MICRON ELECTRONICS INC, 10-K, 1996-10-11

MICRON ELECTRONICS INC
10-K, 1996-10-11
ELECTRONIC COMPUTERS

Previous: MAGNUM PETROLEUM INC /NV/, S-4/A, 1996-10-11

Next: MICRON ELECTRONICS INC, S-3, 1996-10-11

<PAGE>

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

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED AUGUST 29, 1996

COMMISSION FILE NUMBER: 0-17932

MICRON ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MINNESOTA 41-1404301
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

900 E. KARCHER ROAD, NAMPA, IDAHO 83687
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)

(208) 893-3434
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
REGISTERED ON THE NASDAQ NATIONAL MARKET

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, and (2) has been subject to such filing
requirements for 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 non-affiliates of the
registrant as of September 27, 1996 was approximately $308.5 million.

The number of outstanding shares of the registrant's Common Stock on
September 27, 1996 was 92,473,017.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 1996 Annual Meeting of
Shareholders, to be held on November 25, 1996, are incorporated by reference
into Part III of this Annual Report on Form 10-K.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART I

ITEM 1. BUSINESS

The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
actual results of Micron Electronics, Inc. (together with its subsidiaries,
"MEI" or the "Company") could differ materially from MEI's historical results
of operations and those discussed in the forward-looking statements. Factors
that could cause actual results to differ materially are included, but are not
limited to, those identified in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Certain Factors."

Micron Electronics, Inc. is a leading provider of PC systems through the
direct sales channel in the United States. MEI's PC operations develop,
market, manufacture, sell and support a range of memory-intensive, high
performance desktop and notebook PC systems and network servers under the
Micron brand name. In addition to its PC operations, MEI has contract
manufacturing and component recovery operations. MEI's wholly-owned
subsidiary, Micron Custom Manufacturing Services, Inc. ("CMS"), is a contract
manufacturer specializing in the assembly of custom complex printed circuit
boards, memory modules and system level products. MEI's component recovery
operations recover, assemble, test, grade and market nonstandard random access
memory ("RAM") components not meeting full industry standard specifications.

MEI primarily receives orders for PC products via telephone and facsimile,
and PC systems are generally shipped directly to the end-customer. According
to International Data Corporation ("IDC"), this channel of the PC market in
the United States is projected to grow at a compounded annual growth rate of
approximately 13.1%, compared to a projected growth rate of approximately
11.9% for the overall PC market for the period between 1996 and 2000. In
fiscal 1995 and 1996, MEI's rate of growth in PC sales exceeded the rate of
growth in the overall direct sales channel, principally as a result of
increased market awareness and acceptance of its products. As a result, MEI
has increased its market share in the direct sales channel. According to a
recent study conducted by IDC, MEI is the third largest supplier of PC systems
in the direct sales channel and ninth largest in the overall PC market in the
United States.

The following summarizes MEI's net sales by product line:

<TABLE>
<CAPTION>
PRO FORMA FISCAL PRO FORMA FISCAL
FISCAL 1996 1995(1) 1994(1)
--------------------- --------------------- -------------------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
---------- ---------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PC systems.............. $1,252,492 71.0% $ 765,009 64.1% $366,640 56.3%
Contract manufacturing.. 373,622 21.2 188,145 15.8 117,278 18.0
Component recovery...... 138,806 7.8 240,176 20.1 167,065 25.7
---------- ----- ---------- ----- -------- -----
Total net sales......... $1,764,920 100.0% $1,193,330 100.0% $650,983 100.0%
========== ===== ========== ===== ======== =====
</TABLE>
- --------
(1) On April 7, 1995, Micron Computer, Inc. ("MCI") and former Micron Custom
Manufacturing Services, Inc. ("MCMS"), then subsidiaries of Micron
Technology, Inc. ("MTI"), merged with and into ZEOS International, Ltd.
("ZEOS"), and the surviving corporation's name was changed to "Micron
Electronics, Inc." (the "MEI Merger"). The table presents net sales of MEI
for 1996, compared to MEI's pro forma net sales for 1995 and 1994, as if
the MEI Merger had occurred at the beginning of fiscal 1994, giving effect
to pro forma adjustments, including amortization of goodwill, certain
product and process technology costs and related income tax effects.

1
<PAGE>

PERSONAL COMPUTER SYSTEMS

PRODUCTS

MEI develops, markets, manufactures, sells and supports a range of memory
intensive, high performance desktop and notebook PC systems and network servers
under the Micron brand name. These systems use Pentium and Pentium Pro
microprocessors manufactured by Intel Corporation ("Intel") and are assembled
to order with differing memory and storage capacities as well as operating and
applications software. MEI also offers a variety of peripheral products with
its PC systems, including monitors, modems, graphics cards, accelerators and
CD-ROM drives.

As of August 29, 1996, MEI's product line included the following:

MILLENNIA. The Millennia products are the fastest Pentium and Pentium Pro
microprocessor-based computer systems available in MEI's product offerings. The
Millennia comes with Pipeline Burst SRAM cache and EDO DRAM memory. The
Millennia Plus line adds SCSI standards to the base Millennia line. Targeted
for business users and PC enthusiasts, the Millennia and Millennia Plus have
been MEI's best-selling products in recent periods. The Millennia Pro and the
Millennia Pro Plus are high-end workstations designed specifically for 32-bit
and graphic-intense applications. Standard Millennia Pro and Millennia Pro Plus
products utilize Pentium Pro microprocessors, include Microsoft Windows NT and
are available in various configurations.

MILLENNIA TRANSPORT. The Millennia TransPort, designed for all users, is
MEI's notebook line of computer systems. The TransPort incorporates much of the
same technology used in the Millennia desktop lines and can serve as a desktop
replacement. With two modular bays, the TransPort offers customers instant
custom configuration changes between a hard disk drive, floppy disk drive, CD-
ROM drive and an extra battery.

HOME MPC. The Home MPC line includes Pentium microprocessor-based multimedia
computers designed primarily for high performance home use. With an emphasis on
multimedia and connectivity, the Home MPC standard configurations include a
sound card, speakers, a CD-ROM drive, an internal modem and Internet browser
software. In addition, the Home MPC is bundled with a variety of software for
home use, personal finance, education and entertainment.

CLIENTPRO. The ClientPro is MEI's flexible and affordable network solution
for businesses, which require computing stability and performance. The
ClientPro line is designed to provide reliable, adaptable computing without the
need for frequent system upgrades.

POWERSERVER SMP-N. The PowerServer SMP-N is MEI's network server line.
PowerServers are offered with PCI and EISA bus slots for high levels of
performance with multiple network interface cards. The PowerServer line
provides the capability for dual Pentium processors operating under SMP-
compliant operating systems.

2
<PAGE>

The following chart lists MEI's current PC product lines as well as certain
information relating thereto (configurations listed below are subject to
change):

<TABLE>
<CAPTION>
PRODUCT LINE PROCESSOR TYPE AND SPEED SAMPLE KEY FEATURE SET
- ------------ ------------------------ ----------------------
<S> <C> <C>
DESKTOP PRODUCTS
MILLENNIA Intel Pentium Processors: 512K Pipeline Burst SRAM cache
100MHz 64MB EDO RAM (up to 128 MB)
120MHz 8X IDE CD-ROM drive
133MHz 3.1GB EIDE hard drive
150MHz Diamond Stealth 3D 2000 Video
Card w/4MB EDO RAM
166MHz 17" .26 SVGA monitor
200MHz Creative Labs Sound Blaster 16
Advent AV007 speakers
Microsoft Windows 95 & Plus!
Microsoft Office Pro 95 &
Bookshelf 95
- ---------------------------------------------------------------------------------------
MILLENNIA PLUS Same as Millennia Generally same feature set as
Millennia with SCSI storage
devices.

MILLENNIA PRO Intel Pentium Pro Processors: 256K Internal CPU SRAM cache
180MHz 32MB EDO RAM (up to 128 MB)
200MHz 8X IDE CD-ROM drive
2.1GB EIDE hard drive
Diamond Stealth 3D 2000 Video
Card w/4MB EDO RAM
17" .26 SVGA monitor
Creative Labs Sound Blaster 16
Advent AV007 speakers
Microsoft Windows NT or Windows
95 & Plus!
Microsoft Office Pro 95 &
Bookshelf 95
- ---------------------------------------------------------------------------------------
MILLENNIA PRO PLUS Same as Millennia Pro Generally same feature set as
Millennia Pro with SCSI storage
devices.
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
PRODUCT LINE PROCESSOR TYPE AND SPEED SAMPLE KEY FEATURE SET
- ------------ ------------------------ ----------------------
<S> <C> <C>
HOME MPC Intel Pentium Processors: 256K Pipeline Burst SRAM cache
100MHz 32MB EDO RAM (up to 128 MB)
120MHz 8X IDE CD-ROM drive
133MHz 2.1GB EIDE hard drive
150MHz Diamond Stealth 3D 2000 Video
Card w/2MB EDO RAM
166MHz 17" .26 SVGA monitor
200MHz 28.8Kb Internal Fax/Modem w/full
duplex speaker phone and voice
mail
Microsoft phone telephony
software
Creative Labs Sound Blaster 32 3D
Wavetable stereo sound
Advent AV270 powered partner 2x25
watt stereo speakers
Microsoft Windows 95 & Plus!
Microsoft Office Pro 95 &
Bookshelf 95
Internet ready
Variety of home-oriented
software, including Quicken
Financial Pak and Microsoft Home
Pak
- --------------------------------------------------------------------------------------
CLIENTPRO Intel Pentium Processors: 256K Pipeline Burst SRAM cache
100MHz 16MB EDO RAM (up to 128MB)
120MHz 1.2GB EIDE hard drive
133MHz PCI 64-bit graphics accelerator
150MHz w/2MB EDO RAM
3COM 3C509 NIC Ethernet Combo
166MHz 14" .28 SVGA monitor
200MHz Microsoft Windows 95 & Plus!
Microsoft Works 3.0
</TABLE>

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

4
<PAGE>

<TABLE>
<CAPTION>
PRODUCT LINE PROCESSOR TYPE AND SPEED SAMPLE KEY FEATURE SET
- ------------ ------------------------ ----------------------
<S> <C> <C>
PORTABLE PRODUCTS
MILLENNIA TRANSPORT Intel Mobile Pentium 256K L2 Pipeline Burst cache
Processors:
133MHz 32MB EDO RAM (up to 48MB)
150MHz 8X modular CD-ROM drive
2.1GB removable EIDE hard drive
PCI graphics accelerator, 1MD EDO
RAM
Pick-a-Point dual pointing
devices
Intelligent modular lithium-ion
battery
12.1" active matrix display,
800 x 600
3.5" modular floppy drive
Creative Labs Sound Blaster 16
Built-in stereo speakers &
microphone
2 Type II/1 Type III PCMCIA slots
2 infrared ports
S-Video & NTSC video outputs
28.8Kb fax/modem
Leather carrying case
Microsoft Windows 95 & Plus!
Microsoft Office Pro 95 &
Bookshelf 95
Optional matching black 17"
monitor, mouse and keyboard
Optional port replicator,
including LAN adapter
- --------------------------------------------------------------------------------------
SERVER PRODUCTS
POWERSERVER SMP-N Intel Pentium Processor: Single or dual 133 MHz processors
Available in single or 512K write-back SRAM cache
dual
133MHz processors
64MB RAM (up to 512MB)
8 slots: 2PCI, 5 EISA one
PCI/EISA shared slot
PCI Ultra SCSI-2 controller
8X SCSI-2 CD-ROM drive
2.0GB Fast SCSI-2 hard drive
ISA 64-bit graphics accelerator
w/1MB DRAM
3COM 3C595 PC 10/100 Ethernet NIC
15" .28 SVGA monitor
Tower chassis with 10 drive bays
& 3 cooling fans
DOS 6.22
Novell Netware 4.1 available for
single processor systems
</TABLE>

5
<PAGE>

MANUFACTURING AND MATERIALS

MEI's PC system manufacturing process is designed to provide custom-
configured PC products to its customers, and includes assembling components,
loading software and testing each system prior to shipment. MEI's PC systems
are generally assembled to customer specifications. Parts and components
required for each customer order are selected from inventory and are prepared
for assembly into a customized PC system. Inventories of certain components
are staged for system assembly at their point of use. While custom assembly is
advantageous to its customers, MEI is unable to achieve the level of
manufacturing efficiency normally associated with high volume production of
standardized products. Under MEI's Computers Now! program, a limited number of
the most popular PC system configurations are assembled by third parties,
under the indirect supervision and management of MEI personnel, in advance of
customer orders to facilitate rapid shipment.

MEI's desktop PC systems are generally assembled in its own facilities.
MEI's notebook PC systems are designed to include feature sets defined by MEI
but are assembled by a third-party supplier and sent to MEI for final custom
configuration and testing. Following assembly, PC systems are powered up,
loaded with software and subjected to certain diagnostic tests, including
evaluation of each system's functionality and quality. Upon completion of the
process, PC systems undergo a final inspection, after which the systems are
packaged and shipped to customers.

MEI relies on third-party suppliers for its PC system components and seeks
to identify suppliers which can provide state-of-the-art technology, product
quality and prompt delivery at competitive prices. MEI purchases substantially
all of its PC components and subassemblies from suppliers on a purchase order
basis and generally does not have long-term supply arrangements with its
suppliers. Although MEI attempts to use standard components, subassemblies and
software available from multiple suppliers, certain of its components,
subassemblies and software are available only from sole suppliers or a limited
number of suppliers. The microprocessors used in MEI's PC systems are
manufactured exclusively by Intel. From time to time, MEI has been unable to
obtain a sufficient supply of the latest Intel microprocessors. In addition,
MEI currently purchases a significant majority of its motherboards from a
single source. A significant portion of the RAM components used in MEI's PC
systems are supplied by MTI and MEI expects to continue to rely on MTI as its
primary source of RAM components. Although most other components and
subassemblies used by MEI are currently available from multiple sources, MEI
has from time to time experienced shortages in components and subassemblies
used in its PC systems. Any interruption in the supply of any key components
or subassemblies used in MEI's PC systems, could result in production delays
and adversely affect MEI's business and results of operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors--Personal Computer Systems--Dependence on Key
Sources of Supply."

MARKETING AND SALES

MEI's direct marketing approach is aimed toward PC users who evaluate
products based on performance, price, reliability, service and support. MEI's
customer base is comprised primarily of individuals, small to medium-sized
businesses and governmental and educational entities. MEI

6
<PAGE>

markets its PC systems primarily by strategically placing advertisements in
personal computer trade publications, submitting its products for review and
evaluation by these publications and advertising its products on its home page
on the Internet. MEI also markets its PC systems through direct-mail campaigns
and sells a limited number of PCs through its three factory outlet stores
located in Idaho, Minnesota and Utah. In addition, MEI sells its PC systems
through strategic relationships with third parties having large government
procurement contracts. Pricing and terms for such procurement contracts are
generally subject to renegotiation or termination by third parties and
governmental entities.

By focusing on the direct sales channel, MEI can avoid dealer markups
typically experienced in the retail sales channel, limit inventory carrying
costs and maintain closer contact with its target markets. Consumers seeking
high performance systems at competitive prices have historically referenced
computer trade magazines, and more recently have begun utilizing information
available on the Internet, to evaluate systems and configurations best suited
to their particular needs. MEI believes that consumer interest in its PC
systems has grown significantly and brand name recognition and market
acceptance of MEI's products has increased partially as a result of the
receipt of awards from trade publications recognizing the price and
performance characteristics of Micron brand PC systems and MEI's service and
support functions. There can be no assurance that MEI's name recognition and
market acceptance of its PC systems will not decline in the future, which
could have a material adverse effect on MEI's business and results of
operations. There can be no assurance that direct sales of PC systems as a
percentage of industry-wide PC sales will increase or that MEI will be able to
increase its share of the direct sales market in the future. There can also be
no assurance that PC companies that currently distribute their PC systems
primarily through distributors and resellers will not implement or devote
additional resources to a direct sales strategy, or that the direct sales
strategy will be successful in international markets. Any decline in the rate
of growth of the PC direct sales channel, or MEI's failure to compete
successfully in the direct sales channel, could have a material adverse effect
on MEI's business and results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors--Personal Computer Systems--Reliance on the Direct Sales
Approach."

Direct sales orders are received primarily via telephone and facsimile. MEI
sales representatives assist customers in determining system configuration,
compatibility and current pricing. Customers generally order systems
configured with varying feature sets differentiated by microprocessor speed,
hard drive capacity, amount of memory, monitor size and resolution and bundled
software, as well as other features. MEI offers its customers a variety of
payment alternatives, including commercial trade terms, lease financing, cash
on delivery, its own private label credit card and other credit cards.

PRODUCT WARRANTIES AND TECHNICAL SUPPORT

MEI believes that PC product warranties and technical support programs are
key factors in achieving desired levels of customer satisfaction. In November
1995, MEI introduced its Micron Power warranty, which it believes to be among
the most comprehensive in the industry. The key elements of MEI's PC product
warranties and technical support programs are as follows:

30-DAY MONEY BACK GUARANTEE AND MICRON POWER WARRANTY. Customers may
generally return products purchased from MEI within 30 days after shipment for
a full refund of the purchase price. MEI generally sells each system with the
Micron Power warranty, a five-year limited warranty on the microprocessor and
main memory and a three-year limited warranty on the remaining hardware. The
Micron Power warranty covers repair or replacement for defects in workmanship
or materials.

TECHNICAL SUPPORT. MEI offers its customers telephone access to free
technical support services (toll-free in the United States). MEI's technical
support and customer service representatives

7
<PAGE>

respond to a variety of inquiries from customers, including questions
concerning MEI's product offerings, customer order status and post-
installation hardware and software issues. Many customer inquiries are
resolved over the telephone without the need to repair or replace system
components. When repairs are necessary, MEI may ship a replacement part and
advise customers via telephone regarding installation, or a customer may elect
to ship a system directly to MEI for repair. Technical support services are
also provided through MEI's home page on the Internet and through an
electronic bulletin board system. These services enable a customer to access
system-specific information and recent software updates for many of the
software programs and drivers included with MEI's systems. Customers have an
option to purchase on-site service from a third-party service provider.

In recent periods, MEI's PC operations have experienced significant growth
in orders for PC systems. MEI has from time to time experienced an increase in
the volume of customer service and technical support calls, which has placed,
and is expected to continue to place, a strain on MEI's customer service and
technical support resources. To be competitive, MEI must invest significant
resources in the maintenance and improvement of its customer service and
technical support functions. Any failure to maintain adequate customer service
and technical support functions could cause customer dissatisfaction with MEI.
Customer dissatisfaction could result in reduced sales of PC systems, which
could have a material adverse effect on MEI's business and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors--Personal Computer
Systems--Investment in Customer Service and Technical Support Systems."

BACKLOG

Levels of unfilled orders for PC systems fluctuate depending upon component
availability, demand for certain products, the timing of large volume customer
orders and MEI's production schedules. Customers frequently change delivery
schedules and orders depending on market conditions and other reasons.
Unfilled orders can be canceled by the customers any time prior to shipment.
As of August 29, 1996, MEI had unfilled orders for PC systems of approximately
$63 million compared to $46 million as of August 31, 1995. MEI anticipates
that substantially all of the unfilled orders as of August 29, 1996, other
than those subsequently canceled, will be shipped within 45 days. Due to a
customer's ability to cancel or reschedule orders without penalty, industry
seasonality and customer buying patterns, unfilled orders may not be
representative of actual sales for any succeeding period. MEI's past operating
results have been, and its future operating results may be, subject to
seasonality and other fluctuations, on a quarterly and an annual basis, as a
result of a wide variety of factors. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors--
General--Fluctuations in Operating Results."

COMPETITION

8
<PAGE>

products and price its products and offer customers lead times comparable to
its competitors. In addition, to remain competitive, MEI generally reduces the
selling prices of its PC systems in connection with declines in its costs of
components. MEI competes with a number of PC manufacturers which sell their
products primarily through direct channels, including Dell Computer, Inc. and
Gateway 2000, Inc. MEI also competes with PC manufacturers, such as Apple
Computer, Inc., Compaq Computer Corporation, Hewlett-Packard Company,
International Business Machines Corporation and Toshiba Corporation, among
others, which have traditionally sold their products through national and
regional distributors, dealers and value added resellers, retail stores and
direct sales forces. Many of MEI's PC competitors offer broader product lines,
have substantially greater financial, technical, marketing and other resources
than MEI and benefit from component volume purchasing arrangements that are
more favorable in terms of pricing and component availability than the
arrangements enjoyed by MEI. In addition, as a result of PC industry
standards, MEI and its competitors generally use many of the same components,
typically from the same set of suppliers, which limits MEI's ability to
technologically and functionally differentiate its products. In the future,
MEI expects to face increased competition in the U.S. direct sales market from
foreign PC suppliers and from indirect domestic suppliers of PC products that
decide to implement, or devote additional resources to, a direct sales
strategy. In order to gain an increased share of the U.S. PC direct sales
market, these competitors may effect a pricing strategy that is more
aggressive than the current pricing in the direct sales market. MEI's ability
to continue to produce competitively priced products and to maintain existing
gross margin percentages will depend, in large part, on MEI's ability to
sustain high levels of sales and contain and reduce manufacturing and
component costs. Any failure by MEI to transition to new products effectively
or to accurately forecast demand for its products may have a material adverse
effect on MEI's business and results of operations.

CONTRACT MANUFACTURING

PRODUCTS

MEI's wholly-owned subsidiary, Micron Custom Manufacturing Services, Inc.
("CMS"), is a contract manufacturer specializing in the assembly of custom
complex printed circuit boards, memory modules and system level products. CMS
establishes strategic relationships with OEM customers to provide turnkey
manufacturing and other related services for cost-effective solutions to their
manufacturing requirements.

The assembly of electronic products has become increasingly sophisticated
and complex and requires substantial capital investment. In response, many
OEMs are adopting manufacturing outsourcing strategies and relying on
manufacturing specialists to support their production needs. OEMs generally
use contract manufacturers to gain access to leading manufacturing expertise,
reduce time to market, enhance their financial flexibility and improve
inventory management. MEI's contract manufacturing operations consist of
assembling and testing complex printed circuit boards, memory modules and "box
build" final product assembly services. In addition to assembly and test
functions, MEI offers a broad range of manufacturing services, including
design lay-out and product engineering, materials procurement, turnkey and
consignment inventory management, quality assurance and just-in-time delivery.

MANUFACTURING AND MATERIALS

MEI uses numerous suppliers for the electronic components and materials,
including RAM components, used in its contract manufacturing operations. In
fiscal 1996, 1995 and 1994, MEI purchased approximately 27%, 41% and 58%,
respectively, of the full specification RAM components

9
<PAGE>

used in its contract manufacturing operations from MTI. Such purchases are
made by MEI from MTI on a purchase order basis at negotiated prices, and no
long-term agreement exists between MEI and MTI for the supply of such
components. Shortages of certain types of electronic components, including RAM
components, have occurred in the past and may occur in the future. Component
shortages or price fluctuations could have a material adverse effect on MEI's
business and results of operations.

MEI procures its materials and components based on purchase orders received
and accepted from its customers while seeking to minimize its overall level of
inventory. However, MEI's contract manufacturing customers generally require
short delivery cycles and quick turnaround and a substantial portion of
contract manufacturing orders are scheduled for delivery within 90 days.
Although MEI obtains long-term product forecasts from certain of its OEM
customers, MEI generally does not have long-term purchase commitments from its
customers and periodically makes capital expenditures and other commitments
and may incur inventory costs based on anticipated orders. As MEI's OEM
customers react to variations in demand for their products due to, among other
things, product life cycles, competitive conditions or general economic
conditions, and adjust their manufacturing strategies accordingly, MEI is
exposed to the risk of its own non-cancelable purchase orders with its
suppliers and to market risks for raw materials, work in process and finished
goods. From time to time, anticipated orders from MEI's OEM customers have
failed to materialize, or delivery schedules have been deferred as a result of
changes in the customer's business, adversely affecting MEI's business and
results of operations. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors--Contract
Manufacturing--Fluctuations in OEM Orders."

Nearly all of the products manufactured by MEI's contract manufacturing
operations are assembled utilizing surface mount technology ("SMT"), whereby
the leads on integrated circuits and other electronic components are soldered
to the surface of printed circuit boards. SMT assembly requires expensive
capital equipment and a high level of process expertise. CMS has five single-
side SMT lines and two double-side, continuous flow SMT lines in its Boise,
Idaho facility, which are currently being relocated to CMS' new Nampa, Idaho
facility. In addition, CMS has four single-side SMT lines at its Durham, North
Carolina facility.

The Company's contract manufacturing operations perform automated in-circuit
and functional testing, and have the capability to perform environmental
stress testing as requested by customers. As the density and complexity of
electronic circuitry increases, MEI anticipates a need to invest in more
sophisticated automated test equipment and inspection systems that provide
both three dimensional and X-ray inspection of in-process and final products.

MEI also utilizes chip on board ("COB") technology in its manufacturing
processes. COB technology, including multi-chip module assembly, utilizes
unpackaged semiconductor die which are attached to a printed circuit board and
then sealed with epoxy. COB is well-suited for applications involving small
form factor and high lead count products. MEI also has the capability to
utilize ball grid array ("BGA") packaging technology in its assembly process.
This packaging technique utilizes an array of "solder balls" in a matrix
across the bottom of a component package as opposed to attaching leads around
the perimeter of the die. This emerging technology in packaging is typically
utilized for high pin count integrated circuits.

MARKETING AND SALES

MEI markets its contract manufacturing services through a direct sales force
that interfaces with independent sales representatives and OEMs. MEI's
contract manufacturing marketing effort is augmented by MTI's sales force,
which also markets MEI's services to MTI's customer base. MEI's contract
manufacturing marketing efforts also include participating in industry
conferences and publishing articles in trade journals.

10
<PAGE>

PRODUCT WARRANTIES

MEI generally offers a 90-day warranty on the workmanship of its contract
manufacturing services. However, warranties are frequently negotiated with
each customer and may therefore be greater than or less than 90 days for any
given contract. Generally, a considerable amount of time and effort is
invested in the start-up phase of each project. As a result, MEI has not
typically experienced significant warranty claims for its contract
manufacturing services. However, there can be no assurance that MEI will not
experience significant future warranty claims with respect to its contract
manufacturing services.

BACKLOG

Backlog generally consists of purchase orders believed to be firm that are
expected to be filled within the next three months. Backlog for MEI's contract
manufacturing operations as of August 29, 1996 and August 31, 1995 was
approximately $52 million and $95 million, respectively. The primary reason
for the decline from August 31, 1995 to August 29, 1996 was the decline in
selling prices for semiconductor memory. Because of variations in the timing
of orders, delivery intervals, material availability, customer and product mix
and delivery schedules, among other reasons, MEI's contract manufacturing
backlog as of any particular date may not be representative of actual sales
for any succeeding period.

COMPETITION

The contract manufacturing industry is highly competitive. MEI competes
against numerous domestic and offshore contract manufacturers, including a
significant number of local and regional companies. In addition, MEI competes
against in-house manufacturing capabilities of certain of its existing
customers as well as with certain large computer manufacturers which also
offer third-party contract manufacturing services. MEI's contract
manufacturing competitors include, among others, Avex Electronics, Inc.,
Benchmark Electronics, Inc., Celestica Inc., DOVAtron International, Inc.,
Flextronics International, Group Technologies Corporation, Jabil Circuits,
Inc., Sanmina Corporation, SCI Systems, Inc. and Solectron Corporation. Many
of MEI's competitors have substantially greater manufacturing, financial and
marketing resources than MEI and have manufacturing operations at multiple
domestic and overseas locations.

MEI believes the significant competitive factors in contract manufacturing
include service, quality, price, technology, location and the ability to offer
flexible delivery schedules and deliver finished products on an expeditious
and timely basis in accordance with customers' expectations. MEI may be at a
disadvantage as to certain competitive factors when compared to manufacturers
with greater resources than MEI, substantial offshore facilities or
substantially larger domestic facilities. There can be no assurance that MEI
will compete successfully in the future with regard to these factors. In order
to remain competitive, MEI may be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that MEI will be
successful in expanding its contract manufacturing operations on a timely and
efficient basis. The failure to do so could have a material adverse effect on
MEI's business and results of operations. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain
Factors--Contract Manufacturing--Competition in the Contract Manufacturing
Industry."

COMPONENT RECOVERY

PRODUCTS

MEI's component recovery operations generally recover, assemble, test, grade
and market nonstandard RAM components. MEI seeks to maximize its return on
sales of nonstandard RAM

11
<PAGE>

components and to develop custom applications for certain of these devices
with strategic OEM customers. By working with its customers to develop new
applications utilizing nonstandard RAM products, MEI is able to offer low cost
memory solutions and to increase assurance of component and product
compatibility for its OEM customers.

Nonstandard RAM components are semiconductor memory devices that do not meet
full industry specifications. MEI obtains nonstandard RAM components from
certain semiconductor memory manufacturers, generally tests and grades
components to their highest functional level and identifies applications in
which nonstandard RAM components offer a low-cost memory solution. MEI markets
nonstandard RAM components for a wide variety of applications such as PC
systems and peripherals, telephone answering machines, electronic games,
office equipment and cellular telephones.

Historically, a substantial majority of the nonstandard RAM components used
in MEI's component recovery operations has been obtained from MTI. In fiscal
1996, 1995 and 1994, MEI obtained approximately 61%, 89% and 98%,
respectively, of its nonstandard RAM components from MTI. Pursuant to its
arrangements with MEI, MTI has been and is required to deliver to MEI all of
the nonstandard RAM components produced at MTI's semiconductor memory
manufacturing operations. In fiscal 1996, MEI purchased a substantial majority
of the remainder of its nonstandard RAM components from a third-party
alternative single source. There can be no assurance that nonstandard RAM
components obtained from MTI or purchases of components from any alternative
sources will continue at quantities sufficient to sustain MEI's component
recovery operations at their existing or historic levels. MEI intends to
continue to pursue additional third-party sources of nonstandard RAM
components; however, there can be no assurance that significant additional
supplies will be obtained. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Certain Factors--Component
Recovery--Dependence on Component Recovery Agreement with MTI."

MANUFACTURING AND MATERIALS

MEI's component recovery operations require a significant investment in
sophisticated testing hardware and software and expertise in semiconductor
memory products and manufacturing processes. The semiconductor memory
manufacturing process involves a highly complex series of steps performed to
create specific electronic features on silicon wafers. Recovery of nonstandard
RAM components within the semiconductor manufacturing process is generally
performed at two stages: the wafer probe stage and the test stage. The first
test of electrical functionality is performed in the semiconductor memory
manufacturing process at the wafer probe stage, where die not meeting certain
functionality or performance characteristics are segregated while those die
which potentially meet full performance specifications continue in the
manufacturing process to assembly and test. Although a majority of MEI's
nonstandard RAM components are identified for recovery by semiconductor memory
manufacturers during the test function, MEI maintains personnel in MTI's
semiconductor memory manufacturing facility to identify nonstandard die at the
wafer probe stage which may qualify for recovery. Once nonstandard die are
identified as recoverable at wafer probe, the die are assembled by MTI and
delivered to MEI for testing and grading.

Upon delivery to MEI, nonstandard RAM components are grouped according to
device and package type and staged for a specific sequence of electrical,
environmental and mechanical tests identified for that group. MEI's test and
product engineers develop the complex testing algorithms and procedures
necessary to recover nonstandard RAM components on a cost-effective basis. MEI
engineers also develop and implement proprietary software and hardware
modifications to automated test and handling equipment. Throughout the testing
process, nonstandard RAM components are graded in an effort to segregate less
functional nonstandard RAM components and to minimize additional testing with
respect to such components. The semiconductor manufacturers' markings are
removed during the recovery process and the devices are remarked with MEI's
SpecTek brand name or a specific customer's device marking. Test and product
engineers develop burn-in testing

12
<PAGE>

procedures in order to increase assurance of reliability for devices being
produced. MEI strives to maintain close working relationships between its
component recovery engineering staff and its customers, and modifies its test
procedures and test specifications to ensure generally that nonstandard RAM
components properly address customer performance requirements. Once all
electrical and environmental testing is accomplished, the devices are
subjected to automated and human inspection in order to verify that the
devices meet mechanical and cosmetic specifications relating to package, mark
and device lead integrity.

Many semiconductor memory manufacturers are reluctant to sell nonstandard
RAM components because such components could compete with their full
specification RAM components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a component
recovery operation could reveal proprietary data regarding manufacturing
yields and processes. As a result, there can be no assurance that MEI will be
able to obtain nonstandard RAM components from semiconductor manufacturers in
quantities sufficient to meet demand for MEI's products. Any reduction in the
availability or functionality of nonstandard RAM components from MEI's
suppliers could have a material adverse effect on MEI's business and results
of operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors--Component Recovery--
Dependence on Component Recovery Agreement with MTI."

MARKETING AND SALES

MEI's nonstandard RAM components are marketed primarily to domestic
customers through MEI's direct sales force and to international customers
through manufacturing representatives. In fiscal 1996, MEI's component
recovery operations experienced significant growth in units and total megabits
shipped; however, net sales in fiscal 1996 were negatively impacted by a sharp
decline in the market price for semiconductor memory products. The market for
semiconductor memory historically has been volatile and has experienced
significant downturns characterized by diminished product demand, production
overcapacity and declines in average selling prices.

Pricing for MEI's nonstandard RAM products fluctuates, to a large degree,
based on industry-wide pricing for semiconductor memory products. During the
last three quarters of fiscal 1996, MEI experienced significant declines in
the average selling prices of its nonstandard RAM products as industry-wide
average selling prices for full specification semiconductor memory products
experienced a sharp decline. MEI believes such decline in average selling
prices of semiconductor memory products was due primarily to changes in the
balance of supply and demand for these commodity products, and MEI is unable
to predict the impact of semiconductor memory product market dynamics in
future periods. Further declines in industry-wide pricing for semiconductor
memory products would likely result in declines in average selling prices of
MEI's nonstandard RAM products, which could have a material adverse effect on
MEI's business and results of operations. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain
Factors--Component Recovery--Pricing of RAM Products."

PRODUCT WARRANTIES

MEI typically offers a 90-day limited warranty on nonstandard RAM
components. Longer warranties are offered only in special circumstances.
Although MEI's historical warranty claims with respect to nonstandard RAM
components have not been material, there can be no assurance that MEI will not
experience significant future warranty claims with respect to nonstandard RAM
components.

BACKLOG

MEI's component recovery customers generally do not order with long lead
times, and orders are frequently placed with a provision to renegotiate price
at or near the time of shipment. Therefore,

13
<PAGE>

MEI does not believe any backlog of orders for its component recovery products
is firm or a reliable indication of actual sales for any succeeding period.

COMPETITION

The principal competitive factors in MEI's component recovery operations are
access to sources of nonstandard RAM components, testing capabilities,
nonstandard RAM component prices and applications engineering. The price of
nonstandard RAM components is directly influenced by the price of full
specification RAM components, and as higher density memory devices become more
prevalent, error correction technologies and solutions improve, semiconductor
memory manufacturers have sought ways to recover a portion of their
manufacturing costs through recovery of nonstandard RAM components. Certain
manufacturers have established internal capabilities and independent companies
are pursuing opportunities to recover, test and market nonstandard RAM
components. As more semiconductor memory manufacturers recover nonstandard RAM
components, the pressure on the remaining manufacturers may increase to
develop similar programs, whether internal or external, in order to generate
revenue for their nonstandard RAM components. In addition to supplying
nonstandard RAM components in the market, in-house component recovery
operations eliminate a potential source of supply to MEI. Upon termination or
expiration of the Component Recovery Agreement, MTI could develop its own
component recovery operation. The loss of a sourcing arrangement, particularly
MEI's arrangement with MTI, could have a material adverse effect on MEI's
business and results of operations. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors--
Component Recovery--Dependence on Component Recovery Agreement with MTI."

EXPORT SALES

MEI's export sales totaled approximately $181 million, $77 million and $26
million in fiscal 1996, 1995 and 1994, respectively. Export sales are
denominated primarily in United States dollars.

INTELLECTUAL PROPERTY

As of August 29, 1996, MEI held 19 United States patents and 10 non-U.S.
patents relating to the use of its products and processes. In addition, MEI is
the holder of a number of trademarks and registered trademarks.

It is common in the electronics industry for patent and trademark, as well
as other intellectual property right claims, to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, MEI is made
aware that technology used by MEI may infringe on product and process
technology rights held by others. MEI has accrued a liability and charged
operations for the estimated costs of settlement or adjudication of asserted
and unasserted claims for alleged infringement prior to the balance sheet
date. MEI would be placed at a competitive disadvantage if it were unable to
obtain licenses with royalty payments or other terms at least as favorable as
those received by MEI's competitors. MEI has entered into several patent and
software license agreements, all of which require one-time or periodic royalty
payments. MEI is unable to predict whether any of these license agreements can
be obtained or renewed on terms acceptable to MEI. If MEI or its suppliers are
unable to obtain or provide licenses necessary to use protected technology or
software in their products or processes, MEI may be forced to market products
without certain technological features or software, discontinue sales of
certain of its products or defend legal actions taken against it relating to
patent or copyright protected technology. The inability of MEI to obtain
licenses necessary to use certain technology or its inability to obtain such
licenses on competitive terms, or any litigation determining that MEI's
manufacturing processes or products have infringed on the process or product
rights held by others could have a material adverse effect on MEI's business
and results of operations. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Certain Factors--General--
Intellectual Property Matters."

14
<PAGE>

MEI, as a majority-owned subsidiary of MTI, enjoys the benefits of certain
license agreements between MTI and third parties. MEI makes payments to MTI
relating to certain of such agreements, and MEI's rights under such agreements
may terminate in the event that MEI is no longer a majority-owned subsidiary
of MTI. In the event of any such termination, the inability of MEI to obtain
independently licenses necessary to use technology or its inability to obtain
licenses on competitive terms, or a finding of infringement against MEI, could
have a material adverse effect on MEI's business and results of operations. In
addition, MTI has allowed and is currently allowing MEI to use certain of
MTI's trademarks and patents, including the Micron brand name, although such
use by MEI has not been documented by a license agreement. There can be no
assurance that MEI will continue to be able to use such trademarks and patents
in the future, particularly if MEI ceases to be a majority-owned subsidiary of
MTI. MEI's inability to use such trademarks and patents in the future could
have a material adverse effect on MEI's business and results of operations.
MEI also relies on trade secret protection for its technology, in part through
confidentiality agreements with its employees, consultants and third parties.
There can be no assurance that these agreements will not be breached, that MEI
will have adequate remedies for any breach or that MEI's trade secrets will
not otherwise become known to or independently developed by others. In
addition, the laws of certain territories in which MEI's products are or may
be developed, manufactured or sold may not protect MEI's products and
intellectual property rights to the same extent as do the laws of the United
States.

RESEARCH AND DEVELOPMENT

MEI maintains a research and development operation which had approximately
30 employees as of August 29, 1996. This research and development group
focuses its efforts on PC systems, including: motherboards; core logic;
embedded PCs, such as those used in point of sale terminal and
telecommunication systems; PC BIOS development; and other PC-related products.
In addition to assisting MEI's PC operations and its suppliers to maximize the
performance of new technologies in the PC industry, MEI's research and
development operation performs contract design and engineering services. From
concept to completed product, MEI performs circuit and core logic design and
development and works with contract manufacturers to build the final product.
There can be no assurance that MEI will continue to have access to new
technology, be successful in incorporating such new technology in its products
or deliver commercial quantities of new products or features in a timely and
cost-effective manner. Research and development expenses for fiscal 1996, 1995
and 1994 were approximately $3,050,000, $1,893,000 and $561,000, respectively.

EMPLOYEES

As of August 29, 1996, MEI employed approximately 1,950 people in its PC
operations, 750 people in its contract manufacturing operations and 300 people
in its component recovery operations, nearly all of whom are located in the
United States, and none of whom are represented by a labor organization with
respect to their employment by MEI. MEI has never had an organized work
stoppage and considers its employee relations to be satisfactory.

ENVIRONMENTAL REGULATIONS

Some risks of costs and liabilities related to environmental matters are
inherent in MEI's business, as with many similar businesses, and MEI's
operations are subject to certain federal, state and local environmental
regulatory requirements relating to environmental and waste management. There
can be no assurance that material costs and liabilities will not be incurred
in maintaining or establishing compliance with current or future requirements.
MEI believes that its business is operated in compliance with applicable
environmental regulations, the violation of which could have a material
adverse effect on MEI. In the event of violation, these regulations provide
for civil and criminal fines, injunctions and other sanctions and, in certain
instances, allow third parties to sue to enforce compliance. In addition, new,
modified or more stringent requirements or enforcement policies could

15
<PAGE>

be adopted that may adversely affect MEI's business and results of operations.
MEI periodically generates and handles limited amounts of materials that are
considered hazardous waste under applicable law. MEI contracts for the off-
site disposal of these materials. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors--
Contract Manufacturing--Environmental Regulation."

OFFICERS AND DIRECTORS OF THE REGISTRANT

The officers and directors of MEI and their ages as of September 30, 1996,
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Joseph M. Daltoso....... 34 Chairman of the Board, President and Chief Executive
Officer of MEI
T. Erik Oaas............ 43 Vice President, Finance and Chief Financial Officer of
MEI, Director
Gregory D. Stevenson.... 35 Executive Vice President, Operations of MEI, Director
Robert F. Subia......... 34 Chairman of the Board, President and Chief Executive Officer of
Micron Custom Manufacturing Services, Inc.
(a wholly-owned subsidiary of MEI),
Director
Jess Asla............... 34 Vice President, Operations of Micron Custom
Manufacturing Services, Inc. (a wholly-owned
subsidiary of MEI)
George A. Haneke........ 48 Vice President, Chief Information Officer
Nelson L. Hanks......... 43 Vice President, Purchasing
Dean A. Klein........... 39 Vice President, Chief Technical Officer
Brian C. Klene.......... 38 Executive Vice President, Sales and Marketing
Gene P. Thomas, Jr. .... 35 Vice President, Marketing
Steven R. Appleton...... 36 Director
Jerry M. Hess........... 58 Director
Robert A. Lothrop....... 70 Director
John R. Simplot......... 87 Director
</TABLE>

Joseph M. Daltoso served as MTI's Memory Applications Group Manager from May
1990 until April 1992, when he was named President and a director of former
Micron Custom Manufacturing Services, Inc., MCMS, then a wholly-owned
subsidiary of MTI ("MCMS"). In July 1992, Mr. Daltoso was named Chairman of
the Board of Directors of MCMS and, in August 1994, was also named Chief
Executive Officer of MCMS. At the effective time of the MEI Merger, Mr.
Daltoso was appointed Executive Vice President, Operations and a director of
MEI. He was named Chairman of the Board, President and Chief Executive Officer
of MEI on April 17, 1995.

T. Erik Oaas served as the Administration Manager of MTI's Memory
Applications Group from July 1988 to April 1992, and as the Administration
Manager of MCMS from April 1992 until July 1992, when he was named Vice
President, Finance and Treasurer, and a director of MCMS. At the effective
time of the MEI Merger, Mr. Oaas was appointed Vice President, Finance and
Chief Financial Officer, and a director of MEI.

Gregory D. Stevenson served as MTI's Partials Business Unit Manager from
April 1990 until April 1992. Mr. Stevenson joined MCMS as Component Recovery
Business Unit Manager. In July 1992, he was appointed Vice President,
Component Recovery of MCMS, and in September 1992, was also
appointed a director of MCMS. In August 1993, Mr. Stevenson was appointed Vice
President,

16
<PAGE>

Operations of MCMS. At the effective time of the MEI Merger, Mr. Stevenson was
appointed Vice President, Nampa Operations and served in that position until
July 1995 when he was appointed Executive Vice President, Operations and a
director of MEI.

Robert F. Subia served as a Regional Sales Manager for MTI from 1989 until
February 1993. In February 1993, Mr. Subia joined MCMS as Director of Sales
and held this position until August 1994, when he was appointed Vice
President, Sales. On April 17, 1995, Mr. Subia was appointed Chairman,
President and Chief Executive Officer of Micron Custom Manufacturing Services,
Inc., a wholly-owned subsidiary of MEI ("CMS"). Mr. Subia was appointed a
director of MEI in October 1995.

Jess Asla served as the Process Engineer Manager for MTI's Memory
Applications Group from 1988 until July 1994, when he was named Director of
Engineering for MCMS. On April 17, 1995, Mr. Asla was appointed Vice
President, Operations of CMS.

George A. Haneke joined MTI in May 1988 and was named Accounting Manager in
1992. Mr. Haneke joined Micron Computer, Inc. as its Vice President, Finance,
Treasurer and Chief Financial Officer in September 1993 and served in this
position until the effective time of the MEI Merger. At the effective time of
the MEI Merger, Mr. Haneke was appointed Vice President, Chief Information
Officer of MEI.

Nelson L. Hanks served as a consultant for MTI from 1989 to 1991. In 1991,
Mr. Hanks was named Chief Executive Officer of Micron Europe Limited, a
wholly-owned subsidiary of MTI, and served in this position until 1993. From
1993 until the effective time of the MEI Merger, Mr. Hanks served as Special
Projects Manager for MTI. At the effective time of the MEI Merger, Mr. Hanks
was appointed Vice President, Purchasing.

Dean A. Klein was a co-founder of and also served as President of PC Tech,
Inc., a wholly-owned subsidiary of MEI, from its inception in 1984. After the
acquisition of PC Tech, Inc. by MEI in February 1992, Mr. Klein served as Vice
President, Research and Development of MEI and President of PC Tech, Inc. In
February 1996, Mr. Klein was named Vice President and Chief Technical Officer
of MEI.

Brian C. Klene joined MTI in January 1989 as Director, Sales and Marketing
of the Memory Applications Group and served in that position until July 1990
when he was named Regional Sales Manager for MTI. He served in that position
until January 1991 when he was named National Sales Manager of MTI. In July
1995, Mr. Klene joined MEI as Executive Vice President, Sales and Marketing.

Gene P. Thomas, Jr. served in sales managerial roles with Polaroid
Corporation and CompuAdd Computer Corp. and was appointed Director of
Marketing for CompuAdd in 1993. Mr. Thomas joined Micron Computer, Inc. as
Director of Sales in March 1993 and was appointed Vice President, Sales and
Marketing in December 1993. At the effective time of the MEI Merger, Mr.
Thomas was appointed Vice President, Micron Computer Sales and Marketing, and
on July 31, 1995, was named Vice President, Marketing.

Steven R. Appleton joined MTI in February 1983 and has served in various
capacities with MTI and its subsidiaries, including overseeing MTI's
semiconductor operations as President and Chief Executive Officer of Micron
Semiconductor, Inc. (then a wholly-owned subsidiary of MTI) from July 1992 to
November 1994. Except for a nine day period in January 1996, since May 1994
Mr. Appleton has served as a member of MTI's Board of Directors and since
September 1994 Mr. Appleton has served as the Chief Executive Officer,
President and Chairman of the Board of Directors of MTI.

17
<PAGE>

Jerry M. Hess has served as Chairman and Chief Executive Officer of J.M.
Hess Construction Company, Inc. since 1959. Mr. Hess has served on MTI's Board
of Directors since 1994. At the effective time of the MEI Merger, Mr. Hess was
appointed a director of MEI.

Robert A. Lothrop served as the Senior Vice President of the J.R. Simplot
Company, a food processing, fertilizer and agricultural chemicals
manufacturing company, from January 1986 until his retirement in January 1991.
Mr. Lothrop was elected to MTI's Board of Directors in 1986. In 1992, he was
elected to the Board of Directors of Micron Semiconductor, Inc. (then a
wholly-owned subsidiary of MTI) and resigned as a director of MTI. Mr. Lothrop
was re-elected to MTI's Board of Directors in 1994. At the effective time of
the MEI Merger, Mr. Lothrop was appointed a director of MEI.

John R. Simplot founded and served as Chairman of the Board of Directors of
the J.R. Simplot Company prior to his retirement in April 1994. Mr. Simplot
currently serves as Chairman Emeritus of the J.R. Simplot Company. Mr. Simplot
has served on MTI's Board of Directors since 1980. At the effective time of
the MEI Merger, Mr. Simplot was appointed a director of MEI.

ITEM 2. PROPERTIES

The Company's corporate headquarters, PC manufacturing operations, a
majority of its contract manufacturing operations and component recovery
operations are based in a number of facilities aggregating approximately
577,000 square feet located in Nampa, Idaho. Approximately 136,000 square feet
of the Nampa facilities are dedicated to PC manufacturing, approximately
146,000 square feet are dedicated to contract manufacturing, approximately
40,000 square feet are dedicated to component recovery operations. The balance
of the Nampa facilities is dedicated to sales, technical support, customer
service, administrative functions and warehouse space.

The remainder of the Company's PC operations are located in an approximately
60,000 square foot leased facility in Minneapolis, Minnesota, dedicated
primarily to sales, technical support and administrative functions.

The Company also occupies an approximately 61,000 square foot leased
facility in Durham, North Carolina, with approximately 43,000 square feet
dedicated to contract manufacturing.

Other leased facilities include three factory outlets in Boise, Idaho, the
Salt Lake City, Utah area and the Minneapolis/St. Paul, Minnesota area and a
call center office located in Japan.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to various legal actions arising out of the normal
course of business, none of which is expected to have a material adverse
effect on the Company's financial position or results of operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors--Intellectual Property Matters."

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

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1996.

18
<PAGE>

PART II

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

Micron Electronic, Inc.'s Common Stock trades on the Nasdaq National Market
under the symbol "MUEI." On April 7, 1995, MCI and MCMS, then subsidiaries of
MTI, merged with and into ZEOS, and the surviving corporation's name was
changed to "Micron Electronics, Inc." Prior to April 7, 1995, MEI Common Stock
traded under the symbol "ZEOS." The following table shows for the periods
indicated the high and low sales prices for the common stock of MEI, as
reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996:
4th quarter.............................................. $16.500 $ 8.750
3rd quarter.............................................. 17.125 9.000
2nd quarter.............................................. 15.250 9.250
1st quarter.............................................. 29.875 13.000
1995:
4th quarter.............................................. $20.125 $13.750
3rd quarter.............................................. 16.250 9.625
2nd quarter.............................................. 11.750 6.750
1st quarter.............................................. 8.125 2.750
</TABLE>

HOLDERS OF RECORD

As of August 29, 1996, there were approximately 2,228 shareholders of record
of the Company's Common Stock.

DIVIDENDS

The Company did not declare or pay any cash dividends during fiscal 1996 or
fiscal 1995. Payment of cash dividends is currently limited by the terms of
the Company's credit agreement, dated July 3, 1996.

19
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 1,764,920 $ 999,999 $ 412,938 $ 162,180 $ 63,692
Operating income............. 75,998 106,493 59,851 21,622 3,716
Net income................... 44,582 65,086 36,898 13,623 2,169
Earnings per share........... 0.48 0.74 0.45 0.17 0.03
Current assets............... 399,116 308,755 120,880 57,439 26,971
Working capital.............. 121,766 106,452 45,906 24,123 13,998
Total assets................. 529,933 382,716 151,739 70,289 36,848
Total debt (1)............... 21,297 6,823 7,845 9,327 10,713
Shareholders' equity......... 228,460 173,663 68,169 26,874 13,195
</TABLE>

On April 7, 1995, MCI and MCMS, then subsidiaries of MTI, merged with and
into ZEOS, and the surviving corporation's name was changed to Micron
Electronics, Inc. A new basis of accounting, based on fair values, was
established for the assets and liabilities of ZEOS. Subsequent to the MEI
Merger, the Company's financial statements reflect the consolidated results of
operations, financial position and cash flows of MEI based on the new basis of
accounting for the assets and liabilities of ZEOS and the historical cost
bases for the assets and liabilities of MCI and MCMS. Prior to the MEI Merger,
the financial statements of the Company include only the combined results of
operations, financial position and cash flows of MCI and MCMS.

See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Factors."

- --------
(1) Total debt includes all interest-bearing debt of the Company and
subsidiaries.

20
<PAGE>

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

The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. MEI's
actual results could differ materially from MEI's historical results of
operations and those discussed in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited
to, those identified in "Certain Factors."

OVERVIEW

Micron Electronics, Inc. ("MEI") develops, markets, manufactures, sells and
supports a range of memory-intensive, high performance desktop and notebook
personal computer ("PC") systems and network server products under the Micron
brand name. MEI's contract manufacturing operations specialize in the assembly
of custom complex printed circuit boards, memory modules and system level
products. MEI's component recovery operations recover, assemble, test, grade
and market nonstandard RAM products not meeting full industry standard
specification.

All yearly references are to MEI's fiscal years ended August 29, 1996,
August 31, 1995 and September 1, 1994, unless otherwise indicated. All tabular
dollar amounts are stated in thousands.

MEI's net income in 1996 was approximately $44.6 million, or $0.48 per
share, on net sales of approximately $1,764.9 million. Net sales in 1996
increased primarily as a result of significantly higher sales of PC systems
and higher contract manufacturing revenues, partially offset by lower
component recovery sales. MEI's gross margin percentage declined from
approximately 17.6% (on a pro forma basis) in 1995 to approximately 14.8% in
1996, primarily as a result of a significantly lower gross margin percentage
realized from the component recovery operations and, to a lesser extent, a
lower gross margin percentage realized from its contract manufacturing
operations. These effects were partially offset by a higher gross margin
percentage realized from sales of PC systems, as well as an increase in sales
of PC systems as a percentage of total net sales. The gross margin percentage
realized on net sales of PC systems increased in 1996 primarily as a result of
improved component costs, particularly for RAM products, and generally
improved PC inventory management. MEI's gross margin percentage in the fourth
quarter of fiscal 1996 benefitted from an adjustment of approximately $13.0
million relating to revisions of estimates for certain contingencies for
product and process technology costs. Absent this adjustment, MEI's gross
margin percentage in the fourth quarter of fiscal 1996 would have been
approximately 17.9%. MEI believes that, as a result of continued pricing
pressure on PC systems and a slower rate of decline of, or an increase in,
component costs, particularly for RAM products, it may be unable to maintain
its gross margin percentage at this level in the foreseeable future.

MEI's past operating results have been, and its future operating results may
be, subject to seasonality and other fluctuations, on a quarterly and an
annual basis, as a result of a wide variety of factors, including, but not
limited to, critical component availability, the timing of new product
introductions by MEI and its competitors, fluctuating market pricing for
computer and semiconductor memory products, industry competition, fluctuating
component costs, inventory obsolescence, seasonal cycles common in the PC
industry, seasonal government purchasing cycles, the effect of product reviews
and industry awards, manufacturing and production constraints, changes in
product mix and the timing of orders from and shipments to OEM customers. As a
result, the operating results for any particular period are not necessarily
indicative of the results that may occur in any future period.

On April 7, 1995, Micron Computer, Inc. ("MCI") and former Micron Custom
Manufacturing Services, Inc. ("MCMS"), then subsidiaries of Micron Technology,
Inc. ("MTI"), merged with and into ZEOS International, Ltd. ("ZEOS"), and the
surviving corporation's name was changed to "Micron Electronics, Inc." (the
"MEI Merger"). A new basis of accounting, based on fair values, was
established for the assets and liabilities of ZEOS. Subsequent to the MEI
Merger, MEI's financial statements reflect

21
<PAGE>

the consolidated results of operations, financial position and cash flows of
MEI based on the new basis of accounting for the assets and liabilities of ZEOS
and the historical cost bases for the assets and liabilities of MCI and MCMS.
Prior to the MEI Merger, the financial statements of MEI include only the
combined results of operations, financial position and cash flows of MCI and
MCMS.

MEI believes that discussion and analysis of MEI's results of operations on a
pro forma basis, which includes the results of operations of ZEOS prior to the
MEI Merger, provide a more meaningful comparison than discussion and analysis
of MEI's actual results of operations. The following discussion and analysis
present MEI's results of operations for 1996, compared to MEI's pro forma
results of operations for 1995 and 1994, as if the MEI Merger had occurred at
the beginning of 1994, giving effect to pro forma adjustments, including
amortization of goodwill, certain product and process technology costs and
related income tax effects. The pro forma information is provided for
illustrative purposes and is not necessarily indicative of the results of
operations that would have occurred if MCI and MCMS had merged with ZEOS at the
beginning of fiscal 1994, nor does it represent a forecast of results of
operations for any future period.

In February 1996, MEI adopted a plan to restructure its PC manufacturing
operations by discontinuing sales of its ZEOS brand PC systems and closing the
related manufacturing operations in Minneapolis, Minnesota. As a result, MEI
recorded a restructuring charge of $29.2 million in 1996. Restructuring costs
of approximately $28.9 million incurred through August 29, 1996 include
approximately $14.5 million related to the disposition of inventory,
approximately $11.4 million for the write off of goodwill which resulted from
the MEI Merger, approximately $1.1 million related to other asset write downs,
approximately $0.6 million related to personnel costs and approximately $1.3
million related to other exit costs.

Certain reclassifications have been made in the following discussion and
analysis to present results of operations on a consistent basis.

RESULTS OF OPERATIONS

NET SALES

The following table summarizes MEI's net sales by product line:

<TABLE>
<CAPTION>
1996 PRO FORMA 1995 PRO FORMA 1994
--------------------- --------------------- -------------------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PC systems.............. $1,252,492 71.0% $ 765,009 64.1% $366,640 56.3%
Contract manufacturing.. 373,622 21.2 188,145 15.8 117,278 18.0
Component recovery...... 138,806 7.8 240,176 20.1 167,065 25.7
---------- ----- ---------- ----- -------- -----
Total net sales......... $1,764,920 100.0% $1,193,330 100.0% $650,983 100.0%
========== ===== ========== ===== ======== =====
</TABLE>

Net sales for 1996 were approximately 48% higher than in 1995, primarily due
to a significant increase in sales of PC systems and higher revenues from MEI's
contract manufacturing operations, partially offset by lower sales from MEI's
component recovery operations. Net sales for 1995 were approximately 83% higher
than in 1994, due to a significant increase in sales of PC systems and, to a
lesser extent, higher revenues from MEI's component recovery operations and
contract manufacturing operations.

PERSONAL COMPUTER SYSTEMS. Net sales of PC systems were significantly higher
in 1996 compared to 1995 primarily due to significantly higher unit sales of PC
systems and, to a lesser extent, higher average selling prices for such PC
systems. Unit sales of PC systems in 1996 were approximately 60% higher
compared to 1995 principally due to an increase in sales through the direct
channel resulting from increased name recognition and market acceptance of
MEI's Micron brand desktop PC systems and continued growth in the direct sales
channel. Increased sales to

22
<PAGE>

governmental entities and increased sales of notebook systems also contributed
to higher overall unit sales. Increased name recognition and market acceptance
of MEI's Micron brand PC systems partially resulted from the receipt by MEI of
a number of awards from trade publications recognizing the price and
performance characteristics of Micron brand PC systems and MEI's service and
support functions. There can be no assurance that MEI's name recognition and
market acceptance of its PC products will not decline in the future, which
could have a material adverse effect on MEI's business and results of
operations. See "Certain Factors--Personal Computer Systems--Reliance on the
Direct Sales Approach."

Sales to federal, state and local governmental entities increased as a
percentage of total net sales of PC systems in 1996 to approximately 16.3%
compared to 5.6% in 1995 and 5.7% in 1994. During 1996, MEI recorded sales of
approximately $74.8 million pursuant to two subcontract agreements with prime
contractors of the federal government under the PC-1 and Desktop V contracts.
MEI substantially discontinued shipments under the PC-1 contract in the second
quarter of fiscal 1996 and expects that it will make no future shipments
pursuant to the PC-1 contract. The balance of governmental sales in 1996 and
those in 1995 and 1994 were generally under the federal government's General
Services Administration Vendor program and through other direct sales. The
level of MEI's governmental sales is partially dependent on the buying
practices of governmental entities and MEI's success in being selected to
participate in government contracts in the future, of which there can be no
assurance. A significant decline in sales of PC systems pursuant to government
contracts could have a material adverse effect on MEI's business and results of
operations.

Sales of notebook systems represented approximately 8.1% of total PC system
sales during 1996 compared to approximately 2.5% in 1995 and 5.5% in 1994. MEI
experienced an increase in sales of its notebook products in 1996 as a result
of the introduction in the third quarter of fiscal 1996 of the Millennia
TransPort, MEI's modular design multimedia notebook product. The decline of
notebook sales as a percent of total PC system sales in 1995 compared to 1994
was primarily due to the significant increase in desktop PC systems sold in
1995.

Average selling prices for MEI's PC systems increased in 1996 compared to
1995 primarily as a result of the completion of the transition in product mix
toward relatively higher priced Pentium and Pentium Pro microprocessor based
systems and customer preferences for more richly configured PC systems with
components featuring the latest developments in PC-related technology. In
addition, during 1996, MEI experienced higher unit sales of notebook products,
which generally have significantly higher average selling prices compared to
MEI's overall average selling price for PC systems. MEI's average selling price
for PC systems declined approximately 6% in the fourth quarter of fiscal 1996
compared to the third quarter of fiscal 1996, primarily as a result of general
price reductions for desktop systems and an increase in volume of lower priced
PC systems sold under the Desktop V contract.

In the second quarter of fiscal 1996, MEI decided to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a percentage of total PC
system sales, sales of ZEOS brand PC systems represented approximately 7.0% in
1996 compared to 38.5% in 1995 and 65.8% in 1994.

Sales of PC systems in 1995 increased approximately 109% compared to 1994. In
1995 and 1994, sales of desktop systems constituted approximately 97.5% and
94.5%, respectively, of total PC system sales. The increase in sales of desktop
PC systems in 1995 was due to a significant increase in sales of Micron brand
PC systems resulting from an increase in name recognition and market
acceptance. Slightly higher overall average selling prices of PC systems in
1995 compared to 1994 resulted principally from a shift, beginning in the
fourth quarter of fiscal 1994, within the desktop PC product lines from
Intel486 microprocessor based systems to relatively higher priced Pentium
microprocessor based systems. The effect of this shift in product mix was
offset in part by continued competitive pricing pressure.

23
<PAGE>

CONTRACT MANUFACTURING. Revenues from MEI's contract manufacturing
operations were approximately 99% higher in 1996 than in 1995; however,
quarterly revenues declined sequentially in 1996 from the second quarter
through the fourth quarter. The increase in 1996 revenue compared to 1995 was
primarily due to the utilization of increased manufacturing capacity and a
higher percentage of turnkey, as opposed to consignment, memory module
assembly services. Increased capacity was obtained through the acquisition and
utilization of additional manufacturing equipment and the upgrade of existing
manufacturing equipment at MEI's Boise, Idaho and Durham, North Carolina
facilities. Contract manufacturing revenues in the last three quarters of
fiscal 1996 were adversely impacted by an industry-wide decline in pricing for
semiconductor memory products.

Contract manufacturing revenues were higher in 1995 compared to 1994,
primarily due to increased manufacturing capacity obtained through the
addition of a new surface mount technology ("SMT") line at MEI's Boise
facility and the upgrade of MEI's existing production lines. Additionally, two
SMT lines were installed at MEI's Durham, North Carolina facility which became
fully operational in June 1995.

MEI continues to rely on a relatively small number of customers for a
significant portion of its contract manufacturing business. As a percent of
total contract manufacturing revenue for 1996, revenues from MEI's top five
contract manufacturing customers, including MTI, were approximately 69%,
compared to approximately 58% and 63% in 1995 and 1994, respectively.
Revenues, directly or indirectly, from one customer represented approximately
36% of the revenues of MEI's contract manufacturing operations in 1996.
Contract manufacturing revenue from MTI was approximately 8%, 13% and 14% of
total contract manufacturing revenue in 1996, 1995 and 1994, respectively. The
decrease in contract manufacturing revenues from MTI as a percentage of total
contract manufacturing revenues was principally due to a reduction in the
volume of memory module assembly services provided for MTI. See "Certain
Factors--Contract Manufacturing--Customer Concentration."

COMPONENT RECOVERY. Component recovery net sales were approximately 42%
lower in 1996 compared to 1995, primarily due to a significant decline in
sales of peripheral add-on memory modules, a significant decline in average
selling prices for RAM products and a generally lower grade of nonstandard RAM
components received from MTI, MEI's primary supplier. These effects were
partially offset by an increase in unit sales of nonstandard RAM products.
Sales of peripheral add-on memory modules represented approximately 47% of
total sales from MEI's component recovery operations for 1996 compared to
approximately 76% for 1995 and 84% in 1994, as MEI changed the focus of its
internal production and engineering resources in 1996 primarily to capacity
expansion and product development of nonstandard RAM products. The increase in
unit sales of nonstandard RAM products in 1996 compared to 1995 was primarily
due to the acquisition and utilization of additional test and burn-in
equipment and reduced component test times, both resulting in increased
throughput for substantially all nonstandard RAM products. MEI's component
recovery results of operations are influenced by a number of factors including
pricing for, and availability of, nonstandard RAM components. See "Certain
Factors--Component Recovery."

Component recovery net sales were higher in 1995 compared to 1994 as a
result of increases in both unit sales and overall average selling prices.
Unit sales increased approximately 62% in 1995, primarily due to increased
availability of nonstandard RAM components and increased production capacity
resulting primarily from the addition of new test and burn-in equipment.
Overall average selling prices increased approximately 50% in 1995, primarily
due to a shift in the product mix to higher priced, higher density nonstandard
RAM components.

Unit sales of peripheral add-on memory products declined slightly in 1995
compared to 1994, but the average memory density per module increased
approximately 56%. Overall average selling prices of peripheral add-on memory
products increased approximately 75% in 1995 compared to 1994, due largely to
the increase in the average memory density per module.

24
<PAGE>

Historically, a substantial majority of the nonstandard RAM components used
in MEI's component recovery operations has been obtained from MTI. In 1996, MEI
obtained approximately 61% of its nonstandard RAM components from MTI, compared
to approximately 89% in 1995 and 98% in 1994. In 1996, a substantial majority
of the remainder of its nonstandard RAM components were purchased from a single
third-party alternative source. Purchases from this alternative source are
generally negotiated on a purchase order basis. There can be no assurance MEI
will be able to negotiate future purchases from this alternative source on
terms acceptable to MEI. Unless MEI is able to continue obtaining significant
quantities of nonstandard RAM components from alternative sources, MEI's
component recovery operations could be limited by the volume of nonstandard RAM
components supplied by MTI. Changes in MTI's semiconductor manufacturing
processes resulting in improvement of device yields and/or changes in the
nonstandard RAM product mix and specifications, or other changes or events at
MTI adversely affecting its overall manufacturing output, could adversely
affect the volume of nonstandard RAM components supplied by MTI. Any reduction
in the availability or functionality of nonstandard RAM components from MEI's
suppliers could have a material adverse effect on MEI's business and results of
operations. See "Certain Factors--Component Recovery--Dependence on Component
Recovery Agreement with MTI."

GROSS MARGIN
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1996 % CHANGE 1995 % CHANGE 1994
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Gross margin................... $261,185 24.6% $209,578 99.9% $104,839
as a % of net sales............ 14.8% 17.6% 16.1%
</TABLE>

MEI's overall gross margin percentage declined to approximately 14.8% in 1996
from 17.6% in 1995. The decrease in gross margin percentage in 1996 compared to
1995 was primarily a result of a significantly lower gross margin percentage
realized from MEI's component recovery operations and, to a lesser extent, a
lower gross margin percentage realized from MEI's contract manufacturing
operations. These effects were partially offset by a higher gross margin
percentage realized from MEI's PC operations.

MEI's overall gross margin percentage was higher in 1995 compared to 1994
principally due to the adjustment in 1994 of approximately $5.7 million
relating to the write down of certain ZEOS brand PC inventories. Absent the
effect of this adjustment, MEI's gross margin percentage increased slightly in
1995 compared to 1994, reflecting the favorable effect of a higher gross margin
percentage realized in MEI's component recovery operations, offset in part by
an increase in sales of PC systems as a percentage of total net sales.

PERSONAL COMPUTER SYSTEMS. The gross margin amount provided by MEI's PC
operations in 1996 increased approximately 120% compared to 1995 principally
due to the higher level of net sales of PC systems and a generally higher gross
margin percentage realized on such sales. The gross margin percentage for sales
of MEI's PC systems increased in 1996 compared to 1995 primarily as a result of
improved component costs, particularly for RAM products, and generally improved
inventory management. MEI's cost of RAM products, which represents a
significant portion of total PC component costs, decreased significantly during
the last three quarters of fiscal 1996. There can be no assurance that MEI's
future cost of components will decrease at rates comparable to those in recent
periods, or at all, or that MEI's selling prices for its PC systems will not
decrease at a rate faster than the decline in its component costs. In addition,
increased sales of MEI's notebook products favorably affected MEI's gross
margin percentage for sales of PC systems. These systems generally have had
higher selling prices and gross margins compared to the balance of MEI's PC
systems. MEI continues to experience significant pressure on its gross margins
as a result of intense competition in the PC industry and consumer expectations
of more powerful PC systems at lower prices. In addition, MEI's gross margin
percentage will continue to depend in large part on its ability to effectively
manage its inventories of PC system components. See "Certain Factors--Personal
Computer Systems--

25
<PAGE>

Competition in the PC Industry" and "Certain Factors--Personal Computer
Systems--Inventory Management."

MEI's gross margin from sales of PC systems in the fourth quarter of fiscal
1996 was favorably affected by an adjustment relating to revisions of estimates
for certain contingencies for product and process technology costs. In
September 1996, MEI entered into a license agreement and, through MTI, became
licensed under another agreement, each providing for the use of certain
technology in its PC operations. As a result, MEI believes that its charges for
product and process technology in future periods as a percent of net sales of
PC systems will approximate the rate experienced in fiscal 1996 after giving
effect to the fourth quarter adjustments. Future charges for product and
process technology may fluctuate, however, as a result of resolution of
asserted claims of infringement and claims that may be asserted in the future.
In addition, MEI's rights under such license agreement may terminate in the
event that MEI is no longer a majority-owned subsidiary of MTI. See "Certain
Factors--General--Intellectual Property Matters."

The increase in government sales in 1996, in particular those under federal
government procurement contracts, adversely affected MEI's overall PC gross
margin percentage, as these sales generally have lower gross margin percentages
than the balance of MEI's PC sales.

The gross margin on sales of PC systems in 1995 remained relatively stable
compared to 1994. MEI's gross margin percentage realized on sales of PC systems
in 1995 was adversely affected by continued intense pressure on pricing for PC
products. MEI's gross margin percentage realized on sales of PC systems in 1994
was negatively affected by the write down of certain ZEOS brand PC systems and
components.

CONTRACT MANUFACTURING. The gross margin percentage realized from MEI's
contract manufacturing operations decreased in 1996 compared to 1995, due
primarily to an increase in the percentage of total revenues derived from MEI's
turnkey memory module assembly services. Such assembly services generally have
a lower gross margin percentage than the balance of MEI's contract
manufacturing services.

COMPONENT RECOVERY. The gross margin percentage realized by MEI from its
component recovery operations declined significantly in 1996 compared to 1995,
primarily due to significantly lower average selling prices resulting from a
sharp industry-wide decline in market prices for semiconductor memory products.
Gross margins were also adversely affected by the increased purchases by MEI of
nonstandard RAM components from third-party suppliers relative to the amount of
components obtained from MTI under the Revenue Sharing Agreement. Under the
Revenue Sharing Agreement, MEI's costs of components were generally determined
at the time products were sold and were generally equal to one-half the price
realized from such sales. MEI entered into the Component Recovery Agreement
with MTI, dated as of August 14, 1996 and effective the first day of fiscal
year 1997, which replaces the Revenue Sharing Agreement. Under the Component
Recovery Agreement, MEI's costs of components will be generally determined as
one-half of the net operating income generated from sales of nonstandard RAM
products obtained from MTI. See "Certain Factors--Component Recovery--
Dependence on Component Recovery Agreement with MTI."

While overall gross margins on component recovery sales increased in 1995
over 1994, in the fourth quarter of fiscal 1995, MTI's improved semiconductor
testing processes resulted in the shipment of a reduced amount of higher
functional nonstandard RAM components to MEI for recovery, thus reducing MEI's
average selling prices and gross margins for such products.

In the event that average selling prices for MEI's nonstandard RAM products
continue to decline, the gross margin percentage for MEI's component recovery
operation would decline further and overall results of operations could be
adversely affected. See "Certain Factors--Component Recovery--Pricing of RAM
Products."

26
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1996 % CHANGE 1995 % CHANGE 1994
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Selling, general and adminis-
trative...................... $152,937 53.7% $99,524 60.5% $62,005
as a % of net sales........... 8.7% 8.3% 9.5%
</TABLE>

Selling, general and administrative ("SG&A") expenses increased in absolute
dollars, and as a percent of net sales, in 1996 compared to 1995 primarily due
to higher levels of personnel costs associated with the expanded PC
operations. During the fourth quarter of fiscal 1996, MEI charged operations
with a $9.0 million accrual relating to revisions of estimates for selling
costs associated with sales of PC systems. Pro forma SG&A expenses in 1995 and
1994 included approximately $4.9 million for amortization of goodwill, as if
the MEI Merger had occurred at the beginning of 1994. SG&A expenses in 1996
included approximately $1.2 million of goodwill amortization, reflecting
charges prior to the write off of unamortized goodwill in connection with
MEI's restructuring charge in the second quarter of fiscal 1996.

SG&A expenses increased in 1995 compared to 1994, due primarily to higher
levels of personnel costs and, to a lesser extent, increased advertising costs
and credit card processing fees associated with MEI's increased level of net
sales of PC systems. As a percent of net sales, SG&A expenses decreased in
1995 compared to 1994 due to the relatively higher rate of growth of sales
over the same period.

INCOME TAX PROVISION

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1996 % CHANGE 1995 % CHANGE 1994
------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Income tax provision.............. $35,055 (21.5)% $44,651 146.8% $18,090
</TABLE>

The effective income tax rate was 44.0% in 1996 and 40.6% in 1995,
reflecting the federal statutory rate, the net effect of state taxes, the
effect of goodwill amortization and the write off during the second quarter of
1996 of approximately $11.4 million of nondeductible goodwill. Without giving
effect to nondeductible goodwill charges in 1996 totalling approximately $12.6
million, MEI's effective income tax rate would have been 38.0%. MEI's
effective income tax rate of 40.6% for 1995 was lower than the effective
income tax rate of 43.4% in 1994 due primarily to the decrease in the effect
on pretax income of nondeductible goodwill in 1995. Both the 1995 and 1994
rates reflect the federal statutory rate, the net effect of state taxes and
the effect of goodwill amortization. As of June 1996, MEI was not consolidated
with MTI for federal income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

As of August 29, 1996, MEI had cash and equivalents of $115.8 million,
representing an increase of $46.4 million compared to August 31, 1995.
Principal sources of liquidity in 1996 were cash flows from operations of
$117.8 million, borrowings under equipment financing arrangements of $17.8
million and proceeds from the sale of property, plant and equipment of $6.4
million. Principal uses of cash in 1996 were property, plant and equipment
expenditures of $90.1 million for expansion and capacity improvements of MEI's
manufacturing operations and repayment of MEI's long-term loan from MTI of
$6.7 million.

MEI has an unsecured revolving credit facility with MTI which provides for
borrowings of up to $80.0 million, based on MEI's tangible net worth. As of
August 29, 1996, MEI was eligible to borrow approximately $52.0 million under
the facility, but had no borrowings outstanding. In fiscal 1996, MEI
established an unsecured revolving credit facility with financial institutions
providing for borrowings of up to $40.0 million, based on the amount of MEI's
eligible receivables. As of August 29, 1996, MEI was eligible to borrow $40.0
million pursuant to this credit facility, but had no borrowings outstanding.

27
<PAGE>

At August 29,1996, MEI had commitments of approximately $7.5 million for
capital expenditures for expansion and upgrade of facilities and equipment.
MEI anticipates making capital expenditures in fiscal 1997 in excess of $90.0
million. MEI has nearly completed construction of an approximately 200,000
square foot facility in Nampa, Idaho. This new facility is expected to provide
space for the transfer of MEI's Boise, Idaho contract manufacturing operations
and for certain sales and administrative functions of MEI's other operations
and will provide space for possible future expansion. In the third quarter of
fiscal 1996, MEI sold its Boise, Idaho contract manufacturing facility for
approximately $5.0 million.

MEI expects that its future working capital requirements will continue to
increase. MEI believes that currently available cash and equivalents, cash
flows from operations, MEI's current credit facilities and equipment
financings will be sufficient to fund its operations through fiscal 1997.
However, maintaining an adequate level of working capital through the end of
fiscal 1997 and thereafter will depend in large part on the success of MEI's
products in the marketplace and MEI's ability to control inventory levels,
component costs and other operating expenses. MEI may require additional
financing for growth opportunities, including any internal expansion that MEI
may undertake, expansion and capacity enhancements to additional sites, or
strategic acquisitions or partnerships. There can be no assurance that any
financings will be available on terms acceptable to MEI, if at all.

Due to MTI's ownership of approximately 79% of the outstanding shares of
common stock of MEI as of August 29, 1996, only a limited percentage of MEI's
common stock is traded in the public market, which limits the trading
liquidity of MEI's common stock and may limit MEI's ability to complete future
equity financings. In addition, the sales of substantial amounts of shares of
common stock of MEI currently held by MTI on the open market could adversely
affect the prevailing market prices of the common stock of MEI, which could
further limit MEI's ability to complete future equity financings. See "Certain
Factors--General--Concentration of Ownership of Common Stock of MEI."

CERTAIN FACTORS

In addition to factors discussed elsewhere in this Annual Report on Form 10-
K, the following are important factors which could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of MEI.

GENERAL

FLUCTUATIONS IN OPERATING RESULTS

MANAGEMENT OF GROWTH

In recent periods, MEI has experienced rapid revenue growth and an expansion
in the number of its employees, in the breadth and complexity of its
management, operating and financial information systems and in its geographic
scope of operations. This growth has resulted in new and increased
responsibilities for MEI's management and has placed, and continues to place,
significant demands upon MEI's management, operating and financial information
systems, technical support systems and

28
<PAGE>

other resources. MEI continues to consider various expansion alternatives,
including expansion of facilities, acquisition of facilities in alternative
geographic regions and certain strategic relationships. There can be no
assurance that MEI's management resources, operating and financial information
systems, technical support systems and other resources will be adequate to
support MEI's existing or future operations. Any failure to effectively
monitor, implement or improve MEI's operational, financial, management and
technical support systems could have a material adverse effect on MEI's
business and results of operations.

CONTROL BY MTI

As of August 29, 1996, MTI owned approximately 79% of the outstanding common
stock of MEI. In addition, four of the eight directors of MEI are also
directors of MTI, including Steven R. Appleton, Chairman and Chief Executive
Officer of MTI. So long as MTI continues to own a majority of the
outstanding common stock of MEI, MTI has the ability to control the outcome of
matters requiring shareholder approval, including the election of directors,
and generally has the ability to control the management and certain financial
and other affairs of MEI. Termination of certain of MEI's arrangements by MTI
or MTI's control in negotiating arrangements resulting in terms less favorable
to MEI could adversely affect MEI's business and results of operations. In the
event that MEI were to cease to be a majority-owned subsidiary of MTI, certain
of MEI's arrangements with MTI could terminate, which could have a material
adverse effect on MEI's business and results of operations.

INTELLECTUAL PROPERTY MATTERS

It is common in the electronics industry for patent and trademark, as well
as other intellectual property right claims, to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, MEI is made
aware that technology used by MEI may infringe on product and process
technology rights held by others. MEI has accrued a liability and charged
operations for the estimated costs of settlement or adjudication of asserted
and unasserted claims for alleged infringement prior to the balance sheet
date. MEI would be placed at a competitive disadvantage if it were unable to
obtain licenses with royalty payments or other terms at least as favorable as
those received by MEI's competitors. MEI has entered into several patent and
software license agreements, all of which require one-time or periodic royalty
payments. MEI is unable to predict whether any of these license agreements can
be obtained or renewed on terms acceptable to MEI. If MEI or its suppliers are
unable to obtain or provide licenses necessary to use protected technology or
software in their products or processes, MEI may be forced to market products
without certain technological features or software, discontinue sales of
certain of its products or to defend legal actions taken against it relating
to patent or copyright protected technology. The inability of MEI to obtain
licenses necessary to use certain technology, or MEI's inability to obtain
such licenses on competitive terms, or any litigation determining that MEI's
manufacturing processes or products have infringed on the process or product
rights held by others could have a material adverse effect on MEI's business
and results of operations.

29
<PAGE>

INTERNATIONAL OPERATIONS

Approximately 10% of MEI's sales for the fiscal year ended August 29, 1996
were attributable to sales outside the United States, and MEI believes
international sales as a percentage of total MEI sales will increase in the
future, particularly for PC systems and contract manufacturing services. In
marketing its PC systems in foreign countries, MEI uses either direct selling
or indirect selling through distributors, depending on consumer preferences,
local infrastructure, language and marketing methods. MEI recently announced
its plan to establish a PC sales and technical support call center in Japan.
There can be no assurance that the establishment of this call center will not
have an adverse effect on MEI's current relationships with its Japanese
distributors. MEI is in the early stages of establishing a contract
manufacturing operation in Malaysia, and MEI continues to evaluate the
benefits and risks associated with overseas manufacturing for its PC and
contract manufacturing operations. There can be no assurance that the
establishment of the Japan and Malaysia operations or any other international
expansion will be successful, and any failure by MEI to achieve success in
international operations could materially and adversely affect MEI's business
and results of operations. MEI's international operations are subject to a
number of other risks, including, without limitation, fluctuations in the
value of currencies, export duties, import controls, trade barriers,
restrictions on funds transfer, greater difficulty in accounts receivable
collections, political and economic instability and compliance with foreign
laws.

DEPENDENCE ON KEY PERSONNEL

The future success of MEI will depend, in part, on its ability to attract
and retain key management and technical personnel. MEI has enhanced its
respective management and technical expertise by recruiting qualified
individuals who possess desired skill sets and experience in certain targeted
areas. There is competition for such personnel in the electronics industries,
and MEI's inability to attract and retain sufficient additional employees,
particularly in the areas of engineering, information technology and technical
support resources, could have a material adverse effect on MEI's business and
results of operations. MEI does not currently maintain "key man" life
insurance with respect to any of its employees. There can be no assurance that
MEI will not lose key personnel or that the loss of any key personnel will not
have an adverse effect on MEI's business and results of operations.

CONCENTRATION OF OWNERSHIP OF COMMON STOCK OF MEI

Due to MTI's ownership of approximately 79% of the outstanding shares of
common stock of MEI, only a limited percentage of common stock of MEI is
traded in the public market, which limits the trading liquidity of the common
stock of MEI and may limit MEI's ability to complete future equity financings.
The sale of substantial amounts of shares of common stock of MEI currently
held by MTI on the open market could adversely affect the prevailing market
prices of common stock of MEI. MTI's ability to sell shares of common stock of
MEI is subject to volume and other restrictions pursuant to Rule 145
promulgated under the Securities Act.

VOLATILITY OF STOCK PRICE

The trading prices of the common stock of MEI and the stock of other
companies primarily engaged in the PC industry have had a history of
significant volatility. The trading price of common stock of MEI is subject to
significant fluctuations due to general market conditions in the PC industry,
announcements of technological innovations or new commercial products by
competitors, component availability and pricing, the significant number of
shares of common stock of MEI eligible for future sale into the public market
or other factors. The stock market generally has experienced significant price
and volume fluctuations, and such fluctuations have impaired stock prices for
many high technology companies. These broad market fluctuations, as well as
general economic conditions and the financial performance of MEI, may
adversely affect the market price of common stock of MEI.

30
<PAGE>

PERSONAL COMPUTER SYSTEMS

COMPETITION IN THE PC INDUSTRY

The PC industry is highly competitive and has been characterized by intense
pricing pressure, rapid technological advances in hardware and software,
frequent introduction of new products, low gross margin percentages and
rapidly declining component costs. Competition in the PC industry is based
primarily upon performance, price, reliability, service and support. MEI
believes that the rate of growth in worldwide sales of PC systems,
particularly in the United States, where MEI sells a substantial majority of
its PC systems, has declined and may remain below the growth rates experienced
in recent years. Any general decline in demand, or a decline in the rate of
increase of demand, for PC systems could increase price competition and could
have a material adverse effect on MEI's business and results of operations. To
remain competitive, MEI must frequently introduce new products and price its
products and offer customers lead times comparable to its competitors. In
addition, to remain competitive, MEI generally reduces the selling prices of
its PC systems in connection with declines in its costs of components. MEI
competes with a number of PC manufacturers which sell their products primarily
through direct channels, including Dell Computer, Inc. and Gateway 2000, Inc.
MEI also competes with PC manufacturers, such as Apple Computer, Inc., Compaq
Computer Corporation, Hewlett-Packard Company, International Business Machines
Corporation and Toshiba Corporation among others, which have traditionally
sold their products through national and regional distributors, dealers and
value added resellers, retail stores and direct sales forces. Many of MEI's PC
competitors offer broader product lines, have substantially greater financial,
technical, marketing and other resources than MEI and may benefit from
component volume purchasing arrangements that are more favorable in terms of
pricing and component availability than the arrangements enjoyed by MEI. In
addition, as a result of PC industry standards, MEI and its competitors
generally use many of the same components, typically from the same set of
suppliers, which limits MEI's ability to technologically and functionally
differentiate its products. In the future, MEI expects to face increased
competition in the U.S. direct sales market from foreign PC suppliers and from
indirect domestic suppliers of PC products that decide to implement, or devote
additional resources to, a direct sales strategy. In order to gain an
increased share of the U.S. PC direct sales market, these competitors may
effect a pricing strategy that is more aggressive than the current pricing in
the direct sales market. MEI's ability to continue to produce competitively
priced products and to maintain existing gross margin percentages will depend,
in large part, on MEI's ability to sustain high levels of sales, and control
inventory levels, component cost and other operating expenses. Any failure by
MEI to transition to new products effectively or to accurately forecast demand
for its products may adversely affect MEI's business and results of
operations.

INVENTORY MANAGEMENT

MEI's ability to compete successfully in the PC market in the future will
depend in large part on its ability to effectively manage its inventories of
PC components. MEI's PC operations focus on the direct sale of assemble-to-
order PC systems that feature components incorporating the latest
technological developments in the PC industry. MEI has experienced in the
past, and could experience in the future, inventory obsolescence resulting
from, among other things, the fast pace of technological developments in the
PC industry and the short product life cycles of PC systems and components. In
addition, because high volumes of quality components are required for the
manufacture of MEI's PC systems, MEI has experienced in the past, and expects
to experience in the future, shortages and other supply constraints of key
components. Such shortages or supply constraints have in the past and could in
the future adversely affect MEI's ability to ship products on schedule or at
expected gross margins. To be successful in the future, MEI must accurately
anticipate demand for its products and obtain adequate supplies of components
to meet such demand. The failure of MEI to manage its inventories effectively
could result in inventory obsolescence, excess inventories, component
shortages and untimely shipment of products, any of which could have a
material adverse effect on MEI's business and results of operations.

31
<PAGE>

SHORT PC PRODUCT LIFE CYCLES

To maintain a competitive position in the PC industry, MEI must introduce
new products and features that address the needs and preferences of customers
in its target markets. The PC industry is characterized by short product life
cycles resulting from rapid changes in technology and consumer preferences and
declining product prices. In fiscal 1996, MEI introduced numerous new products
and features. There can be no assurance that these products or features will
be successful, that the introduction of new products or features by MEI or its
competitors will not materially and adversely affect the sale of the existing
products of MEI or that MEI will be able to adapt to future changes in the PC
industry. MEI does not maintain traditional research and development groups.
Instead, MEI strives to work closely with PC component suppliers and other
technology developers to evaluate the latest developments in PC-related
technology. There can be no assurance that MEI will continue to have access to
new technology, will be successful in incorporating new technology in its
products or will be able to deliver commercial quantities of new products or
features in a timely and cost-effective manner.

DEPENDENCE ON KEY SOURCES OF SUPPLY

MEI purchases substantially all of its PC components and subassemblies from
suppliers on a purchase order basis and generally does not have long-term
supply arrangements with its suppliers. Certain components, subassemblies and
software included in MEI's PC systems are obtained from sole suppliers or a
limited number of suppliers. The microprocessors used in MEI's PC systems are
manufactured exclusively by Intel. From time to time, MEI has been unable to
obtain sufficient supply of the latest Intel microprocessors. In addition, MEI
currently purchases a significant majority of its motherboards from a single
source. A significant portion of the RAM components used in MEI's PC systems
are supplied by MTI, and MEI expects to continue to rely on MTI as its primary
source of RAM components. MEI focuses on providing PC systems that feature
components incorporating the latest technological developments in the PC
industry, which components are periodically in short supply and are available
from sole or a limited number of suppliers. As a result, MEI has experienced
in the past, and expects to experience in the future, shortages in the
components and subassemblies used in its PC systems. In recent weeks, MEI has
experienced, and continues to experience, difficulty in obtaining a sufficient
supply of certain Intel Pentium Pro microprocessors and certain disk drives.
MEI relies, to a certain extent, upon its suppliers' abilities to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging standards
and other technological developments in the PC industry. MEI's reliance on a
limited number of suppliers and on a strategy of incorporating the latest
technological developments into its PC systems involves several risks,
including the possibility of shortages and/or increases in costs of
components, subassemblies and software, and risk of reduced control over
delivery schedules, which could have a material adverse effect on MEI's
business and results of operations.

MEI's Millennia TransPort notebook PC systems are currently assembled by a
single third-party manufacturer. This outsourcing arrangement and any future
outsourcing arrangements that MEI may enter into may reduce the direct control
MEI has over certain components and the assembly of such products. It is
uncertain what effect such limited control will have over the quality of the
products manufactured, MEI's ability to ship such products on a timely basis
or the flexibility of MEI to respond to changing market conditions. Moreover,
although arrangements with such manufacturers may contain provisions for
warranty obligations on the part of such manufacturers, MEI remains primarily
responsible to the consumer for warranty obligations. Any unanticipated
product defect or warranty obligation, whether pursuant to arrangements with
third-party manufacturers or otherwise, could adversely affect MEI's business
and results of operations.

STATE TAXATION

Several states have enacted legislation which would require out of state
direct marketers to collect and remit sales and use taxes based on certain
limited contacts with the state. Taxation authorities in certain states have,
from time to time, solicited information from MEI to determine whether MEI has

32
<PAGE>

sufficient contacts with such states to require payment of sales and use taxes
on its PC systems sold to customers in those states. MEI could be required to
pay sales and use taxes and income and franchise taxes related to MEI's
operations in prior periods, which could have a material adverse effect on
MEI's business and results of operations. In addition, MEI may be increasing
its contacts and presence in various states as it pursues its business
strategies. As a result of its contacts, MEI may be required to collect and
remit sales and use taxes in the future, which could have a material adverse
effect MEI's business and results of operations.

RELIANCE ON THE DIRECT SALES APPROACH

MEI currently markets its PC systems directly to individuals, small and
medium-sized businesses and governmental and educational entities through
advertisements in personal computer trade
publications, direct-mail campaigns and on the Internet. Direct sales orders
are received primarily by telephone by MEI sales representatives who review
configuration options and pricing with the customer. The direct sales approach
may make it difficult for MEI to penetrate specific markets and may be less
appealing to first-time PC buyers than other sales channels. In addition,
MEI's ability to increase future sales of PC systems is dependent in part on
the growth of the direct sales channel. MEI believes that in order to retain
customer interest in its PC systems and brand name recognition of its
products, MEI must continue to offer products, services and support which are
recognized by trade publications for overall performance, price, reliability
and quality. There can be no assurance that MEI's name recognition and market
acceptance of its PC products will not decline in the future, which could have
a material adverse effect on MEI's business and results of operations. There
can be no assurance that direct sales of PC systems as a percentage of
industry-wide PC sales will increase or that MEI will be able to increase its
share of the direct sales market in the future. There can also be no assurance
that PC companies that currently distribute their PC products primarily
through distributors and resellers will not implement or devote additional
resources to a direct sales strategy, or that the direct sales strategy will
be successful in international markets. Any decline in the rate of growth of
the PC direct sales channel, or MEI's failure to compete successfully in the
direct sales channel, could have a material adverse effect on MEI's business
and result of operations.

INVESTMENT IN CUSTOMER SERVICE AND TECHNICAL SUPPORT SYSTEMS

In recent periods, MEI's PC operations have experienced significant growth
in orders for PC systems. MEI has from time to time experienced an increase in
the volume of customer service and technical support calls, which has placed,
and is expected to continue to place, a strain on MEI's customer service and
technical support systems. To be competitive, MEI must invest significant
resources in the maintenance and improvement of its customer service and
technical support systems. Any failure to maintain adequate customer service
and technical support systems could cause customer dissatisfaction with MEI.
Customer dissatisfaction could result in reduced sales of PC systems, which
could have a material adverse effect on MEI's business and results of
operations.

GOVERNMENT REGULATION OF THE PC INDUSTRY

Prior to marketing its PC systems, MEI must receive certification that such
systems meet standards established by the Federal Communications Commission
and certain foreign agencies for radio frequency emissions. Any delay or
failure by MEI to obtain such certifications may delay or prevent MEI from
introducing new products on a timely basis, which could have a material
adverse effect on MEI's business and results of operations. In addition, the
U.S. Federal Trade Commission and the Department of Commerce, along with
similar foreign agencies in other jurisdictions, have promulgated certain
regulations that affect MEI's shipping, advertising and general operations.
Any failure by MEI to comply with such regulations could result in significant
penalties, fines or marketing restrictions, which in turn could have a
material adverse effect on MEI's business and results of operations.

33
<PAGE>

CONTRACT MANUFACTURING

COMPETITION IN THE CONTRACT MANUFACTURING INDUSTRY

The contract manufacturing industry is highly competitive. MEI's contract
manufacturing operations compete against numerous domestic and offshore
contract manufacturers, including a significant number of local and regional
companies. In addition, MEI competes against in-house manufacturing
capabilities of certain of its existing customers as well as with certain
large computer manufacturers which offer third-party contract manufacturing
services. MEI's contract manufacturing competitors include, among others, Avex
Electronics, Inc., Benchmark Electronics, Inc., Celestica Inc., DOVAtron
International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits,
Inc., Sanmina Corporation, SCI Systems, Inc. and Solectron Corporation. Many
of MEI's competitors have substantially greater manufacturing, technical,
financial, personnel, marketing and other resources than MEI and have
manufacturing operations at multiple domestic and overseas locations.

MEI believes that the significant competitive factors in the contract
manufacturing industry include service, quality, price, technology, location
and the ability to offer flexible delivery schedules and deliver finished
products on an expeditious and timely basis in accordance with customers'
expectations. MEI may be at a disadvantage as to certain competitive factors
when compared to manufacturers with greater resources than MEI, substantial
offshore facilities or substantially larger domestic facilities. There can be
no assurance that MEI's contract manufacturing operations will compete
successfully in the future with regard to these factors. In order to remain
competitive, MEI may be required to expand its contract manufacturing capacity
and may be required to establish additional international operations. There
can be no assurance that MEI will be successful in expanding its contract
manufacturing operations on a timely and efficient basis. The failure to do so
could have a material adverse effect on MEI's business and results of
operations.

FLUCTUATIONS IN OEM ORDERS

MEI's contract manufacturing customers generally require short delivery
cycles and quick turnaround for contract manufacturing services. As MEI's OEM
customers react to variations in demand for their products and adjust their
purchase orders to MEI, MEI may be subject to non-cancelable purchase orders
with its suppliers and may recognize losses on write downs of inventories due
primarily to the specialized nature of certain custom components and declines
in market pricing of components. OEM order fluctuations and deferrals have had
an adverse effect on MEI's contract manufacturing operations in the past and
there can be no assurance that MEI will not experience such adverse effects in
the future.

CUSTOMER CONCENTRATION

In 1996, MEI's five largest contract manufacturing customers accounted for
approximately 69% of the revenues from MEI's contract manufacturing
operations, compared to approximately 58% in 1995 and 63% in 1994. In
addition, sales, directly or indirectly, to one customer represented
approximately 36% of the revenues of MEI's contract manufacturing operations
in 1996. Revenues from MTI in 1996 accounted for approximately 8% of total
revenues from MEI's contract manufacturing operations, compared to
approximately 13% in 1995 and 14% in 1994. MEI has no long-term agreements
with any of its contract manufacturing customers which require such customers
to purchase contract manufacturing services from MEI. In recent periods,
direct and indirect sales to MEI's largest contract manufacturing customer
have declined materially, and MEI believes that its key contract manufacturing
customers will from time to time materially reduce their purchases of MEI's
contract manufacturing services in the future. Although MEI has in the past
been able to replace such business with increased business from new or
existing customers, there can be no assurance that MEI will obtain sufficient
alternative business on a timely basis, and the failure to obtain such
business could have a material adverse effect on MEI's business and results of
operations.

34
<PAGE>

ENVIRONMENTAL REGULATION

MEI's contract manufacturing business is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals and waste water used during its manufacturing
processes. Any failure by MEI to comply with present and future environmental
regulations could subject it to liabilities or the suspension of production.
In addition, such regulations could restrict the ability of MEI's contract
manufacturing business to expand its facilities or could require MEI to
acquire costly equipment or incur other significant expenses any of which
could have a material adverse effect on MEI's business and results of
operations.

COMPONENT RECOVERY

DEPENDENCE ON COMPONENT RECOVERY AGREEMENT WITH MTI

Historically, a substantial majority of the nonstandard random access memory
("RAM") components used in MEI's component recovery operations has been
obtained from MTI. MEI and MTI are parties to a Component Recovery Agreement,
effective as of August 30, 1996 (the "Component Recovery Agreement"). Under
the Component Recovery Agreement, MTI is required to deliver to MEI all of the
nonstandard RAM components produced at MTI's semiconductor manufacturing
operations, and MEI's cost of components generally will be determined as one-
half of the operating income generated from sales of nonstandard RAM products
supplied by MTI. There can be no assurance that MTI will continue to produce
adequate volumes of nonstandard RAM components to maintain MEI's component
recovery operation at its existing or historic levels. Termination or
renegotiation of the key terms of the Component Recovery Agreement could have
a material adverse effect on MEI's business and results of operations. Changes
in MTI's semiconductor manufacturing processes resulting in improvement of
device yields and/or changes in the nonstandard RAM product mix and
specifications, or other changes or events at MTI adversely affecting its
overall manufacturing output, could adversely affect the volume of nonstandard
RAM components supplied by MTI.

Many semiconductor memory manufacturers are reluctant to sell nonstandard
RAM components because such components could compete with their full
specification RAM components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. As a result, there can be no assurance that MEI will be able to
obtain nonstandard RAM components from semiconductor manufacturers in
quantities sufficient to meet demand for MEI's products. Any reduction in the
availability or functionality of nonstandard RAM components from MEI's
suppliers could have a material adverse effect on MEI's business and results
of operations.

PRICING OF RAM PRODUCTS

Pricing for MEI's nonstandard RAM products fluctuates, to a large degree,
based on industry-wide pricing for semiconductor memory products. During the
last three quarters of fiscal 1996, MEI experienced significant declines in
the average selling prices of its nonstandard RAM products as industry-wide
average selling prices for full specification semiconductor memory products
experienced a sharp decline. MEI believes that such decline in average selling
prices of semiconductor memory products was due primarily to changes in the
balance of supply and demand for these commodity products, and MEI is unable
to predict the impact of semiconductor memory product market dynamics in
future periods. In recent periods, MEI has increased the amount of nonstandard
RAM components purchased from alternative third-party sources relative to the
amount of such components obtained from MTI. Due to increased market risk
associated with holding purchased nonstandard RAM products, MEI has
experienced in the past and may experience in the future losses from write
downs of nonstandard RAM component inventories in periods of declining prices.
Further declines in industry-wide pricing for semiconductor memory products
would likely result in declines in average selling prices of MEI's nonstandard
RAM products, which could have a material adverse effect on MEI's business and
results of operations.

35
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Statements of Operations for the Fiscal Years Ended August 29, 1996, Au-
gust 31, 1995 and September 1, 1994.................................... 37
Balance Sheets as of August 29, 1996 and August 31, 1995................ 38
Statements of Shareholders' Equity for the Fiscal Years Ended August 29,
1996,
August 31, 1995 and September 1, 1994.................................. 39
Statements of Cash Flows for the Fiscal Years Ended August 29, 1996, Au-
gust 31, 1995 and September 1, 1994.................................... 40
Notes to Financial Statements........................................... 41
Report of Independent Accountants....................................... 51
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the Fiscal Years
Ended
August 29, 1996, August 31, 1995 and September 1, 1994................. 55
</TABLE>

36
<PAGE>

MICRON ELECTRONICS, INC.

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
Net sales................... $1,764,920 $999,999 $412,938
Cost of goods sold.......... 1,503,735 816,662 326,643
---------- -------- --------
Gross margin................ 261,185 183,337 86,295
Selling, general and admin-
istrative.................. 152,937 74,951 25,883
Research and development.... 3,050 1,893 561
Restructuring charge........ 29,200 -- --
---------- -------- --------
Operating income............ 75,998 106,493 59,851
Interest income, net........ 3,639 1,983 546
---------- -------- --------
Income before taxes......... 79,637 108,476 60,397
Income tax provision........ 35,055 43,390 23,499
---------- -------- --------
Net income.................. $ 44,582 $ 65,086 $ 36,898
========== ======== ========
Earnings per share.......... $ 0.48 $ 0.74 $ 0.45
Number of shares used in per
share calculation.......... 92,495 87,422 81,523
</TABLE>

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

37
<PAGE>

MICRON ELECTRONICS, INC.

BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)

<TABLE>
<CAPTION>
AS OF
-------------------------------
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents...................... $115,839 $ 69,406
Receivables.................................... 176,547 128,744
Inventories.................................... 69,863 92,709
Deferred income taxes.......................... 35,014 16,086
Other current assets........................... 1,853 1,810
-------- --------
Total current assets......................... 399,116 308,755
Property, plant and equipment, net............. 129,192 58,254
Goodwill, net.................................. -- 12,612
Other assets................................... 1,625 3,095
-------- --------
Total assets................................. $529,933 $382,716
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.......... $247,044 $177,437
Accrued licenses and royalties................. 27,242 23,844
Current debt................................... 3,064 1,022
-------- --------
Total current liabilities.................... 277,350 202,303
Long-term debt................................. 18,233 5,801
Deferred income taxes.......................... 2,436 --
Other liabilities.............................. 3,454 949
-------- --------
Total liabilities............................ 301,473 209,053
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0
million shares; issued and outstanding 92.5
million shares at August 29, 1996 and 91.4
million shares at August 31, 1995............. 925 914
Additional capital............................. 69,392 58,613
Retained earnings.............................. 158,143 114,136
-------- --------
Total shareholders' equity................... 228,460 173,663
-------- --------
Total liabilities and shareholders' equity... $529,933 $382,716
======== ========
</TABLE>

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

38
<PAGE>

MICRON ELECTRONICS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
---------------- ---------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ -------- ------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
MCI Class A:
Balance at beginning
of year.............. 988 $ 79 198 $ 79
Stock split........... -- -- 790 --
Purchase and retire-
ment of stock........ (16) (1) -- --
Merger transaction.... (972) (78) -- --
------ -------- ------- ---------
Balance at end of
year................. -- $ -- 988 $ 79
====== ======== ======= =========
MCI Class B:
Balance at beginning
of year.............. 470 $ 286 84 $ 88
Stock sold............ 7 67 45 221
Stock split........... -- -- 341 --
Purchase and retire-
ment of stock........ (90) (55) -- (23)
Merger transaction.... (387) (298) -- --
------ -------- ------- ---------
Balance at end of
year................. -- $ -- 470 $ 286
====== ======== ======= =========
MCMS:
Balance at beginning
of year.............. 1,849 $ 185 9 $ 1
Stock sold............ -- -- 258 26
Stock split........... -- -- 1,582 158
Merger transaction.... (1,849) (185) -- --
------ -------- ------- ---------
Balance at end of
year................. -- $ -- 1,849 $ 185
====== ======== ======= =========
MEI:
Balance at beginning
of year.............. 91,431 $ 914 -- $ --
Stock sold............ 136 1 -- --
Stock award........... 151 2 -- --
Purchase and retire-
ment of stock........ (238) (2) (16) --
Stock options......... 993 10 84 1
Merger transaction.... -- -- 91,363 913
------ -------- ------ --------
Balance at end of
year................. 92,473 $ 925 91,431 $ 914
====== ======== ====== ========
ADDITIONAL CAPITAL
Balance at beginning of
year................... $ 58,613 $ 14,662 $ 10,646
Stock sold.............. 1,283 -- 4,001
Stock award............. 1,298 -- --
Purchase and retirement
of stock............... (156) (11) --
Stock split............. -- -- (158)
Stock options........... 997 464 --
Tax effect of stock op-
tion and purchase
plans.................. 7,357 710 173
Merger transaction...... -- 42,788 --
-------- -------- ---------
Balance at end of year.. $ 69,392 $ 58,613 $ 14,662
======== ======== =========
RETAINED EARNINGS
Balance at beginning of
year................... $114,136 $ 52,957 $ 16,060
Purchase and retirement
of stock............... (575) (824) (1)
Merger transaction...... -- (3,083) --
Net income.............. 44,582 65,086 36,898
-------- -------- ---------
Balance at end of year.. $158,143 $114,136 $ 52,957
======== ======== =========
</TABLE>

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

39
<PAGE>

MICRON ELECTRONICS, INC.

STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income.................. $ 44,582 $ 65,086 $ 36,898
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation.............. 20,718 11,057 4,635
Amortization.............. 1,508 2,101 31
Restructuring charge...... 29,200 -- --
Changes in assets and
liabilities, net of
effects of restructuring
charge and merger
transaction:
Receivables............. (48,478) (56,049) (29,490)
Inventories............. 8,382 (34,052) (16,711)
Accounts payable and
accrued expenses....... 66,592 62,377 36,509
Accrued licenses and
royalties.............. 9,165 14,411 568
Deferred income taxes... (14,382) (3,634) (794)
Other................... 525 (942) (119)
-------- -------- --------
Net cash provided by
operating activities....... 117,812 60,355 31,527
-------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Expenditures for property,
plant and equipment........ (90,122) (39,585) (19,260)
Proceeds from sales of
property, plant and
equipment.................. 6,354 528 787
Purchases of held-to-
maturity investment
securities................. -- (3,165) (2,164)
Proceeds from maturities of
investment securities...... -- 5,400 --
Cash acquired in merger
transaction................ -- 14,060 --
Other....................... 21 (439) (63)
-------- -------- --------
Net cash used for investing
activities................. (83,747) (23,201) (20,700)
-------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from borrowings.... 42,770 -- --
Repayments of debt.......... (31,969) (1,022) (1,669)
Proceeds from issuance of
common stock............... 2,300 398 4,248
Purchase and retirement of
stock...................... (733) (891) (24)
Other....................... -- (1,281) (18)
-------- -------- --------
Net cash provided by (used
for) financing activities.. 12,368 (2,796) 2,537
-------- -------- --------
Net increase in cash and
cash equivalents........... 46,433 34,358 13,364
Cash and cash equivalents at
beginning of year.......... 69,406 35,048 21,684
-------- -------- --------
Cash and cash equivalents at
end of year................ $115,839 $ 69,406 $ 35,048
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid........... $ 36,076 $ 45,277 $ 21,889
Interest paid, net of
amounts capitalized........ 253 412 416
Noncash investing and
financing activities:
Reclassification of
accrued licenses and
royalties to long-term
debt..................... 3,768 -- --
Assets acquired, net of
cash and liabilities
assumed, in merger
transaction.............. -- 25,998 --
Assets acquired in
exchange for debt........ -- -- 1,468
</TABLE>

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

40
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN THOUSANDS)

SIGNIFICANT ACCOUNTING POLICIES

BUSINESS: Micron Electronics, Inc. and its subsidiaries (collectively, "MEI"
or "the Company") develop, market, manufacture, sell and support a range of
memory-intensive, high performance desktop and notebook PC systems and network
servers under the Micron brand name, and manufacture other electronic products
for a wide range of computing and digital applications. The Company markets
and sells its PC systems to individuals for home use, small to medium-sized
businesses and governmental and educational entities. MEI's wholly-owned
subsidiary, Micron Custom Manufacturing Services, Inc., is a contract
manufacturer specializing in the assembly of custom complex printed circuit
boards, memory modules and system level products. MEI's component recovery
operations recover, assemble, test, grade and market nonstandard random access
memory ("RAM") products not meeting full industry standard specifications. The
contract manufacturing and component recovery operations market and sell a
significant amount of products and services to original equipment
manufacturers in diverse areas of the electronics industry.

BASIS OF PRESENTATION: The financial statements include the accounts of
Micron Electronics, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company's fiscal year is
the 52 or 53 week period ending on the Thursday closest to August 31. As of
August 29, 1996, the Company was approximately 79% owned by Micron Technology,
Inc. ("MTI" or "Parent").

CERTAIN CONCENTRATIONS AND USE OF ESTIMATES: Certain components,
subassemblies and software included in the Company's PC systems are obtained
from sole suppliers or a limited number of suppliers. The Company relies, to a
certain extent, upon its suppliers' abilities to enhance existing products in
a timely and cost-effective manner, to develop new products to meet changing
customer needs and to respond to emerging standards and other technological
developments in the PC industry. The Company's reliance on a limited number of
suppliers involves several risks, including the possibility of shortages
and/or increases in costs of components and subassemblies, and the risk of
reduced control over delivery schedules.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Although actual results could differ from those estimates,
management believes its estimates are reasonable.

REVENUE RECOGNITION: Revenue from product sales to customers is generally
recognized upon shipment. A provision for estimated sales returns is recorded
in the period in which the sales are recognized. The Company defers
recognition of sales to distributors with return privileges until the
distributors have sold the products.

EARNINGS PER SHARE: Earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock
options and affect earnings per share when they have a dilutive effect. All
historical per share amounts have been restated to reflect stock splits and
the effect of the merger transaction (see "The MEI Merger").

FINANCIAL INSTRUMENTS: Cash equivalents include highly liquid short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts

41
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

reported as cash equivalents, receivables, other assets, accounts payable and
accrued expenses and debt are considered by the Company to be reasonable
approximations of their fair values, based on market information available to
management as of August 29, 1996. The use of different market assumptions and
estimation methodologies could have a material effect on the estimated fair
value amounts. The reported fair values do not take into consideration
potential taxes or other expenses that would be incurred in an actual
settlement.

Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, investment
securities and trade accounts receivable. The Company invests its cash in
credit instruments of highly rated financial institutions and performs
periodic evaluations of the credit standing of these financial institutions.
The Company, by policy, limits the concentration of credit exposure by
restricting investments with any single obligor, instrument, or geographic
area. A concentration of credit risk may exist with respect to trade
receivables, as many of the Company's customers are affiliated with the
computer, telecommunications and office automation industries. The Company has
a large number of customers on which it performs ongoing credit evaluations
and generally does not require collateral from its customers. Historically,
the Company has not experienced significant losses related to receivables from
individual customers or groups of customers in any particular industry or
geographic area.

INVENTORIES: Inventories are stated at the lower of average cost or market.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of 5 to 30 years for buildings and 2 to 5 years for
equipment.

PRODUCT AND PROCESS TECHNOLOGY: Costs related to the conceptual formulation
and design of products and processes are expensed as research and development.
Costs incurred to establish patents and acquire product and process technology
are capitalized. Capitalized costs are amortized using the straight-line
method over the shorter of the estimated useful life of the technology, the
patent term, or the agreement, ranging up to 10 years.

ROYALTIES: The Company has royalty-bearing license agreements that allow it
to sell certain hardware and software and to use certain patented technology.
Royalty costs are accrued and included in cost of goods sold when the sale is
recognized.

ADVERTISING: Advertising costs are charged to operations as incurred.

RECENTLY ISSUED ACCOUNTING STANDARDS: In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The Company has not
elected early adoption of SFAS 121 and intends to adopt the provisions of SFAS
121 in fiscal 1997. Adoption of SFAS 121 is not expected to have a material
effect on the Company's financial position or results of operations.

In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." The Company has not elected early adoption of SFAS 123 and
intends to adopt SFAS 123 in fiscal 1997. As permitted under SFAS 123, the
Company intends to continue to measure compensation expense for its stock-
based employee compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and

42
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

provide pro forma disclosure of net income and earnings per share as a fair
value-based method had been applied in measuring compensation expense. As a
result, adoption of SFAS 123 is not expected to have a material effect on the
Company's financial position or results of operations.

RECLASSIFICATIONS: Certain reclassifications have been made, none of which
affected results of operations, to present the financial statements on a
consistent basis.

THE MEI MERGER

On April 7, 1995, Micron Computer, Inc. ("MCI") and the former Micron Custom
Manufacturing Services, Inc. ("MCMS"), then subsidiaries of MTI, merged with
and into ZEOS International, Ltd. ("ZEOS") (the "MEI Merger"). Pursuant to the
terms of the MEI Merger, ZEOS issued approximately 82.5 million shares of its
common stock in exchange for all of the outstanding shares of MCI and MCMS,
and the name of the surviving corporation was changed to Micron Electronics,
Inc. The MEI Merger resulted in a change of control of approximately 89% of
ZEOS wherein, assuming exercise of all options outstanding at the time of the
MEI Merger, (a) MTI owned an approximate 79% interest in the Company, and (b)
the other shareholders of MCI and MCMS owned an approximate 10% interest in
the Company. The MEI Merger was accounted for as a purchase of ZEOS by MCI and
MCMS. A new basis of accounting was established for the assets and liabilities
of ZEOS to the extent of the change of control. The new basis reflects the
allocation of the approximate $39.1 million basis to the ZEOS assets and
liabilities on the basis of their fair values. Goodwill of approximately $14.6
million was recorded to the extent the purchase price exceeded the fair value
of the identifiable net assets for which a change of control occurred.
Goodwill was being amortized on a straight line basis over three years and
accumulated amortization as of August 31, 1995 was approximately $2.0 million.
In the second quarter of fiscal 1996, the remaining goodwill was written off
in connection with a restructuring charge recorded by the Company (see
"Restructuring Charge").

The Company's fiscal year is a 52 or 53 week period ending on the Thursday
closest to August 31, which was the fiscal year of MCI and MCMS. Subsequent to
the MEI Merger, the financial statements of the Company reflect the
consolidated results of operations, financial position and cash flows of MEI,
based on the new basis of accounting for the assets and liabilities of ZEOS
and the historical cost bases for the assets and liabilities of MCI and MCMS.
Prior to the MEI Merger, the financial statements of the Company include only
the combined results of operations, financial position and cash flows of MCI
and MCMS.

RESTRUCTURING CHARGE

In February 1996, the Company adopted a plan to discontinue the manufacture
and sale of ZEOS brand PC systems and to close the related manufacturing
operations in Minneapolis, Minnesota. As a result, the Company recorded a
restructuring charge of $29.5 million in the second quarter of fiscal 1996. In
the fourth quarter of fiscal 1996, the Company reduced the restructuring
charge by $0.3 million after concluding its restructuring activities had been
completed or were adequately provided for in the remaining restructuring
accrual. Restructuring costs of $28.9 million incurred through August 29, 1996
include approximately $14.5 million related to the disposition of inventory;
$11.4 million related to the write-off of goodwill which resulted from the MEI
Merger; $1.1 million related to other asset write-downs; $0.6 million related
to personnel costs for approximately 250 employees engaged in manufacturing,
purchasing, customer service, finance and administrative functions; and $1.3
million related to other exit costs.

43
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

INVESTMENT SECURITIES

<TABLE>
<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Held-to-maturity investment securities, at am-
ortized cost:
Commercial paper............................ $ 30,437 $ 19,421
State and local government.................. 24,650 12,050
Bankers' acceptances........................ 11,976 5,966
Certificates of deposit..................... -- 1,030
U.S. Government agency...................... 7,813 1,000
-------- --------
74,876 39,467
Less cash equivalents......................... (74,876) (39,467)
-------- --------
Liquid investments............................ $ -- $ --
======== ========

RECEIVABLES

<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Trade receivables............................. $171,820 $126,040
Receivables from affiliates, net.............. 2,526 8,379
Income taxes recoverable from parent corpora-
tion......................................... 5,147 --
Other......................................... 7,363 1,070
Allowance for doubtful accounts............... (8,221) (5,458)
Allowance for returns and discounts........... (2,088) (1,287)
-------- --------
$176,547 $128,744
======== ========

INVENTORIES

<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Raw materials and supplies.................... $ 45,949 $ 65,684
Work in progress.............................. 13,239 19,367
Finished goods................................ 10,675 7,658
-------- --------
$ 69,863 $ 92,709
======== ========

PROPERTY, PLANT AND EQUIPMENT

<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Land.......................................... $ 1,639 $ 987
Buildings..................................... 17,647 15,643
Equipment..................................... 120,393 71,502
Construction in progress...................... 35,398 7,259
-------- --------
175,077 95,391
Less accumulated depreciation and amortiza-
tion......................................... (45,885) (37,137)
-------- --------
$129,192 $ 58,254
======== ========
</TABLE>

44
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

During the third quarter of fiscal 1996, the Company purchased approximately
30 acres of land adjacent to its PC manufacturing operations from a director
of the Company and a third party for approximately $575,000.

In December 1993, the Company exchanged approximately 13 acres of land owned
by the Company for 13 acres of land owned by a director. Additionally, the
Company purchased approximately 17 acres of land for approximately $258,000
and obtained an option to purchase approximately 40 additional acres of real
property adjacent to its Nampa facility from this director.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Trade accounts payable......................... $157,350 $ 99,065
Payable to affiliates.......................... 25,829 53,750
Salaries, wages and benefits................... 16,168 11,086
Income taxes payable........................... 14,526 --
Income taxes payable to parent corporation..... 1,300 4,686
Equipment contracts payable.................... 7,955 1,926
Accrued warranty............................... 7,905 2,758
Other.......................................... 16,011 4,166
-------- --------
$247,044 $177,437
======== ========

DEBT

<CAPTION>
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Notes payable in periodic installments through
August, 2001 weighted average interest rate
7.52%......................................... $ 21,261 $ --
Notes payable to parent corporation............ -- 6,672
Other.......................................... 36 151
-------- --------
21,297 6,823
Less current portion........................... (3,064) (1,022)
-------- --------
$ 18,233 $ 5,801
======== ========
</TABLE>

The Company has an unsecured revolving credit facility with MTI providing
for borrowings of up to $80 million, based on the Company's tangible net
worth. As of August 29, 1996, the Company was eligible to borrow approximately
$52 million under the facility, but had no borrowings outstanding.

The Company has an unsecured credit agreement with financial institutions
providing for borrowings of up to $40 million, based on the amount of the
Company's eligible receivables. As of August 29, 1996, the Company was
eligible to borrow $40 million pursuant to the agreement, but had no
borrowings outstanding. Under the agreement, the Company is subject to certain
financial and other covenants including certain financial ratios and
limitations on the amount of dividends declared or paid by the Company.

45
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Certain of the Company's notes payable are collateralized by equipment with
a total cost of approximately $17,583,000 and accumulated depreciation of
approximately $863,000 as of August 29, 1996.

Maturities of debt are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR NOTES PAYABLE OTHER
----------- ------------- -----
<S> <C> <C>
1997................................................ $ 3,044 $21
1998................................................ 5,175 17
1999................................................ 5,443 --
2000................................................ 3,849 --
2001................................................ 3,750 --
Less interest....................................... -- (2)
------- ---
$21,261 $36
======= ===
</TABLE>

Interest income is net of $176,000, $426,000 and $430,000 of interest
expense in 1996, 1995 and 1994, respectively. Construction period interest of
$326,000, $119,000 and $34,000 was capitalized in 1996, 1995 and 1994,
respectively.

STOCK PURCHASE AND INCENTIVE PLANS

The Company's 1995 Stock Option Plan provides for the granting of incentive
and nonstatutory stock options. As of August 29, 1996, there were 5,000,000
shares of common stock reserved for issuance under the plan. Exercise prices
of the incentive and nonstatutory stock options have been 100% and 85%,
respectively, of the fair market value of the Company's common stock on the
date of grant. Options are granted subject to terms and conditions determined
by the Board of Directors, and generally are exercisable in increments of 20%
for each year of employment beginning one year from date of grant and
generally expire six years from date of grant. As of August 29, 1996, there
were options outstanding to purchase approximately 1,859,000 shares of common
stock at prices ranging from $8.89 to $23.83 of which options to purchase
approximately 121,000 shares of common stock were exercisable.

The Company's 1995 Employee Stock Purchase Plan allows eligible employees of
the Company to purchase shares of common stock through payroll deductions. The
shares can be purchased for 85% of the lower of the beginning or ending fair
market value of each six month offering period and are restricted from resale
for a period of one year from the date of purchase. Purchases are limited to
20% of an employee's eligible compensation. A total of 2,500,000 shares are
reserved for issuance under the plan, of which approximately 136,000 shares
had been issued as of August 29, 1996.

Granting of options under ZEOS' stock option plan was suspended after the
MEI Merger. During 1996 and subsequent to the MEI Merger in 1995, options to
purchase approximately 993,000 and 84,000 shares of the Company's common
stock, respectively, were exercised at per share prices ranging from $0.33 to
$17.00 and $2.63 to $8.50, respectively. As of August 29, 1996, options to
purchase approximately 49,000 shares of the Company's common stock were
outstanding under this plan, all of which were exercisable at per share prices
ranging from $2.63 to $10.75.

In December 1994, ZEOS awarded shares of its common stock to certain of its
employees subject to their continued employment as of January 1, 1996.
Compensation expense was recognized over the vesting period based upon the
fair market value of the stock at the date of award. To satisfy this award,
the Company issued approximately 151,000 shares of the Company's common stock
in January 1996.

46
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

EMPLOYEE SAVINGS PLAN

The Company has two 401(k) profit-sharing plans, the RAM Plan and the ZEOS
Plan, in which employees participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2% to 16% of eligible pay
to various savings alternatives. In 1994, the RAM Plan was modified to provide
for an annual match by the Company of the first $1,500 of eligible employee
contributions and for additional contributions by the Company based on the
Company's financial performance. Effective September 1, 1995, the ZEOS Plan
was amended to match the provisions of the RAM Plan. The Company's expense
pursuant to these plans was approximately $3,051,000, $1,062,000 and $450,000
in 1996, 1995 and 1994, respectively.

TRANSACTIONS WITH AFFILIATES

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
Net sales................... $ 46,579 $ 32,417 $ 14,703
Inventory purchases......... 198,753 177,402 82,094
Revenue sharing and product
and process technology
expenses................... 49,645 72,889 42,655
Administrative services
expenses................... 1,680 917 554
Property, plant and
equipment purchases........ 574 5,647 2,805
Property, plant and
equipment sales............ 9 -- 506
Construction management
services................... 940 112 149
</TABLE>

Revenue sharing expense is a component of cost of goods sold and reflects
expenses incurred under a revenue sharing agreement, wherein, for the
nonstandard semiconductor components supplied by MTI, the Company paid MTI an
amount equal to one-half of net sales to third parties and one-half of the
transfer price for products identified for internal use by the Company.

During the fourth quarter of 1996, the Company entered into a new component
recovery agreement with MTI, effective August 30, 1996 and expiring August
1999. The new agreement replaces the revenue sharing agreement. Pursuant to
the component recovery agreement, the Company generally will pay to MTI an
amount equal to one-half of the operating income from sales of nonstandard
semiconductor components supplied by MTI.

COMMITMENTS

As of August 29, 1996, the Company had commitments of $5.5 million for
equipment purchases and $2.0 million for construction of buildings. In
addition, the Company is required to make minimum royalty payments under
certain agreements and periodically enters into minimum purchase commitments
with certain suppliers.

The Company leases its office and production facilities in North Carolina,
its office facilities in Minneapolis, Minnesota and certain other property and
equipment, under operating lease agreements expiring through 2001, with
renewals thereafter at the option of the Company. Future minimum lease
payments total approximately $7,870,000 and are as follows: $1,999,000 in
1997, $1,989,000 in 1998, $1,770,000 in 1999, $1,646,000 in 2000 and $466,000
in 2001.

47
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Rental expense was approximately $2,405,000, $1,026,000 and $277,000 in
1996, 1995 and 1994, respectively.

INCOME TAXES

The Company was included in the consolidated U.S. federal income tax return
of its Parent until June 1996, at which time the Company became a separate
taxpayer. For all periods presented, the provision for income taxes is
computed as if the Company were a separate taxpayer, and consists of the
following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
Current:
U.S. federal............. $44,128 $38,548 $19,586
State.................... 5,309 7,691 4,378
------- ------- -------
49,437 46,239 23,964
------- ------- -------
Deferred:
U.S. federal............. (11,923) (570) (83)
State.................... (2,459) (2,279) (382)
------- ------- -------
(14,382) (2,849) (465)
------- ------- -------
Income tax provision....... $35,055 $43,390 $23,499
======= ======= =======
</TABLE>

The tax benefit associated with nonstatutory stock options and disqualifying
dispositions by employees of shares issued under the Company's and Parent's
stock plans reduced taxes payable by $7,357,000, $710,000 and $173,000 for
1996, 1995 and 1994, respectively. Such benefits are credited to additional
capital.

A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
U.S. federal income tax at
statutory rate............. $27,873 $37,967 $21,140
State taxes, net of federal
benefit.................... 2,254 4,592 2,664
Goodwill.................... 4,935 776 --
Other....................... (7) 55 (305)
------- ------- -------
$35,055 $43,390 $23,499
======= ======= =======
</TABLE>

48
<PAGE>

MICRON ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes at enacted tax rates.
Deferred income tax assets totaled approximately $38,903,000 and $22,360,000
and liabilities totaled approximately $6,325,000 and $4,164,000 at August 29,
1996 and August 31, 1995, respectively. The tax effects of temporary
differences and carryforwards which give rise to the net deferred tax assets
are as follows:

<TABLE>
<CAPTION>
AS OF
-------------------------------
AUGUST 29, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
Current deferred tax asset:
Receivables............................... $ 3,217 $ 2,161
Inventories............................... 4,155 4,462
Accrued compensation...................... 4,928 812
Accrued licenses and royalties............ 9,107 4,029
Net operating loss carryforwards.......... 2,619 2,828
Accrued expenses.......................... 7,472 1,367
Other..................................... 3,516 427
------- -------
35,014 16,086
------- -------
Noncurrent deferred tax asset (liability):
Property, plant and equipment............. (2,093) (1,298)
Net operating loss carryforwards.......... 333 2,954
Accrued licenses and royalties............ 1,956 --
Other..................................... (2,632) 454
------- -------
(2,436) 2,110
------- -------
Total net deferred tax asset.............. $32,578 $18,196
======= =======
</TABLE>

Deferred tax assets of approximately $15,247,000 were recorded in 1995 in
connection with the MEI Merger. Net operating loss carryforwards as of August
29, 1996 of approximately $7,787,000, available to offset future taxable
income, will begin to expire in 2006.

EXPORT SALES

Export sales were approximately $181,371,000, $76,686,000 and $25,957,000 in
1996, 1995 and 1994, respectively.

CONTINGENCIES

Periodically, the Company is made aware that technology used by the Company
may infringe on product or process technology rights held by others. The
Company has accrued a liability and charged operations for the estimated costs
of settlement or adjudication of asserted and unasserted claims for alleged
infringement prior to the balance sheet date. Resolution of these claims could
have a material adverse effect on future results of operations and could
require changes in the Company's products or processes.

The Company is currently a party to various other legal actions arising out
of the normal course of business, none of which is expected to have a material
effect on the Company's financial position or results of operations.

49
<PAGE>

QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)

<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Net sales............................... $457,401 $412,322 $456,619 $438,578
Gross margin............................ 94,892 58,571 49,010 58,712
Net income (loss)....................... 26,448 14,075 (12,556) 16,615
Earnings (loss) per share............... 0.29 0.15 (0.14) 0.18
1995
Net sales............................... $403,968 $271,477 $190,225 $134,329
Gross margin............................ 64,038 49,782 40,493 29,024
Net income.............................. 20,957 15,605 16,918 11,606
Earnings per share...................... 0.23 0.17 0.20 0.14
</TABLE>

In the fourth quarter of fiscal 1996, the Company recorded certain
adjustments increasing pre-tax income by approximately $4.0 million, and net
income by approximately $2.5 million or $.03 per share. The adjustments
include a benefit to cost of goods sold of approximately $13.0 million related
to revisions of estimates for product and process technology costs and an
accrual, included in selling, general and administrative expense, of $9.0
million related to revisions of estimates for selling costs associated with
sales of PC systems.

50
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders and Board of Directors Micron Electronics, Inc.

We have audited the financial statements and financial statement schedule of
Micron Electronics, Inc. listed in the index on page 36 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Micron Electronics, Inc.,
as of August 29, 1996 and August 31, 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August
29, 1996, in conformity with generally accepted accounting principles. In
addition, 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 therein.

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

Boise, Idaho
September 19, 1996

51
<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

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain information concerning the Registrant's executive officers and
directors is included under the caption "Officers and Directors of the
Registrant" included in PART I, Item 1 of this report. Other information
required by Items 10, 11, 12 and 13 will be contained in the registrant's
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days after August 29, 1996, and is incorporated herein
by reference.

52
<PAGE>

PART IV

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

(a) The following are filed as a part of this report:

Financial statements and financial statement schedules--see "Item 8.
Financial Statements and Supplementary Data."

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement of Merger, dated as of October 30, 1994, as amended by the
first amendment thereto, dated as of December 13, 1994, by and among
ZEOS, MCI and MCMS(1)
2.2 Articles of Merger, dated April 7, 1995, by and among ZEOS, MCI and
MCMS(2)
3.1 Articles of Incorporation of Registrant, as amended(3)
3.2 Bylaws of the Registrant(4)
10.32 Voting Agreement, dated October 30, 1994, between ZEOS and Micron
Technology, Inc.(1)
10.35 1995 Stock Option Plan(5)
10.36 1995 Employee Stock Purchase Plan(5)
10.37 Executive Bonus Plan(5)
10.38 Form of Indemnification Agreement between the Registrant and its
officers and directors(6)
10.39 Form of Termination Agreement for officers of the Registrant(6)
10.40 Revolving Credit Facility between MTI and the Company(7)
10.41 Credit Agreement, dated July 3, 1996, between the Company and certain
financial institutions named therein
10.42 Component Recovery Agreement, dated August 14, 1996, between the
Company and Micron Technology, Inc.
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to Registration Statement on Form S-4 (File No.
33-90212), as declared effective on March 13, 1995
(2) Incorporated by reference to Current Report on Form 8-K, dated April 7,
1995
(3) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal
quarter ended April 1, 1995
(4) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1992
(5) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal
quarter ended June 1, 1995
(6) Incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended August 31, 1995
(7) Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal
quarter ended November 1, 1995

(b) Reports on Form 8-K:

The registrant did not file any Reports on Form 8-K during the quarter
ended August 29, 1996.

Micron Electronics, Millennia, Millennia TransPort, Home MPC, ClientPro,
Pick-a-Point and SpecTek are trademarks of MEI, and ZEOS and Computers Now!
are registered trademarks of MEI. Micron Power is a service mark of the
Company. All other trademarks are the property of their respective holders.

53
<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, IN THE CITY OF
NAMPA, STATE OF IDAHO, ON THE 11TH DAY OF OCTOBER, 1996.

Micron Electronics Inc.

/s/ T. Erik Oaas
_____________________________________
T. ERIK OAAS,
VICE PRESIDENT, FINANCE, AND CHIEF
FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)

PURSUANT TO THE REQUIREMENTS 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, IN THE CITY OF NAMPA,
STATE OF IDAHO, ON THE 11TH DAY OF OCTOBER, 1996.

SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph M. Daltoso Chairman of the October 11, 1996
- ------------------------------------- Board, Chief
(JOSEPH M. DALTOSO) Executive Officer,
and President
(Principal
Executive Officer)

/s/ T. Erik Oaas Vice President, October 11, 1996
- ------------------------------------- Finance, and Chief
(T. ERIK OAAS) Financial Officer
(Principal
Financial and
Accounting
Officer), Director

/s/ Gregory D. Stevenson Executive Vice October 11, 1996
- ------------------------------------- President,
(GREGORY D. STEVENSON) Operations,
Director

/s/ Robert F. Subia Director; Chairman, October 11, 1996
- ------------------------------------- President and Chief
(ROBERT F. SUBIA) Executive Officer
of Micron Custom
Manufacturing
Services, Inc.

/s/ Steven R. Appleton Director October 11, 1996
- -------------------------------------
(STEVEN R. APPLETON)

/s/ Jerry M. Hess Director October 11, 1996
- -------------------------------------
(JERRY M. HESS)

/s/ Robert A. Lothrop Director October 11, 1996
- -------------------------------------
(ROBERT A. LOTHROP)

/s/ John R. Simplot Director October 11, 1996
- -------------------------------------
(JOHN R. SIMPLOT)

<PAGE>

EXHIBIT 10.41

CREDIT AGREEMENT

BETWEEN

MICRON ELECTRONICS, INC.

AND

SEAFIRST BANK

AS AGENT

AND

SEAFIRST BANK
UNITED STATES NATIONAL BANK OF OREGON

AS BANKS

DATED July 3, 1996
<PAGE>

TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C> <C>
ARTICLE 1 ARTICLE 5
DEFINITIONS................. 1 CONDITIONS OF LENDING...... 11
1.1 Accounts...................... 1 5.1 Authorization................ 11
-------- -------------
1.2 Adjusted Leverage Ratio....... 1 5.2 Documentation................ 11
----------------------- -------------
1.3 Adjusted LIBOR Rate........... 1 5.3 Opinion of Counsel........... 11
------------------- ------------------
1.4 Advances...................... 2 5.4 MTI Release.................. 11
-------- -----------
1.5 Agent's Related Parties....... 2 5.5 Proof of Insurance........... 11
----------------------- ------------------
1.6 Assessment Rate............... 2 5.6 Representations and
--------------- -------------------
1.7 Available Amount.............. 2 Warranties................... 11
---------------- ----------
1.8 Borrowing Base................ 2 5.7 Compliance................... 12
-------------- ----------
1.9 Business Day.................. 2
------------ ARTICLE 6
1.10 Capital Adequacy Regulation... 2 REPRESENTATIONS AND
--------------------------- WARRANTIES................. 12
1.11 Code.......................... 3 6.1 Existence.................... 12
---- ---------
1.12 Commencement Date............. 3 6.2 Enforceability............... 12
----------------- --------------
1.13 Credit Limit.................. 3 6.3 No Legal Bar................. 12
------------ ------------
1.14 Current Assets................ 3 6.4 Financial Information........ 12
-------------- ---------------------
1.15 Current Liabilities........... 3 6.5 Liens and Encumbrances....... 13
------------------- ----------------------
1.16 Eligible Assignee............. 3 6.6 Litigation................... 13
----------------- ----------
1.17 ERISA......................... 3 6.7 Payment of Taxes............. 13
----- ----------------
1.18 Fixtures...................... 3 6.8 Employee Benefit Plan........ 13
-------- ---------------------
1.19 GAAP.......................... 3 6.9 Misrepresentations........... 13
---- ------------------
1.20 Governmental Authority........ 3 6.10 No Default................... 14
---------------------- ----------
6.11 No Burdensome Restrictions... 14
1.21 Ineligible Securities......... 4 --------------------------
--------------------- 6.12 Hazardous Substances......... 14
1.22 Interest Payment Dates........ 4 --------------------
----------------------
1.23 Interest Period............... 4 ARTICLE 7
--------------- AFFIRMATIVE COVENANTS...... 14
1.24 Liabilities................... 4 7.1 Use of Proceeds.............. 14
----------- ---------------
1.25 LIBOR Rate.................... 4 7.2 Tangible Net Worth........... 15
---------- ------------------
1.26 LIBOR Rate Loans.............. 5 7.3 Current Ratio................ 15
---------------- -------------
1.27 Loan Documents................ 5 7.4 Debt Ratio................... 15
-------------- ----------
1.28 London Banking Day............ 5 7.5 Minimum Cash Flow............ 15
------------------ -----------------
1.29 Majority Banks................ 5 7.6 Financial Information........ 15
-------------- ---------------------
1.30 MTI........................... 5 7.7 Maintenance of Existence..... 16
--- ------------------------
1.31 Obligations................... 5 7.8 Books and Records............ 17
----------- -----------------
1.32 Person........................ 5 7.9 Access to Premises and
------ ----------------------
1.33 Plan.......................... 5 Records...................... 17
---- -------
1.34 Prime Rate.................... 5 7.10 Notice of Events............. 17
---------- ----------------
1.35 Prime Rate Loans.............. 5 7.11 Payment of Liabilities,
---------------- -----------------------
1.36 Prime-Related Rate............ 5 Performance of Obligations
------------------ --------------------------
1.37 Pro Rata Share(s)............. 6 and Compliance with Laws..... 17
----------------- ------------------------
1.38 Real Estate................... 6 7.12 Payment of Taxes............. 18
----------- ----------------
1.39 Reserve Adjustment............ 6 7.13 Insurance.................... 18
------------------ ---------
1.40 Tangible Net Worth............ 6 7.14 Hazardous Substances......... 18
------------------ --------------------
1.41 Termination Date.............. 7
---------------- ARTICLE 8
NEGATIVE COVENANTS......... 19
ARTICLE 2 8.1 Liabilities.................. 19
REVOLVING LOAN............. 7 -----------
2.1 Revolving Loan Facility...... 7 8.2 Liens and Encumbrances....... 20
----------------------- ----------------------
2.2 Revolving Notes.............. 7 8.3 Guaranties................... 20
--------------- ----------
2.3 Procedure for Prime Rate 8.4 Disposition of Assets........ 20
------------------------ ---------------------
Advances..................... 7 8.5 Mergers...................... 20
-------- -------
2.4 Procedure for LIBOR Rate 8.6 Capital Structure............ 21
------------------------ -----------------
Advances..................... 8 8.7 Wage and Hour Laws........... 21
------- ------------------
2.5 LIBOR Notice Procedure....... 8 8.8 ERISA........................ 21
---------------------- -----
2.6 Permanent Reduction or 8.9 Dissolution.................. 21
---------------------- -----------
Termination of the 8.10 Business Activities.......... 21
------------------ -------------------
Unutilized Credit Limit...... 8 8.11 Cash Dividends and Stock
---------- ------------------------
2.7 Facility Fee................. 9 Repurchases.................. 21
------------ -----------
2.8 Agency Fee................... 9 8.12 Permissible Loans and
---------- ---------------------
Investments.................. 21
ARTICLE 3 -----------
NEGATIVE PLEDGE............ 9
ARTICLE 9
ARTICLE 4 AGENCY..................... 21
INTEREST RATE OPTIONS...... 9 9.1 Appointment.................. 21
4.1 Interest Rates and Payment -----------
-------------------------- 9.2 Successor Agent.............. 22
Date......................... 9 ---------------
---- 9.3 Duties of Agent.............. 22
4.2 Option Restrictions.......... 9 ---------------
------------------- 9.4 Delegation of Duties......... 22
4.3 Prepayments.................. 9 --------------------
----------- 9.5 Exculpatory Provisions....... 23
4.4 Reversion to Prime........... 10 ----------------------
------------------ (a) Actions................ 23
4.5 Inability to Participate -------
------------------------ (b) B o r r o w e r
in Market.................... 10 ---------------
--------- Statements............. 23
4.6 Costs........................ 10 ----------
----- (c) Enforceability......... 23
4.7 Capital Adequacy............. 10 --------------
---------------- (d) Failure to Perfect..... 23
4.8 Basis of Quotes.............. 11 ------------------
--------------- (e) Investigation.......... 23
-------------
9.6 Reliance by Agent............ 23
-----------------
9.7 Instructions................. 23
------------

</TABLE>
<PAGE>

<TABLE>
<S> <C>
9.8 Notice of Default............ 24
-----------------
9.9 Representations.............. 24
---------------
9.10 Independent Credit Review.... 24
-------------------------
9.11 Information.................. 24
-----------
9.12 Indemnity.................... 25
---------
9.13 Withholding Tax.............. 25
---------------
9.14 Separation of Capacities..... 27
------------------------

ARTICLE 10
EVENTS AND CONSEQUENCES
OF DEFAULT................. 27
10.1 Events of Default............ 27
-----------------
10.2 Remedies Upon Default........ 29
---------------------

ARTICLE 11
MISCELLANEOUS.............. 30
11.1 Manner of Payments........... 30
------------------
11.2 Notices...................... 31
-------
11.3 Documentation and
-----------------
Administration Expenses...... 32
-----------------------
11.4 Collection Expenses.......... 32
-------------------
11.5 Waiver....................... 32
------
11.6 Assignment................... 32
----------
11.7 Merger....................... 33
------
11.8 Bank Assignments,
-----------------
Participations, ect.......... 33
-------------------
11.9 Confidentiality.............. 36
---------------
11.10 Written Credit Agreement..... 37
------------------------
11.11 Amendments and Waivers....... 37
----------------------
11.12 Mandatory Arbitration........ 38
---------------------
11.13 Construction................. 39
------------
11.14 Counterparts................. 39
------------
</TABLE>

EXHIBITS:
- --------

A & B - Revolving Notes
C - Existing Liens
D - Existing Debt
E - Assignment and Acceptance
F - Real Estate
<PAGE>

CREDIT AGREEMENT

THIS CREDIT AGREEMENT ("Agreement") is made by and between (i) MICRON
ELECTRONICS, INC., a Minnesota corporation ("Borrower"), (ii) Bank of America
NW, N.A., doing business as Seafirst Bank, a national banking association, as
agent ("Agent"), and (iii) the following financial institutions that are
individually called a "Bank" and collectively called the "Banks," including
their respective successors and/or assigns: Bank of America NW, N.A., doing
business as SEAFIRST BANK, and UNITED STATES NATIONAL BANK OF OREGON. The
parties agree as follows:

ARTICLE 1

DEFINITIONS

All terms defined below shall have the meaning indicated. All references
in this Agreement to:

(a) "dollars" or "$" shall mean U.S. dollars;

(b) "Article," "Section" or "Subsection" shall mean articles, sections
and subsections of this Agreement, unless otherwise indicated;

(c) terms defined in the Washington version of the Uniform Commercial
Code, R.C.W. (S)62A.9-101, et seq. ("UCC"), and not otherwise defined in
this Agreement, shall have the meaning given in the UCC; and

(d) an accounting term not otherwise defined in this Agreement shall
have the meaning assigned to it under GAAP.

1.1 Accounts shall mean all of Borrower's consolidated receipts, accounts,
--------
drafts, acceptances, contract rights of and for moneys and performances due or
to become due, chattel paper and other forms of receivables, now owned or later
acquired, which derive from or arise out of the conduct of Borrower's business,
sale of its inventory, or the furnishing of services, together with all
guaranties and security interests for all the foregoing.

- 1 -
<PAGE>

1.2 Adjusted Leverage Ratio shall mean the ratio of (a) Liabilities to (b)
-----------------------
Tangible Net Worth.

1.3 Adjusted LIBOR Rate shall mean for any day that per annum rate equal
-------------------
to the sum of (a) a margin equal to the percentage listed in the table below
opposite the Adjusted Leverage Ratio prevailing at the end of Borrower's most
recent fiscal quarter and set forth on the debt ratio certificate that Borrower
is required to provide under Subsection 7.6(e) ("LIBOR Margin"), (b) the
Assessment Rate and (c) the highest of the quotient calculated for each of the
Banks of (i) the LIBOR Rate as determined for such day, divided by (ii) the
Reserve Adjustment. The Adjusted LIBOR Rate shall change with any change in the
LIBOR Rate on the first day of each Interest Period following receipt of the
most current debt ratio certificate required under Subsection 7.6(e), and upon
notice from Agent to Borrower, on the effective date of any change in the
Assessment Rate or Reserve Adjustment.

If Borrower's Adjusted Leverage Ratio is: Then the LIBOR Margin is:

greater than 1.50:1 2.00%
1.26:1 to 1.50:1 1.75%
1.01:1 to 1.25:1 1.50%
0.76:1 to 1.00:1 1.25%
0.51:1 to 0.75:1 1.00%
less than 0.51:1 0.75%

1.4 Advances shall mean the disbursement of loan proceeds under the
--------
Revolving Loan. An Advance shall not constitute a "payment order" under R.C.W.
(S)62A.4A-103.

1.5 Agent's Related Parties shall mean Agent, its affiliates and all
-----------------------
officers, directors and employees of Agent and such affiliates.

1.6 Assessment Rate shall mean as of any day the minimum annual percentage
---------------
rate established by the Federal Deposit Insurance Corporation (or any successor)
for the assessment due from members of the Bank Insurance Fund (or any
successor) in effect for the

- 2 -
<PAGE>

assessment period during which said day occurs based on deposits maintained at
such members' offices located outside of the United States. In the event of a
retroactive reduction in the Assessment Rate after a commencement of any
Interest Period, Agent shall not retroactively adjust as to such Interest
Period any interest rate calculated using the Assessment Rate.

1.7 Available Amount shall mean at any time the amount of the Credit Limit
----------------
or the Borrowing Base, whichever is less, minus the aggregate unpaid balance of
the Revolving Notes.

1.8 Borrowing Base shall mean the product of 56%, multiplied by the sum of
--------------
all Accounts.

1.9 Business Day shall mean any day other than a Saturday, Sunday or other
------------
day on which commercial banks in Seattle, Washington, or Portland, Oregon, are
authorized or required by law to close.

1.10 Capital Adequacy Regulation shall mean any directive of any central
---------------------------
bank or other Governmental Authority, or any other law, rule or regulation,
whether or not having the force of law, in each case, regarding capital adequacy
of any bank or of any corporation controlling a bank.

1.11 Code shall mean the Internal Revenue Code of 1986, and regulations
----
promulgated thereunder, as amended.

1.12 Commencement Date shall mean the first day of any Interest Period as
-----------------
requested by Borrower.

1.13 Credit Limit shall mean $40,000,000, less all permanent reductions
------------
make in accordance with Section 2.6.

1.14 Current Assets shall mean all consolidated assets of Borrower, on a
--------------
GAAP basis, which may be properly classified as current assets in accordance
with GAAP.

1.15 Current Liabilities shall mean all consolidated indebtedness of
-------------------
Borrower, on a GAAP basis, which may be properly classified as current
liabilities in accordance with GAAP.

- 3 -
<PAGE>

1.16 Eligible Assignee shall mean (a) a commercial bank organized under the
-----------------
laws of the United States, or any state thereof, and having a combined capital
and surplus of at least $100,000,000; (b) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000,
provided that such bank is acting through a branch or agency located in the
United States; and (c) a Person that is primarily engaged in the business of
commercial banking and that is (i) a subsidiary of a Bank, (ii) a subsidiary of
a Person of which a Bank is a subsidiary, or (iii) a Person of which a Bank is a
subsidiary.

1.17 ERISA shall mean the Employee Retirement Income Security Act of 1974,
-----
as amended.

1.18 Fixtures shall mean all improvements to the Real Estate that are made
--------
after the date of this Agreement, become affixed to the Real Estate and are
considered fixtures under the UCC.

1.19 GAAP shall mean generally accepted accounting principles as in effect
----
from time to time in the United States and as consistently applied by Borrower.

1.20 Governmental Authority shall mean any nation or government, any state
----------------------
or other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.

1.21 Ineligible Securities shall mean securities which may not be
---------------------
underwritten or dealt in by member banks of the Federal Reserve System under
Section 16 of the Banking Act of 1933 (12 U.S.C. (S)24, Seventh), as amended.

- 4 -
<PAGE>

1.22 Interest Payment Dates shall mean (a) the last Business Day of each
----------------------
month as to each Prime Rate Loan, (b) the earlier of (i) the last day of each
calendar quarter or (ii) the last day of each Interest Period as to each LIBOR
Rate Loan and (c) upon maturity, including upon maturity by acceleration.

1.23 Interest Period shall mean the period commencing on the date of any
---------------
Advance at, conversion to or a continuation of an Adjusted LIBOR Rate and
ending on any date thereafter as selected by Borrower, subject to the
restrictions of Section 42. If any Interest Period would end on a day which is
not a Business Day, the Interest Period shall be extended to the next succeeding
Business Day, unless the next succeeding Business Day falls in the next month,
in which case the Interest Period shall be shortened to the preceding Business
Day.

1.24 Liabilities shall mean all consolidated obligations, on a GAAP basis,
-----------
included in the consolidated liability section of a balance sheet of Borrower,
including but without limitation and without duplication of such amounts, and
regardless of whether such items would otherwise not be shown on the liability
side of a consolidated balance sheet:

(a) Guaranties. All obligations guaranteed or assumed by Borrower,
----------
directly or indirectly in any manner, or endorsed (other than for
collection and deposit in the ordinary course of business) or discounted by
Borrower with recourse, including all debt guaranteed by Borrower through
any agreement, contingent or otherwise;

(b) Contingent Reserves. The aggregate amount of reserves established
-------------------
on the consolidated books of Borrower with respect to contingent
liabilities (except reserves which are properly treated as deductions from
assets); and

(c) Leases. All obligations for the payment of money or other
------
property pursuant to capital leases under which Borrower is leasing real or
personal property.

- 5 -
<PAGE>

1.25 LIBOR Rate shall mean for any Interest Period the per annum rate,
----------
calculated on the basis of actual number of days elapsed over a year of 360
days, for U.S. Dollar deposits for a period equal to the Interest Period
appearing on the display designated as "Page 3750" on the Telerate Service (or
such other page on that service or such other service designated by the British
Banker's Association for the display of that Association's Interest Settlement
Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on the day
which is two London Banking Days prior to the first day of the Interest
Period. If there is no period equal to the Interest Period on the display, the
LIBOR Rate shall be determined by straight-line interpolation to the nearest
month (or week or day if expressed in weeks or days) corresponding to the
Interest Period between the two nearest neighboring periods on the display.

1.26 LIBOR Rate Loans shall mean those portions of principal of the
----------------
Revolving Notes accruing interest at the Adjusted LIBOR Rate.

1.27 Loan Documents shall mean collectively this Agreement, the Revolving
--------------
Notes, all documents, instruments and other agreements and any reports or
certificates now or later executed or delivered by Borrower in connection with
this Agreement.

1.28 London Banking Day shall mean any day other than a Saturday, Sunday or
------------------
other day on which commercial banks in London, England, are authorized or
required by law to close.

1.29 Majority Banks shall mean Banks holding 66 2/3% of the Pro Rata
--------------
Shares.

1.30 MTI shall mean Micron Technology, Inc., a Delaware corporation.
---

1.31 Obligations shall mean the Revolving Notes and all fees, costs,
-----------
expenses and indemnifications due to Agent and/or Banks under the Loan
Documents.

- 6 -
<PAGE>

1.32 Person shall mean any individual, partnership, corporation, business
------
trust, unincorporated organization, joint venture or any governmental entity,
department, agency or political subdivision.

1.33 Plan shall mean any employee benefit plan or other plan maintained for
----
Borrower's employees and covered by Title IV of ERISA, excluding any plan
created or operated by or for any labor union.

1.34 Prime Rate shall mean the floating commercial loan reference rate of
----------
Agent, publicly announced from time to time as its "prime rate" (calculated on
the basis of actual number of days elapsed over a year of 360 days), with any
change in the Prime-Related Rate to be effective on the date the Prime Rate
changes.

1.35 Prime Rate Loans shall mean those portions of principal of the
----------------
Revolving Notes accruing interest at the Prime-Related Rate.

1.36 Prime-Related Rate shall mean for any day that per annum rate equal
------------------
to the sum of (a) the Prime Rate, plus (b) a margin equal to the percentage
listed in the table below opposite the Adjusted Leverage Ratio prevailing at the
end of Borrower's most recent fiscal quarter and set forth on the debt ratio
certificate that Borrower is required to provide under Subsection 7.6(e) ("Prime
Margin"); provided that, the Prime-Related Rate shall change on the day
following Agent's receipt of the latest debt ratio certificate required to be
delivered under Section 7.6(e):

If Borrower's Adjusted Leverage Ratio is: Then the Prime Margin is:

greater than 1.50:1 1.00%
1.26:1 to 1.50:1 0.75%
1.01:1 to 1.25:1 0.50%
0.76:1 to 1.00:1 0.25%
less than 0.76:1 0.00%

1.37 Pro Rata Share(s) shall mean the following percentages as to the Bank
-----------------
indicated:

SEAFIRST BANK - 50%

- 7 -
<PAGE>

UNITED STATES NATIONAL BANK OF OREGON - 50%

1.38 Real Estate shall mean that certain real property legally described on
-----------
Exhibit F, attached to and hereby incorporated into this Agreement.
- ---------

1.39 Reserve Adjustment shall mean as of any day the remainder of one minus
------------------
that percentage (expressed as a decimal) which is the highest of any such
percentages established by the Board of Governors of the Federal Reserve System
(or any successor) for required reserves (including any emergency, marginal or
supplemental reserve requirement) regardless of the aggregate amount of deposits
with said member bank and without benefit of any possible credit, proration,
exemptions or offsets for time deposits established at offices of member banks
located outside of the United States or for eurocurrency liabilities, if any.

1.40 Tangible Net Worth shall mean the excess of total consolidated assets
------------------
over total consolidated liabilities, excluding, however, from the determination
of total assets (a) all assets which should be classified as intangible assets
(such as goodwill, patents, trademarks, copyrights, franchises and deferred
charges, including unamortized debt discount and research and development
costs), (b) treasury stock, (c) cash held in a sinking or other similar fund
established for the purpose of redemption or other retirement of capital stock,
(d) to the extent not already deducted from total assets, reserves for
depreciation, depletion, obsolescence or amortization of properties and other
reserves or appropriations of retained earnings which have been or should be
established in connection with Borrower's business, and (e) any revaluation or
other write-up in book value of assets subsequent to the fiscal year of Borrower
last ended at the date Tangible Net Worth is being measured.

- 8 -
<PAGE>

1.41 Termination Date shall mean May 30, 1997, or such earlier date upon
----------------
which Banks' commitment to lend is terminated pursuant to Subsection 10.2(a).

ARTICLE 2

REVOLVING LOAN

2.1 Revolving Loan Facility. Subject to the terms and conditions of this
-----------------------
Agreement and to the extent of its Pro Rata Share of the Credit Limit, each Bank
shall make Advances to Borrower from time to time, until the Termination Date
("Revolving Loan"), with the aggregate principal amount at any one time
outstanding not to exceed the lesser of the Credit Limit or the Borrowing Base.
Borrower may use the Revolving Loan by borrowing, prepaying and reborrowing the
amounts available under the Revolving Loan, in whole or in part; provided that
Borrower shall fully and finally pay off the Revolving Loan on the Termination
Date. No Bank shall be liable for any failure of any other Bank to fund its Pro
Rata Share of Advances. At no time shall any Bank be obligated to make Advances
that exceed its Pro Rata Share of the Credit Limit. Each borrowing by Borrower
under this Agreement shall constitute a representation and warranty by Borrower
as of the date of each such borrowing that the conditions precedent contained in
Sections 56 and 57 of this Agreement have been satisfied.

2.2 Revolving Notes. The obligation of Borrower to repay the Revolving
---------------
Loan shall be evidenced by promissory notes (including all renewals,
modifications and extensions thereof, collectively called the "Revolving Notes")
made by Borrower to the order of each of the Banks, and shall bear interest as
provided in Article 4. The Revolving Notes shall be in substantially the same
form as Exhibits A and B attached. Each of the Banks shall note on its internal
----------------
records each Advance made by it, each payment on its respective note and any
interest rate conversions.

- 9 -
<PAGE>

2.3 Procedure for Prime Rate Advances. In accordance with all terms and
---------------------------------
conditions of this Agreement and so long as there is no Default which has not
been cured, Borrower may borrow at the Prime-Related Rate under the Revolving
Notes on any Business Day. Borrower shall give Agent irrevocable written notice
or oral notice (with written confirmation immediately following) specifying the
amount to be borrowed on or before 9:30 a.m., Seattle time, on the day that a
Prime Rate Advance is requested; all Prime Rate Advances shall be discretionary
to the extent notification by Borrower is given subsequent to that time. Agent
shall advise each Bank by 11:00 a.m., Seattle time, of a request for a Prime
Rate Advance, and each Bank shall make available to Agent its respective Pro
Rata Share of such requested Prime Rate Advance no later than 1:00 p.m.,
Seattle time, on the date of Prime Rate Advance. Whether or not any Bank fails
to fund its Pro Rata Share of a Prime Rate Advance, each Bank shall only be
obligated to disburse to Agent such Bank's Pro Rata Share of such requested
Prime Rate Advance.

2.4 Procedure for LIBOR Rate Advances. In accordance with all terms and
---------------------------------
conditions of this Agreement and so long as there is no Default which has not
been cured, Borrower may borrow at the Adjusted LIBOR Rate under the Revolving
Notes on any Commencement Date. In accordance with Section 25, Borrower shall
give Agent irrevocable written notice or oral notice (with written confirmation
immediately following) specifying the amount to be borrowed and the requested
borrowing date, and on the Commencement Date, each Bank shall make available to
Agent its respective Pro Rata Share of such requested LIBOR Rate Advance no
later than 1:00 p.m., Seattle time, on the date of the LIBOR Rate Advance.
Whether or not any Bank fails to fund its Pro Rata Share of a LIBOR Rate
Advance, each Bank shall only be obligated to disburse to Agent such Bank's Pro
Rata Share of such requested LIBOR Rate Advance. At the time that Agent learns
of any change in the Assessment Rate

- 10 -
<PAGE>

or Reserve Adjustment, Agent shall notify Borrower of the change and of the
impact on any LIBOR Rate Advances then outstanding.

2.5 LIBOR Notice Procedure. On or before 9:00 a.m., Seattle time,
----------------------
Borrower may, on any London Banking Day two London Banking Days before a
Commencement Date, request Agent to give an Adjusted LIBOR Rate quote for a
specified loan amount and Interest Period. Agent will then quote to Borrower
the available Adjusted LIBOR Rate. Borrower shall have two hours from the time
of the quote to elect an Adjusted LIBOR Rate by giving Agent irrevocable written
notice of such election, which notice Agent shall immediately fax to the Banks.

2.6 Permanent Reduction or Termination of the Unutilized Credit Limit.
-----------------------------------------------------------------
Without penalty, Borrower shall have the right at any time and from time to time
to (a) terminate the unutilized Credit Limit in whole or (b) permanently reduce
the unutilized portion of the Credit Limit in a minimum amount of $1,000,000 (or
in integral multiples of $1,000,000 in excess thereof), by giving at least five
Business Days' prior written or telephonic notice to the Agent specifying the
scheduled date of such termination or reduction and the amount of any permitted
partial reduction. The Agent shall promptly notify each Bank of the amount of
the termination or reduction; the termination or reduction shall be effective on
the scheduled date specified in the Borrower's notice and each Bank's aggregate
commitment shall be reduced or terminated in accordance with its Pro Rata Share.

2.7 Facility Fee. On the first Business Day of each quarter beginning
------------
September 2, 1996, Borrower shall pay to Agent for the account of Banks, in
accordance with their respective Pro Rata Shares, in arrears a commitment fee
equal to 0.25% per annum of the difference between the Credit Limit and the
daily outstanding principal balance of the Revolving Notes.

- 11 -
<PAGE>

2.8 Agency Fee. Upon execution of this Agreement, Borrower shall pay to
----------
Agent, for Agent's sole account, an agency fee in an amount equal to $6,250.

ARTICLE 3

NEGATIVE PLEDGE

So long as any amount is payable by Borrower under this Agreement or the
Banks have a commitment to lend, Borrower shall not allow, or permit any of its
subsidiaries to allow, any assets to be transferred or encumbered, except (a)
the transfer of assets arising from immaterial charitable donations, immaterial
sales promotions or other immaterial transfers, (b) sales of inventory and
equipment in the ordinary course of business for adequate consideration for cash
or upon credit to creditworthy customers, reasonably determined by Borrower and
its subsidiaries, (c) to secure the Obligations under this Agreement, (d) as
already pledged as reflected on Exhibit C, attached to and hereby incorporated
---------
into this Agreement, and (e) Borrower may grant purchase money security
interests in, or other liens on, Borrower's equipment, Real Estate and Fixtures
after the date of this Agreement in support of Borrower's obligation to repay
debt arising after the date of this Agreement in accordance with Subsection
8.1(c).

ARTICLE 4

INTEREST RATE OPTIONS

4.1 Interest Rates and Payment Date. The Revolving Notes shall bear
-------------------------------
interest from the date of Advance on the unpaid principal balance outstanding
from time to time at the Prime-Related Rate or Adjusted LIBOR Rate as selected
by Borrower and all accrued interest shall be payable in arrears on each
Interest Payment Date.

4.2 Option Restrictions. Each Interest Period shall be one month, two
-------------------
months, three months or six months for the Revolving Notes. In no event shall
the Interest Period extend beyond the

- 12 -
<PAGE>

Termination Date. The minimum amount of a LIBOR Rate Loan shall be $5,000,000.

4.3 Prepayments. If Borrower fails to draw down an Advance on an
-----------
Adjusted-LIBOR Rate basis selected by Borrower pursuant to this Agreement or
prepays all or any portion of a LIBOR Rate Loan prior to the end of an Interest
Period, there shall be due at the time of any such failure to borrow or
prepayment the Prepayment Fee, determined in accordance with Form 51-6325, which
shall be attached as Exhibit 1 to the Revolving Notes. No prepayment penalty
shall be assessed against any Prime Rate Loans.

4.4 Reversion to Prime. The Revolving Notes shall each bear interest at
------------------
the Prime-Related Rate unless an Adjusted LIBOR Rate is specifically selected.
At the termination of any Interest Period, each LIBOR Rate Loan shall revert to
a Prime Rate Loan unless Borrower directs otherwise pursuant to Section 2.5.

4.5 Inability to Participate in Market. If Agent in good faith cannot
----------------------------------
participate in the Eurodollar market for legal or practical reasons, the
Adjusted LIBOR Rate shall cease to be an interest rate option. Agent shall
notify Borrower if and when it again becomes legal or practical to participate
in the Eurodollar market, at which time the Adjusted LIBOR Rate shall resume
being an interest rate option.

4.6 Costs. Borrower shall, as to LIBOR Rate Loans, reimburse Agent, for
-----
the account of Banks, for all costs, taxes, expenses and liabilities which Banks
may incur as a consequence of any changes in the cost of participating in, or in
the laws or regulations affecting, the Eurodollar market, including any
additional reserve requirements, except to the extent such costs are already
calculated into the Adjusted LIBOR Rate. This covenant shall survive this
Agreement and the payment of the Revolving Notes.

4.7 Capital Adequacy. If any Bank shall have determined that (a) the
----------------
introduction announced after the date hereof of any Capital Adequacy Regulation,
(b) any change announced after the date hereof in any Capital Adequacy
Regulation, (c) any change announced after the date hereof

- 13 -
<PAGE>

in the interpretation or administration of any Capital Adequacy Regulation by
any central bank or other Governmental Authority charged with the
interpretation or administration thereof, or (d) compliance by the Bank or any
corporation controlling the Bank with any Capital Adequacy Regulation, affects
or would affect the amount of capital required to be maintained by the Bank or
any corporation controlling the Bank and (taking into consideration such
Bank's or such corporation's policies with respect to capital adequacy)
determines that the amount of such capital is increased as a consequence of
its Pro Rata Share of the Credit Limit, Revolving Loan, credits or obligations
under this Agreement, then, upon prompt demand of such Bank to the Borrower
through the Agent, the Borrower shall pay to the Bank, from time to time as
specified by the Bank, additional amounts sufficient to compensate the Bank
for such increase.

4.8 Basis of Quotes. Borrower acknowledges that Agent or Banks may or may
---------------
not in any particular case actually match-fund a LIBOR Rate Loan. Whether the
mechanism for setting a particular rate in fact represents the actual cost to
Banks for any particular dollar or Eurodollar deposit or any LIBOR Rate Loan
will depend upon how such Bank actually chooses to fund the LIBOR Rate Loan. By
electing an Adjusted LIBOR Rate, Borrower waives any right to object to Agent's
means of calculating the Adjusted LIBOR Rate quote accepted by Borrower. Each
determination of the Adjusted LIBOR Rate or Prime-Related Rate by Agent shall be
conclusive and binding on Borrower and Banks, absent manifest error.

- 14 -
<PAGE>

ARTICLE 5

CONDITIONS OF LENDING

The closing of this Agreement is subject to the conditions precedent listed
in Sections 5.1, 5.2, 5.6 and 5.7; provided that this Agreement shall be of no
force of effect if Borrower fails to timely satisfy Section 5.3 or fails to
satisfy Section 5.4 on or before the earlier of the initial Advance or August
29, 1996. Banks' obligation to make the initial Advance is subject to the
conditions precedent listed in Sections 5.1 through 5.7, and to make subsequent
Advances is subject to the conditions precedent listed in Sections 5.6 and 5.7,
unless waived by the Majority Banks in writing:

5.1 Authorization. Borrower shall have delivered to Agent a certified
-------------
copy of the resolution of Borrower's board of directors authorizing the
transactions contemplated by this Agreement and the execution, delivery and
performance of all Loan Documents, together with appropriate certificates of
incumbency.

5.2 Documentation. Borrower shall have executed and delivered to Agent
-------------
all documents to reflect the existence of the Obligations.

5.3 Opinion of Counsel. An opinion of Borrower's counsel, in form and
------------------
substance satisfactory to Agent, confirming the truth of Sections 6.1, 6.2, 6.3,
6.5, 6.6, 6.8, 6.10 and 6.11 and executed as of, and delivered within nine days
of, the closing date of this Agreement.

5.4 MTI Release. MTI shall have released, and Borrower shall have
-----------
provided Agent with proof of MTI's release of, all of MTI's right, title and
interest in and to the assets of Borrower and of Borrower's subsidiaries.

5.5 Proof of Insurance. Proof of insurance as required by Section 7.13
------------------
shall have been provided to Agent.

5.6 Representations and Warranties. The representations and warranties
------------------------------
made by Borrower in the Loan Documents and in any certificate, document or
financial statement furnished at any time shall continue to be true and correct,
except to the extent that such representations and warranties expressly relate
to an earlier date.

[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

- 15 -
<PAGE>

5.7 Compliance. No Default or other event which, upon notice or lapse of
----------
time or both would constitute a Default, shall have occurred and be continuing,
or shall exist after giving effect to the advance of credit to be made.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES
To induce Banks to enter into this Agreement, Borrower represents, warrants
and covenants to Agent and Banks as follows:

6.1 Existence. Borrower is in good standing as a corporation under the
---------
laws of the state of Minnesota, has the power, authority and legal right to own
and operate its property or lease the property it operates and to conduct its
current business; and is qualified to do business and is in good standing in all
other jurisdictions where the ownership, lease or operation of its property or
the conduct of its business requires such qualification, except where the
failure to qualify does not have a material adverse effect on the business
affairs or assets of Borrower.

6.2 Enforceability. The Loan Documents, when executed and delivered by
--------------
Borrower, shall be enforceable against Borrower in accordance with their
respective terms, except as limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally or by
general equitable principles.

6.3 No Legal Bar. The execution, delivery and performance by Borrower of
------------
the Loan Documents, and the use of the loan proceeds, shall not violate any
existing law or regulation applicable to Borrower; any ruling applicable to
Borrower of any court, arbitrator or governmental agency or body of any kind;
Borrower's organizational documents; any security issued by Borrower; or any
mortgage, indenture, lease, contract, undertaking or other

- 16 -
<PAGE>

agreement to which Borrower is a party or by which Borrower or any of its
property may be bound.

6.4 Financial Information. By submitting each of the financial statements
---------------------
required by Subsection 7.6(a) and 7.6(b), Borrower is deemed to represent and
warrant that: (a) such statement is complete and correct and fairly presents
the financial condition of Borrower as of the date of such statement; (b) such
statement discloses all liabilities of Borrower that are required to be
reflected or reserved against under GAAP, whether liquidated or unliquidated,
fixed or contingent; and (c) such statement has been prepared in accordance
with GAAP. As of this date, there has been no adverse change in Borrower's
financial condition since preparation of the last such financial statements
delivered to Banks which would materially impair Borrower's ability to repay
the Obligations.

6.5 Liens and Encumbrances. As of this date, Borrower and its
----------------------
subsidiaries have good and marketable title to their property free and clear of
all security interests, liens, encumbrances or rights of others, except for a
general lien on MEI's assets and those of its subsidiaries held by MTI to the
extent permitted under Section 5.4, except as disclosed on Exhibit C, attached
---------
to and hereby incorporated into this Agreement, and except for taxes which are
not yet delinquent and for conditions, restrictions, easements and rights of way
of record which do not materially affect the use of any of Borrower's property
(other than those immaterial security interests, liens, encumbrances or rights
of others, of which the amount, enforceability or validity are contested in good
faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP are provided on Borrower's books).

6.6 Litigation. Except as disclosed in writing to Banks, there is no
----------
threatened (to Borrower's knowledge) or pending litigation, investigation,
arbitration or administrative action

- 17 -
<PAGE>

which may materially adversely affect Borrower's business, property,
operations or financial condition.

6.7 Payment of Taxes. Borrower has filed or caused to be filed all tax
----------------
returns when required to be filed; and to the best of Borrower's knowledge, has
paid all taxes, assessments, fees, licenses, excise taxes, franchise taxes,
governmental liens, penalties and other charges levied or assessed against
Borrower or any of its property imposed on it by any Governmental Authority,
agency or instrumentality that are due and payable (other than those returns or
payments of which the amount, enforceability or validity are contested in good
faith by appropriate proceedings and with respect to which reserves in
conformity with GAAP are provided on Borrower's books).

6.8 Employee Benefit Plan. Borrower is in compliance in all material
---------------------
respects with the provisions of ERISA and the regulations and published
interpretations thereunder. Borrower has not engaged in any acts or omissions
which would make Borrower liable to the Plan, to any of its participants, or to
the Internal Revenue Service, under ERISA.

6.9 Misrepresentations. When taken as a whole, no information, exhibits,
------------------
data or reports furnished by Borrower or delivered to Agent or Banks in
connection with Borrower's application for credit misstates any material fact,
or omits any fact necessary to make such information, exhibits, data or reports
not misleading.

6.10 No Default. Borrower is not in default in any Loan Document, or in
----------
any material contract, agreement or instrument to which it is a party.

6.11 No Burdensome Restrictions. No contract or other instrument to which
--------------------------
Borrower is a party, or order, award or decree of any court, arbitrator or
governmental agency, materially impairs Borrower's ability to repay the
Obligations.

- 18 -
<PAGE>

6.12 Hazardous Substances. To the best of Borrower's knowledge after due
--------------------
and diligent inquiry, no hazardous or toxic waste or substances are being stored
on any property of Borrower or any of its subsidiaries (together for purposes of
this section and Section 7.14, the "Property"), other than in accordance with
all applicable environmental laws and regulations, or as disclosed in writing to
Agent; nor have any such waste or substances been stored or used in, on, under
or over the Property prior to or during Borrower's or any subsidiary's
ownership, possession or control of any of such Property, other than in
accordance with all applicable environmental laws and regulations or as
disclosed in writing to Agent. Borrower agrees to provide written notice to
Agent immediately upon Borrower becoming aware that the Property is being or has
been contaminated with hazardous or toxic waste or substances. Borrower will
not cause nor permit any activities on the Property which directly or indirectly
could result in the Property or any other property becoming contaminated with
hazardous or toxic waste or substances. For purposes of this section and Section
7.14, the term "hazardous or toxic waste or substances" means any substance or
material defined or designated as hazardous or toxic wastes, hazardous or toxic
material, a hazardous, toxic or radioactive substance or other similar term by
any applicable federal, state, or local statute, regulation, or ordinance now or
hereafter in effect.

ARTICLE 7

AFFIRMATIVE COVENANTS

So long as this Agreement shall remain in effect, or any liability exists
under the Loan Documents, Borrower shall:

7.1 Use of Proceeds. Use the proceeds of the Revolving Loan for
---------------
acquisitions and working capital or other general corporate purposes. Borrower
shall not use any Advances to:

- 19 -
<PAGE>

(a) knowingly purchase Ineligible Securities from BA Securities, Inc.
(the "Arranger") during any period in which the Arranger makes a market in
such Ineligible Securities; or

(b) knowingly purchase during the underwriting or placement period
Ineligible Securities being underwritten or privately placed by the
Arranger; or

(c) make payments of principal or interest on Ineligible Securities
underwritten or privately placed by the Arranger and issued by or for the
benefit of Borrower or any affiliate of Borrower.

7.2 Tangible Net Worth. As measured as of the end of each fiscal quarter,
------------------
maintain a Tangible Net Worth of not less than the sum of (a) $177,051,000, plus
(b) 75% of Borrower's cumulative, positive net income, commencing with the net
income earned for the fiscal quarter ending August 29, 1996, plus (c) net
proceeds from any sale by the Borrower of any of its common or preferred stock
on or after the execution of this Agreement.

7.3 Current Ratio. Maintain a ratio of Current Assets to the sum of
-------------
Current Liabilities (including the outstanding principal balance under the
Revolving Notes) of not less than (a) 1.25 to 1 through the end of the second
fiscal quarter in fiscal year 1997; (b) 1.30 to 1 from the commencement of the
third fiscal quarter in fiscal year 1997 through the Termination Date.

7.4 Debt Ratio. Maintain an Adjusted Leverage Ratio of not more than (a)
----------
2.00 to 1 throughout fiscal year 1996; and (b) 1.80 to 1 throughout fiscal year
1997.

7.5 Minimum Cash Flow. For the four most recent fiscal quarters just
-----------------
ending, maintain the sum of consolidated operating profit before income taxes
and interest expense, plus depreciation and amortization and other non-cash
charges of not less than (a) $95,000,000 as of the end of the third and fourth
fiscal quarters in fiscal year 1996 and as of the end of the first fiscal
quarter

- 20 -
<PAGE>

in fiscal year 1997; and (b) $115,000,000 as of the end of the second fiscal
quarter in fiscal year 1997.

7.6 Financial Information. Maintain a standard system of accounting in
---------------------
accordance with GAAP and furnish to Agent the following:

(a) Quarterly Financial Statements. As soon as available and, in any
------------------------------
event, within 45 days after the end of each quarter, except the last fiscal
quarter of each fiscal year, a copy of the consolidated statement of income
and retained earnings of Borrower for the quarter and for the current
fiscal year through such quarter, and for each such quarter a copy of the
consolidated balance sheet, consolidated statement of shareholders' equity
and consolidated statement of cash flow of Borrower as of the end of such
quarter, setting forth, in each case, in comparative form, figures for
the corresponding period of the preceding fiscal year, all in reasonable
detail and satisfactory in scope to Agent, prepared under the supervision
of the chief financial officer of Borrower, and in form and substance
satisfactory to Agent;

(b) Annual Financial Statements. As soon as available and, in any
---------------------------
event, within 90 days after the end of each fiscal year, a copy of the
consolidated balance sheet, consolidated statement of income and retained
earnings, consolidated statement of shareholders' equity and consolidated
statement of cash flow of Borrower for such year, setting forth in each
case, in comparative form, corresponding figures from the preceding annual
statements, each audited by independent certified public accountants of
recognized standing selected by Borrower and satisfactory to Agent
certifying that such statement is complete and correct, fairly presents
without qualification the financial condition of Borrower for such period,
is prepared in accordance with GAAP, and has been audited in conformity
with generally accepted auditing standards;

- 21 -
<PAGE>

(c) Borrowing Base Certificate. Within 20 days of the end of each
--------------------------
month or more frequently as requested by Agent, a borrowing base
certificate in form and substance satisfactory to Agent, prepared as of the
end of such month;

(d) Aging Report. Within 20 days of the end of each month or more
------------
frequently as requested by Agent, a summary report providing the agings of
Accounts, in form and substance satisfactory to Agent, prepared as of the
end of such month;

(e) Debt Ratio Certificate. Within 45 days of the end of each fiscal
----------------------
quarter, a certification with respect to the Adjusted Leverage Ratio as of
the end of such fiscal quarter, signed by Borrower's chief financial
officer, which Agent shall promptly deliver to the Banks;

(f) SEC Financial Information. Within 10 days of filing with the
-------------------------
Securities and Exchange Commission, copies of all filed reports, including
without limitation 8K, 10-Q, S-1 and S-3; and

(g) Additional Financial Information. As soon as available and, in
--------------------------------
any event, within ten days after request, such other data, information or
documentation as Agent may reasonably request.

7.7 Maintenance of Existence. Preserve and maintain and cause its
------------------------
subsidiaries to preserve and maintain its or their existence, powers and
privileges in the jurisdiction of its or their formation, and qualify and remain
qualified in each jurisdiction in which its or their presence is necessary or
desirable in view of its or their business, operations or ownership of its or
their property, except where the failure to qualify does not have a material
adverse effect on the business affairs or assets of Borrower or its
subsidiaries. Borrower shall also maintain and

- 22 -
<PAGE>

preserve and cause its subsidiaries to maintain and preserve all of its or
their property which is necessary or useful in the proper course of its or
their business, in good working order and condition, ordinary wear and tear
excepted.

7.8 Books and Records. Keep accurate and complete books, accounts and
-----------------
records in which complete entries shall be made in accordance with GAAP,
reflecting all financial transactions of Borrower and its subsidiaries.

7.9 Access to Premises and Records. At all reasonable times and as often
------------------------------
as Agent or Banks may reasonably request, permit any authorized representative
designated by Agent or Banks to have access to the premises, property and
financial records of Borrower or its subsidiaries, including all records
relating to the finances, operations and procedures of Borrower or its
subsidiaries, and to make copies of or abstracts from such records.

7.10 Notice of Events. Furnish Agent prompt written notice of:
----------------

(a) Proceedings. Any proceeding instituted by or against Borrower or
-----------
its subsidiaries in any court or before any commission or regulatory body,
or any proceeding threatened against it in writing by any governmental
agency which if adversely determined would have a material adverse effect
on Borrower's consolidated business, property or financial condition, or
where the amount involved is $250,000 or more and not covered by insurance;

(b) Material Development. Any material development in any such
--------------------
proceeding referred to in Subsection 7.10(a);

(c) Defaults. Any accident, event or condition which is or, with
--------
notice or lapse of time or both, would constitute a Default, or a default
under any other agreement to which Borrower is a party; and

(d) Adverse Effect. Any other action, event or condition of any
--------------
nature which could result in a material

- 23 -
<PAGE>

adverse effect on the consolidated business, property or financial
condition of Borrower.

7.11 Payment of Liabilities, Performance of Obligations and Compliance with
----------------------------------------------------------------------
Laws. In accordance with their terms and unless waived in writing by the party
- ----
to be benefitted, pay all Liabilities, perform all obligations and pay all
lawful claims for labor, material, supplies or otherwise which, if unpaid, might
become a lien or charge upon Borrower's or its subsidiaries' property unless the
enforceability, amount or validity of any such claim is disputed and contested
in good faith by appropriate proceedings; and comply with all laws, rules and
regulations applicable to Borrower and Borrower's business unless the failure to
do so would not have a materially adverse impact on the consolidated business,
operations or financial condition of the Borrower.

7.12 Payment of Taxes. Pay and discharge promptly within applicable grace
----------------
periods all taxes, assessments and governmental charges or levies imposed upon
Borrower or its subsidiaries, its or their property or revenues prior to the
date on which penalties attach thereto. Borrower and its subsidiaries shall
not, however, be required to pay or discharge any such tax, assessment, charge
or levy so long as its enforceability, amount or validity is disputed and
contested in good faith by appropriate proceedings.

7.13 Insurance. Maintain commercially adequate levels of coverage with
---------
financially sound and reputable insurers, including without limitation:

(a) Property Insurance. Insurance on all property of a character
------------------
usually insured by organizations engaged in the same or similar type of
business as Borrower and its subsidiaries against all risks, casualties and
losses through extended coverage or otherwise and of the kind customarily
insured against by such organizations;

- 24 -
<PAGE>

(b) Liability Insurance. Public liability insurance against tort
-------------------
claims which may be asserted against Borrower or its subsidiaries; and

7.14 Hazardous Substances. Promptly comply, at Borrower's expense, with
--------------------
all statutes, regulations and ordinances which apply to Borrower or the
Property, and with all orders, decrees or judgments of Governmental Authorities
or courts having jurisdiction which Borrower is bound by, relating to the use,
collection storage, treatment, control, removal or cleanup of hazardous or toxic
waste or substances in, on, under, over, or about the Property or in, on, under,
over, or about any adjacent property that becomes contaminated with hazardous or
toxic waste or substances as a result of construction, operations or other
activities on, or the contamination of, the Property. Borrower shall defend,
protect, hold harmless, and indemnify the Agent and/or Banks and their
affiliates, and their successors and assigns, and their shareholders, directors,
officers, employees, attorneys and agents, from and against any and all claims,
demands, penalties, fees, liens, damages, losses, expenses and liabilities
arising out of or in any way connected with any alleged or actual past or
future presence on or under the Property of any hazardous or toxic waste or
substances from any cause whatsoever; it being intended that Borrower shall be
strictly and absolutely liable to the Agent and/or Banks without regard to any
fault by Borrower. The Agent and/or Banks may, but are not obligated to, enter
upon the Property to inspect it for compliance and to take such actions and
incur such costs and expenses to effect such compliance as it deems advisable
to protect their interest; and whether or not Borrower has actual knowledge of
the existence of hazardous or toxic substances in, on, under, over, or about
the Property as of the date of this Agreement, Borrower shall reimburse the
Agent

- 25 -
<PAGE>

and/or Banks on demand for the full amount of all costs and expenses incurred
by the Banks in connection with such compliance activities.

ARTICLE 8

NEGATIVE COVENANTS

So long as this Agreement shall remain in effect or any liability shall
exist under the Loan Documents, Borrower shall not and shall cause its
subsidiaries not to, without prior consent of the Majority Banks:

8.1 Liabilities. Create, incur, assume, permit to exist or otherwise
-----------
become committed for any Liabilities except any:

(a) Unsecured Trade Credit. Unsecured, short-term Liabilities arising
----------------------
from current operations by purchasing on credit goods, services, supplies
or merchandise;

(b) Existing Obligations. Liabilities owing to Banks, or Liabilities
--------------------
in existence as of this date and disclosed on Exhibit D, and all renewals,
---------
modifications and extensions thereof without an increase in the aggregate
amount of Liabilities outstanding or committed; or

(c) New Liabilities. New Liabilities incurred so long as: (i) the
---------------
aggregate amount of such new secured or unsecured Liabilities shall not
exceed $85,000,000, (ii) any new secured Liabilities may be only be secured
by equipment, Fixtures or Real Estate as further detailed in accordance
with this Subsection, (iii) with respect to new Liabilities secured by
equipment, the new Liabilities must arise from the lease or purchase of the
equipment on or after the date of this Agreement and cannot be secured by
equipment with a fair market value that exceeds the amount of such new
Liabilities, and (iv) with respect to new Liabilities secured by the Real
Estate and Fixtures, the new Liabilities must arise from the

- 26 -
<PAGE>

purchase of the Fixtures or the improvements made to the Real Estate on
or after the date of this Agreement.

8.2 Liens and Encumbrances. Create, incur or assume, or agree to create,
----------------------
incur, or assume any lien, whether consensual or nonconsensual, on any of its
property, or to enter into any lease with respect to any of its property except:

(a) Existing or Permitted Liens. Liens in effect as of this date and
---------------------------
shown on Exhibit C, attached to and hereby incorporated into this
---------
Agreement, or permitted under Article 3;

(b) Liens of Bank. Liens in favor of Banks;
-------------

(c) Tax Liens. Liens for taxes not yet due or which are being
---------
contested in good faith by appropriate proceedings; and

(d) Incidental Liens. Other liens incidental to the conduct of its
----------------
business or the ownership of its property which are not incurred in
connection with the borrowing of money or the obtaining of credit, and
which do not in the aggregate materially impair the value or use of
property.

8.3 Guaranties. Assume, guaranty, endorse, become a surety for, indemnify
----------
or otherwise in any fashion become responsible for, directly or indirectly, any
obligation of any Person, except:

(a) Negotiable Instruments. Endorsements on negotiable instruments
----------------------
for deposit or collection in the ordinary course of business;

(b) Performance Bonds. Performance bonds as required in the ordinary
-----------------
course of Borrower's business; and

(c) Permitted Guaranties. Guaranties of subsidiary debt that is
--------------------
considered new Liabilities permitted under Subsection 8.1(c).

8.4 Disposition of Assets. Sell, transfer, lease or otherwise assign or
---------------------
dispose of a substantial portion of its property to any Person, outside the
ordinary course of business.

- 27 -
<PAGE>

8.5 Mergers. Become a party to any merger, consolidation or like
-------
corporate change, or make any substantial transfer or contribution to, or
material investment in, stock, shares or licenses of any Person if Borrower's
Adjusted Leverage Ratio immediately after giving effect to such transaction, or
group of transactions, is greater than Borrower's Adjusted Leverage Ratio
immediately prior to giving effect to such transaction, or group of
transactions, plus .50 percentage points.

8.6 Capital Structure. Purchase, retire or redeem any of its capital
-----------------
stock or otherwise effect any change in Borrower's capital structure, except as
permitted by Section 8.11.

8.7 Wage and Hour Laws. Engage in any material violation of the federal
------------------
Fair Labor Standards Act or any comparable state wage and hour law.

8.8 ERISA. Engage in any act or omission which would make Borrower
-----
materially liable under ERISA to the Plan, to any of its participants, or to the
Internal Revenue Service.

8.9 Dissolution. Adopt any agreement or resolution for dissolving,
-----------
terminating or substantially altering Borrower's present business activities.

8.10 Business Activities. Engage or enter into any activity which is
-------------------
unrelated to Borrower's existing business.

8.11 Cash Dividends and Stock Repurchases. In any fiscal year, declare or
------------------------------------
pay any cash dividend or make any other cash payment or cash distribution on
account of its capital stock or purchase, retire or redeem, or obligate itself
to purchase, retire or redeem, any of its capital stock or any other of its
equity securities (other than as required by the Plan) in an amount that in the
aggregate exceeds 25% of Borrower's cumulative after tax net income for the
fiscal year, calculated and paid at the end of such fiscal year.

- 28 -
<PAGE>

8.12 Permissible Loans and Investments. Make any loan or advance to any
---------------------------------
Person other than in the ordinary course of business.

ARTICLE 9

AGENCY

9.1 Appointment. The Banks irrevocably designate and appoint Agent as
-----------
their agent under this Agreement, and irrevocably authorize Agent, as their
agent, to take such action on their behalf under the provisions of this
Agreement and to exercise all such powers as are expressly delegated to Agent by
the terms of this Agreement, together with such other powers as are reasonably
incidental thereto. No implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or otherwise exist
against Agent. Notwithstanding any provision to the contrary in this Agreement,
Agent shall have no implied duties or responsibilities to take any action,
except such action as it is expressly required to take under the express terms
of this Agreement, and shall have no fiduciary relationship with any of the
Banks as to any matter not expressly provided for by the Loan Documents,
including without limitation enforcement or collection of the Revolving Notes.
Agent shall not be required to exercise any discretion or take any action, but
shall be required to act or to refrain from acting upon the unanimous consent
and instructions of Banks or of the Majority Banks, as applicable. Any company
into which Agent may be merged or converted or with which it may be
consolidated or any company resulting from any merger, conversion or
consolidation to which it shall be a party, or any company to which Agent may
sell or transfer all or substantially all of its agency relationships, shall
be the successor to Agent without any further action by Banks or Borrower and
without the execution or filing of any paper.

9.2 Successor Agent. Agent may, and upon the consent of the Majority
---------------
Banks shall, resign as Agent upon 30 days' notice to

- 29 -
<PAGE>

Banks. Upon Agent's resignation as agent under this Agreement, Banks, upon
consent of the Majority Banks, shall appoint from among the Banks a successor
agent for the Banks. If no successor agent is appointed prior to the effective
date of the resignation of Agent, Agent may appoint, after consulting with
Banks, a successor agent from among the Banks, and the appointed successor
shall accept its appointment. Upon the acceptance of its appointment as
successor agent hereunder, (a) such successor agent shall succeed to all the
rights, powers and duties of the retiring Agent, (b) the term "Agent" shall
mean such successor agent, and (c) the retiring Agent's appointment, powers
and duties as Agent shall be terminated. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Agreement shall inure
to such retiring Agent's benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.

9.3 Duties of Agent. Agent shall service the Revolving Loan in accordance
---------------
with its usual practice in connection with similar credits. Except as otherwise
instructed by the unanimous consent of Banks or the Majority Banks, as
applicable, in accordance with this Agreement, Agent may manage and enforce the
terms of the Loan Documents, and exercise and enforce all privileges and rights
exercisable and enforceable by it, for the joint benefit of Banks, in accordance
with Agent's discretion and exercise of its business judgment. In servicing and
collecting the Revolving Notes and in carrying out the terms and provisions of
the Loan Documents, Agent shall not be liable to any of the Banks for any error
of judgment, or for any action taken or omitted to be taken by it, except for
gross negligence or willful misconduct.

9.4 Delegation of Duties. Agent may execute any of its duties under this
--------------------
Agreement by or through agents or attorneys-in-fact and shall be entitled to
rely upon advice of counsel concerning all matters pertaining to such duties.
Agent shall not be responsible for the negligence or misconduct of any agent or

- 30 -
<PAGE>

attorney-in-fact selected by it with reasonable care or any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel.

9.5 Exculpatory Provisions. Agent's Related Parties shall not be
----------------------
responsible or otherwise liable to any of Banks in any manner for:

(a) Actions. Any action lawfully taken or omitted to be taken by it
-------
or by such other persons or entities under or in connection with this
Agreement or any other Loan Document, except for its or their own gross
negligence or willful misconduct;

(b) Borrower Statements. Any recital, statement, representation or
-------------------
warranty made by Borrower or any officer thereof contained in this
Agreement or any other Loan Document, or in any certificate, report,
statement or other document relating to this Agreement or any other Loan
Document;

(c) Enforceability. The validity, effectiveness, genuineness,
--------------
enforceability or sufficiency of this Agreement or any other Loan Document,
the financial condition of Borrower, or any failure of Borrower to perform
its obligations under this Agreement or any other Loan Document;

(d) Failure to Perfect. Inability to perfect any collateral to the
------------------
extent required by this Agreement where such inability is due to Borrower's
failure to act or take such steps as Agent may direct; or

(e) Investigation. Ascertaining or inquiring as to the observance of
-------------
or Borrower's performance under any Loan Document, or inspecting the
property, books or records of Borrower.

9.6 Reliance by Agent. Agent's Related Parties shall be entitled to rely,
-----------------
and shall be fully protected in relying upon, any note, writing, resolution,
notice, consent, certificate, message,

- 31 -
<PAGE>

statement, order or other document or conversation believed to have been
authorized, genuine or correct, or signed, sent or made by the proper Person,
or upon advice and statements of counsel (including without limitation legal
counsel to Agent or Borrower, independent accountants and other experts
selected by Agent).

9.7 Instructions. Agent shall be fully justified in failing or refusing
------------
to take any action under this Agreement or any other Loan Document as Agent
deems appropriate, unless it shall first receive the unanimous consent of Banks
or of the Majority Banks, as applicable, or shall first be indemnified to its
satisfaction by all Banks in accordance with their respective Pro Rata Share,
against all liabilities and expenses which may be incurred by it or by reason of
taking or continuing to take any such action. Agent shall in all cases be fully
protected in acting or in refraining from acting under this Agreement or any
other Loan Document in accordance with the unanimous consent of Banks or
Majority Banks, as applicable, where required, and such request and any action
taken or not taken to act pursuant thereto shall be binding upon all of the
Banks and all future holders of the Revolving Notes.

9.8 Notice of Default. Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default unless Agent has actual knowledge or has
received notice from one or more of the Banks or Borrower referring to this
Agreement, describing such Default and stating in substance that such notice is
a "notice of default." In the event Agent receives such a notice or has actual
knowledge of any Default, Agent shall give notice thereof to all of the Banks.

9.9 Representations. None of Agent's Related Parties have made any
---------------
representation or warranty to Banks, and no action taken by Agent after the date
of this Agreement, including any review of Borrower's affairs, shall be deemed
to constitute any representation or warranty by Agent to any of the Banks.

- 32 -
<PAGE>

9.10 Independent Credit Review. Each Bank represents to Agent that it has,
-------------------------
independently and without reliance upon Agent, and based upon such financial
statements, documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, property, operations and
financial condition of Borrower and made its own decision to enter into this
Agreement. Each of the Banks also represents that it shall, independently and
without reliance upon Agent, and based upon such financial statements, documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement, and to make such investigation as it deems necessary to
inform itself as to the business, property, operations and financial condition
of Borrower. For purposes of determining compliance with the conditions
specified in Article 5, each Bank that has executed this Agreement shall be
deemed to have consented to, approved or accepted, or to be satisfied with, each
document or other matter either sent by Agent to such Bank for consent,
approval, acceptance or satisfaction, or required under said Article to be
consented to or approved by or acceptable or satisfactory to such Bank, unless
such Bank immediately provides Agent with written notice to the contrary.

9.11 Information. Except for the financial statements, reports and notices
-----------
delivered to Agent pursuant to and received by Agent pursuant to this
Agreement, Agent shall have no obligation, duty or responsibility, either
initially or on a continuing basis, to provide Banks with any credit or other
information concerning the business, property, operations or financial
condition which may come into possession of any of Agent's Related Parties.
Although Agent may furnish to Banks, upon request, copies of documents Agent
has received pursuant to this Agreement, Agent assumes no responsibility as to
the authenticity, validity or enforceability of any such documents.

- 33 -
<PAGE>

9.12 Indemnity. The Banks shall indemnify Agent, according to their
---------
respective Pro Rata Share, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, suits, judgments, costs,
expenses, taxes and disbursements of any kind or nature whatsoever (except to
the extent they arise from Agent's gross negligence or willful misconduct) which
may at any time be imposed on, incurred by, or asserted against any of Agent's
Related Parties or in any way relating to or arising out of this Agreement, any
other Loan Document or any document contemplated by or referred to therein, any
transaction contemplated thereby, or any action taken or omitted by Agent under
or in connection with any of the foregoing. Without limiting the foregoing,
each Bank shall reimburse Agent, in accordance with such Bank's Pro Rata Share,
for any costs or expenses incurred by Agent, including outside or in-house legal
fees, which (a) are required to be reimbursed to Agent by Borrower under any of
the Loan Documents, but are not so reimbursed, or (b) arise out of action taken
by Agent at the unanimous consent of Banks or the Majority Banks, as applicable,
in accordance with this Agreement. This Section shall survive the final payment
and cancellation of the Revolving Notes and payment all other amounts due under
this Agreement or the other Loan Documents.

9.13 Withholding Tax.
---------------

(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code,
such Bank agrees with and in favor of the Agent, to deliver to the Agent:

(i) if such Bank claims an exemption from, or a reduction
of, withholding tax under a United States tax treaty, two properly
completed and executed copies of IRS Form 1001 before the payment of
any interest in the first

- 34 -
<PAGE>

calendar year and before the payment of any interest in each third
succeeding calendar year during which interest may be paid under
this Agreement;

(ii) if such Bank claims that interest paid under this
Agreement is exempt from United States withholding tax because it is
effectively connected with a United States trade or business of such
Bank, two properly completed and executed copies of IRS Form 4224
before the payment of any interest is due in the first taxable year of
such Bank and in each succeeding taxable year of such Bank during
which interest may be paid under this Agreement, and

(iii) such other form or forms as may be required under the
Code or other laws of the United States as a condition to exemption
from, or reduction of, United States withholding tax.

Such Bank agrees to promptly notify the Agent of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.

(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such
Bank sells, assigns, grants a participation in, or otherwise transfers all
or part of the Obligations of the Borrower to such Bank, such Bank agrees
to notify the Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Borrower to such Bank. To the
extent of such percentage amount, the Agent will treat such Bank's IRS Form
1001 as no longer valid.

(c) If any Bank claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of
the Borrower to such Bank, such Bank agrees to notify the Agent of the
percentage amount which

- 35 -
<PAGE>

it is no longer the beneficial owner of Obligations of the Borrower to
such Bank. To the extent of such percentage amount, the Agent will treat
such Bank's IRS Form 4224 as no longer valid.

(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such
Bank an amount equivalent to the applicable withholding tax after taking
into account such reduction. However, if the forms or other documentation
required by Subsection (a) of this Section are not delivered to the Agent,
then the Agent may withhold from any interest payment to such Bank not
providing such forms or other documentation an amount equivalent to the
applicable withholding tax imposed by Sections 1441 and 1442 of the Code,
without reduction.

(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not
properly withhold tax from amounts paid to or for the account of any Bank
because the appropriate form was not delivered or was not properly
executed, or because such Bank failed to notify the Agent of a change in
circumstances which rendered the exemption from, or reduction of,
withholding tax ineffective, or for any other reason, such Bank shall
indemnify the Agent fully for all amounts paid, directly or indirectly, by
the Agent as tax or otherwise, including penalties and interest, and
including any taxes imposed by any jurisdiction on the amounts payable to
the Agent under this Section, together with all costs and expenses
including attorneys' fees and costs, such as the allocated cost of in-house
counsel. The obligation of the Banks under this subsection shall survive
the payment of all Obligations and the resignation or replacement of the
Agent.

- 36 -
<PAGE>

9.14 Separation of Capacities. In its capacity as a lender that is one of
------------------------
the Banks, Seafirst Bank shall have the same rights and powers hereunder as the
other Banks and may exercise the same as though it were not Agent. The term
"Bank(s)" shall include Seafirst Bank, in its individual capacity as a lender
and not as an agent, unless the context otherwise indicates.

ARTICLE 10

EVENTS AND CONSEQUENCES OF DEFAULT

10.1 Events of Default. Any of the following events shall constitute a
-----------------
default by Borrower under the terms of this Agreement, the Revolving Notes and
all other Loan Documents ("Default"):

(a) No Debt Ratio Certificate. Any debt ratio certificate required
-------------------------
under Section 7.6(e) is not delivered to Agent when due, provided that this
Default may be cured at the time that Borrower delivers the tardy debt
ratio certificate to Agent;

(b) Nonpayment. Any payment or reimbursement due or demanded under
----------
this Agreement or any Loan Document is not made within 20 days of the date
when due;

(c) Breach of Warranty. Any representation or warranty made in
------------------
connection with this Agreement or any other Loan Document, or any
certificate, notice or report furnished pursuant hereto, is determined by
any Bank to be false in any material respect when made;

(d) Borrowing Base. The Borrowing Base shall become less than the
--------------
aggregate outstanding principal balance plus accrued interest of the
Revolving Notes, and shall remain so after ten days notice from Agent;

(e) Failure to Perform. Any other term, covenant or agreement
------------------
contained in any Loan Document is not performed or satisfied, and if
remediable, such failure continues

- 37 -
<PAGE>

unremedied for 30 days after written notice thereof has been given to
Borrower by Agent;

(f) Defaults on Other Obligations. There exists a default in the
-----------------------------
performance of any material agreement or obligation for the payment of
borrowed money, for the deferred purchase price of property or services, or
for the payment of rent under any lease, whether by acceleration or
otherwise, which would permit such obligation to be declared due and
payable (other than cases where Borrower and one of its vendors or
suppliers are involved in an immaterial dispute) prior to its stated
maturity; and such default continues for 30 days after Borrower receives
written notice thereof from the creditor so affected;

(g) Loss, Destruction, or Condemnation of Property. A portion of
----------------------------------------------
Borrower's property is either (i) affected by any uninsured loss, damage,
destruction, theft, sale or encumbrance other than created herein or (ii)
is condemned, seized or appropriated and the effect of the occurrence
described in clause (i) or (ii) materially impairs Borrower's financial
condition or its ability to pay its debts as they come due;

(h) Attachment Proceedings and Insolvency. Borrower or any of
-------------------------------------
Borrower's property is affected by any:

(i) Execution, attachment, garnishment, general assignment for
the benefit of creditors, sequestration or forfeiture, to the extent
Borrower's financial condition or its ability to pay its debts as they
come due is thereby materially impaired; or

(ii) Proceeding under the laws of any jurisdiction relating to
receivership, insolvency or bankruptcy, whether brought voluntarily or
involuntarily by or against Borrower, including without limitation any
reorganization of assets, deferment or arrangement of

- 38 -
<PAGE>

debts, or and similar proceeding, and, if such proceeding is
involuntarily brought against Borrower, it is not dismissed within
60 days;

(i) Judgments. Final judgment on claims not covered by insurance
---------
which, together with other outstanding final judgments against Borrower,
exceeds $1,000,000, is rendered against Borrower and is not discharged,
vacated or reversed, or its execution stayed pending appeal, within 60 days
after entry, or is not discharged within 60 days after the expiration of
such stay; or

(j) Government Approvals. Any governmental approval, registration or
--------------------
filing with any Governmental Authority, now or later required in connection
with the performance by Borrower of its obligations under the Loan
Documents, is revoked, withdrawn or withheld, or fails to remain in full
force and effect, except Borrower shall have 60 days after notice of any
such event to take whatever action is necessary to obtain all necessary
approvals, registrations and filings.

10.2 Remedies Upon Default. If any Default occurs and is continuing,
---------------------
Banks, upon consent of the Majority Banks, may at their option, by notice from
Agent to Borrower:

(a) Terminate Commitments. Terminate Banks' commitment to make
---------------------
Advances;

(b) Suspend Commitments. Refuse to make further Advances until any
-------------------
Default has been cured;

(c) Accelerate. Declare all or any of the Revolving Notes, together
----------
with all accrued interest, to be immediately due and payable without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived by Borrower;

(d) Setoff. Exercise its right of setoff against deposit accounts of
------
Borrower with Bank; and/or

- 39 -
<PAGE>

(e) All Remedies. Pursue any other available legal and equitable
------------
remedies.

In addition, each Bank shall have the right to set off against deposit accounts
of Borrower at such Bank any amounts owing under the Obligations, including
amounts in excess of such Bank's Pro Rata Share of the outstanding balance of
the Obligations. Any such amounts, and any other amounts received by any Bank
on account of the Obligations, other than from Agent, shall be delivered to
Agent to be distributed to each Bank in accordance with its respective Pro Rata
Share; provided, however, that if all or any portion of such payment turned over
from a Bank to Agent and distributed to each Bank is thereafter recovered by
Borrower from such Bank, each Bank shall, in accordance with its respective
Pro Rata Share, reimburse such other Bank for the amount so recovered. All of
Banks' and Agent's rights and remedies in all Loan Documents shall be
cumulative and can be exercised separately or concurrently. Borrower shall
have no liability to any Bank with respect to any sum that Agent receives in
accordance with this Agreement and fails to distribute to such Bank as
required by this Agreement.

ARTICLE 11

MISCELLANEOUS

11.1 Manner of Payments.
------------------

(a) Payments on Nonbusiness Days. Whenever any event is to occur or
----------------------------
any payment is to be made under any Loan Document on any day other than a
Business Day, such event may occur or such payment may be made on the next
succeeding Business Day and such extension of time shall be included in
computation of interest in connection with any such payment, except as
otherwise stated to the contrary in Section 1.23.

(b) Payments. All payments and prepayments to be made by Borrower
--------
shall be made to Agent when due, at Agent's office as may be designated by
Agent, without offsets or

- 40 -
<PAGE>

counterclaims for any amounts claimed by Borrower to be due from Agent or
Banks, in U.S. dollars and in immediately available funds.

(c) Application of Payments. All payments made by Borrower shall be
-----------------------
applied first against fees, expenses and indemnities due; second, against
interest due; and third, against principal, with Agent having the right,
after a Default which is continuing, to apply any payments or collections
received against any one or more of the Obligations in any manner which the
Majority Banks may choose. Except for payments made by Borrower to Agent
for fees and indemnities due Agent, all payments made by Borrower shall be
deemed to be made to Agent, as agent for Banks in accordance with each
Bank's Pro Rata Share, and shall be distributed by Agent to Banks according
to their respective Pro Rata Share. Any such payments which are received
by a Bank shall be delivered immediately by such Bank to Agent for
distribution to Banks in accordance with this subsection.

(d) Recording of Payments. Agent is authorized to record on a
---------------------
schedule or computer-generated statement the date and amount of each
Advance, all conversions between interest rate options and all payments of
principal and interest. All such schedules or statements shall constitute
prima facie evidence of the accuracy of the information so recorded.

11.2 Notices. Agent may make Advances and conversions between interest
-------
rates based on telephonic, telex and oral requests made by any Person whom Agent
in good faith believes to be authorized to act on behalf of Borrower. All other
notices, demands and other communications to be given pursuant to any of the
Loan Documents shall be in writing and shall be deemed received the earlier of
when actually received, or two days after being mailed, postage prepaid and
addressed as follows, or as later designated in writing:

- 41 -
<PAGE>

AGENT: BORROWER:

SEAFIRST BANK MICRON ELECTRONICS, INC.
Seafirst Agency Services 900 East Karcher Road
701 Fifth Avenue, 16th Floor Nampa, Idaho 83687
Seattle, WA 98104 Attention: Erik Oaas
Attention: Ken Puro Facsimile: (208) 893-7411
Facsimile: (206) 358-0971
With a copy to:
BANKS:
MICRON ELECTRONICS, INC.
SEAFIRST BANK 900 East Karcher Road
Western Commercial Banking Team 2 Nampa, Idaho 83687
10500 NE Eighth Street, Suite #500 Attention: General Counsel
Bellevue, WA 98009 Facsimile: (208) 893-7411
Attention: Tom Rook
Facsimile: (206) 585-6393

UNITED STATES NATIONAL BANK OF OREGON
Oregon Corporate Banking Division
111 SW Fifth Avenue, Suite #400
Portland, OR 97204
Attention: Jeffrey Killian
Facsimile: (503) 275-5795

- 42 -
<PAGE>

11.3 Documentation and Administration Expenses. Borrower shall pay,
-----------------------------------------
reimburse and indemnify Agent and Banks up to $6,000 for Agent's and Banks'
reasonable attorneys' fees (including the allocated cost of in-house counsel)
and legal expenses incurred in connection with the negotiation, preparation and
execution of this Agreement and all other Loan Documents. Borrower shall pay,
reimburse and indemnify Agent and Banks for all of Agent's and Banks' reasonable
costs and expenses, including without limitation all accounting, appraisal and
report preparation fees or expenses, all attorneys' fees (including the
allocated cost of in-house counsel), legal expenses and recording or filing fees
incurred in connection with the administration of this Agreement and all other
Loan Documents, and all amendments, supplements or modifications thereto, and
the perfection of all security interests, liens or encumbrances that may be
granted to Banks. Borrower acknowledges that any legal counsel retained or
employed by Agent or Banks acts solely on the Agent's and Banks' behalf and not
on Borrower's behalf, despite Borrower's obligation to reimburse Agent and Banks
for the cost of such legal counsel, and that Borrower has had sufficient
opportunity to seek the advice of its own legal counsel with regard to this
Agreement.

11.4 Collection Expenses. The nonprevailing party shall, upon demand by
-------------------
the prevailing party, reimburse the prevailing party for all of its costs,
expenses and reasonable attorneys' fees (including the allocated cost of in-
house counsel) incurred in connection with any controversy or claim between said
parties relating to this Agreement or any of the other Loan Documents, or to an
alleged tort arising out of the transactions evidenced by this Agreement,
including those incurred in any action, bankruptcy proceeding, arbitration or
other alternative dispute resolution proceeding, or appeal, or in the course of
exercising any judicial or nonjudicial remedies.

- 43 -
<PAGE>

11.5 Waiver. No failure to exercise and no delay in exercising, on the
------
part of Agent or Banks, any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power
or privilege hereunder preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. Further, no waiver or
indulgence by Agent or Banks of any Default shall constitute a waiver of Agent's
and Banks' right to declare a subsequent similar failure or event to be a
Default.

11.6 Assignment. This Agreement is made expressly for the sole benefit of
----------
Borrower and for the protection of Agent and Banks and their respective
successors and assigns. The rights of Borrower hereunder shall not be
assignable by operation of law or otherwise, without the prior written consent
of Agent and Banks.

11.7 Merger. The rights and obligations set forth in this Agreement shall
------
not merge into or be extinguished by any of the Loan Documents, but shall
continue and remain valid and enforceable. This Agreement and the other Loan
Documents constitute Agent's and Banks' entire agreement with Borrower with
regard to the Revolving Loan, and supersede all prior writings and oral
negotiations.

11.8 Bank Assignments, Participations, etc.
-------------------------------------

(a) Notwithstanding anything to the contrary in this Section 11.8, the
two original Banks to this Agreement may, without the written consent of
the Borrower or the Agent, at any time assign and delegate to an Eligible
Assignee that is an affiliate of such Bank (each an affiliate Assignee) all
of its Pro Rata Share of the Revolving Loan, the Credit Limit and the other
rights and obligations of such Bank hereunder; provided, however, that the
Borrower and the Agent may continue to deal solely and directly with such
Bank in connection with the interest so assigned to an affiliate Assignee
until (i) written notice of such assignment, together

- 44 -
<PAGE>

with payment instructions, addresses and related information with respect
to the affiliate Assignee, shall have been given to the Borrower and the
Agent by such Bank and the affiliate Assignee; (ii) such Bank and its
affiliate Assignee shall have delivered to the Borrower, and the Agent an
Assignment and Acceptance substantially in the form of Exhibit E
("Assignment and Acceptance"), together with any Revolving Note subject
to such assignment, and (iii) the assignor Bank or affiliate Assignee has
paid to the Agent a processing fee in the amount of $1,750.

(b) Notwithstanding anything to the contrary in the remainder of this
Section and so long as there is no Default that has not been cured, the two
original Banks to this Agreement, or their affiliate Assignee, shall not
assign or delegate to one or more Eligible Assignees an interest in the
Revolving Loan, the Credit Limit or the other rights and obligations of
such Bank hereunder so as to cause such original Bank's or its affiliate
Assignee's Pro-Rata Share of the Revolving Loan, Credit Limit or other
rights and obligations to drop below 25% immediately after giving effect to
such assignment or delegation.

(c) Except as expressly stated to the contrary in the two Subsections
immediately preceding, any Bank may, with the written consent of the
Borrower (at all times other than during the existence of an Event of
Default) and the Agent, which consents shall not unreasonably be withheld,
at any time assign and delegate to one or more Eligible Assignees (provided
that no written consent of the Borrower or the Agent shall be required in
connection with any assignment and delegation by a Bank to an Eligible
Assignee that is an affiliate of such Bank or to another Bank party hereto)
(each an "Assignee") all, or any ratable part of all of its Pro Rata Share
of the Revolving Loan, the Credit Limit and the other

- 45 -
<PAGE>

rights and obligations of such Bank hereunder, in a minimum amount of
$5,000,000; provided, however, that the Borrower and the Agent may
continue to deal solely and directly with such Bank in connection with
the interest so assigned to an Assignee until (i) written notice of such
assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the
Borrower and the Agent by such Bank and the Assignee; (ii) such Bank and
its Assignee shall have delivered to the Borrower, and the Agent an
Assignment and Acceptance, together with any Revolving Note subject to
such assignment, and (iii) the assignor Bank or Assignee has paid to the
Agent a processing fee in the amount of $1,750.

(d) From and after the date that the Agent notifies the assignor Bank
that the Agent and the Borrower have received (and provided their consent,
if required, with respect to) an executed Assignment and Acceptance and
payment of the above-referenced processing fee, (i) the Assignee thereunder
shall be a party hereto and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment and
Acceptance, shall have the rights and obligations of a Bank under the Loan
Documents, and (ii) the assignor Bank shall, to the extent that rights and
obligations hereunder and under the other Loan Documents have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its rights and
be released from its obligations under the Loan Documents.

(e) Within five Business Days after the Borrower's receipt of notice
by the Agent that it has received an executed Assignment and Acceptance and
payment of the processing fee, (and provided the Borrower has consented to
such assignment if required by Section 11), the Borrower shall execute
and deliver to the Agent, new Revolving Notes

- 46 -
<PAGE>

evidencing such Assignee's assigned Pro Rata Share of the Credit Limit
and, if the assignor Bank has retained a portion of its Pro Rata Share of
the Credit Limit, a replacement Revolving Note in the principal amount of
the Revolving Loan retained by the assignor Bank (such Revolving Notes to
be in exchange for, but not in payment of, the Revolving Note held by
such Bank). Immediately upon each Assignee's making its processing fee
payment under the Assignment and Acceptance, this Agreement shall be
deemed to be amended to the extent, but only to the extent, necessary to
reflect the addition of the Assignee and the resulting adjustment of the
Pro Rata Shares arising therefrom. The Pro Rata Share of the Credit Limit
allocated to each Assignee shall reduce such Pro Rata Share of the Credit
Limit of the assigning Bank pro tanto.
--- -----

(f) Any Bank may at any time sell to one or more commercial banks or
other Persons not affiliates of the Borrower (a "Participant")
participating interests in the Bank's Pro Rata Share of the Revolving Loan,
the Credit Limit and the other interests of that Bank (the "originating
Bank") hereunder and under the other Loan Documents; provided, however,
--------
that (i) the originating Bank's obligations under this Agreement shall
remain unchanged, (ii) the originating Bank shall remain solely responsible
for the performance of such obligations, (iii) the Borrower and the Agent
shall continue to deal solely and directly with the originating Bank in
connection with the originating Bank's rights and obligations under this
Agreement and the other Loan Documents, and (iv) no Bank shall transfer or
grant any participating interest under which the Participant has rights to
approve any amendment to, or any consent or waiver with respect to, this
Agreement or any other Loan Document, except to the extent such amendment,
consent or waiver would require unanimous consent of the Banks as described
in the first proviso to
-------

- 47 -
<PAGE>

Section 11.11. In the case of any such participation, the Participant
shall be entitled to the benefit of Sections 7.14, 11.3 and 11.4 as
though it were also a Bank hereunder (provided, however, that no
Participant shall be entitled to greater benefits under any such Section
than the Bank which sold such participation would have been entitled to),
and if amounts outstanding under this Agreement are due and unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall be deemed to
have the right of set-off in respect of its participating interest in
amounts owing under this Agreement to the same extent as if the amount of
its participating interest were owing directly to it as a Bank under this
Agreement.

11.9 Confidentiality. Each Bank agrees to take and to cause its affiliates
---------------
to take normal and reasonable precautions and exercise due care to maintain the
confidentiality of all confidential information provided to it by the Borrower
or any subsidiary, or by the Agent on the Borrower's or such subsidiary's
behalf, under this Agreement or any other Loan Document, and neither it nor any
of its affiliates shall use any such information other than in connection with
or in enforcement of this Agreement and the other Loan Documents or in
connection with other business now or hereafter existing or contemplated with
the Borrower or any subsidiary; except to the extent such information (a) was or
becomes generally available to the public other than as a result of disclosure
by any of the Banks, or (b) was or becomes available on a non-confidential basis
from a source other than the Borrower, provided that such source is not bound by
a confidentiality agreement with the Borrower known to the Bank; provided,
---------
however, that any Bank may disclose such information (A) at the request or
- -------
pursuant to any requirement of any Governmental Authority to which the Bank is
subject or in connection with an examination of such

- 48 -
<PAGE>

Bank by any such authority; (B) pursuant to subpoena or other court process,
provided, that the Bank shall use its reasonable, good faith efforts to
provide prior written notice (unless prohibited from doing so by any
applicable law) to the Borrower to allow the Borrower to seek a protective
order; (C) when required to do so in accordance with the provisions of any
applicable law; (D) to the extent reasonably required in connection with any
litigation or proceeding (except as set forth in clause (E)) to which the
Agent, any Bank or their respective affiliates may be party, provided, that
the Bank shall use its reasonable, good faith efforts to provide prior written
notice (unless prohibited from doing so by any applicable law) to the Borrower
to allow the Borrower to seek a protective order; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Loan Document; (F) to such Bank's independent auditors and other
professional advisors, provided such persons have a need to know such
information and agree to be bound by the terms of this Section as if they were
a party hereto; (G) to any Participant or Assignee, actual or potential,
provided that such Person agrees in writing to keep such information
confidential to the same extent required of the Banks hereunder; (H) as to any
Bank or its affiliate, as expressly permitted under the terms of any other
document or agreement regarding confidentiality to which the Borrower or any
subsidiary is party with such Bank or such affiliate; and (I) to its
affiliates. Upon the execution hereof by all the parties, the confidentiality
undertaking set forth in this Section shall replace and supersede the terms of
any confidentiality agreement between the Borrower and any of the Agent or the
Banks previously executed prior to the date of this Agreement and shall
survive the termination of this Agreement for a period of 12 months.

11.10 Written Credit Agreement. A promise or commitment to lend money or
------------------------
to grant or extend credit in an original principal

- 49 -
<PAGE>

amount of fifty thousand dollars ($50,000) or more, made by a person or entity
engaged in the business of lending money or extending credit, or some note or
memorandum thereof, must be in writing and subscribed by the person or entity
making the promise or commitment, or the agent of that person or entity, or
the agreement is invalid.

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.

11.11 Amendments and Waivers. No oral or written representation,
----------------------
covenant, commitment, waiver or promise of either Agent, any Bank or Borrower
shall have any effect, whether made before or after the date of this Agreement,
unless contained in this Agreement, another Loan Document, or in a written
amendment or waiver, executed by all parties required by this Agreement. No
amendment, waiver or consent with respect to any departure by the Borrower [or
any subsidiary] from any of the Loan Documents shall be effective unless the
same shall be in writing and signed by the Majority Banks, or signed by all of
the Banks if required by this Agreement, (or by the Agent at the written request
of the Majority Banks or of all the Banks if required by this Agreement) and the
Borrower and acknowledged by the Agent, and then any such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no such waiver, amendment or consent
-------- -------
shall, unless in writing and signed by all the Banks and the Borrower and
acknowledged by the Agent, do any of the following:

(a) increase or extend the Credit Limit;

(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Agent or Banks (or any of them) hereunder or under any other Loan
Document;

- 50 -
<PAGE>

(c) reduce the principal of (except as permitted pursuant to Section
2.6), or the rate of interest specified herein on the Revolving Loan, or any
fees or other amounts payable hereunder or under any other Loan Document;

(d) change the definition of Majority Banks or change any requirement
that specifies whether the unanimous consent of the Banks or the Majority Banks
is required for the Banks or any of them to take any action hereunder;

(e) change the calculation of the Borrowing Base; or

(f) amend this Section, or Section 9.12, or any provision herein
providing for consent or other action by all Banks; and, provided further,
-------- -------
that no amendment, waiver or consent shall, unless in writing and signed by
the Agent in addition to the Majority Banks or all the Banks, as the case may
be, affect the rights or duties of the Agent under this Agreement or any other
Loan Document.

11.12 Mandatory Arbitration.
---------------------

(a) At the request of Agent, any Bank or Borrower, any controversy or
claim between Agent and Banks and Borrower, arising from or relating to
this Agreement or any of the other Loan Documents, or arising from an
alleged tort, shall be settled by arbitration in Seattle, Washington. The
United States Arbitration Act shall apply even though this Agreement is
otherwise governed by Washington law. The proceedings shall be
administered by the American Arbitration Association under its commercial
rules of arbitration. Any controversy over whether an issue is arbitrable
shall be determined by the arbitrator(s). Judgment upon the arbitration
award may be entered in any court having jurisdiction over the parties.
The institution and maintenance of an action for judicial relief or pursuit
of an ancillary or provisional remedy shall not constitute a waiver of the
right of either party,

- 51 -
<PAGE>

including the plaintiff, to submit the controversy or claim to
arbitration if such action for judicial relief is contested. For purposes
of the application of the statute of limitations, the filing of an
arbitration pursuant to this subsection is the equivalent of the filing
of a lawsuit, and any claim or controversy which may be arbitrated under
this subsection is subject to any applicable statute of limitations. The
arbitrator(s) will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to
dismiss the arbitration on that basis. The parties consent to the joinder
of any guarantor, hypothecator, or other party having an interest
relating to the claim or controversy being arbitrated in any proceedings
under this Section.

(b) Notwithstanding the provisions of Subsection 11.12(a), no
controversy or claim shall be submitted to arbitration without the
consent of all parties if at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation secured by
real property.

(c) No provision of this subsection shall limit the right of Borrower
or Agent or Banks to exercise self-help remedies such as set-off,
foreclosure, retention or sale of any collateral, or obtaining any
ancillary, provisional or interim remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration
proceeding. The exercise of any such remedy does not waive the right of
either party to request arbitration.

11.13 Construction. Each term of this Agreement and each Loan Document
------------
shall be binding to the extent permitted by law and shall be governed by the
laws of the State of Washington, excluding its conflict of laws rules. If one
or more of the provisions of this Agreement should be invalid, illegal or
unenforceable in any respect, the remaining provisions of this Agreement shall
remain effective and enforceable. If there is a conflict among the provisions
of any Loan Documents, the provisions of this

- 52 -
<PAGE>

Agreement shall be controlling. The captions and organization of this
Agreement are for convenience only, and shall not be construed to affect any
provision of this Agreement.

11.14 Counterparts. This Agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures to such counterparts were upon the same instrument. This Agreement
shall become effective when Agent shall have received counterparts of the

- 53 -
<PAGE>

Agreement signed by all of the parties to the Agreement.

DATED July 3, 1996.

BORROWER: AGENT:

MICRON ELECTRONICS, INC. SEAFIRST BANK

By /s/ T. Erik Oaas By /s/ Ronald R. Parsons
--------------------- ---------------------

Title Vice President, Title Vice President
--------------------- ------------------
Finance and CFO
---------------------

BANKS:

SEAFIRST BANK

By /s/ Thomas P. Rook
---------------------

Title Vice President
---------------------

UNITED STATES NATIONAL BANK OF OREGON

By /s/ Richard M. Glassman
-------------------------
Title Assistant Relationship Manager
------------------------------

MTI (a) hereby acknowledges receipt of a copy of the foregoing Agreement,
(b) hereby agrees to maintain a direct ownership interest in Borrower's capital
stock at least equal to 51% and (c) hereby represents and warrants to Agent and
Banks, as of the date of this Agreement, that the Revolving Loan is permitted
indebtedness pursuant to clause (h) of Section 7.06 of that certain Revolving
Credit Agreement, dated as of May 14, 1996 and executed by and between MTI, Bank
of America National Trust and Savings

- 54 -
<PAGE>

Association, as agent, and the several financial institutions that are a party
thereto, as banks.

MICRON TECHNOLOGY, INC.

By /s/ Norman Schlachter
--------------------------

Title Treasurer
-----------------------

Date July 3, 1996
------------------------

- 55 -
<PAGE>

EXHIBIT A TO CREDIT AGREEMENT

DUE: MAY 30, 1997
REVOLVING NOTE

MICRON ELECTRONICS, INC.

$20,000,000 Dated: ___________________________,19___________
Seattle, Washington

MICRON ELECTRONICS, INC. ("Maker") unconditionally promises to pay to the
order of Bank of America NW, N.A., doing business as Seafirst Bank ("Bank"), on
or before May 30, 1997, in immediately available funds, the principal sum of
Twenty Million and No/100 Dollars ($20,000,000), or such lesser sum as may be
outstanding under this Note, together with interest on the daily unpaid
principal balance from the date of each Advance until paid in full in accordance
with the terms, conditions and definitions of the Credit Agreement dated
__________________________________, 19___ ("Agreement") between Maker, as
Borrower, Bank of America NW, N.A., doing business as Seafirst Bank as Agent,
and Bank of America NW, N.A., doing business as Seafirst Bank, and UNITED STATES
NATIONAL BANK OF OREGON, as Banks. All payments under this Note shall be
payable to Bank of America NW, N.A., doing business as Seafirst Bank, as Agent,
at its Seattle office, as provided in the Agreement.

This Note is one of the Revolving Notes referred to in the Agreement, and
the Agreement is incorporated herein. Also incorporated herein is Exhibit 1
attached hereto, regarding prepayment fees.

If a Default shall occur, interest shall accrue, at the option of the
holder of this Note, from the date of Default at a floating rate per annum three
percent (3%) above the Prime Rate, as the Prime Rate may vary from time to time,
and the entire unpaid principal amount of this Note, together with all accrued
interest, shall become immediately due and payable at the option of the holder
hereof.

Advances under this Note may be made by Agent at the oral or written
request of
_________________________________________________________________________, any
one acting alone, who are authorized to request Advances and direct the
disposition of any such Advances until written notice of the revocation of such
authority is received by Agent at its office indicated above. Any such Advance
shall be conclusively presumed to have been made to or for the benefit of Maker
when made in accordance with such requests and directions, or when said Advances
are deposited to the credit of an account of Maker with Agent, regardless of the
fact that persons other than those authorized under this paragraph may have
authority to draw against such account.
<PAGE>

Except as otherwise expressly set forth in the Agreement, Maker hereby
waives presentment, demand, protest and notice of dishonor hereof. Each party
signing or endorsing this Note signs as maker and principal, and not as
guarantor, surety or accommodation party; and is estopped from asserting any
defense based on any capacity other than maker or principal.

This Note shall be governed by and construed in accordance with the laws of
the State of Washington.

MICRON ELECTRONICS, INC.

By _____________________

Title __________________
<PAGE>

EXHIBIT B TO CREDIT AGREEMENT

DUE: MAY 30, 1997
REVOLVING NOTE

MICRON ELECTRONICS, INC.

$20,000,000 Dated: ___________________________, 19_____
Seattle, Washington

MICRON ELECTRONICS, INC. ("Maker") unconditionally promises to pay to the
order of UNITED STATES NATIONAL BANK OF OREGON ("Bank"), on or before May 30,
1997, in immediately available funds, the principal sum of Twenty Million and
No/100 Dollars ($20,000,000), or such lesser sum as may be outstanding under
this Note, together with interest on the daily unpaid principal balance from the
date of each Advance until paid in full in accordance with the terms, conditions
and definitions of the Credit Agreement dated ______________________________,
19__, ("Agreement") between Maker, as Borrower, Bank of America NW, N.A., doing
business as Seafirst Bank as Agent, and Bank of America NW, N.A., doing business
as Seafirst Bank, and UNITED STATES NATIONAL BANK OF OREGON, as Banks. All
payments under this Note shall be payable to Bank of America NW, N.A., doing
business as Seafirst Bank, as Agent, at its Seattle office, as provided in the
Agreement.

This Note is one of the Revolving Notes referred to in the Agreement, and
the Agreement is incorporated herein. Also incorporated herein is Exhibit 1
attached hereto, regarding prepayment fees.

Advances under this Note may be made by Agent at the oral or written
request of___________________________________________________________________,
any one acting alone, who are authorized to request Advances and direct the
disposition of any such Advances until written notice of the revocation of such
authority is received by Agent at its office indicated above. Any such Advance
shall be conclusively presumed to have been made to or for the benefit of Maker
when made in accordance with such requests and directions, or when said Advances
are deposited to the credit of an account of Maker with Agent, regardless of the
fact that persons other than those authorized under this paragraph may have
authority to draw against such account.

<PAGE>

This Note shall be governed by and construed in accordance with the laws of
the State of Washington.

MICRON ELECTRONICS, INC.

By _____________________

Title __________________

<PAGE>

EXHIBIT 10.42

COMPONENT RECOVERY AGREEMENT

This Component Recovery Agreement (the "Agreement") is entered into
effective as of August 14, 1996 (the "Effective Date"), by and between Micron
Technology, Inc., a Delaware corporation located at 8000 South Federal Way,
Boise, Idaho 83707 ("MTI"), and Micron Electronics, Inc., a Minnesota
corporation located at 900 E. Karcher Road, Nampa, Idaho 83687 ("MEI").

WHEREAS, MTI is engaged in the business of developing and manufacturing
semiconductor memory devices and MEI is engaged in the business of recovering
semiconductor memory devices for sale to third parties; and

WHEREAS, MTI wishes to sell and MEI wishes to purchase semiconductor memory
devices manufactured by MTI which do not meet MTI's design and electrical
specifications and utilize them in less critical applications;

NOW, THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:

1. Definitions. As used in this Agreement, the following terms have the
------------
following meanings:

(a) "Affiliated company" means any entity which is at least fifty percent
(50%) owned or controlled by MEI or by MTI and any entity which is at least
fifty percent (50%) owned or controlled by any such entity.

(b) "Components" means MTI semiconductor memory devices, in die or packaged
form, limited to DRAMs, SRAMs, VRAMs and/or derivatives which have failed MTI's
design and electrical specifications.

(c) "MEI Volume" means, at any given time and for each separate part type,
the quantity of full specification semiconductor memory devices purchased by MEI
during the previous fiscal work week.

(d) "MTI's Average Sales Price" means, for each separate part type, the
average of the prices associated with the lowest priced full specification
semiconductor memory devices sold by MTI during the previous fiscal work week in
the amount equal to the MEI Volume. For example, if the MEI Volume for 1 meg x
4 devices were 100 and if, during the same fiscal work week, MTI sold 50 1 meg x
4 devices for $4.00 per device, 100 1 meg x 4 devices for $5.25 per device and
50 1 meg x 4 devices for $6.00 per device, MTI's Average Sales Price for 1 meg x
4 devices would be $4.63 [(50 x 4) + (50 x 5.25) divided by 100].

1
<PAGE>

2. Sales of Components. MTI hereby grants to MEI the right to purchase all
--------------------
of MTI's Components and to resale the Components upon the terms and conditions
set forth herein. Accordingly, MTI shall not sell Components to any third party
whether in the form of components, modules or board level products without first
offering such Components for sale to MEI in accordance with this Agreement.
Nothing contained herein shall obligate MEI to purchase Components made
available for sale by MTI.

3. Component Recovery. MTI hereby grants to MEI the right to enter onto MTI's
-------------------
premises at all reasonable hours to recover Components from MTI. This right
shall include the right by MEI personnel directly or indirectly, with or without
MTI's assistance, (i) to retrieve Components from MTI's Probe area; (ii) to
select and assemble Components retrieved from MTI's Probe area for submission to
MTI's Assembly area for packaging (encapsulation) by MTI or in MTI's discretion
to an assembly site of MTI's choice (MTI is under no obligation to assemble
these Components for MEI); (iii) to retrieve Components from MTI's Assembly area
and from MTI's Test area. For the purpose of allowing MEI personnel to select
and assemble Components for packaging by MTI in MTI's Assembly area, MTI agrees
to make available to MEI at no cost a reasonable and adequate amount of Assembly
cleanroom floor space, but in no event less than 300 square feet of such floor
space, for use by MEI personnel and equipment; provided, however, that MTI may
for reasonable business purposes deny MEI access to MTI's manufacturing site,
recover Components and provide such Components to MEI off-site at MTI's cost.
MTI shall bear all costs associated with MTI's fabrication, probe, assembly and
testing of Components that failed (as defined in Section 1(b) above) in the Test
area. MTI shall also bear all fabrication and probe costs relating to
Components MEI recovers from MTI's Assembly and Probe areas. All manufacturing
costs associated with the assembly of Components recovered by MEI from MTI's
Probe and Assembly areas shall be borne by MEI. Except as otherwise provided
above, the point of delivery shall be deemed to be the point of shipment by MTI
at MTI's manufacturing site or the point of direct retrieval by MEI personnel of
packaged Components at MTI's manufacturing site. Components shall be shipped
FOB the point of delivery. Title and risk of loss of Components shall pass from
MTI to MEI at the FOB point.

4. Profit Sharing. In consideration for the recovery and purchase by MEI
---------------
of the Components from MTI, MEI hereby agrees to pay to MTI an amount equal to
fifty percent (50%) of the pre-tax net income realized by MEI's Component
Recovery Division from sales of the Components to third parties and affiliated
companies and from intracompany sales or transfers to MEI's other divisions or
operations. For the purpose of determining profits of sales from MEI's
Component Recovery Division to MEI's affiliated companies and intracompany sales
or transfers to MEI's other divisions or operations, prices for such Components
shall be based on MTI's Average Sales Price and established in accordance with
the transfer price schedule set forth in Schedule A attached hereto.

5. Payment of Profit Sharing Amount. Unless otherwise provided herein,
----------------------------------
MTI's share of pre-tax net income realized from sales to third parties and
intracompany

2
<PAGE>

sales or transfers of Components shall be paid by MEI to MTI net forty-five (45)
days after the end of each MEI fiscal month.

6. Inspection of Records. MEI shall keep full, clear and accurate records
----------------------
with respect to third party and intracompany sales of Components. MTI shall
keep full, clear and accurate records with respect to the Average Sales Price
used for the purpose of calculating the price of Components and with respect to
MTI's assembly costs. Each party's records shall be kept at the party's
principal place of business and shall be open at all reasonable times during the
term of this Agreement to the inspection of a mutually agreeable third party.
Neither party hereto shall unreasonably withhold from the other information
necessary to confirm compliance with the terms of this Agreement, including but
not limited to information pertaining to intellectual property rights and
agreements pertaining to the Components. In the event a party requests an
inspection as provided herein, such party shall bear all costs and expenses
associated with such inspection, unless such inspection reveals noncompliance
with the terms of this Agreement by the other party, in which case the
noncomplying party shall bear all such costs and expenses.

7. Intellectual Property Rights. Each party hereby grants to the other party
-----------------------------
the right to use and make available as reasonably requested the intellectual
property of the other, including but not limited to patents, patent
applications, software programs, and copyrighted materials, as necessary to
identify, recover and sell the Components. In addition to bearing all costs of
development and manufacture of Components, MTI shall bear sole responsibility
for, and shall promptly pay when due, all royalty obligations arising from
patent license agreements entered into by MTI, and associated with sales of the
Components to and by MEI. MTI hereby agrees to indemnify MEI for any damages
incurred in the event of nonpayment by MTI of any such royalty obligations,
provided that such indemnification shall not extend to damages incurred as the
result of nonpayment of royalties arising from a bona fide dispute by MTI
regarding the terms or extent of such obligations. Royalty obligations paid by
MTI associated with sales of the Components shall be treated as costs for the
purpose of the computation of pre-tax net income referred to in Section 4 above.

8. Confidentiality. Each party acknowledges that it will have access to
----------------
certain information and materials concerning the business, plans, customers,
technology, and products of the other pertaining to the subject matter of this
Agreement that are confidential and of substantial value to the other party.
Each party agrees that it will not at any time disclose such confidential
information to any third party.

9. No Warranty. MTI MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE
------------
COMPONENTS, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR QUALITY, OR OTHERWISE.
MTI DOES NOT MAKE TO MEI OR ANY CUSTOMER OF MEI, AND HEREBY EXPRESSLY DISCLAIMS,
ANY OTHER REPRESENTATION OR WARRANTY OF ANY KIND

3
<PAGE>

WITH RESPECT TO THE COMPONENTS. ALL COMPONENTS ARE SOLD "AS IS" AND "WITH ALL
FAULTS".

10. Limitation of Liability. Except as otherwise provided herein, in the event
------------------------
of termination by either party in accordance with any of the provisions of this
Agreement, neither party shall be liable to the other because of such
termination, for compensation, reimbursement or damages on account of the loss
of prospective profits or anticipated sales, or on account of any expenditures
or commitments in connection with the business or goodwill of either party.

11. Patent Indemnity. MTI represents and warrants that the delivery and sale
-----------------
of Components hereunder will not infringe any patent, trademark or other
intellectual property rights of third parties. MTI shall indemnify and hold MEI
harmless of and from any and all losses, including loss of costs, claims
liabilities and expenses, including attorneys' fees, incurred by MEI with
respect to any such infringement of any patent, trademark or other intellectual
property rights, provided that such indemnification shall not exceed that amount
equal to MTI's share of the net profits derived from the sale by MEI of the
infringing products. MEI shall have the right to offset against payments due to
MTI hereunder the amount of any indemnification owed by MTI to MEI under this
Section.

12. Term and Termination.
---------------------

12.1 Term. The term of this Agreement shall commence on the Effective
-----
Date and shall continue thereafter for a period of three (3) full fiscal years
from the fiscal year-end next following the Effective Date, subject to earlier
termination in accordance with the provisions of this Section and shall continue
on a year-to-year basis thereafter unless canceled by the other party within
thirty (30) days prior to the end of the initial term or any extension thereof.

12.2 Termination by Mutual Agreement. This Agreement may be terminated at
--------------------------------
any time upon the mutual written agreement of the parties.

12.3 Termination by MTI. MTI shall have the option to terminate this
-------------------
Agreement upon MTI's Loss of Control of MEI (as defined below), by providing
written notice to MEI within ninety (90) days of such Loss of Control.

For purposes of this Section 12.3, "Loss of Control" shall mean such time
as MTI shall become the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Securities Exchange Act of 1934, as amended) of less than thirty
percent (30%) of the total voting power of all classes of Equity Interests of
MEI then outstanding and normally entitled to vote in the election of directors
or other governing body of MEI. For purposes of this Section 12.3, "Equity
Interests" shall mean any and all shares, interests, rights to purchase
warrants, options, participations or other equivalents of, or interests in
(however

4
<PAGE>

designated) corporate stock or other equity participations, including
partnership interests, whether general or limited, including any preferred
equity interests.

12.4 Survival of Certain Terms. The provisions of Sections 8, 9, 10, 11
--------------------------
and 14 of this Agreement shall remain in full force and effect after any
termination of the Agreement. With respect to Components delivered by MTI to MEI
for which profits have not yet been realized by MEI or paid to MTI, all the
provisions of this Agreement shall remain in full force and effect after any
termination of this Agreement.

13. Application to Subsidiaries. The obligations of either party hereunder
----------------------------
shall be applicable to subsidiaries of each such party. "Subsidiary" shall mean
any entity owned fifty percent (50%) or more by a party.

14. General Provisions.
-------------------

14.1 Governing Law. This Agreement shall be governed by and construed under
--------------
the laws of the State of Idaho. The federal and state courts within the State
of Idaho shall have the sole and exclusive jurisdiction to adjudicate any
dispute arising out of this Agreement.

14.2 Entire Agreement. This Agreement sets forth the entire agreement and
-----------------
understanding of the parties relating to the subject matter herein and merges
all prior discussions between them. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by authorized representatives of both parties.

14.3 Notices. Any notice required or permitted by this Agreement shall be
--------
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, addressed to the other party at the address shown at the
beginning of this Agreement or at such other address for which such party give
notice hereunder. Such notice shall be deemed to have been given three (3) days
after deposit in the mail.

14.4 Force Majeure. Nonperformance of either party shall be excused to the
--------------
extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, or any other reason where failure
to perform is beyond the control and not caused by the negligence of the
nonperforming party.

14.5 Assignability and Binding Effect. The rights and obligation of each
---------------------------------
party hereunder may not be assigned or transferred directly or indirectly
without the prior written consent of the other party, which consent shall not be
unreasonably withheld. Provided, however, that MEI may assign or transfer its
rights and obligations arising out of this Agreement to one or more of its
subsidiaries or affiliated companies. Change of ownership or control of MEI or
MTI or any assignee permitted under this Section 14.5 shall not constitute an
assignment or transfer under this Section 14.5. If MEI sells or transfers its
component recovery assets and business to a subsidiary or affiliated company,

5
<PAGE>

MEI shall be permitted to assign or transfer its rights and obligations arising
out of this Agreement to such subsidiary or affiliated company. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns.

14.6 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.

MICRON TECHNOLOGY, INC. MICRON ELECTRONICS, INC.

By /s/ Steven R. Appleton By /s/ Gregory D. Stevenson
--------------------------- ---------------------------

Title CEO and President Title Executive Vice President,
------------------------- ---------------------------
Operations
---------------------------

6
<PAGE>

Schedule A

Transfer Price

Transfer Price Transfer Price Transfer Price Transfer Parts
for Full Specification for Systems Grade for Printer for Audio Grade
MTI's Average Sales Price Parts Parts Buffer Grade Parts Devices
- ----------------------------- ----------------------- ------------------ ------------------ ------------------

X .975(X) .8288(X) .70(X) .25(X)

</TABLE>

<PAGE>

EXHIBIT 11

MICRON ELECTRONICS, INC.

COMPUTATION OF PER SHARE EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
AUGUST 29, 1996 AUGUST 31, 1995 SEPTEMBER 1, 1994
--------------- --------------- -----------------
<S> <C> <C> <C>
PRIMARY
Weighted average shares out-
standing................... 91,687 86,959 81,427
Net effect of dilutive stock
options.................... 808 463 96
------- ------- -------
Number of shares used in per
share calculation.......... 92,495 87,422 81,523
======= ======= =======
Net income.................. $44,582 $65,086 $36,898
======= ======= =======
Per share earnings.......... $ 0.48 $ 0.74 $ 0.45
======= ======= =======
FULLY DILUTED
Weighted average shares out-
standing................... 91,687 86,959 81,427
Net effect of dilutive stock
options.................... 834 469 98
------- ------- -------
Number of shares used in per
share calculation.......... 92,521 87,428 81,525
======= ======= =======
Net income.................. $44,582 $65,086 $36,898
======= ======= =======
Per share earnings.......... $ 0.48 $ 0.74 $ 0.45
======= ======= =======
</TABLE>

<PAGE>

EXHIBIT 21

MICRON ELECTRONICS, INC.

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
STATE (OR JURISDICTION) PERCENTAGE
IN WHICH OWNERSHIP
NAME INCORPORATED BY REGISTRANT
---- ----------------------- -------------
<S> <C> <C>
Micron Custom Manufacturing Services,
Inc.................................... Idaho 100%
M.C.M.S. SDN. BHD...................... Malaysia 100%
PC Tech, Inc. .......................... Minnesota 100%
Micron Electronics (H.K.) Limited ...... Hong Kong 100%
Micron Electronics Japan K.K. .......... Japan 100%
Micron Electronics Overseas Trading,
Inc. .................................. Barbados 100%
</TABLE>

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement
of Micron Electronics, Inc. on Form S-8 (File No. 33-63701) of our report,
dated September 19, 1996, on our audits of the financial statements and
financial statement schedule of Micron Electronics, Inc., as of August 29,
1996 and August 31, 1995 and for each of the three years in the period ended
August 29, 1996, which report is included in this Annual Report on Form 10-K.

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

Boise, Idaho
October 11, 1996

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> AUG-31-1995 AUG-29-1996
<PERIOD-END> AUG-31-1995 AUG-29-1996
<CASH> 69,406 115,839
<SECURITIES> 0 0
<RECEIVABLES> 135,489 186,856
<ALLOWANCES> 6,745 10,309
<INVENTORY> 92,709 69,863
<CURRENT-ASSETS> 308,755 399,116
<PP&E> 95,391 175,077
<DEPRECIATION> 37,137 45,885
<TOTAL-ASSETS> 382,716 529,933
<CURRENT-LIABILITIES> 202,303 277,350
<BONDS> 0 0
0 0
0 0
<COMMON> 914 925
<OTHER-SE> 172,749 227,535
<TOTAL-LIABILITY-AND-EQUITY> 173,663 228,460
<SALES> 999,999 1,764,920
<TOTAL-REVENUES> 999,999 1,764,920
<CGS> 816,662 1,503,735
<TOTAL-COSTS> 893,506 1,688,922
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,983) (3,639)
<INCOME-PRETAX> 108,476 79,637
<INCOME-TAX> 43,390 35,055
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 65,086 44,582
<EPS-PRIMARY> 0.74 0.48
<EPS-DILUTED> 0 0

</TABLE>