SAVOIR TECHNOLOGY GROUP INC/DE, 10-K/A, 1998-04-23

SAVOIR TECHNOLOGY GROUP INC/DE
10-K/A, 1998-04-23
ELECTRONIC PARTS & EQUIPMENT, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A
AMENDMENT NO. 1

(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, 1997

[_] 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

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SAVOIR TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S> <C>
DELAWARE 94-2414428
STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

254 E. HACIENDA AVENUE, CAMPBELL, CA 95008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 379-0177
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
</TABLE>

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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 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 $53,180,404 on March 11, 1998.

The aggregate number of outstanding shares of Common Stock, par value $0.01,
of the registrant was 5,489,258 shares as of March 11, 1998.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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SAVOIR TECHNOLOGY GROUP, INC.

INDEX TO 1997 FORM 10-K

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ITEM NO. PAGE
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PART I................................................................... 1
ITEM 1. BUSINESS.............................................. 1
ITEM 2. PROPERTIES............................................ 13
ITEM 3. LEGAL PROCEEDINGS..................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 14
PART II.................................................................. 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................... 14
ITEM 6. SELECTED FINANCIAL DATA............................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.................................................. 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 43
PART III................................................................. 43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.... 43
ITEM 11. EXECUTIVE COMPENSATION................................ 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................ 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 50
PART IV.................................................................. 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K........................................... 51
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This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding future events and the Company's plans and
expectations that involve risks and uncertainties. When used in this Report,
the words "estimate," "project," "intend," "expect" and "anticipate" and
similar expressions are intended to identify such forward-looking statements.
Such statements are subject to certain risks and uncertainties, including
those discussed below, that could cause actual results to differ materially
from those projected. Factors that may cause or contribute to such differences
include, but are not limited to, those discussed below under "Risk Factors,"
as well as those discussed elsewhere in this Report and in the documents
incorporated herein by reference. In light of the important factors that can
materially affect results, including those set forth in this paragraph and
below, the inclusion of forward-looking information herein should not be
regarded as a representation by the Company or any other person that the
objectives or plans for the Company will be achieved. The reader is therefore
cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. Savoir Technology
Group, Inc. (the "Company") undertakes no obligation to publicly release
updates or revisions to these statements.
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PART I

ITEM 1. BUSINESS

Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements
regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below in "--Risk Factors" as well as those
discussed elsewhere in this Report.

GENERAL

The Company is a value-added wholesale distributor of commercial mid-range
servers, peripheral equipment (including wireless networking equipment,
storage products, printers and terminals) and software. The Company believes
that it is one of the top three distributors of IBM's AS/400 and RS/6000
commercial mid-range servers. The Company also distributes commercial mid-
range servers, peripheral equipment and software manufactured by Unisys, NCR,
Data General and Telxon. The Company primarily distributes commercial mid-
range servers and related products to VARs who generally incorporate
commercial applications software and sell integrated computer systems to end
user customers. The Company also integrates and configures personal computers,
workstations and departmental servers for OEMs, and provides and remarkets
installation and technical support services. Through seven acquisitions and
internal growth, the Company has expanded its products and services, increased
its geographic market coverage, strengthened its management and technical
personnel and increased its operating leverage. As a result, the Company's net
sales increased from $106.5 million in 1995 to $237.9 million in 1997,
representing compound annual growth of 49.5%, while its operating income
improved from a loss (excluding restructuring charges) of $648,000 in 1995 to
income of $6.8 million in 1997.

PRODUCTS AND VENDORS

The Company's net sales are derived primarily from the activities of two
business divisions, the Mid-Range Systems Division and the Computer and
Peripherals Group.

Mid-Range Systems Division. The distribution of commercial mid-range
servers in 1997 accounted for approximately 75% of the Company's net sales.
The principal goal of the Company's commercial mid-range systems
distribution business is to provide customers with rapid, accurate delivery
of products as well as to provide quality configuration and technical
support. Products distributed by the Company include mid-range servers
which run on Unix, OS/400 and NT operating systems, peripheral equipment
(including wireless networking equipment, storage products, printers and
terminals) and software. In addition to selling new equipment, the Company
also distributes refurbished IBM AS/400 equipment. Within the Mid-Range
Systems Division, the Company represents five major manufacturers: IBM;
Data General; NCR; Unisys; and Telxon. During the years ended December 31,
1995, 1996 and 1997, approximately 30%, 50% and 65%, respectively, of the
Company's net sales were generated from the sale of IBM products. The
Company's mid-range IBM product line includes the AS/400 and RS/6000
families of mid-range servers. The Company believes that it is one of the
top three distributors of IBM commercial mid-range servers. Recently, the
Company was named IBM's Distributor of the Year for the second half of
1997, as one of IBM's Premier Business Partners and as one of several
distributors to qualify for IBM's Authorized Assembly Program ("AAP"). The
AAP certification allows the Company to utilize its integration facilities
to assemble custom RS/6000 configurations, allowing for shorter delivery
times to customers and a reduction in required inventory levels of pre-
configured systems.

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Computer and Peripherals Group. The Company offers OEMs and its
departmental server customers a single source for their hardware, software
and service needs through its Computers and Peripherals Group ("CPG"), CPG
accounted for approximately 25% of the Company's net sales in 1997. Through
CPG, the Company offers its customers a wide variety of value-added systems
integration services up to, and including, the actual installation at the
end user site (e.g., "turnkey" systems assembly of departmental servers,
workstations, hardware and software "bundling" and light manufacturing).
CPG's more advanced products include fault tolerant software, serial port
expansion devices and disk striping and mirroring solutions for the
SCO/UNIX operating environments. Products assembled and manufactured by the
Company include special purpose PC-based subcomponents of larger systems,
private-label departmental and small enterprise servers and related
peripherals. CPG sources components manufactured by DIGI International,
Inc., IBM, Sony Electronics, Inc., The Santa Cruz Operation, Inc. ("SCO"),
Toshiba America Electronic Components, Inc. and Wyse Technologies, Inc.,
among others. Through CPG, the Company also specializes in building systems
pursuant to long-term contracts for companies seeking fully compatible
configurations that remain consistent over time.

VALUE-ADDED SERVICES

In addition to the products it offers, the Company also provides a variety
of value-added services, including the following:

Integration Services. The Company performs light manufacturing or
technical integration services, ranging from simple hardware and software
integration, burn-in and testing to building customized systems to the
customer's specifications.

Technical Support Services. The Company currently offers its customers
pre-sale technical assistance, configuration review and verification,
consulting services, network design, implementation and installation
services and site planning, telephone support and help desk, patch/bug
isolation and identification, certification requirements and preparation
and system administration assistance. The Company also remarkets certain
vendor maintenance and consulting services and reseller training programs.

Logistical and Inventory Management Services. The Company offers ordering
and purchasing services, including order acknowledgment, order management,
contract purchasing and end-of-life buy programs. The Company also offers
inventory services such as expedited delivery, kitting and bill-of-material
services, warehousing and storage services, bonded inventory programs,
consignment programs and customer on-site operations. The Company offers
various delivery options and services, including drop shipments, blind
shipments, custom packaging, consolidated shipping services, special
handling services, personnel services and exporting assistance.
Additionally, in the near future, the Company expects to implement an
automated system by which customers can access status information on
product orders that are being drop shipped directly to such customers by
the vendor.

Marketing Services. The Company makes current and updated information on
its products and services available to its customers through its fax
broadcast service and its web site. The Company also customizes and
provides Internet web sites for certain of its customers. In addition, the
Company offers ready to execute demand generation campaigns, assistance
with such campaigns, assistance with organizing advertising campaigns and
joint marketing funds.

Financing, Credit and Leasing Services. The Company offers its customers
various financing and credit options, including open account terms,
electronic funds transfer, standby letters of credit, security interest/UCC
filings, personal guarantees, end user lock box services and bid bonds. The
Company also offers end user financing programs through third parties,
including leasing programs, joint purchase orders, payment agreements and
inventory financing programs.

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CUSTOMERS

The Company's customers currently include approximately 800 active accounts.
Except for Sirius Computer Solutions, Ltd. ("Sirius"), which accounted for
approximately 11% of the Company's net sales in 1997 and 23% of the Company's
net sales in the quarter ended December 31, 1997, no other single customer
accounted for more than 5% of the Company's net sales in 1997. The Company's
sales to Sirius are made under the Sirius Agreement (as defined herein),
pursuant to which the Company appointed Sirius as one of its industry
remarketer affiliates of IBM products. The Sirius Agreement provides that
Sirius may not enter into any similar arrangement with any third party for the
purpose of selling IBM products to its end user customers and also provides a
favorable pricing structure to Sirius. As a result, Sirius is expected to
remain the Company's largest customer for the duration of the Sirius Agreement
and to account for approximately the same percentage of the Company's net
sales in 1998 as it represented in the fourth quarter of 1997. The Sirius
Agreement expires on September 30, 2000, but may be terminated earlier under
certain conditions, not including termination at will. See "--Risk Factors--
Reliance on Sirius Computer Solutions, Ltd."

The Company segments its significant customers into the following three
broad categories:

Value-Added Resellers. VARs typically install their own or other vendors'
software, configure completed systems and integrate their service offerings
with hardware which can be supplied by the Company. For example, Sirius
purchases IBM mid-range servers from the Company and typically bundles
these servers with software provided by J.D. Edwards. Sirius is therefore
generally able to provide its end user customers with a complete turnkey
computer systems package. In addition, NxTrend purchases IBM, Data General
and Unisys mid-range servers from the Company and bundles its proprietary
distribution applications software with these mid-range products for sale
to its end user customers.

OEMs. These manufacturers, served by the Company through CPG, integrate
or have the Company integrate the Company's products with their own prior
to distribution to their end user customer. One example of the Company's
OEM customers is Melita International, Inc. ("Melita"), a provider of
customer contact and telephone call management systems. Melita utilizes the
Company to configure its proprietary software on a preconfigured system
which can be shipped directly to Melita's customer. In addition, customers
such as Tektronix, Inc. and Wang Laboratories, Inc. have found it more
efficient to outsource certain specialized products to the Company as
opposed to creating an internal infrastructure for themselves.

Systems Integrators. Systems integrators focus on delivering non-industry
specific solutions to the end user customer. Such solutions may include
electronic commerce, networking, Intranet/Internet configurations, as well
as application-specific solutions. For example, Q.I.V. Systems, Inc.
designs and installs network systems solutions in a variety of application
environments that incorporate commercial mid-range servers purchased from
the Company.

SALES AND MARKETING

In general, the Company focuses on selling and marketing high-quality
commercial mid-range servers and integrated computer system products from a
relatively small number of vendors. The Company's sales, sales support and
product management organizations are generally organized by vendor into
autonomous business units that sell and support only products offered by that
particular vendor. The Company believes that its customers require ongoing
support from technically trained sales professionals who are dedicated to a
particular vendor, and, in certain instances, to a particular product line,
and who can provide technical support on the increasingly complex mid-range
servers and systems offered by the Company's vendors.

The Company sells and supports IBM mid-range products through its Business
Partner Solutions, Inc. subsidiary and Data General, NCR and Unisys mid-range
products through its Western Micro Technology division. Sales professionals
require the technical expertise to work with customers and the Company's mid-
range product purchasing specialists to provide the computer system solutions
that their customers and, ultimately the end user, require. The Company's
sales professionals participate in vendor-sponsored training and certification
programs. Within the mid-range distribution business units, the Company
maintains a salesperson to

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technical support person ratio of approximately 4 to 1. The Company utilizes
directed telemarketing programs, maintains a database of current and potential
customers, participates in cooperative advertising with vendors, participates
in trade shows and advisory councils and utilizes print media as part of its
sales and marketing efforts.

Within CPG, the Company sells primarily to OEMs. Technical expertise within
CPG's sales force is critical during the relatively long sales cycles required
to develop new commercial products. Once the products are developed, the
ongoing forecasting, manufacture, delivery and installation of these systems
must be carefully managed and reviewed. Within CPG, the Company maintains a
salesperson to technical support person ratio of approximately 2 to 1. In
general, due to the complex nature of the products offered by CPG, new
customers are primarily solicited using targeted print advertising and
customer referrals.

As of December 31, 1997, the Company had approximately 90 direct sales
personnel. The Company has a national presence served by its sales offices in
Campbell and Irvine, California, Colorado Springs, Colorado, Chicago,
Illinois, Boston, Massachusetts and San Antonio, Texas. The Company's sales
offices are supported by centralized marketing departments located in Chicago
and San Antonio. The Company generally compensates its sales personnel based
on attainment of specified gross profit margins, return on assets and
inventory turns.

OPERATIONS AND INFRASTRUCTURE

Information Systems

The Company's corporate information system is a scalable, centralized
processing system capable of supporting numerous operational functions,
including purchasing, receiving, order processing, shipping, inventory
management, sales analysis and accounting. The Company's customers and sales
representatives rely on the information system for on-line, real-time
information on product pricing, inventory availability and order status. The
fully integrated modular system provides customers and sales representatives
on-line access to the status of IBM's backlog of shipments the Company expects
to receive, thereby significantly reducing back office telephone investigation
time. After product pricing and availability have been determined, the
integrated order entry system automatically places an order for shipment or
allocates the inventory to the assembly operations, if so required. The system
then instructs warehouse personnel to pull products for shipment and informs
them as to the location of the inventory. In order to optimize the use of
warehouse space, the Company uses a random access system whereby inventory is
stored in the first available location within the warehouse. The Company
believes that its business systems, including its computer systems, are not
subject to the Year 2000 problem. The Company anticipates that in the second
quarter of 1998, it will undertake conversion of the information systems at
its San Antonio, Texas locations to its corporate information system in
Campbell, California.

Inventory Control

For both the Mid-Range Systems Division and CPG, the Company's computer
systems automatically determine price and availability of inventory and can
allocate inventory to bills of material. The Company currently has two
discrete inventory control systems. The first is maintained in San Antonio,
Texas and manages the Company's IBM AS/400 and Telxon product inventories. The
second is located in Campbell, California and tracks all IBM RS/6000, Data
General, NCR, Unisys and CPG inventories at the Company's locations throughout
the United States. Under both systems, inventories are overseen by a dedicated
group of product specialists, assigned by product line, whose responsibility
it is to appropriately manage inventory levels and turnover. A significant
portion of these specialists' compensation is paid based upon the attainment
of certain prescribed inventory management benchmarks. The Company anticipates
that the San Antonio inventory system will be converted into the corporate
inventory control system in Campbell, California in the second quarter of
1998.

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Warehouse and Integration Facilities; Shipping

The Company maintains inventory stocking locations in Irvine and Fremont,
California, Chicago, Illinois and San Antonio, Texas. In addition, the Company
has a major integration facility in Fremont, California, adjacent to its
warehouse, with other integration facilities in Irvine, Chicago and San
Antonio. The Company's Fremont integration facility is ISO 9002 certified and
the Company intends to seek ISO 9002 certification for its Irvine facility.
The Company presently ships products from its warehouses via FedEx, UPS and
other common carriers. In addition, certain products that the Company
distributes are drop-shipped to the Company's customers by its vendors. See
"Risk Factors--Dependence on Third Party Shippers."

Financial Services

The Company provides a number of flexible leasing and financing alternatives
to its customers, including a variety of leasing options, inventory flooring
options and end user lock-box arrangements. The Company also maintains credit
insurance to enable it to more effectively manage the risk of extending credit
to its customers. See "Risk Factors--Extension of Credit to Customers Without
Requiring Collateral."

COMPETITION

The markets in which the Company operates are highly competitive.
Competition is based primarily on product availability, price, credit
availability, speed of delivery, ability to tailor specific solutions to
customer needs, breadth and depth of product lines and services, technical
expertise and pre- and post-sale service and support. Increased competition
may result in further price reductions, reduced gross profit margins and loss
of market share, any of which could materially and adversely affect the
Company's business, financial condition and results of operations.

Through the Mid-Range Systems Division, the Company competes with national,
regional and local distributors, including, but not limited to, Gates/Arrow
Commercial Systems, a division of Arrow Electronics, Inc., Hamilton Hall-Mark
Computer Products, a subsidiary of Avnet, Inc., and Pioneer Standard
Electronics, Inc. (which recently announced its intention to acquire Dickens
Data Systems, Inc.), and, in some limited circumstances, its own vendors. In
the distribution of storage products, the Company competes with national,
regional and local distributors. Through CPG, the Company competes with
contract manufacturers, systems integrators and certain assemblers of computer
products. The Company has experienced, and expects to continue to experience,
increased competition from current and potential competitors, many of which
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base than
the Company. Accordingly, such competitors or future competitors may be able
to respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion and sale of their products than the Company. Competitors which are
larger than the Company may be able to obtain more favorable pricing and terms
from vendors than the Company. As a result, the Company may be at a
disadvantage when competing with these larger companies. If the Company fails
to compete effectively, the Company's business, financial condition and
results of operations would be materially and adversely affected. See "Risk
Factors--Substantial Competition."

EMPLOYEES

As of February 28, 1998, the Company had approximately 373 full-time
employees. The Company is not a party to any collective bargaining agreement
and considers its employee relations to be good.

RISK FACTORS

Dependence Upon IBM and Vendor Concentration. The Company's business,
financial condition and results of operations are highly dependent upon the
Company's relationship with IBM and upon the continued market acceptance of
IBM commercial mid-range servers. During the years ended December 31, 1995,
1996 and

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1997, approximately 30%, 50% and 65%, respectively, of the Company's net sales
were generated from the sale of IBM products, and the Company expects the
percentage to increase in 1998. The Company's non-exclusive agreement with IBM
may be unilaterally modified by IBM upon 30 days' written notice, is subject
to a 90-day renewal notice, provides no franchise rights and may not be
assigned by the Company. The continued consolidation of wholesale distributors
of commercial mid-range servers may also result in IBM raising the sales
volume threshold required to maintain most favorable volume discount status.
In furtherance of its business strategy, and in order to maintain most
favorable volume discount status with IBM, the Company has recently completed
several acquisitions and is actively engaged in an ongoing search for
additional acquisitions and potential equity investments for similar purposes.
However, there can be no assurance that the Company will be successful in
completing any future acquisitions or in making any such equity investments.
The failure by the Company to complete other acquisitions or make equity
investments, or to otherwise increase its sales volume through internal
growth, could result in the Company's inability to maintain most favorable
volume discount status with IBM, which would, in turn, have a material adverse
effect on the Company's relationship with IBM and on the Company's business,
financial condition and results of operations. Any disruption, change or
termination in the Company's relationship with IBM or in the manner in which
IBM distributes its products, the failure of IBM to develop new products which
are accepted by the Company's customers, the failure by the Company to
maintain certain operational and administrative capabilities, the failure by
the Company to maintain sufficient sales volumes of certain IBM products to
maintain most favorable volume discount status or the addition of other
wholesale distributors by IBM would have a material adverse effect upon the
Company's business, financial condition and results of operations.

The balance of the Company's net sales is derived from the sale of products
from a limited number of other vendors. During the years ended December 31,
1995, 1996 and 1997, approximately 22%, 28% and 19%, respectively, of the
Company's net sales were derived from the sale of products manufactured by
Data General, NCR and Unisys, collectively. To become an authorized
distributor for these vendors, the Company typically enters into a non-
exclusive agreement that is cancelable by either party upon 30 to 120 days'
prior written notice. Any disruption, change or termination in the Company's
relationship with any such vendor or in the manner in which any such vendor
distributes its products, the failure of any such vendor to develop new
products which are accepted by the Company's customers, the failure by the
Company to maintain certain operational and administrative capabilities, the
failure by the Company to maintain sufficient sales volumes of certain
vendors' products to maintain most favorable volume discount status or the
addition of other wholesale distributors by any such vendor would have a
material adverse effect upon the Company's business, financial condition and
results of operations.

As is typical in its industry, the Company receives volume discounts and
market development funds from most of its vendors. These volume discounts
directly affect the Company's gross profits. In addition, market development
funds are typically used by the Company to offset a portion of its sales and
marketing expenses. Any change in the availability of these discounts or
market development funds or the failure of the Company to obtain vendor
financing on satisfactory terms and conditions would have a material adverse
effect on the Company's business, financial condition and results of
operations.

Fluctuations in Operating Results. The Company's quarterly net sales and
operating results may vary significantly as a result of a variety of factors,
including, but not limited to, changes in the supply and demand for commercial
mid-range servers, peripheral equipment, software and related services, the
cost, timing and integration of acquisitions, the addition or loss of a key
vendor or customer, the introduction of new technologies, changes in
manufacturers' prices, price protection policies or stock rotation privileges,
changes in market development funds, changes in the level of operating
expenses, product supply shortages, disruption of warehousing or shipping
channels, inventory adjustments, increases in the amount of accounts
receivable written off, price competition and changes in the mix of products
sold through distribution channels and in the mix of products purchased by
OEMs. Operating results could also be adversely affected by general economic
and other conditions affecting the timing of customer orders and capital
spending, a downturn in the market for commercial mid-range servers and order
cancelations or rescheduling. In addition, historically a substantial portion
of the

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Company's net sales has been made in the last few days of a quarter.
Accordingly, the Company's quarterly operating results are difficult to
predict and delays in the closing of sales near the end of a quarter could
cause quarterly net sales to fall substantially short of anticipated levels
and, to a greater degree, adversely affect profitability. Thus, the Company
believes that period-to-period comparisons of the Company's operating results
are not necessarily meaningful and should not be relied upon as an indication
of future performance. The Company's future operating results are expected to
fluctuate as a result of these and other factors, which could have a material
adverse effect on the Company's business, financial condition and results of
operations and on the price of the Common Stock. It is possible that in future
periods the Company's operating results may be below the expectations of
securities analysts and investors. In such event, the market price of the
Common Stock would likely be materially and adversely affected.

Substantial Competition. The markets in which the Company operates are
highly competitive. Competition is based primarily on product availability,
price, credit availability, speed of delivery, ability to tailor specific
solutions to customer needs, breadth and depth of product lines and services,
technical expertise and pre- and post-sale service and support. Increased
competition may result in further price reductions, reduced gross profit
margins and loss of market share, any of which could materially and adversely
affect the Company's business, financial condition and results of operations.

Reliance on Sirius Computer Solutions, Ltd. During the year ended December
31, 1997 and the quarter ended December 31, 1997, sales to Sirius accounted
for approximately 11% and 23%, respectively, of the Company's net sales. The
Company's sales to Sirius are made under the Industry Remarketer Affiliate
Agreement between the Company and Sirius dated as of September 30, 1997 (the
"Sirius Agreement"), pursuant to which the Company appointed Sirius as one of
its industry remarketer affiliates of IBM products. The Sirius Agreement
provides that Sirius may not enter into any similar arrangement with any third
party for the purpose of selling IBM products to its end user customers and
also provides a favorable pricing structure to Sirius. As a result, Sirius is
expected to remain the Company's largest customer for the duration of the
Sirius Agreement and to account for approximately the same percentage of the
Company's net sales in 1998 as it represented in the fourth quarter of 1997.
The Sirius Agreement expires on September 30, 2000, but may be terminated
earlier under certain conditions, not including termination at will. Any
disruption, change or termination of the Company's relationship with Sirius or
a reduction in purchases from the Company by Sirius could have a material
adverse effect upon the Company's business, financial condition and results of
operations.

Integration Risks Relating to Acquisitions. Since December 1994, the Company
has completed seven acquisitions, and on November 22, 1997, the Company
entered into an Agreement and Plan of Reorganization with MCBA Systems, Inc.
("MCBA") (the "MCBA Agreement") which contemplates that MCBA will become a
wholly owned subsidiary of the Company upon consummation of the proposed
acquisition of MCBA by the

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Company (the "MCBA Acquisition"). The MCBA Acquisition is expected to be
consummated by March 31, 1998. The respective obligations of the Company and
MCBA to consummate the MCBA Acquisition, however, are subject to the
satisfaction of various customary conditions set forth in the MCBA Agreement.
There can be no assurance that the Company and MCBA will be able to satisfy in
a timely manner any or all of the conditions precedent to closing the MCBA
Acquisition. In addition, the MCBA Agreement may be terminated for various
reasons or no reason, including, but not limited to, termination by either
party at will if the MCBA Acquisition has not been consummated March 31, 1998.

The combination of the Company's business and acquired businesses requires,
among other things, integration of the respective management teams and sales
and other personnel, coordination of sales and marketing efforts, conversion
of computer systems (including inventory control, order entry and financial
reporting) and integration of the businesses' products and physical
facilities. The difficulties of such integration may be increased by the
necessity of coordinating geographically separate organizations. The
integration of certain operations will require the dedication of management
resources which may temporarily divert attention away from the day-to-day
business of the combined company. There can be no assurance that such
coordination and integration will be accomplished smoothly or successfully.
The inability of management to integrate the operations of acquired businesses
successfully could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, during the
integration phase, aggressive competitors may undertake to attract customers
and to recruit key employees through various incentives. There can be no
assurance that acquisitions will not materially and adversely affect the
selling patterns of vendors and the buying patterns of present and potential
customers of the Company and that such effect will not materially and
adversely affect the Company's business, financial condition and results of
operations.

The Company's ability to achieve the anticipated benefits of the proposed
MCBA Acquisition, the acquisition of Star Management Services, Inc. ("SMS")
completed on September 30, 1997 (the "SMS Acquisition") or any other
acquisition depends in part upon whether the integration of the business of
the Company and any acquired business is accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. The SMS
Acquisition and other prior acquisitions and investments have placed, and will
continue to place, substantial demands on the Company's management team and
financial resources. The integration of the operations of SMS and the other
acquired companies has on occasion been slower, more complex and more costly
than originally anticipated. The Company will encounter similar uncertainties
and risks with respect to any future acquisitions and investments, including
the proposed MCBA Acquisition. Although the Company expects to realize cost
savings and sales enhancements as a result of the recent and proposed
acquisitions, there can be no assurance that such savings or enhancements will
be realized in full or when anticipated, or that any such cost savings will
not be offset by increases in other expenses or operating losses.

Uncertainty of Future Acquisitions and Expansion. Acquisitions have played
an important role in the implementation of the Company's business strategy,
and the Company believes that additional acquisitions are important to its
growth, development and continued ability to compete effectively in the
marketplace. The Company evaluates potential acquisitions and strategic
investments on an ongoing basis. No assurance can be given as to the Company's
ability to compete successfully for available acquisition or investment
candidates or to complete future acquisitions and investments or as to the
financial effect on the Company of any acquired businesses or equity
investments. Future acquisitions and investments by the Company may involve
significant cash expenditures and may result in increased indebtedness,
interest and amortization expense or decreased operating income, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, future growth will require
additional financing to fund the working capital requirements of the Company's
business and to finance future acquisitions and strategic equity investments,
if any. There can be no assurance that the Company will be able to raise
financing on satisfactory terms and conditions, if at all. See "--Future
Capital Needs; Uncertainty of Additional Financing." If businesses are
acquired through the issuance of equity securities, the percentage ownership
of the stockholders of the Company will be reduced and stockholders may
experience additional dilution. Should the Company be unable

8
<PAGE>

to implement successfully its acquisition and investment strategy, its
business, financial condition and results of operations could be materially
and adversely affected.

Management of Growth. Since 1995, the Company has experienced significant
growth in the number of its employees and in the scope of its operating and
financial systems, resulting in increased responsibilities for the Company's
management. In addition, the SMS Acquisition, which was completed in September
1997, increased the Company's employee base by approximately 140 persons to
373 employees as of February 28, 1998. To manage future growth effectively,
the Company will need to continue to improve its operational, financial and
management information systems, procedures and controls and expand, train,
motivate, retain and manage its employee base. There can be no assurance that
the Company will be successful in managing any future expansion or
identifying, attracting and retaining key personnel, and failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Dependence on Key Personnel. The Company's future success depends in part on
the continued service of its key management, sales and marketing personnel and
its ability to identify and hire additional personnel. Competition for
qualified management, sales and marketing personnel is intense and there can
be no assurance that the Company can retain and recruit adequate personnel to
operate its business. The success of the Company is largely dependent on the
skills, experience and efforts of its key personnel, particularly P. Scott
Munro, Chairman of the Board, Chief Executive Officer, President and
Secretary, and Carlton Joseph Mertens II, Chief Executive Officer and
President of the Company's subsidiary, Business Partner Solutions, Inc., both
of whom have entered into employment agreements with the Company. The loss of
either of these individuals or other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company maintains life insurance on Messrs. Munro and Mertens
in the amounts of $7.9 million and $10.0 million, respectively. The Company is
contractually obligated to apply any proceeds from these policies in the
following order: (i) to repay the credit advance from IBMCC (as defined
herein) and (ii) to repay any amounts outstanding under the Company's
Subordinated Notes (as defined herein).

Future Capital Needs; Uncertainty of Additional Financing. The Company's
operations to date have required substantial amounts of working capital to
finance accounts receivable and product inventories. Although the Company
believes it has sufficient funds, or alternate sources of funds, to carry on
its business as presently conducted through 1998, the Company will need to
raise additional amounts through public or private debt or equity financings
in order to achieve the growth contemplated by the Company's business plan.
There can be no assurance that additional financing of any type will be
available on acceptable terms, or at all, and failure to obtain such financing
could have a material adverse effect upon the Company's business, financial
condition and results of operations.

Dependence on Availability of Credit and IBMCC Credit Facility. In order to
obtain necessary working capital, the Company relies primarily on a line of
credit that is collateralized by substantially all of the Company's assets. As
a result, the amount of credit available to the Company may be adversely
affected by numerous factors beyond the Company's control, such as delays in
collection or deterioration in the quality of the Company's accounts
receivable, economic trends in the technology industry, interest rate
fluctuations and the lending policies of the Company's creditors. Any decrease
or material limitation on the amount of capital available to the Company under
its line of credit or other financing arrangements will limit the ability of
the Company to fill existing sales orders or expand its sales levels and,
therefore, would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any significant
increases in interest rates will increase the cost of financing to the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is dependent on the
availability of accounts receivable financing on reasonable terms and at
levels that are high relative to its equity base in order to maintain and
increase its sales. There can be no assurance that such financing will
continue to be available to the Company in the future or available under terms
acceptable to the Company. The inability of the Company to have continuous
access to such financing at reasonable costs would materially and adversely
impact the Company's business, financial condition, results of operations and
cash flows.

9
<PAGE>

The Company has primarily funded its working capital requirements through a
$75.0 million Inventory and Working Capital Agreement (the "IBMCC Credit
Facility") with IBM Credit Corporation ("IBMCC"), which credit line was
temporarily increased to $85.0 million through January 31, 1998. At December
31, 1997, the outstanding principal balance under the IBMCC Credit Facility
was approximately $71.7 million, of which $65.1 million represented product
purchases and $6.6 million represented interest-bearing cash advances. In
addition, the Company has an outstanding credit advance under the IBMCC Credit
Facility in the amount of $10.0 million (the "IBMCC Credit Advance").
Borrowings under the IBMCC Credit Facility are collateralized by substantially
all assets of the Company, including accounts receivable, inventories and
equipment. The IBMCC Credit Facility provides that the outstanding interest-
bearing cash advance balance (excluding the IBMCC Credit Advance) is subject
to an annual interest rate of prime plus 1.875% (10.375% at February 28, 1998)
and expires on September 30, 1999. IBMCC may terminate the IBMCC Credit
Facility at any time upon the occurrence of, and subsequent failure to cure,
an "Event of Default" (as such term is defined in the IBMCC Credit Facility
and the Note Purchase Agreement (as defined herein)). In the event of such
termination, the outstanding borrowings under the IBMCC Credit Facility become
immediately due and payable in their entirety. The termination of the IBMCC
Credit Facility and the subsequent inability of the Company to secure a
replacement credit facility on terms and conditions similar to those contained
in the IBMCC Credit Facility would have a material adverse effect on the
Company's business, financial condition and results of operations.

Limitations Upon Incurrence of Additional Indebtedness. The terms of the
IBMCC Credit Facility and the Note Purchase Agreement dated September 30, 1997
with Robert Fleming, Inc. and Canpartners Investments IV, LLC, as purchasers
(together, the "Purchasers"), and Canpartners Investments IV, LLC, as agent
for the Purchasers (the "Note Purchase Agreement"), require that the Company
obtain the consent of IBMCC and the Purchasers of the Company's subordinated
notes issued pursuant to the Note Purchase Agreement (the "Subordinated
Notes") prior to incurring certain additional indebtedness, including any
additional senior or subordinated debt. The Company may incur additional
indebtedness without such consent through capital leases and general business
commitments insofar as the terms thereof are commercially reasonable and
consistent with prior business practices. The IBMCC Credit Facility and the
Company's anticipated cash flows may not provide sufficient funding to achieve
the growth contemplated by the Company's business plan. Accordingly, the
Company may need to obtain the consent of IBMCC and the Purchasers of the
Subordinated Notes prior to incurring any additional indebtedness. While the
Company has no reason to believe that such consents will be withheld, there
can be no assurance that the Company will obtain such consents. Failure to
obtain such consents or to obtain an alternate credit facility or to refinance
the Subordinated Notes in order to allow the Company to incur additional
indebtedness in an amount sufficient to achieve the growth contemplated by the
Company's business plan could have a material adverse effect on the Company's
business, financial condition and results of operations.

Rapid Technological Change, Price Reductions and Inventory Risk. The markets
for products sold by the Company are extremely competitive and are
characterized by declining selling prices over the life of a particular
product and rapid technological change. Since the Company acquires inventory
in advance of product shipments, and because the markets for the Company's
products are volatile and subject to rapid technological and price changes,
there is a risk that the Company will forecast incorrectly and stock excessive
or insufficient inventory of particular products. The Company's business, like
that of other wholesale distributors, is subject to the risk that the value of
its inventory will be adversely affected by price reductions by manufacturers
or by technological changes affecting the usefulness or desirability of its
product inventory. It is the policy of many manufacturers of technology
products to protect wholesale distributors such as the Company from the loss
in value of inventory due to technological change or reductions in the
manufacturers' prices. Under the terms of most of the Company's agreements,
vendors will generally credit the Company for inventory losses resulting from
the vendor's price reductions if the Company complies with certain conditions.
In addition, generally under such agreements, the Company has the right to
return for credit or exchange for other products a portion of its slow moving
or obsolete inventory items within designated periods of time. There can be no
assurance that, in every instance, the Company will be able to comply with all
necessary conditions or manage successfully such price protection or stock
rotation opportunities, if available. Also, a manufacturer which elects to
terminate a

10
<PAGE>

distribution agreement generally will repurchase its products carried in a
wholesale distributor's inventory. These industry practices are sometimes not
included in written agreements and do not protect the Company in all cases
from declines in inventory value, excess inventory or product obsolescence.
There can be no assurance that manufacturers will continue such practices or
that the Company will be able to manage successfully its existing and future
inventories. Historically, the Company has not experienced losses due to
obsolete inventory in excess of established inventory reserves. Significant
declines in inventory value in excess of established inventory reserves or
dramatic changes in prevailing technology could have a material adverse effect
on the Company's business, financial condition and results of operations.

Certain major systems vendors, including IBM, have developed and will
continue to implement programs which allow the Company to assemble systems
from components provided by the vendors. While the Company has developed the
ability to integrate and configure computer products, the process of
assembling large volumes of systems from components will require new business
practices by the Company. It is also uncertain how the vendors will apply
policies related to price protection, stock rotation and other protections
against the decline in inventory value of such system components. There can be
no assurance that the Company will be successful in the integration and
configuration of computer products or that certain vendors will apply the same
price protection and stock rotation policies to the Company's component
inventories.

Low Profit Margins. As a result of price competition, the Company has low
gross profit and operating income margins. These low margins magnify the
impact on operating results of variations in net sales and operating costs.
The Company has partially offset the effects of its low gross profit margins
by increasing net sales, availing itself of large volume purchase discount
opportunities and reducing selling, general and administrative expenses as a
percentage of net sales. However, there can be no assurance that the Company
will maintain or increase net sales, continue to avail itself of large volume
purchase discount opportunities or further reduce selling, general and
administrative expenses as a percentage of net sales in the future. Future
gross profit margins may be materially and adversely affected by changes in
product mix, vendor pricing actions and competitive and economic pressures.

Product Supply Shortages. The Company is dependent upon the supply of
products available from its vendors. From time to time, the industry has
experienced product shortages due to vendors' difficulty in projecting demand
for certain products distributed by the Company. When such product shortages
occur, the Company typically receives an allocation of product from the
vendor. There can be no assurance that vendors will be able to maintain an
adequate supply of products to fulfill all of the Company's orders on a timely
basis. Failure to obtain adequate product supplies, if such supplies are
available to competitors, would have a material adverse effect on the
Company's business, financial condition and results of operations.

Extension of Credit to Customers Without Requiring Collateral. The Company
sells products to a broad geographic and demographic base of customers and
offers unsecured credit terms to its customers. To reduce credit risk, the
Company performs ongoing credit evaluations of its customers, maintains an
allowance for doubtful accounts and has credit insurance. Sirius accounted for
more than 10% of the Company's outstanding accounts receivable at December 31,
1997. No other single customer accounted for more than 5% of the Company's
outstanding accounts receivable balance at December 31, 1997. Historically,
the Company has not experienced losses from write-offs in excess of
established reserves. Should the Company's customers increase the rate at
which they default on payments due to the Company, and should the Company be
unable to collect such amounts, it could have a material adverse effect on the
Company's business, financial condition and results of operations.

Seasonality. The computer distribution industry experiences seasonal trends
and, within each quarter, generally tends to sell a substantial amount of its
products in the last few days of the quarter. The Company's largest vendor,
IBM, sells approximately 35-40% of its products in the last calendar quarter,
and such continuing pattern could have an effect on the Company's quarterly
net sales. Historically, a substantial portion of the Company's net sales has
been made in the last few days of a quarter. Due to the Company's recent
significant growth through acquisitions and the Company's increased dependence
on the sale of IBM products, variations

11
<PAGE>

experienced by IBM and the Company may be magnified in the future and could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Expanding Service Capabilities. The Company is expanding the nature and
scope of its value-added services. There can be no assurance that new value-
added services will be integrated successfully with the Company's commercial
mid-range server and related products distribution business. If the Company is
unable to effectively provide value-added services, it may be unable to
compete effectively for the business of certain customers which require the
provision of such services as a condition to purchasing products from the
Company. In addition, the Company will be subject to risks, commonly
associated with a value-added services business, including dependence on
reputation, fluctuations in workload and dependence on the ability to
identify, recruit and retain qualified technical personnel. The expansion of
the Company's value-added services is expected to require a significant
capital investment, including an increase in the number of technical
employees. There can be no assurance that one or more of such factors will not
have a material adverse effect on the Company's business, financial condition
and results of operations.

Dependence On Third-Party Shippers. The Company presently ships a majority
of its products from its warehouses via Federal Express Corporation ("FedEx"),
but also ships via United Parcel Service of America, Inc. ("UPS") and other
common carriers. In addition, certain products that the Company sells are drop
shipped to its customers via these carriers. Changes in shipping terms or the
inability of FedEx, UPS or any other third-party shipper to perform
effectively (whether as a result of mechanical failure, casualty loss, labor
stoppage, other disruption or any other reason) could have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company can maintain favorable
shipping terms or replace such shipping services on a timely or cost-effective
basis.

Planned International Expansion. Although the Company to date has not
generated significant net sales from international operations, one of the
elements of its business strategy is to expand internationally. The Company
was recently authorized to distribute IBM's AS/400 products in Canada. There
can be no assurance that the Company will be able to expand successfully its
international business. Certain risks inherent in doing business on an
international level include, but are not limited to, management of remote
operations, unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates and potentially adverse tax consequences, any of which could adversely
impact the success of the Company's international operations. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, financial condition and results of operations.

Risk Associated With Potential "Year 2000" Problems of Third Parties. It is
possible that the currently installed computer systems, software products or
other business systems of the Company's vendors or customers, working either
alone or in conjunction with other software or systems, will not accept input
of, store, manipulate and output data in the year 2000 or thereafter without
error or interruption (commonly known as the "Year 2000 problem"). The Company
believes that its business systems, including its computer systems, are not
subject to the Year 2000 problem; however, the Company has begun to query its
vendors and customers as to their progress in identifying and addressing
problems that their computer systems may face in correctly processing date
information as the Year 2000 approaches. However, there can be no assurance
that the Company will identify all such Year 2000 problems in the computer
systems of its vendors or customers in advance of their occurrence or that
they will be able to successfully rectify any problems that are discovered.
The expenses of the Company's efforts to identify and address such problems,
or the expenses or liabilities to which the Company may become subject as a
result of such problems, are not expected to have a material adverse effect on
the Company's business, financial condition or results of operations. The
purchasing patterns of existing and potential customers, however, may be
affected by Year 2000 problems, which could cause fluctuations in the
Company's sales volumes and could have a material adverse effect on the
Company's business, financial condition and results of operations.

12
<PAGE>

ITEM 2. PROPERTIES

The Company leases all facilities used in its business. The following table
summarizes the principal properties occupied by the Company:

<TABLE>
<CAPTION>
APPROXIMATE LEASE
SQUARE EXPIRATION
LOCATION PRINCIPAL USE FOOTAGE DATE
-------- ------------- ----------- ----------
<C> <S> <C> <C>
Campbell, California....................... Corporate Headquarters 36,000 2000
and Sales Office
San Antonio, Texas(1)...................... Business Partner 27,000 1998
Solutions, Inc.
Corporate Headquarters
and Sales, Marketing and
Technical Support Office
Fremont, California........................ Warehouse, Distribution 66,500 2003
and Integration Center
Irvine, California......................... Warehouse, Distribution 41,000 2004
and Integration Center
and Sales Office
San Antonio, Texas(1)...................... Warehouse, Distribution 30,000 1998
and Integration Center
Burr Ridge, Illinois (a suburb of Chicago). Warehouse, Distribution, 16,900 2003
Integration Center and
Sales, Marketing and
Technical Support Office
Framingham, Massachusetts (a suburb of 11,200 2000
Boston)................................... Sales Office
Colorado Springs, Colorado................. Sales Office 2,500 1999
</TABLE>
- --------
(1) It is currently anticipated that the operations housed in these locations
will be moved by July 1998 to a single new 87,000 square foot facility in
San Antonio, Texas, which has been leased by the Company through 2008.

The Company believes its facilities are suitable for their uses and are
generally adequate to support the Company's current level of operations. The
Company believes that lease extensions or replacement space may be obtained
for all of its leased facilities upon the expiration of the current lease
terms, in most cases at rates not materially higher than those currently in
effect.

13
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company is not presently a party to any litigation that is material to
the Company. The Company is involved in various other investigations and
claims arising in the normal conduct of its business, none of which, in the
opinion of the Company, will have a material adverse effect on the Company's
business, financial condition and results of operations or its ability to
conduct business.

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

None.

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 quoted on The Nasdaq National Market under the
symbol "SVTG." Prior to November 24, 1997, the Common Stock was quoted on The
Nasdaq National Market under the symbol "WSTM." The following table sets
forth, for the periods indicated, high and low sales prices for the Common
Stock as reported by The Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter................................................. $ 7.07 $4.38
Second Quarter................................................ 11.38 6.25
Third Quarter................................................. 9.13 5.88
Fourth Quarter................................................ 12.38 8.00
YEAR ENDED DECEMBER 31, 1997
First Quarter................................................. $14.50 $9.50
Second Quarter................................................ 13.50 8.63
Third Quarter................................................. 12.75 8.00
Fourth Quarter................................................ 11.63 9.00
</TABLE>

(b) As of March 11, 1998, there were approximately 300 stockholders of
record and approximately 1,800 beneficial stockholders of the Common Stock.
The Company has never declared or paid any cash dividends on the Common Stock.
The Company currently anticipates that it will retain all available funds for
use in the operation of its business, including possible acquisitions, and
does not intend to pay any cash dividends in the foreseeable future.

(c) (1) On March 17, 1997, the Company acquired all of the common stock of
Target Solutions, Inc. ("TSI") for approximately $2,200,000 paid in common
stock (220,273 shares) of the Company, which shares were issued to Lee Adams,
the sole stockholder of TSI. The acquisition was accounted for as a purchase.
The fair value of the assets acquired from TSI was approximately $1,141,000
and liabilities assumed were approximately $1,484,000.

(2) On September 19, 1997, the Company completed the private placement of
1,121,250 units (the "Units") to certain investors. Each Unit consists of two
shares of the Company's Series A Preferred Stock, par value $0.01 per share,
for an aggregate of 2,242,500 shares, at a purchase price of $9.5625 per
share, and one common stock purchase warrant (which expires in 5 years), par
value $0.01 per share, for an aggregate of 1,121,250 shares, at a purchase
price of $.125 per warrant and exercisable at a price of $9.6875 per share for
a

14
<PAGE>

total purchase price of $19.25 per Unit. The Series A Preferred Stock is
convertible at the option of the holders of the Series A Preferred Stock, at
any time, into common stock of the Company. The conversion price is $9.5625
and is subject to adjustment if the Company issues any stock or securities at
less than the conversion price. The Series A Preferred Stock has an eight
percent (8%) cumulative dividend, payable in cash of unrestricted shares of
the Company's common stock at the election of the Company, with a potential
special dividend should the price of the Company's common stock fall below
$9.5625 on each anniversary of the private placement. In connection with the
transaction, the Company has agreed to pay Fahnestock & Co. Inc., the
placement agent, a placement fee equal to 7% of the aggregate purchase price
for the Units, and to issue to the placement agent a warrant to purchase
112,250 shares of common stock. Each warrant issued in connection with this
transaction entitles the holder to purchase one share of the Company's common
stock at an exercise price of $9.6875 per share and expires in September 2002.
Net proceeds totaled approximately $19,300,000. The Company used the proceeds
to pay down its line of credit and for general working capital purposes.

(3) On September 30, 1997, the Company acquired all of the capital stock of
Star Management Services, Inc. ("SMS") for an aggregate of $42,149,535 in cash
at closing and 460,000 shares of the Company's common stock, valued at
approximately $3,887,000, which shares were issued to Carlton Joseph Mertens
II, a stockholder of SMS. Additional cash payments of $3,675,000 are to be
paid on each of the first and second anniversaries of the closing. The
acquisition was accounted for as a purchase. The fair value of the assets
acquired from SMS was approximately $41,400,000 and liabilities assumed were
approximately $36,100,000.

(4) On September 30, 1997, the Company entered into a note purchase
agreement (the "Note Purchase Agreement") with Robert Fleming, Inc. and
Canpartners Investments IV, LLC, as purchasers (together, the "Purchasers")
and Canpartners Investments IV, LLC as agent for the Purchasers. Pursuant to
the Note Purchase Agreement, the Company sold $15,700,000 of secured notes to
the Purchasers and granted to the Purchasers 10 shares of newly issued Series
B Preferred Stock of the Company and warrants to purchase 400,000 shares of
the Company's common stock. Each warrant issued in connection with this
transaction entitles the holder to purchase one share of common stock of the
Company at an exercise price of $7.50 per share and expires on September 30,
2004. On each anniversary, the exercise price may be reset to 87.5% of the
price of the Company's common stock if the market price of the Company's
common stock is less than $7.50. The warrants issued in connection with this
transaction were determined to have a fair market value of $1,064,000.

(5) On September 30, 1998, the Company executed an amendment to its credit
facility with IBM Credit Corporation ("IBMCC"), pursuant to which the Company
obtained an additional loan of $10,000,000. In consideration therefor, the
Company granted IBMCC warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $7.50 per share and expires on September
30, 2004. On each anniversary, the exercise price may be reset to 87.5% of the
price of the Company's common stock if the market price of the Company's
common stock is less than $7.50. The warrants were determined to have a fair
market value of $266,000.

On November 19, 1998, the Company filed a registration statement on Form S-3
to register the common stock issuable on conversion of the Series A Preferred
Stock or upon exercise of the warrants issued in connection with the private
placement of the Series A Preferred Stock, which registration statement also
registered the 460,000 shares issued to Mr. Mertens and the common stock
issuable upon exercise of the warrants issued in connection with the Note
Purchase Agreement and the amendment to the IBMCC credit facility. The
registration statement on Form S-3 became effective on February 17, 1998.

The sale and issuance of the shares listed above were exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), by virtue of Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder. The recipients of the above-described securities
represented their intention to acquire the securities for investment only and
not with a view to distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationship with the
Registrant, to information about the Registrant.

15
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993(1) 1994(1) 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales..................... $96,843 $119,285 $106,462 $131,697 $237,884
Cost of goods sold............ 79,802 102,662 93,416 114,389 205,089
------- -------- -------- -------- --------
Gross profit.................. 17,041 16,623 13,046 17,308 32,795
Selling, general and
administrative expenses...... 16,373 16,958 13,694 13,716 25,969
Restructuring costs........... 1,510 -- 3,600 -- --
------- -------- -------- -------- --------
Operating income (loss) --
continuing operations....... (842) (335) (4,248) 3,592 6,826
Interest expense.............. 535 884 850 978 3,181
------- -------- -------- -------- --------
Income (loss) before income
taxes--continuing operations. (1,377) (1,219) (5,098) 2,614 3,645
Income tax expense (benefit).. (286) (217) -- 276 335
------- -------- -------- -------- --------
Income (loss) from continuing
operations................... (1,091) (1,002) (5,098) 2,338 3,310
Discontinued operations, net
of tax....................... 524 387 -- -- --
------- -------- -------- -------- --------
Net income (loss)............. $ (567) $ (615) $ (5,098) $ 2,338 $ 3,310
======= ======== ======== ======== ========
Net income (loss) per
share:(2)
--Basic...................... $ (0.16) $ (0.17) $ (1.36) $ 0.55 $ 0.57
--Diluted.................... (0.16) (0.17) (1.36) 0.52 0.55
Number of shares used in per
share calculations:(2)
--Basic...................... 3,474 3,669 3,756 4,255 4,902
--Diluted.................... 3,474 3,669 3,756 4,513 5,976
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $12,021 $ 12,334 $ 7,312 $ 7,448 $ 6,454
Total assets.................. 34,975 37,898 35,899 63,276 186,888
Short-term debt............... 6,131 9,261 7,126 11,335 15,579
Long-term debt, less current
portion...................... 52 65 117 53 22,330
Stockholders' equity.......... 13,976 14,424 11,004 15,714 47,080
</TABLE>
- --------
(1) Amounts for 1993 and 1994 have been restated to reflect the 1994
discontinuation of the testing division and the 1994 acquisition of First
Computer Corporation accounted for as a pooling of interests.
(2) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.

16
<PAGE>

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

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report. Except for
historical information contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties. Such forward-
looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed previously in "Risk Factors," as well as those discussed
elsewhere in this Report or incorporated herein by reference.

OVERVIEW

Recognizing the consolidation trend in the commercial mid-range systems
distribution industry, the Company commenced its acquisition strategy in
December 1994 with the acquisition of First Computer Corporation. Since then,
the Company has focused upon expanding its commercial mid-range server
distribution business through internal growth and strategic acquisitions. On
July 26, 1995, the Company sold its electronic components distribution assets
to Reptron Electronics Inc. The transaction, valued at approximately $12.5
million, consisted of a $9.2 million payment in cash and the assumption of
$3.3 million in accounts payable. Since December 1995, the Company has
completed an additional six acquisitions, which have expanded the Company's
products and services, increased its geographic market coverage, strengthened
its management and technical personnel and increased its operating leverage.
The following table summarizes the Company's acquisition history:

<TABLE>
<CAPTION>
ESTIMATED EARNOUT
INITIAL CONSIDERATION ACTUAL EARNOUT PAID(1) POTENTIAL CONSIDERATION(1)
------------------------ -------------------------- --------------------------------
ACQUISITION TRANSACTION SHARES OF SHARES OF SHARES OF
TARGET DATE CASH COMMON STOCK CASH COMMON STOCK CASH COMMON STOCK
----------------------- ----------- ----------- ------------ --------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Star Management
Services, Inc.
("SMS")(2)............. 9/30/97 $49,500,000 460,000 -- -- $ 5,000,000 --
Target Solutions, Inc.
("TSI")(3)............. 3/17/97 -- 220,273 -- -- -- --
International Data
Products, LLC
("IDP")(4)............. 11/29/96 265,000 -- -- -- -- 140,000
Star Technologies, Inc.
("STI")(5)............. 11/7/96 -- 113,263 -- 48,721 -- 60,000
R&D Hardware Systems
Company of Colorado
("R&D")(6)............. 1/2/96 1,000,000 125,000 -- 78,587 -- --
International Parts,
Inc. ("IPI")(7)........ 11/18/95 -- 300,000 -- 42,516 -- --
First Computer
Corporation ("FCC")(8). 12/1/94 -- 328,943 -- -- -- --
</TABLE>
- --------
(1) As of March 11, 1998.
(2) The $49.5 million cash consideration is to be paid in three installments,
with $42.2 million paid at closing and two subsequent payments of $3.7
million to be made on the first and second anniversaries of the closing,
respectively. For the eleven months ended September 30, 1997, SMS had
audited revenue of $86.5 million and operating income of $1.1 million.
(3) For the year ended December 31, 1996, TSI had unaudited revenue of $15.0
million and net income of approximately $200,000. The TSI agreement
provides for a total earnout potential consideration of $10,000,000 in
cash and stock. See Note 11 of Notes to Consolidated Financial Statements.
(4) Excludes assumed liabilities of $424,000. For the year ended December 31,
1995, IDP had unaudited revenue of $4.6 million and net income of
approximately $2,000. The IDP agreement provides for a total earnout
potential consideration of 140,000 shares of Common Stock. See Note 11 of
Notes to Consolidated Financial Statements.
(5) For the year ended June 30, 1996, STI had unaudited revenue of $7.5
million and net income of approximately $40,000.
(6) For the year ended December 31, 1995, R&D had unaudited revenue of $9.6
million and net income of approximately $446,000.
(7) For the year ended December 31, 1994, IPI had unaudited revenue of $15.2
million and net income of approximately $90,000.
(8) For the year ended December 31, 1993, FCC had unaudited revenue of $6.1
million and net income of approximately $23,000.

17
<PAGE>

INCOME TAXES

Due to the utilization of net operating loss carryforwards generated in 1995
and years prior, the Company's effective tax rate was 10.6% and 9.2% in 1996
and 1997, respectively, as compared to a normal combined effective tax rate of
approximately 40% for federal and state income taxes. As of December 31, 1997,
the Company has utilized substantially all of its available federal net
operating loss carryforward amounts. Due to the utilization of these
carryforwards and the significant amount of non-tax deductible amortization
expense related to goodwill incurred in certain acquisitions, the Company
expects its effective tax rate to approximate 50% in 1998.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0%
Cost of goods sold........................ 87.7 86.9 86.2
---------- ---------- ----------
Gross profit............................ 12.3 13.1 13.8
Selling, general and administrative
expenses................................. 12.4 9.7 9.8
Depreciation and amortization expense..... 0.5 0.7 1.1
Restructuring costs....................... 3.4 0.0 0.0
---------- ---------- ----------
Total operating expenses.............. 16.3 10.4 10.9
---------- ---------- ----------
Operating income (loss)............... (4.0) 2.7 2.9
Interest expense.......................... 0.8 0.7 1.4
---------- ---------- ----------
Income (loss) before income taxes......... (4.8) 2.0 1.5
Income tax expense........................ 0.0 0.2 0.1
---------- ---------- ----------
Net income (loss)......................... (4.8)% 1.8% 1.4%
========== ========== ==========
</TABLE>

COMPARISONS OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

Net Sales. Net sales consists of sales of commercial mid-range servers,
integrated personal computers, workstations, peripheral equipment, storage
products, software and remarketed installation and technical support services,
net of sales discounts and returns. Net sales increased by 80.6% to $237.9
million in 1997 from $131.7 million in 1996, and by 23.7% in 1996 from $106.5
million in 1995. Net sales in 1995 included $28.2 million in net sales from
the Company's former electronic components distribution business, which was
sold in July 1995. Excluding the net sales of the electronic components
distribution business, net sales in 1996 increased 68.2% from $78.3 million in
1995. The growth in net sales resulted primarily from additions to the
Company's sales force, increased marketing efforts, increased integration and
storage product sales in CPG and the acquisitions of IPI, R&D, STI, IDP, TSI
and SMS. The TSI and SMS acquisitions accounted for approximately $69.9
million of net sales in 1997. The R&D, STI and IDP acquisitions accounted for
approximately $17.7 million of net sales in 1996.

For the year ended December 31, 1997 and the quarter ended December 31,
1997, sales to Sirius accounted for approximately 11% and 23%, respectively,
of the Company's net sales. The Company's sales to Sirius are made under the
Sirius Agreement, pursuant to which the Company appointed Sirius as one of its
industry remarketer affiliates of IBM products. The Sirius Agreement provides
that Sirius may not enter into any similar arrangement with any third party
for the purpose of selling IBM products to its end user customers and also
provides a favorable pricing structure to Sirius. As a result, Sirius is
expected to remain the Company's largest customer for the duration of the
Sirius Agreement and to account for approximately the same percentage of the

18
<PAGE>

Company's net sales in 1998 as it represented in the fourth quarter of 1997.
The Sirius Agreement expires on September 30, 2000, but may be terminated
earlier under certain conditions, not including termination at will. See
"Business--Risk Factors--Reliance on Sirius Computer Solutions, Ltd."

Gross Profit. Cost of sales is comprised of purchase costs, net of early
payment and volume discounts and product freight. Gross profit as a percentage
of net sales is affected by several factors including the mix of high margin
and low margin products and services and the proportion of large orders on
which the Company extends volume discounts to customers. Gross profit
increased by 89.5% to $32.8 million in 1997 from $17.3 million in 1996, and by
32.7% in 1996 from $13.0 million in 1995. Gross profit in 1995 includes $4.1
million in gross profit from the former electronic components distribution
business. Excluding the gross profit of the electronic components distribution
business, gross profit increased 94.4% in 1996 from $8.9 million in 1995.
Gross profit as a percentage of net sales was 13.8% in 1997, 13.1% in 1996 and
12.3% in 1995 (11.4% excluding the electronic components distribution
business). The increase in gross profit as a percentage of net sales in 1996
and 1997 was a result of a greater mix of higher margin products and services,
including integration and technical support services, as well as increased
volume discounts provided by certain vendors. These higher margin products and
integration services were derived principally from increases in the net sales
of CPG offset by a general decrease in gross profit margins associated with
the acquisition of SMS in the fourth quarter of 1997.

Operating Expenses. Operating expenses include: salaries and commissions
paid to sales representatives; compensation paid to marketing, product
management, technical and administrative personnel; depreciation of
infrastructure costs, including the Company's information system and leasehold
improvements; amortization of intangibles resulting from goodwill recorded
from acquisitions; facility lease expenses; telephone and data line expenses
and provision for bad debt losses. Fluctuations in operating expenses as a
percentage of net sales can result from planned expenditures by the Company
for additional sales, marketing, technical support and administrative
personnel, efficiencies gained through higher sales volumes and resulting
economies of scale and the timing of acquisitions.

Selling, general and administrative expenses (excluding depreciation and
amortization expense) increased by 83.5% to $23.3 million in 1997 from $12.7
million in 1996, and decreased 3.3% in 1996 from $13.2 million in 1995.
Selling, general and administrative expenses as a percentage of net sales were
9.8% in 1997, 9.7% in 1996 and 12.4% in 1995. In 1997, selling, general and
administrative expenses as a percentage of net sales were essentially the same
as in 1996, despite rapid net sales growth and the addition of personnel and
infrastructure costs from acquisitions. As a percentage of net sales, these
costs increased as a result of investments in infrastructure made in CPG as
well as in the Data General, NCR and Unisys mid-range business units offset by
a decrease associated with the acquisition of SMS in the fourth quarter of
1997. The Company expects to achieve additional economies of scale in selling,
general and administrative expenses in 1998 as the Company continues to
integrate the acquisition of SMS which was completed on September 30, 1997.
Selling, general and administrative expenses as a percentage of net sales
decreased in 1996 from 1995 primarily due to elimination of the personnel and
infrastructure relating to the electronic components distribution business.

Depreciation and amortization expense increased by 171.6% to $2.7 million in
1997 from $1.0 million in 1996, and by 86.5% in 1996 from $500,000 in 1995.
Depreciation and amortization expense as a percentage of net sales was 1.1% in
1997, 0.7% in 1996 and 0.5% in 1995. In 1997, depreciation and amortization
expense as a percentage of net sales increased over 1996 due to higher
amortization expense as a result of increased goodwill related to acquisitions
and higher depreciation costs incurred as a result of leasehold improvements
and computer equipment additions. In 1996, depreciation and amortization
expense as a percentage of net sales increased over 1995 primarily due to
higher amortization expense as a result of increased goodwill related to
acquisitions.

Restructuring costs incurred by the Company in 1995 related to the
divestiture of the Company's former electronic components distribution
business. The $3.6 million charge taken in 1995, 3.4% of net sales, consisted
of $1.4 million for write-offs of goodwill, $1.2 million for severance and
other related exit charges and $1.0 million for component inventory reserves.

19
<PAGE>

Operating Income (Loss). Operating income increased by 90.0% to $6.8 million
in 1997 from $3.6 million in 1996. In 1995, the Company had an operating loss
of $4.2 million. The increase in operating income in 1996 and 1997 resulted
from higher net sales and increased gross profit as a percentage of net sales,
operating expense control and economies of scale. Operating income (loss) as a
percentage of net sales was 2.9% in 1997, 2.7% in 1996 and (4.0%) in 1995.

Interest Expense. Interest expense increased by 225.3% to $3.2 million in
1997 from $1.0 million in 1996, and by 15.1% in 1996 from $850,000 in 1995.
The increase in interest expense in 1996 and 1997 resulted from increased
borrowings in order to fund acquisitions, principally the acquisition of SMS
on September 30, 1997, infrastructure additions, expanded operations and
overall growth.

Income Taxes. Income tax expense was $335,000, $276,000 and $0 in 1997, 1996
and 1995, respectively, reflecting effective tax rates of 9.2%, 10.6% and 0%,
respectively. The Company's effective tax rate differed from statutory rates
due to the utilization of net operating loss carryforwards from losses
generated in 1995 and prior.

Net Income (Loss). Net income increased by 41.6% to $3.3 million in 1997
from $2.3 million in 1996. The Company incurred a net loss of $5.1 million in
1995. Net income (loss) as a percentage of net sales was 1.4% in 1997, 1.8% in
1996 and (4.8%) in 1995.

20
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited quarterly financial data
and such data expressed as a percentage of net sales for the quarters of 1996
and 1997. In the opinion of management, this information has been presented on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Report, and all necessary adjustments (consisting only of
normal recurring adjustments) have been included in the amounts stated below
to present fairly the unaudited quarterly results when read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report. The operating results for any quarter are not
necessarily indicative of the results to be expected for any future period.

<TABLE>
<CAPTION>
1996 1997
---------------------------------- -----------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $27,617 $32,364 $33,940 $37,776 $35,950 $39,886 $46,139 $115,909
Cost of goods sold...... 24,037 28,458 29,443 32,451 29,981 33,293 39,297 102,518
------- ------- ------- ------- ------- ------- ------- --------
Gross profit........... 3,580 3,906 4,497 5,325 5,969 6,593 6,842 13,391
------- ------- ------- ------- ------- ------- ------- --------
Selling, general and
administrative
expenses............... 2,727 2,929 3,297 3,780 4,410 5,213 4,967 8,709
Depreciation and
amortization........... 211 234 254 284 393 356 504 1,417
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 2,938 3,163 3,551 4,064 4,803 5,569 5,471 10,126
------- ------- ------- ------- ------- ------- ------- --------
Operating income....... 642 743 946 1,261 1,166 1,024 1,371 3,265
Interest expense........ 237 197 242 302 432 496 604 1,649
------- ------- ------- ------- ------- ------- ------- --------
Income before income
taxes................. 405 546 704 959 734 528 767 1,616
Income tax expense...... 34 60 61 121 191 121 -- 23
------- ------- ------- ------- ------- ------- ------- --------
Net income............. $ 371 $ 486 $ 643 $ 838 $ 543 $ 407 $ 767 $ 1,593
======= ======= ======= ======= ======= ======= ======= ========
Diluted net income per
share................. $ 0.09 $ 0.11 $ 0.14 $ 0.18 $ 0.11 $ 0.08 $ 0.15 $ 0.19
======= ======= ======= ======= ======= ======= ======= ========
Number of shares
(diluted) used in per
share calculation..... 4,326 4,529 4,476 4,708 4,977 5,196 5,144 8,194
======= ======= ======= ======= ======= ======= ======= ========
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 87.0 87.9 86.8 85.9 83.4 83.5 85.2 88.5
------- ------- ------- ------- ------- ------- ------- --------
Gross profit........... 13.0 12.1 13.2 14.1 16.6 16.5 14.8 11.5
------- ------- ------- ------- ------- ------- ------- --------
Selling, general and
administrative
expenses............... 9.9 9.1 9.7 10.0 12.3 13.1 10.8 7.5
Depreciation and
amortization........... 0.8 0.7 0.8 0.8 1.1 0.9 1.0 1.2
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 10.7 9.8 10.5 10.8 13.4 14.0 11.8 8.7
------- ------- ------- ------- ------- ------- ------- --------
Operating income....... 2.3 2.3 2.7 3.3 3.2 2.5 3.0 2.8
Interest expense........ 0.9 0.6 0.6 0.8 1.2 1.2 1.3 1.4
------- ------- ------- ------- ------- ------- ------- --------
Income before income
taxes................. 1.4 1.7 2.1 2.5 2.0 1.3 1.7 1.4
Income tax expense...... 0.1 0.2 0.2 0.3 0.5 0.3 -- --
------- ------- ------- ------- ------- ------- ------- --------
Net income............. 1.3% 1.5% 1.9% 2.2% 1.5% 1.0% 1.7% 1.4%
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>

The Company's quarterly net sales and operating results may vary
significantly as a result of a variety of factors, including, but not limited
to, changes in the supply and demand for commercial mid-range servers,
peripheral equipment, software and related services, the cost, timing and
integration of acquisitions, the addition or loss of a key vendor or customer,
the introduction of new technologies, changes in manufacturers' prices, price
protection policies or stock rotation privileges, changes in market
development funds, changes in the level of operating expenses, product supply
shortages, disruption of warehousing or shipping channels, inventory
adjustments, increases in the amount of accounts receivable written off, price
competition, changes in the mix of products sold through distribution channels
and in the mix of products purchased by OEMs. Operating results could also be
adversely affected by general economic and other conditions affecting the
timing of customer orders and capital spending, a downturn in the market for
commercial mid-range servers, and order cancelations

21
<PAGE>

or rescheduling. In addition, the computer distribution industry experiences
both seasonal trends and, within each quarter, tends to sell a substantial
amount of its products at the end of the quarter. For example, the Company's
largest vendor, IBM, sells approximately 35-40% of its products in the last
calendar quarter. Historically, a substantial portion of the Company's net
sales has been made in the last few days of a quarter. Accordingly, the
Company's quarterly results of operations are difficult to predict and delays
in the closing of sales near the end of a quarter could cause quarterly net
sales to fall substantially short of anticipated levels and, to a greater
degree, adversely affect profitability. Thus, the Company believes that
period-to-period comparisons of the Company's operating results are not
necessarily meaningful and should not be relied upon as an indication of
future performance. The Company's future operating results are expected to
continue to fluctuate as a result of these and other factors, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Fluctuations in Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

The Company has required substantial capital to finance accounts receivable,
inventories, capital expenditures and acquisitions, and has financed these
requirements primarily through borrowings under credit facilities, cash
generated from operations and recently, the issuance and sale of Series A
Preferred Stock and Subordinated Notes.

In September 1997, the Company negotiated with IBMCC to increase the IBMCC
Credit Facility line from $35.0 million to $75.0 million. The line was
subsequently increased on a temporary basis to $85.0 million through January
31, 1998. Product purchases from IBM and cash advances from IBMCC are directly
charged to the credit line and are paid by the Company based on payment terms
outlined in the IBMCC Credit Facility. Borrowings under the IBMCC Credit
Facility are based on eligible accounts receivable and inventory, as defined.
The IBMCC Credit Facility is renewable in September 1999 and contains
restrictive covenants which include the maintenance of minimum current,
tangible net worth and times interest earned ratios, as defined. As of
December 31, 1996 and 1997, the Company had outstanding borrowings under the
IBMCC Credit Facility of $27.2 million and $71.7 million, respectively. Of the
total outstanding borrowings, $11.2 million and $6.6 million represented cash
advances at December 31, 1996 and 1997, respectively. Cash advances bear
interest at the prime rate plus 1.875% (10.375% at December 31, 1997). Based
on eligible assets, as of December 31, 1997, the Company had additional
borrowings available under the IBMCC Credit Facility of approximately $12.5
million.

On September 30, 1997, the Company entered into the Note Purchase Agreement,
pursuant to which the Company sold $15.7 million of Subordinated Notes to the
Purchasers, granted to the Purchasers warrants (the "Warrants") to purchase an
aggregate of 400,000 shares of the Common Stock and granted to the Purchasers
10 shares of Series B Preferred Stock. The Subordinated Notes, which are
subordinated to the Company's primary lender, IBMCC, bear interest at 13.5%
annually, include an original issue discount, fully earned upon funding, of
$700,000, and are due September 30, 2000. The Company may prepay the
Subordinated Notes at 107% of the principal balance subsequent to September
30, 1997, 106% subsequent to September 30, 1998 and 105% subsequent to
September 30, 1999. On or after March 31, 2000, the Purchasers may request
redemption of up to 50% of the Subordinated Notes issued at 100% of the
principal amount. The Warrants issued pursuant to the Note Purchase Agreement
have an exercise price of $7.50 per share and expire on September 30, 2004. On
each anniversary, the Warrant price may be reset to 87.5% of the price, as
defined, of the Common Stock if the market price of the Common Stock is less
than $7.50. The Note Purchase Agreement required the Company to register the
Common Stock underlying the Warrants on a registration statement on Form S-3.
The Series B Preferred Stock issued to the Purchasers allows the holders of
the Series B Preferred Stock to elect one member to the Company's Board of
Directors if there is a default or event of default, as defined, in the Note
Purchase Agreement. The Note Purchase Agreement contains restrictive covenants
which include minimum fixed charge
coverage ratio, minimum income, minimum consolidated net worth and maximum
capital expenditures. The Company used the proceeds from the issuance of the
Subordinated Notes to consummate the SMS Acquisition.

On September 30, 1997, the Company executed an amendment to its IBMCC Credit
Facility, pursuant to which the Company obtained the IBMCC Credit Advance to
consummate the SMS Acquisition. The IBMCC

22
<PAGE>

Credit Advance bears interest at the rate of prime plus 2% (10.5% at December
31, 1997) and is due in four installments through September 30, 1999. As part
of the amendment, the Company granted IBMCC warrants to purchase 100,000
shares of the Common Stock. The warrants issued to IBMCC are the same, in all
respects, to the Warrants issued to the Purchasers.

Operating activities for 1997 provided cash in the amount of $5.9 million.
For this period, cash was provided primarily as a result of net income of $3.3
million, depreciation and amortization of $2.7 million, and a $32.3 million
increase in accounts payable, partially offset by a $23.3 million increase in
accounts receivable and a $7.5 million increase in inventories. Favorable
accounts payable terms with IBMCC and increased leasing of product purchases
by customers through IBMCC and third party leasing vendors, which decreased
the average days to collect customer receivables, resulted in the generation
of cash in 1997. For 1996, net cash in the amount of $1.0 million was used in
operating activities, primarily as a result of higher levels of accounts
receivable and inventories, increased sales volume and acquisitions, partially
offset by an increase in accounts payable.

Investing activities for 1997 used cash in the amount of $37.7 million. For
this period, cash was used for the acquisitions of SMS and TSI, the equity
investment in Q.I.V. Systems, Inc. and continuing leasehold and computer
hardware and software investments made at the headquarters, sales office and
warehouse and integration center sites. For 1996, net cash in the amount of
$2.8 million was used in investing activities, primarily for the acquisitions
of R&D, IDP and STI and infrastructure additions.

Cash provided by financing activities for 1997 was $34.4 million, consisting
primarily of borrowings under the Note Purchase Agreement and the IBMCC Credit
Advance totaling $23.1 million and the issuance of Series A Preferred Stock
totaling $19.1 million, partially offset by the Company's reduction in short-
term borrowings by $8.4 million. For 1996, cash provided by financing
activities was $3.7 million, resulting primarily from an increase in short-
term borrowings to fund working capital requirements.

The Company believes it has sufficient funds, or alternate sources of funds,
to carry on its business as presently conducted through 1998. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Financing."

YEAR 2000 COMPLIANCE

The Company believes that its business systems, including its computer
systems, are not subject to the Year 2000 problem; however, the Company has
begun to query its vendors and customers as to their progress in identifying
and addressing problems that their computer systems may face in correctly
processing date information as the Year 2000 approaches. See "Risk Factors--
Risks Associated With Potential "Year 2000" Problems of Third Parties."

BACKLOG

Although the Company receives purchase orders for products to be delivered
to customers over a specified time period, there can be no assurance that such
orders will result in sales, as most orders are subject to revision or
cancellation without penalty. Consequently, the Company does not believe that
backlog is a meaningful indicator of sales for future periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

23
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Savoir Technology Group, Inc.
Campbell, California

We have audited the accompanying consolidated balance sheets of Savoir
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 audits 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 Savoir
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Jose, California
January 30, 1998, except for
Note 14, as to which the
date is February 17, 1998

24
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 384 $ 2,919
Trade accounts receivable, net of allowance for doubtful
accounts of $319 in 1997 and $411 in 1996................. 25,943 76,664
Inventories................................................ 26,142 36,841
Other current assets....................................... 2,254 7,388
------- --------
Total current assets..................................... 54,723 123,812
Property and equipment, net.................................. 3,276 4,920
Excess of cost over acquired net assets and other
intangibles, net............................................ 4,937 57,537
Other assets................................................. 340 619
------- --------
Total assets........................................... $63,276 $186,888
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $11,277 $ 7,063
Current portion of long-term debt.......................... 58 8,516
Accounts payable........................................... 33,956 96,143
Accrued expenses........................................... 1,984 5,636
------- --------
Total current liabilities................................ 47,275 117,358
Long-term debt, less current portion......................... 53 22,330
Other........................................................ 234 120
Commitments and contingencies (Notes 4, 9 and 11) -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; issued and outstanding: 2,242,500 shares
Series A and 10 shares Series B at December 31, 1997;
liquidation preference of $21,444 at December 31, 1997 -- 18,132
Common stock, $0.01 par value; 25,000,000 shares
authorized; issued and outstanding: 5,357,678 shares in
1997 and 4,488,131 shares in 1996......................... 17,959 27,983
Retained earnings (deficit)................................ (2,245) 965
------- --------
Total stockholders' equity............................... 15,714 47,080
------- --------
Total liabilities and stockholders' equity............. $63,276 $186,888
======= ========
</TABLE>

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

25
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $106,462 $131,697 $237,884
Cost of goods sold................................. 93,416 114,389 205,089
-------- -------- --------
Gross profit..................................... 13,046 17,308 32,795
-------- -------- --------
Selling, general and administrative expenses....... 13,694 13,716 25,969
Restructuring costs................................ 3,600 -- --
-------- -------- --------
17,294 13,716 25,969
-------- -------- --------
Operating income (loss).......................... (4,248) 3,592 6,826
Interest expense................................... 850 978 3,181
-------- -------- --------
Income (loss) before income taxes................ (5,098) 2,614 3,645
Income tax expense................................. -- 276 335
-------- -------- --------
Net income (loss)................................ $ (5,098) $ 2,338 $ 3,310
======== ======== ========
Net income (loss) per share:
Basic............................................ $ (1.36) $ 0.55 $ 0.57
======== ======== ========
Diluted.......................................... $ (1.36) $ 0.52 $ 0.55
======== ======== ========
Number of shares used in per share calculations:
Basic............................................ 3,756 4,255 4,902
======== ======== ========
Diluted.......................................... 3,756 4,513 5,976
======== ======== ========
</TABLE>

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

26
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
----------------- ----------------- EARNINGS
SHARES AMOUNT SHARES AMOUNT (DEFICIT) TOTAL
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1995................... -- $ -- 3,702,007 $13,909 $ 515 $14,424
Exercise of stock
options.............. -- -- 7,981 18 -- 18
Issuance of common
stock in business
combination.......... -- -- 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 in business
combinations......... -- -- 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
Exercise of stock
options.............. -- -- 24,375 74 -- 74
Issuance of common
stock in business
combinations......... -- -- 809,898 6,825 -- 6,825
Issuance under
employee stock
purchase plan........ -- -- 31,044 256 -- 256
Issuance of preferred
stock and common
stock warrants, net
of offering costs.... 2,242,500 18,132 -- 1,000 -- 19,132
Dividend on preferred
stock................ -- -- 4,230 50 (100) (50)
Common stock warrants
issued in connection
with debt offerings.. -- -- -- 1,330 -- 1,330
Tax benefit from
exercise of stock
options.............. -- -- -- 489 -- 489
Net income............ -- -- -- -- 3,310 3,310
--------- ------- --------- ------- ------- -------
Balances, December 31,
1997................... 2,242,500 $18,132 5,357,678 $27,983 $ 965 $47,080
========= ======= ========= ======= ======= =======
</TABLE>

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

27
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(5,098) $ 2,338 $ 3,310
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 527 983 2,670
Gain on sale of equipment...................... (68) (11) --
Provision for doubtful accounts receivable..... 291 120 472
Deferred taxes................................. -- -- (1,551)
Accretion on long-term debt obligations........ -- -- 344
Provision for restructuring costs.............. 3,600 -- --
Change in assets and liabilities:
Accounts receivable.......................... 421 (9,648) (23,282)
Inventories.................................. 2,035 (9,831) (7,505)
Other current assets......................... (110) (478) (1,564)
Other assets................................. (154) (484) --
Accounts payable............................. 4,001 15,591 32,312
Accrued expenses and other liabilities....... (1,726) 403 655
------- ------- --------
Net cash provided by (used in) operating
activities................................ 3,719 (1,017) 5,861
------- ------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.. -- (640) (35,166)
Proceeds from sale of equipment.................. 192 22 --
Acquisition of other assets...................... -- -- (988)
Acquisitions of property and equipment........... (1,364) (2,200) (1,592)
------- ------- --------
Net cash used in investing activities...... (1,172) (2,818) (37,746)
------- ------- --------
Cash flows from financing activities:
Net proceeds (repayments) from short-term
borrowings...................................... (2,135) 3,434 (8,414)
Payments on long-term debt obligations........... (123) (184) (236)
Proceeds from exercise of stock options.......... 18 331 74
Proceeds from employee stock purchase plan....... -- 92 256
Proceeds from issuance of long-term debt, net of
issuance cost................................... -- -- 23,099
Proceeds from issuance of preferred stock and
warrants, net................................... -- -- 19,082
Proceeds from equipment loans.................... 101 -- 559
------- ------- --------
Net cash provided by (used in) financing
activities................................ (2,139) 3,673 34,420
------- ------- --------
Net increase (decrease) in cash.................... 408 (162) 2,535
Cash--beginning of period.......................... 138 546 384
------- ------- --------
Cash--end of period................................ $ 546 $ 384 $ 2,919
======= ======= ========
</TABLE>

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

28
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Operations:

Savoir Technology Group, Inc. (the Company), formerly Western Micro
Technology, Inc., is a value-added distributor of commercial mid-range servers
(file servers and workstations), peripheral equipment and a full range of
storage products and software. The Company also integrates and configures
personal computers, work- stations and departmental servers, as well as
provides and remarkets installation and technical support services. Prior to
July 26, 1995, the Company's operations also included the distribution of
electronic components (see Note 12). The Company's primary sales office and
distribution center, from which it ships products to customers throughout the
United States, is located in Northern California. In addition to the Northern
California location, the Company has distribution centers in Texas,
Massachusetts, Southern California and Illinois and has sales offices
throughout the United States. The principal customers of the Company are
value-added-resellers, systems integrators and original equipment
manufacturers located in the United States.

Consolidated Financial Statement Presentation:

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, including Star Management Services, Inc.
(SMS) which the Company acquired in a purchase combination on September 30,
1997 (see Note 11). All significant intercompany accounts and transactions
have been eliminated.

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. One customer accounted for more than 10% of the
outstanding accounts receivable balance at December 31, 1997. No other
customer accounted for more than 10% of the outstanding accounts receivable
balance at December 31, 1996 and 1997.

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 affect operating results. During the years ended
December 31, 1995, 1996 and 1997, approximately 30%, 50% and 65%,
respectively, of the Company's revenue was generated from the sale of products
purchased from one of the Company's vendors, International Business Machines
Corporation (IBM).

Fair Value of Financial Instruments:

The carrying amounts of the Company's financial instruments including cash,
accounts receivable, notes payable, accounts payable and accrued expenses
approximate fair value due to their short maturity.

Revenue Recognition:

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

29
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Inventories:

Inventories, consisting primarily of purchased product held for resale, are
stated at the lower of cost or net realizable value. Cost is determined using
average and specific cost methods. 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.

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.

Excess of Cost over Acquired Net Assets and Other Intangibles:

The excess cost over acquired net assets is being amortized on a straight-
line basis over 15 and 20 year periods. Other intangibles are being amortized
on a straight-line basis over their estimated useful lives which is typically
3 to 5 years. Amortization expense was $39,000, $292,000 and $1,400,000, in
1995, 1996 and 1997, respectively. The Company reviews the carrying value of
excess costs over acquired net assets and other intangibles for impairment
whenever events or changes in circumstances indicate the carrying amount may
not be recoverable. At December 31, 1997, the net unamortized balance of
goodwill is not considered to be impaired.

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 records these funds when earned as a reduction to offset direct
costs of marketing, selling, general, and administrative expenses.

Stock-Based Compensation:

The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."

30
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Net Income (Loss) Per Share:

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share", effective December 31,
1997. SFAS 128 requires the presentation of basic and diluted earnings per
share (EPS). Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of incremental shares issuable upon exercise of stock
options and conversion of preferred stock outstanding. All prior period
earnings per share amounts have been restated to comply with SFAS 128.

Reclassifications:

Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. These classifications did not
change previously reported total assets, liabilities, stockholders' equity or
net income (loss).

Recent Accounting Pronouncements:

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in stockholders' equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative formats
for presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." The new standard becomes effective for fiscal years
beginning after December 15, 1997, and requires that comparative information
from earlier years be restated to conform to the requirements of this
standard. The Company is evaluating the requirements of SFAS 131 and the
effects, if any, on the Company's current reporting and disclosures.

2. LONG LIVED ASSETS:

Property and equipment consist of the following (In thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Computer and office equipment................................ $4,728 $8,286
Leasehold improvements....................................... 682 1,190
------ ------
5,410 9,476
Accumulated depreciation and amortization.................... (2,134) (4,556)
------ ------
$3,276 $4,920
====== ======
</TABLE>

31
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. LONG LIVED ASSETS, CONTINUED:

Excess of cost over acquired net assets and other intangibles (In
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Excess of cost over net assets acquired..................... $4,668 $55,528
Other intangibles........................................... 600 3,740
------ -------
5,268 59,268
Accumulated amortization.................................... (331) (1,731)
------ -------
$4,937 $57,537
====== =======
</TABLE>

3. BORROWING ARRANGEMENTS:

Notes Payable (In thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Working capital line.......................................... $11,277 $6,645
Other......................................................... -- 418
------- ------
$11,277 $7,063
======= ======
</TABLE>

The Company has an inventory and working capital financing agreement (the
IBMCC Credit Facility) with IBM Credit Corporation (IBMCC), an affiliate of
IBM, whereby purchases from IBM and cash advances from IBMCC are directly
charged to the IBMCC Credit Facility and are paid by the Company based on
payment terms outlined in the agreement. Total borrowings under the IBMCC
Credit Facility are based on eligible accounts receivable and inventory, as
defined, and are limited to $75,000,000, temporarily increased to $85,000,000
through January 31, 1998. The IBMCC Credit Facility is renewable in September
1999 and contains restrictive covenants which include the maintenance of
minimum current ratio, tangible net worth and times interest earned ratios, as
defined and is collateralized by substantially all assets of the Company. As
of December 31, 1996 and 1997, the Company had outstanding borrowings under
this agreement of $27,286,000 and $71,661,000, respectively. Of the total
outstanding borrowings, $11,277,000 and $6,645,000 represented cash advances
at December 31, 1996 and 1997, respectively with the remainder included in
accounts payable which amounted to $16,009 and $65,016, respectively. Cash
advances bear interest at prime (8.50% as of December 31, 1997) plus 1.875%.
Based on eligible assets, as of December 31, 1997, the Company had borrowings
available of approximately $12,500,000. The weighted average interest rates
for the Company's cash advances during 1996 and 1997 were 9.2% and 10.23%,
respectively.

Long-Term Debt (In thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- -------
<S> <C> <C>
Subordinated notes payable................................... $-- $15,700
IBMCC loan................................................... -- 10,000
SMS seller notes............................................. -- 7,350
Other........................................................ 111 528
--- -------
111 33,578
Less discount................................................ -- (2,732)
--- -------
111 30,846
Less amount due within one year.............................. (58) (8,516)
--- -------
Long-term debt due after one year............................ $53 $22,330
=== =======
</TABLE>

32
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. BORROWING ARRANGEMENTS, CONTINUED:

Principal payments for long-term debt at December 31, 1997 are as follows:

On September 30, 1997, the Company entered into a note purchase agreement
(the "Note Purchase Agreement") with Robert Fleming, Inc. and Canpartners
Investments IV, LLC, as purchasers (together, the "Purchasers") and
Canpartners Investments IV, LLC, as agent for the Purchasers. Pursuant to the
Note Purchase Agreement, the Company sold $15,700,000 of secured notes to the
Purchasers, granted to the Purchasers warrants to purchase 400,000 shares of
the Company's Common Stock, and granted to the Purchasers ten shares of newly
authorized and issued Series B Preferred Stock. The notes, which are
subordinated to the Company's primary lender, IBMCC, bear interest at 13.5%
annually, include an original issue discount, fully earned upon funding, of
$700,000 and are due September 30, 2000. The Company may prepay the notes at
107% of the principal balance subsequent to September 30, 1997, 106%
subsequent to September 30, 1998 and 105% subsequent to September 30, 1999. On
or after March 31, 2000, the Purchasers may request redemption of up to 50% of
the notes issued at 100% of the principal amount. The warrants issued pursuant
to the Note Purchase Agreement have a purchase price of $7.50 and expire in
seven years. On each anniversary the warrant price may be reset to 87.5% of
the price, as defined, of the Company's Common Stock if the market price is
less than $7.50. The warrants issued in connection with the notes were
determined to have a fair market value of $1,064,000, which has been charged,
along with the original issue discount, to discount on notes payable. The
discount is being charged to interest expense on a straight-line basis over
the life of the notes. The Series B Preferred Stock issued to the purchasers
allows the holders of the Series B Preferred Stock to elect one member to the
Company Board of Directors if there is a default or event of default, as
defined, on the Note Purchase Agreement. The Note Purchase Agreement contains
restrictive covenants which include minimum fixed charge coverage ratio,
minimum income, minimum consolidated net worth and maximum capital
expenditures, as defined. The Company was not in compliance with the maximum
capital expenditure covenants at December 31, 1997 and received a waiver for
this specific violation. The Company used the proceeds from the notes to
consummate the SMS acquisition (see Note 11).

On September 30, 1997, the Company executed an amendment to the IBMCC Credit
Facility. Pursuant to the amendment of the IBMCC Credit Facility, the Company
obtained an additional loan of $10,000,000 to consummate the acquisition of
SMS. The loan bears interest at prime (8.5% as of September 30, 1997) plus 2%
and is due in four installments through September 30, 1999. As part of the
amendment, the Company granted IBMCC warrants to purchase 100,000 shares of
the Company's Common Stock. The warrants issued to IBMCC are the same, in all
respects, to the warrants issued to the Purchasers of the Note Agreement.
These warrants were determined to have a fair value of $266,000, which has
been charged against the face value of the loan. The discount is being charged
to interest expense over the life of the loan.

In connection with the acquisition of SMS (see Note 11), the Company is
obligated to pay the two selling stockholders of SMS cash payments totaling
$3,675,000 on the first and second anniversary of the acquisition, September
30, 1998 and 1999. The non-interest-bearing notes have been discounted using
the Company's effective borrowing rate of 10.375%. The total discount to the
face value of the notes was $1,047,000 and is being charged to interest
expense over the life of the notes.

33
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. OPERATING LEASE COMMITMENTS:

The Company leases its warehouse and office space under operating leases.
These leases expire through 2004 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.

The total rent expense, net of sublease income, was $934,000, $722,000 and
$1,600,000 for 1995, 1996 and 1997, respectively.

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

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------------------------------------------
<S> <C>
1998................................................................. $1,462
1999................................................................. 1,324
2000................................................................. 1,111
2001................................................................. 985
2002................................................................. 1,003
Thereafter........................................................... 542
------
$6,427
======
</TABLE>

5. INCOME TAXES:

The provision for (benefit from) income taxes consist of the following (In
thousands):

<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -------
<S> <C> <C> <C>
1997:
Current........................................... $ 1,578 $ 308 $ 1,886
Deferred.......................................... (1,301) (250) (1,551)
------- ----- -------
$ 277 $ 58 $ 335
======= ===== =======
1996:
Current........................................... $ 223 $ 53 $ 276
Deferred.......................................... -- -- --
------- ----- -------
$ 223 $ 53 $ 276
======= ===== =======
1995:
Current........................................... $ -- $ -- $ --
Deferred.......................................... -- -- --
------- ----- -------
$ -- $ -- $ --
======= ===== =======
</TABLE>

34
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. INCOME TAXES, CONTINUED:

The Company's effective tax rate differs from the U.S. federal statutory tax
rate as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory tax (benefit) rate.................. (34)% 34 % 34 %
Goodwill and other nondeductible expenses..... 11 4 15
Benefit resulting from utilization of federal
NOL.......................................... -- (33) (17)
State taxes, net of federal benefit........... -- 6 8
Change in valuation reserve................... 23 -- (35)
Other......................................... -- -- 4
------- ------- -------
-- % 11 % 9 %
======= ======= =======
</TABLE>

The components of the net deferred tax asset are as follows (In thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserve................................. $ 93 $ 518
Accumulated depreciation.................................... 83 85
Uniform inventory capitalization............................ 248 221
Inventory reserve........................................... 314 285
Other nondeductible reserves................................ 124 289
Other....................................................... 111 73
Net operating losses........................................ 915 80
Valuation allowance......................................... (1,888) --
------- ------
$ -- $1,551
======= ======
</TABLE>

Realization of the net deferred tax assets as of December 31, 1997 is
dependent on generating sufficient taxable income to offset future deduction
of the related items. Although realization is not assured, management believes
it is more likely than not that all of the net deferred tax assets will be
realized.

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $1,600,000 available to offset future taxable income for state
tax purposes. The operating loss carryforwards expire from 1998 to 2002, if
not utilized.

6. STOCKHOLDERS' EQUITY:

Stockholders' Equity;

In August of 1997, the stockholders of the Company approved an amendment of
the Company's Articles of Incorporation to increase the number of authorized
shares of Common Stock from 10,000,000 to 25,000,000. The stockholders also
approved the change of the Company's state of incorporation from California to
Delaware.

Preferred Stock Private Placement:

On September 19, 1997, the Company completed the private placement of
1,121,250 units (the "Units"). Each Unit consists of two shares of the
Company's Series A Preferred Stock, par value $0.01 per share, for an
aggregate of 2,242,500 shares, at a purchase price of $9.5625 per share, and
one Common Stock purchase warrant (which expires in five years), par value
$0.01 per share, for an aggregate of 1,121,250 shares, at a purchase price of
$.125 per warrant and exercisable at a price of $9.6875 per share. The Series
A Preferred Stock has an eight percent (8%) cumulative dividend, payable in
cash or Company Common Stock at the election of the Company and a potential
special dividend should the price of the Company's Common Stock fall below
$9.5625 on each anniversary of the private placement. The special dividend may
not exceed $1.9125 per share

35
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCKHOLDERS' EQUITY, CONTINUED:

each year. The Series A Preferred Stock is convertible at the option of the
Holders, at any time, into Common Stock of the Company. The conversion price
is $9.3125 and is subject to adjustment if the Company issues any stock or
securities at less than the conversion price. Subsequent to September 19,
1998, the Company may redeem the Preferred Stock provided that the Company's
Common Stock is trading at one hundred fifty percent (150%) of the conversion
price (as adjusted) and the daily trading volume of the Company's stock is in
excess of 125,000 shares, as defined. Subsequent to September 19, 2001, the
Company may redeem the Preferred Stock at the conversion price (as adjusted).
In connection with the transaction, the Company issued warrants for the
purchase of 112,125 shares of Common Stock to placement agents. The warrants
are exercisable at $9.6875 per share and expire in five years. Net proceeds
totaled approximately $19,100,000. The Company used the proceeds to pay down
its line of credit and for general working capital purposes.

Warrants:

At December 31, 1997, warrants were outstanding to purchase a total of
1,733,375 shares of Common Stock at exercise prices ranging from $7.50 to
$9.6875 per share. The warrants, which were issued in connection with various
debt and equity financings, expire between 2002 to 2004. At December 31, 1997,
the Company had reserved 1,733,375 shares of Common Stock for issuance upon
exercise of these warrants. During the years ended December 31, 1996 and 1997,
no warrants were exercised.

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, 1995.......... 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
Additional shares reserved........ 700,000
Options granted................... (610,679) 610,679 $8.00-$12.75 6,506
Options exercised................. -- (24,375) $2.25-$ 7.00 (74)
Options terminated................ 79,875 (79,875) $2.13-$12.25 (629)
-------- --------- ------------ -------
Balances, December 31, 1997........ 169,260 1,436,010 $2.00-$12.75 $11,233
======== ========= ============ =======
</TABLE>

At December 31, 1997, there were 1,605,270 shares of common stock reserved
for issuance under the Company's stock option plans and outstanding options
for 360,581 shares of common stock were exercisable.

36
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCKHOLDERS' 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, 1997, 50,241 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.

The following table summarizes information with respect to stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 (YEARS) PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00-$3.63............... 219,706 7.54 $ 2.74 122,206 $2.75
$5.00-$8.88............... 396,125 8.26 $ 6.08 179,750 $6.09
$9.00-$12.75.............. 820,179 9.71 $10.39 58,625 $9.13
--------- -------
$2.00-$12.75.............. 1,436,010 8.95 $ 7.93 360,581 $5.44
========= =======
</TABLE>

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 1995, 1996 and 1997:

<TABLE>
<CAPTION>
GROUP A GROUP B
------------------------- -------------------------
1995 1996 1997 1995 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest
rates.................. 7.68 5.17 6.30 7.64 5.25 6.39
Expected life........... 5 years 5 years 5 years 4 years 4 years 4 years
Volatility.............. 87.42% 87.42% 75.00% 87.42% 87.42% 75.00%
</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 1995, 1996 and
1997 was $3.34, $7.64 and $6.90, 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 1997:

<TABLE>
<S> <C>
Risk-free interest rate............................................ 5.46
Expected life...................................................... 0.5 years
Volatility......................................................... 75.00%
</TABLE>

37
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCKHOLDERS' EQUITY, CONTINUED:

The weighted average fair value of those purchase rights granted in 1996 was
$5.10.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Net income (loss)--pro forma......................... $(5,213) $1,750 $1,624
======= ====== ======
Basic net income (loss) per share--pro forma......... $ (1.39) $ 0.41 $ 0.33
======= ====== ======
Diluted net income (loss) per share--pro forma....... $ (1.39) $ 0.42 $ 0.35
======= ====== ======
</TABLE>

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.

7. EARNINGS PER SHARE:

In accordance with the disclosure requirements of SFAS 128, a reconciliation
of the numerator and denominator of basic and diluted EPS is provided as
follows (In thousands, except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Numerator--basic and diluted EPS
Net income (loss).................................. $(5,098) $2,338 $3,310
Less: preferred stock dividends.................... -- -- (484)
------- ------ ------
Income available to common stockholders--basic..... (5,098) 2,338 2,826
Plus: impact of assumed preferred stock conversion. -- -- 484
------- ------ ------
Income available to common holders plus assumed
conversions--diluted.............................. $(5,098) $2,338 $3,310
======= ====== ======
Denominator--basic EPS
Weighted average shares outstanding................ 3,756 4,255 4,902
------- ------ ------
Basic earnings per share........................... $ (1.36) $ 0.55 $ 0.57
======= ====== ======
Denominator--diluted EPS
Denominator--basic EPS............................. 3,756 4,255 4,902
Effect of dilutive securities:
Common stock options and warrants.................. -- 258 453
Convertible preferred stock........................ -- -- 621
------- ------ ------
3,756 4,513 5,976
======= ====== ======
Diluted earnings per share......................... $ (1.36) $ 0.52 $ 0.55
======= ====== ======
</TABLE>

38
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. SUPPLEMENTAL CASH FLOW INFORMATION:

Supplemental Disclosures of Cash Flow Information (In thousands):

Cash paid for interest and income taxes was:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Interest.................................................. $895 $1,021 $2,700
Income taxes.............................................. $ -- $ 66 $ 706
</TABLE>

Supplemental Disclosures of Noncash Investing and Financing Activities (In
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax benefit from exercise of stock options............. $ -- $ -- $ 489
Capital lease obligations.............................. $ 79 $ -- $ --
Common stock issued in connection with acquisitions.... $1,660 $1,949 $6,825
Dividend on preferred stock............................ $ -- $ -- $ 50
Common stock warrants issued in connection with notes
payable issuance...................................... $ -- $ -- $1,330
Common stock warrants issued in connection with pre-
ferred stock.......................................... $ -- $ -- $1,000
</TABLE>

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 financial position or results of operations.

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, 1995,
1996 or 1997.

11. ACQUISITIONS AND INVESTMENTS:

On September 30, 1997, the Company acquired all of the capital stock of SMS
for an aggregate of $42,150,000 in cash at closing and 460,000 shares of the
Company's common stock, valued at $3,887,000, and additional cash payments of
$3,675,000 to be paid on each of the first and second anniversaries of the
closing (see Note 3). In addition, the selling stockholders can earn up to an
additional $5,000,000 in cash payments based upon attainment of certain
performance goals. All the additional cash payments become immediately due
upon a change in control of the Company, as defined. The acquisition has been
accounted for as a purchase with the result that SMS operations are included
in the Company's financial statements from the date of purchase. In connection
with the acquisition, the Company recorded approximately $47,600,000 of
goodwill and other

39
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. ACQUISITIONS AND INVESTMENTS, CONTINUED:

intangible assets. Additional amounts payable under contingent earn-out
provisions will be accounted for as an increase in the purchase price when
such amounts become determinable. The fair value of assets acquired from SMS
was approximately $41,400,000 and liabilities assumed were approximately
$36,100,000. SMS is a holding company for a family of companies including Star
Data Systems, Inc., dba Sirius Computer Solutions ("Sirius"), a value-added
distributor for high technology mid-range solutions in the IBM AS/400 and
RS/6000 systems market. Sirius also sells systems directly to end-user
customers as an industry remarketer. Prior to the closing of the SMS
acquisition, SMS completed a spin-off of the Sirius end-user business as a
separate unaffiliated company. Upon acquiring SMS, the distribution arm was
renamed Business Partner Solutions, Inc. ("BPS"). Upon completion of the SMS
acquisition, BPS became a wholly owned subsidiary of the Company. For the
eleven months ended September 30, 1997, the distribution business of Sirius
had revenues of approximately $86,500,000 and income from operations of
approximately $1,100,000. The following presents unaudited pro forma combined
net sales, net income and earnings per share of the Company and SMS (excluding
the Sirius end-user business) for the fiscal years ended December 31, 1996 and
1997. The pro forma information is presented for informational purposes only,
and is not necessarily indicative of the operating results that would have
occurred if the SMS acquisition had been consummated at the beginning of the
earliest period presented, nor is it indicative of future operating results.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net sales................................ $208,000,000 $306,000,000
============ ============
Net income............................... $ 631,000 $ 899,000
============ ============
Net income per share--basic.............. $ 0.13 $ 0.17
============ ============
Net income per share--diluted............ $ 0.13 $ 0.14
============ ============
</TABLE>

For purposes of the pro forma combined data, SMS's financial data for its
fiscal year ended October 31, 1996 have been combined with the Company's
financial data for the fiscal year ended December 31, 1996. The above amounts
do not include pro forma adjustments for sales that would have occurred
between the distribution business of SMS and the end-user business if the
spinoff of the end-user business had occurred at the beginning of such period
presented. Including these sales amounts, pro forma combined net sales would
have been approximately $247,000,000 and $336,000,000 for the year ended
December 31, 1996 and 1997, respectively.

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 (220,273 shares) of the Company. Additional
consideration, up to $10,000,000 in cash and stock, can be earned by TSI by
meeting certain defined gross profit targets through fiscal year 1998. An
additional 62,578 shares were issued by the Company on March 17, 1997, and
placed in escrow for the earn-out provision. No shares were earned in 1997. If
TSI does not meet the earn-out provision targets in 1998, the appropriate
amount of shares will be returned to the Company. The acquisition has been
accounted for as a purchase with the result that TSI operations are included
in the Company's financial statements from the date of purchase. Additional
amounts payable under contingent earn-out provisions will be accounted for as
an increase in the purchase price when such amounts become determinable. In
connection with the acquisition, the Company recorded approximately $2,600,000
of goodwill and other intangible assets. The fair value of assets acquired
from TSI was approximately $1,141,000 and liabilities assumed were
approximately $1,484,000. For the year ended December 31, 1996, TSI had
unaudited revenues of approximately $15,000,000 with net income of
approximately $200,000.

40
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. ACQUISITIONS AND INVESTMENTS, CONTINUED:

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). In connection with the
acquisition, the Company recorded approximately $780,000 of goodwill and other
intangible assets. Additional amounts payable under contingent earn-out
provisions will be accounted for as an increase in the purchase price when
such amounts become determinable. For the year ended December 31, 1995, IDP
had unaudited revenues of approximately $4,611,000 with net income of
approximately $2,000.

On November 7, 1996, the Company acquired the net assets of Star
Technologies, Inc. ("Star"), a privately held company, for $950,000 paid in
common stock (113,263 shares) of the Company. The agreement between the
Company and Star (the "Agreement") contains an earnout provision which allows
Star to earn up to an additional $1,500,000 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 earnout
provision. Additional amounts payable under contingent earn-out provisions
will be accounted for as an increase in the purchase price when such amounts
become determinable. As of December 31, 1997, 48,721 shares, at an average
price of $10.26, have been earned under this provision. If Star does not meet
the earnout provision targets, the appropriate amount of shares will be
returned to the Company. 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 earnout 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. Additional amounts payable under contingent earn-out
provisions will be accounted for as an increase in the purchase price when
such amounts become determinable. As of December 31, 1997, the end of the
earnout period, 78,587 shares, at an average price of $10.33, have been earned
under this provision. 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 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 earnout 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. Additional
amounts payable under contingent earn-out provisions will be accounted for as
an increase in the purchase price when such amounts become determinable. As of
December 31, 1997, the end of the earnout period, 42,516 shares, at an average
price of $9.76, have been earned under this provision.

41
<PAGE>

SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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. The sale, which was approved by
the Company's stockholders, 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, 1997 the Company did not have any inventory related to the
Reptron transaction.

13. PENDING ACQUISITION:

On November 22, 1997, the Company signed a definitive agreement to acquire
MCBA Systems, Inc. (MCBA), a privately held company, for approximately 900,000
shares of the Company's common stock in a combination to be accounted for as a
purchase. Additional consideration of 1,500,000 shares can be earned by MCBA
stockholders by meeting certain future performance targets. Contingent
consolidation will be accounted for as an increase in the purchase price when
such amounts become determinable. The acquisition is subject to a number of
conditions, including the approval by the stockholders of the Company. The
acquisition is anticipated to close in March of 1998. MCBA distributes the
same IBM mid-range servers as the Company plus the IBM S/390 system. For the
year ended December 31, 1997, MCBA had unaudited revenues of $26,900,000 with
unaudited net income of $26,000.

14. SUBSEQUENT EVENT:

On February 17, 1998, the Company completed a Registration Statement on Form
S-3 for the registration of 4,482,542 shares of common stock issuable in
connection with the conversion of Series A Preferred Stock and the exercise of
certain warrants and for restricted shares issued in the SMS transaction.

42
<PAGE>

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of February 28, 1998.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
P. Scott Munro........... 41 Chairman of the Board, Chief Executive Officer,
President, Secretary and Director
James W. Dorst........... 43 Chief Financial Officer
Robert O'Reilly.......... 45 Senior Vice President
Carlton Joseph Mertens 32 Chief Executive Officer and President of the
II...................... Company's subsidiary, Business Partner Solutions,
Inc., and Director
Angelo Guadagno(1)(2).... 55 Director
James J. Heffernan(3).... 55 Director
K. William Sickler(1)(2). 48 Director
J. Larry Smart(1)(3)..... 49 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Stock Option Committee.
(3) Member of the Audit Committee.

P. SCOTT MUNRO has served as Chief Executive Officer, President and
Secretary of the Company since July 1995. Mr. Munro has also served as
Chairman of the Board since January 1998 and served as a Director of the
Company from 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, he served as Senior Vice President, Computer Systems Division of
the Company. Prior to 1990, Mr. Munro served as a General Manager for both
Future Electronics, Inc., a distributor of electronic components, and Arrow
Electronics, Inc., a distributor of computer products.

JAMES W. DORST has served as Chief Financial Officer of the Company since
May 1995. From May 1994 to February 1995, Mr. Dorst was Chief Financial
Officer of Accolade, Inc., an entertainment software developer. From March
1986 to April 1993, he was Chief Financial Officer of Drypers Corporation, a
manufacturer of consumer disposable products. Prior to 1986, he was employed
by the public accounting firm of Coopers & Lybrand L.L.P.

ROBERT O'REILLY has served as Senior Vice President of the Company since
September 1997 and prior to that time served as Vice President of Human
Resources from February 1996 and Director of Human Resources from September
1995. Prior to joining the Company, Mr. O'Reilly was a Director of Human
Resources, with special emphasis on recruitment, training and development,
during his 10-year career with Future Electronics, Inc., a distributor of
electronic components.

CARLTON JOSEPH MERTENS II has served as a Director of the Company and as
Chief Executive Officer and President of the Company's subsidiary, Business
Partners Solutions, Inc., since September 1997. From 1984 to September 1997,
Mr. Mertens was an active member of SMS' management team, and served as
Executive Vice President of SMS from 1991 to September 1997 prior to its
acquisition by the Company.

43
<PAGE>

ANGELO GUADAGNO has served as a Director of the Company since August 1997.
From 1989 to 1997, he was the Vice President of Worldwide Channel Sales of
Data General, a manufacturer of servers, storage systems and related software.
During his tenure at Data General he also served as: Vice President of U.S.
Sales from 1994 to 1996; Vice President, American Sales and Services from 1990
to 1994; and Vice President of North American Sales Division from 1989 to
1990.

JAMES J. HEFFERNAN has served as a Director of the Company since October
1995. Since January 1996, he has been Chief Financial Officer and a director
of USWeb Corporation, an Internet consulting firm. From March 1995 to January
1996, he was Chief Financial Officer of Interlink Computer Sciences, a
software company. Prior to such time, Mr. Heffernan was Chairman of the Board
and Chief Financial Officer of Panoramic, Inc., a software company. From June
1994 to June 1995, Mr. Heffernan was a director of International Microcomputer
Software, Inc., a software company.

K. WILLIAM SICKLER has served as a Director of the Company since July 1993.
Mr. Sickler has served as Chief Executive Officer and President of Gadzoox
Networks, Inc., a provider of gigabit fibre channel networking products since
April 1996. From July 1995 to April 1996, he was Executive Director of
Software Business Development for Seagate Technology, a software developer and
manufacturer of disk drives, with responsibility for analysis of potential
software company acquisitions. From December 1992 to July 1995, Mr. Sickler
was President and Chief Executive Officer of Network Computing, Inc., a
provider of network management software for local area networks.

J. LARRY SMART has served as a Director of the Company since October 1995.
From October 1995 to January 1998, he also served as Chairman of the Board of
the Company. Since March 1997, Mr. Smart has served as President and Chief
Executive Officer of Visioneer, Inc., a developer of personal desktop
management hardware and software imaging products, and served as Chairman of
the Board of Directors of that company from February 1997 until assuming the
position of President and Chief Executive Officer. From July 1995 until March
1997, he was Chairman of the Board, President and Chief Executive Officer of
StreamLogic Corporation, a data storage company. 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 materials sciences company.

The Company currently has authorized six (6) members of the Board of
Directors. All directors are elected to hold office until the next annual
meeting of stockholders of the Company and until their successors have been
duly elected and qualified. Officers are elected at the first meeting of the
Board of Directors following the stockholders' meeting at which the directors
are elected and serve at the discretion of the Board of Directors. There are
no family relationships among any of the directors or executive officers of
the Company.

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 Messrs. Guadagno and O'Reilly filed their Forms 3
approximately 5 months late.

44
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table provides certain summary information for the years ended
December 31, 1995, 1996 and 1997 concerning compensation paid to the Company's
Chief Executive Officer and to the Company's two other named executive
officers whose compensation exceeded $100,000 in 1997 (the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ ------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro.......... 1997 302,485 119,398 -- 150,000 --
Chairman of the Board, 1996 221,286 122,564 -- 125,000 --
Chief Executive 1995 173,660 152,530 -- 60,000 --
Officer, President and
Secretary
James W. Dorst.......... 1997 192,333 51,872 -- 30,000 --
Chief Financial Officer 1996 150,000 47,867 -- 20,000 --
1995 100,000 30,640 20,833(1) 50,000 --
Robert O'Reilly(2)...... 1997 142,517 36,578 -- 30,000 --
Senior Vice President
</TABLE>

- --------
(1) Mr. Dorst served as a consultant to the Company from February 1995 until
he was hired by the Company in May 1995. During his consultancy with the
Company, he was paid $20,833.
(2) Mr. O'Reilly became an executive officer of the Company during 1997.

45
<PAGE>

RECENT OPTION GRANTS

The following table sets forth certain information regarding options granted
during the fiscal year ended December 31, 1997 to the Named Executive
Officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE) DATE 5% 10%
- ---- ---------- -------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
P. Scott Munro.......... 75,000(3) 13.2% 11.375 5/16/07 536,526 1,359,662
75,000(4) 13.2% 11.375 5/16/07 536,526 1,359,662
James W. Dorst.......... 15,000(3) 2.6% 11.375 5/16/07 107,305 271,932
15,000(4) 2.6% 11.375 5/16/07 107,305 271,932
Robert O'Reilly......... 15,000(3) 2.6% 11.375 5/16/07 107,305 271,932
15,000(4) 2.6% 11.375 5/16/07 107,305 271,932
</TABLE>
- --------
(1) Based on options to purchase an aggregate of 567,000 shares of Common
Stock granted during fiscal 1997.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of the Common Stock.
The gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares of Common Stock. The actual
gains, if any, on the stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment
through applicable vesting periods and the date on which the options are
exercised.
(3) These options have a 10-year term and vest at the rate of twenty-five
percent (25%) per year over a four-year period. These options have
accelerated vesting upon a change of control of the Company.
(4) These options have a 10-year term and vest based on the price of the
Common Stock expressed as a 30-day consecutive average, with one hundred
percent (100%) vesting after five years in any event. These options have
accelerated vesting upon a change of control of the Company.

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, 1997.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES(1)

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------------------- -------------------------
<S> <C> <C>
P. Scott Munro............. 134,218 / 302,500 718,549 / 828,438
James W. Dorst............. 30,000 / 70,000 210,000 / 233,750
Robert O'Reilly............ 11,250 / 63,750 32,344 / 97,031
</TABLE>
- --------
(1) Based on a per share price of $10.375, the closing price of the Common
Stock as reported by The Nasdaq National Market on December 31, 1997, the
last trading day of the fiscal year.

46
<PAGE>

COMPENSATION OF DIRECTORS

The Company's 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 its directors. At the
1994 Annual Meeting of Stockholders, the stockholders approved the adoption of
the 1994 Stock Option Plan, which has on several occasions thereafter been
amended. The 1994 Stock Option Plan, as amended, provides for the grant of an
option of 15,000 shares of the Common Stock to certain directors who are not
employees following their initial election or appointment and an option for
4,000 shares of Common Stock at every regular annual meeting thereafter at
which they are elected. The exercise price of the options is the fair market
value of the Common Stock on the date of each respective grant and the options
vest over a four-year period. In April 1997, the Board of Directors made
discretionary grants of nonstatutory stock options to each of the outside
directors to purchase 6,250 shares of Common Stock at an exercise price of
$11.00 per share.

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: (i) stockholder
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; (ii) stockholder 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 (iii) any person becomes the
beneficial owner of more than fifty percent (50%) of the Company's total
outstanding securities.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with P. Scott Munro
dated January 1, 1996. Pursuant to the terms of the agreement, as amended, Mr.
Munro receives a base salary of $325,000 per year and is eligible to receive a
bonus of up to $200,000 per year, subject to achievement of certain
performance goals. 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 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 has also entered into employment agreements with other
management personnel as follows: (i) an employment agreement with James W.
Dorst dated June 12, 1995, pursuant to which Mr. Dorst receives a base salary
of $200,000 per year and is eligible to receive a bonus of up to $60,000 per
year, subject to achievement of certain performance goals; and (ii) an
employment agreement with Robert O'Reilly dated January 22, 1998, pursuant to
which Mr. O'Reilly receives a base salary of $150,000 per year and is eligible
to receive a bonus of up to $50,000 per year and a one-time bonus of $12,500,
subject to achievement of certain performance goals. In addition to the
foregoing, pursuant to each of their agreements with the Company, if Mr. Dorst
or Mr. O'Reilly is terminated for cause, such person will be entitled to
receive his base salary and bonus through the date of his termination. If Mr.
Dorst or Mr. O'Reilly is terminated without cause, such person will be
entitled to receive his base salary for a period following his termination,
twelve (12) months for Mr. Dorst and six (6) months for Mr. O'Reilly. If Mr.
Dorst's or Mr. O'Reilly's responsibilities are reduced twelve (12) months
following a change in control and such reduction in responsibilities is not
for cause, any resignation of employment as a consequence of such reduction in
responsibilities will be treated as a termination of employment without cause.

The Company has entered into an employment agreement with Carlton Joseph
Mertens II dated September 30, 1997, pursuant to which Mr. Mertens receives a
base salary of $270,000 per year and is eligible

47
<PAGE>

to receive a bonus of up to $130,000 per year, subject to achievement of
certain performance goals. If Mr. Mertens is terminated for cause, he will be
entitled to receive his base salary and bonus due through the date of his
termination. If Mr. Mertens is terminated without cause or if Mr. Mertens
terminates his employment with the Company for certain specified reasons, he
will be entitled to receive his base salary for nine (9) months following his
termination; such reasons include assignment or alteration by the Company of
Mr. Mertens' duties, responsibilities or obligations materially inconsistent
with his position with the Company after notice of Mr. Mertens' objections
thereto, failure of the Company to provide to Mr. Mertens the salary or
bonuses described above, relocation of the Company's Business Partner
Solutions, Inc.'s principal offices outside of San Antonio, Texas, any
requirement by the Company for Mr. Mertens to relocate anywhere other than San
Antonio, Texas and instructions by the Company given to Mr. Mertens to violate
any applicable law after notice of Mr. Mertens' objections. In addition, the
Company has entered into a noncompetition agreement with Mr. Mertens dated
September 30, 1997 (the "Mertens Non-Compete"). The Mertens Non-Compete was
made in connection with the sale by Mr. Mertens of all of his shares of SMS to
the Company. Under the Mertens Non-Compete, Mr. Mertens agreed that, with
respect to certain geographic areas, including all of the states of the United
States of America (but excluding certain California counties), Canada, Mexico
and Puerto Rico, he would not sell computer hardware, software or services to
value-added resellers, resellers or systems integrators or approach, contact
or solicit any employee of the Company (or any affiliate of the Company) to
leave the employ of the Company (or any of its affiliates) except through
general employment advertising. The Mertens Non-Compete expires on the earlier
of September 30, 1999 or the date on which final payment of any salary due to
Mr. Mertens is made. The Mertens Non-Compete may terminate earlier upon the
Company's failure to pay timely accrued interest on certain promissory notes
held by Mr. Mertens.

48
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as to the beneficial ownership of
the capital stock of the Company as of March 11, 1998 by: (i) each person
known to the Company to beneficially own more than five percent (5%) of the
capital stock of the Company; (ii) each of the Company's directors; (iii) each
of the Named Executive Officers; and (iv) all executive officers and directors
as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS OWNED(1) OWNED (2)
- ------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
ROI Capital Management, Inc. ("ROI") and
affiliates(3)
One Bush Street, Suite 1150
San Francisco, CA 94104........................... 590,825 7.5%
Canpartners Investments IV, LLC ("CanIV")
and affiliates(4)
9665 Wilshire Boulevard, Suite 200
Beverly Hills, CA 90212........................... 517,616 6.4
Strome Susskind Investment Management,
L.P. ("SSIM") and affiliates(5)
100 Wilshire Avenue
Santa Monica, CA 90491............................ 590,967 7.4
Carlton Joseph Mertens II(6)....................... 460,000 5.9
Hemisphere Trading Co.(7)
5796 Shelby Oaks Drive, Suite 12
Memphis, TN 38134................................. 414,000 5.4
Robert Fleming Inc.(8)............................. 436,685 5.4
P. Scott Munro(9).................................. 154,844 2.0
James W. Dorst(10)................................. 47,469 *
Angelo Guadagno.................................... 0 *
James J. Heffernan(11)............................. 7,188 *
Robert O'Reilly(12)................................ 17,609 *
K. William Sickler(13)............................. 22,688 *
J. Larry Smart(14)................................. 21,188 *
All executive officers and directors as a group
(8 persons)(15)................................... 816,433 10.5
</TABLE>
- --------
* 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. Includes shares
of Common Stock and shares of Series A Preferred Stock on an as converted
basis. Information with respect to beneficial ownership is based upon
information obtained from the stockholders and from the Company's transfer
agent. To the Company's knowledge, unless otherwise indicated, the persons
and entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission (the
"Commission") and includes voting and investment power with respect to
securities. Shares of Common Stock issuable upon exercise of stock options
exercisable within 60 days of March 11, 1998 or upon exercise of warrants
that are currently exercisable or exercisable within 60 days of March 11,
1998 are deemed to be outstanding and to be beneficially owned by the
person presently entitled to exercise for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
Each share of Series A Preferred Stock is convertible at any time into
shares of the Common Stock at a current ratio of 1.027 shares of Common
Stock for each share of Series A Preferred Stock and is entitled to vote,
without conversion, together with the Common Stock as a single class on an
as converted basis.
(2) Based on 5,489,258 shares of Common Stock and 2,242,500 shares of Series A
Preferred Stock outstanding (equivalent to 2,303,048 shares of Common
Stock) on an as converted basis, as of March 11, 1998.

49
<PAGE>

(3) Includes 323,600 shares of Common Stock, 175,000 shares of Series A
Preferred Stock and warrants to purchase 87,500 shares of Common Stock.
Common Stock ownership information is based on Amendment Number 1 to
Schedule 13D 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:
<TABLE>
<CAPTION>
SHARED
SHARES VOTING AND
BENEFICIALLY DISPOSITIVE
OWNED 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
</TABLE>

Messrs. Boyer and Soboleski are the sole stockholders and President and
Secretary, respectively, of ROI. 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. In
addition, the shares of Series A Preferred Stock and warrants are held as
follows: (i) 60,000 shares of Series A Preferred Stock and warrants to
purchase 30,000 shares of Common Stock are held by ROI Offshore Fund Ltd;
(ii) 100,000 shares of Series A Preferred Stock and warrants to purchase
50,000 shares of Common Stock are held by PTRS; and (iii) 15,000 shares of
Series A Preferred Stock and warrants to purchase 7,500 shares of Common
Stock are held by Microcap Partners, L.P. The Series A Preferred Stock and
warrants are not registered pursuant to Section 12 of the Exchange Act;
therefore, ownership of such securities does not require reporting pursuant
to Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(4) Includes 208,000 shares of Series A Preferred Stock and warrants to
purchase 304,000 shares of Common Stock. Common Stock ownership
information is based on a Schedule 13D dated September 30, 1997 filed
jointly by CanIV, Canyon Capital Management, L.P. ("CCM"), Canpartners
Incorporated ("Canpartners"), Mitchell R. Julis, Joshua S. Friedman and R.
Christian B. Evensen, each of whom beneficially owns 512,000 shares and
shares voting and dispositive power over all such shares. Messrs. Julis,
Friedman and Evensen are the sole stockholders of Canpartners. Messrs.
Julis, Friedman and Evensen and Canpartners are the members of CanIV,
which is an investment limited partnership formed to hold securities
through participation agreements for accounts managed by CCM. Canpartners
is the managing general partner of CanIV. CCM is a registered investment
advisor controlled by Canpartners. In addition, 208,000 shares of Series A
Preferred Stock and warrants to purchase 304,000 shares of Common Stock
are held by CanIV. The Series A Preferred Stock and warrants are not
registered pursuant to Section 12 of the Exchange Act; therefore,
ownership of such securities does not require reporting pursuant to
Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(5) Includes 387,012 shares of Series A Preferred Stock and warrants to
purchase 193,506 shares of Common Stock. The shares of Series A Preferred
Stock and warrants are held as follows: (i) 126,852 shares of Series A
Preferred Stock and warrants to purchase 63,426 shares of Common Stock are
held by Strome Offshore Limited; (ii) 125,098 shares of Series A Preferred
Stock and warrants to purchase 62,549 of Common Stock are held by Strome
Susskind Hedgecap Fund, LP; (iii) 103,788 shares of Series A Preferred
Stock and warrants to purchase 51,894 shares of Common Stock are held by
Strome Partners L.P.; and (iv) 31,274 shares of Series A Preferred Stock
and warrants to purchase 15,637 shares of Common Stock are held by Strome
Hedgecap Limited. The Series A Preferred Stock and warrants are not
registered pursuant to Section 12 of the Exchange Act; therefore,
ownership of such securities does not require reporting pursuant to
Regulation 13D of the Exchange Act. The Company has no information about
the shared voting and dispositive power of such securities.
(6) Based on a Schedule 13D dated September 30, 1997 filed by Mr. Mertens.
(7) Based on a Schedule 13G dated October 3, 1997 filed by Hemisphere Trading
Co. Hemisphere Trading Co. is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, as amended, and has
sole voting and dispositive power with regard to all of the 414,000 shares
of the Common Stock covered by the Schedule 13G.
(8) Includes 155,000 shares of Series A Preferred Stock and warrants to
purchase 277,500 shares of Common Stock. The shares of Series A Preferred
Stock and warrants are held as follows: (i) 155,000 shares of Series A
Preferred Stock and warrants to purchase 277,500 shares of Common Stock
are held by Robert Fleming Inc.
(9) Includes 144,218 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(10) Includes 30,000 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(11) Includes 7,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(12) Includes 16,250 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(13) Includes 17,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(14) Includes 7,188 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.
(15) Includes 275,158 shares subject to stock options that are presently
exercisable or will become exercisable within 60 days of March 11, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a) Transactions with Management and Others

None.

(b) Certain Business Relationships

None.

50
<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:

<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Consolidated Balance Sheets, December 31, 1996 and 1997......... 25
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997............................... 26
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997......................... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997............................... 28
Notes to Consolidated Financial Statements...................... 29
</TABLE>

2. Financial Statement Schedules

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

<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II--Valuation and Qualifying Accounts and Reserves..... 55
Report of Independent Accountants on Financial Statement
Schedules...................................................... 56
</TABLE>

3. Exhibits

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

(b) Reports on Form 8-K

During the fourth quarter of 1997, the Registrant filed the following
Current Reports on Form 8-K:

<TABLE>
<CAPTION>
ITEM
DATE NO. EVENT REPORTED
---- ---- -----------------------------------------------
<C> <C> <S>
(1) October 10, 1997 5 Execution of the third amendment to the stock
purchase agreement pursuant to which the
Registrant acquired Star Management Services,
Inc. ("SMS") and the issuance of a press
release announcing the closing of the SMS
acquisition.
(2) November 19, 1997 5 Issuance of a press release announcing
Registrant's intent to reincorporate in the
State of Delaware (the "Reincorporation") and
to effect a name change to Savoir Technology
Group, Inc. (the "Name Change").
(3) November 21, 1997 5 Completion of Reincorporation and Name Change
(4) November 22, 1997 5 Execution of agreement and plan of
reorganization pursuant to which the Registrant
would acquire all of the outstanding capital
stock of MCBA Systems, Inc. and the issuance of
a press release in connection therewith.
</TABLE>

51
<PAGE>

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2.1 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 Commis-
sion on January 17, 1996, and incorporated herein by this reference.
2.2 Agreement and Plan of Reorganization dated March 17, 1997 by and
among the Company, WMT Acquisition Corp., Target Solutions, Inc. and
Lee Adams, filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Commission on March 28, 1997, and incorpo-
rated herein by this reference.
2.3 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, and incorporated herein by this reference.
2.4 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 Current Report on Form 8-K filed with the Commission
on December 4, 1995, and incorporated herein by this reference.
2.5+* Stock Purchase Agreement dated June 4, 1997 by and among the Compa-
ny, Star Management Services, Inc., Harvey E. Najim and Carlton Jo-
seph Mertens II, filed as Exhibit 2.1 to the Company's Current Re-
port on Form 8-K filed with the Commission on July 16, 1997, and in-
corporated herein by this reference.
2.6+* Third Amendment to Stock Purchase Agreement dated September 30, 1997
by and among the Company, Star Management Services, Inc., Harvey E.
Najim and Carlton Joseph Mertens II, filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K, filed with the Commission on
October 10, 1997, and incorporated herein by this reference.
2.7 Purchase Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
2.8* Asset Purchase Agreement dated November 7, 1996 by and among the
Company, Star Technologies, Inc. and the Stockholders of Star Tech-
nologies, Inc., filed as Exhibit 10.24 to the Company's Annual Re-
port on Form 10-K for the year ended December 31, 1996 and incorpo-
rated herein by this reference.
2.9 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, filed as Exhibit 10.25 to the
Company's Amendment on Form 10-K/A to its Annual Report on Form 10-K
for the year ended December 31, 1996 filed with the Commission on
November 19, 1997 and incorporated herein by this reference.
2.10 Certificate of Ownership and Merger dated as of November 21, 1997,
filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated November 21, 1997, and incorporated herein by this reference.
2.11 Agreement and Plan of Reorganization dated November 22, 1997, by and
among Savoir Technology Group, Inc., MCBA Systems, Inc., Michael N.
Gunnells and John Harkins, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on December 22,
1997, and incorporated herein by this reference.
3.1 Restated Certificate of Incorporation of Savoir Technology Group,
Inc., a Delaware corporation, filed as Exhibit 3(ii) to the
Company's Current Report on Form 8-K dated July 23, 1997, filed on
August 14, 1997, and incorporated herein by this reference.
3.2** Amended and Restated Bylaws of Savoir Technology Group, Inc., a Del-
aware corporation.
4.1 Certificate of Designation, Preferences and Rights of the Company's
Series A Preferred Stock, filed as Exhibit 3.2 to the Company's Cur-
rent Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
4.2 Certificate of Designation, Preferences and Rights of the Company's
Series B Preferred Stock, filed as Exhibit 3.1 to the Company's Cur-
rent Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
</TABLE>

52
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.3 Registration and Put Rights Agreement among the Company and the Pur-
chasers dated September 30, 1997, filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated October 10, 1997, and in-
corporated herein by this reference.
4.4 Warrant Agreement of Western Micro Technology, Inc. between the Com-
pany and the Purchasers dated September 30, 1997 filed as Exhibit
4.3 to the Company's Current Report on Form 8-K dated October 10,
1997, and incorporated herein by this reference.
4.5 Common Stock Purchase Warrant in favor of Robert Fleming Inc., filed
as Exhibit 4.4 to the Company's Current Report on Form 8-K dated Oc-
tober 10, 1997 and incorporated herein by this reference.
4.6 Common Stock Purchase Warrant in favor of CanPartners Investments
IV, LLC filed as Exhibit 4.5 to the Company's Current Report on Form
8-K dated October 10, 1997 and incorporated herein by this refer-
ence.
4.7 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of Robert Fleming Inc., filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
4.8 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of CanPartners Investments IV, LLC, filed as Exhibit 4.7 to
the Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.9 Promissory Note of Registrant in the amount of Ten Million Dollars
($10,000,000) in favor of ICC dated September 30, 1997, filed as Ex-
hibit 4.8 to the Company's Current Report on Form 8-K dated October
10, 1997 and incorporated herein by this reference.
4.10 Warrant Agreement of Western Micro Technology, Inc. between the Com-
pany and ICC dated September 30, 1997, filed as Exhibit 4.9 to the
Company's Current Report on Form 8-K dated October 10, 1997 and in-
corporated herein by this reference.
4.11 Registration and Put Rights Amendment between the Company and ICC,
filed as Exhibit 4.10 to the Company's Current Report on Form 8-K
dated October 10, 1997 and incorporated herein by this reference.
4.12 Common Stock Purchase Warrant in favor of ICC, filed as Exhibit 4.11
to the Company's Current Report on Form 8-K dated October 10, 1997
and incorporated herein by this reference.
10.1** Lease Agreement dated February 2, 1998, by and between Green Moun-
tain Ventures I, Ltd., a Texas limited partnership and the Company's
Business Partner Solutions, Inc., a Texas corporation.
10.2 Inventory and Working Capital Financing Agreement dated December 1,
1996 by and between IBM Credit Corporation and the Company, and
Amendment #1 thereto, filed as Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 31, 1997, and incorporated herein by this
reference.
10.3+** Business Partner Agreement between the Company and International
Business Machines Corporation dated September 29, 1997.
10.4 Amended and Restated 1994 Stock Option Plan of Western Micro Tech-
nology, Inc. amended and restated as of May 18, 1997, filed as Ex-
hibit A to the Company's Definitive Proxy Statement as filed with
the Commission on June 27, 1997, and incorporated herein by this
reference.
10.5 Lease Agreement between MP Hacienda, Inc. and the Company dated July
15, 1995, filed as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, and incorporated
herein by this reference.
10.6 Master Lease Commitment dated September 25, 1989 and Supplements
8.01 and 8.02 thereto, filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1990, and
incorporated herein by this reference.
10.7 Amendment #4 to the Inventory and Working Capital Financing Agree-
ment dated September 30, 1997, filed as Exhibit 10.6 to the
Company's Current Report on Form 8-K, filed with the Commission on
October 10, 1997, and incorporated herein by this reference.
10.8 Note Purchase Agreement dated September 30, 1997 among the Company,
the Guarantors and the Purchasers, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
October 10, 1997, and incorporated herein by this reference.
</TABLE>

53
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.9 Guarantor Security and Pledge Agreement among the Company, the Guar-
antors and the Agent dated September 30, 1997, filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated October 10, 1997,
and incorporated herein by this reference.
10.10 SMS Subordination and Intercreditor Agreement among the Company, the
Selling Stockholders, the Guarantors and the Purchasers dated Sep-
tember 30, 1997, filed as Exhibit 10.2 to the Company's Current Re-
port on Form 8-K dated October 10, 1997, and incorporated herein by
this reference.
10.11 Issuer Security and Pledge Agreement between the Company and the
Agent dated September 30, 1997, filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated October 10, 1997, and in-
corporated herein by this reference.
10.12 Contribution Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.4 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
10.13 Assumption Agreement among the Company, Star Data Systems, Inc. and
ICC dated September 30, 1997, filed as Exhibit 10.7 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
10.14 Collateralized Guaranty of Payment between the Company and ICC dated
September 30, 1997, filed as Exhibit 10.8 to the Company's Current
Report on Form 8-K dated October 10, 1997, and incorporated herein
by this reference.
10.15 IBM Credit Corporation Subordination and Intercreditor Agreement
among the Company, the Guarantors, the Purchasers and ICC dated Sep-
tember 30, 1997, filed as Exhibit 10.9 to the Company's Current Re-
port on Form 8-K dated October 10, 1997, and incorporated herein by
this reference.
10.16+ Employment Letter between the Company and Carlton Joseph Mertens II
dated September 30, 1997 filed as part of Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on
July 16, 1997, and incorporated herein by this reference.
10.17** Employment Letter between the Company and P. Scott Munro dated Janu-
ary 22, 1998.
10.18** Employment Letter between the Company and James W. Dorst dated Janu-
ary 22, 1998.
10.19** Employment Letter between the Company and Robert O'Reilly dated Jan-
uary 22, 1998.
10.20*+ Industry Remarketer Affiliate Agreement between the Company and
Sirius Computer Solutions, Ltd. (included in Exhibit 2.8).
21.1** List of Subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
+ Confidential Treatment was granted by the Commission with respect to certain
portions of this exhibit.
* Schedules omitted from this exhibit will be furnished to the Commission upon
request.
+ Confidential Treatment requested with respect to certain portions of this
exhibit pursuant to a request for confidential treatment filed with the
Commission on March 13, 1998. The portions of the exhibit for which
confidential treatment has been requested have been omitted from the
exhibit. The omitted information has been filed separately with the
Commission as part of the confidential treatment request.
** Previously Filed.

(d) Financial Statement Schedules

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

<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and Reserves 55
Report of Independent Accountants on Financial Statement
Schedule 56
</TABLE>

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 Consolidated
Financial Statements or Notes thereto.

54
<PAGE>

SCHEDULE II

SAVOIR TECHNOLOGY GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

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

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS(1) OTHER(2) DEDUCTIONS(3) PERIOD
---------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $411 $472 $ 80 $644 $319
</TABLE>
- --------
(1) Charged to costs and expenses.
(2) Reserves related to acquisitions.
(3) Accounts written off against the reserve.

55
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
Savoir Technology Group, Inc.

Our report on the consolidated financial statements of Savoir Technology
Group, Inc. and its subsidiaries is included on page 24 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 51 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 30, 1998

56
<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 ON APRIL 23, 1998.

REGISTRANT:

Savoir Technology Group, Inc.

/s/ P. Scott Munro
_____________________________________
P. SCOTT MUNRO
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND
SECRETARY

/s/ James W. Dorst
_____________________________________
JAMES W. DORST
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)

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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ P. Scott Munro Chairman of the Board, April 23, 1998
____________________________________ President, Chief Executive
P. Scott Munro Officer and Secretary
(Principal Executive
Officer)

/s/ James W. Dorst Chief Financial Officer April 23, 1998
____________________________________ (Principal Financial
James W. Dorst Officer)

Angelo Guadagno * Director April 23, 1998
____________________________________
Angelo Guadagno

James J. Heffernan * Director April 23, 1998
____________________________________
James J. Heffernan

Carlton Joseph Mertens II * Director April 23, 1998
____________________________________
Carlton Joseph Mertens II

K. William Sickler * Director April 23, 1998
____________________________________
K. William Sickler

J. Larry Smart * Director April 23, 1998
____________________________________
J. Larry Smart
</TABLE>
James W. Dorst
*By /s/
------------------------------
James W. Dorst
(Attorney-in-Fact)

57
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
4.2 Certificate of Designation, Preferences and Rights of the Company's
Series B Preferred Stock, filed as Exhibit 3.1 to the Company's Cur-
rent Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
4.3 Registration and Put Rights Agreement among the Company and the Pur-
chasers dated September 30, 1997, filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated October 10, 1997, and in-
corporated herein by this reference.
4.4 Warrant Agreement of Western Micro Technology, Inc. between the Com-
pany and the Purchasers dated September 30, 1997 filed as Exhibit
4.3 to the Company's Current Report on Form 8-K dated October 10,
1997, and incorporated herein by this reference.
4.5 Common Stock Purchase Warrant in favor of Robert Fleming Inc., filed
as Exhibit 4.4 to the Company's Current Report on Form 8-K dated Oc-
tober 10, 1997 and incorporated herein by this reference.
4.6 Common Stock Purchase Warrant in favor of CanPartners Investments
IV, LLC filed as Exhibit 4.5 to the Company's Current Report on Form
8-K dated October 10, 1997 and incorporated herein by this refer-
ence.
4.7 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of Robert Fleming Inc., filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K dated October 10, 1997 and incorporated
herein by this reference.
4.8 13.5% Second Priority Senior Secured Notes Due September 30, 2000 in
favor of CanPartners Investments IV, LLC, filed as Exhibit 4.7 to
the Company's Current Report on Form 8-K dated October 10, 1997 and
incorporated herein by this reference.
4.9 Promissory Note of Registrant in the amount of Ten Million Dollars
($10,000,000) in favor of ICC dated September 30, 1997, filed as Ex-
hibit 4.8 to the Company's Current Report on Form 8-K dated October
10, 1997 and incorporated herein by this reference.
4.10 Warrant Agreement of Western Micro Technology, Inc. between the Com-
pany and ICC dated September 30, 1997, filed as Exhibit 4.9 to the
Company's Current Report on Form 8-K dated October 10, 1997 and in-
corporated herein by this reference.
4.11 Registration and Put Rights Amendment between the Company and ICC,
filed as Exhibit 4.10 to the Company's Current Report on Form 8-K
dated October 10, 1997 and incorporated herein by this reference.
4.12 Common Stock Purchase Warrant in favor of ICC, filed as Exhibit 4.11
to the Company's Current Report on Form 8-K dated October 10, 1997
and incorporated herein by this reference.
10.1** Lease Agreement dated February 2, 1998, by and between Green Moun-
tain Ventures I, Ltd., a Texas limited partnership and the Company's
Business Partner Solutions, Inc., a Texas corporation.
10.2 Inventory and Working Capital Financing Agreement dated December 1,
1996 by and between IBM Credit Corporation and the Company, and
Amendment #1 thereto, filed as Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 31, 1997, and incorporated herein by this
reference.
10.3+** Business Partner Agreement between the Company and International
Business Machines Corporation dated September 29, 1997.
10.4 Amended and Restated 1994 Stock Option Plan of Western Micro Tech-
nology, Inc. amended and restated as of May 18, 1997, filed as Ex-
hibit A to the Company's Definitive Proxy Statement as filed with
the Commission on June 27, 1997, and incorporated herein by this
reference.
10.5 Lease Agreement between MP Hacienda, Inc. and the Company dated July
15, 1995, filed as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, and incorporated
herein by this reference.
10.6 Master Lease Commitment dated September 25, 1989 and Supplements
8.01 and 8.02 thereto, filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1990, and
incorporated herein by this reference.
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.7 Amendment #4 to the Inventory and Working Capital Financing Agree-
ment dated September 30, 1997, filed as Exhibit 10.6 to the
Company's Current Report on Form 8-K, filed with the Commission on
October 10, 1997, and incorporated herein by this reference.
10.8 Note Purchase Agreement dated September 30, 1997 among the Company,
the Guarantors and the Purchasers, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on
October 10, 1997, and incorporated herein by this reference.
10.9 Guarantor Security and Pledge Agreement among the Company, the Guar-
antors and the Agent dated September 30, 1997, filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated October 10, 1997,
and incorporated herein by this reference.
10.10 SMS Subordination and Intercreditor Agreement among the Company, the
Selling Stockholders, the Guarantors and the Purchasers dated Sep-
tember 30, 1997, filed as Exhibit 10.2 to the Company's Current Re-
port on Form 8-K dated October 10, 1997, and incorporated herein by
this reference.
10.11 Issuer Security and Pledge Agreement between the Company and the
Agent dated September 30, 1997, filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated October 10, 1997, and in-
corporated herein by this reference.
10.12 Contribution Agreement Assignment between the Company and the Agent
dated September 30, 1997, filed as Exhibit 10.4 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
10.13 Assumption Agreement among the Company, Star Data Systems, Inc. and
ICC dated September 30, 1997, filed as Exhibit 10.7 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
10.14 Collateralized Guaranty of Payment between the Company and ICC dated
September 30, 1997, filed as Exhibit 10.8 to the Company's Current
Report on Form 8-K dated October 10, 1997, and incorporated herein
by this reference.
10.15 IBM Credit Corporation Subordination and Intercreditor Agreement
among the Company, the Guarantors, the Purchasers and ICC dated Sep-
tember 30, 1997, filed as Exhibit 10.9 to the Company's Current Re-
port on Form 8-K dated October 10, 1997, and incorporated herein by
this reference.
10.16+ Employment Letter between the Company and Carlton Joseph Mertens II
dated September 30, 1997 filed as part of Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on
July 16, 1997, and incorporated herein by this reference.
10.17** Employment Letter between the Company and P. Scott Munro dated Janu-
ary 22, 1998.
10.18** Employment Letter between the Company and James W. Dorst dated Janu-
ary 22, 1998.
10.19** Employment Letter between the Company and Robert O'Reilly dated Jan-
uary 22, 1998.
10.20*+ Industry Remarketer Affiliate Agreement between the Company and Sir-
ius Computer Solutions, Ltd. (included in Exhibit 2.8).
21.1** List of Subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
+ Confidential Treatment was granted by the Commission with respect to certain
portions of this exhibit.
* Schedules omitted from this exhibit will be furnished to the Commission upon
request.
+ Confidential Treatment requested with respect to certain portions of this
exhibit pursuant to a request for confidential treatment filed with the
Commission on March 13, 1998. The portions of the exhibit for which
confidential treatment has been requested have been omitted from the exhibit.
The omitted information has been filed separately with the Commission as part
of the confidential treatment request.
** Previously Filed.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statements
of Savoir Technology Group, Inc. on Form S-8 (File Nos. 033-64279, 333-30825
and 333-08989) and Form S-3 (File No. 333-46049) of our reports dated January
30, 1998, except for the matters discussed in Note 14 for which the date is
February 17, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Savoir Technology Group, Inc. and subsidiaries
as of December 31, 1997, and 1996, and for each of the three years in the
period ended December 31, 1997, which reports are included in this Annual
Report on Form 10-K.

/s/ Coopers & Lybrand L.L.P.

COOPERS & LYBRAND L.L.P.

San Jose, California
April 23, 1998