exchange Commission
upon request.

10.25 Asset Purchase Agreement dated November 29, 1996 by and among the
Company, International Data Products, LLC, Oliver-Allen Corporation,
Inc., International Data Products and Financial, Ltd., Alan M. Bynder
and Michael R. Duhaime. Schedules to this Agreement omitted from this
report will be furnished to the Securities and Exchange Commission
upon request.

11.1 Statement re Computation of Per Share Earnings.

-47-

<PAGE>

23.1 Consent of Coopers & Lybrand L.L.P.

24.0 Power of Attorney [see pages 52-53 of this Form 10-K].

27.0 Financial Data Schedule.

* Denotes management compensation plan or arrangement.

(d) Financial Statement Schedules
-----------------------------

The financial statement schedules listed below appear on the pages
indicated.

Page Number
-----------
Schedule II - Valuation and Qualifying Accounts and
Reserves 49

Report of Independent Accountants on Financial
Statement Schedules 50

All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto.

-48-

<PAGE>

SCHEDULE II

<TABLE>
WESTERN MICRO TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
----------

<CAPTION>
Balance at Balance
Beginning At End
of Period Additions(1) Other(2) Deductions(3) of Period
---------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts $882 $302 $ $791 $393

Year ended December 31, 1995:
Allowance for doubtful accounts $393 $291 $200 $504 $380

Year ended December 31, 1996:
Allowance for doubtful accounts $380 $120 $250 $339 $411

- ----------
(1) Charged to costs and expenses.
(2) Reserves related to acquisitions.
(3) Accounts written off against the reserve.
</TABLE>

-49-

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders
Western Micro Technology, Inc.:

Our report on the consolidated financial statements of Western Micro Technology,
Inc. and its subsidiaries is included on page 14 in this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page of this
Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.

COOPERS & LYBRAND L.L.P.

San Jose, California
January 31, 1997

-50-

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 27, 1997 REGISTRANT:

WESTERN MICRO TECHNOLOGY, INC.

By /s/ P. SCOTT MUNRO
-----------------------------------------
P. Scott Munro
President, Chief Executive Officer,
Secretary and Director
(Principal Executive Officer)

By /s/ JAMES W. DORST
-----------------------------------------
James W. Dorst
Chief Financial Officer
(Principal Financial and
Accounting Officer)

-51-

<PAGE>

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints P. Scott Munro and James W. Dorst and
each of them, as his attorney-in-fact, with full power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature and Title Date
------------------- ----

By /s/ P. SCOTT MUNRO March 27, 1997
------------------------------------------
P. Scott Munro
President, Chief Executive Officer,
Secretary and Director
(Principal Executive Officer)

By /s/ JAMES W. DORST March 27, 1997
------------------------------------------
James W. Dorst
Chief Financial Officer
(Principal Financial and Accounting Officer)

By /s/ JAMES J. HEFFERNAN March 27, 1997
------------------------------------------
James J. Heffernan
Director

By /s/ JEROME A. MARTIN March 27, 1997
------------------------------------------
Jerome A. Martin
Director

-52-

<PAGE>

Signature and Title Date
------------------- ----

By /s/ K. WILLIAM SICKLER March 27, 1997
------------------------------------------
K. William Sickler
Director

By /s/ J. LARRY SMART March 27, 1997
------------------------------------------
J. Larry Smart
Director, Chairman of the Board

By /s/ WILLIAM H. WELLING March 27, 1997
------------------------------------------
William H. Welling
Director

-53-

Table of Contents

INVENTORY AND WORKING CAPITAL
FINANCING AGREEMENT

Section 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . .3
1.1. Special Definitions . . . . . . . . . . . . . . . . . .3
1.2. Other Defined Terms . . . . . . . . . . . . . . . . . . 11
1.3 Attachments . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES . . . . . . . 11
2.1. Credit Line . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Product Advances . . . . . . . . . . . . . . . . . . . . 11
2.3. A/R Advances . . . . . . . . . . . . . . . . . . . . . . 13
2.4. Finance and Other Charges . . . . . . . . . . . . . . . 14
2.5. Statements Regarding Customer's Account. . . . . . . . . 15
2.6. Shortfall. . . . . . . . . . . . . . . . . . . . . . . . 15
2.7. Application of Payments. . . . . . . . . . . . . . . . . 15
2.8. Prepayment and Reborrowing By Customer . . . . . . . . . 15
Section 3. CREDIT LINE/ADDITIONAL PROVISIONS . . . . . . . . . . . 16
3.1. Ineligible Accounts. . . . . . . . . . . . . . . . . . . 16
3.2. Reimbursement for Charges. . . . . . . . . . . . . . . . 18
3.3. Lockbox and Special Account. . . . . . . . . . . . . . . 18
3.4. Collections. . . . . . . . . . . . . . . . . . . . . . . 18
3.5. Application of Remittances and Credits . . . . . . . . . 18
3.6. Power of Attorney. . . . . . . . . . . . . . . . . . . . 19
Section 4. SECURITY -- COLLATERAL. . . . . . . . . . . . . . . . . 20
4.1 Grant. . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.2. Further Assurances . . . . . . . . . . . . . . . . . . . 21
Section 5. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . 21
5.1. Conditions Precedent to the Effectiveness of
This Agreement . . . . . . . . . . . . . . . . . . . . 21
5.2. Conditions Precedent to Each Advance . . . . . . . . . . 22
Section 6. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . 23
6.1. Organization and Qualifications. . . . . . . . . . . . . 23
6.2. Rights in Collateral; Priority of Liens. . . . . . . . . 23
6.3. No Conflicts . . . . . . . . . . . . . . . . . . . . . . 23
6.4. Enforceability . . . . . . . . . . . . . . . . . . . . . 24
6.5. Locations of Offices, Records and Inventory. . . . . . . 24
6.6. Fictitious Business Names. . . . . . . . . . . . . . . . 24
6.7. Organization . . . . . . . . . . . . . . . . . . . . . . 24
6.8. No Judgments or Litigation . . . . . . . . . . . . . . . 24
6.9. No Defaults. . . . . . . . . . . . . . . . . . . . . . . 24
6.10. Labor Matters . . . . . . . . . . . . . . . . . . . . . 25
6.11. Compliance with Law . . . . . . . . . . . . . . . . . . 25
6.12. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.13. Compliance with Environmental Laws . . . . . . . . . . . 25
6.14. Intellectual Property . . . . . . . . . . . . . . . . . 26
6.15. Licenses and Permits . . . . . . . . . . . . . . . . . . 26
6.16. Investment Company . . . . . . . . . . . . . . . . . . . 26
6.17. Taxes and Tax Returns . . . . . . . . . . . . . . . . . 26
6.18. Status of Accounts . . . . . . . . . . . . . . . . . . . 27
6.19. Affiliate/Subsidiary Transactions . . . . . . . . . . . 27
6.20. Accuracy and Completeness of Information . . . . . . . . 27
6.21. Recording Taxes . . . . . . . . . . . . . . . . . . . . 27
6.22. Indebtedness . . . . . . . . . . . . . . . . . . . . . . 27

Page 1 of 46

<PAGE>

Section 7. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . 27
7.1. Financial and Other Information. . . . . . . . . . . . . 27
7.2. Location of Collateral . . . . . . . . . . . . . . . . . 30
7.3. Changes in Customer. . . . . . . . . . . . . . . . . . . 30
7.4. Corporate Existence . . . . . . . . . . . . . . . . . . 31
7.5. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.6. Environmental Matters . . . . . . . . . . . . . . . . . 31
7.7. Collateral Books and Records/Collateral Audit . . . . . 32
7.8. Insurance; Casualty Loss . . . . . . . . . . . . . . . . 32
7.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.10. Compliance With Laws . . . . . . . . . . . . . . . . . . 33
7.11. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 33
7.12. Intellectual Property . . . . . . . . . . . . . . . . . 33
7.13. Maintenance of Property . . . . . . . . . . . . . . . . 33
7.14. Collateral . . . . . . . . . . . . . . . . . . . . . . . 34
7.15. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 35
7.16. Financial Covenants; Additional Covenants . . . . . . . 35
Section 8. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . 35
8.1. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.2. Disposition of Assets. . . . . . . . . . . . . . . . . . 35
8.3. Corporate Changes. . . . . . . . . . . . . . . . . . . . 35
8.4. Guaranties . . . . . . . . . . . . . . . . . . . . . . . 36
8.5. Restricted Payments. . . . . . . . . . . . . . . . . . . 36
8.6. Investments. . . . . . . . . . . . . . . . . . . . . . . 36
8.7. Affiliate/Subsidiary Transactions . . . . . . . . . . . 36
8.8. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.9. Additional Negative Pledges . . . . . . . . . . . . . . 37
8.10. Storage of Collateral with Bailees and Warehousemen. . . 37
8.11. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 37
8.12. Accounts . . . . . . . . . . . . . . . . . . . . . . . 37
8.13. Indebtedness . . . . . . . . . . . . . . . . . . . . . . 37
8.14. Loans . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 9. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 38
9.1. Event of Default . . . . . . . . . . . . . . . . . . . . 38
9.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . 40
9.3. Remedies . . . . . . . . . . . . . . . . . . . . . . . . 40
9.4. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 42
10.1. Term; Termination . . . . . . . . . . . . . . . . . . . 42
10.2. Indemnification . . . . . . . . . . . . . . . . . . . . 42
10.3. Additional Obligations . . . . . . . . . . . . . . . . 42
10.4. Limitation of Liability . . . . . . . . . . . . . . . . 43
10.5. Alteration/Waiver . . . . . . . . . . . . . . . . . . . 43
10.6. Severability . . . . . . . . . . . . . . . . . . . . . 43
10.7. One Loan . . . . . . . . . . . . . . . . . . . . . . . 43
10.8. Additional Collateral . . . . . . . . . . . . . . . . . 44
10.9. No Merger or Novations. . . . . . . . . . . . . . . . . 44
10.10. Paragraph Titles . . . . . . . . . . . . . . . . . . . 44
10.11. Binding Effect; Assignment . . . . . . . . . . . . . . 44
10.12. Notices . . . . . . . . . . . . . . . . . . . . . . . . 45
10.13. Counterparts . . . . . . . . . . . . . . . . . . . . . 45
10.14. Attachment A modifications . . . . . . . . . . . . . . 45
10.15. Submission and Consent to Jurisdiction and
Choice of Law . . . . . . . . . . . . . . . . . . . . 45
10.16. Jury Trial Waiver . . . . . . . . . . . . . . . . . . . 46

Page 2 of 46

<PAGE>

INVENTORY AND WORKING CAPITAL
FINANCING AGREEMENT

This INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT (as amended, supplemented
or otherwise modified from time to time, this "Agreement") amends and restates
that Agreement for Wholesale Financing dated April 29, 1993 (as amended from
time to time, the "Financing Agreement") and is hereby made this ____ day of
____________, 1996, by and between IBM CREDIT CORPORATION with a place of
business at 5000 Executive Parkway, Suite 450, San Ramon, CA 94583, a Delaware
corporation, ("IBM Credit"), and WESTERN MICRO TECHNOLOGY, INC. with a place of
business at 254 E. Hacienda Avenue, Campbell, CA 95008, a California
corporation, ("Customer").

WITNESSETH

WHEREAS, IBM Credit and Customer are parties to that certain Financing
Agreement pursuant to which IBM Credit finances Customer's acquisition of
inventory and equipment;

WHEREAS, in the course of Customer's operations, Customer intends to
purchase from Persons approved in writing by IBM Credit for the purposes of this
Agreement (the "Authorized Suppliers") computer hardware and software products
manufactured or distributed by or bearing any trademark or trade name of such
Authorized Suppliers for distribution throughout the United States (the
"Products") (as of the date hereof the Authorized Suppliers are as set forth on
Attachment E hereto);

WHEREAS, Customer has requested that IBM Credit finance its purchase of
Products from such Authorized Suppliers and its working capital requirements,
and IBM Credit is willing to provide such financing to Customer subject to the
terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree that the Financing Agreement is hereby
amended and restated in its entirety as follows:

Section 1. DEFINITIONS; ATTACHMENTS

1.1 Special Definitions. The following terms shall have the following respective
meaning in this Agreement:

"A/R Advance": any loan or advance of funds made by IBM Credit to or on behalf
of Customer pursuant to Section 2.3 of this Agreement, including, as the context
may require, a WCO Advance, a PRO Advance and a Takeout Advance.

Page 3 of 46

<PAGE>

"A/R Advance Date": the Business Day on which IBM Credit makes an A/R Advance
under this Agreement.

"A/R Advance Term": shall be the collective or individual reference, as the
context may require, to a PRO Advance Term and a WCO Advance Term.

"A/R Finance Charges": as defined on Attachment A.

"Accounts": as defined in the U.C.C.

"Advance": any loan or other extension of credit by IBM Credit to or on behalf
of Customer pursuant to this Agree- ment including, without limitation, (i)
Product Advances and (ii) A/R Advances.

"Affiliate": with respect to the Customer, any Person meeting one of the
following: (i) at least 10% of such Person's equity is owned, directly or
indirectly, by Customer; (ii) at least 10% of Customer's equity is owned,
directly or indirectly, by such Person; or (iii) at least 10% of Customer's
equity and at least 10% of such Person's equity is owned, directly or
indirectly, by the same Person or Persons. All of Customer's officers,
directors, joint venturers, and partners shall also be deemed to be Affiliates
of Customer for purposes of this Agreement.

"Agreement": as defined in the caption.

"Auditors": a nationally recognized firm of independent certified public
accountants selected by Customer and satis- factory to IBM Credit.

"Available Credit": at any time, (1) the Maximum Advance Amount less (2) the
Outstanding Advances at such time.

"Average Daily Balance": the sum of the Outstanding Product Advances or
Outstanding A/R Advances, as the case may be, as of the end of each day during a
calendar month, divided by the number of days in the calendar month.

"Borrowing Base": as defined in Attachment A.

"Business Day": any day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York are generally closed or on which IBM
Credit is closed.

"Closing Date": the date on which the conditions precedent to the effectiveness
of this Agreement set forth in Section 5.1 hereof are satisfied or waived in
writing by IBM Credit.

"Code": the Internal Revenue Code of 1986, as amended or any successor statute.

"Collateral": as defined in Section 4.1.

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"Collateral Management Report": a report to be delivered by Customer to IBM
Credit from time to time, as provided herein, signed by the chief executive
officer or chief financial officer of Customer, in the form of Attachment F
hereto, detailing and certifying, among other items: a summary of Customer's
inventory on hand financed by IBM Credit and Customer's Eligible Accounts, the
amounts and aging of all of Customer's Accounts, Customer's inventory on hand
financed by IBM Credit by quantity, type, model, Authorized Supplier's invoice
price to Customer and the total of the line item values for all inventory listed
on the report, the amounts and aging of Customer's accounts payable as of a
specified date, all of Customer's IBM Credit borrowing activity during a
specified period and the total amount of Customer's Borrowing Base as well as
Customer's Outstanding A/R Advances, Outstanding Product Advances, Available
Credit and any Shortfall Amount as of a specified date.

"Common Due Date": (1) the fifth day of a calendar month if the Product
Financing Period or A/R Advance Term, whichever is applicable, expires on the
first through tenth of such calendar month; (2) the fifteenth day of a calendar
month if the Product Financing Period or A/R Advance Term, whichever is
applicable, expires on the eleventh through twentieth of such calendar month;
and (3) the twenty-fifth day of a calendar month if the Product Financing Period
or A/R Advance Term, whichever is applicable, expires on the twenty-first
through the last day of such calendar month.

"Compliance Certificate": a certificate substantially in the form of Attachment
C.

"Credit Line": as defined in Section 2.1.

"Customer": as defined in the caption.

"Default": either (1) an Event of Default or (2) any event or condition which,
but for the requirement that notice be given or time lapse or both, would be an
Event of Default.

"Delinquency Fee Rate": as defined on Attachment A.

"Eligible Accounts": as defined in Section 3.1.

"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions relating to pollution, the
protection of the environment, occupational health and safety, or to emissions,
discharges or release of pollutants, contaminants, hazardous substances or
wastes into the environment.

"Environmental Liability": any claim, demand, obligation, cause of action,
allegation, order, violation, injury, judg- ment, penalty or fine, cost or
expense, resulting from the violation or alleged violation of any Environmental
Laws or the imposition of any Lien pursuant to any Environmental Laws.

"ERISA": the Employee Retirement Income Security Act of 1974, as amended, or any
successor statutes.

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"Event of Default": as defined in Section 9.1.

"Financial Statements": the consolidated and consolidating balance sheets,
statements of operations, statements of cash flows and statements of changes in
shareholder's equity of Customer and its Subsidiaries for the period specified,
pre- pared in accordance with GAAP and consistent with prior practices.

"Floor Plan Lender": any Person who now or hereinafter provides inventory
financing to Customer, provided that such Person executes an Intercreditor
Agreement (as defined in Section 5.1 of this Agreement) or a subordination
agreement with IBM Credit in form and substance satisfactory to IBM Credit.

"Free Financing Period": for each Product Advance, the period, if any, in which
IBM Credit does not charge Customer a financing charge. IBM Credit shall
calculate the Customer's Free Financing Period utilizing a methodology that is
consistent with the methodologies used for similarly situated customers of IBM
Credit. The Customer understands that IBM Credit may not offer or may cease to
offer a Free Financing Period for the Customer's purchases of Products.

"Free Financing Period Exclusion Fee": as defined in At- tachment A.

"GAAP": generally accepted accounting principles in the United States as in
effect from time to time.

"Governmental Authority": any nation or government, any state or other political
subdivision thereof, and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled (through stock or capital
ownership or otherwise) by any of the foregoing.

"Hazardous Substances": all substances, wastes or materials, to the extent
subject to regulation as "hazardous sub- stances" or "hazardous waste" under any
Environmental Laws.

"IBM Credit": as defined in the caption.

"Indebtedness": with respect to any Person, (1) all obligations of such Person
for borrowed money or for the deferred purchase price of property or services
(other than trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices) or which is evidenced by a note,
bond, debenture or similar instrument, (2) all obligations of such Person under
capital leases, (3) all obligations of such Person in respect of letters of
credit, banker's acceptances or similar obligations issued or created for the
account of such Person, (4) liabilities arising under any interest rate
protection, future, option swap, cap or hedge agreement or arrangement under
which such Person is a party or beneficiary, (5) all obligations under
guaranties of such Person and (6) all liabilities secured by any Lien on any
property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof.

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"Investment": with respect to any Person (the "Investor"), (1) any investment by
the Investor in any other Person, whether by means of share purchase, capital
contribution, purchase or other acquisition of a partnership or joint venture
interest, loan, time deposit, demand deposit or otherwise, and (2) any guaranty
by the Investor of any Indebtedness or other obligation of any other Person.

"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,
mortgage, other encumbrance or other arrangement having the practical effect of
the foregoing, including the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.

"Material Adverse Effect": a material adverse effect (1) on the business,
operations, results of operations, assets, or financial condition of the
Customer, (2) on the aggregate value of the Collateral or the aggregate amount
which IBM Credit would be likely to receive (after giving consideration to
reasonably likely delays in payment and reasonable costs of enforcement) in the
liquidation of such Collateral to recover the Obligations in full, or (3) on the
rights and remedies of IBM Credit under this Agreement.

"Maximum Advance Amount": at any time, the lesser of (1) the Credit Line and (2)
the Borrowing Base at such time.

"Obligations": all covenants, agreements, warranties, duties, representations,
loans, advances, interest (including interest accruing on or after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Customer, whether or not a claim
for post-filing or post-petition interest is allowed in such proceeding), fees,
reasonable expenses, indemnities, liabilities and Indebtedness of any kind and
nature whatsoever now or hereafter arising, owing, due or payable from Customer
to IBM Credit.

"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar agreements
executed by Customer and delivered to IBM Credit, pursuant to this Agreement or
otherwise, and all amendments, supplements and other modifications to the
foregoing from time to time.

"Other Charges": as set forth in Attachment A.

"Outstanding Advances": at any time of determination, the sum of (1) the unpaid
principal amount of all Advances made by IBM Credit under this Agreement, and
(2) any finance charge, fee, expense or other amount related to Advances charged
to Customer's account with IBM Credit.

"Outstanding A/R Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all A/R Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
A/R Advances charged to Customer's account with IBM Credit.

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"Outstanding Product Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all Product Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
Product Advances charged to Customer's account with IBM Credit.

"Payment Dates": the fifth, fifteenth and twenty-fifth day of each calendar
month.

"Permitted Indebtedness": any of the following:

(1) Indebtedness to IBM Credit;

(2) Indebtedness described in Section VII of Attachment B;

(3) Indebtedness to any Floor Plan Lender;

(4) Purchase Money Indebtedness;

(5) guaranties in favor of IBM Credit; and

(6) other Indebtedness consented to by IBM Credit in writing prior to incurring
such Indebtedness.

"Permitted Liens": any of the following:

(1) Liens which are the subject of an Intercreditor Agreement, in effect from
time to time between IBM Credit and any other secured creditor;

(2) Purchase Money Security Interests;

(3) Liens described in Section I of Attachment B;

(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen, common
carriers, landlords and other similar Liens arising by operation of law or
otherwise, not waived in connection herewith, for amounts that are not yet due
and payable or being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted if an adequate reserve or other appropriate
provisions shall have been made therefor as required to be in conformity with
GAAP and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;

(5) attachment or judgment Liens individually or in the aggregate not in excess
of $100,000.00 (exclusive of (A) any amounts that are duly bonded to the
satisfaction of IBM Credit or (B) any amount fully covered by insurance as to
which the insurance company has acknowledged its obligation to pay such judgment
in full);

(6) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of Customer;

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(7) extensions and renewals of the foregoing permitted Liens; provided that (A)
the aggregate amount of such extended or renewed Liens do not exceed the
original principal amount of the Indebtedness for which it secures, (B) such
Liens do not extend to any property other than property already previously
subject to the Lien and (C) such extended or renewed Liens are on terms and
conditions no more restrictive than the terms and conditions of the Liens being
extended or renewed;

(8) Liens arising from deposits or pledges to secure bids, tenders, contracts,
leases, surety and appeal bonds and other obligations of like nature arising in
the ordinary course of the Customer's business;

(9) Liens for taxes, assessments or governmental charges not delinquent or being
contested, in good faith, by appropriate proceedings promptly instituted and
diligently conducted if an adequate reserve or other appropriate provisions
shall have been made therefor as required in order to be in conformity with GAAP
and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;

(10) Liens arising out of deposits in connection with workers' compensation,
unemployment insurance or other social security or similar legislation;

(11) Liens arising pursuant to this Agreement; and

(12) other Liens consented to by IBM Credit in writing prior to incurring such
Lien.

"Person": any individual, association, firm, corporation, partnership, trust,
unincorporated organization or other en- tity whatsoever.

"Policies": all policies of insurance required to be main- tained by Customer
under this Agreement or any of the Other Documents.

"Prime Rate": as of the date of determination, the average of the rates of
interest announced by Citibank, N.A., The Chase Manhattan Bank, N.A. and Bank of
America National Trust & Savings Association (or other bank which IBM Credit
uses in its normal course of business of determining Prime Rate) as their prime
or base rate, as of the last Business Day of the calendar month immediately
preceding the date of determination, whether or not such announced rates are the
actual rates charged by such banking institutions to their most credit-worthy
borrowers.

"PRO Advance": an A/R Advance, with a PRO Advance Term, made by IBM Credit to
itself on behalf of Customer to repay all or a portion of a Product Advance that
is due and payable.

"PRO Advance Term": for each PRO Advance, a period, in increments of ten days as
specified by Customer in the Request for A/R Advance with respect to such PRO
Advance, but in no event in excess of thirty days, commencing on the A/R Advance
Date for such PRO Advance.

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"Product Advance": any advance of funds made or committed to be made by IBM
Credit for the account of Customer to an Authorized Supplier in respect of an
invoice delivered by such Authorized Supplier to IBM Credit describing Products
purchased by Customer, including any such advance made or committed to be made
as of the date hereof pursuant to the Financing Agreement.

"Product Financing Charge": as defined on Attachment A.

"Product Financing Period": for each Product Advance, a pe- riod of days equal
to that set forth in Attachment A from time to time, commencing on the invoice
date of such Product Advance.

"Purchase Money Indebtedness": any Indebtedness (including capital leases)
incurred to finance the acquisition of assets (other than assets manufactured or
distributed by or bearing any trademark or trade name of any Authorized
Supplier) to be used in the Customer's business not to exceed the lesser of (1)
the purchase price or acquisition cost of such asset and (2) the fair market
value of such asset.

"Purchase Money Security Interest": any security interest securing Purchase
Money Indebtedness, which security inter- est applies solely to the particular
asset acquired with the Purchase Money Indebtedness.

"Request for A/R Advance": as defined in Section 2.3.

"Requirement of Law": as to any Person, the articles of incorporation and
by-laws of such Person, and any law, treaty, rule or regulation or determination
of an arbitrator or a court or other governmental authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.

"Shortfall Amount": as defined in Section 2.6.

"Shortfall Transaction Fee": as defined in Attachment A.

"Subsidiary": with respect to any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by such Person.

"Takeout Advance": an A/R Advance made to existing credi- tors of Customer on
behalf of Customer, in an amount suffi- cient to discharge Customer's
indebtedness to such creditor.

"Termination Date": shall mean (i) the first anniversary of the date of this
Agreement or such other date as IBM Credit and Customer may agree to in writing
from time to time.

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"Voting Stock": securities, the holders of which are ordi- narily, in the
absence of contingencies, entitled to elect the corporate directors (or persons
performing similar func- tions).

"WCO Advance": an A/R Advance, with a WCO Advance Term.

"WCO Advance Term": for each WCO Advance, a period of one hundred eighty (180)
days commencing on the A/R Advance Date for such WCO Advance.

1.2. Other Defined Terms. Terms not otherwise defined in this Agreement which
are defined in the Uniform Commercial Code as in effect in the State of New York
(the "U.C.C.") shall have the meanings assigned to them therein.

1.3. Attachments. All attachments, exhibits, schedules and other addenda hereto,
including, without limitation, Attach- ment A and Attachment B, are specifically
incorporated herein and made a part of this Agreement.

Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES

2.1. Credit Line. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that is
the earlier of (x) the date on which this Agreement is terminated pursuant to
Section 10. and (y) the date on which IBM Credit terminates the Credit Line
pursuant to Section 9., IBM Credit agrees to extend to the Customer a credit
line ("Credit Line") in the amount set forth in Attachment A pursuant to which
IBM Credit will make to the Customer, from time to time, Advances in an
aggregate amount at any one time outstanding not to exceed the Maximum Advance
Amount. Notwithstanding any other term or provision of this Agreement, IBM
Credit may, at any time and from time to time, in its sole discretion (x)
temporarily increase the amount of the Credit Line above the amount set forth in
Attachment A and decrease the amount of the Credit Line back to the amount of
the Credit Line set forth in Attachment A, in each case upon written notice to
the Customer and (y) make Advances pursuant to this Agreement upon the request
of Customer in an aggregate amount at any one time outstanding in excess of the
Credit Line.

2.2. Product Advances. (A) Subject to the terms and conditions of this
Agreement, IBM Credit shall make Product Advances in connection with Customer's
purchase of Products from Authorized Suppliers. Customer hereby authorizes and
directs IBM Credit to pay the proceeds of Product Advances directly to the
applicable Authorized Supplier in respect of invoices delivered to IBM Credit
for such Products by such Authorized Supplier and acknowledges that each such
Product Advance constitutes a loan by IBM Credit to Customer pursuant to this
Agreement as if the Customer received the proceeds of the Product Advance
directly from IBM Credit.

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(B) No finance charge shall accrue on any Product Advance during the Free
Financing Period, if any, applicable to such Product Advance. Customer shall
repay each Product Advance no later than the Common Due Date for such Product
Advance. Customer may, at its option, repay each Product Advance by requesting
IBM Credit to apply all or any part of the principal amount of an A/R Advance to
the Outstanding Product Advances. Customer's request for such application shall
be made in accordance with Section 2. When so requested and subject to the terms
and conditions of this Agreement, IBM Credit shall apply the amount so requested
to the amounts due in respect of the Outstanding Product Advances. Nothing
contained herein shall relieve Customer of its obligation to repay Product
Advances when due. Each Product Advance shall accrue a finance charge on the
Average Daily Balance thereof from the end of the Free Financing Period, if any,
for such Product Advance, or if no such Free Financing Period shall be in
effect, from the date of invoice for such Product Advance, in each case, until
such Product Advance shall become due and payable in accordance with the terms
of this Agreement, at a per annum rate equal to the lesser of (a) the finance
charge set forth in Attachment A to this Agreement as the "Product Financing
Charge" and (b) the highest rate from time to time permitted by applicable law.

In addition, for any Product Advance with respect to which a Free Financing
Period shall not be in effect, Customer shall pay a Free Financing Period
Exclusion Fee. Such fee shall be due and payable on the Common Due Date for such
Product Advance. If it is determined that amounts received from Customer were in
excess of the highest rate permitted by law, then the amount representing such
excess shall be considered reductions to principal of Advances.

(C) Customer acknowledges that IBM Credit does not warrant the Collateral.
Customer shall be obligated to pay IBM Credit in full even if the Collateral is
defective or fails to conform to the warranties extended by the Authorized
Supplier. The Obligations of Customer shall not be affected by any dispute
Customer may have with any manufacturer, distributor or Authorized Supplier.
Customer will not assert any claim or defense which it may have against any
manufacturer, distributor or Authorized Supplier against IBM Credit.

(D) Customer hereby authorizes IBM Credit to collect directly from any
Authorized Supplier any credits, rebates, bonuses or discounts owed by such
Authorized Supplier to Customer ("Supplier Credits"). Any Supplier Credits
received by IBM Credit may be applied by IBM Credit to the Outstanding Advances.
Any Supplier Credits collected by IBM Credit shall in no way reduce Customer's
debt to IBM Credit in respect of the Outstanding Advances until such Supplier
Credits are applied by IBM Credit.

(E) IBM Credit may apply any payments and Supplier Credits received by IBM
Credit to reduce finance charges first and then to principal amounts of Advances
owed by Customer. IBM Credit may apply principal payments to the oldest
(earliest) invoices (and related Product Advances) first, but, in any case, all
principal payments will be applied in respect of the Outstanding Product
Advances made for Products which have been sold, lost, stolen, destroyed,
damaged or otherwise disposed of prior to any other application thereof.

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(F) Customer will indemnify and hold IBM Credit harmless from and against
any claims or demands asserted by any Person relating to or arising from the
Collateral for any reason whatsoever, including, without limitation, the
condition of the Collateral, any misrepresentation made about the Collateral by
any representative of Customer, or any act or failure to act by Customer except
to the extent such claims or demands are directly attributable to IBM Credit's
gross negligence or willful misconduct. Nothing contained in the foregoing shall
impair any rights or claims which the Customer may have against any
manufacturer, distributor or Authorized Supplier.

2.3. A/R Advances. (A) Whenever Customer shall desire IBM Credit to provide an
A/R Advance, Customer shall deliver to IBM Credit written notice of Customer's
request for such an Advance ("Request for A/R Advance"). For any requested A/R
Advance pursuant to which monies will be disbursed to Customer or any Person
other than IBM Credit, a Request for A/R Advance shall be delivered to IBM
Credit on or prior to 1:00 p.m. (Eastern time) one Business Day prior to the
requested A/R Advance Date. The Request for A/R Advance shall specify (i) the
requested A/R Advance Date;

(ii) the amount of the requested A/R Advance; (iii) whether such A/R Advance is
a WCO Advance or a PRO Advance; (iv) if applicable, the PRO Advance Term for
such A/R Advance; (v) for each PRO Advance, the month, day and year of the
Common Due Date, as set forth in Customer's applicable billing statement from
IBM Credit, for the Product Advance to which the PRO Advance is to be applied;
and (vi) if applicable, the amount of the requested A/R Advance that should be
applied to the Outstanding Product Advances (provided that all PRO Advances
shall be applied to Outstanding Product Advances). Customer may deliver a
Request for A/R Advance via facsimile. Any Request for A/R Advance delivered to
IBM Credit shall be irrevocable. Notwithstanding any other provision of this
Agreement, Customer shall not (i) request more than one PRO Advance in respect
of any Product Advance; and (ii) request a PRO Advance for any Common Due Date
on which Customer will take a discount offered by IBM Credit for invoice amounts
paid in full within fifteen days of the invoice date under IBM Credit's High
Turnover Option ("HTO") Program.

(B) Subject to the terms and conditions of this Agreement, on the A/R
Advance Date specified in a Request for A/R Advance, IBM Credit shall make the
principal amount of each A/R Advance available to the Customer in immediately
available funds to an account maintained by Customer (or in the case of a
Takeout Advance, as directed by Customer). If IBM Credit is making an A/R
Advance hereunder on a day on which Customer is to repay all or any part of an
Outstanding Advance (or any other amount owing hereunder), IBM Credit shall
apply the proceeds of the A/R Advance to such repayment and only an amount equal
to the difference, if any, between the amount of the A/R Advance and the amount
being repaid shall be made available to Customer as provided in the immediately
preceding sentence.

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(C) Each A/R Advance shall accrue a finance charge on the unpaid principal
amount thereof, at a per annum rate equal to the lesser of (a) the finance
charge set forth in Attachment A to this Agreement under the caption "A/R
Finance Charge" for such type of A/R Advance, and (b) the highest rate from time
to time permitted by applicable law. If it is determined that amounts received
from the Customer were in excess of such highest rate, then the amount
representing such excess shall be considered reductions to principal of
Advances.

(D) Unless otherwise due and payable at an earlier date, the unpaid
principal amount of each A/R Advance, other than a Takeout Advance, shall be due
and payable on the applicable Common Due Date. Unless otherwise notified by
Customer in writing prior to the day the principal amount of any WCO Advance
becomes due and payable, the Customer shall be deemed to have provided IBM
Credit with a Request for A/R Advance requesting a WCO Advance on the day such
principal amount is due and payable in an amount equal to the unpaid principal
amount of the WCO Advance so due. Subject to the terms and conditions of this
Agreement, the principal amount of such WCO Advance shall automatically renew
for an additional WCO Advance Term. Notwithstanding any other provision of this
Agreement, a Takeout Advance may only be requested on the Closing Date and such
Takeout Advance shall be limited to an amount sufficient to discharge the
indebtedness that is the subject of a Takeout Advance.

Unless otherwise agreed in writing, a Takeout Advance shall be due pursuant to
the Schedule of Repayments in Attachment D to this Agreement.

2.4. Finance and Other Charges. (A) Finance charges shall be calculated by
multiplying the applicable Delinquency Fee Rate, Product Financing Charge or A/R
Finance Charge provided for in this Agreement by Customer's applicable Average
Daily Balance. The Delinquency Fee Rate, the Product Financing Charge and the
various A/R Finance Charges provided for in this Agreement are each computed on
the basis of an actual day, 360 day year.

(B) The Customer hereby agrees to pay to IBM Credit the charges set forth
as "Other Charges" in Attachment A. The Customer also agrees to pay IBM Credit
additional charges for any returned items of payment received by IBM Credit. The
Customer hereby acknowledges that any such charges are not interest but that
such charges, if unpaid, will constitute part of the Outstanding Advances.

(C) The finance charges and Other Charges owed under this Agreement, and
any charges hereafter agreed to in writing by the parties, are payable monthly
on receipt of IBM Credit's bill or statement therefor or IBM Credit may, in its
sole discretion, add unpaid finance charges and Other Charges to the Customer's
outstanding Advances.

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(D) If any amount owed under this Agreement, including, without limitation,
any Advance, is not paid when due (whether at maturity, by acceleration or
otherwise), the unpaid amount thereof will bear a late charge from and including
its due date to but not including the date IBM Credit receives payment thereof,
at a per annum rate equal to the lesser of (a) the amount set forth in
Attachment A to this Agreement as the "Delinquency Fee Rate" and (b) the highest
rate from time to time permitted by applicable law. In addition, if any
Shortfall Amount shall not be paid when due pursuant to Section 2.6 hereof,
Customer shall pay IBM Credit a Shortfall Transaction Fee. If it is determined
that amounts received from Customer were in excess of such highest rate, then
the amount representing such excess shall be considered reductions to principal
of Advances.

2.5. Statements Regarding Customer's Account. IBM Credit will send statements of
each transaction hereunder as well as monthly billing statements to Customer
with respect to Advances and other charges due on Customer's account with IBM
Credit. Each statement of transaction and monthly billing statement shall be
deemed, absent manifest error, to be correct and shall constitute an account
stated with respect to each transaction or amount described therein unless
within seven (7) Business Days after such statement of transaction or billing
statement is received by Customer, Customer provides IBM Credit written notice
objecting that such amount or transaction is incorrectly described therein and
specifying the error(s), if any, contained therein. IBM Credit may at any time
adjust such statements of transaction or billing statements to comply with
applicable law and this Agreement.

2.6. Shortfall. If, on any date, the Outstanding Advances shall exceed the
Maximum Advance Amount (such excess, the "Shortfall Amount"), then the Customer
shall on such date prepay the Outstanding Advances in an amount equal to such
Shortfall Amount.

2.7. Application of Payments. The Customer hereby agrees that all checks and
other instruments delivered to IBM Credit on account of Customer's Obligations
shall constitute conditional payment until such items are actually collected by
IBM Credit. The Customer waives the right to direct the application of any and
all payments at any time or times hereafter received by IBM Credit on account of
the Customer's Obligations. Customer agrees that IBM Credit shall have the
continuing exclusive right to apply and reapply any and all such payments to
Customer's Obligations in such manner as IBM Credit may deem advisable
notwithstanding any entry by IBM Credit upon any of its books and records.

2.8. Prepayment and Reborrowing By Customer. (A) Customer may at any time
prepay, without notice or penalty, in whole or in part amounts owed under this
Agreement. IBM Credit may apply payments made to it (whether by the Customer or
otherwise) to pay finance charges and other amounts owing under this Agreement
first and then to the principal amount owed by the Customer.

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(B) Subject to the terms and conditions of this Agreement, any amount
prepaid or repaid to IBM Credit in respect to the Outstanding Advances may be
reborrowed by Customer in accordance with the provisions of this Agreement.

Section 3. CREDIT LINE ADDITIONAL PROVISIONS

3.1. Ineligible Accounts. IBM Credit and Customer agree that IBM Credit shall
have the sole right to determine eligibility of Accounts from an Account debtor
for purposes of determining the Borrowing Base; however, without limiting such
right, the following Accounts will be deemed to be ineligible for purposes of
determining the Borrowing Base:

(A) Accounts created from the sale of goods and/or performance of services
on non-standard terms or that allow for payment to be made more than forty-five
(45) days from the date of such sale or performance of services;

(B) Accounts unpaid more than ninety (90) days from date of invoice;

(C) Accounts payable by an Account debtor if fifty percent (50%) or more of
the aggregate outstanding balance of all such Accounts remain unpaid for more
than ninety (90) days from the date of invoice;

(D) Accounts payable by an Account debtor that is an Affiliate of Customer,
or an officer, employee, agent, guarantor, stockholder of Customer or an
Affiliate of Customer, or is related to or has common shareholders, officers or
directors with Customer;

(E) Accounts arising from consignment sales;

(F) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which the payment by
the Account debtor is or may be conditional;

(G) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which:

(i) the Account debtor is not a commercial entity, or

(ii) the Account debtor is not a resident of the United States;

(H) Accounts payable by any Account debtor to which Customer is or may
become liable for goods sold or services rendered by such Account debtor to
Customer;

(I) Accounts arising from the sale or lease of goods purchased for a
personal, family or household purpose;

(J) Accounts arising from the sale or other disposition of goods that have
been used for demonstration purposes or loaned or leased by the Customer to
another party;

(K) Accounts which are progress payment accounts or contra accounts;

(L) Accounts upon which IBM Credit does not have a valid, perfected, first
priority security interest;

(M) Accounts payable by an Account debtor that is or Customer knows will
become, subject to proceedings under United States Bankruptcy Law or other law
for the relief of debtors;

(N) Accounts that are not payable in US dollars;

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(O) Accounts payable by any Account debtor that is a remarketer of computer
hardware and software products and whose purchases of such products from
Customer have been financed by another person, other than IBM Credit, who pays
the proceeds of such financing directly to Customer on behalf of such debtor
("Third Party Financer") unless (i) such Third Party Financer does not have a
separate financing relationship with Customer or (ii) such Third Party Financer
has a separate financing relationship with Customer and has waived its right to
set off its obligations to Customer;

(P) Accounts arising from the sale or lease of goods which are billed to
any Account debtor but have not yet been shipped by Customer;

(Q) Accounts with respect to which Customer has permitted or agreed to any
extension, compromise or settlement, or made any change or modification of any
kind or nature, including, but not limited to, any change or modification to the
terms relating thereto;

(R) Accounts that do not arise from undisputed bona fide transactions
completed in accordance with the terms and conditions contained in the invoices,
purchase orders and contracts relating thereto;

(S) Accounts that are discounted for the full payment term specified in
Customer's terms and conditions with its account debtors, or for any longer
period of time;

(T) Accounts on cash on delivery (C.O.D.) terms;

(U) Accounts arising from maintenance or service contracts that are billed
in advance of full performance of service;

(V) Accounts arising from bartered transactions;

(W) Accounts arising from incentive payments, rebates, discounts, credits,
and refunds from a supplier, other than verifiable incentive payments from an
Authorized Supplier for which there is no right of offset; and

(X) Any and all other Accounts that IBM Credit deems, in its sole and
absolute discretion, to be ineligible, except that IBM Credit agrees that it
will not deem any Accounts to be ineligible retroactively.

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The aggregate of all Accounts that are not ineligible Accounts shall hereinafter
be referred to as "Eligible Accounts".

3.2. Reimbursement for Charges. Customer agrees to pay for all costs and
expenses of Customer's bank in respect to collection of checks and other items
of payment, all fees relating to the use and maintenance of the Lockbox and the
Special Account (each as defined in Section 3.3) and with respect to remittances
of proceeds of the Advances hereunder.

3.4. Collections. Customer shall instruct all Account debtors to remit payments
directly to a Lockbox. In addition, Customer shall have such instruction printed
in conspicuous type on all invoices. Customer shall instruct such Bank to
deposit all remittances to such Bank's Lockbox into its Special Account.
Customer further agrees that it shall not deposit or permit any deposits of
funds other than remittances paid in respect of the Accounts into the Special
Account(s) or permit any commingling of funds with such remittances in any
Lockbox or Special Account.

Without limiting the Customer's foregoing obligations, if, at any time, Customer
receives a remittance directly from an account debtor, then Customer shall make
entries on its books and records in a manner that shall reasonably identify such
remittances and shall keep a separate account on its record books of all
remittances so received and deposit the same into a Special Account. Until so
deposited into the Special Account, Customer shall keep all remittances received
in respect of Accounts separate and apart from Customer's other property so that
they are capable of identification as the proceeds of Accounts in which IBM
Credit has a security interest.

3.5. Application of Remittances and Credits. Customer shall apply all
remittances against the aggregate of Customer's outstanding Accounts no later
than the end of the Business Day on which such remittances are deposited into
the Special Account. Customer also agrees to apply each remittance against its
respective Account no later than three (3) Business Days from the date such
remittance is deposited into the Special Account. In addition, Customer shall
promptly apply any credits owing in respect to any Account when due.

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3.6. Power of Attorney. Customer hereby irrevocably appoints IBM Credit, with
full power of substitution, as its true and lawful attorney-in-fact with full
power, in good faith and in compliance with commercially reasonable standards,
in the discretion of IBM Credit, to:

(A) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to perfect and maintain perfected the
security interest in the Collateral contemplated under this Agreement and the
Other Documents;

(B) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation; and

upon the occurrence and during the continuance of an Event of Default as defined
in Section 9.1 hereof:

(C) demand payment, enforce payment and otherwise exercise all Customer's
rights and remedies with respect to the collection of any Accounts;

(D) settle, adjust, compromise, extend or renew any Accounts;

(E) settle, adjust or compromise any legal proceedings brought to collect
any Accounts;

(F) sell or assign any Accounts upon such terms, for such amounts and at
such time or times as IBM Credit may deem advisable;

(G) discharge and release any Accounts;

(H) prepare, file and sign Customer's name on any Proof of Claim in
Bankruptcy or similar document against any Account debtor;

(I) prepare, file and sign Customer's name on any notice of lien, claim of
mechanic's lien, assignment or satisfaction of lien or mechanic's lien, or
similar document in connection with any Accounts;

(J) endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to any Account or goods pertaining thereto;

(K) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation;

(L) sign the name of Customer to requests for verification of Accounts and
notices thereof to Account debtors;

(M) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to enforce any and all remedies it may have
under this Agreement, at law or otherwise; and

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(N) make, settle and adjust claims under the Policies with respect to the
Collateral and endorse Customer's name on any check, draft, instrument or other
item of payment of the proceeds of the Policies with respect to the Collateral;
and

(O) take control in any manner of any term of payment or proceeds and for
such purpose to notify the postal authorities to change the address for delivery
of mail addressed to Customer to such address as IBM Credit may designate.

The power of attorney granted by this Section is for value and coupled with an
interest and is irrevocable so long as this Agreement is in effect or any
Obligations remain outstanding. Nothing done by IBM Credit pursuant to such
power of attorney will reduce any of Customer's Obligations other than
Customer's payment Obligations to the extent IBM Credit has received monies.

Section 4. SECURITY -- COLLATERAL

4.1. Grant. To secure Customer's full and punctual payment and performance of
the Obligations when due (whether at the stated maturity, by acceleration or
otherwise), Customer hereby grants IBM Credit a security interest in all of
Customer's right, title and interest in and to the following property, whether
now owned or hereafter acquired or existing and wherever located:

(A) all inventory and equipment, and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents therefor;

(B) all accounts, contract rights, chattel paper, instruments, deposit
accounts, obligations of any kind owing to Customer, whether or not arising out
of or in connection with the sale or lease of goods or the rendering of services
and all books, invoices, documents and other records in any form evidencing or
relating to any of the foregoing;

(D) all rights now or hereafter existing in and to all mortgages, security
agreements, leases or other contracts securing or otherwise relating to any of
the foregoing; and

(E) all substitutions and replacements for all of the foregoing, all
proceeds of all of the foregoing and, to the extent not otherwise included, all
payments under insurance or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the foregoing.

All of the above assets shall be collectively defined herein as the
"Collateral".

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Customer covenants and agrees with IBM Credit that: (a) the security constituted
to by this Agreement is in addition to any other security from time to time held
by IBM Credit and (b) the security hereby created is a continuing security
interest and will cover and secure the payment of all Obligations both present
and future of Customer to IBM Credit.

4.2. Further Assurances. Customer shall, from time to time upon the request of
IBM Credit, execute and deliver to IBM Credit, or cause to be executed and
delivered, at such time or times as IBM Credit may request such other and
further documents, certificates and instruments that IBM Credit may deem
necessary to perfect and maintain perfected IBM Credit's security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated under this Agreement and the Other Documents. Customer shall make
appropriate entries on its books and records disclosing IBM Credit's security
interests in the Collateral.

Section 5. CONDITIONS PRECEDENT

5.1. Conditions Precedent to the Effectiveness of This Agreement. The
effectiveness of this Agreement is subject to the receipt by IBM Credit of, or
waiver in writing by IBM Credit of compliance with, the following conditions
precedent:

(A) this Agreement executed and delivered by Customer and IBM Credit;

(B) (i) copies of the resolutions of the Board of Directors of Customer
certified by the secretary or assistant secretary of Customer authorizing the
execution, delivery and performance of this Agreement and each Other Document
executed and delivered in connection herewith, (ii) a certificate of the
secretary or an assistant secretary of Customer, in form and substance
satisfactory to IBM Credit, certifying the names and true signatures of the
officers of Customer authorized to sign this Agreement and the Other Documents
and (iii) copies of the articles of incorporation and by-laws of Customer
certified by the secretary or assistant secretary of Customer;

(C) certificates dated as of a recent date from the Secretary of State or
other appropriate authority evidencing the good standing of Customer in the
jurisdiction of its organization and in each other jurisdiction where the
ownership or lease of its property or the conduct of its business requires it to
qualify to do business;

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(D) copies of all approvals and consents from any Person, in each case in
form and substance satisfactory to IBM Credit, which are required to enable
Customer to authorize, or required in connection with, (a) the execution,
delivery or performance of this Agreement and each of the Other Documents, and
(b) the legality, validity, binding effect or enforceability of this Agreement
and each of the Other Documents;

(E) a lockbox agreement executed by Customer and each Bank, in form and
substance satisfactory to IBM Credit;

(F) a contingent blocked account agreement executed by Customer and each
Bank in form and substance satisfactory to IBM Credit;

(G) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to IBM Credit, executed by each other secured creditor of
Customer as set forth in Attachment A;

(H) a favorable opinion of counsel for Customer in substantially the form
of Attachment H;

(I) UCC-1 financing statements for each jurisdiction reasonably requested
by IBM Credit executed by Customer and each guarantor whose guaranty to IBM
Credit is intended to be secured by a pledge of its assets;

(J) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and Attachment
B; and

(K) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as IBM Credit shall have reasonably
requested.

5.2. Conditions Precedent to Each Advance. No Advance will be required to be
made or renewed by IBM Credit under this Agreement unless, on and as of the date
of such Advance, the following statements shall be true to the satisfaction of
IBM Credit:

(A) The representations and warranties contained in this Agreement or in
any document, instrument or agreement executed in connection herewith, are true
and correct in all material respects on and as of the date of such Advance as
though made on and as of such date;

(B) No event has occurred and is continuing or after giving effect to such
Advance or the application of the proceeds thereof would result which would
constitute a Default;

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(D) Both before and after giving effect to the making of such Advance, no
Shortfall Amount exists.

Except as Customer has otherwise disclosed to IBM Credit in writing prior to
each request, each request (or deemed request pursuant to Section 2.3 (D)) for
an Advance hereunder and the receipt (or deemed receipt) by the Customer of the
proceeds of any Advance hereunder shall be deemed to be a representation and
warranty by Customer that, as of and on the date of such Advance, the statements
set forth in (A) through (D) above are true statements. No such disclosures by
Customer to IBM Credit shall in any manner be deemed to satisfy the conditions
precedent to each Advance that are set forth in this Section 5.2.

Section 6. REPRESENTATIONS AND WARRANTIES

To induce IBM Credit to enter into this Agreement, Customer represents and
warrants to IBM Credit as follows:

6.1. Organization and Qualifications. Customer and each of its Subsidiaries (i)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (ii) has the power and authority
to own its properties and assets and to transact the businesses in which it
presently is engaged and (iii) is duly qualified and is authorized to do
business and is in good standing in each jurisdiction where it presently is
engaged in business and is required to be so qualified.

6.2. Rights in Collateral; Priority of Liens. Customer and each of its
Subsidiaries owns the property granted by it respectively as Collateral to IBM
Credit, free and clear of any and all Liens in favor of third parties except for
the Liens otherwise permitted pursuant to Section 8.1. The Liens granted by the
Customer and each of its Subsidiaries pursuant to this Agreement, the Guaranties
and the Other Documents in the Collateral constitute the valid and enforceable
first, prior and perfected Liens on the Collateral, except to the extent any
Liens that are prior to IBM Credit's Liens are (i) the subject of an
Intercreditor Agreement or (ii) Purchase Money Security Interests in product of
a brand that is not financed by IBM Credit.

6.3. No Conflicts. The execution, delivery and performance by Customer of this
Agreement and each of the Other Documents (i) are within its corporate power;
(ii) are duly authorized by all necessary corporate action; (iii) are not in
contravention in any respect of any Requirement of Law or any indenture,
contract, lease, agreement, instrument or other commitment to which it is a
party or by which it or any of its properties are bound; (iv) do not require the
consent, registration or approval of any Governmental Authority or any other
Person (except such as have been duly obtained, made or given, and are in full
force and effect); and (v) will not, except as contemplated herein, result in
the imposition of any Liens upon any of its properties.

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6.4. Enforceability. This Agreement and all of the other documents executed and
delivered by the Customer in connection herewith are the legal, valid and
binding obligations of Customer, and are enforceable in accordance with their
terms, except as such enforceability may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting creditors' rights generally or the general
equitable principles relating thereto.

6.5. Locations of Offices, Records and Inventory. The address of the principal
place of business and chief executive office of Customer is as set forth on
Attachment B or on any notice provided by Customer to IBM Credit pursuant to
Section 7.7(C) of this Agreement. The books and records of Customer, and all of
its chattel paper (other than the chattel paper delivered to IBM Credit pursuant
to Section 7.14(E)) and records of Accounts, are maintained exclusively at such
location.

There is no jurisdiction in which Customer has any assets, equipment or
inventory (except for vehicles and inventory in transit for processing) other
than those jurisdictions identified on Attachment B or on any notice provided by
Customer to IBM Credit pursuant to Section 7.7(C) of this Agreement. Attachment
B, as amended from time to time by any notice provided by Customer to IBM Credit
in accordance with Section 7.7(C) of this Agreement, also contains a complete
list of the legal names and addresses of each warehouse at which the Customer's
inventory is stored. None of the receipts received by Customer from any
warehouseman states that the goods covered thereby are to be delivered to bearer
or to the order of a named person or to a named person and such named person's
assigns.

6.6. Fictitious Business Names. Customer has not used any corporate or
fictitious name during the five (5) years pre- ceding the date of this
Agreement, other than those listed on Attachment B.

6.7. Organization. All of the outstanding capital stock of Customer has been
validly issued, is fully paid and nonassessable.

6.8. No Judgments or Litigation. Except as set forth on Attachment B, no
judgments, orders, writs or decrees are outstanding against Customer
individually or which in the aggregate exceed $100,000.00 or would have a
Material Adverse Effect, nor is there now pending or, to the best of Customer's
knowledge after due inquiry, threatened, any litigation, contested claim,
investigation, arbitration, or governmental proceeding by or against Customer.

6.9. No Defaults. The Customer is not in default under any material term of any
indenture, contract, lease, agreement, instrument or other commitment to which
it is a party or by which it, or any of its properties are bound. Customer has
no knowledge of any dispute regarding any such indenture, contract, lease,
agreement, instrument or other commitment. No Default or Event of Default has
occurred and is continuing.

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6.10. Labor Matters. Except as set forth on any notice provided by Customer to
IBM Credit pursuant to Section 7.1(G) of this Agreement, the Customer is not a
party to any labor dispute. There are no strikes or walkouts or labor
controversies pending or threatened against the Customer which could reasonably
be expected to have a Material Adverse Effect.

6.11. Compliance with Law. Customer has not violated or failed to comply with
any Requirement of Law or any requirement of any self regulatory organization,
which violation or failure to comply would have a Material Adverse Effect.

6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan",
"defined benefit plan", or "multi-employer benefit plan", which Customer has
established, maintained, or to which it is required to contribute (collectively,
the "Plans") is in compliance with all applicable provisions of ERISA and the
Code and the rules and regulations thereunder as well as the Plan's terms and
conditions. There have been no "prohibited transactions" and no "reportable
event" has occurred within the last 60 months with respect to any Plan. Customer
has no "multi- employer benefit plan".

As used in this Agreement the terms "employee benefit plan", "employee pension
benefit plan", "defined benefit plan", and "multi-employer benefit plan" have
the respective meanings assigned to them in Section 3 of ERISA and any
applicable rules and regulations thereunder. The Customer has not incurred any
"accumulated funding deficiency" within the meaning of ERISA or incurred any
liability to the Pension Benefit Guaranty Corporation (the "PBGC") in connection
with a Plan (other than for premiums due in the ordinary course).

6.13. Compliance with Environmental Laws. Except as other- wise disclosed in
Attachment B:

(A) The Customer has obtained all government approvals required with
respect to the operation of their businesses under any Environmental Law.

(B) (i) the Customer has not generated, transported or disposed of any
Hazardous Substances; (ii) the Customer is not currently generating,
transporting or disposing of any Hazardous Substances; (iii) the Customer has no
knowledge that (a) any of its real property (whether owned, leased, or otherwise
directly or indirectly controlled) has been used for the disposal of or has been
contaminated by any Hazardous Substances, or (b) any of its business operations
have contaminated lands or waters of others with any Hazardous Substances; (iv)
the Customer and its respective assets are not subject to any Environmental
Liability and, to the best of the Customer's knowledge, any threatened
Environmental Liability which could have a Material Adverse Effect; (v) the
Customer has not received any notice of or otherwise learned of any governmental
investigation evaluating whether any remedial action is necessary to respond to
a release or threatened release of any Hazardous Substances for which the
Customer may be liable; (vi) the Customer is not in violation of any
Environmental Law, which violation could have a Material Adverse Effect; (vii)
there are no proceedings or investigations pending against Customer with respect
to any violation or

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alleged violation of any Environmental Law; provided however, that the parties
acknowledge that any generation, transportation, use, storage and disposal of
certain such Hazardous Substances in Customer's or its Subsidiaries' business
shall be excluded from representations (i) and (ii) above, provided, further,
that Customer is at all times generating, transporting, utilizing, storing and
disposing such Hazardous Substances in accordance with all applicable
Environmental Laws and in a manner designed to minimize the risk of any spill,
contamination, release or discharge of Hazardous Substances other than as
authorized by Environmental Laws.

6.14. Intellectual Property. Customer possesses such assets, licenses, patents,
patent applications, copyrights, service marks, trademarks, trade names and
trade secrets and all rights and other property relating thereto or arising
therefrom ("Intellectual Property") as are necessary or advisable to continue to
conduct its present and proposed business activities.

6.15. Licenses and Permits. Customer has obtained and holds in full force and
effect all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary for the operation of its businesses as presently conducted.
Customer is not in violation of the terms of any such franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval.

6.16. Investment Company. The Customer is not (i) an investment company or a
company controlled by an investment company within the meaning of the Investment
Company Act of 1940, as amended, (ii) a holding company or a subsidiary of a
holding company, or an Affiliate of a holding company or of a subsidiary of a
holding company, within the meaning of the Public Utility Holding Company Act of
1935, as amended, or (iii) subject to any other law which purports to regulate
or restrict its ability to borrow money or to consummate the transactions
contemplated by this Agreement or the Other Documents or to perform its
obligations hereunder or thereunder.

6.17. Taxes and Tax Returns. Customer has timely filed all federal, state, and
local tax returns and other reports which it is required by law to file, and has
either duly paid all taxes, fees and other governmental charges indicated to be
due on the basis of such reports and returns or pursuant to any assessment
received by the Customer, or made provision for the payment thereof in
accordance with GAAP. The charges and reserves on the books of the Customer in
respect of taxes or other governmental charges are in accordance with GAAP. No
tax liens have been filed against Customer or any of its property.

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6.18. Status of Accounts. Each Account is based on an actual and bona fide sale
and delivery of goods or rendition of services to customers, made by Customer,
in the ordinary course of its business; the goods and inventory being sold and
the Accounts created are its exclusive property and are not and shall not be
subject to any Lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever (other than Permitted Liens). The Customer's
customers have accepted goods or services and owe and are obligated to pay the
full amounts stated in the invoices according to their terms. There are no
proceedings or actions known to Customer which are pending or threatened against
any Material Account Obligor (as defined in Section 7.14(B) of this Agreement)
of any of the Accounts which could reasonably be expected to result in a
material adverse effect on the debtor's ability to pay the full amounts due to
Customer.

6.19. Affiliate/Subsidiary Transactions. Customer is not a party to or bound by
any agreement or arrangement (whether oral or written) to which any Affiliate or
Subsidiary of the Customer is a party except (i) in the ordinary course of and
pursuant to the reasonable requirements of Customer's business and (ii) upon
fair and reasonable terms no less favorable to Customer than it could obtain in
a comparable arm's-length transaction with an unaffiliated Person.

6.20. Accuracy and Completeness of Information. All factual information
furnished by or on behalf of the Customer to IBM Credit or the Auditors for
purposes of or in connection with this Agreement or any Other Document, or any
transaction contemplated hereby or thereby is or will be true and accurate in
all material respects on the date as of which such information is dated or
certified and not incomplete by omitting to state any material fact necessary to
make such information not misleading at such time.

6.21. Recording Taxes. All recording taxes, recording fees, filing fees and
other charges payable in connection with the filing and recording of this
Agreement have either been paid in full by Customer or arrangements for the
payment of such amounts by Customer have been made to the satisfaction of IBM
Credit.

6.22. Indebtedness. Customer (i) has no Indebtedness, other than Permitted
Indebtedness; and (ii) has not guaran- teed the obligations of any other Person
(except as permit- ted by Section 8.4).

Section 7. AFFIRMATIVE COVENANTS

Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations:

7.1. Financial and Other Information. Customer shall cause to be furnished to
IBM Credit the following information within the following time periods:

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(A) as soon as available and in any event within ninety (90) days after the
end of each fiscal year of Customer (i) audited Financial Statements (provided
that, to the extent not otherwise audited by the Auditors, the consolidating
Financial Statements may be unaudited) as of the close of the fiscal year and
for the fiscal year, together with a comparison to the Financial Statements for
the prior year, in each case accompanied by (a) either an opinion of the
Auditors without a "going concern" or like qualification or exception, or
qualification arising out of the scope of the audit or, if so qualified, an
opinion which shall be in scope and substance reasonably satisfactory to IBM
Credit, (b) such Auditors' "Management Letter" to Customer, if any (such
"Management Letter" shall be provided to IBM Credit within 120 days after the
end of each fiscal year), (c) a written statement signed by the Auditors stating
that in the course of the regular audit of the business of Customer and its
consolidated Subsidiaries, which audit was conducted by the Auditors in
accordance with generally accepted auditing standards, the Auditors have not
obtained any knowledge of the existence of any Default under any provision of
this Agreement, or, if such Auditors shall have obtained from such examination
any such knowledge, they shall disclose in such written statement the existence
of the Default and the nature thereof, it being understood that such Auditors
shall have no liability, directly or indirectly, to anyone for failure to obtain
knowledge of any such Default; (ii) if composed, a narrative discussion of the
consolidated financial condition and results of operations and the consolidated
liquidity and capital resources of Customer and its Subsidiaries for such fiscal
year prepared by the chief executive officer or chief financial officer of
Customer; and (iii) a Compliance Certificate along with a schedule, in
substantially the form of Attachment C hereto, of the calculations used in
determining, as of the end of such fiscal year, whether Customer is in
compliance with the financial covenants set forth in Attachment A;

(B) as soon as available and in any event within forty-five (45) days after
the end of each fiscal quarter of Customer (i) Financial Statements as of the
end of such period and for the fiscal year to date, together with a comparison
to the Financial Statements for the same periods in the prior year, all in
reasonable detail and duly certified (subject to normal year-end audit
adjustments and except for the absence of footnotes) by the chief executive
officer or chief financial officer of Customer as having been prepared in
accordance dance with GAAP; (ii) if composed, a narrative discussion of the
consolidated financial condition and results of operations and the consolidated
liquidity and capital resources of Customer and its Subsidiaries for such period
and for the fiscal year to date prepared by the chief executive officer or chief
financial officer of Customer; and (iii) a Compliance Certificate along with a
schedule, in substantially the form of Attachment C hereto, of the calculations
used in determining, as of the end of such fiscal quarter, whether Customer is
in compliance with the financial covenants set forth in Attachment A;

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(C) as soon as available and in any event within thirty (30) days after the
end of each fiscal month of Customer (i) Financial Statements as of the end of
such period and for the fiscal year to date, all in reasonable detail and duly
certified (subject to normal year-end audit adjustments and except for the
absence of footnotes) by the chief executive officer or chief financial officer
of Customer as having been prepared in accordance with GAAP; and (ii) if
composed, a narrative discussion of the consolidated financial condition and
results of operations and the consolidated liquidity and capital resources of
Customer and its Subsidiaries for such period and for the fiscal year to date
prepared by the chief executive officer or chief financial officer of Customer;

(D) as soon as available and in any event within thirty (30) days after the
end of each fiscal year of Customer (i) projected Financial Statements, broken
down by quarter, for the current fiscal year; and (ii) if composed, a narrative
discussion relating to such projected Financial Statements;

(E) as soon as available and in any event within thirty (30) days after the
end of each fiscal quarter of Customer, revised projected Financial Statements,
broken down by quarter, for (i) the current fiscal year from the beginning of
such fiscal quarter to the fiscal year end and (ii) sufficient quarters of the
following fiscal year to provide twelve months of projected data;

(F) promptly after Customer obtains knowledge of (i) the occurrence of a
Default or Event of Default, or (ii) the existence of any condition or event
which would result in the Customer's failure to satisfy the conditions precedent
to Advances set forth in Section 5, a certificate of the chief executive officer
or chief financial officer of Customer specifying the nature thereof and the
Customer's proposed response thereto, each in reasonable detail;

(G) promptly after Customer obtains knowledge of (i) any proceeding(s)
being instituted or threatened to be instituted by or against Customer in any
federal, state, local or foreign court or before any commission or other
regulatory body (federal, state, local or foreign), or (ii) any actual or
prospective change, development or event which, in any such case, has had or
could reasonably be expected to have a Material Adverse Effect, a certificate of
the chief executive officer or chief financial officer of Customer specifying
the nature thereof and the Customer's proposed response thereto, each in
reasonable detail;

(H) promptly after Customer obtains knowledge that (i) any order, judgment
or decree in excess of $100,000.00 (exclusive of (a) any amounts that are duly
bonded to the satisfaction of IBM Credit or (b) any amount fully covered by
insurance as to which the insurance company has acknowledged its obligation to
pay such judgment in full) shall have been entered against Customer or any of
its properties or assets, or (ii) it has received any notification of a material
violation of any Requirement of Law from any Governmental Authority, a
certificate of the chief executive officer or chief financial officer of
Customer specifying the nature thereof and the Customer's proposed response
thereto, each in reasonable detail;

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(I) promptly after Customer learns of any material labor dispute to which
Customer may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
Customer is a party or by which it is bound, a certificate of the chief
executive officer or chief financial officer of Customer specifying the nature
thereof and the Customer's proposed response thereto, each in reasonable detail;

(J) within five (5) Business Days after request by IBM Credit, any written
certificates, schedules and reports together with all supporting documents as
IBM Credit may reasonably request relating to the Collateral or the Customer's
or any guarantor's business affairs and financial condition;

(K) by the fifth (5th) Business Day of each month, or as otherwise agreed
in writing, a Collateral Management Report as of a date no earlier than the last
day of the immediately preceding month;

(L) along with the Financial Statements set forth in Section 7.1(A) and
(B), the name, address and phone number of each of its account debtors' primary
contacts for each Account on the Accounts aging report contained in its most
recent Collateral Management Report; and

(M) within five (5) days after the same are sent, copies of all financial
statements and reports which Customer sends to its stockholders, and within five
(5) days after the same are filed, copies of all financial statements and
reports which Customer may make to, or file with, the Securities and Exchange
Commission or any successor or analogous governmental authority. The requirement
of this paragraph 7.1(M) can be fulfilled by notification to IBM Credit that the
required information is available on publicly accessible electronic databases.

Each certificate, schedule and report provided by Customer to IBM Credit shall
be signed by an authorized officer of Customer, and which signature shall be
deemed a representation and warranty that the information contained in such
certificate, schedule or report is true and accurate in all material respects on
the date as of which such certificate, schedule or report is made and does not
omit to state a material fact necessary in order to make the statements
contained therein not misleading at such time. Each financial statement
delivered pursuant to this Section 7.1 shall be prepared in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.

7.2. Location of Collateral. The inventory, equipment and other tangible
Collateral shall be kept or sold at the addresses as set forth on Attachment B
or on any notice provided by Customer to IBM Credit in accordance with Section
7.7(C). Such locations shall be certified quarterly to IBM Credit substantially
in the form of Attachment G.

7.3. Changes in Customer. Customer shall provide thirty (30) days prior written
notice to IBM Credit of any change in Customer's name, chief executive office
and principal place of business, organization, form of ownership or corporate
structure; provided, however, that Customer's compliance with this covenant
shall not relieve it of any of its other obligations or any other provisions
under this Agreement or

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any Other Document limiting actions of the type described in this Section.

7.4. Corporate Existence. Customer shall (A) maintain its corporate existence,
maintain in full force and effect all licenses, bonds, franchises, leases and
qualifications to do business, and all contracts and other rights necessary to
the profitable conduct of its business, (B) continue in, and limit its
operations to, the same general lines of business as presently conducted by it
unless otherwise permitted in writing by IBM Credit and (C) comply with all
Requirements of Law.

7.5. ERISA. Customer shall promptly notify IBM Credit in writing after it learns
of the occurrence of any event which would constitute a "reportable event" under
ERISA or any regulations thereunder with respect to any Plan, or that the PBGC
has instituted or will institute proceedings to terminate any Plan.
Notwithstanding the foregoing, the Customer shall have no obligation to notify
IBM Credit as to any "reportable event" as to which the 30-day notice
requirement of Section 4043(b) has been waived by the PBGC, until such time as
such Customer is required to notify the PBGC of such reportable event.

Such notification shall include a certificate of the chief financial officer of
Customer setting forth details as to such "reportable event" and the action
which Customer proposes to take with respect thereto, together with a copy of
any notice of such "reportable event" which may be required to be filed with the
PBGC, or any notice delivered by the PBGC evidencing its intent to institute
such proceedings. Upon request of IBM Credit, Customer shall furnish, or cause
the plan administrator to furnish, to IBM Credit the most recently filed annual
report for each Plan.

7.6. Environmental Matters. (A) Customer and any other Person under Customer's
control (including, without limitation, agents and Affiliates under such
control) shall (i) comply with all Environmental Laws in all material respects,
and (ii) undertake to use commercially reasonable efforts to prevent any
unlawful release of any Hazardous Substance by Customer or such Person into,
upon, over or under any property now or hereinafter owned, leased or otherwise
controlled (directly or indirectly) by Customer.

(B) Customer shall notify IBM Credit, promptly upon its obtaining knowledge
of (i) any non-routine proceeding or investigation by any Governmental Authority
with respect to the presence of any Hazardous Substances on or in any property
now or hereinafter owned, leased or otherwise controlled (directly or
indirectly) by Customer, (ii) all claims made or threatened by any Person or
Governmental Authority against Customer or any of Customer's assets relating to
any loss or injury resulting from any Hazardous Substance, (iii) Customer's
discovery of evidence of unlawful disposal of or environmental contamination by
any Hazardous Substance on any property now or hereinafter owned, leased or
otherwise controlled (directly or indirectly) by Customer, and (iv) any
occurrence or condition which could constitute a violation of any Environmental
Law.

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7.7. Collateral Books and Records/Collateral Audit. (A) Customer agrees to
maintain books and records pertaining to the Collateral in such detail, form and
scope as is consistent with good business practice, and agrees that such books
and records will reflect IBM Credit's interest in the Accounts.

(B) Customer agrees that IBM Credit or its agents may enter upon the
premises of Customer at any time and from time to time, during normal business
hours and upon reasonable notice under the circumstances, and at any time at all
on and after the occurrence and during the continuance of an Event of Default
for the purposes of (i) inspecting the Collateral, (ii) inspecting and/or
copying (at Customer's expense) any and all records pertaining thereto, (iii)
discussing the affairs, finances and business of Customer with any officers,
employees and directors of Customer or with the Auditors and (iv) verifying
Eligible Accounts and other Collateral. Customer also agrees to provide IBM
Credit with such reasonable information and documentation that IBM Credit deems
necessary to conduct the foregoing activities, including, without limitation,
reasonably requested samplings of purchase orders, invoices and evidences of
delivery or other performance.

Upon the occurrence and during the continuance of an Event of Default which has
not been waived by IBM Credit in writing, IBM Credit may conduct any of the
foregoing activities in any manner that IBM Credit deems reasonably necessary.

(C) Customer shall give IBM Credit thirty (30) days prior written notice of
any change in the location of any Collateral, the location of its books and
records or in the location of its chief executive office or place of business
from the locations specified in Attachment B, and will execute in advance of
such change and cause to be filed and/or delivered to IBM Credit any financing
statements, landlord or other lien waivers, or other documents reasonably
required by IBM Credit, all in form and substance reasonably satisfactory to IBM
Credit.

(D) Customer agrees to advise IBM Credit promptly, in reasonably sufficient
detail, of any substantial change relating to the type, quantity or quality of
the Collateral, or any event which could reasonably be expected to have a
Material Adverse Effect on the value of the Collateral or on the security
interests granted to IBM Credit therein.

7.8. Insurance; Casualty Loss. (A) Customer agrees to maintain with financially
sound and reputable insurance companies: (i) insurance on its properties, (ii)
public liability insurance against claims for personal injury or death as a
result of the use of any products sold by it and (iii) insurance coverage
against other business risks, in each case, in at least such amounts and against
at least such risks as are usually and prudently insured against in the same
general geographical area by companies of established repute engaged in the same
or a similar business. Customer will furnish to IBM Credit, upon its written
request, the insurance certificates with respect to such insurance. In addition,
all Policies so maintained are to name IBM Credit as an additional insured as
its interest may appear.

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(B) Without limiting the generality of the foregoing, Customer shall keep
and maintain, at its sole expense, the Collateral insured for an amount not less
than the amount set forth on Attachment A from time to time opposite the caption
"Collateral Insurance Amount" against all loss or damage under an "all risk"
Policy with companies mutually acceptable to IBM Credit and Customer, with a
lender's loss payable endorsement or mortgagee clause in form and substance
reasonably satisfactory to IBM Credit designating that any loss payable
thereunder with respect to such Collateral shall be payable to IBM Credit. Upon
receipt of proceeds by IBM Credit the same shall be applied on account of the
Customer's Outstanding Product Advances first, then to the Outstanding A/R
Advances. Customer agrees to instruct each insurer to give IBM Credit, by
endorsement upon the Policy issued by it or by independent instruments furnished
to IBM Credit, at least ten (10) days written notice before any Policy shall be
altered or cancelled and that no act or default of Customer or any other person
shall affect the right of IBM Credit to recover under the Policies. Customer
hereby agrees to direct all insurers under the Policies to pay all proceeds with
respect to the Collateral directly to IBM Credit.

If Customer fails to pay any cost, charges or premiums, or if Customer fails to
insure the Collateral, IBM Credit may pay such costs, charges or premiums. Any
amounts paid by IBM Credit hereunder shall be considered an additional debt owed
by Customer to IBM Credit and are due and payable immediately upon receipt of an
invoice by IBM Credit.

7.9. Taxes. Customer agrees to pay, when due, all taxes lawfully levied or
assessed against Customer or any of the Collateral before any penalty or
interest accrues thereon unless such taxes are being contested, in good faith,
by appropriate proceedings promptly instituted and diligently conducted and an
adequate reserve or other appropriate provisions have been made therefor as
required in order to be in conformity with GAAP and an adverse determination in
such proceedings could not reasonably be expected to have a Material Adverse
Effect.

7.10. Compliance With Laws. Customer agrees to comply with all Requirements of
Law applicable to the Collateral or any part thereof, or to the operation of its
business in a man- ner which does not cause a Material Adverse Effect.

7.11. Fiscal Year. Customer agrees to maintain its fiscal year as a year ending
December 31 unless Customer provides IBM Credit at least thirty (30) days prior
written notice of any change thereof.

7.12. Intellectual Property. Customer shall do and cause to be done all things
necessary to preserve and keep in full force and effect all registrations of
Intellectual Property which the failure to do or cause to be done could
reasonably be expected to have a Material Adverse Effect.

7.13. Maintenance of Property. Customer shall maintain all of its material
properties (business and otherwise) in good condition and repair (ordinary wear
and tear excepted) and pay and discharge all costs of repair and maintenance
thereof and all rental and mortgage payments and related charges pertaining
thereto and not commit or permit any waste with respect to any of its material
properties.

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7.14. Collateral. Customer shall:

(A) from time to time upon request of IBM Credit, provide IBM Credit with
access to copies of all invoices, delivery evidences and other such documents
relating to each Account;

(B) promptly upon Customer's obtaining knowledge thereof, furnish to and
inform IBM Credit of all material adverse information relating to the financial
condition of any Account debtor whose outstanding obligations to Customer
constitute two percent (2%) or more of the Accounts at such time (a "Material
Account Debtor");

(C) promptly upon Customer's learning thereof, notify IBM Credit in writing
of any event which would cause any obligation of a Material Account Debtor to
become an Ineligible Account;

(D) keep all goods rejected or returned by any Account debtor and all goods
repossessed or stopped in transit by Customer from any account debtor segregated
from other property of Customer, holding the same in trust for IBM Credit until
Customer applies a credit against such Account debtor's outstanding obligations
to Customer or sells such goods in the ordinary course of business, whichever
occurs earlier;

(E) stamp or otherwise mark chattel paper and instruments now owned or
hereafter acquired by it in conspicuous type to show that the same are subject
to IBM Credit's security interest and immediately thereafter deliver or cause
such chattel paper and instruments to be delivered to IBM Credit or any agent
designated by IBM Credit with appropriate endorsements and assignments to vest
title and possession in IBM Credit;

(F) use commercially reasonable efforts to collect all Accounts owed;

(G) promptly notify IBM Credit of any loss, theft or destruction of or
damage to any of the Collateral. Customer shall diligently file and prosecute
its claim for any award or payment in connection with any such loss, theft,
destruction of or damage to Collateral. Customer shall, upon demand of IBM
Credit, make, execute and deliver any assignments and other instruments
sufficient for the purpose of assigning any such award or payment to IBM Credit,
free of any encumbrances of any kind whatsoever;

(H) consistent with reasonable commercial practice, observe and perform all
matters and things necessary or expedient to be observed or performed under or
by virtue of any lease, license, concession or franchise forming part of the
Collateral in order to preserve, protect and maintain all the rights of IBM
Credit thereunder;

(I) consistent with reasonable commercial practice, maintain, use and
operate the Collateral and carry on and conduct its business in a proper and
efficient manner so as to preserve and protect the Collateral and the earnings,
incomes, rents, issues and profits thereof; and

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(J) at any time and from time to time, upon the request of IBM Credit, and
at the sole expense of Customer, Customer will promptly and duly execute and
deliver such further instruments and documents and take such further action as
IBM Credit may reasonably request for the purpose of obtaining or preserving the
full benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code in effect in any jurisdiction with
respect to the security interests granted herein and the payment of any and all
recording taxes and filing fees in connection therewith.

7.15. Subsidiaries. IBM Credit may require that any Subsidiaries of Customer
become parties to this Agreement or any other agreement executed in connection
with this Agreement as guarantors or sureties. Customer will comply, and cause
all Subsidiaries of Customer to comply with Sections 7 and 8 of this Agreement,
as if such sections applied directly to such Subsidiaries.

7.16. Financial Covenants; Additional Covenants. Customer acknowledges and
agrees that Customer shall at all times maintain the financial covenants and
other covenants set forth in the attachments, exhibits and other addenda incor-
porated in this Agreement.

Section 8. NEGATIVE COVENANTS

Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations due hereunder:

8.1. Liens. The Customer will not, directly or indirectly mortgage, assign,
pledge, transfer, create, incur, assume, permit to exist or otherwise permit any
Lien or judgment to exist on any of its property, assets, revenues or goods,
whether real, personal or mixed, whether now owned or hereafter acquired, except
for Permitted Liens.

8.2. Disposition of Assets. The Customer will not, directly or indirectly, sell,
lease, assign, transfer or otherwise dispose of any assets other than (i) sales
of inventory in the ordinary course of business and short term rental of
inventory as demonstrations in amounts not material to Customer, and (ii)
voluntary dispositions of individual assets and obsolete or worn out property in
the ordinary course of business, provided, that the aggregate book value of all
such assets and property so sold or disposed of under this section 8.2 (ii) in
any fiscal year shall not exceed 5% of the consolidated assets of the Customer
as of the beginning of such fiscal year.

8.3. Corporate Changes. The Customer will not, without the prior written consent
of IBM Credit (which consent shall not be unreasonably withheld), directly or
indirectly, merge, consolidate, liquidate, dissolve or enter into or engage in
any operation or activity materially different from that presently being
conducted by Customer.

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8.4. Guaranties. The Customer will not, directly or indirectly, assume,
guaranty, endorse, or otherwise become liable upon the obligations of any other
Person, except (i) by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, (ii) by
the giving of indemnities in connection with the sale of inventory or other
asset dispositions permitted hereunder, and (iii) for guaranties in favor of IBM
Credit.

8.5. Restricted Payments. The Customer will not, directly or indirectly: (i)
declare or pay any dividend (other than dividends payable solely in common stock
of Customer) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of capital stock of
Customer or any warrants, options or rights to purchase any such capital stock,
whether now or hereafter outstanding, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of Customer; or (ii) make any optional payment or prepayment on or
redemption (including, without limitation, by making payments to a sinking or
analogous fund) or repurchase of any Indebtedness (other than the Obligations).

8.6. Investments. The Customer will not, directly or indi- rectly, make,
maintain or acquire any Investment in any Per- son other than:

(A) interest bearing deposit accounts (including certificates of deposit)
which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a
similar federal insurance program;

(B) direct obligations of the government of the United States of America or
any agency or instrumentality thereof or obligations guaranteed as to principal
and interest by the United States of America or any agency thereof;

(C) stock or obligations issued to Customer in settlement of claims against
others by reason of an event of bankruptcy or a composition or the readjustment
of debt or a reorganization of any debtor of Customer; and

(D) commercial paper of any corporation organized under the laws of any
State of the United States or any bank organized or licensed to conduct a
banking business under the laws of the United States or any State thereof having
the short-term highest rating then given by Moody's Investor's Services, Inc. or
Standard & Poor's Corporation.

8.7. Affiliate/Subsidiary Transactions. The Customer will not, directly or
indirectly, enter into any transaction with any Affiliate or Subsidiary,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service to any Affiliate or Subsidiary of Customer except in
the ordinary course of business and pursuant to the reasonable requirements of
Customer's business upon fair and reasonable terms no less favorable to Customer
than could be obtained in a comparable arm's-length transaction with an
unaffiliated Person.

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8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC, (B) permit any "prohibited transaction"
involving any Plan (other than a "multi-employer benefit plan") which would
subject the Customer to a material tax or penalty on "prohibited transactions"
under the Code or ERISA, (C) fail to pay to any Plan any contribution which they
are obligated to pay under the terms of such Plan, if such failure would result
in a material "accumulated funding deficiency", whether or not waived, (D) allow
or suffer to exist any occurrence and during the continuance of a "reportable
event" or any other event or condition, which presents a material risk of
termination by the PBGC of any Plan (other than a "multi-employer benefit
plan"), or (E) fail to notify IBM Credit as required in Section 7.5. As used in
this Agreement, the terms "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in ERISA, and the
term "prohibited transaction" shall have the meaning assigned to it in the Code
and ERISA. For purposes of this Section 8.8, the terms material liability, tax,
penalty, accumulated funding deficiency and risk of termination shall mean a
liability, tax, penalty, accumulated funding deficiency or risk of termination
which could reasonably be expected to have a Material Adverse Effect.

8.9. Additional Negative Pledges. Customer will not, directly or indirectly,
create or otherwise cause or permit to exist or become effective any contractual
obligation which may restrict or inhibit IBM Credit's rights or ability to sell
or otherwise dispose of the Collateral or any part thereof after the occurrence
and during the continuance of an Event of Default.

8.10. Storage of Collateral with Bailees and Warehousemen. Collateral shall not
be stored with a bailee, warehouseman or similar party without the prior written
consent of IBM Credit unless Customer will, concurrently with the delivery of
such Collateral to such party, cause such party to issue and deliver to IBM
Credit, warehouse receipts in the name of IBM Credit evidencing the storage of
such Collateral.

8.11. Use of Proceeds. The Customer shall not use any por- tion of the proceeds
of any Advances other than to acquire Products from Authorized Suppliers and for
its general work- ing capital requirements.

8.12. Accounts. The Customer shall not permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms relating thereto,
which would affect IBM Credit's ability to collect payment on any Account in
whole or in part, except for such extensions, compromises or settlements made by
Customer in the ordinary course of its business, provided, however, that the
aggregate amount of such extensions, compromises or settlements does not exceed
five percent (5%) of the Customer's Accounts at any time.

8.13. Indebtedness. The Customer will not create, incur, assume or permit to
exist any Indebtedness, except for Permitted Indebtedness.

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8.14. Loans. The Customer will not make any loans, advances, contributions or
payments of money or goods exceeding $250,000 in the aggregate to any
Subsidiary, Affiliate or parent corporation or to any officer, director or
stockholder of Customer or of any such corporation (except for compensation for
personal services actually rendered), except for transactions expressly
authorized in this Agreement.

Section 9. DEFAULT

9.1. Event of Default. Any one or more of the following events shall constitute
an Event of Default by the Customer under this Agreement and the Other
Documents:

(A) The failure to make timely payment of the Obligations or any part
thereof when due and payable;

(B) Customer fails to comply with or observe any material term, covenant or
agreement contained in this Agreement or any Other Documents;

(C) Any representation, warranty, statement, report or certificate made or
delivered by or on behalf of Customer or any of its officers, employees or
agents or by or on behalf of any guarantor to IBM Credit was false in any
material respect at the time when made or deemed made;

(D) The occurrence of any event or circumstance which could reasonably be
expected to have a Material Adverse Effect;

(E) Customer, any Subsidiary or any guarantor shall generally not pay its
debts as such debts become due, become or otherwise declare itself insolvent,
file a voluntary petition for bankruptcy protection, have filed against it any
involuntary bankruptcy petition, cease to do business as a going concern, make
any assignment for the benefit of creditors, or a custodian, receiver, trustee,
liquidator, administrator or person with similar powers shall be appointed for
Customer, any Subsidiary or any guarantor or any of its respective properties or
have any of its respective properties seized or attached, or take any action to
authorize, or for the purpose of effectuating, the foregoing, provided, however,
that Customer, any Subsidiary or any guarantor shall have a period of forty-five
(45) days within which to discharge any involuntary petition for bankruptcy or
similar proceeding;

(F) The use of any funds borrowed from IBM Credit under this Agreement for
any purpose other than as provided in this Agreement;

(G) The entry of any judgment against Customer or any guarantor in an
amount in excess of $100,000.00 and such judgment is not satisfied, dismissed,
stayed or superseded by bond within thirty (30) days after the day of entry
thereof (and in the event of a stay or supersedeas bond, such judgment is not
discharged within thirty (30) days after termination of any such stay or bond)
or such judgment is not fully covered by insurance as to which the insurance
company has acknowledged its obligation to pay such judgment in full;

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(H) The dissolution or liquidation of Customer or any guarantor, or
Customer or any guarantor or its directors or stockholders shall take any action
to dissolve or liquidate Customer or any guarantor;

(I) Any "going concern" or like qualification or exception, or
qualification arising out of the scope of an audit by an Auditor of his opinion
relative to any Financial Statement delivered to IBM Credit under this
Agreement;

(J) There issues a warrant of distress for any rent or taxes with respect
to any premises occupied by Customer in or upon which the Collateral, or any
part thereof, may at any time be situated and such warrant shall continue for a
period of ten (10) Business Days from the date such warrant is issued;

(K) Customer suspends business;

(L) The occurrence of any event or condition which enables the holder of
any Indebtedness arising in one or more related or unrelated transactions, in
aggregate principal amount exceeding $100,000.00, to accelerate the maturity
thereof or the failure of Customer to pay when due any such Indebtedness;

(M) Any guaranty of any or all of the Customer's Obligations executed by
any guarantor in favor of IBM Credit, shall at any time for any reason cease to
be in full force and effect or shall be declared to be null and void by a court
of competent jurisdiction or the validity or enforceability thereof shall be
contested or denied by any such guarantor, or any such guarantor shall deny that
it has any further liability or obligation thereunder or any such guarantor
shall fail to comply with or observe any of the terms, provisions or conditions
contained in any such guaranty;

(N) Customer is in default under the material terms of any of the Other
Documents after the expiration of any applicable cure periods;

(O) There shall occur a "reportable event" with respect to any Plan, or any
Plan shall be subject to termination proceedings (whether voluntary or
involuntary) and there shall result from such "reportable event" or termination
proceedings a liability of Customer to the PBGC which in the reasonable opinion
of IBM Credit will have a Material Adverse Effect;

(P) Any "person" (as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended) acquires a beneficial interest in 50% or more of the
Voting Stock of Customer without the prior written consent of IBM Credit (which
consent shall not be unreasonably withheld).

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9.2. Acceleration. Upon the occurrence and during the continuance of an Event of
Default which has not been waived in writing by IBM Credit, IBM Credit may, in
its sole discretion, take any or all of the following actions, without prejudice
to any other rights it may have at law or under this Agreement to enforce its
claims against the Customer: (a) declare all Obligations to be immediately due
and payable (except with respect to any Event of Default set forth in Section
9.1(E) hereof, in which case all Obligations shall automatically become
immediately due and payable without the necessity of any notice or other demand)
without presentment, demand, protest or any other action or obligation of IBM
Credit; and

(b) immediately terminate the Credit Line hereunder.

9.3. Remedies. (A) Upon the occurrence and during the continuance of any Event
of Default which has not been waived in writing by IBM Credit, IBM Credit may
exercise all rights and remedies of a secured party under the U.C.C. Without
limiting the generality of the foregoing, IBM Credit may: (i) remove from any
premises where same may be located any and all documents, instruments, files and
records (including the copying of any computer records), and any receptacles or
cabinets containing same, relating to the Accounts, or IBM Credit may use (at
the expense of the Customer) such of the supplies or space of the Customer at
Customer's place of business or otherwise, as may be necessary to properly
administer and control the Accounts or the handling of collections and
realizations thereon; (ii) bring suit, in the name of the Customer or IBM Credit
and generally shall have all other rights respecting said Accounts, including
without limitation the right to accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Customer or IBM Credit;

(iii) sell, assign and deliver the Accounts and any returned, reclaimed or
repossessed merchandise, with or without advertisement, at public or private
sale, for cash, on credit or otherwise, at IBM Credit's sole option and
discretion, and IBM Credit may bid or become a purchaser at any such sale; and
(iv) foreclose the security interests created pursuant to this Agreement by any
available judicial procedure, or to take possession of any or all of the
Collateral without judicial process and to enter any premises where any
Collateral may be located for the purpose of taking possession of or removing
the same.

(B) Upon the occurrence and during the continuance of any Event of Default
which has not been waived in writing by IBM Credit, IBM Credit shall have the
right to sell, lease, or otherwise dispose of all or any part of the Collateral,
whether in its then condition or after further preparation or processing, in the
name of Customer or IBM Credit, or in the name of such other party as IBM Credit
may designate, either at public or private sale or at any broker's board, in
lots or in bulk, for cash or for credit, with or without warranties or
representations, and upon such other terms and conditions as IBM Credit in its
sole discretion may deem advisable, and IBM Credit shall have the right to
purchase at any such sale.

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If IBM Credit, in its sole discretion determines that any of the Collateral
requires rebuilding, repairing, maintenance or preparation, IBM Credit shall
have the right, at its option, to do such of the aforesaid as it deems necessary
for the purpose of putting such Collateral in such saleable form as IBM Credit
shall deem appropriate. The Customer hereby agrees that any disposition by IBM
Credit of any Collateral pursuant to and in accordance with the terms of a
repurchase agreement between IBM Credit and the manufacturer or any supplier
(including any Authorized Supplier) of such Collateral constitutes a
commercially reasonable sale. The Customer agrees, at the request of IBM Credit,
to assemble the Collateral and to make it available to IBM Credit at places
which IBM Credit shall select, whether at the premises of the Customer or
elsewhere, and to make available to IBM Credit the premises and facilities of
the Customer for the purpose of IBM Credit's taking possession of, removing or
putting such Collateral in saleable form. If notice of intended disposition of
any Collateral is required by law, it is agreed that ten (10) Business Days
notice shall constitute reasonable notification.

(C) Unless expressly prohibited by the licensor thereof, if any, IBM Credit
is hereby granted, upon the occurrence and during the continuance of any Event
of Default which has not been waived in writing by IBM Credit, an irrevocable,
non-exclusive license to use, assign, license or sublicense all computer
software programs, data bases, processes and materials used by the Customer in
its businesses or in connection with any of the Collateral.

(D) The net cash proceeds resulting from IBM Credit's exercise of any of
the foregoing rights (after deducting all charges, costs and expenses, including
reasonable attorneys' fees) shall be applied by IBM Credit to the payment of
Customer's Obligations, whether due or to become due, in such order as IBM
Credit may in it sole discretion elect. Customer shall remain liable to IBM
Credit for any deficiencies, and IBM Credit in turn agrees to remit to Customer
or its successors or assigns, any surplus resulting therefrom.

(E) The enumeration of the foregoing rights is not intended to be
exhaustive and the exercise of any right shall not preclude the exercise of any
other rights, all of which shall be cumulative.

9.4. Waiver. If IBM Credit seeks to take possession of any of the Collateral by
any court process Customer hereby irrevocably waives to the extent permitted by
applicable law any bonds, surety and security relating thereto required by any
statute, court rule or otherwise as an incident to such possession and any
demand for possession of the Collateral prior to the commencement of any suit or
action to recover possession thereof. In addition, Customer waives to the extent
permitted by applicable law all rights of set-off it may have against IBM
Credit. Customer further waives to the extent permitted by applicable law
presentment, demand and protest, and notices of non-payment, non-performance,
any right of contribution, dishonor, and any other demands, and notices required
by law.

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Section 10. MISCELLANEOUS

10.1. Term; Termination. (A) This Agreement shall remain in force until the
earlier of (i) the Termination Date, (ii) the date specified in a written notice
by the Customer that they intend to terminate this Agreement which date shall be
no less than ninety (90) days following the receipt by IBM Credit of such
written notice, and (iii) termination by IBM Credit after the occurrence and
during the continuance of an Event of Default. Upon the date that this Agreement
is terminated, all of Customer's Obligations shall be immediately due and
payable in their entirety, even if they are not yet due under their terms.

(B) Until the indefeasible payment in full of all of Customer's
Obligations, no termination of this Agreement or any of the Other Documents
shall in any way affect or impair (i) Customer's Obligations to IBM Credit
including, without limitation, any transaction or event occurring prior to such
termination, or (ii) IBM Credit's rights hereunder, including, without
limitation IBM Credit's security interest in the Collateral.

10.2. Indemnification. The Customer hereby agrees to indemnify and hold harmless
IBM Credit and each of its officers, directors, agents and assigns
(collectively, the "Indemnified Persons") against all losses, claims, damages,
liabilities or other expenses (including reasonable attorneys' fees and court
costs now or hereinafter arising from the enforcement of this Agreement, the
"Losses") to which any of them may become subject insofar as such Losses arise
out of or are based upon any event, circumstance or condition (a) occurring or
existing on or before the date of this Agreement relating to any financing
arrangements IBM Credit may from time to time have with (i) Customer, (ii) any
Person that shall be acquired by Customer or (iii) any Person that Customer may
acquire all or substantially all of the assets of, or (b) directly or
indirectly, relating to the execution, delivery or performance of this Agreement
or the consummation of the transactions contemplated hereby or thereby or to any
of the Collateral or to any act or omission of the Customer in connection
therewith. Notwithstanding the foregoing, the Customer shall not be obligated to
indemnify IBM Credit for any Losses incurred by IBM Credit which are a result of
IBM Credit's negligence or willful misconduct. The indemnity provided herein
shall survive the termination of this Agreement.

10.3. Additional Obligations. IBM Credit, without waiving or releasing any
Obligation or Default of the Customer, may perform any Obligations of the
Customer that the Customer shall fail or refuse to perform and IBM Credit may,
at any time or times hereafter, but shall be under no obligation so to do, pay,
acquire or accept any assignment of any security interest, lien, encumbrance or
claim against the Collateral asserted by any person. All sums paid by IBM Credit
in performing in satisfaction or on account of the foregoing and any expenses,
including reasonable attorney's fees, court costs, and other charges relating
thereto, shall be a part of the Obligations, payable on demand and secured by
the Collateral.

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10.4. LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIED
PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS AGREEMENT,
ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL IBM
CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMER OR ANY
OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEM
HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

10.5. Alteration/Waiver. This Agreement and the Other Documents may not be
altered or amended except by an agreement in writing signed by the Customer and
by IBM Credit. No delay or omission of IBM Credit to exercise any right or
remedy hereunder, whether before or after the occurrence of any Event of
Default, shall impair any such right or remedy or shall operate as a waiver
thereof or as a waiver of any such Event of Default. In the event that IBM
Credit at any time or from time to time dispenses with any one or more of the
requirements specified in this Agreement or any of the Other Documents, such
dispensation may be revoked by IBM Credit at any time and shall not be deemed to
constitute a waiver of any such requirement subsequent thereto. IBM Credit's
failure at any time or times to require strict compliance and performance by the
Customer of any undertakings, agreements, covenants, warranties and
representations of this Agreement or any Other Document shall not waive, affect
or diminish any right of IBM Credit thereafter to demand strict compliance and
performance thereof. Any waiver by IBM Credit of any Default by the Customer
under this Agreement or any of the Other Documents shall not waive or affect any
other Default by the Customer under this Agreement or any of the Other
Documents, whether such Default is prior or subsequent to such other Default and
whether of the same or a different type. None of the undertakings, agreements,
warranties, covenants, and representations of the Customer contained in this
Agreement or the Other Documents and no Default by the Customer shall be deemed
waived by IBM Credit unless such waiver is in writing signed by an authorized
representative of IBM Credit.

10.6. Severability. If any provision of this Agreement or the Other Documents or
the application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the Other Documents and the
application of such provision to other Persons or circumstances will not be
affected thereby, the provisions of this Agreement and the Other Documents being
severable in any such instance.

10.7. One Loan. All Advances heretofore, now or at any time or times hereafter
made by IBM Credit to the Customer under this Agreement or the Other Documents
shall constitute one loan secured by IBM Credit's security interests in the
Collateral and by all other security interests, liens and encumbrances
heretofore, now or from time to time hereafter granted by the Customer to IBM
Credit or any assignor of IBM Credit.

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10.8. Additional Collateral. All monies, reserves and proceeds received or
collected by IBM Credit with respect to Accounts and other property of the
Customer in possession of IBM Credit at any time or times hereafter are hereby
pledged by Customer to IBM Credit as security for the payment of Customer's
Obligations and shall be applied promptly by IBM Credit on account of the
Customer's Obligations; provided, however, IBM Credit may release to the
Customer such portions of such monies, reserves and proceeds as IBM Credit may
from time to time determine, in its sole discretion.

10.9. No Merger or Novations. (A) Notwithstanding anything contained in any
document to the contrary, it is understood and agreed by the Customer and IBM
Credit that the claims of IBM Credit arising hereunder and existing as of the
date hereof constitute continuing claims arising out of the Obligations of
Customer under the Financing Agreement and any Other Document. Customer
acknowledges and agrees that such Obligations outstanding as of the date hereof
have not been satisfied or discharged and that this Agreement is not intended to
effect a novation of the Customer's Obligations under the Financing Agreement or
any Other Document.

(B) Neither the obtaining of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the Obligations of the Customer to
IBM Credit secured by this Agreement and shall not operate as a merger of any
covenant in this Agreement, and the acceptance of any payment or alternate
security shall not constitute or create a novation and the obtaining of a
judgment or judgments under a covenant herein contained shall not operate as a
merger of that covenant or affect IBM Credit's rights under this Agreement.

10.10. Paragraph Titles. The Section titles used in this Agreement and the Other
Documents are for convenience only and do not define or limit the contents of
any Section.

10.11. Binding Effect; Assignment. This Agreement and the Other Documents shall
be binding upon and inure to the benefit of IBM Credit and the Customer and
their respective successors and assigns; provided, that the Customer shall have
no right to assign this Agreement or any of the Other Documents without the
prior written consent of IBM Credit.

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10.12. Notices. Except as otherwise expressly provided in this Agreement, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(A) upon receipt if deposited in the United States mails, first class mail, with
proper postage prepaid, (B) upon receipt of confirmation or answerback if sent
by telecopy, or other similar facsimile transmission, (C) one Business Day after
deposit with a reputable overnight courier with all charges prepaid, or (D) when
delivered, if hand-delivered by messenger, all of which shall be properly
addressed to the party to be notified and sent to the address or number
indicated as follows:

(i) If to IBM Credit at:
IBM Credit Corporation
5000 Executive Parkway, Suite 450
San Ramon, CA 94583
Attention: Remarketer Finance Center Manager
Telecopy: (510) 277-5659

(ii) If to Customer at:
Western Micro Technology, Inc.
254 E. Hacienda Avenue
Campbell, CA 95008
Attention: James W. Dorst
Telecopy: (800) 725-5496

or to such other address or number as each party designates to the other in the
manner prescribed herein.

10.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.

10.14. ATTACHMENT A MODIFICATIONS. IBM Credit may modify the Product Financing
Period set forth in Attachment A from time to time if on at least two occasions
during any three-month period a Shortfall Amount has become due and payable and
may modify the Collateral Insurance Amount set forth in Attachment A from time
to time, in each case, by providing Customer with a new Attachment A. Any such
new Attachment A shall be effective as of the date specified in the new
Attachment A. IBM Credit agrees that the Product Financing Period will not be
reduced more than one time within any three-month period.

10.15. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBM
CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER HEREBY
IRREVOCABLY AND UNCON- DITIONALLY:

(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER DOCUMENT, OR FOR THE RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICT
COURT IN NEW YORK.

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(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME.

(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER AT ITS ADDRESS
SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT SHALL
HAVE BEEN NOTIFIED PURSUANT THERETO;

(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN
ANY OTHER JURISDICTION.

(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT OF
LAW PROVISIONS) OF THE STATE OF NEW YORK.

10.16. JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY IRREVOCABLY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ANY
COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMER ARE PARTIES AS TO
ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY
DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH.

IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has caused
its authorized representatives to execute this Agreement and has caused its
corporate seal to be affixed hereto as of the date first written above.

WESTERN MICRO TECHNOLOGY, INC.

By:_____________________________

Print Name:_____________________

Title:__________________________

ACCEPTED this_________day of___________________, 199__.

IBM CREDIT CORPORATION

By:___________________________
Print Name: __________________
Title: _______________________

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AMENDNENT #1 TO THE
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT

THIS AMENDMENT #1 dated as of December 31, 1996 (this "Amendment"), hereby
amends that certain Inventory and Working Capital Financing Agreement by and
between Western Micro Technology, Inc., a California corporation ("Customer"),
and IBM Credit Corporation, a Delaware corporation ("IBM Credit").

RECITALS

WHEREAS, the Customer and IBM Credit have entered into that certain
Inventory and Working Capital Financing Agreement dated as of December 31, 1996
(as amended, supplemented or as otherwise modified from time to time, the
"Agreement");

WHEREAS, Customer and IBM Credit have agreed to modify the Agreement as
more specifically set forth below, upon and subject to the terms and conditions
set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Customer and IBM Credit hereby agree as follows:

Section 1. All capitalized terms not otherwise defined herein shall have the
respective meanings set forth in the Agreement.

Section 2. Modification of Agreement

A. Section 3.3 of the Agreement is hereby amended by deleting such Section
3.3 in its entirety and substituting, in lieu thereof, the following Section
3.3:

3.3. Lockbox and Special Account. Customer shall establish and maintain
lockbox(es) (each, a "Lockbox") at the address(es) set forth in Attachment A
with the financial institution listed in Attachment A ("Bank") pursuant to an
agreement between the Customer and Bank in form and substance satisfactory to
IBM Credit. Customer shall also establish and maintain a deposit account which
shall contain only proceeds of Customer's Accounts ("Proceeds Account") pursuant
to the Contingent Lockbox Proceeds Agreement by and among Customer, Bank and IBM
Credit. Such Contingent Lockbox Proceeds Agreement for the benefit of IBM Credit
in form and substance satisfactory to IBM Credit pursuant to which, among other
things, such Bank shall agree that, upon notice from IBM Credit, disbursements
from the Proceeds Account shall be made only as IBM Credit shall direct. Bank
shall charge the Proceeds Account for any deposited items which are returned
unpaid and for Proceeds Account fees and charges. If the Proceeds Account
becomes overdrawn then IBM Credit will pay any overdraft upon demand from Bank.
Customer agrees that IBM Credit may advance such funds to Bank. Any such advance
shall constitute an Advance under the terms of the Agreement.

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Section 3. Representations and Warranties. Customer makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.

Section 3.1 Enforceability of Amendment. This Amendment has been duly
authorized, executed and delivered by Customer and is enforceable against
Customer in accordance with its terms.

Section 4. Ratification of Agreement. Except as specifically amended hereby, all
of the provisions of the Agreement shall remain unamended and in full force and
effect. Customer hereby, ratifies, confirms and agrees that the Agreement, as
amended hereby, represents a valid and enforceable obligation of Customer's, and
is not subject to any claims, offsets or defense.

Section 5. Governing Law. This Amendment shall be governed by and interpreted in
accordance with the laws of the State of New York.

Section 6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.

IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.

IBM CREDIT CORPORATION WESTERN MICRO TECHNOLOGY, INC.

By: ________________________ By: ________________________________

Name: ______________________ Name: ______________________________

Title: _____________________ Title: _____________________________

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ATTACHMENT A, EFFECTIVE DATE December _ , 1996 ("IWCF ATTACHMENT A")
TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
DATED December , 1996

Customer: Western Micro Technology, Inc.

I. Fees, Rates and Repayment Terms:

(A) Credit Line: Twenty Five Million Dollars ($25,000,000.00);

(B) Borrowing Base:

(i) 80% of the amount of the Customer's Eligible Accounts as of the
date of determination as reflected in the Customer's most recent
Collateral Management Report;

(ii) 100% of the Customer's inventory in the Customer's possession as
of the date of determination as reflected in the Customer's most
recent Collateral Management Report constituting Products (other than
service parts) financed through a Product Advance by IBM Credit. The
value to be assigned to such inventory shall be based upon the
Authorized Supplier's invoice price to Customer for Financed Products
net of all applicable price reduction credits;

(iii) 30% of the value of other inventory in which IBM Credit has a
first priority security interest and ordered from other parties than
Authorized Suppliers which are on such parties' current price list, UP
TO a maximum collateral value of $4,000,000.00.

(D) Product Financing Period: 75 days

(E) Collateral Insurance Amount: Fourteen Million Six Hundred Thousand
Dollars ($14,600,000.00) (Such insurance shall also include coverage
against earthquake peril for at least 30% of the value of inventory
stored in California)

(F) A/R Finance Charge:

(i) PRO Advance Charge: Prime Rate plus 1.75%

(ii) WCO Advance Charge: Prime Rate plus 1.75%

(iii) Takeout Advance Charge: Prime Rate plus 1.50%

(G) Delinquency Fee Rate: Prime Rate plus 6.500%

(H) Shortfall Transaction Fee: Shortfall Amount multiplied by 0.30%

(I) Free Financing Period Exclusion Fee: Product Advance multiplied by
0.40%

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IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("OWCF AGREEMENT")

I. Fees, Rates and Repayment Terms (condintued):

(J) Other Charges:

(i) Application Processing Fee: $9,000.00
(ii) Monthly Service Fee: $1,500.00
(iii) Closing Fee: $ 0.00
(iv) Commitment Fee: $ 0.00

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IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")

II. Bank Account

(A) Customer's Lockbox(es) and Special Account(s) will be maintained at the
following Bank(s):

Name of Bank: _________________________________________________________________

Address: ______________________________________________________________________
_______________________________________________________________________________

Phone: ________________________________________________________________________

Lockbox Address: ______________________________________________________________

Special Account #: ____________________________________________________________