PANDA PROJECT INC, DEF 14A, 2000-01-28

PANDA PROJECT INC
DEF 14A, 2000-01-28
SEMICONDUCTORS & RELATED DEVICES

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As filed with the Securities and Exchange Commission on January 28, 2000

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934

Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12

The Panda Project, Inc.
- ---------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- ---------------------------------------------------------------------

(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.

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

------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:

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

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

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

4) Proposed maximum aggregate value of transaction:

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

5) Total fee paid:
$200.00
------------------------------------------------------------

[x] Fee paid previously with preliminary materials.

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

1) Amount Previously Paid: _____________________________________
2) Form, Schedule or Registration Statement No.: _______________
3) Filing Party: _______________________________________________
4) Date filed: ________________________________________________

THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487

ANNUAL MEETING OF SHAREHOLDERS
February 18, 2000

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

YOUR VOTE IS VERY IMPORTANT

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

To the Shareholders of The Panda Project, Inc.

On behalf of the Board of Directors of The Panda Project, Inc., a
Florida corporation ("Panda" or the "Company"), I cordially invite you to
attend an Annual Meeting of the shareholders of Panda, to be held at 8:00 a.m.
(Eastern time) on Wednesday, February 18, 2000, at the Hilton Hotel, 100
Fairway Drive, Deerfield Beach, Florida 33441. As previously announced, Panda
has entered into an agreement (the "Asset Purchase Agreement") to sell
substantially all of its operating assets to Silicon Bandwidth, Inc., a
Delaware corporation ("SBI"). The terms of the proposed sale are described
more fully in the enclosed Proxy Statement, and a copy of the Asset Purchase
Agreement, as amended, is attached as Annex A to the Proxy Statement.

Panda entered into this Asset Purchase Agreement, and the Board of
Directors is recommending that Panda's shareholders approve the proposed sale,
because the Board is of the view that Panda will not be able to generate
sufficient revenues and resulting gross profits to cover its fixed costs in
order to continue its operations in the future. The Board believes that this
reason, coupled with Panda's continued negative cash flow and the general
decline of its financial condition, suggest that the interests of Panda
shareholders would be better served if Panda pursues the sale of substantially
all of its operating assets to SBI. The sale of substantially all of Panda's
operating assets, if approved by the shareholders, will help Panda minimize
its negative cash flow and allow it to continue to exist as a public "holding"
corporation. If approved by the shareholders, the sale will take place on a
date mutually agreed upon by Panda and SBI, but in no event later than
February 24, 2000, unless extended by the parties.

Panda will receive 10% of SBI's capital stock in exchange for Panda's
operating assets. As part of the closing conditions to the Proposed Sale, SBI
will assist Panda in eliminating certain outstanding obligations. Panda's
shareholders will not receive any dividend or other form of payment or
distribution as a result of the completion of the sale of the operating assets
to SBI. The ownership of Panda's common stock by the shareholders will not be
affected by the sale, and Panda will continue to be subject to the reporting
requirements of the Securities Exchange Act of 1934. Panda expects that its
common stock will continue to trade on the OTC Bulletin Board. However, Panda
will not have any control over whether, or to what extent, a trading market
will exist following completion of the sale to SBI.

If the proposed sale to SBI is not approved by Panda shareholders, Panda
anticipates that its negative cash flow will continue indefinitely and that it
will likely be unable to continue as a going concern. If the sale to SBI is
not approved, Helix has the right to foreclose on the intellectual property
and sell it through a private or public sale, in which case it is unlikely
that the Panda shareholders would receive any value. As such, if the proposed
sale to SBI is not approved by Panda shareholders, Panda intends to try to
find a purchaser of its operating assets, but it is more likely that the
Company will be forced to file bankruptcy.

We cannot complete the sale to SBI without the approval of Panda's
shareholders. We have therefore scheduled an Annual Meeting of Panda's
shareholders to consider and vote upon the proposed sale of Panda's operating
assets to SBI. A majority of the issued and outstanding shares of Panda's
Common Stock must vote in favor of the proposal for the sale to SBI to be
completed.

THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, AND RECOMMENDS THAT YOU
VOTE "FOR," THE PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S OPERATING ASSETS
TO SBI. In arriving at its recommendation, the Board of Directors has given
careful consideration to a number of factors which are described in the
enclosed Proxy Statement, including a recommendation of a special committee of
its board of directors that the consideration SBI will deliver to Panda for
Panda's operating assets in the proposed transaction is in the best interest
of Panda.

Panda is also seeking your vote to (1) elect a new director to serve on
Panda's Board of Directors, (2) amend its Articles of Incorporation (the
"Amendment to the Articles") to increase the number of authorized shares of
its common stock from 50,000,000 to 100,000,000 and (3) ratify the selection
by Panda's Board of Directors of Grant Thornton LLP as independent accountants
for the current fiscal year. This increase in the number of authorized but
unissued
shares is necessary to fulfill Panda's obligations under certain existing
agreements.

Whether or not you plan to attend the Annual Meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. Sending in
your proxy will not prevent you from voting in person at the Annual Meeting,
but will assure that your vote is counted if you are unable to attend the
Annual Meeting. If you sign, date and mail your proxy card to us without
indicating how you wish to vote on the proposed sale to SBI, your proxy will
be counted as a vote in favor of the adoption of the Asset Purchase Agreement
and approval of the proposed sale. If you fail to return your proxy card, the
effect will be the same as a vote against the adoption of the Asset Purchase
Agreement and against the approval of the proposed sale.

The enclosed Proxy Statement provides you with detailed information about
(1) the proposed sale of Panda's operating assets to SBI, (2) Panda's plans
following the completion of the sale and (3) the Amendment to the Articles.
We encourage you to read the entire Proxy Statement, including the Annexes,
and consider the information carefully prior to casting your vote.

Stanford W. Crane, Jr.
President and Chief Executive Officer

PRELIMINARY COPY CONFIDENTIAL
FOR USE OF THE COMMISSION ONLY

THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 18, 2000

The Panda Project, Inc. ("Panda") will hold an annual meeting of its
shareholders (the "Annual Meeting") on February 18, 2000, 8:00 a.m. Eastern
time, at the Hilton Hotel, 100 Fairway Drive, Deerfield Beach, Florida 33441,
for the following purposes:

1. To consider and vote on a proposal (the "Proposed Sale") to approve an
Asset Purchase Agreement, dated as of July 19, 1999, as amended (the "Asset
Purchase Agreement"), between Panda and Silicon Bandwidth, Inc., a Delaware
corporation ("SBI"), and related transactions for the sale of substantially
all the operating assets of Panda.

2. To consider and vote upon a proposal to amend Panda's Articles of
Incorporation (the "Amendment to the Articles") to increase the authorized
shares of its common stock, par value $.01 per share (the "Panda Common
Stock"), from 50,000,000 to 100,000,000.

3. To elect a director to serve on Panda's Board of Directors until the
2002 Annual Meeting and until his successor is duly elected and qualified.

4. To ratify the selection by the Board of Directors of Grant Thornton
LLP as independent accountants for the current fiscal year.

5. To transact such other business as may properly come before the Annual
Meeting.

Panda has fixed the close of business on January 20, 2000 as the Record
Date for the determination of shareholders entitled to vote at the Annual
Meeting or any adjournment thereof. A list of such shareholders will be
available for inspection by shareholders of record during business hours at
Panda's principal place of business in Boca Raton, Florida for ten days prior
to the date of the Annual Meeting, and will also be available at the Annual
Meeting.

Approval of the Proposed Sale requires the affirmative vote of a majority
of the outstanding shares of Panda Common Stock entitled to vote at the Annual
Meeting. Approval of the other proposals requires that the number of votes
cast in favor of these proposals at the Annual Meeting exceed those votes cast
against. Failure to return a properly executed proxy card or to vote at the
Annual Meeting will have the same effect as a vote against the Proposed Sale.

The Board of Directors unanimously recommends that shareholders vote to
approve the Proposed Sale, which is described in detail in the accompanying
Proxy Statement, and the other proposals.

Please sign and promptly return the proxy card in the enclosed envelope,
whether or not you expect to attend the Panda Annual Meeting.

By Order of the Board of Directors,

Melissa F. Crane
Secretary
Boca Raton, Florida
January 28, 2000

<PAGE>
TABLE OF CONTENTS

NOTE REGARDING FORWARD-LOOKING
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 1

PANDA'S ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . 3
Proposal 1: Proposed Sale of Substantially
All of Panda's Assets . . . . . . . . . . . . . . . . . 3

VOTING SECURITIES OF PANDA. . . . . . . . . . . . . . . . . . . 3
Times and Places; Quorum; Votes Required
for Approval. . . . . . . . . . . . . . . . . . . . . . . 3
Intentions and Agreements to Vote. . . . . . . . . . . . . 3
No Dissenters' Rights. . . . . . . . . . . . . . . . . . . 5
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 5
Votes Required for Approval of Proposal 1 . . . . . . . . 6

THE PROPOSED SALE . . . . . . . . . . . . . . . . . . . . . . . 6
Panda. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SBI. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VantagePoint Venture Partners. . . . . . . . . . . . . . . 7
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . 7
Holding Company Structure. . . . . . . . . . . . . . . . . 7
Background of the Proposed Sale. . . . . . . . . . . . . . 8
Panda's Reasons for the Proposed Sale;
Recommendation of the Board of Directors. . . . . . . . 9
Recommendation of the Special Committee. . . . . . . . . . 11
Absence of Financial Advisor . . . . . . . . . . . . . . . 13
Approval of the Panda Series A
Preferred Shareholders. . . . . . . . . . . . . . . . . 13
Interests of Certain Persons in the Proposed
Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Transition Planning. . . . . . . . . . . . . . . . . . . . 13
Changes in Shareholder Rights after the
Proposed Sale . . . . . . . . . . . . . . . . . . . . . 14
Continued Operations of the Company. . . . . . . . . . . . 14
Accounting Treatment; Material Federal
Income Tax Consequences . . . . . . . . . . . . . . . . 14
Regulatory Approvals . . . . . . . . . . . . . . . . . . . 15

RISKS AND CONSIDERATIONS RELATED TO
THE PROPOSED SALE. . . . . . . . . . . . . . . . . . . . . . 15
Holding Company Structure. . . . . . . . . . . . . . . . . 15
Unregistered Stock; Absence of a Public
Trading Market . . . . . . . . . . . . . . . . . . . . 15
Absence of an Operating History. . . . . . . . . . . . . . 15
Absence of a Financial Advisor . . . . . . . . . . . . . . 16
No Dividends on SBI Common Stock . . . . . . . . . . . . . 16
Minority Interest; No Voting Power . . . . . . . . . . . . 16
Remaining Panda Assets Have Limited Value. . . . . . . . . 16
No Reporting Requirements. . . . . . . . . . . . . . . . . 16

THE ASSET PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . 16
Terms of the Asset Purchase Agreement . . . . . . . . . . 16
Operating Assets Being Sold and Liabilities
and Obligations Assumed . . . . . . . . . . . . . . . . 17
Consideration Price . . . . . . . . . . . . . . . . . . . 17
Closing . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conditions to Closing . . . . . . . . . . . . . . . . . . 18
Representations and Warranties . . . . . . . . . . . . . 20
Covenants. . . . . . . . . . . . . . . . . . . . . . . . . 21
Stockholders Agreement . . . . . . . . . . . . . . . . . . 22
Indemnification. . . . . . . . . . . . . . . . . . . . . . 22
Termination and Waiver . . . . . . . . . . . . . . . . . . 23

UNAUDITED PRO FORMA
FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 24

PROPOSAL 2: AMENDMENT TO
ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES. . . . . . . . . . . . . . . . . . 31
Votes Required for Approval of Proposal 2. . . . . . . . . 35

PROPOSAL 3: ELECTION OF DIRECTORS. . . . . . . . . . . . . . . 36

SUMMARY COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 42

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 47
Recent Sales of Unregistered Securities . . . . . . . . . 47

SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . .50

MARKET FOR PANDA'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . 51

INFORMATION REGARDING PANDA . . . . . . . . . . . . . . . . . . 52
Business . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Properties. . . . . . . . . . . . . . . . . . .. . . . . . . 58
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 59

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . .. . . . 61
Change in Fiscal Year End . . . . . . . . . . . .. . . . 61
Results of Operations . . . . . . . . . . . . . .. . . . 61
Liquidity and Capital Resources . . . . . . . . .. . . . 64
Year 2000 Issues . . . . . . . . . . . . . . . . . . . . 66
Votes Required for Approval of Proposal 3 . . .. . . . . . 67

PROPOSAL 4: RATIFICATION OF
APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . 68
Votes Required for Approval of Proposal 4 . . . . . . . . . . . 68

EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

SHAREHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . .69

SHAREHOLDER LIST. . . . . . . . . . . . . . . . . . . . . . . . 69

WHERE YOU CAN FIND MORE
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 69
FINANCIALS. . . . . . . . . . . . . . . . . . . . . . . . . . .F-1

Annex A: Asset Purchase Agreement, as amended
Annex B: Text of Amendment to Panda's Articles of Incorporation

<PAGE>
Page 1
NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements regarding Panda's future financial condition, results of
operations, cash flows, financing plans, business strategy, projected costs
and capital expenditures, operations after the proposed sale of substantially
all of Panda's operating assets and words such as "anticipate," "estimate,"
"expect," "project," "intend," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions. All of these forward-looking statements
are based on estimates and assumptions made by Panda's management which,
although believed by Panda's management to be reasonable, are inherently
uncertain. Stockholders are cautioned that such forward-looking statements are
not guarantees of future performance or results and involve risks and
uncertainties and that actual results or developments may differ materially
from the forward-looking statements as a result of various considerations,
including the considerations described in this Proxy Statement.

THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487
----------------------

Proxy Statement
for Annual Meeting of Shareholders
to be held February 18, 2000
----------------------

INTRODUCTION

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of The Panda Project, Inc. ("Panda" or the
"Company") for use at the Annual Meeting of the Shareholders of Panda (the
"Annual Meeting") to be held on February 18, 2000, 8:00 a.m. Eastern time, at
the Hilton Hotel, 100 Fairway Drive, Deerfield Beach, Florida 33441, and at
any adjournment or postponement thereof for the purposes stated in the
attached Notice of Annual Meeting of the Shareholders. This Proxy Statement,
the Notice of Annual Meeting of Shareholders and the accompanying form of
Proxy are first being mailed to shareholders on or about January 28, 2000.
Panda also will mail with this Proxy Statement, its Annual Report on Form
10-K/A for the fiscal year ended December 31, 1998, its Quarterly Report on
Form 10-Q/A for the quarter ended June 30, 1999, and its Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1999.

The matters to be considered and voted upon at the Annual Meeting will be:

1. A proposal (the "Proposed Sale") to approve an Asset Purchase
Agreement, dated as of July 19, 1999, as amended (the "Asset Purchase
Agreement"), between Panda and Silicon Bandwidth, Inc., a Delaware corporation
("SBI"), and related transactions for the sale of substantially all the
operating assets of Panda.

2. A proposal to amend Panda's Articles of Incorporation (the
"Amendment to the Articles") to increase the authorized shares of its common
stock, par value $.01 per share (the "Panda Common Stock"), from 50,000,000 to
100,000,000.

3. A proposal to elect a director to serve on Panda's Board of Directors
until the 2002 Annual Meeting and until his successor is duly elected and
qualified.

4. A proposal to ratify the selection by the Board of Directors of Grant
Thornton LLP as independent certified public accountants for the current
fiscal year.

5. Such other business as may properly come before the Annual Meeting.

<PAGE>
Page 2

A copy of the Asset Purchase Agreement, as amended, is attached as Annex A
to this Proxy Statement.

The description of the proposals set forth above is intended only as a
summary and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement.

<PAGE>
Page 3
PANDA'S ANNUAL MEETING

PROPOSAL 1:

PROPOSED SALE OF SUBSTANTIALLY ALL OF PANDA'S ASSETS
----------------------------------------------------

VOTING SECURITIES OF PANDA

Times and Places; Quorum; Votes Required for Approval

The Annual Meeting will be held at the Hilton Hotel, 100 Fairway Drive,
Deerfield Beach, Florida 33441, on February 18, 2000, starting at 8:00 a.m.
Eastern time. The Board of Directors has fixed the close of business on
January 20, 2000, as the Panda Record Date. Only holders of record of shares
of Panda Common Stock on the Record Date are entitled to notice of and to vote
at the Annual Meeting. On the Record Date, there were 49,961,107 shares of
Panda Common Stock outstanding and entitled to vote at the Panda Annual
Meeting held by 294 shareholders of record.

Each holder of record, as of the Record Date, of Panda Common Stock is
entitled to cast one vote per share. The presence, in person or by proxy, of
the holders of a majority of the outstanding shares of Panda Common Stock
entitled to vote is necessary to constitute a quorum at the Annual Meeting.
The affirmative vote, in person or by proxy, of the holders of a majority of
the shares of Panda Common Stock outstanding on the Record Date is required to
approve and adopt the Proposed Sale.

THE MEMBERS OF THE BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
PROPOSED SALE (SUBJECT TO SHAREHOLDER APPROVAL) AND RECOMMEND A VOTE FOR THE
ADOPTION AND APPROVAL OF THE PROPOSED SALE.

Intentions and Agreements to Vote

In connection with the Proposed Sale, a majority of shareholders, who in
the aggregate will own approximately 52% of Panda Common Stock on the Record
Date, have agreed pursuant to a settlement agreement with Panda and a voting
agreement (the "Voting Agreement") with SBI to vote their shares of Panda
Common Stock in favor of the Proposed Sale. Shareholders who are a party to
the Voting Agreement include GAM Arbitrage Fund L.P., AGR Halifax Fund, Ltd.,
Leonardo L.P., Ramius Fund, Ltd., Raphael L.P., Helix (PEI) Inc. and AG Super
Fund L.P. Listed below are the parties to the Voting Agreement and the number
of shares of Panda Common Stock they agreed to vote:

Shares
Received Upon
Total Conversion Total Number
Shares of the Series of Shares to
Shareholder Currently Held A Preferred Stock be Voted
- ----------- -------------- ----------------- ------------
GAM Arbitrage
Fund L.P. 0 601,719 601,719
AGR Halifax
Fund, Ltd. 1,366,619 11,682,842 13,049,461
Leonardo L.P. 911,077 6,492,420 7,403,497
Ramius
Fund, Ltd. 273,325 0 273,325
Raphael L.P. 182,217 900,472 1,082,689
Helix
(PEI) Inc. 1,000,000 0 1,000,000
AG Super
Fund L.P. 0 585,228 585,228

<PAGE>
Page 4

All of these entities were holders of Series A Preferred Stock except
for Helix (PEI) Inc., which is Panda's largest creditor. Except for Helix
(PEI) Inc., the number of shares to be voted by each entity includes shares
issued upon conversion of the Series A Preferred Stock into shares of Common
Stock. All of these shares were converted in to common stock on January 19,
2000. Joseph A. Sarubbi also agreed to vote his 2,100,000 shares in favor of
the Proposed Sale pursuant to the Amended Settlement Agreement (as defined
herein). He has delivered an irrevocable proxy to Panda voting in favor of
the Proposed Sale.

The Series A Preferred shareholders agreed to enter into the Voting
Agreement pursuant to the Exchange Agreement (as defined herein) to induce SBI
to consummate the Proposed Sale. Helix (PEI) Inc. agreed to enter into the
Voting Agreement to induce SBI to consummate the Proposed Sale and to assume
Panda's obligations to Helix (PEI) Inc.

The Voting Agreement and the Amended Settlement Agreement provide that
Panda shareholders party thereto vote their shares of Panda Common Stock in
favor of the approval of the Proposed Sale and any matter that could
reasonably be expected to facilitate the Proposed Sale and against approval of
any proposal for any recapitalization, merger, sale of assets or other
business combination (other than the Proposed Sale) between Panda and any
person or entity other than SBI (an "Opposing Proposal"). The Voting
Agreement also provides that, prior to the Record Date for the Panda Annual
Meeting relating to the Proposed Sale, holders of Share Equivalents will
exercise or convert such number of Share Equivalents, as the case may be, into
capital stock of Panda, pro rata in the amount determined by SBI to be
necessary to achieve approval of the Proposed Sale or rejection of an Opposing
Proposal, and vote such shares of Panda Common Stock as set forth above.
"Share Equivalents" are defined in the Voting Agreement as any securities of
Panda convertible into or exercisable for shares of capital stock of Panda.
The Voting Agreement also provides that Panda shareholders will execute and
deliver irrevocable proxies appointing the board of directors of SBI as their
sole and exclusive proxies.

Joseph A. Sarubbi and the parties to the Voting Agreement constitute a
majority of the outstanding shares of Panda Common Stock entitled to vote on
the proposals that are the subject of this Proxy Statement. Therefore, absent
an extraordinary event, Panda believes that approval of the proposals is
assured.

In addition, the Voting Agreement provides that Panda will enter into an
agreement with Helix, a shareholder and holder of a security interest in
certain assets of Panda, to restructure the indebtedness of Panda (the
"Secured Debt") currently secured by Helix's security interest in certain
assets of Panda (the "Restructuring Agreement"). The Restructuring Agreement
provides that (i) Helix will release its security interest in all assets of
Panda other than its intellectual property assets and (ii) the terms of the
Secured Debt will be modified so that (A) the Secured Debt accrues interest
after the Closing at a rate of 6% per annum, calculated on a monthly basis,
(B) any interest accrued with respect to the Secured Debt prior to the Closing
is forgiven by Helix and (C) the Secured Debt will be subject to (x) a
principal payment obligation of $1,000,000 immediately after the Closing and
(y) principal and interest payments aggregating $100,000 per month on each of
the monthly anniversaries of the Closing (and such lesser amount on the
eleventh monthly anniversary of the Closing as will satisfy all remaining
principal and interest on the Secured Debt).

Panda entered into the Exchange Agreement, dated May 12, 1999, by and
among Panda and the Panda Series A Preferred shareholders (the "Exchange
Agreement"). Pursuant to the Exchange Agreement, all holders of Series A
Preferred Stock agreed to exchange their Series A Preferred Stock for shares
of Panda Common Stock. In the Exchange Agreement, Panda agreed to allow the
conversion of certain shares of Series A Preferred Stock into Panda Common
Stock at a rate of $0.261 and to permit the sale of the Panda Common Stock.
This conversion rate was equal to the conversion rate under the terms of the
Series A Preferred Stock. Panda also agreed to issue penalty shares to the
holders of Series A Preferred Stock at the same exchange rate to satisfy a
covenant in the agreement with the holders requiring Panda to pay the Holders
an aggregate of $100,000 per month during such time as Panda is not listed on
a national securities exchange or NASDAQ. The total amount of the penalty was
$916,500. The holders of Series A Preferred Stock agreed (i) to enter into a
voting agreement to vote their shares of Panda Common Stock in favor of the
Proposed Sale and (ii) not to sell certain amounts of their Panda Common Stock
received pursuant to the Exchange Agreement. Holders of the Series A
Preferred Stock also agreed to release Panda from all existing obligations to
them. No other agreements were entered into among Panda and the Series A
Preferred shareholders to induce them to exchange their shares of Series A
Preferred Stock and to vote for the Proposed Sale.

<PAGE>
Page 5

Since beginning discussions with SBI, Panda has issued 2,100,000 shares of
Panda Common Stock to Joseph Sarubbi and 1,000,000 shares of Panda Common
Stock to Helix, all of which shares are subject to voting agreements.

No Dissenters' Rights

Holders of Panda Common Stock are not entitled to dissenters' rights in
connection with the Proposed Sale.

Proxies

All shares of Panda Common Stock represented by properly executed
proxies received prior to or at the Annual Meeting, as the case may be, and
not revoked, will be voted in accordance with the instructions indicated in
such proxies. If no instructions are indicated on a properly executed
returned proxy, such proxies will be voted FOR the approval of the Proposed
Sale. A properly executed proxy marked "ABSTAIN," although counted for
purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power and number of shares represented and
entitled to vote at the applicable Annual Meeting, will not be voted.
Accordingly, since the affirmative vote of a majority of outstanding shares is
required for approval of the Proposed Sale, a proxy marked "ABSTAIN" will have
the effect of a vote against such Proposed Sale. Shares represented by
"broker non-votes" (i.e., shares held by brokers or nominees which are
represented at a meeting but with respect to which the broker or nominee is
not empowered to vote on a particular proposal) will be counted for purposes
of determining whether there is a quorum at the applicable Annual Meeting.
Brokers and nominees are precluded from exercising their voting discretion
with respect to the approval and adoption of the Proposed Sale and thus,
absent specific instructions from the beneficial owner of such shares, are not
empowered to vote such shares with respect to the approval and adoption of
such proposals. Therefore, since the affirmative vote of a majority of the
aggregate voting power is required for approval of the Proposed Sale, a
"broker non-vote" with respect to either proposal will have the effect of a
vote against the Proposed Sale.

The Board of Directors is not currently aware of any business to be acted
upon at the Annual Meeting other than as described herein. If, however, other
matters are properly brought before the Annual Meeting, or any adjournments or
postponements thereof, the persons appointed as proxies will have discretion
to vote or act thereon according to their best judgment. Such adjournment may
be for the purpose of soliciting additional proxies. Shares represented by
proxies voting against the approval and adoption of the Proposed Sale will be
voted against a proposal to adjourn the respective Annual meeting for the
purpose of soliciting additional proxies. Panda does not currently intend to
seek an adjournment of its Meeting.

A shareholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of Panda a signed notice of revocation or a
later-dated signed proxy or by attending the Annual Meeting and voting in
person. Attendance at the Annual Meeting will not in itself constitute the
revocation of a proxy.

It is the policy of Panda to keep confidential proxy cards, ballots and
voting tabulations that identify individual shareholders, except where
disclosure is mandated by law and in other limited circumstances.

The cost of solicitation of proxies will be paid by Panda for Panda
proxies. In addition to solicitation by mail, arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to send proxy
material to beneficial owners; and Panda will, upon request, reimburse them
for their reasonable expenses in so doing. Panda has retained ADP to aid in
the solicitation of proxies and to verify certain records related to the
solicitation at a fee of $8,000 plus expenses. To the extent necessary in
order to ensure sufficient representation at its Annual Meeting, Panda may
request by telephone or telegram the return of proxy cards. The extent to
which this will be necessary depends entirely upon how promptly proxy cards
are returned. Shareholders are urged to send in their proxies without delay.

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Votes Required for Approval of Proposal 1

Approval of Proposal 1 requires the affirmative vote of a majority of the
outstanding shares of Panda Common Stock issued and outstanding as of the
Record Date.

THE PROPOSED SALE

Panda

Panda is a technology company engaged in the development,
manufacture and sale of Panda's proprietary semiconductor packaging and
interconnect devices (the "Technology Products"). Panda also has been engaged
in the design and manufacturing of modular workstations and desk top computers
("Systems"). Due to financial constraints, Panda discontinued all operations
related to the Systems business in December 1998. The features and design of
the Technology Products, many of which are protected by United States and
foreign patents or patent applications, are intended to address the need for
greater bandwidth in electronics products. Panda believes that its products
will satisfy the market's demand for increased bandwidth in computer,
telecommunications, automotive and other electronics industries by enhancing
the performance of new generations of high speed semiconductors.

SBI

SBI was recently organized as a Delaware corporation for the purpose of
acquiring the intellectual property portfolio and certain fixed assets related
to the interconnect and semiconductor packaging business of Panda. SBI will
initially be capitalized with $6,000,000, of which $1,000,000 will be paid to
Helix upon closing of the transaction. Within the first year of ongoing
operations, SBI anticipates the need for additional financing which it will
seek from the private capital markets. SBI intends to continue marketing,
manufacturing and selling the technology acquired from Panda. Additionally,
SBI intends to commercialize other related technologies for the semiconductor
packaging and interconnect markets.

SBI's strategy is to (i) continue the commercialization of the VSPA and
Compass V technology as well as continuing to design and produce leading-edge
custom packaging solutions; (ii) maintain advanced manufacturing capabilities
through partnerships with LG Cable & Machinery as well as Possehl Hong Kong
Machinery Ltd. and (iii) leverage the scale and scope of the packaging and
interconnect capabilities to provide Integrated Interface Modules for silicon
to system applications.

After the acquisition, SBI will be controlled by VantagePoint Venture
Partners. The board of directors will initially have five members including
the chief executive officer of SBI, three representatives of VantagePoint
Venture Partners and one outside director. The chief executive officer and
the representatives of VantagePoint Venture Partners will not receive any
additional compensation for serving on the board of directors. The
independent directors will have some level of compensation for service.

Principal elements of the Company's strategy are set forth below.

Similar forces drive future customer demand for the packaging and
interconnect products acquired by SBI. The electronics industry is seeking
greater "Bandwidth" to increase performance in a variety of applications.
Panda's VSPA and the new Cluster Grid Array address the semiconductor market
for high I/O with thermal requirements as well as new emerging markets such as
System on Chip, Monitor on Chip and Integrated modules for the
telecommunications, medical and computer industries.

VSPA competes very effectively with the enhanced versions of the BGA. A
customer application that currently uses a BGA with a heatsink for additional
thermal dissipation is an ideal candidate for VSPA. Using VSPA will reduce
cost while improving thermal performance. Target customers include Fabless
companies designing all types of Integrated Circuits ("IC") for the
telecommunications, graphics chips, and sensor markets. VSPA is also able to
withstand a tremendous amount of environmental stress including high
temperature and the potentially explosive automotive engine environment. The
new Cluster Grid Array ("CGA") addresses the high I/O market segment and
competes against very expensive LGA, BGA and CCGA. These problems of these
current packages, which include difficulties with the SMT process and routing,
open the door for a robust high density pluggable chip scale package.

The interconnect technology includes the Compass V connector which recently
received Bellcore approval. The interconnect has been designed for use in
backplane applications specifically for the telecommunications industry.

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Page 7

Other technologies developed but never commercialized include Welltech, a
routing technology for printed circuit boards to increase the amount of traces
thereupon without degradation of signal integrity. As the industry moves to
higher I/O, then a new routing technology will be required. Welltech has never
been introduced.

SBI believes that partnering with large companies for high volume
manufacturing will be a key factor in future success and in attracting and
retaining customers. SBI will produce all prototype and preproduction orders
using the acquired VSPA Flex machines. SBI will maintain Panda's current
suppliers in order to facilitate the transition. SBI believes that there will
be no interruption of production to current customers.

SBI believes that by bringing new package designs to market early, its
designs are more likely to enjoy a competitive advantage, which in turn will
allow the Company to obtain higher margins. SBI also seeks to capture
substantial market share and to spur the industry-wide adoption of its
integrated interface solutions in specific market areas. SBI believes these
modules types will comprise some of the highest growth and more profitable
segments of the interconnect and packaging market in coming years.

VantagePoint Venture Partners

VantagePoint Venture Partners ("Vantage" or "VantagePoint") manages three
private venture capital funds with more than $800 million. The firm offers a
unique blend of venture capital, investment banking, operations, legal, sales,
marketing and advertising experience, combined with deep expertise in data
networking, next-generation communications services, e-commerce and the
Internet.

Use of Proceeds

Panda intends to hold SBI common stock received in the Proposed Sale for
investment purposes. Panda shareholders will not receive any dividend or
other form of payment or distribution as a result of the completion of the
sale of Panda's Assets as defined in the Asset Purchase Agreement (the
"Operating Assets") to SBI. In the event, if ever, that SBI completes an
initial public offering or is acquired, the Board of Directors intends to
dissolve the Company and distribute to the Panda shareholders either SBI
common stock or the proceeds received by Panda if SBI is acquired. Panda has
agreed not to distribute the SBI common stock to its shareholders so long as
SBI remains a private company. The ownership of Panda's Common Stock by the
Panda shareholders will not be affected by the Proposed Sale, and Panda will
continue to be subject to the reporting requirements of the Securities
Exchange Act of 1934. Panda expects that Panda Common Stock will continue to
trade on the OTC Bulletin Board. However, Panda will not have any control
over whether, or to what extent, a trading market will exist following
completion of the Proposed Sale.

Holding Company Structure

If the Proposed Sale is approved and consummated, Panda will cease
conducting operations and become a holding company, with its sole significant
asset consisting of a 10% equity interest in SBI's common stock subject to
possible future dilution. Panda will not have a direct ownership interest in
any assets of SBI and will solely be entitled to those rights that it may have
as a shareholder of SBI under Delaware law. In addition, Panda's right, and
the right of Panda's creditors, to participate in any distribution of the
assets of SBI upon SBI's liquidation or reorganization or otherwise, will
necessarily be subject to the prior claims of creditors of SBI, except to the
extent that a bankruptcy court recognizes Panda's claims as a creditor of SBI.

<PAGE>
Page 8

If SBI is successful in exploiting the intellectual property it is
acquiring from Panda, SBI expects to have a public offering of its common
stock or be acquired. At that time, Panda expects to liquidate and distribute
the SBI shares or the proceeds received by SBI stockholders in the
acquisition, pro rata to Panda's shareholders. However, there can be no
assurance that SBI will be able to exploit the intellectual property, whether
SBI can effect a public offering or be acquired, or how long it may be until
either of them occurs, if ever.

The Investment Company Act of 1940 ( the "1940 Act") provides that an
investment company cannot engage in various business activities unless it is
registered under the Act or unless it is incidental to its dissolution. Panda
does not believe the intent of the 1940 Act was to apply to circumstances like
the proposed structure of Panda after closing of the transaction; that is,
Panda holding the SBI shares until such time as it dissolves and distributes
the shares to its shareholders. As a condition of the transaction, Panda has
agreed with SBI not to distribute the SBI shares until SBI's public offering
or sale.

Panda's circumstances are similar to those described in LDX Group, Inc. 9 no
action letter available May 4, 1990). In LDX, the Commission confirmed that it
would not recommend an enforcement action if LDX failed to register under the
1940 Act. By court order, LDX was prohibited from distributing cash and a
minority interest in another company for two years. At that time, LDX had no
operating business. If the transaction with SBI closes, Panda proposes to
seek a no action letter from the commission. In the event the Commission is
unable to grant the requested no action position, Panda would register under
the 1940 Act as an investment company.

In order to dissolve at some undetermined future date, Panda will be obligated
to obtain approval of its shareholders and will conduct another proxy
solicitation at that time. At that time, Panda will be obligated to file
Schedule 13E-3 with the Commission.

Background of the Proposed Sale

Since 1996, Panda has experienced significant operating losses in
attempts to develop its Technology Products and Systems business. Panda has
lacked additional capital funding for its operations and the Board of
Directors believes Panda has exhausted all resources for such financing. The
financing Panda has received has been dilutive and has had a negative effect
on the price of Panda Common Stock. Other non- operational events also had a
significant effect on Panda's operations. In December 1997, Mr. Webster,
founder of Helix, passed away. His death changed Helix's ability to continue
any future long- term financial participation in Panda. Helix, as an entity,
is liquidating its investment portfolio and anticipates being complete by
December 2000. In August 1998, Panda received a notice from the National
Association of Securities Dealers, Inc. regarding the delisting of Panda
Common Stock from the Nasdaq National Market. In September 1998, Joseph
Sarubbi obtained a judgment against Panda in the amount of $1,227,041.

In September 1998, the Board of Directors determined that Panda would not
be able to generate sufficient revenues and resulting gross profits to cover
its fixed costs in order to continue its operations in the future. The Board
of Directors believed the factors mentioned above, coupled with Panda's
continued negative cash flow and the general decline of its financial
condition, suggested that the interests of Panda's shareholders would be
better served if Panda pursued the sale of substantially all of its Operating
Assets.

Panda's management contacted over 35 companies and venture capital firms
between March 1997 and May 1999 regarding their interest in providing capital
to Panda, acquiring Panda or acquiring Panda's assets. None of the parties
approached expressed a serious interest in such a transaction except for
VantagePoint Venture Partners. Archimedes Capital LLC ("Archimedes"), an
entity controlled by Matthew A. Ocko, a partner of Vantage, entered into a
consulting arrangement with Panda four months prior to discussions between
Vantage and Panda for the sale of Panda's assets. Mr. Ocko ceased consulting
to Panda once discussions between Panda and Vantage commenced. In February
1999, Vantage indicated it would be willing to consider an acquisition of
Panda, but only if the transaction was structured as an asset acquisition in
which Vantage or an entity founded by Vantage would assume only certain
liabilities of Panda. In February 1999, Panda defaulted on certain loans from
Helix (PEI) Inc. ("Helix"). Helix possessed a security interest in all of the
intellectual property assets of Panda. Helix, under the loan documents, has
the right to foreclose on the intellectual property and sell such property
through a private or public sale. It is unlikely under this scenario that
Panda shareholders would receive any value. Without the intellectual
property, the fixed assets have little or no value except as scrap. The VSPA
flex machines cannot be used without access to Panda's intellectual property.
Helix communicated to Panda that, in order to avoid an "Event of Default"
under the parties' loan agreement and resulting foreclosure on Panda's
intellectual property assets, either (i) the Helix loans would need to be
repaid in full or (ii) the capital structure of Panda would need to be
restructured in order to modify the rights of Panda's preferred shareholders.
Helix also requested 10% of the equity of Panda with protection for
antidilution.

In light of these developments, the Board of Directors, in a special
meeting held on April 23, 1999, decided to take the course of the strategy it
had originally discussed in its February 1999 meeting by selling Panda's
Operating Assets to SBI, discontinuing Panda's business operations, and
continuing the existence of Panda as a public "holding" corporation whose
principal asset would be the ownership of its interest in SBI. At the special
meeting, the Board of Directors approved the execution and delivery of a
letter of intent with SBI for the sale of substantially all of Panda's
Operating Assets to SBI. The Board of Directors opted for the Proposed Sale
to Vantage because (1) it believed it was optimizing the return on the value
of Panda's assets, (2) Vantage agreed to assume a significant amount of
Panda's liabilities and (3) the Board of Directors had confidence in Vantage's
ability to conclude the transaction in a timely manner. To determine whether
Panda was optimizing the return on its assets, the Board of Directors reviewed
the total consideration to be received from SBI in comparison to all other
viable offers previously received for Panda and its Operating Assets.

<PAGE>
Page 9

Panda and Vantage commenced preliminary discussions concerning the
Proposed Sale in February 1999. Between February and May 1999, Vantage and
Panda engaged in significant negotiations related to the sale of Operating
Assets. There were several financing alternatives contemplated with the
intentions to maximize the return for the Company's common shareholders and
restructure the Helix loans. It was concluded that the likely liquidation
value of the Company's intellectual property if sold through the method
permitted under the Helix loan documents would yield a lower value than if the
intellectual property was sold in conjunction with certain fixed assets to
manufacture the product as well. It was determined that the Company had
payables in excess of $1,000,000, loans to Helix in the amount of $2,000,000
and other various on going obligations. The Company had a negative book
value. If the Company were liquidated, the shareholders would receive nothing
for their shares. There have been studies performed on liquidation values of
business assets such as one by Hite, Owers & Rogers. It was concluded that
the sale value was approximately 50% of the market value of the assets. The
Hite, Owens & Rogers study was not related to, or an evaluation of, Panda's
assets, but is just used as a general reference for the kind of value Panda
might receive if it was forced to liquidate all of its assets in lieu of
selling certain of them to VantagePoint. The 10% offer to Panda was
determined by Vantage Point as a reasonable and fair premium to pay over the
Company's current book value for the intellectual property and certain fixed
assets. On May 14, 1999, Panda announced it had entered into a letter of
intent with SBI with respect to the sale of substantially all of its operating
assets. During the months of May and June 1999, the parties exchanged drafts
of the Asset Purchase Agreement and negotiated the remaining terms of the
transaction. During the period, Panda furnished Vantage with requested due
diligence materials. On July 15, 1999, the Board of Directors, which was
comprised of Stanford W. Crane, Jr. and William E. Ahearn, approved the Asset
Purchase Agreement. The Asset Purchase Agreement was executed by SBI and
Panda on July 19, 1999.

Other than as discussed above with respect to the negotiations regarding
the Asset Purchase Agreement and related agreements, the only other material
contracts arrangement, understanding, relationship, negotiation or transaction
between SBI and Panda in the last two fiscal years or in 1999 has been the
"bridge" loans extended by SBI to Panda. On October 1, 1999, August 17, 1999,
July 15, 1999 and June 11, 1999, Panda entered into agreements with SBI to
borrow $300,000, $325,000, $325,000 and $300,000, respectively. In connection
with these loans, Panda has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to a security
agreement. The loans will bear interest at a rate of 6% per annum and are due
and payable on February 24, 2000. Panda and SBI have engaged in discussions
regarding the forgiveness of loans made by SBI to Panda. In exchange for the
forgiveness by SBI of the loans, Panda would agree to reduce the
capitalization requirements of SBI by the amount of the loans forgiven.

Panda's Reasons for the Proposed Sale; Recommendation of the Board of
Directors

THE BOARD OF DIRECTORS OF PANDA HAS UNANIMOUSLY APPROVED THE PROPOSED SALE
AND RECOMMENDS APPROVAL OF THE PROPOSED SALE BY PANDA SHAREHOLDERS.

As discussed above under "Background of the Proposed Sale," since 1996,
Panda has had negative cash flow and a consistent decline in its financial
condition. Panda also has had extreme difficulty in securing additional
financing to fund operations. Panda has been forced to enter into several
complex and dilutive financings in order to continue operations. These
financings have adversely affected Panda's stock price.

<PAGE>
Page 10

In response to these critical problems affecting Panda's business
operations, the Board of Directors had instructed Panda's management to
develop and adopt a business strategy which would continue Panda's existing
business operations while simultaneously (i) seeking to minimize its expenses
and (ii) considering and pursuing all potential merger, acquisition, sales,
joint-venture and other combination options. Panda's management implemented
this strategy and sought out appropriate potential merger and acquisition
candidates.

Other interested parties included two parties from Europe and one party
from the United States. All parties which expressed interest, however, were
never able to access any substantial capital. The United States interest came
from an individual who could not even produce approximately $200,000 committed
in a prior transaction. SBI was the only legitimate alternative to provide
both capital and a vehicle for Panda shareholders to obtain a potential return
on their investment.

As described above under "Background of the Proposed Sale," the decision
of Panda's Board of Directors to approve the Proposed Sale and recommend that
Panda shareholders vote in favor of the Proposed Sale followed many months of
analyzing Panda's future prospects, discussing the advantages and
disadvantages of merging or disposing of Panda's assets and exploring sale
alternatives. As of February 15, 1999, the Company was in default of its loan
agreement with Helix, although no notice of default was delivered to Panda by
Helix. The Company was unable to repay the principal due in the amount of
$2,000,000 and Helix had the right to foreclose on the intellectual property.
If Helix had foreclosed on the intellectual property of the Company and sold
it to a third party, the value of the Company's other assets would be severely
diminished. As of March 31, 1999, the Company had assets of $2,608,219 and
current liabilities of $4,593,208. As of March 31, 1999, the deficit was
$1,984,989. The Company asked Helix not to foreclose and allow it additional
time to identify other sources of capital to repay the loan. Due to the
complexity of the Company's capital structure, including the Helix loans and
the Series A Preferred Stock, the Company was faced with few alternatives.
The Board calculated that the Panda shareholders would receive in the
transaction (i) a 10% stake in SBI valued at $600,000, (ii) the ability to
assign the $2,000,000 note and interest on the note of approximately $183,000
and (iii) $500,000 for payable and other accrued expenses extended to the
Company. The $600,000 valuation of the 10% stake in SBI is based on SBI's $6
million initial capitalization. The value of the funds being received by the
Panda shareholders totalled $3,283,000 before including any of the advanced
funds for continuing operations. When SBI expressed interest in acquiring
substantially all of Panda's Operating Assets, the Board considered whether or
not the interests of the Panda shareholders would be better served if Panda's
Operating Assets would be retained and (i) Panda would instead be dissolved,
or (ii) Panda would continue its business operations. If Panda were to be
dissolved, Helix had the ability to sell Panda's intellectual property assets
in a private sale within five days of the notice of dissolution. The Board
concluded that Panda's prospects for future success have continued to diminish
because Panda has not been able to achieve a self-sustaining level of
revenues. The Board determined that Panda's failure to generate sufficient
revenues to warrant its operations in the future, coupled with Panda's
continued negative cash flow and the general decline of its financial
condition, suggest that the interests of the Panda shareholders would be
better served if Panda did not continue its business operations. In making
its recommendation of the Proposed Sale to Panda's shareholders, the Board
considered a number of factors, including those summarized below:

- the likelihood of Panda achieving sustained profitability from its
current and planned operations in view of the limited financial resources
available to it;

- the terms of the Asset Purchase Agreement;

- the potential courses of action available to Helix due to Panda's
default under the loan;

- the fact that no firm offers have been received by Panda involving cash
consideration, although various indications of interest have been expressed by
other potential buyers; and

<PAGE>
Page 11

- the recommendation of William E. Ahearn, independent director, stating
that, subject to the matters and limitations set forth therein, the
consideration to be received by Panda in the Proposed Sale is in the best
interests of Panda.

The positive factors of the SBI transaction were that the capital available
from SBI's venture backers would allow Helix to be paid off, and the
shareholders in Panda would have an opportunity to have ownership in a company
with adequate resources to potentially show a return to the investors. The
negative factors were the lack of liquidity for this ownership stake and the
relatively low ownership position of Panda in the new company. After weighing
these factors, the SBI transaction seemed a far better alternative to
liquidation to satisfy the Helix debt.

The main reason the Board of Directors believed that SBI could succeed with
the assets of Panda when Panda could not was that SBI is funded by a large
venture capitalist, VantagePoint Venture Partners, which gives them access to
substantial capital needed to grow the business. Additionally, VantagePoint
Venture Partners has extensive contacts through its limited partners, and
other investments, to assist in commercializing the acquired Panda
technologies in the target marketplace.

Based on these factors, the Board of Directors concluded that the sale of
substantially all of Panda's Operating Assets to SBI would help minimize these
adverse financial conditions and would therefore serve the interests of the
Panda shareholders. The Board of Directors believes this transaction is fair
and in the best interests of all the Panda shareholders.

If the Proposed Sale is not approved by Panda shareholders, Panda has
insufficient working capital to operate its business and will be unable to
continue as a going concern. Currently, Panda is relying upon capital
borrowed from SBI to continue operations. As such, if the Proposed Sale is
not approved by Panda shareholders, Panda intends to continue its search for
another purchaser of its Operating Assets. The approximate value of the
operating assets assumes that the intellectual property and the fixed assets
are not segregated. The property and equipment was valued on the balance
sheet at $1,171,853 as of the quarter ending September 30, 1999. However, the
value of the property and equipment would be substantially less, with an
approximate salvage value of $150,000, if the intellectual property was sold
separately. Most of the equipment related to VPSA would not be usable by a
third party without a license to the intellectual property. If the
transaction does not close with SBI, Helix has retained its rights to
foreclose on the intellectual property.

Recommendation of the Special Committee

At a meeting of the Board of Directors on February 25, 1999, the Board of
Directors established a special committee for reviewing and negotiating the
proposal by Vantage to purchase the Operating Assets. Board members Claud L.
Gingrich and Rao R. Tummala were named as the members of the special
committee. On March 18, 1999, Mr. Gingrich and Dr. Tummala resigned as
members of the special committee and the Board of Directors. Neither Mr.
Gingrich nor Dr. Tummala believed he possessed (i) the expertise to examine
the Proposed Sale or (ii) the time to thoroughly review the Proposed Sale.
Dr. Tummala is an academician who viewed his technical expertise as of little
relevance to the then current situation. Both directors viewed William E.
Ahearn, a former officer of Panda, as much more experienced in matters of this
type because he had experience with nineteen acquisitions while at AMP
Incorporated and was working with another small company on a capital/sale
issue early in 1999. Mr. Gingrich and Dr. Tummala then decided to elect Mr.
Ahearn to the Board and have him conduct the activities of the special
committee. At a Board of Directors meeting on May 18, 1999, Mr. Gingrich and
Dr. Tummala resigned from the Board of Directors.

Mr. Ahearn was elected as a member of the Board of Directors and
appointed to review and negotiate the Vantage proposal. Mr. Ahearn was a
former IBM executive, MIT Media Scholar, AMP Incorporated executive
instrumental in nineteen acquisitions, as well as a former Vice President at
the Company. Mr. Ahearn was familiar with the Company's products and business
challenges and therefore, was the most qualified person to handle the
negotiations with SBI.

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Page 12

Mr. Ahearn also had discussions with European investment advisor Sven
Josting of Teamwork related to potential investment by European institutions.
Nothing substantive, however, came from those discussions. Additionally, Mr.
Ahearn had extensive discussions with ART Computer of France, and their
representatives related to both licensing the Company's systems technology and
investment in, or purchase of, the Company. Upon reviewing the financial
capability of ART, the Company believed ART would be unable to produce even
the initial $250,000 payment for the license to the Systems business. Mr.
Ahearn then decided the proposal of VantagePoint Venture Partners was the only
viable option for the Company.

Mr. Ahearn concluded that the Proposed Sale was in the best interest of
Panda and its shareholders. Mr. Ahearn recommended to the Board of Directors
that Panda enter into the Proposed Sale. Mr. Ahearn based his recommendation
on a number of factors affecting Panda. Panda's poor financial condition and
Panda's inability to raise additional capital to fund its operations were the
primary factors in his recommendation. Panda has sought a purchaser for its
assets for a considerable period of time. In determining a fair value for the
assets, Mr. Ahearn evaluated bids for remaining inventory, current market
prices for used equipment in the machine shop, and liquidation value for the
used furniture and fixtures. He also evaluated the ability of Panda to
restructure its outstanding loans with Helix to obtain greater future value
for the intellectual property. Mr. Ahearn valued the 10% interest in SBI at
$600,000. This value is based on SBI's $6 million initial capitalization.
Panda also would assign the $2,000,000 note and interest of approximately
$183,000 of Helix (PEI) Inc. to SBI and receive $500,000 from SBI for payables
and other expenses. Mr. Ahearn valued the total consideration to be received
in the Proposed Sale by Panda to be $3,283,000.

In arriving at his recommendation, Mr. Ahearn, among other things, (i)
reviewed drafts of the Letter of Intent, dated March 17, 1999 and thereafter,
by and between Panda and SBI; (ii) reviewed the Annual Reports to shareholders
and Forms 10-K for the years 1997 and 1998, and the Form 10-Q for March 31,
1999, which were provided to Mr. Ahearn by Panda; (iii) discussed the future
prospects, including financing needs of Panda, with the management of Panda
and its creditors; (iv) reviewed correspondence between Panda and certain
financial institutions, investment banking firms and venture capital groups
regarding the sale of Panda; (v) had discussions with Vantage and other
potential purchasers of Panda's Operating Assets; (vi) had discussions with
Helix and Panda's preferred shareholders regarding the financial situation of
Panda; (vii) reviewed the asset listing provided to Mr. Ahearn by Panda; and
(viii) performed such other analyses and reviews as he deemed necessary and
appropriate.

In preparing his recommendation, Mr. Ahearn relied on the accuracy and
completeness of all information that was publicly available, supplied or
communicated to him by or on behalf of Panda, and Mr. Ahearn has not assumed
any responsibility to independently verify the same. Mr. Ahearn assumed that
the financial forecasts provided to him were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the management of Panda as to the future performance of Panda.

Mr. Ahearn reviewed the asset listing of Panda to determine the approximate
purchase value of the assets. Mr. Ahearn determined that the assets being
sold included all the operating assets of Panda. In his analysis, Mr. Ahearn
has assumed that the highest and best use of the assets is in their continued
use in a business enterprise.

In connection with Mr. Ahearn's time to analyze and evaluate the Proposed
Sale as well as assist in the negotiations with Helix and the Series A
Preferred shareholders, Mr. Ahearn was paid approximately $10,500 including
out-of-pocket expenses. Mr. Ahearn retained outside non-affiliated legal
counsel to assist him in the required procedures to make an independent
recommendation. Panda paid his legal fees of $10,000 related to his services.
The Company does not expect any additional expenses related to Mr. Ahearn's
services. No portion of Mr. Ahearn's fee is contingent upon the successful
completion of the Proposed Sale. In addition, Panda has agreed to indemnify
Mr. Ahearn and his agents against certain liabilities incurred in connection
with their services, including liabilities under federal securities laws.

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Page 13

Absence of Financial Advisor

The Board of Directors did not, and did not consider it advisable to,
engage an independent financial advisor to render a fairness opinion with
respect to the Proposed Sale. The Asset Purchase Agreement was negotiated at
arm's length between Panda and SBI. Given Panda's limited resources, the
Board of Directors did not believe that it was in the best interest of the
Panda shareholders to incur the cost of a fairness opinion. In addition, the
Board of Directors believed that other factors to be reviewed, such as the
value of the assets, the need for additional capital, the inability to attract
new personnel and the extent of existing liabilities, were within the
competence of the Board of Directors. The absence of a financial advisor
forces Panda shareholders to rely solely on the recommendation of Mr. Ahearn
and the Board of Directors. The lack of review by an independent third party
does create the risk that the review of the Proposed Sale by Mr. Ahearn and
the Board of Directors may not consider all relevant factors that a third
party with extensive expertise may consider.

Approval of the Panda Series A Preferred Shareholders

Prior to any transfer of substantially all of the assets of Panda to
another entity, Panda must receive the written approval of the holders of
66-2/3% of the Panda Series A Preferred Stock holders , if any remain
outstanding. However all of the holders of the Series A Preferred Stock
converted their shares to common stock prior to the record date for the
meeting. Consequently, no approval of the Preferred Stock will be required.

Interests of Certain Persons in the Proposed Sale

In early September, SBI engaged in discussions with Stanford W. Crane,
Jr., Panda's Chief Executive Officer, and Melissa F. Crane, Panda's acting
Chief Financing Officer, regarding potential employment opportunities for
these individuals with SBI. If the Proposed Sale is completed, these
individuals may become employees of or consultants to SBI and may therefore
receive compensation for their services to SBI. In particular, during the
negotiations, SBI discussed with Stanford Crane the opportunity to become
Chief Technical Officer of SBI. Although the specific terms and conditions of
his employment as Chief Technical Officer have not been determined, SBI did
say that Mr. Crane's salary would be commensurate with industry standards. No
other specific employment terms or conditions have been offered by SBI.
During the negotiations with SBI, Mr. Ahearn received no information about the
terms of any potential employment or consulting agreements between these
individuals and SBI. SBI intends to hire seven to ten employees from Panda's
current workforce, and no contracts have been executed or agreed to for their
employment.

During 1998, Panda entered into a consulting agreement with Archimedes
whereby Archimedes would provide assistance to Panda in connection with
seeking a corporate partnering transaction or a sale of Panda. Mr. Ocko
became a partner of VantagePoint four months after such agreement was signed.
In connection with that agreement, Panda granted to Archimedes a warrant
convertible into 2% of Panda capital stock upon the completion of a successful
transaction. SBI has agreed that upon completion of the transactions set
forth herein, Archimedes will receive 2% of SBI's preferred stock in exchange
for this warrant (the "Archimedes Exchange").

Pursuant to the Asset Purchase Agreement, 20% of SBI capital stock will be
reserved for issuance to SBI's employees, officers and directors upon the
exercise of employee stock options. SBI has not determined (i) which
employees, officers or directors of SBI, including any current employees of
Panda that become employees of SBI, will receive this SBI capital stock or
(ii) the amount they will receive.

A license agreement between Stanford W. Crane, Jr., the President and Chief
Executive Officer of Panda, and Panda (the "Crane-Panda License") is being
transferred to SBI. Any royalties received from SBI by Mr. Crane under the
Crane-Panda License would be at the same rate at which he currently receives
royalties.

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Page 14

Transition Planning

Melissa F. Crane, Acting Chief Financial Officer of Panda, and Alan
Salzman, a partner of VantagePoint, respectively, will be jointly responsible
for coordinating all aspects of transition planning and implementation
relating to the Proposed Sale and the other transactions contemplated by the
Asset Purchase Agreement. Until the consummation of the Proposed Sale, Ms.
Crane and Mr. Salzman jointly will (i) examine various alternatives regarding
the manner in which to best organize and manage the businesses of SBI and
Panda after the consummation of the Proposed Sale and (ii) coordinate policies
and strategies with respect to regulatory authorities and bodies, in all cases
subject to applicable law.

Changes in Shareholder Rights after the Proposed Sale

Following the completion of the Proposed Sale, Panda's shareholders will
retain their same equity interests in Panda. The completion of the Proposed
Sale will not result in any changes in the rights of Panda's shareholders. As
discussed above, Panda does not intend to distribute any of the SBI common
stock from the sale to Panda shareholders through a special dividend or
similar device.

Continued Operations of the Company

After the consummation of the Proposed Sale, Panda expects to have the
same directors. Director William E. Ahearn has indicated he will serve as
Panda's President, and Susana Van Arsdale will serve as Panda's Controller.
Ms. Van Arsdale has worked for Panda since 1995 as the Accounting Manager and
became Panda's Controller in January 1999. Ms. Van Arsdale is a CPA and was
previously employed by PricewaterhouseCoopers L.L.C.

Panda's financial obligations after the Proposed Sale will be comprised
of accounts payable of approximately $883,000. Of this amount, approximately
$34,000 owed to L.G. Cable will be deducted from the $100,000 licensing fee
pursuant to an agreement with L.G. Cable and $723,000 related to professional
fees is in the process of being negotiated and settled for less than the
amount owed. Panda owes approximately $461,000 in liquidated damages to
purchasers of Panda Common Stock in the August 1998 Private Placement, which
Panda is negotiating to pay off with 4,500,000 newly authorized shares of
Panda Common Stock. In addition, approximately $162,000 is in dispute between
Panda and various vendors for services which did not meet specifications or
parameters in accordance with purchase orders. The expense of maintaining
Exchange Act requirements is expected to be approximately $200,000 in the
first year and approximately $100,000 in the subsequent year.

Panda expects to fulfill its obligations to creditors and pay its
expenses related to Exchange Act requirements through the sale of remaining
assets and the use of returned security deposits on existing leases. The
assets remaining after the sale will be systems inventory assets which were
reserved as of December 31,1998. The Company expects to recover approximately
$60,000 of security deposits paid on leases. In addition, $80,000 related to
a letter of credit as security on a terminated lease agreement will be
refunded if no event of default occurs by the new tenant, $40,000 of which
will be released in July 2000 and the remaining $40,000 of which will be
released in July 2002.

Accounting Treatment; Material Federal Income Tax Consequences

The Proposed Sale will be accounted for as a sale, and Panda will recognize
gain or loss on the sale of its Operating Assets to the extent the portion of
the purchase price allocated to such Operating Assets exceeds or is less than
Panda's basis therein. For federal income tax purposes, when a trade or
business is sold, each asset is treated as sold separately in determining the
seller's income, gain or loss. The purchase price is allocated among the
assets sold using a residual value method in the case of a sale of assets to
which goodwill could be attached. The characterization of income or loss on
property used in a trade or business is generally governed by Section 1231 of
the Internal Revenue Code. If the Section 1231 gains exceed the losses, each
gain or loss is a long term capital gain or loss derived from the sale of a
capital asset to the extent the asset has been held for twelve months or more.
If the losses exceed the gains, all gains and losses are treated as ordinary
gains or losses. Any gain attributable to the sale of inventory and any
depreciation recapture, will produce ordinary income.

Capital gains of a corporation can be used to offset capital losses only,
with no offset against ordinary income. A three year carry-back and five year
carry-forward is available.

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Page 15

The Proposed Sale will not have any federal tax consequences to the Panda
shareholders.

THE FOREGOING DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS
DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL
TAX CONSEQUENCES OF THE PROPOSED SALE. THIS DISCUSSION DOES NOT ADDRESS THE
TAX CONSEQUENCES OF ANY TRANSACTION OTHER THAN THE PROPOSED SALE.

Regulatory Approvals

To Panda's knowledge, completion of the Proposed Sale does not require any
regulatory approvals other than the filings in connection with this Proxy
Statement required under Federal securities laws.

RISKS AND CONSIDERATIONS RELATED TO THE PROPOSED SALE

The Panda shareholders need to understand the issues related to the
Proposed Sale which are set forth below. In particular, the Panda
shareholders should be aware of the risks related to the ownership of SBI
common stock, which will be Panda's main asset upon consummation of the
Proposed Sale.

Holding Company Structure

Unregistered Stock; Absence of a Public Trading Market

The shares of SBI common stock which Panda will receive as part of the
Proposed Sale have not been registered under the Securities Act or any state
securities laws and, unless so registered, may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities law. The shares of SBI common stock are new securities for which
there is currently no public market. In addition, Panda has agreed not to
dispose of the SBI shares for a period of five years. As a result, Panda's
investment in SBI will be illiquid and there can be no assurance that a public
trading market for SBI stock will develop in the future or, that if developed,
such a trading market will be sustained.

Absence of an Operating History

SBI was recently formed and has not yet commenced operations. Accordingly,
SBI has no operating history on which to base an evaluation of its business
prospects. SBI's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development. Such risks for SBI include, but are not limited to, an evolving
and unpredictable business model and the management of growth. To address
these risks, SBI must, among other things, develop high quality "Integrated
Interface" products, establish, maintain and increase its customer base,
implement and successfully execute its business and marketing strategies,
develop and upgrade its technology and transaction-processing systems, respond
to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the SBI will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on SBI's business, prospects, financial condition and results of
operations.

<PAGE>
Page 16

Absence of a Financial Advisor

Panda did not engage an independent financial advisor to render a
fairness opinion with respect to the Proposed Sale. The absence of a
financial advisor forces shareholders to rely solely on the recommendation of
Mr. Ahearn and the Board of Directors. The lack of review by an independent
third party does create the risk that the review of the Proposed Sale by Mr.
Ahearn and the Board of Directors may not consider all relevant factors that a
third party with extensive expertise may consider.

No Dividends on SBI Common Stock

Since Panda's primary source of income will be its investment in SBI,
Panda's ability to declare cash dividends in the future will depend
exclusively on SBI's ability to pay cash dividends. Currently, SBI intends to
retain future earnings to finance the development and expansion of SBI's
business and does not anticipate paying any cash or stock dividends on its
common stock in the foreseeable future. The declaration and payment of any
dividends in the future will be determined by the board of directors of SBI,
in its discretion, and will depend on a number of factors, including SBI's
earnings, capital requirements and overall financial condition.

Minority Interest; No Voting Power

If the Proposed Sale is approved, Panda will own an aggregate of
approximately 10% of the outstanding common stock of SBI. Given this minority
equity position, Panda will not have the ability to influence the day to day
management of SBI. In addition, Panda will not have sufficient shares of SBI
common stock to be able to individually control matters submitted to a vote of
the SBI shareholders.

Remaining Panda Assets Have Limited Value

After the Proposed Sale, Panda's sole significant asset will be its 10%
equity stake in SBI's common stock. All of Panda's other remaining assets
will be of limited or no value. As a result, Panda's future prospects, and
the future value of Panda's Common Stock, will depend almost entirely on the
success or failure of SBI.

No Reporting Requirements

Although Panda will continue to be subject to the reporting requirements of
the Exchange Act following the Proposed Sale, SBI has no reporting obligations
under the Exchange Act. As a result, subject to certain circumstances, SBI
will not have an ongoing duty to publicly disclose material information or
developments related to its business, financial condition or results of
operations. In addition, there can be no assurance that Panda will
independently have timely knowledge of such developments or access to such
information. Accordingly, Panda shareholders may not obtain information on SBI
that is directly relevant to their investment in Panda in a timely manner or
at all.

THE ASSET PURCHASE AGREEMENT

Terms of the Asset Purchase Agreement

The following is a brief summary of the material provisions of the Asset
Purchase Agreement. The Asset Purchase Agreement contemplates the sale of
substantially all of Panda's Operating Assets to SBI. THE DESCRIPTION OF THE
ASSET PURCHASE AGREEMENT SET FORTH HEREIN DOES NOT PURPORT TO BE COMPLETE;
HOWEVER, ALL MATERIAL TERMS OF THE AGREEMENT ARE SUMMARIZED BELOW. PANDA
SHAREHOLDERS SHOULD REVIEW THE ASSET PURCHASE AGREEMENT, A COPY OF WHICH IS
ATTACHED TO THIS PROXY STATEMENT AS ANNEX A AND IS INCORPORATED HEREIN BY
REFERENCE. YOU ARE URGED TO CAREFULLY READ THE ASSET PURCHASE AGREEMENT IN ITS
ENTIRETY.

<PAGE>
Page 17

Operating Assets Being Sold and Liabilities and Obligations Assumed

Panda has agreed to sell to SBI the following Operating Assets and rights
of Panda relating to Panda's business operations:

- all permits, authorizations, licenses and other governmental and
third-party rights and privileges, in each case used in Panda's business
operations;

- all tangible personal property owned by Panda and used in Panda's
business operations and all right, title and interest of Panda in the
inventory and supplies of Panda used in its business operations;

- any and all contracts and other rights, in each case used in Panda's
business operations, except for contracts which are excluded below;

- all patents, trade and service marks, designs, drawings, software
(except for software necessary for the continuation of Panda's operations),
trade names, copyrights, mask works, applications therefor, licenses thereof
and similar intangible property (collectively, "Intellectual Property"), in
each case used in Panda's business operations; and

- all of Panda's accounts receivable as of the closing date of the asset
sale transaction.

Those assets (other than assets constituting Intellectual Property)
exclusively used in Panda's computer systems business will not be sold under
the Asset Purchase Agreement.

In addition, SBI has agreed to assume or observe, subsequent to the closing
date of the Proposed Sale, Panda's obligations pursuant to the contracts that
are assigned by Panda to SBI in connection with the sale of Operating Assets.
The obligations to be assumed include the following:

- Panda's trade accounts payable outstanding on the closing date (up to
a maximum amount of $300,000);

- specific items included in Panda's accrued payroll and benefits
account outstanding on the closing date, which will not exceed $100,000;

- specific items included in Panda's "other current liabilities" account
on the closing date, which will not exceed $100,000;

- up to $2,000,000 of Panda's indebtedness to Helix, effective upon such
indebtedness' restructuring as described in the Voting Agreement among SBI,
Panda and certain shareholders of Panda dated May 14, 1999; and

- Panda's obligations under certain agreements assigned by Panda to SBI.

These liabilities are collectively referred to herein as the "Assumed
Liabilities."

Consideration Price

The aggregate consideration for the Operating Assets will be (i) shares
of SBI's common stock initially representing 10% of SBI's capital stock on a
fully diluted basis and (ii) the assumption of the Assumed Liabilities. In
addition to Panda's initial 10% fully diluted common equity interest, the
capital structure of SBI upon consummation of the Proposed Sale will be
comprised of Vantage's 70% fully diluted preferred equity interest and a 20%
fully diluted pool of common shares reserved for issuance upon exercise of
stock options to be issued to SBI's officers, directors, employees and
consultants. Each of these interests will be diluted pro rata by the issuance
of a 2% fully diluted preferred equity interest to Archimedes upon completion
of the Archimedes Exchange. See "Interests of Certain Persons in the Proposed
Sale." The SBI Common Stock to be received by Panda will be entitled to one
vote per share and to such dividends, if any, as are declared by the SBI Board
of Directors. SBI has indicated that it does not intend to pay any common
stock dividends for the foreseeable future. The Vantage preferred equity
interest will be comprised of shares of preferred stock, the material terms of
which include:

<PAGE>
Page 18

- one vote per share in all matters voted on by the common stock;

- a liquidation preference equal in the aggregate to Vantage's initial
$6,000,000 investment in SBI plus a participation interest along with SBI's
common stock;

- non-cumulative 6% dividends;

- the right to convert on a one-for-one basis (subject to customary
weighted average anti-dilution protection) into shares of SBI common stock;

- a pro rata right of first refusal on future stock issuances by SBI;
and

- the ability to appoint a majority of the board of directors of SBI.

Upon consummation of the Proposed Sale, the authorized capital stock of
SBI will be 30,000,000 shares of Common Stock and 10,000,000 shares of Series
A Preferred Stock. Of these shares, 1,000,000 shares of Common Stock will be
issued to Panda, 2,000,000 additional shares of Common Stock will be reserved
for issuance upon exercise of employee stock options and 7,000,000 shares of
Series A Preferred Stock will be issued and outstanding. Any additional
issuance of currently authorized capital stock of the Company, or any
additional issuances of capital stock of the Company that is not currently
authorized but is authorized after the consummation of the Proposed Sales will
further dilute Panda's ownership of SBI. Panda's ownership interest in SBI
will not be sufficient to allow Panda to control SBI's future authorization or
issuance of securities or to control any other corporate decision.

In connection with the Asset Purchase Agreement, Panda and SBI will execute
additional agreements to facilitate transfer of Panda's assets (the "Ancillary
Agreements").

Closing

The closing of the Proposed Sale will take place within three business days
of approval of the Proposed Sale by the Panda shareholders. The closing,
however, must in all events occur before February 24, 2000.

Conditions to Closing

Conditions to Obligations of Purchaser

SBI's obligation to consummate the Proposed Sale is subject to the
satisfaction (or waiver) of various conditions, including the following:

- the representations and warranties of Panda contained in the Asset
Purchase Agreement will have been true and correct when made and as of the
closing, and the covenants and agreements in the Asset Purchase Agreement to
be complied with by Panda on or before the closing date have been complied
with;

- no action will have been commenced or threatened against Panda or SBI
that would render inadvisable the consummation by SBI of the transactions
contemplated by the Asset Purchase Agreement, except in the case where SBI has
solicited or encouraged any such transaction;

<PAGE>
Page 19

- SBI and Panda will each have received all authorizations, consents,
orders and approvals which SBI reasonably deems necessary or desirable for the
consummation of the transactions contemplated by the Asset Purchase Agreement
and the Ancillary Agreements;

- SBI will have received amendments or novations of the contracts
identified in the Asset Purchase Agreement;

- no circumstance, change in or effect on Panda's operations will have
occurred which has a material adverse effect on the Operating Assets;

- the approval of the number of Panda's shareholders necessary to effect
the Asset Purchase Agreement, including preferred shareholders;

- the receipt by purchaser of all permits, authorizations, licenses and
other governmental and third party rights and privileges necessary to operate
the Business as currently conducted (collectively, "Approvals");

- the delivery by Panda to SBI of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;

- SBI's satisfaction that Panda is able to sell, convey and assign to
SBI, free and clear of all claims, liens and interests except as provided in
the Asset Purchase Agreement, title and interest in the Operating Assets;

- Panda's compliance in all material respects with its covenants and
agreements under the Asset Purchase Agreement;

- the absence of any injunction, stay or restraining order staying the
effectiveness of any Approval; and

- the absence of any threatened or pending suit, action, investigation,
inquiry or other proceeding which could have a material adverse effect on
SBI's ability to acquire, use, operate or enjoy the Operating Assets of Panda.

Panda has executed the contract amendments and novations required for Closing.
No governmental approvals are required for the consummation of the Proposed
Sale.

Conditions to Obligations of Seller

Panda's obligation to consummate the Proposed Sale will be subject to the
satisfaction (or waiver) of various conditions, including the following:

- the Asset Purchase Agreement will have been approved and adopted by
the requisite vote of the Panda shareholders;

- the representations and warranties of SBI contained in the Asset
Purchase Agreement will have been true and correct when made and as of the
closing, and the covenants and agreements in the Asset Purchase Agreement to
be complied with by SBI on or before the closing date have been complied with;

- the delivery by SBI to Panda of a signed counterpart of a
stockholders' agreement as set out in the Asset Purchase Agreement;

- SBI will be capitalized with equity capital of not less than
$6,000,000 in cash and commitments; and

<PAGE>
Page 20

- SBI's compliance in all material respects with its covenants and
agreements under the Asset Purchase Agreement.

SBI has been sufficiently capitalized to satisfy that condition for Closing.

Representations and Warranties

The Asset Purchase Agreement contains various representations and
warranties customary for transactions of this type, including representations
and warranties of Panda relating to, among other things:

- the due organization, valid existence, and good standing of Panda and
similar corporate matters;

- the authorization, execution, delivery, and enforceability of the
Asset Purchase Agreement;

- the accuracy and completeness of each report or proxy statement
delivered to SBI;

- Panda's compliance with the requirements of the Securities Act of 1933
and the Securities Exchange Act of 1934;

- the compliance of Panda's financial statements as to form with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and the accuracy of Panda's
financial statements;

- the collectibility and status of Panda's accounts receivable;

- the good condition and saleability of Panda's business inventories;

- Panda's compliance with all applicable laws and government orders;

- Panda's receipt of all required government permits, licenses,
authorizations, certificates and approvals;

- Panda's environmental, tax, labor and employee benefit matters;

- the legality, validity, enforceability, and assignability of all
contracts entered into by Panda that are necessary or useful for the operation
of its business, and the absence of any breach of these contracts by Panda;

- Panda's ownership of the Intellectual Property that it will sell to
SBI under the Asset Purchase Agreement;

- Panda's year 2000 compliance;

- Panda's title to the Operating Assets;

- the insurance coverage of all the Operating Assets;

- Panda's authority to execute the Asset Purchase Agreement and the
Ancillary Agreements;

- the absence of any pending, threatened or contemplated investigation
of or administrative or legal proceeding against Panda which Panda has not
disclosed;

- the absence of any material inaccuracy or omission in the Asset
Purchase Agreement or in any document filed by Panda with the SEC on or prior
to the date of the Asset Purchase Agreement;

<PAGE>
Page 21

- the absence of any undisclosed changes in Panda's condition that, in
the aggregate, are materially adverse to SBI;

- the absence of any undisclosed material liabilities;

- the absence of any material tax liability, except for taxes which
Panda reasonably disputes, the filing of all returns and reports due, and the
absence of any tax liens on the Operating Assets;

- the absence of any event or circumstance which, under applicable law,
would require public disclosure but which has not been so publicly disclosed;

- the absence of conflicts under Panda's charter or by-laws, required
consents or approvals, and violations of any instrument or law;

- the absence of any notice that any significant customer has ceased or
substantially reduced, or will cease or substantially reduce, its use of
Panda's products;

- the absence of any notice that any significant supplier will not sell
goods related to the Business at any time after the closing date on terms and
conditions similar to those imposed on current sales to Panda;

- the absence of certain liabilities by Panda under ERISA, and the
absence of any excise tax liabilities under certain sections of the Internal
Revenue Code;

- the absence of any undisclosed facts that affect Panda's operations
adversely or could do so in the future; and

- the absence of any broker's or finder's fees.

The Asset Purchase Agreement also contains various representations and
warranties of SBI with respect to the following:

- the due organization, valid existence, and good standing of SBI and
similar corporate matters;

- the authorization, execution, delivery, and enforceability of the
Asset Purchase Agreement;

- SBI's capitalization;

- SBI's financing commitments;

- the absence of any broker's or finder's fees; and

- the absence of conflicts under SBI's charter or by-laws, required
consents or approvals, and violations of any instrument, law, or governmental
order.

Covenants

In the Asset Purchase Agreement, Panda has agreed to the following
covenants:

- between the date of the Asset Purchase Agreement and the closing date,
Panda will not conduct its operations relating to the Operating Assets other
than in the ordinary course and consistent with Panda's past practice;

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Page 22

- Panda will provide SBI full and complete access to all facilities,
relevant documents and personnel;

- Panda will use commercially reasonable efforts to obtain all
authorizations, consents, orders, and approvals that may be or become
necessary for execution and delivery of the Asset Purchase Agreement and the
Ancillary Agreements;

- prior to the closing, Panda will promptly notify SBI of all events,
circumstances, facts and occurrences arising subsequent to the date of the
Asset Purchase Agreement which could have a material effect on its operations;

- Panda will not use any of the Intellectual Property after the closing
date of the Proposed Sale;

- Panda and SBI agree to cooperate and coordinate the making of any
public announcements concerning the Asset Purchase Agreement and the Ancillary
Agreements; and

- from the date of the execution of the Asset Purchase Agreement until
February 24, 2000, except as required pursuant to any fiduciary duty, neither
Panda nor any of its directors, officers, agents or representatives will (i)
solicit, encourage, initiate or participate in any negotiations or discussions
with respect to any offer or proposal to acquire all or any part of its
operations or assets whether by purchase of assets or otherwise, (ii) disclose
any information not customarily disclosed to any person concerning its
operations or the Assets or afford to any person or entity access to the
properties, books or records of its operations or the assets or (iii)
cooperate with any person to make any proposal to purchase all or any part of
the assets of its operations or the assets (directly or indirectly) other than
inventory or non-essential or excess assets sold in the ordinary course of
business.

Stockholders Agreement

Panda will be required to enter into a stockholders agreement as a
condition to the receipt of SBI common stock. The stockholder agreement will
include the following terms:

- the SBI common stock held by Panda is not transferable for a period of
five years, except in limited circumstances such as an initial public
offering;

- Panda must vote its shares of SBI common stock proportionately in
accordance with the vote of all other holders of SBI common stock;

- if holders of 50% of the SBI preferred shares dispose of their
preferred shares, Panda may be required to sell their shares on the same terms
as the SBI preferred shareholders;

- SBI will have the right of first refusal for any sales of SBI common
stock; and

- SBI common stock will have registration rights on substantially the
same terms as the SBI preferred shares.

Terms of Stockholders Agreement
-------------------------------

Transfer Any Purchaser Common Stock held by Seller would not be
Restrictions transferable for a period of five years from the Closing
Date, except pursuant to the drag along and registration
rights referred to below or, after Purchaser is a
publicly traded Company, to the shareholders of Seller.

Voting Seller shall agree to vote its shares of Purchaser
Common Stock proportionately in accordance with the vote
of all other holders of the Capital Stock of Purchaser.

Drag Rights Holders of 50% or more of Purchaser Series A Preferred
Stock, in connection with the disposition of 50% or more
or Purchaser Series A Preferred stock, may require the
holders of Purchaser Common Stock to sell their shares
on the same terms as the 50% or more holders.

First Right of first refusal in favor of Purchaser and other
Refusal holders in all sales (other than drag sales and
registered sales).

Registration Available to holders of Common Stock on substantially
Rights the same terms as Purchaser Series A Preferred Stock
subject to customary underwriter cutbacks and other
customary terms.

Purchaser Non-cumulative 6% dividends (will not ever be declared);
Series A participating preferred on Purchaser liquidation
Preferred (including merger or sale); weighed average anti-
Stock dilution protection; pro-rata right of first refusal on
Terms future Purchaser stock issuances; ability to appoint
majority of Purchaser Board of Directors.

Indemnification

The representations, warranties, covenants, agreements and obligations
contained in the Asset Purchase Agreement, or in any document or instrument
executed and delivered in connection with that agreement, will survive the
closing of the Proposed Sale for a period of one year. In addition, the Asset
Purchase Agreement requires Panda to indemnify and hold harmless SBI, its
successors and assigns from, for and against any loss, damage, liability,
injury or deficiency which results from the inaccuracy of any representation
or the breach of any warranty made by Panda in that agreement or the failure
of Panda duly to perform or observe any term, provision, covenant, agreement
or condition of the Asset Purchase Agreement relating to the period prior to
the closing date (other than with respect to the liabilities that SBI will
assume). In addition, the Asset Purchase Agreement requires Panda to
indemnify and hold harmless SBI, its successors and assigns from, for and
against any loss damage, liability, injury or deficiency that results from the
transport or arranged transport or disposal of any hazardous materials to any
location which is listed or proposed for listing on any federal or state list
of sites requiring investigation or remediation. The right of indemnification
for any of the environmental problems does not apply to any post-acquisition
activities. Panda does not have knowledge of any current environmental
liability.

<PAGE>
Page 23

The Asset Purchase Agreement also requires SBI to indemnify and hold
harmless Panda, its successors and assigns from, for and against any loss,
damage, liability or deficiency which results from the inaccuracy of any
representation or the breach of any warranty made by SBI or any failure of SBI
duly to perform or observe any term, provision, covenant, agreement or
condition of the Asset Purchase Agreement. The liability of Panda to
indemnify SBI is limited to $200,000 (the "Indemnification Limit"), and no
damage can be recovered unless the aggregate amount of damages exceeds
$50,000, provided, however, that once such threshold is met, the full amount
of damages, from the first dollar, can be recovered.

Panda agrees to indemnify and hold harmless SBI against the following taxes
and against any loss, damage, liability or expense, including reasonable fees
for attorneys and other outside consultants, incurred in contesting or
otherwise in connection with any such taxes:

- taxes imposed on SBI with respect to taxable periods ending on or
before the closing date;

- with respect to taxable periods beginning before the closing date and
ending after the closing date, taxes imposed on SBI or the operations of Panda
which are allocable to the portion of such period ending on the closing date;
and

- taxes imposed as a result of any breach of warranty or
misrepresentation of the Asset Purchase Agreement.

Indemnification obligations resulting from tax liabilities or employee
benefit liabilities are not subject to the Indemnification Limit.

The Asset Purchase Agreement imposes specific procedures, terms and
conditions on any party seeking indemnification under the Asset Purchase
Agreement, including, without limitation, notice requirements, defense of
claim procedures and settlement conditions.

Termination and Waiver

The Asset Purchase Agreement may be terminated at any time prior to the
closing:

- by SBI, if between the date of the Asset Purchase Agreement and the
time scheduled for closing an event or condition occurs that has resulted in
or SBI reasonably believes may result in a material adverse effect;

- by either Panda or SBI if the closing will not have occurred by
February 24, 2000, provided that such a right will not be available to any
party who causes the failure of the closing to occur on or prior to such date;

- by either Panda or SBI in the event that any governmental authority
will have issued an order, decree, or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions contemplated
by the Asset Purchase Agreement and such order, decree, ruling or other action
will have become final and nonappealable; or

- by the mutual written consent of Panda and SBI.

<PAGE>
Page 24

Pursuant to Section 5.07 of the Asset Purchase Agreement, Panda's Board of
Directors can negotiate a competing transaction consistent with its fiduciary
obligations if Panda receives a superior proposal to SBI's proposal.

To the extent material provisions or conditions of the Asset Purchase
Agreement are waived or amended or the termination date is extended, Panda
will amend the Proxy Statement and resolicit proxies.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following Unaudited Pro Forma Financial Information gives effect to
the consummation of Panda's sale of substantially all of its operating assets
to SBI as if it had been consummated on September 30, 1999, in the case of the
Unaudited Pro Forma Balance Sheet, and on Unaudited Pro Forma Statements of
Operations for the year ended March 31, 1997, the nine months ended December
31, 1997, the fiscal year ended December 31, 1998, and the nine months ended
September 30, 1999.

The following Unaudited Pro Forma Financial Information is presented for
illustrative purposes only and does not purport to be indicative of the
Company's actual financial position or results of operations as of the date
hereof, or as of or for any other future date, and is not necessarily
indicative of what the Company's actual financial position or results of
operations would have been had the Proposed Sale been consummated on the
above-referenced dates, nor does it give effect to (i) any transactions other
than the Proposed Sale and those described in the Notes to the Unaudited Pro
Forma Financial Information or (ii) Panda's results of operations since
September 30, 1999.

The following Unaudited Pro Forma Financial Information is based upon the
historical financial data of Panda and should be read in conjunction with the
information appearing in "The Asset Purchase Agreement," "Selected Historical
Financial Data" and other financial data included in this Proxy Statement. In
the preparation of the following Unaudited Pro Forma Financial Information, it
has been assumed that Panda's 10% interest in SBI is valued at $600,000 based
upon the initial $6,000,000 capitalization of SBI.

The Unaudited Pro Forma Balance Sheet at September 30, 1999, is based upon
Panda's financial position at June 30, 1999. The Unaudited Pro Forma
Statement of Operations for the nine months ended September 30, 1999 is based
upon Panda's results of operations for the nine months ended September 30,
1999. The Unaudited Pro Forma Statements of Operations for the fiscal year
ended March 31, 1997, the nine months ended December 31, 1997 and the fiscal
year ended December 31, 1998 is based on Panda's results of operations for
those periods.

<PAGE>
Page 25

UNAUDITED PRO FORMA FINANCIAL INFORMATION
BALANCE SHEET

September 30, 1999

Pro Forma
Historical Adjustment As Adjusted
---------- ---------- -----------
Current assets
Cash and cash equivalents $ 80,535 $ - $ 80,535
Accounts receivable (net of
allowance of $295,292) 8,496 (8,496)(1) -
Inventory, net 24,167 (24,167)(1) -
Other receivables 289,618 (289,618)(1) -
Prepaid expenses and other
current assets 43,128 (43,128)(1) -
----------- ---------- -----------
Total current assets 445,944 (365,409) 80,535

Property and equipment, net 1,171,853 (1,171,853)(1) -

Restricted cash 80,000 - 80,000

Other assets 85,104 - 85,104

Investment in SBI - 600,000(1) 600,000
----------- ---------- -----------
Total assets $ 1,782,901 $ (937,262) $ 845,639
=========== ========== ===========

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities
Accounts payable $ 1,182,648 $ (300,000)(1) $ 882,648

Notes payable Helix 2,000,000 (2,000,000)(1) -

Notes payable SBI 950,000 - 950,000

Other current liabilities 2,282,584 (100,000)(1) 1,722,084
(460,500)(5)
----------- ---------- -----------
Total current
liabilities 6,415,232 (2,860,500) 3,554,732

Commitments and contingencies

Stockholders' (deficit)
Preferred stock, $.01 par
value, 2,000,000 shares
authorized; 529 historical
and zero, as adjusted,
shares issued and
outstanding 4,864,137 (4,864,137)(7) -

Common stock, $.01 par value,
50,000,000 shares
authorized; 29,698,425
historical and
49,946,515, as adjusted,
shares issued
and outstanding 296,985 202,627 (7) 499,612

Additional paid-in capital 76,931,972 4,661,510 (7) 82,053,982
460,500 (5)

Accumulated deficit (86,725,425) 1,462,738 (1) (85,262,687)
----------- ---------- -----------

Total stockholders'
(deficit) (4,632,331) 1,923,238 (2,709,093)
----------- ---------- -----------

Total liabilities
and stockholders'
(deficit) $ 1,782,901 $ (937,262) $ 845,639
=========== ========== ===========

See Notes to Unaudited Pro Forma Financial Information

<PAGE>
Page 26

UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS

Nine Months Ended September 30, 1999

Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 403,841 $ (403,841)(2) $ -
Licensing fees 750,000 (750,000) (2) -
Contract research and
development revenues - - -
----------- ---------- -----------
Net revenues 1,153,841 (1,153,841) -

Other expenses
Cost of sales 206,060 (206,060)(2) -
Research and development 754,652 (754,652)(2) -
Selling, general and
administrative 3,582,071 (3,582,071)(2) 312,680
312,680 (6)
Amortization of debt
issuance costs/ accrued
penalties 2,695,500 (2,695,500)(2) -
Cost associated with asset
impairments 167,223 (167,223)(2) -
----------- ---------- -----------
Total operating expenses 7,405,506 (7,092,826) 312,680
----------- ---------- -----------
Operating loss (6,251,665) 5,938,985 (312,680)
Interest expense (302,938) 302,938(2) (27,552)
(27,552)(4)
Interest income - - -
Other income 111,059 (111,059)(2) -
Gain on sale/disposal
of assets 58,368 (58,368)(2) -
----------- ---------- -----------
Net loss from operations (6,385,176) 6,044,944 (340,232)

Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock (54,067) - (54,067)
----------- ---------- -----------
Net loss applicable
to common stock (6,439,243) 6,044,944 (394,299)

Net loss from discontinued
operations - (6,044,944)(2) -
6,044,944 (3)
----------- ---------- -----------
Net loss $(6,439,243) $6,044,944 $ (394,299)
=========== ========== ===========
Basic and diluted loss
per share $ (.26) $ (.01)
=========== ===========
Weighted average shares
outstanding 24,587,384 24,587,384
=========== ===========
See Notes to Unaudited Pro Forma Financial Information

<PAGE>
Page 27

UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS

Twelve Months Ended December 31, 1998

Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 586,907 $ (586,907)(2) $ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 135,673 (135,673)(2) -
----------- ---------- -----------
Net revenues 822,580 (822,580) -

Other expenses
Cost of sales 1,739,418 (1,739,418)(2) -
Research and development 3,395,577 (3,395,577)(2) -
Selling, general and
administrative 9,263,283 416,906 (6) 416,906
(9,263,283)(2) -
Cost associated with asset
impairments 125,038 (125,038)(2) -
----------- ---------- -----------
Total operating expenses 14,523,316 (14,106,410) 416,906
----------- ---------- -----------
Operating loss (13,700,736) 13,283,830 (416,906)

Interest expense (3,881,406) 3,881,406(2) -
(18,000)(4) (18,000)
Interest income 72,345 (72,345)(2) -
Other income 35,101 (35,101)(2) -
----------- ---------- -----------
Net loss from operations (17,474,696) 17,039,790 (434,906)

Dividends and amortization
of beneficial conversion
feature related to convertible
preferred stock (741,886) - (741,886)
----------- ---------- -----------
Net loss applicable
to common stock (18,216,582) 17,039,790 (1,176,792)
Net loss from discontinued
operations (17,039,790)(2)
- 17,039,790 (3) -
----------- ---------- -----------
Net loss $(18,216,582)$17,039,790 $(1,176,792)
=========== ========== ===========
Basic and diluted loss
per share $ (1.33) $ (.09)
=========== ===========
Weighted average shares
outstanding 13,732,936 13,732,936
=========== ===========

See Notes to Unaudited Pro Forma Financial Information

<PAGE>
Page 28

UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS

Nine Months Ended December 31, 1997

Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 923,792 $ (923,792)(2) $ -
Licensing fees 350,000 (350,000)(2) -
Contract research and
development revenues 973,003 (973,003)(2) -
----------- ---------- -----------
Net revenues 2,246,795 (2,246,795) -

Other expenses
Cost of sales 1,028,577 (1,028,577)(2) -
Research and development 3,255,335 (3,255,335)(2) -
Selling, general and
administrative 6,113,255 (6,113,255)(2) 312,680
312,680 (6)
----------- ---------- -----------
Total operating
expenses 10,397,167 (10,084,487) 312,680

Operating loss (8,150,372) 7,837,692 (312,680)

Interest expense (955,014) 955,014 (2) -
(18,000)(4) (18,000)
Interest income 144,449 (144,449)(2) -
Other income 11,285 (11,285)(2) -
----------- ---------- -----------
Net loss from
operations (8,949,652) 8,618,972 (330,680)

Net loss from discontinued
operations (8,618,972) (2)
- 8,618,972 (3) -
----------- ---------- -----------
Net loss $(8,949,652) $8,618,972 $ (330,680)
=========== ========== ===========
Basic and diluted loss
per share $ (.78) $ (.03)
=========== ===========

Weighted average shares
outstanding 11,541,811 11,541,811
=========== ===========

See Notes to Unaudited Pro Forma Financial Information

<PAGE>
Page 29
UNAUDITED PRO FORMA FINANCIAL INFORMATION
STATEMENT OF OPERATIONS

Twelve Months Ended March 31, 1997

Pro Forma
Historical Adjustment As Adjusted
----------- ---------- -----------
Revenues
Product sales $ 1,547,896 $(1,547,896)(2)$ -
Licensing fees 100,000 (100,000)(2) -
Contract research and
development revenues 734,123 (734,123) (2) -
----------- ---------- -----------
Net revenues 2,382,019 (2,382,019) -

Other expenses
Cost of sales 2,762,936 (2,762,936) (2) -
Research and development 5,722,717 (5,722,717) (2) -
Selling, general and
administrative 13,142,099 (13,142,099) (2) 416,906
416,906 (6)
Cost associated with asset
impairments 2,056,025 (2,056,025) (2) -
----------- ---------- -----------
Total operating expenses 23,683,777 (23,266,871) (416,906)
----------- ---------- -----------
Operating loss (21,301,758) 20,884,852 (416,906)

Interest expense - (18,000) (4) (18,000)
Interest income 427,657 (427,657) (2) -
Other income - - -
----------- ---------- -----------
Net loss from operations (20,874,101) 20,439,195 (434,906)

Net loss from discontinued
operations (20,439,195) (2)
- 20,439,195 (3) -
----------- ---------- -----------
Net loss $(20,874,101)$20,439,195 $ (434,906)
=========== ========== ===========

Basic and diluted loss
per share $ (2.15) $ (.04)
=========== ===========

Weighted average shares
outstanding 9,723,801 9,723,801
=========== ===========

See Notes to Unaudited Pro Forma Financial Information

<PAGE>
Page 30

NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION

(1) To reflect the sale of certain assets to and the assumptions of certain
liabilities by SBI under the capital asset purchase agreement. As a result of
the proposed sale, the Panda Project will recognize a gain of $1,462,738,
which was not presented herein.

(2) To reclassify the operating loss to discontinued operations as a result
of the proposed sale of the operating business per Accounting Principles Board
Opinion No. 30.

(3) To eliminate the loss as a result of the sale of the proposed sale of
the business as if it had occurred at the beginning of the period.

(4) To reflect interest on the new $950,000 SBI bridge loan at the 6%
annual interest rate as per the promissory note.

(5) To reflect elimination of accrued penalties on Class A Preferred Stock
and certain common stock penalties in the amount of $460,500.

The Company had previously accrued certain penalties under the Class A
Preferred Stock Agreement, but under the new exchange agreement executed in
connection with the SBI purchase agreement, the preferred shareholders waived
the penalties due both for the Class A Preferred Stock as well as their share
of the accrued common stock penalties totalling $383,500.

(6) To reflect estimated legal fees, accounting fees and other general and
administrative costs including payroll and rent to be incurred as a result of
the sale. Estimated operating costs for the 12-month period and nine-month
period are $416,906 and $312,680, respectively.

(7) To reflect the conversion of the Preferred Stock into 20,262,681 shares
of common stock. These additional shares of common stock are not included in
the Pro Forma Statements of Operations as the inclusion of these additional
shares would be anti-dilutive.

<PAGE>
Page 31

PROPOSAL 2:

AMENDMENT TO
ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES

Description

The Board of Directors proposes and recommends to the shareholders an
amendment to the Panda Articles of Incorporation (the "Panda Articles")
increasing the number of authorized shares of Panda Common Stock from
50,000,000 shares to 100,000,000.

The text of the proposed amendment to the Panda Articles is set forth on
Annex B to this Proxy Statement.

Additional Shares Necessary to Meet Current Commitments

The Board of Directors determined that additional shares of Panda Common
Stock (the "Additional Shares") should be authorized to fulfill Panda's
obligations under certain commitments and obligations that, if not fulfilled,
threaten Panda's solvency.

In July 1996, the Company completed the sale of 1,087,833 shares of its
common stock in a private placement to accredited investors. The Company
received proceeds of approximately $9 million, net of expenses of
approximately $800,000. In addition to the shares of common stock purchased by
each investor in the placement, such investor received a warrant to purchase
an equal number of shares of common stock at an exercise price of $11 per
share. In January, 1999 the Company reduced the price of the warrants to $0.75
per share and accelerated the expiration date at the choice of the investor.
Currently there are 112,500 of the original warrants that remain outstanding.
The warrants expire in July 2001 and are callable by the Company whenever the
Company's common stock trades at a price of $26 or more for thirty consecutive
trading days. No value has been separately allocated to these warrants. If
the Company pays a dividend or makes a distribution on the Common Stock
payable otherwise than in cash out of earnings or earned surplus (determined
in accordance with generally accepted accounting principles) except for a
stock dividend payable in shares of Common Stock (an "Liquidating Dividend"),
then the Company will pay or distribute to the holder of this Warrant, upon
the exercise hereof, in addition to the Warrant Shares purchased upon such
exercise, the Liquidating Dividend which would have been paid to such holder
if he had been the owner of record of such shares immediately prior to the
date on which a record is taken for such Liquidating Dividend. Any proceeds
received from the exercising of the warrants will be used for ongoing
operational expenses.

In connection with the 1997 Reg S subordinated convertible debenture
transaction, the Company paid a fee of $384,000to Dusseldorf Securities
Limited ("Dusseldorf") of which $192,000 was paid in cash and the balance by
the issuance to Dusseldorf of 30,918 shares of Common Stock (the "DSL
Shares"). In addition, the Company agreed to issue to Dusseldorf and Jefferies
& Company, Inc. ("Jefferies") warrants, exercisable during the period
beginning April 14, 1997 and ending April 2, 2002 to purchase 42,667 shares
and 27,429 shares, respectively, of Common Stock of the Company at respective
exercise prices of $6.75 and $7.00per share. The warrants were issued for
placement of the debentures. Any proceeds received from the exercising of the
warrants will be used for ongoing operational expenses.

During December 1997 and January 1998, the Company received two short-term
loans in the amount of $1,000,000 each from Helix (PEI) Inc.("Helix"). On
February 27, 1998, the Company fully repaid both of these loans using a
portion of the proceeds from the issuance of preferred stock. The Company
received additional short-term loans from Helix during the quarter ended June
30, 1998 which aggregated $1,750,000, and an additional $250,000 was received
in July1998. The loans are secured by the Company's intellectual property. In
connection with the issuance of these notes, the Company issued warrants to
Helix to purchase an aggregate of 850,000 shares of the Company's common stock
at exercise prices ranging from $1.63 to $2.125per share. On August 7, 1998,
Helix agreed to extend the maturity date of all outstanding notes payable to
February 15, 1999, from their original due date in August 1998, in exchange
for the issuance of a warrant to purchase up to 2,000,000 shares of the
Company's common stock at an exercise price equal to the fair market value of
the Company's common stock at the date of issuance ($2.125). The warrant has a
term of two years. The warrants issued to Helix have a cashless exercise.
Notwithstanding the foregoing provision regarding payment of the Exercise
Price in cash, Helix may elect to receive a reduced number of Shares in lieu
of tendering the Exercise Price in cash. Any proceeds received from the
exercising of the warrants will be used for ongoing operational expenses.
Sarubbi is entitled to 3,750,000 shares of Panda Common Stock to fulfill
Panda's obligation under the Amended Settlement Agreement after the Panda
Shareholders approve Proposal 2. In the event the Panda shareholders do not
approve this Proposal 2, Panda will be in breach of the Amended Settlement
Agreement due to a lack of authorized shares to fulfill this obligation, which
will materially affect Panda.

On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with Panda
in 1992. Sarubbi also later served as a director and general manager of
Panda. Under this consulting arrangement, Sarubbi received 91,000 options to
purchase shares of Panda Common Stock. Sarubbi also served as a director of
Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his desire to
exercise all of his options and to sell all of the Panda Common Stock received
upon the exercise of such options. A Florida district court held Panda liable
for certain losses Sarubbi alleged he incurred in connection with the sale of
his Panda Common Stock and for fees for his previous service as director. The
court granted a judgment of $1,227,041 in favor of Sarubbi. Under the
Settlement Agreement, Panda has agreed to pay Sarubbi total consideration
worth $1,000,000 of which $240,000 has been paid in cash in December 1998 and
the remainder is to be satisfied upon the sale of shares of Panda's Common
Stock which have been delivered to Sarubbi by Panda. Panda has registered
1,775,000 shares for Sarubbi pursuant to a registration statement, declared
effective on February 5, 1999. The parties have agreed to petition the
Florida Court of Appeals for the Fourth District to dismiss the litigation
within five business days after Panda's obligations in the Settlement
Agreement have been completed. If such obligations are not completed, the
judgment will remain in effect. This settlement amount was recorded as a
charge against Company earnings for the quarter ended December 31, 1998. On
April 14, 1999, Panda received a Notice of Default on the Settlement
Agreement. Sarubbi claimed that his inability to sell the stock that he
received in the settlement creates a breach under the Settlement Agreement.
Panda believes that it is in full compliance with the Settlement Agreement and
that no breach exists. On June 25, 1999, the Settlement Agreement was amended
to allow Panda to extend its time to satisfy its obligations under the
Settlement Agreement (the "Amended Settlement Agreement"). Under the Amended
Settlement Agreement, the Company issued Sarubbi 2,100,000 shares of Panda
Common Stock in the second quarter of 1999. Panda also agreed to issue Sarubbi
an additional 3,750,000 shares upon the increase in the number of shares of
Panda Common Stock authorized under Panda's Articles of Incorporation. Panda
will have 90 days to register such shares of Panda Common Stock with the
Securities and Exchange Commission after the approval of the authorization of
such shares. In the event that the increase in the number of authorized shares
of Panda common stock is not approved pursuant to Proposal 2, Panda will be
obligated to pay Sarubbi $1,502,041, which is equal to the amount of the
judgement entered in favor of Sarubbi plus attorneys' fees, less the value of
any cash or stock received by Sarubbi pursuant to the Settlement Agreement or
the Amended Settlement Agreement. The Amended Settlement Agreement imposed a
deadline of September 1, 1999 for satisfaction of Panda's obligation to
register the 2,100,000 shares of Panda Common Stock with the Securities and
Exchange Commission. Panda has not satisfied its obligations under the
Amended Settlement Agreement and has received a notice of default. Any
further legal action taken by Sarubbi may be material to the Company. On
November 2, 1999, as stated in Panda's Form 8-K dated November 9, 1999,
Sarubbi alleged that the Company was in default under the Letter Agreement
dated June 24, 1999. Sarubbi demanded payment within 10 days of approximately
$505,000 in exchange for the 2,100,000 shares previously issued as well as the
3,750,000 shares which would be issued upon shareholder approval. As a
result, Sarubbi may assert remedies that he feels are available to him under
Florida law which may include a writ of execution as well as levying on real
property of Panda.

<PAGE>
Page 32

On August 14, 1998, Panda completed an agreement for the sale of
2,254,602 shares of its Common Stock and 2,254,602 shares of Common Stock
issuable upon the exercise of Common Stock Purchase Warrants in a private
placement to accredited investors with gross proceeds of approximately $3.8
million of which all but $200,000 has been funded as of the date hereof.
Expenses of the Private Placement were approximately $230,000. In addition to
the shares of Common Stock purchased by each investor in the Private
Placement, such investor received a warrant to purchase an equal number of
shares of Common Stock, subject to adjustment for stock splits and similar
events, at an exercise price of $2.55 per share. Upon exercise of the Private
Placement Warrants, an investor may elect to receive a reduced number of
shares of Common Stock in lieu of tendering the warrant exercise price in
cash. The Private Placement Warrants have a term of five years expiring August
13, 2003. Issuance of shares of Common Stock pursuant to exercise of the
Private Placement Warrants requires the approval of Panda's shareholders.

Under the terms of the August 1998 Private Placement, Panda is obligated to
issue certain Fill-Up Shares related to the one-year anniversary date of the
closing of the Private Placement. Under the terms of the Securities Purchase
Agreement relating to the Private Placement, if on either the six-month or the
one-year anniversary of the date of closing of the Private Placement (each
"Anniversary Date"), the average closing bid price of the Common Stock for the
20 trading-day period ending on the trading day immediately prior to the
applicable Anniversary Date (the "Anniversary Price") is less than the Closing
Price ($2.0375), or the prior Anniversary Price in the event the six-month
Anniversary Price is less than the Closing Price, respectively, the Company is
required to issue a number of shares of Common Stock within ten days after the
Anniversary Date equal to the product of (i) (x) the difference between the
Closing Price (or if the measurement date is the one-year Anniversary Date,
the six-month Anniversary Price if the six-month Anniversary Price is less
than the Closing Price) and the applicable Anniversary Price, multiplied by
.85, multiplied by (y) the number of shares of Common Stock purchased by the
investors in the Private Placement and not sold or assigned to non-affiliated
third parties, divided by (ii) (x) the applicable Anniversary Price multiplied
by (y) .85. The shares issuable pursuant to this formula are referred to as
the "Fill-Up Shares".

In the event (i) the Common Stock is delisted or suspended from trading
on NASDAQ, (ii) the Fill-Up Shares or the Private Placement Warrant Shares are
not issuable or are not listed with NASDAQ or (iii) the Company fails to issue
Fill-Up Shares as required, then the Company shall pay to the initial
investors $100,000 for each full 30-day period that the condition continues.
The Company's common stock was delisted from NASDAQ on December 16, 1998 and
as a result the Company has recognized liquidating damages. The Company
continues to incur the liquidated damages. Pursuant to the Agreement,
additional shares are issuable to purchasers if the average closing bid price
of the Common Stock for the 20 trading-day period immediately prior to the
anniversary date (August 15, 1999) is less than the prior anniversary price
(February 15, 1999 anniversary date). Upon approval of Proposal 2, Panda will
issue approximately 6,000,000 shares of the Company's Common Stock under the
Fill-Up Provision of the August 1998 Private Placement. In addition, the
Company is in the process of negotiating with August 1998 Private Placement
holders who are not Series A Preferred shareholders to accept shares of common
stock in lieu of the accrued liquidating damages of $460,500 as a result of
the Company's common stock delisting from Nasdaq. Upon approval of Proposal 2
and the agreement with August 1998 Private Placement investors, Panda will
issue 4,600,000 shares to cover this obligation.

The Company maintains three stock option plans as follows: the 1993
Performance Incentive Plan ("1993 Plan"), the Non-Employee Director Stock
Option Plan ("Director Plan"), and the 1995 Employee Stock Incentive Plan
("1995 Plan"). Under the 1993 Plan and the 1995 Plan both incentive options
and non-qualified options may be granted. In addition, stock appreciation
rights and restricted stock may also be granted under the Plans; however, no
stock appreciation rights or restricted stock have been granted to date.

The exercise price for incentive options under the 1993 Plan, the 1995
Plan and non-qualified options under the Director Plan is the fair market
value of the Company's common stock as of the date of grant. Each stock
option expires ten years from the grant date under the 1993 Plan and the 1995
Plan, and five years under the Director Plan.

<PAGE>
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Options granted pursuant to the 1993 Plan cannot be exercised prior to
the expiration of six months from the date of grant while vesting of options
granted under the 1995 Plan is determined at the discretion of the Company's
Stock Option Committee. Options granted under the Director Plan vest 25%
annually beginning on the first anniversary of the grant date. The maximum
number of shares of common stock with respect to which options may be granted
under the 1993 Plan is 5% of the outstanding shares, not to exceed 1,000,000
shares. Under the 1995 Plan and the Director Plan, options to purchase up to
1,000,000 and 50,000 shares may be granted, respectively. As of December 31,
1999, there were 664,054, 593,300 and 10,000 shares available for grant under
the 1993 Plan, the 1995 Plan and the Director Plan, respectively. Because it
does not expect to grant these options, the Company has not reserved any
shares for issuance for these options. No options were granted during 1999,
and Panda does not expect to grant options for the foreseeable future. As of
December 31, 1999, there were outstanding options to purchase 585,900 shares
of common stock, for which 585,900 shares were reserved for issuance. None
of the outstanding options were held by a director of Panda. Melissa Crane
holds 44,000 outstanding options which are currently exercisable, of which
30,000 are exercisable at $6.13 per share and 14,000 are exercisable at $5.25
per share, and 41,000 options which are not yet vested, of which 20,000 have
an exercise price of $6.13 and 21,000 have an exercise price of $5.25.

There were 50,000,000 authorized shares of Panda Common Stock, with
49,961,107 shares outstanding as of the record date. On May 14, 1999 the
conversion price of the Series A Preferred was set pursuant to the Exchange
Agreement at $.261. From July 1, 1998 through September 30, 1999, 271.76
shares of Series A Preferred were converted into an aggregate of 4,637,310
shares of common stock of the Company. On January 19, 2000, the remaining
shares of Series A Preferred were converted into common stock. Panda entered
into the Exchange Agreement, dated May 12, 1999, by and among Panda and the
Panda Series A Preferred shareholders (the "Exchange Agreement"). Pursuant to
the Exchange Agreement, all holders of Series A Preferred Stock agreed to
exchange their Series A Preferred Stock for shares of Panda Common Stock. In
the Exchange Agreement, Panda agreed to allow the conversion of certain shares
of Series A Preferred Stock into Panda Common Stock at a rate of $0.261 and to
permit the sale of the Panda Common Stock. This conversion rate was equal to
the conversion rate under the terms of the Series A Preferred Stock. Panda
also agreed to issue penalty shares to the holders of Series A Preferred Stock
at the same exchange rate to satisfy a covenant in the agreement with the
holders requiring Panda to pay the Holders an aggregate of $100,000 per month
during such time as Panda is not listed on a national securities exchange or
NASDAQ. The total amount of the penalty was $916,500. The holders of Series
A Preferred Stock agreed (i) to enter into a voting agreement to vote their
shares of Panda Common Stock in favor of the Proposed Sale and (ii) not to
sell certain amounts of their Panda Common Stock received pursuant to the
Exchange Agreement. Holders of the Series A Preferred Stock also agreed to
release Panda from all existing obligations to them. No other agreements were
entered into among Panda and the Series A Preferred shareholders to induce
them to exchange their shares of Series A Preferred Stock and to vote for the
Proposed Sale. After the Record Date, there will be 38,894 authorized shares
of Panda Common Stock reserved for issuance pursuant to options, warrants,
contractual commitments or other arrangements.

On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock and Common Stock Purchase Warrants to purchase an
aggregate of 150,000 shares of common stock for a total purchase price of
$6,000,000. The purchase price was allocated to the Series A Preferred and
Warrants based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock splits
and similar events, of $6.10 per share, were valued at $411,000 using the
Black-Scholes option pricing model. Issuance costs of approximately $193,000
were deducted on a pro rata basis from the gross proceeds assigned to the
Series A Preferred and the Warrants. The Warrants, which have a term of five
years and an exercise price, subject to adjustment for stock splits and
similar events, of $6.10 per share. The warrant was issued at 155% of the
average of the closing bid price per share of Common Stock for the five (5)
trading days immediately preceding the applicable issuance date of this
Warrant.

The Company may require that all unconverted shares of Series A Preferred be
converted at any time if the closing bid price of common stock is equal to or
greater than $12.00 per share for a period of twenty consecutive trading days.
In addition, on February 11, 2003, the Company may, at its option, require the
holders to convert the Series A Preferred shares which remain outstanding on
such date (plus accrued and unpaid dividends) or redeem such shares of Series
A Preferred. In the event the closing price of the common stock is $6.00 or
greater for 20 consecutive days and the common stock is listed for trading on
a stock exchange or NASDAQ, the Company has the right to cause the issuance of
an additional 400 shares of Series A Preferred for an aggregate purchase price
of $4,000,000. These shares would have the same conversion price as the
outstanding shares of Series A Preferred. Such event is unlikely because the
Company does not have any current prospect of being qualified to be listed on
an exchange or NASDAQ. In such event, the Company would be required to issue
Warrants to the purchasers of Series A Preferred to purchase an additional
100,000 shares of common stock at $6.00 per share. Any proceeds received from
the exercising of the warrants will be used for ongoing operational expenses.
The Series A Preferred shares are held by six investment funds.

The 225,000 warrants issued for investor relation services include 100,000 to
Mallory Factor issued in 1996. These warrants expire on September 10,2000
and have an exercise price of $8.00 per share. Another 100,000 warrants were
issued to AMT Capital in August 1998 and have an expiration of August
15,2003. The AMT warrants have an exercise price of $4.68. The remaining
25,000 were issued to Martech Associates. These warrants have an expiration
date of July 15,2000 and an exercise price of $3.625.Any proceeds received
from the exercising of the warrants will be used for ongoing operational
expenses.

As of January 1, 2000, Panda has commitments to issue 40,860,779
additional shares of Panda Common Stock, including 20,262,681 shares pursuant
to the Exchange Agreement, as follows:

Purpose for which Number of
Shares are Reserved Reserved Shares
- ------------------------ --------------------

Employee Stock Option Plans 585,900

Warrants:
1996 Equity Transaction 112,500
1998 Equity Transaction 2,254,602
Helix (PEI) Inc. 2,850,000
Convertible Preferred
Transaction in February 1998 150,000

<PAGE>
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Fees related to Convertible
Debenture in August 1997 70,096
Warrants issued related to
Investor Relation Services 225,000

Contractual Agreements:
Joseph A. Sarubbi Amendment
to Settlement Agreement
dated December 1998 (see "Legal
Proceedings") 3,750,000
Fill-Up Shares pursuant to the
August 1998 Private Placement
(approx.) 6,000,000

Other:
Potential shares in lieu of liquidating
damages related to the August 1998
Private Placement upon issuance of
new authorized shares 4,600,000

Of the Panda Common Stock reserved for issuance, it is highly unlikely
that the options and warrants would be exercised due to exercise prices that
range from $0.75 to $44.25 within the given time criteria pursuant to the
respective option and warrant agreements. There are no authorized and unissued
shares of Panda Common Stock that are not currently reserved for any specific
use and available for future issuances. If Proposal 2 is approved, there will
be 29,440,796 such authorized and unissued shares of Panda Common Stock that
are not reserved for any specific use and available for future issuances.

Additional Authorized Shares Requested

Having the Additional Shares available for issuance in the future would give
the Company greater flexibility by allowing shares to be issued without
incurring the delay and expense of a special stockholders' meeting. Except as
described in this Proxy Statement, the Company has no other definitive plans
or comments to issue the Additional Shares. The Additional Shares, together
with other authorized and unissued shares of Panda Common Stock, generally
would be available for issuance without the requirement for further
stockholder approval, unless action is required by applicable law or Panda's
governing documents.

Shareholders of Panda do not have any pre-emptive or similar rights to
subscribe for or purchase any additional shares of Panda Common Stock that may
be issued in the future, and therefore future issuances of Panda Common Stock
may, depending on the circumstances, have a dilutive effect on the earnings
and equity per share, voting power and other interests of the existing
shareholders of Panda.

The increase in the authorized number of shares of Panda Common Stock also
could be viewed as having anti-takeover effects. Although the Board of
Directors has no current plans to do so, shares of Panda Common Stock could be
issued in various transactions that would make a change in control of the
Company more difficult or dilute stock ownership of a person seeking to obtain
control.

The availability of this defensive strategy to the Company could discourage
unsolicited takeover attempts, thereby limiting the opportunity for the
Company's shareholders to realize a higher price for their shares than is
generally available in the public markets. The Company is not aware of any
effort to accumulate shares of Panda Common Stock or obtain control of the
Company by a tender offer, proxy contest or otherwise, and the Company has no
present intention to use the Additional Shares for anti-takeover purposes.

<PAGE>
Page 35

The Board of Directors recommends a vote FOR approval of the amendment to
the Panda Articles.

Votes Required for Approval of Proposal 2

Approval of Proposal 2 requires that the number of votes cast in favor
of Proposal 2 exceed the number of votes cast against. Votes for Proposal 2
may be cast in favor of or against the proposal or may abstain from voting.
Abstentions, therefore, will not have the effect of a negative vote.
Abstentions may be specified on the proposal and will be considered present at
the Annual Meeting, but will not be counted as affirmative votes. In
addition, broker non- votes, where brokers are prohibited from exercising
discretionary authority in voting shares for beneficial owners who have not
provided voting instructions, will not be included in vote totals for Proposal
2, but will be counted for purposes of determining whether there is a quorum
at the Annual Meeting.

<PAGE>
Page 36
PROPOSAL 3:

ELECTION OF DIRECTORS

Panda's Articles of Incorporation provide that the Board of Directors shall
consist of not less than three nor more than nine members, the exact number of
directors to be fixed by the Board of Directors. The Board of Directors has
set the number of directors at three. The Board of Directors has three
classes, each of whose members serve for a staggered three-year term.
Currently, the Board consists of one Class II director William E. Ahearn, one
Class I director John T. Friedline and one Class III director Stanford W.
Crane, Jr. At each annual meeting of shareholders, a class of directors is
elected for a three-year term to succeed the directors of the same class whose
terms are expiring. At Panda's upcoming annual meeting, the Class II director
will be elected for a term expiring at the 2003 Annual Meeting of Shareholders
and until his successor is duly elected and qualified, subject to his earlier
death, resignation or removal. The Board of Directors has nominated William
E. Ahearn for election as Class II director at the Annual Meeting.

Because no annual meeting was held in 1999, the Company has revised the
terms of its directors so that the Class I director will serve until the 2002
annual meeting, the Class II director will serve until the 2003 annual meeting
and the Class III director will serve until the 2001 annual meeting.

The persons named in the accompanying form of proxy intend to vote all
valid proxies received in favor of the election of Mr. Ahearn as Class II
director unless authority is withheld.

Set forth below is certain biographical information furnished to Panda by
the director nominee. The nominee currently serves as a director of Panda.
For a summary of stock ownership information concerning the director nominee,
see "Security Ownership of Certain Beneficial Owners and Management." In the
event the nominee is unable or unwilling to serve, discretionary authority is
reserved to the persons named in the accompanying form of proxy to vote for a
substitute nominee. Management does not anticipate that such an event will
occur. Also set forth below is certain information concerning the Class I and
Class III directors, whose terms of office will continue after the Annual
Meeting until the 2002 and 2001 annual meetings, respectively.

Nominee for Class II Director

William E. Ahearn, age 61, was appointed to the Board of Directors in
November 1998 by the directors then in office. Mr. Ahearn joined Panda in
March of 1996 and served as President of the Archistrat Systems division from
April 1996 to December 1996. He served as Vice President of Technology at
Panda from January 1997 to September 1997 and as Vice President and Chief
Scientist from September 1997 to November 1998. From 1993 to 1996, he was
Director of Multimedia Products at AMP Incorporated. AMP is a manufacturer of
electronic components. From 1964 to 1993, Mr. Ahearn served in a variety of
positions at International Business Machines Corporation ("IBM"), including
Product Manager for Digital Video Interactive and Collaborative Work Products
IBM Europe, Product and Project Manager for Input/Output Technology Entry
Systems and Electro-Optical Technologies at IBM Corporate Headquarters, and as
staff member of IBM's T.J. Watson Research Center. From 1984 to 1989, Mr.
Ahearn was a visiting scholar at the MIT Media Lab.

The Board of Directors recommends that shareholders vote "FOR" the nominee
for director.

Class I Director

John T. Friedline, age 58, was appointed to the Board of Directors in June
1999 by the directors then in office. Since 1994, Mr. Friedline has been
President and Chief Executive Officer of Friedline & Associates, Inc., an
independent management consultant primarily in the multi media arena. From
1965 to 1994, Mr. Friedline held various positions at IBM Corp. ("IBM"). From
1965 to 1988, he served in IBM's domestic offices, holding positions that
included National Marketing Manager - PCS and Application Development and
Director - Systems Application Architecture Marketing. From 1988 to 1994, he
served in IBM's European headquarters as Director of its New Business
Solutions Unit. From 1963 to 1965, Mr. Friedline was an engineer at Union
Carbide. He holds a B.S. in Engineering from Bucknell University and an MBA
from the University of Buffalo.

<PAGE>
Page 37

Class III Director

Stanford W. Crane, Jr., age 48, has served as President, Chief Executive
Officer and Chairman of the Board of Directors of the Company since its
inception in April 1992 and, since November 1993, as Senior Vice President -
Product Design and Development. From May 1990 to April 1992, Mr. Crane was
self-employed, principally engaged in the development of the Compass
Connector. From 1984 to April 1990, Mr. Crane was president of Crane
Electronics, Inc., which supplied advanced interconnection technology for
military and commercial products. From 1980 until 1984, Mr. Crane was an
executive at Molex Corporation, a publicly held corporation manufacturing and
selling electronic interconnect devices, and served from 1982 to 1984 on the
Chairman's staff for the Advanced Development Committee and assisted in
marketing and strategic planning for domestic and international operations.
From 1976 to 1980, Mr. Crane served as a sales executive for AMP Incorporated,
a manufacturer of electronic components.

Board and Committee Meetings

The Board of Directors of Panda held 19 meetings during 1998. The Board
has a standing Audit Committee and a standing Compensation and Stock Option
Committee. The Compensation and Stock Option Committee and the Audit
Committee met several times during 1998 to address Mr. Crane's contract and
employee stock option grants. A contract with Mr. Crane was not renewed.
Additional stock option grants were approved by the Board of Directors in
October 1998. Panda does not have a nominating committee. During the most
recent fiscal year, each director attended at least 75% of the meetings of the
Board and any committee on which such director served.

Mr. Gingrich and James T.A. Wooder, a former director, served on the Audit
Committee of the Board of Directors until their resignation in March 1999 and
November 1998, respectively, the members of which make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the results of the audit engagement, approve
professional services provided by the independent accountants, review the
independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of Panda's internal
accounting controls. Mr. Ahearn now serves as the Audit Committee.

Mr. Gingrich and Dr. Tummala comprised the Compensation and Stock Option
Committee of the Board of Directors, which makes recommendations to the Board
regarding the executive and employee compensation programs of Panda and which
administers the 1993 Performance Incentive Plan, the 1995 Employee Stock
Incentive Plan and the Nonemployee Director Stock Option Plan. Mr. Gingrich
and Dr. Tummala both have resigned as of March 1999. The Board has not
replaced those members and has decreased the number of directors to three.

Directors' Compensation

All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors who are not
employees and do not otherwise receive compensation from Panda are entitled to
a retainer of $2,000 per month for serving on the Board of Directors in
addition to the reimbursement of reasonable expenses incurred at any meetings.

In addition, each outside director participates in Panda's Nonemployee
Director Stock Option Plan ("Director Plan"). Under this plan each outside
director receives an option to purchase 4,000 shares of Panda Common Stock at
each annual meeting of shareholders of Panda. Such options have a per share
exercise price equal to the fair market value of the Panda Common Stock on the
date of grant, vest annually in four equal installments beginning on the first
anniversary of grant and, unless sooner terminated, expire five years from the
date of grant. During 1998, Messrs. Gingrich, Tummala and Wooder each
received an option to purchase 4,000 shares of Panda Common Stock under the
Director Plan at an exercise price of $3.81 per share. At the Annual Meeting,
an additional option to purchase 4,000 shares of Panda Common Stock will be
granted to each of the existing directors. In 1999, there were no options
granted to any Director of the Company.

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Page 38

Annual and Long-Term Incentive Compensation

Panda has no formal bonus program for its key employees. Occasionally,
bonus payments may be made to key employees based on the achievement of agreed
upon performance objectives or as a part of the recruitment process.

Panda's stock option plans are designed to promote the identity of
long-term interests between Panda's employees and its shareholders and to
assist in the retention of executives. The size of option grants is generally
intended by the Committee to reflect the executive's position with Panda and
his or her contributions to Panda. Stock options generally vest over a
four-year period in order to encourage key employees to continue in the employ
of Panda. Stock options are granted at an option price equal to the fair
market value of Panda's Common Stock on the date of grant; however, Panda
reserves the right to grant stock options having exercise prices less than the
fair market value of the Panda Common Stock on the date of grant, to modify
the terms of existing options and to reprice the options as an incentive for
employees to remain with Panda.

Benefits

Panda's executive officers are entitled to receive medical and life
insurance benefits and to participate in Panda's 401(k) Retirement Savings
Plan on the same basis as other full-time employees of Panda.

The amount of perquisites, as determined in accordance with the rules of
the Securities Exchange Commission relating to executive compensation, did not
exceed 10% of salary and bonus for 1999 for any of the named executive
officers.

Summary of Compensation of Chief Executive Officer

For the fiscal year ended December 31, 1999, Mr. Crane, Panda's President
and Chief Executive Officer, received a salary of $150,000.

Compliance with Internal Revenue Code Section 162(m)

Panda does not believe Section 162(m) of the Internal Revenue Code, which
disallows a tax deduction for certain compensation in excess of $1 million,
will generally have an effect on Panda. The Compensation Committee intends to
review the potential effect of Section 162(m) periodically and in the future
may decide to structure the performance-based portion of its executive officer
compensation to comply with Section 162(m). The Compensation Committee has
approved the per-participant limitations included in Panda's 1993 Performance
Incentive Plan and in Panda's 1995 Employee Stock Incentive Plan as a means of
preserving flexibility in structuring executive officer compensation.

<PAGE>
Page 39

Company Stock Price Performance

The following graph shows a comparison of cumulative total return since
December 1994 for the Company's stock, the Nasdaq Composite Index and the
Philadelphia Semiconductor Index. The performance graph shows cumulative
percentage increases or decreases in each investment.

Comparison of Cumulative Return since December 31, 1994*

[GRAPH]

The Panda Nasdaq Philadelphia
Project, Inc. Composite Index Semiconductor Index
------------ --------------- -------------------

12/31/94 100 100 100
12/31/95 195.51 139.92 143.24
12/31/96 33.15 171.69 171.54
12/31/97 41.01 208.83 188.19
12/31/98 4.21 291.60 250.25
12/31/99 .047 541.17 502.96
- --------------------
* Assumes $100 invested on December 31, 1994 in each investment.
Total Return assumes reinvestment of dividends.

Compensation and Stock Option Committee Interlocks and Insider Participation

The members of the Compensation and Stock Option Committee were Rao R.
Tummala and Claud L. Gingrich until March 1999 when they resigned. No member
of the Compensation and Stock Option Committee was at any time during fiscal
year 1998, or formerly, an officer or employee of Panda.

Employment Agreements

Mr. Crane entered into an employment agreement with Panda on November 8,
1993, as amended and restated on February 22, 1994, which expired on January
1, 1999 (subject to certain termination provisions). Under this agreement Mr.
Crane receives an annual base salary of $150,000. Mr. Crane is also eligible
to receive discretionary bonuses as determined by the Board of Directors.
Furthermore, the agreement provides that Mr. Crane is entitled to participate
in any medical, stock option and benefit plans that Panda may establish. Mr.
Crane does not currently have an employment agreement.

<PAGE>
Page 40

Mr. Crane's employment is terminable at will by Mr. Crane upon six months'
prior notice, and is terminable by Panda for cause at any time or in the event
that Mr. Crane becomes disabled and, as a result, is unable to perform his
obligations under the agreement for three consecutive months. In the event
that the agreement is terminated other than as a result of Mr. Crane's death
or disability or for cause, Mr. Crane will be entitled to receive an amount
equal to the greater of $150,000 or his annual compensation for the preceding
calendar year. In addition, Mr. Crane has agreed not to compete with Panda
for a period of two years after the termination of his employment provided he
receives payments during that period equal to twice the greater of $150,000 or
his salary at the time of such termination, calculated on an annualized basis.

Mr. Crane has assigned to Panda all improvements or related discoveries or
inventions developed or conceived by him during the term of the agreement and
the two-year noncompetition period which (i) relate to the technology assigned
by Mr. Crane to Panda pursuant to the assignment by Mr. Crane in November 1993
of all of his rights to certain prefabricated semiconductor packaging, printed
circuit board technology and computer technologies and products, including
VSPA, Compass PGA, Well Tech printed circuit board technology and Archistrat 4
Computers, as well as certain other products and technology being developed by
him on behalf of Panda, and all related proprietary information (the "Crane
Assignment"), or (ii) would enable the development of replacements for the
products developed by Panda. See "Certain Relationships and Related
Transactions."

Mr. Crane's employment agreement also provides that he may develop products
or technologies ("Unrelated Investigations") unrelated to Panda's technology
and proposed products provided that the cost to Panda of such Unrelated
Investigations is not significant in the reasonable judgment of Panda's Board
of Directors. Mr. Crane has agreed to disclose the results of any Unrelated
Investigations to Panda and negotiate in good faith the terms pursuant to
which Panda may participate in any such products or technology. If no
agreement is reached, Mr. Crane may independently commercialize such products
or technology, but will pay Panda a 5% royalty on any sales, licensing fees or
other remuneration he receives with respect to Unrelated Investigations.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Upon the formation of Panda in April 1992, Panda issued 2,283,000 shares of
Common Stock to Mr. Crane in connection with Mr. Crane's agreement to assign
and license to Panda certain technology and products. Such license agreement
(the "Crane-Panda License") was amended in January 1996.

Under the Crane-Panda License, Mr. Crane has granted Panda the nonexclusive
right to utilize the Compass Connector, a key component in the
commercialization of Panda's Archistrat Computers and the development and
commercialization of the Compass PGA product. The Crane-Panda License was
executed in connection with the conversion to a nonexclusive license of the 3M
License described below. Under the Crane-Panda License, Panda is required to
pay Mr. Crane a royalty on any sales of Compass Connectors as discrete parts
in the amount of 5% of the net sales price for the first five years of the
term of the agreement, 2.5% of the net sales price for the next five years of
the term of the agreement and 2% of the net sales price thereafter, provided
that no royalty is payable until aggregate net sales of the Compass Connector
as discrete parts exceed $100,000. The royalty rate will be reduced after the
fifth anniversary of the agreement if no patent remains in effect with respect
to the Compass Connector. No royalty is payable on sales of the Compass
Connector as incorporated in the Archistrat Computers or other computer system
or assembly. Panda may grant sublicenses under the Crane-Panda License, but
only for the use of products as incorporated in the Archistrat Computers or
other computer system or assembly. To date, there have been no sales
requiring the payment of royalties to Mr. Crane under the Crane-Panda License.
The Crane-Panda License obligates Panda to maintain proprietary information
relating to the Compass Connector on a confidential basis, notify Mr. Crane of
any evidence of infringement with respect to the Compass Connector and related
technology, and cooperate with Mr. Crane to contest any such infringement. In
the event that Panda becomes bankrupt or insolvent or defaults in any of its
material obligations under the Crane-Panda License and fails to cure any such
defaults within specified cure periods, Mr. Crane may terminate the
Crane-Panda License. Panda is substantially dependent upon the Crane-Panda
License. The termination of the agreement under any circumstances would have
a material adverse effect on Panda. There can be no assurance that conflicts
of interest will not arise with respect to the Crane-Panda License or that
such conflicts will be resolved in a manner favorable to Panda. In addition,
Mr. Crane retains ownership of the Compass Connector technology, and has the
right to grant licenses to or otherwise transfer rights to the Compass
Connector technology to third parties.

<PAGE>
Page 41

In September 1992, Mr. Crane granted an exclusive license (the "3M License")
to Minnesota Mining and Manufacturing Co. ("3M") to develop, manufacture, use
and sell the Compass Connector other than as part of a computer system. In
February 1996, Mr. Crane and 3M agreed to convert the 3M License to a
nonexclusive license. Pursuant to the 3M License, Mr. Crane is entitled to
receive from 3M, in general, a 5% royalty (decreasing to 2.5% after five
years, and to 2% after ten years) on net sales of the Compass Connector
(including sales to Panda). The 3M License provides in certain circumstances
for the payment of a royalty to Mr. Crane. As of December 31, 1999, Mr.
Crane had received no such payments.

In April 1999, Mr. Crane licensed the Compass Connector technology to
Winchester Electronics to develop, manufacture and sell on a non- exclusive
world-wide basis. Winchester Electronics competes in a number of different
market segments and is not currently competing with any specific product
versions offered by Panda.

In October 1993, Panda settled litigation with Jack R. Moore and Gary
Marvel, former officers and promoters of Panda. In connection with the
settlement, the former officers, or their designees, received 197,860 shares
of Panda's Common Stock which were being held by an escrow agent (the
"Escrowed Shares") subject to Panda's or its assignee's right to repurchase
them. In February 1994, Panda's rights to purchase the Escrowed Shares were
assigned to Mr. Crane in connection with his employment agreement. In March
1996, Mr. Crane purchased the Escrowed Shares for an aggregate purchase price
of $312,000.

In July 1996, Mr. Crane purchased 1,000 shares of Panda Common Stock at a
purchase price of $9.00 per share in connection with a private placement
financing and warrants to purchase 1,000 shares of Panda Common Stock in
connection with such purchase having a term of five years and an exercise
price of $11.00 per share.

In October 1996, Panda and Mr. Crane entered into a license agreement with
LG Cable & Machinery Ltd. ("LG") whereby LG was granted a license with respect
to Compass Connector technology owned by Mr. Crane and certain enhanced
Compass Connector technology owned by Panda. The license granted to LG is
non-exclusive except for certain limited exclusive manufacturing rights with
respect to specified Asian countries. The $1 million license fee will be
split equally between Mr. Crane and Panda. In addition, Panda and Mr. Crane
are entitled to receive royalties on sales of the Compass Connector products
by LG or its affiliates, which will be split equally between Mr. Crane and
Panda. As of December 31, 1999, Mr. Crane had received an aggregate of
$400,000 in payments under this Agreement.

In August 1997, Panda hired Melissa Crane, wife of Stanford W. Crane, Jr.,
as Director of Strategic Business at an annual salary of $100,000 per year.
In September 1997, Ms. Crane was granted an option to purchase 50,000 shares
of Panda Common Stock at an exercise price of $6.13 per share. In November
1997, the Board of Directors elected Ms. Crane Vice President of Strategic
Business and authorized an increase in her annual salary to $125,000 per year.
See "Executive Compensation." In October 1998, the Board of Directors
appointed Ms. Crane the Acting Chief Financial Officer.

With respect to each transaction between Panda and an affiliate of Panda, a
majority of the disinterested members of the Board of Directors determined
that such transactions were on terms at least as fair as had they been
consummated with unrelated third parties.

<PAGE>
Page 42

Continuation of 1993 Performance Incentive Plan and 1995 Employee
Stock Incentive Plan

The 1993 Performance Incentive Plan and the 1995 Employee Stock Incentive
Plan remain in effect pursuant to their existing terms.

Compliance with Section 16(a) of the Exchange Act

Federal securities laws require the Company's directors, certain of its
officers, and person owning beneficially more than ten percent of Panda's
Common Stock to file reports of initial ownership and is required to disclose
into this Proxy Statement any failure of the foregoing persons to file timely
into this Form 10K any failure of the foregoing persons to file timely those
reports during its fiscal year ended December 31, 1998. To the best of the
Company's knowledge, they solely upon a review of copies of reports furnished
to it and written representations that no other reports were required to
report, and greater that then percent beneficial owners made all such filing
timely, except that Mr. Ahearn and Helix filed their respective Form 4's late
on one occasion.

SUMMARY COMPENSATION

The following table sets forth the compensation paid by the Company for
services performed on the Company's behalf during the fiscal year ended
December 31, 1999 with respect to the Company's Chief Executive Officer and
the Company's Three other most highly compensated executive officers as of
December 31, 1999 (the "Named Executive Officers"). The Company during 1999
only had three Executive Officers as a result of the decrease in the number of
employees, the pending sale to SBI and the overall financial condition of the
Company. The table sets forth compensation for services performed on the
Company's behalf for the Fiscal year ended December 31, 1998 . During
September 1997, the Company decided to change its fiscal year from April 1
through March 31 to January 1 through December 31. The Summary Compensation
Table covers the year ended December 31, 1999, the year ended December 31,
1998 and the transition period April 1, 1997 through December 31, 1997 (the
"Transition Period").

SUMMARY COMPENSATION TABLE
-------------------------------------------------
Name and Annual Long-Term
Principal Fiscal Compensation Compensation All Other
Position Period Salary Bonus Options (#) Compensation
- -------- ------ ------------ ----- ------------ ------------

Stanford W.
Crane, Jr.
President,
Chief
Executive 1999 $150,000 - - $9,600 (2)
Officer 1998 150,000 - - 9,600 (2)
and Chairman Transition
of Period 112,500 283 (1) - 9,600 (2)
the Board 1997 150,000 100 (1) - 7,613 (3)

William E.
Ahearn
Vice President 1999 - - - -
and 1998 96,666(10) - 5,000 6,000 (2)
Chief Transition
Scientist Period 93,750 283 (1) - 5,500 (2)
1997 143,752 50,100 (5) 70,000 4,800 (2)

C. Daryl Hollis 1999 - - - -
Executive Vice 1998 78,125(11) - 5,000 6,000 (2)
President, Transition
Secretary Period 93,750 10,283 (6) 15,000 7,200 (2)
Treasurer 1997 93,754 25,100 (7) 70,000 4,800 (2)
and Chief
Financial
Officer

<PAGE>
Page 43

Melissa F.
Crane
Vice President 1999 125,000 - - 9,600 (2)
of 1998 125,000 25,000 (12) 35,000 5,035 (4)
Strategic Transition
Business Period 41,779(8) 25,155 (9) 50,000 -
1997 - - - -

Roy K. Lee 1999 31,250 (17) - - 1,200 (2)
Vice 1998 125,000 - 55,000 3,150 (2)
President Transition
Engineering Period 93,750 - 30,000 -
1997 54,688 (15) - 40,000 -

Kevin J. Calhoun
Controller 1999 - - - -
1998 85,000 (13) - 2,500 1,650 (2)
Transition
Period 82,500 - 17,500 17,783 (14)
1997 73,334 (16) - 10,000 -

- --------------------
(1) Holiday bonus.

(2) Car allowance.

(3) $25,000 bonus paid to Ms. Crane in connection with achieving certain
performance objectives.

(4) $5,035 commission paid to Ms. Crane in connection with achieving certain
performance objectives and car allowance.

(5) Mr. Ahearn's salary is prorated as he resigned on October 30, 1998.

(6) Mr. Hollis' salary is prorated as he resigned on August 14, 1998.

(7) Mr. Calhoun's salary is prorated as he resigned on September 30, 1998.

(8) Mr. Crane's Company contribution to 401(k) Plan.

(9) Consists of car allowance of $4,800 and Company contribution to 401(k)
Plan.

(10) Mr. Ahearn's salary is prorated as he resigned on October 30, 1998.

(11) Mr. Hollis' salary is prorated as he resigned on August 14, 1998.

(12) Bonus paid to Ms. Crane is a result of achieving certain performance
incentives.

(13) Mr. Calhoun's salary is prorated as he resigned on September 30, 1998.

(14) Mr. Calhoun was paid a bonus in connection with achieving certain
objectives.

(15) Mr. Lee was hired during fiscal year 1997 and his salary was prorated.

(16) Mr. Calhoun was hired during fiscal year 1997 and his salary was
prorated.

(17) Mr. Lee's salary was prorated as he left the Company in March 1999.

<PAGE>
Page 44

Roy K. Lee left the employment of the Company on March 15, 1999. He had
first joined the Company in 1996. Mr. Lee (age 37) was Vice President of
Engineering and Business Development for the Company. He is a computer
engineering manager specializing in computer architectures including Intel,
Alpha and X86 clones. He is experienced in both hardware and software aspects
of motherboards and modular architectures including Archistrat 4s, 5s, 5r and
IO-A. Additionally, Mr. Lee worked with development teams on multichip module
solutions utilizing VSPA semiconductor packaging and Compass interconnect
solutions. Mr. Lee has an MSEE from the University of Southern California, an
MBA from the University of California, Irvine and has authored articles on
computers and software.

<PAGE>
Page 45

STOCK OPTION GRANTS IN LAST FISCAL YEAR

Option Grants. There were no options granted for the Fiscal year ended
December 31, 1999. The following table summarizes option grants during the
fiscal year ended December 31, 1998 to the Named Executive Officers:

Potential
Realizable
Value at
Assumed
Annual
Percent Rates of
of Total Stock Price
Options Appreciation
Options Granted to Exercise for Option
Granted Employees Price Expiration Term (2)
Name (#)(3) In Period ($/Share)(1) Date 5%($) 10%($)
- ---- ------- --------- ------------ ---------- ------ ------
Stanford
W. Crane,
Jr. - - - - - -

William E.
Ahearn 5,000 * 5.25 01/29/08 38,750 56,250

Daryl
Hollis 5,000 * 5.25 01/29/08 38,750 56,250

Melissa F.
Crane 35,000 4.5% 5.25 01/29/08 27,250 393,750

Roy Lee 5,000 * 5.25 01/29/08 38,750 56,250
5,000 6.45% 0.78 10/29/08 5,750 8,350

Kevin J.
Calhoun 2,500 * 5.25 01/29/08 38,750 56,250

- --------------------
* represents less than 1%.

(1) Equals fair market value of Panda Common Stock on the date of grant.

(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains are
based on assumed rates of stock price appreciation of 5% and 10% compounded
annually from the date of grant to their expiration date. Actual gains, if
any, on stock option exercises will depend upon the future performance of
Panda Common Stock and the date on which the options are exercised.

(3) Options to purchase 20% of shares of Panda Common Stock are exercisable
six months from the date of grant; the remainder become exercisable in equal
annual installments on the first, second, third and fourth anniversaries of
grant.

Option Exercises and Year-End Values. None of the Named Executive
Officers exercised any stock options during the twelve-month period for the
year ended December 31, 1999. The following table summarizes the value of
options held by such persons as of December 31, 1999:

<PAGE>
Page 46

YEAR-END OPTION VALUES

Number of Unexercised Value of Unexercised
Options at December 31, 1998 In-the-Money Options
Year-End (#) December 31, 1999 ($) (1)

Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------

Stanford W.
Crane, Jr. - - - -

William E.
Ahearn (2) - - - -

C. Daryl
Hollis (2) - - - -

Melissa F.
Crane 44,000 41,000 - -

Roy Lee - - - -

Kevin
Calhoun (2) - - - -

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

(1) As of December 31, 1999, the closing sale price of the Company's
Common Stock was $.047 per share.

(2) Mr. Hollis' and Mr. Ahearn's options expired in November 15,1998
and January 30, 1999 respectively. Mr. Calhoun's options expired
December 30,1998. Mr. Lee's options expired on June 30,1999.

<PAGE>
Page 47

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below is based on information obtained from the persons named
below with respect to the shares of Panda Common Stock and Series A Preferred
Stock beneficially owned, as of December 15, 1999 (except as noted below), by
(i) each person known by Panda to be the owner of more than 5% of the
outstanding shares of Panda Common Stock or the Series A Preferred Stock, (ii)
each executive officer included in the Summary Compensation Table and (iii)
all executive officers and directors of Panda as a group. All of the shares
of Series A Preferred Stock were converted into shares of common stock on
January 19, 2000.

Amount of Percentage of
Outstanding Outstanding
Nature and Amount of Common Shares Shares Upon
Beneficial Ownership (1) Upon Conversion of
------------------------ Conversion of Series A
Name, Address Common Common Series A Series A Preferred
and Title of Stock Stock Preferred Preferred Shares (2)
Beneficial Shares Warrants Shares Shares
Owner
Shares
- ------------ ------------------------ ----------- -----------

Stanford W.
Crane, Jr. (3) 6,860 1,000 - 7,860 *

William E.
Ahearn - - - - *

John Friedline - - - - *

Melissa F.
Crane (4) 41,860 1,000 0 42,860 *

Helix (PEI)
Inc. 1,000,000 2,850,000 - 3,850,000 11.8%

99 Yorkville Avenue, #218
Toronto,Ontario
Canada M5R 3K5

Joseph A. 2,100,000 0 0 2,100,000 7.1%
Sarubbi

3221 S. Ocean Boulevard
Highland Beach, FL

AGR Halifax
Fund L.P. 1,366,619 528,123 304.9222 13,577,584 32.4%

757 3rd Avenue, 27th Floor
New York, NY 10017

Leonardo L.P. 911,077 334,752 169.4522 7,738,249 21.2%

245 Park Avenue, 26th Floor
New York, NY 10167

VantagePoint
Venture
Partners 5,833,238 - 528.8560 26,095,919 52.2%

1001 Bayhill Drive, #130
San Bruno, CA 94066 (5)

All executive
officers and 40,860 1,000 0 41,860 *
directors as
a group
(four
persons) (3)(4)
- --------------------
* Less than 1%.

<PAGE>
Page 48

(1) The number of shares of Panda Common Stock beneficially owned by each
person is determined under the rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also any
shares of Panda Common Stock which the individual has the right to acquire
within 60 days after December 31, 1999 through the exercise of any stock
option or other right. The inclusion herein of any shares of Panda Common
Stock deemed beneficially owned does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated, the persons named in
the table have sole voting and investment power with respect to all shares of
Panda Common Stock shown as beneficially owned by them.

(2) Includes 29,698,425 shares outstanding as of December 31, 1999 plus any
shares subject to options or warrants that are currently exercisable within 60
days after December 31, 1999 and the number of shares issuable on exchange of
the Series A Preferred Stock.

(3) Includes 6,860 shares held by Mr. Crane jointly with his wife, of which
1,000 shares are issuable upon exercise of a warrant.

(4) Includes 6,860 shares held by Ms. Crane jointly with her husband, of
which 1,000 shares are issuable upon exercise of a warrant.

(5) Includes all shares of Panda Common Stock pursuant to which
VantagePoint currently has voting rights as well as all warrants delivered
pursuant to the 1998 Convertible Preferred issuance and the August 1998
Private Placement.

Shareholders who are a party to agreements to vote in favor of the Proposed
Sale are Joseph A. Sarubbi, GAM Arbitrage Fund L.P., AGR Halifax Fund, Ltd.,
Leonardo L.P., Ramius Fund, Ltd., Raphael L.P., Helix (PEI) Inc. and AG Super
Fund L.P. These shareholders own approximately 52% of the outstanding Panda
Common Stock.

Recent Sales of Unregistered Securities

Set forth below is a description of recent sales by the Company in
transactions which were not registered under the Securities Act of 1933.
Except as noted, the securities sold were shares of Common Stock. Unless
otherwise indicated, all securities were issued by the Company in reliance
upon Section 4(2) of the Securities Act of 1933 as transactions by an issuer
not involving a public offering. All securities were acquired by the
recipients thereof for investment and with no view toward the resale or
distribution thereof. In each instance, offers and sales were made to a
limited number of investors, each purchaser was an accredited investor or a
financially sophisticated investor, the offers and sales were made without any
public solicitation, the certificates bear restrictive legends and appropriate
stop transfer instructions have been given to the transfer agent. Except as
noted, no underwriter was involved in the transactions, and no commissions
were paid. In 1998, the Company issued 2,254,602 common shares in the August
1998 Private Placement, 2,234,363 shares were issued pursuant to conversions
of the Series A Preferred, and 39,601 additional shares to investor relation
firms and for the employee stock option plan and incentive stock option plan.
There were 12,215,522 shares outstanding at December 31, 1997. In 1998, the
Company issued an additional 4,528,566 to bring the total outstanding common
shares of the Company to 16,744,088.

Aggregate
Shares Reason for Date of Offering Number of
Shareholder Issued Issuance Issuance Price Investors
- ----------- ------ --------- -------- --------- ---------
DTM 17,500 Legal 2-28-97 $104,825 1
Settlement
Agreement

Dusseldorf 30,918 Underwriters April $192,000 1
Securities 42,667 (2) Fee 1997

Jeffries 27,429 (2) Underwriters April -- 1
& Co. Fee 1997

IIRG 18,462 Investor 10-6-97 $ 86,129 1
Relations
Services

<PAGE>
Page 49

Ballin &
Partners 5,000 Investor 10-6-97 $ 27,450 1
Relations
Services

Helix 442,667 (2) In connection 12-19-97 -- 1
with
debenture
financing

IIRG 18,462 Investor 3-18-98 $ 76,852 1
Relations
Services

Martech 25,000 (2) Investor 7-15-98 -- 1
Relations
Services

Helix 2,850,000 (2) In connection 8-7-98 -- 1
with
debentures

AMT 100,000 (2) Investor 8-15-98 -- 1
Capital Relations
Services

Private 600 (1) Financing 2-11-98 $6,000,000 7
Placement 150,000 (2)

Preferred Stock 30 (1) Preferred Stock 3-31-98, $170,762 7
Dividends Financing 6-30-98,
Agreement 9-30-98

Preferred 4,637,310 Preferred 7-1-98 -- 7
Stock Stock through
Conversions Terms 9-30-99
Ballin &
Partners 5,000 Investor 7-20-98 $18,125 1
Relations
Services

Private 2,254,602 Financing 8-14-98 $3,675,000(3) 9
Placement 2,254,602 (2)

Warrant 553,333 Warrant 1-5-99 $ 415,175 4
Exercise Agreement through
1-29-99

Samtec,
Inc. 666,667 Financing 2-3-99 $ 500,000 1

Fill-Up
Shares 4,441,829 Private 6-29-99 $2,437,675 9
Placement

Helix 1,000,000 SBI/Helix/ 5-18-99 $ 266,000 1
Panda Agreement

Joseph
Sarubbi 2,100,000 Legal Settlement 6-29-99 $1,087,600 1
Agreement
- -------------------
(1) Preferred Stock.

(2) Warrants.

(3) Aggregate Underwriting Discount of $117,500.

<PAGE>
Page 50

SELECTED FINANCIAL DATA

The following table sets forth selected financial data as of and for the
nine months ended September 30, 1999 and 1998 (unaudited), the twelve months
ended December 31, 1998, the nine months ended December 31, 1997 and 1996
(unaudited) and the twelve months ended March 31, 1997, 1996 and 1995. This
information is qualified in its entirety by, and should be read in conjunction
with, the financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are included elsewhere in this Proxy Statement. The following data insofar as
it relates to the twelve-month period ended December 31, 1998, the nine months
ended December 31, 1997 and each of the years in the three-year period ended
March 31, 1997 has been derived from audited financial statements.

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, December 31, Fiscal Year Ended March 31,
------------------------ ------------ ------------------------- -----------------------------------
1999 1998 1998 1997 1996 1997 1996 1995
(unaudited) (unaudited)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
revenues $ 1,153,841 $ 647,620 $ 822,580 $ 2,246,795 $ 2,091,132 $ 2,382,019 $ 870,658 $ --

Research
and
development
costs 754,652 2,832,242 3,395,577 3,255,335 4,786,838 5,722,717 7,954,924 3,494,260

Selling,
general and
administrative
expenses 3,582,071 6,316,268 9,263,283 6,113,255 10,830,976 13,142,099 15,810,701 3,744,914

Costs
associated
with
asset
impairments 167,223 0 125,038 1,471,025 2,056,025

Net loss (6,385,176) (11,513,995) (17,474,696) (8,949,652) (17,217,703) (20,874,101) (23,894,426) (6,931,346)

Basic and
diluted
loss
per share ($0.26) ($0.95) ($1.33) ($0.78) ($1.79) ($2.15) ($3.07) ($1.25)

Weighted
average
shares
outstanding 24,587,384 12,779,174 13,732,936 11,541,811 9,605,280 9,723,801 7,786,426 5,531,941
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet

September 30, December 31, March 31,
------------ --------------------------- ----------------------------------------
1999 1998 1997 1997 1996 1995
(unaudited)
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Total
Assets $ 1,782,901 $ 2,837,837 $ 5,713,830 $ 7,337,320 $ 18,557,681 $10,245,133

Total
Liabilities $ 6,415,232 $ 4,563,731 $ 3,616,126 $ 2,524,445 $ 3,690,090 $ 1,069,810

Accumulated
Deficit $(86,725,425) $(80,340,249) $(62,865,553) $(53,915,901) $(33,041,800) $(9,147,374)

Stockholders'
Equity
(Deficit) $ (4,632,331) $ (1,725,894) $ 2,097,704 $ 4,812,875 $ 14,867,591 $ 9,175,323
</TABLE>

Panda computes per share data in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Due to losses from
continuing operations, the effect of stock options and warrants is
antidilutive. Accordingly, Panda's presentation of diluted earnings per share
is the same as that of basic earnings per share.

<PAGE>
Page 51

MARKET FOR PANDA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Panda's Common Stock had been traded since May 1994 to December 16, 1998 on
the Nasdaq National Market under the symbol "PNDA." The stock currently
trades on the OTC Electronic Bulletin Board. Prior to that time, there was no
public market for the Panda Common Stock. The following table sets forth the
range of high and low closing sale prices for the Panda Common Stock as
reported during each of the quarters presented. The quotations set forth
below are inter-dealer quotations, without retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.

Common Stock
- ------------------------
Quarterly Period Ended High Low
- ---------------------- ------ ------
1999
- ----
December 31, 1999 $ .125 $ .047
September 30, 1999 $ .19 $ .09
June 30, 1999 $ .41 $ .12
March 31, 1999 $ .97 $ .31

1998
- ----
December 31, 1998 $ 1.50 $ .19
September 30, 1998 $ 3.44 $ .19
June 30, 1998 $ 6.25 $ 3.13
March 31, 1998 $ 6.25 $ 3.88

1997
- ----
December 31, 1997 $ 9.38 $ 3.81
September 30, 1997 $ 7.31 $ 2.50
June 30, 1997 $ 6.00 $ 2.63
March 31, 1997 $ 9.25 $ 3.75

The closing bid price on the date immediately prior to the announcement
of the Proposed Sale, May 17, 1999, was $0.20 per share. The closing bid price
of Panda's Common Stock on the OTC Electronic Bulletin Board on December 15,
1999 was $0.05 per share. As of December 15, 1999, there were approximately
29,698,425 shares of Panda Common Stock outstanding and 294 holders of record
of Panda's Common Stock. This number does not include beneficial owners of
Panda Common Stock whose shares are held in the names of various dealers,
clearing agencies, banks, brokers and other fiduciaries.

Panda has never declared or paid any cash dividends. After the consummation
of the Proposed Sale, Panda intends to invest any income received as Panda
believes appropriate under the circumstances, which may include U.S.
Government Securities and other short-term instruments. Panda currently
intends to retain any future earnings to finance the growth and development of
its business and future operations, and therefore does not anticipate paying
any cash dividends in the foreseeable future.

In addition, in February 1998, Panda issued shares of Series A Preferred
Stock, the terms of which prohibit Panda from paying any dividends on Panda
Common Stock or other shares junior in rank to the Series A Preferred Stock
unless all dividends for all past quarterly periods have been paid or declared
and a sum of cash or amount of shares sufficient for the payment thereof set
apart. Further, the terms of the Series A Preferred Stock allow for the
redemption of any outstanding shares of Series A Preferred Stock in the event
Panda declares a dividend (other than a dividend payable in Panda Common
Stock).

<PAGE>
Page 52

INFORMATION REGARDING PANDA

BUSINESS

Overview

Statements in this Proxy Statement that are not statements of historical
fact are to be regarded as forward-looking statements which are based on
information available to Panda as of the date hereof and involve a number of
risks and uncertainties. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are delays in product development, competitive pressures, general
economic conditions, risks of intellectual property and other litigation, and
the factors detailed below under "Certain Factors That May Affect Future
Results" or elsewhere herein or set forth from time to time in Panda's
periodic reports and registration statements filed with the SEC.

Panda is a technology company engaged in the design, development,
manufacture, licensing and sale of interconnect solutions to generate greater
throughput from silicon to board to system. These technologies are embodied
in VSPA, a three-dimensional semiconductor package, and the Compass Connector,
a board-to-board interconnect solution (collectively the "Technology
Products"). VSPA has received JEDEC JC-11 Committee designation and has
passed Mil Std. 883. The JEDEC JC-11 Committee is responsible for setting
standards for semiconductor packages. The Company obtained JEDEC designation
in 1997. The JEDEC designation for VSPA is PQFP-B. Semiconductor
manufacturers can obtain relevant mechanical data and specifications regarding
the VSPA product. Military standard 883D is the reliability standard for
electrical and mechanical testing parameters which indicate the level of
future durability and performance for components. In order for VSPA to be
commercially viable, it was necessary to prove its performance by achieving
industry standard levels. In addition, in September 1998, the Compass
Connector received Bellcore approval. Bellcore approval is an important
series of reliability, mechanical and electrical tests for the
telecommunications industry. In order for an interconnect to be used in
commercial applications for the telecommunications industries, most potential
end users will require that the connector be Bellcore
approved.

In September 1998, Panda announced a streamlining of operations that
included a significant reduction of operations related to the development of
the Archistrat line of computers and the Rock City line of desktop computers
(collectively the "Systems") and any upgradable mother board development
related to the Systems. Due to further cash constraints in November 1998,
Panda elected to exit its Systems business entirely. Panda continues to focus
its efforts on the Technology Products.

Panda has delivered products for commitments of prototype, pre-production
and production orders of its Technology Products from Veridicom, Motorola,
Kaiser Aerospace & Electronics, Honeywell and National Semiconductor. Several
of these customers have notified Panda that the VSPA parts have passed Mil
Std. 883 level of qualification for their specific application. See
"Semiconductor Packages."

Technology Products

The proliferation of increasingly sophisticated semiconductors for computer
operating systems and other electronic applications, along with the explosive
growth in Internet usage, have created the need for substantially greater
bandwidth in products ranging from the semiconductor to the printed circuit
board. Bandwidth refers to the capacity for transmitting data inside the
electronic device as well as between two or more devices. In recent years,
improvements in the speed at which microprocessors and other integrated
circuits can process data have far outpaced the data transmission capacity of
other electronic components and of the connectors and lines which link the
devices. The resulting bandwidth bottlenecks have effectively negated some of
the improvement in processing speed attributable to the enhanced
microprocessors. The Technology Products include semiconductor packages and
interconnect devices which incorporate designs which Panda believes enable
these products to effectively address the bandwidth bottlenecks. In addition,
these Company products, which are protected by a variety of patents which have
either been issued or for which applications are currently pending, have
significant advantages over currently available products, including:

<PAGE>
Page 53

Density of Electrical Connections. The Technology Products embody
proprietary geometrics that allow the placement of a greater number of
conductive leads than is possible with conventional designs. This permits the
access and transport of an increased volume of data.

Reduced Size. Due to their higher contact density, the Technology Products
require less surface area and routing layers than is required by conventional
semiconductor packages and interconnect devices to accommodate the same number
of leads. This improves the performance and, lowers the cost of using the
products in electronic applications.

Superior Electrical and Thermal Characteristics. The Technology Products
are designed to provide faster electrical connections while minimizing the
interference (parasitics) which can occur in a high density electrical
environment. The materials, used in the Technology Products, are also
constructed in such a way to dissipate heat better than conventional designs.
Panda believes that its Technology Products will withstand the rigors of
environmentally stressful applications such as automotive and other
high-temperature applications.

Compatibility; Reduced Cost of Manufacture. The Technology Products are
intended to be compatible with existing industry standards. For example,
while one of Panda's semiconductor packages (VSPA) incorporates a proprietary
array of electrical leads, the space (pitch) between the leads, which is of
critical importance in the surface mount manufacturing process, is no smaller
than that of conventional packages such as Plastic Quad Flat Pack ("PQFP"),
and Ball Grid Array packages ("BGA"). In addition, use of VSPA in an assembly
environment, requires only minor modifications to be compatible with standard
die attachment and wire bonding equipment such as the ESEC 3008 and K&S 8020
wirebonders. Additionally, test sockets for electrical testing, post
assembly, and complete manufacturing procedures are available for customers.
Panda believes that customers housing their silicon devices in the Technology
Products will experience reduced overall production cost in high volume.

Semiconductor Packages. Semiconductor companies are facing ever increasing
demands for greater lead counts, improved thermal performance, miniaturization
and lower packaging costs in Semiconductor packages. As a result of the trend
in semiconductors, there have been increasing strains on the packaging.
Semiconductor companies have turned to independent packaging companies for
technology development and innovation.

Semiconductor companies are striving to shorten the time to market for new
products. Having a flexible packaging technology, quick turn programs and
capacity available are critical in attracting new customers.

Another trend in the semiconductor market is in the "fabless" segment of the
market. These companies have a core competency in the silicon design process.
This market segment relies solely on independent companies for their packaging
of their semiconductors.

There is a broad range of semiconductor packages available in the market
today for both commodity and custom products. These products are broken into
three categories: Leadframe, BGA and PGA. Samples of leadframe products
include SOIC, QFP and PLCC. These packages generally range from 8 leads to
304 leads. BGA or laminate products include the BGA family of products like
the PBGA, MicroBGA and FlipChip products. These packages range in lead counts
from 8-600. Another market segment are the PGA's which are pluggable packages
which traditionally have been used for microprocessor applications.

Leadframe products are the most widely recognizable package types in the
marketplace. The chip is encapsulated in a plastic mold compound with metal
leads extending peripherally from the perimeter. Laminate products have been
gaining market acceptance. The BGA uses a laminate, usually plastic or tape
substrate rather than a leadframe substrate. Tiny balls are attached in an
array to the bottom. PGA's are made from plastic or ceramic and have pins
extend perpendicularly from the bottom of the package arranged in several
rows.

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Panda has developed and patented 2 semiconductor packages: VSPA, which a
peripherally leaded package with one or multiple tiers, and Compass PGA, a
pluggable pin grid array. Both packages are made from similar materials.

VSPA has been designed to address the increasing demands on bandwidth from
the silicon to the PCB. VSPA is a low cost surface mount semiconductor
package that provides higher I/O in less space with improved electrical and
thermal performance as compared to other packages on the market today. VSPA,
also called PQFP-B, is registered with JEDEC JC-11 committee under MO-198 and
has passed Military Standard 883D. The qualification testing from the VSPA
was performed by independent companies including ISE/IQL Labs, Inc., Lockheed
Martin and the Georgia Tech Packaging Research Center.

VSPA is based on a three-dimensional architecture that utilizes multiple
rows of pins that are tiered to achieve a greater density within a smaller
area. The VSPA is scalable in X, Y, and Z axes being either square or
rectangular in shape. By using individual, pre-stamped, pins the VSPA package
does away with a traditional lead frame and many of the labor intensive
molding steps. As a result, it allows leads to be interleaved and arranged in
several tiers. The number of tiers depends upon the target die size and
necessary number of I/O. VSPA can be configured with one to six tiers,
allowing packages up to and over 1,000 pins. This allows the package to
shrink and grow depending on the customer's chip application.

VSPA is also available in both 'cavity down' and 'cavity up' versions. With
VSPA's wide range of I/O's and variable package dimensions, multichip modules
(MCMs) are also possible with the VSPA. This scalability allows silicon
designers considerable flexibility in choosing a VSPA package that will best
suit their specific package requirements.

This minimum lead length yields low package parasitic and inductance by
keeping pins a constant size for each tier and a common part number for each
package size. These parameters remain constant for each package size since
only the frame is scaled to accommodate different die sizes. This cannot be
achieved in PQFP or BGA packages. The electrical characteristics of VSPA
allow it to perform with faster rise times and the ability to support high
performance applications at much higher frequencies. VSPA has tested
resonance free to 3.5GHz with the next generation projected for a 10GHz range.

In 1998, Panda introduced several versions of the VSPA package including the
thermally enhanced and super thermally enhanced versions to address market
demands. Panda shipped pre-production parts of the VSPA TE and submitted
several designs using the VSPA STE.

In January 1998, Panda received its first production order for 1 million
units for a customized version of the VSPA package from Veridicom. As of June
1, 1999, Panda shipped in excess of 115,000 units to Veridicom. Additionally,
Panda has delivered prototype and pre-production parts to Lucent Technologies,
Motorola, EG&G Heimann, Honeywell SSEC, Samsung, SEEQ Technologies, National
Semiconductor, Kaiser Electronics and several other companies. While Panda
believes that production orders may materialize from the initial orders
received, there can be no assurance that any of these activities will result
in sales of the VSPA product.

Compass PGA is a high density PGA semiconductor product primarily designed
to address the high density chipscale segment of the packaging market. The
Compass PGA employs multiple leads and requires less surface area of the PCB
to accommodate the same number of leads in traditional PGA packages.
Additional design and qualification work must be done prior to
commercialization of this product. The Compass PGA can be used with existing
wirebond and FlipChip technologies. Panda believes that densities in excess of
1,100 can be achieved. In July 1996, Panda received a patent covering the
Compass PGA product.

Interconnect Products. Panda has been granted a license to the Compass
interconnect product by Stanford W. Crane, Jr., its inventor and Company
President and Chief Executive Officer. Panda has produced the Compass II
version in a 152 position right angle female, and 152 position vertical male
connector. Currently Panda purchases and resells the Compass V version from
LG Cable & Machinery ("LG Cable"), part of the LG Group in Korea, and a
licensee of the Compass technology. The Compass V is a 196 position connector
available in both straight and right angle female versions, and vertical male
versions.

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Compass V is the most dense interconnect currently in production. On the
edge of a printed circuit board it delivers 146 contacts per linear inch when
used in a double-sided arrangement. This compares with 80 contacts per linear
inch in the most widely used products used in high density applications. LG
Cable contracted for Bellcore testing of the Compass V with Contech, an
independent testing group. The Compass V connector received Bellcore approval
in 1998. Compass uses a patented arrangement of contacts and is actually
capable of delivering over 300 contacts per linear inch on the edge of a
printed circuit board, and over 1100 in a parallel configuration in one square
inch.

Compass also forms the basic platform for Compass PGA (pin grid array).
Compass PGA utilizes the design of Compass to connect semiconductors in a
pluggable fashion to another substrate, such as a printed circuit board.

Manufacturing

Panda has developed the ability to manufacture the VSPA semiconductor
package at its production facility in Boca Raton, Florida, using two automated
machines designed and built by Panda. The machines have a wide range of
flexibility in terms of the pin count of the VSPA packages it will produce,
and their production capacity ranges from 235,000 parts per month to 290,000
parts per month, depending upon the pin count of the package (i.e., the higher
the pin count, the lower the monthly production capacity). The first machine
became operational in late September 1997 and the second machine, after
undergoing refinements based on data derived from operating the first machine,
became operational in 1998. Although these machines have been designed and
developed by Panda, most of the components from which they are built are
available from multiple suppliers. Panda believes these machines can be
readily replicated to increase manufacturing capacity as demand for VSPA
increases. If Panda is successful in commercializing VSPA, such
commercialization will require Panda to expand its manufacturing capacity for
VSPA parts or enter into additional licensing arrangements, joint ventures or
strategic alliances with respect to the manufacture of VSPA parts. See
"Marketing and Strategic Relationships."

Panda has an arrangement with LG Cable, a unit of Korea-based LG Group and a
licensee of Panda's Compass technology, to acquire the Compass V Connectors
for distribution as discrete parts to customers. Panda believes that this
source of supply is sufficient to meet the demand for Compass V Connectors for
the foreseeable future. If Panda is successful in commercializing the Compass
V Connector for use by third parties, such commercialization may require its
strategic partners to expand their manufacturing capacity for Compass V
Connectors or for Panda to enter into additional licensing arrangements, joint
ventures or strategic alliances with respect to the manufacture of Compass
Connectors. See "Marketing and Strategic Relationships."

Panda has also subcontracted with LG Cable for the manufacturing of the VSPA
80/1 package for Veridicom. In addition to the single row production machines
Panda added internally, LG has built a fully automated assembly line with
capacity of 350,000 units per month.

In 1998, Panda contracted with Possehl Hong Kong Machinery limited ("PBE")
for the production of the VSPA 360 and 240 products. PBE specializes in
providing leadframe and other raw materials for the semiconductor packaging
market. PBE has 16 factories in 12 countries located in Europe, Asia and the
U.S. The 360 and 240 have the same body size and have an interchangeable
footprint on the PCB. In March 1999, the machine at PBE was being qualified
for production. PBE will be responsible for all VSPA high volume production
for these products.

In September 1999, Panda licensed AJU EXIM, a Korean leadframe
manufacturer, the rights to manufacture the VSPA product line. Panda expects
AJU EXIM to become a supplier of VSPA components including pins, plastic and
die attach plates.

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Marketing and Strategic Relationships. In June 1996, September 1996, July
1997 and January 1999, Panda licensed the VSPA semiconductor packaging
technology to AMP Incorporated, Pantronix Corporation, LG Cable and Samtec,
Inc., respectively. Under the terms of each licensing agreement, the licensee
has been granted worldwide rights to manufacture and sell VSPA. Panda
currently has only received up-front licensing fees and is unable to predict
the amount of sales revenue or royalty revenue, if any, that may be earned in
the future under these agreements.

In October 1996, Panda and Stanford W. Crane, Jr., Panda's President and
Chairman, entered into an agreement with LG Cable, under which LG Cable was
granted a license to the Compass technology. The license granted to LG Cable
is non-exclusive except for certain limited exclusive manufacturing rights
with respect to specified Asian countries. LG Cable has built a production
facility in Korea for production of Compass V, an enhanced version of the
Compass Connector. Based on information supplied to Panda by LG Cable,
production capability of the Compass V reached 250,000 parts per month in
January 1998. Under the terms of the agreement, LG Cable is to pay Panda and
Mr. Crane a royalty based on the sales price of each Compass Connector
produced and sold. See "Patents; Proprietary Information Systems." Such
royalties are to be divided equally between Panda and Mr. Crane.

Panda has also established relationships with semiconductor assemblers for
the back-end assembly process for VSPA which includes mounting the chip,
wirebonding, encapsulation and marking of the finished product. These
relationships include Gateway Semiconductor, ATEC and ASE Malaysia. Other
companies such as STATs, have qualification underway. These relationships are
needed for Panda's customers to utilize the VSPA package. Additionally, Panda
has worked closely with ESEC, a Swiss manufacturer of die attachment and
wirebonding equipment, to optimize their equipment for the VSPA package.

Panda markets it products through a direct sales force and a network of
independent sales representatives. At the present time Panda has four
salespeople engaged in the sales and marketing of its VSPA product. Panda is
engaged in recruiting additional personnel for various geographic locations
and positions.

Backlog. As of September, 1999, the Company's revenue backlog amounted
to approximately $966,000. In October 1999, Panda received authorization to
begin fulfilling a customer's order for an additional 150,000 VSPA units.
This will reduce the backlog by $154,000. The Company and/or SBI expect to
completely fill the current backlog within the next fiscal year. As of
November 15, 1999, the backlog consisted of product to be shipped to Veridicom
under their respective original purchase orders.

In the first quarter ending March 31, 1998, the Company reported a
backlog of approximately $1,700,000. Of the $1,700,000 reported, $707,500 was
recognized during year ending December 31, 1998. The remaining portion of the
backlog of $992,500 related to one customer was not recognized due to delays
to Veridicom in shipment of their silicon wafers. Veridicom uses the VSPA
product to house their proprietary silicon. If Veridicom has delays in
shipment of their silicon wafers, then there would be a delay of ordering
additional VSPA packages. It is expected that Veridicom will continue to
order parts for this specific version of their product and therefore it is
expected that the original purchase order will be fulfilled by Panda prior to
the closing of the transaction and by SBI after closing the transaction.

Research and Development

In early 1998, Panda's principal research and development efforts were
devoted to the design and development of VSPA and Rock City. The Rock City
development included new upgradable boards as well as a new chassis design.
Since September 1998, all research and development was for the VSPA product
and specific customer applications. In 1998, Panda spent approximately
$3,400,000 on research and development. For the nine months ending December
31,1997, Panda spent approximately $3,300,000 on research and development.
There will be no further development related to the Systems business.

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Panda currently anticipates that its research and development activities
over the next year will focus on enhancements to the automated machine for
producing VSPA, and developing specific applications for VSPA and the Compass
Connector. Panda believes that its spending on research and development in
the current fiscal year will be approximately the same amount as it was during
the previous twelve months.

Patents and Proprietary Information

Panda's success will depend on its ability to obtain patents, protect trade
secrets, and operate without infringing on the proprietary rights of others.
As of July 12, 1999, Panda had obtained 18 United States patents and an
aggregate of 41 foreign patents. In addition, Panda had pending a total of 18
United States and 29 foreign patent applications. These patents and pending
applications relate to VSPA, Compass PGA, various designs of the Computer
Systems, the use of the Compass Connector in Compass PGA and in the Computer
Systems, and a PCB manufacturing technology known as "Well Tech PCB." Panda's
foreign patent filings have been made in selected countries, including the
Republic of China (Taiwan), Germany, the United Kingdom, Ireland and France.
Panda will continue to file applications in certain foreign jurisdictions to
secure protection in those jurisdictions in accordance with the Patent
Cooperation Treaty and the Paris Convention for the Production of Industrial
Property (which allows such filings to relate back to the original filing date
in the United States) covering Panda's technology and proposed products. To
the extent possible, Panda also intends to file patent applications with
respect to products and technology that it may develop in the future.

There can be no assurance that any of Panda's pending patent applications
will ultimately result in an issued patent. Moreover, the patent laws of
other countries may differ from those of the United States as to the
patentability of Panda's products or technology, and the degree of protection
afforded by foreign patents may be different from that in the United States.
The failure by Panda to obtain patents for which applications are currently
pending could have a material adverse effect on Panda's ability to
commercialize successfully its proposed technology and products. Even if
Panda is able to obtain such patents, there can be no assurance that any such
patents will afford Panda commercially significant protection for its
technology or products. In addition, other companies may independently
develop equivalent or superior technologies or products and may obtain patent
or similar rights with respect to them. Although Panda believes that its
technology has been independently developed and that its technology does not
infringe on the patents or violate the proprietary rights of others, there can
be no assurance that any of Panda's technology or products, will not be
determined to infringe upon the patents or proprietary rights of others, or
that patents or proprietary rights of others will not have an adverse effect
on the ability of Panda to do business. If Panda's technology or products
were determined to infringe on the patents, trademarks or proprietary rights
of others, Panda could, under certain circumstances, become liable for
damages, which also could have a material adverse effect on Panda. Moreover,
in the event that Panda's technology or proposed products were deemed to
infringe upon the rights of others, Panda would be required to obtain licenses
to utilize such technology. There can be no assurance that Panda would be
able to obtain such licenses in a timely manner or on acceptable terms and
conditions, and the failure to do so could have a material adverse effect on
Panda. If Panda were unable to obtain such licenses, it could encounter
significant delays in product market introductions while it attempted to
design around the infringed upon patents or rights, or could find the
development, manufacture or sale of products requiring such licenses to be
foreclosed. In addition, patent disputes are common in the computer industry
and there can be no assurance that Panda will have the financial resources to
enforce or defend a patent infringement or proprietary rights action.

Panda has registered the Archistrat, VSPA and Rock City trademarks with the
U.S. Patent and Trademark Office and has applied for appropriate trademark,
copyright and other legal protection for its product names, logos and other
identifications. There can be no assurance that Panda will not be precluded
by others from using any of such identifications or creating proprietary
rights with respect to them.

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Pursuant to a license agreement entered into in January 1996 between Panda
and Mr. Crane (the "Crane-Panda License"), Mr. Crane has granted Panda the
nonexclusive right to utilize the Compass Connector, a key component in the
commercialization of Panda's Archistrat Computers and the development and
commercialization of Compass PGA. The Crane-Panda License was executed in
connection with the conversion to a nonexclusive license of the 3M License
described below and supersedes an earlier license agreement between Mr. Crane
and Panda relating to the Compass Connector. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors
That May Affect Future Results" and "--Dependence On The Crane-Panda License
Agreement; Potential Conflicts Of Interest." Under the Crane- Panda License,
Panda is required to pay Mr. Crane a royalty on any sales of Compass
Connectors as discrete parts in the amount of 5% of the net sales price for
the first five years of the term of the agreement, 2.5% of the net sales price
for the next five years of the term of the agreement and 2% of the net sales
price thereafter, provided that no royalty is payable until aggregate net
sales of the Compass Connector as discrete parts exceed $100,000. The royalty
rate will be reduced after the fifth anniversary of the agreement if no patent
remains in effect with respect to the Compass Connector. No royalty is
payable on sales of the Compass Connector as incorporated in the Archistrat
Computers or other computer system or assembly. Panda may grant sublicenses
under the Crane-Panda License, but only for the use of products as
incorporated in the Archistrat Computers or other computer system or assembly.
To date, there have been no sales requiring the payment of royalties to Mr.
Crane under the Crane-Panda License. The Crane-Panda License obligates Panda
to maintain proprietary information relating to the Compass Connector on a
confidential basis, notify Mr. Crane of any evidence of infringement with
respect to the Compass Connector and related technology, and cooperate with
Mr. Crane to contest any such infringement. In the event that Panda becomes
bankrupt or insolvent or defaults in any of its material obligations under the
Crane-Panda License and fails to cure any such defaults within specified cure
periods, Mr. Crane may terminate the Crane-Panda License. Panda is
substantially dependent upon the Crane-Panda License. The termination of the
agreement under any circumstances would have a material adverse effect on
Panda. There can be no assurance that conflicts of interest will not arise
with respect to the Crane-Panda License or that such conflicts will be
resolved in a manner favorable to Panda. In addition, Mr. Crane retains
ownership of the Compass Connector technology, and has the right to grant
licenses to or otherwise transfer rights to the Compass Connector technology
to third parties.

Panda relies on confidentiality and nondisclosure arrangements with its
employees, consultants and others involved with Panda's product and
technological development efforts. There can be no assurance that these
agreements will provide meaningful protection to Panda or that other companies
will not acquire information which Panda considers proprietary. Moreover,
there can be no assurance that other companies will not independently develop
know-how comparable or superior to that of Panda.

Competition

Panda competes with many large corporations for sales on semiconductor
packages and interconnect devices. These corporations all have significantly
greater financial resources than Panda. In semiconductor packaging, companies
such as IBM, Motorola and Amkor have significant development capabilities and
financial strength to develop new semiconductor packages. VSPA competes
against well established products such as QFP's, BGA's and PGA's. Panda also
depends on third party subcontractors for volume production and may have
difficulties getting supply from time to time.

In the connector market, Compass competes with the AMP's Mictor Line and the
Teradyne VHDM connectors. These companies have significant resources, not
only financially, but also in manufacturing and sales and marketing.

Employees

On November 15, 1999, Panda had 17 full-time employees. Mr. Crane divides
his time between product research, manufacturing, and general management.
Panda considers its relations with its employees to be good. None of Panda's
employees are represented by labor unions.

PROPERTIES

Panda leases its principal offices at 951 Broken Sound Parkway in Boca
Raton, Florida. This facility has housed Panda's operations since November 1,
1998. The facility is approximately 11,230 square feet with monthly rent of
approximately $10,322 escalating to $12,547 beginning in November 2002. The
lease terminates on October 21, 2003.

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Panda leases two additional facilities at 1101 Holland Drive in Boca Raton,
Florida totalling approximately 7,200 square feet and uses these facilities
for Panda's machining operations, the production of the automated machines for
producing VSPA parts and current VSPA production. The leases for these two
facilities total approximately $5,000 in monthly rental payments. There is no
long-term lease for these facilities. The Company rents the property on a
month-to-month basis.

Panda also leases 10,547 square feet in Fremont, California and uses this
facility for sales & marketing and application engineering. The lease is for
a term of five years with monthly rental fees of approximately $22,000
escalating to approximately $24,000 in 2003.

In addition to the facility in Fremont, Panda also leases a facility in San
Jose, California, which was previously used to house Panda's Advanced Design
Group, manufacturing administrative personnel and certain sales personnel.
The lease term is through December 1999 and calls for monthly lease payments
of $4,746. Effective August 1, 1997, Panda entered into a sublease agreement
with a term ending in December 1999 and which called for monthly sublease
payments to Panda of approximately $4,800.

Panda has terminated its lease in Hayward, California for 50,000 square
feet, the original lease agreement had a term of 5 years with monthly rental
fees of approximately $18,000. Panda was required to secure lease payments
with an $80,000 Certificate of Deposit held at the Silicon Valley Bank through
July 16, 2002. On July 16, 2000, the guaranty limit will be reduced to
$40,000 provided no event of default has occurred by the current tenant.

Panda believes that its properties are generally in good condition,
except for the facility at 951 Broken Sound Parkway, at which the air
conditioning systems and ceiling are in disrepair. The other facilities are
well maintained and are generally suitable and adequate to carry on Panda's
current business.

On July 18, 1999, a complaint was filed against the Company in Palm Beach
County, Florida. The complaint alleges breach of contract by the Company for
non-monetary default of its lease agreement for the premises at 951 Broken
Sound Parkway, Boca Raton, Florida. The alleged default was that the Company
was insolvent and had, by entering into the Asset Purchase Agreement with SBI,
essentially subleased the leased premises without the landlord's consent.
Panda denies it is in default under the lease. Liberty seeks acceleration of
future rent payments in the amount of approximately $809,000. The Company has
filed an answer to the complaint and the outcome is both immeasurable and
undeterminable. There can be no assurance that the Company will be successful
in defending this litigation and the outcome to this litigation could have a
material adverse effect if the Company is unsuccessful.

LEGAL PROCEEDINGS

On October 16, 1998, a complaint was filed against Panda in the United
States District Court for the Southern District of New York by Promethean
Investment Group, L.L.C. The complaint alleges breach of contract by Panda
for failing to proceed with a financing transaction and seeks damages in an
unspecified amount in excess of $270,000 or a declaration that Panda is
required to proceed with the financing transaction. Panda has filed an answer
to the complaint. At the present time, the outcome of this litigation is both
immeasurable and undeterminable. There can be no assurance that Panda will be
successful in defending this litigation.

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On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in the
amount of $1,227,041. Sarubbi entered into a consulting agreement with Panda
in 1992. Sarubbi also later served as a director and general manager of
Panda. Under this consulting arrangement, Sarubbi received 91,000 options to
purchase shares of Panda Common Stock. Sarubbi also served as a director of
Panda in 1995 and 1996. In 1996, Sarubbi notified Panda of his desire to
exercise all of his options and to sell all of the Panda Common Stock received
upon the exercise of such options. A Florida district court held Panda liable
for certain losses Sarubbi alleged he incurred in connection with the sale of
his Panda Common Stock and for fees for his previous service as director. The
court granted a judgment of $1,227,041 in favor of Sarubbi. Under the
Settlement Agreement, Panda has agreed to pay Sarubbi total consideration
worth $1,000,000 of which $240,000 has been paid in cash in December 1998 and
the remainder is to be satisfied upon the sale of shares of Panda's Common
Stock which have been delivered to Sarubbi by Panda. Panda has registered
1,775,000 shares for Sarubbi pursuant to a registration statement, declared
effective on February 5, 1999. The parties have agreed to petition the
Florida Court of Appeals for the Fourth District to dismiss the litigation
within five business days after Panda's obligations in the Settlement
Agreement have been completed. If such obligations are not completed, the
judgment will remain in effect. This settlement amount was recorded as a
charge against Company earnings for the quarter ended December 31, 1998. On
April 14, 1999, Panda received a Notice of Default on the Settlement
Agreement. Sarubbi claimed that his inability to sell the stock that he
received in the settlement creates a breach under the Settlement Agreement.
Panda believes that it is in full compliance with the Settlement Agreement and
that no breach exists. On June 25, 1999, the Settlement Agreement was amended
to allow Panda to extend its time to satisfy its obligations under the
Settlement Agreement (the "Amended Settlement Agreement"). Under the Amended
Settlement Agreement, the Company issued Sarubbi 2,100,000 shares of Panda
Common Stock in the second quarter of 1999 and such shares were recorded as an
expense to SG&A at the closing price of $0.156 totalling $327,600. Panda also
agreed to issue Sarubbi an additional 3,750,000 shares upon the increase in
the number of shares of Panda Common Stock authorized under Panda's Articles
of Incorporation. Panda will have 90 days to register such shares of Panda
Common Stock with the Securities and Exchange Commission after the approval of
the authorization of such shares. $585,000 has been recorded in Panda's
financial statements for the additional 3,750,000 shares of Panda Common
Stock. In the event that the increase in the number of authorized shares of
Panda Common Stock is not approved pursuant to Proposal 2, Panda will be
obligated to pay Sarubbi $1,502,041, which is equal to the amount of the
judgment entered in favor of Sarubbi plus attorneys' fees, less the value of
any cash or stock received by Sarubbi pursuant to the Settlement Agreement or
the Amended Settlement Agreement. The Amended Settlement Agreement imposed a
deadline of September 1, 1999 for satisfaction of Panda's obligation to
register the 2,100,000 shares of Panda Common Stock with the Securities and
Exchange Commission. Panda has not satisfied its obligations under the
Amended Settlement Agreement and has received a notice of default. Any
further legal action taken by Sarubbi may be material to the Company. On
November 2, 1999, as stated in Panda's Form 8-K dated November 9, 1999,
Sarubbi alleged that the Company was in default under the Letter Agreement
dated June 24, 1999. Sarubbi demanded payment within 10 days of approximately
$505,000 in exchange for the 2,100,000 shares previously issued as well as the
3,750,000 shares which would be issued upon shareholder approval. As a
result, Sarubbi may assert remedies that he feels are available to him under
Florida law which may include a writ of execution as well as levying on real
property of Panda.

On July 18, 1999, a complaint was filed against the Company in Palm Beach
County, Florida by Liberty Property Limited Partnership ("Liberty"). The
complaint alleges breach of contract by the Company for non-monetary default
of its lease agreement for the premises at 951 Broken Sound Parkway, Boca
Raton, Florida. Liberty seeks acceleration of future rent payments in the
amount of approximately $809,000. The Company has filed an answer to the
complaint and the outcome is both immeasurable and undeterminable. There can
be no assurance that the Company will be successful in defending this
litigation and the outcome to this litigation could have a material adverse
effect if the Company is unsuccessful.

Panda from time to time is involved in disputes that may lead to litigation
in the future. Panda cannot determine the impact of those potential lawsuits
at the current time. The disputes are not expected to be material.

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

Change in Fiscal Year End

During September 1997, the Company decided to change its fiscal year from
April 1 through March 31 to January 1 through December 31. For discussion and
analysis purposes, the twelve months ended December 31, 1998 are compared to
the audited nine months ended December 31, 1997 and the audited nine months
ended December 31, 1997 are compared to the unaudited nine months ended
December 31, 1996.

Results of Operations

Twelve Months Ended December 31, 1998 Compared to Nine Months Ended
December 31, 1997

Net revenues decreased to approximately $823,000 during the twelve months
ended December 31, 1998 from $2,247,000 for the nine months ended December 31,
1997. Net revenues for the respective periods include approximately $184,000
and $924,000 of net sales of Archistrat Computers, $100,000 and $350,000 of
licensing fees, and approximately $136,000 and $973,000 of revenues associated
with a cooperative development agreement with the U.S. government. Also, the
Company realized approximately $170,000 of net revenues from the introduction
of the Rock City line of computers and approximately $232,000 from the sale of
VSPA and Compass semiconductor packages. The Company completed all of the
milestones set forth in its cooperative development agreement with the Defense
Advanced Research Projects Agency (DARPA) during April 1998. The objective to
the DARPA program was to develop a family of VSPA semiconductor packages and
process technologies, including a variety of multi-chip modules, and to define
the infrastructure to manufacture these packages on a high volume, low cost
basis. The DARPA Agreement was not intended to directly generate sales for
the VSPA product. The grant was for development of volume manufacturing
capabilities and applications with semiconductors. The US government has a
non-exclusive non- transferable royalty fee fully paid license to use,
duplicate or dispose for governmental purposes any data, technology and
inventions, whether patented or not, made or developed under the DARPA
Agreement. They are prohibited from giving the technology to any third party
for commercial uses. The decrease in revenue related to the Archistrat
Computers is directly related to the Company's refocused efforts toward the
Rock City line of computers introduced during the second quarter of 1998. In
September 1998, the Company streamlined operations related to the Systems
business including both Archistrat and Rock City products. In November 1998,
the Company ceased all operations related to the Systems business.

Research and development ("R&D") expenses increased to approximately
$3,400,000 for the twelve-month period ending December 31,1998 as compared to
approximately $3,300,000 for the nine-month period ending December 31,1997.
However, on a monthly basis comparative spending on R&D decreased
approximately $83,000 per month. R&D efforts in 1998 were focused on new
custom VSPA designs for specific customer applications, the refinement of the
existing VSPA Flex automation. In addition, the Company also designed the
IO-A architecture that was going to be used in the Rock City line of
computers. The Company believes that although its level of R&D spending is
appropriate to support current operations, it will need to increase future R&D
spending to enhance further development of VSPA, Compass Connectors, Compass
PGA and other derivative technologies as resources are available. Management
is currently evaluating the appropriate R&D expense relative to the current
level of activity in its Technology Products.

Selling, general and administrative ("SG&A") expenses increased to
approximately $9,300,000 for the twelve months ended December 31, 1998 from
$6,100,000 for the nine months ended December 31, 1997. The increase of
approximately $3,200,000 is primarily related to a $1,000,000 charge related
to a legal settlement (see "Legal Proceedings"), approximately $253,000
related to the relocation of the Company's corporate headquarters in November
1998, and approximately $285,000 charge to reserve certain receivables
associated with the Systems business. After the effect of these charges
totalling approximately $1,600,000 and annualizing SG&A for the nine months
ended December 31, 1997 (approximately $8,100,000) for comparative purposes,
SG&A actually decreased approximately $433,000. The decrease in SG&A is
primarily related with management's decision to streamline operations. During
1998, the Company reduced its number of employees resulting in savings of
approximately $211,000 related to employee compensation, benefits and travel,
$620,000 reduction related to consulting agreements and an increase of
$245,000 in advertising and marketing expenses related to the introduction of
the Rock City line of computers in the first and second quarters of 1998.

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During the twelve months ending December 31, 1998, the Company
determined that, due to various events and changes in circumstances
associated with exiting the Systems Business, certain long-lived
assets were impaired. As a result, the Company recorded a charge of
approximately $125,000. The Company also recorded an inventory write
down of approximately $1,178,836 related to its decision to exit its
Systems business in November 1998.

During the twelve months ended December 31, 1998, the Company
recorded interest expense of approximately $3,881,000 representing the
amortization of the debt issuance and interest costs related to the
Helix loans. This is a significant increase from approximately
$955,000 recorded for the nine-month period ending December 31, 1997.
This expense represents a non-cash charge.

Nine Months Ended December 31, 1997 Compared to Nine Months Ended
December 31, 1996

Net revenues increased to approximately $2,247,000 during the nine
months ended December 31, 1997 from $2,091,000 for the nine-month
period ended December 31, 1996. Net revenues for the respective
periods include approximately $924,000 and $1,422,000 of net sales of
Archistrat Computers, $350,000 and $100,000 of licensing fees, and
approximately $973,000 and $569,000 of revenues associated with a
cooperative development agreement with the U.S. government. Computer
systems revenues of approximately $924,000 were recorded during the
nine months ended December 31, 1996 as a result of a barter
transaction with a software developer. Other sales of Archistrat
computers increased 85% during the nine months ended December 31, 1997
compared to the same period of 1996 as the Company refocused its
selling efforts on certain niche markets. In July 1997, the Company
entered into a second licensing agreement with LG Cable whereby LG was
granted a license with respect to a semiconductor package product. In
connection with this agreement, the Company was entitled to a non-
refundable license fee of $250,000 that became immediately vested upon
signing the agreement and has been recorded as revenue during the nine
months ended December 31, 1997. The Company accomplished a majority
of the milestones set forth in its cooperative development agreement
with the Defense Advanced Research Projects Agency (DARPA) during the
nine months ended December 31, 1997 which accounts for the 71%
increase in the related revenue compared to the same period of 1996.
Revenues associated with this agreement will be limited during 1998 as
the agreement near its end.

During the nine months ended December 31, 1997 as compared to the
same period of the prior year, research and development expenses
decreased 32% from approximately $4.8 million to $3.3 million.
Development activities associated with Archistrat 4s server were
substantially completed during the period ended December 31, 1996
which resulted in the overall decrease. Spending related to the
design and development of automated manufacturing equipment for the
Company's VSPA product line as well as various new Archistrat computer
systems increased during the nine months ended December 31, 1997 as
compared to the same period of the prior year.

SG&A expenses decreased approximately $4.7 million or 44% to $6.1
million during the nine months ended December 31, 1997 as compared to
$10.8 million during the comparable period of 1996. The most
significant changes were in the following categories: compensation and
benefits decreased approximately $3.1 million resulting from a
decrease in the average employee head count from approximately 118
during the nine months ended December 31, 1996 to approximately 60 for
the same period of the current year; legal fees decreased 48% or
$580,000 as a result of management's efforts to reduce such costs;
office rent expense decreased approximately $440,000 resulting from
certain lease termination costs incurred during 1996; sales and
marketing expenses were reduced approximately $700,000 as a result of
streamlining certain of the Company's advertising and promotional
campaigns, as well as the reduction of product marketing expenses
associated with the barter agreement entered into in the prior fiscal
year.

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During the nine months ended December 31, 1996, the Company
determined that, due to various events and changes in circumstances
(including efforts to streamline operations and to increase the use of
strategic alliances to manufacture and market the Company's products),
certain long-lived assets were imparted. As a result, the Company
recorded a charge of approximately $1.5 million. No such charges were
deemed necessary during the nine months ended December 31, 1997.
During the nine months ended December 31, 1997, the Company recorded
interest expenses of approximately $900,000 representing the
beneficial conversion feature associated with the convertible
debentures issued in April 1997. This expense represents a non-cash
charge with no net effect on total shareholders' equity.

Quarter and Nine Months Ended September 30, 1999 and 1998

Net revenues increased during the quarter ended September 30,
1999 ("Third Quarter of 1999") to approximately $250,000 as compared
to $190,000 for the quarter ended September 30, 1998 ("Third Quarter
of 1998"). The net revenue increase for the quarter was attributable
to a one time license fee to be paid by Aju Exim, a Korean lead frame
manufacturer. In addition, the third quarter of 1998 revenue was
solely recognized from product sales of remaining Rock City inventory
and VSPA sales for prototype, pre-production and production orders.
In the third quarter of 1999, no such product sales were realized.
Net revenues for the nine months ended September 30, 1999 were
approximately $1,154,000 compared to approximately $648,000 for the
same period last year as a result of increased technology revenues,
including two one time, up front licensing fees totalling $750,000. In
addition, in 1998 approximately $138,000 of revenue was recorded
related to contract research and development from DARPA which was
successfully completed in April of 1998.

Research and development ("R&D") expenses decreased to
approximately $183,000 for the Third Quarter of 1999 as compared to
approximately $804,000 for the Third Quarter of 1998. R&D for the
first nine months of 1999 was approximately $755,000 attributable to
new custom VSPA designs for specific customer applications and the
refinement of the existing VSPA Flex automation machines. R&D for the
first nine months of 1998 was approximately $2,832,000. This decrease
is primarily due to ceasing operations relating to Systems activity,
including the Rock City computers, and the completion of the
cooperative development agreement with the US government.

Consistent with management's focus on decreasing fixed costs,
selling, general and administrative ("SG&A") expenses decreased for
the Third Quarter 1999 to approximately $858,000 compared to
approximately $2,076,000 for the Third Quarter 1998. The average
number of employees has decreased from 40 at September 30, 1998 to 17
full time employees as of September 30, 1999. The decrease in full-
time employees is directly related to ceasing operations related to
Systems activity and the need to reduce on going operational costs.
Payroll and related expenses decreased to approximately $345,600 for
the quarter ended September 1999 as compared to $1,054,000 for the
quarter ended September 1998.

For the nine months ending September 30,1999 SG&A decreased to
approximately $3,582,000 compared to $6,316,000 for the same period in
1998. The average number of full-time employees decreased to 17 from
40. The decrease in full-time employees is directly related to
ceasing operations related to the Systems activity and the need to
reduce on going operational costs. Payroll and related expenses
decreased approximately $2,001,000 for the nine months ended September
30, 1999 compared to the same period in 1998. In addition, a non-cash
charge of $327,600 related to the issuance of 2,100,000 shares and
$585,000 related to the 3,750,000 shares to be issued pursuant to the
Sarubbi settlement is recorded in SG&A.

Total debt issuance costs associated with short-term borrowings from
Helix, including the value of the warrants issued in connection with
such borrowings, charged to amortization expense during the quarter
ended September 30, 1999, amounted to zero, however for the Third
Quarter 1998, $1,246,000 was charged to amortization expense. For the
nine months ending September 30, 1999 approximately $525,000 and for
the nine months ending September 30, 1998 approximately $2,476,000 was
charged to amortization expense. The valuation of the warrants and
related amortization expense represents a non-cash transaction.

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In the Third Quarter 1999,$177,000 of liquidating damages are
recorded in accrued penalties related to the 1998 common stock private
placement. For the nine months ended September 30, 1999 accrued
penalties totalling $2,170,000 related to the Series A Preferred
Convertible transaction and the 1998 common stock private placement
were recorded. 171 Preferred penalty shares at $1,710,000; pursuant
to the Exchange Agreement, will be converted at a fixed conversion
price of $.261. At today's market prices of approximately $.12 per
share the value of the common stock shares would be valued at
approximately $205,000. The penalty shares were issued related to the
Series A Preferred Convertible transaction and the 1998 common stock
private placement holders of the Series A Preferred Convertible in
lieu of any accrued or future penalties. In addition, $460,500 of
liquidating damages related to the remaining 1998 common stock private
placement holders which did not receive penalty shares is recorded in
accrued penalties. There were no such penalties as of the third
quarter of 1998.

Interest expense increased for the nine months ended September
30, 1999 to $302,000 as compared to $21,000 for the same period last
year. The increase is related to a non-cash charge of $266,000 related
to the issuance of 1,000,000 common shares to Helix pursuant to the
Helix Agreement dated May 14, 1999.

Other income increased in the third quarter of 1999,
approximately $108,000 from the same period last year related to the
settlement of various trade receivables for less than the amount
originally expensed.

Liquidity and Capital Resources

During February 1998, the Company completed a private placement
of $6.0 million of Series A Preferred Stock and received net proceeds
of approximately $5.8 million. The shares of preferred stock are
convertible into common stock at the lower of $3.50 per share (in
accordance with the revised terms effective July 2, 1998) or a
floating conversion price. Through September 30, 1999, 271.76 shares
of preferred stock were converted into an aggregate of 4,637,310
shares of Panda Common Stock. As of September 30, 1999, 529.24
preferred shares are outstanding including dividends.

The Company may require that all unconverted shares of Series A
Preferred Stock be converted at any time if the closing bid price of
Panda Common Stock is equal to or greater than $12.00 per share for a
period of twenty consecutive trading days. In addition, on February
11, 2003, the Company may, at its option, require the holders to
convert the shares of Series A Preferred Stock which remain
outstanding on such date (plus accrued and unpaid dividends) or redeem
such shares of Series A Preferred Stock. The terms of the Series A
Preferred Stock, as revised on July 2, 1998, provide that upon the
occurrence of certain Triggering Events, as defined in the Panda
Articles, the Company may be required to pay the holders $100,000 per
month until such time that the Triggering Event has been remedied.
Any requirement that the Company pay such amounts could have a
material adverse impact on the Company in the event the Triggering
Event causing such payment is not remedied on a timely basis. On
December 16, 1998, a triggering event occurred related to the
delisting of Panda Common Stock from the Nasdaq National Market to the
OTC Bulletin Board. On May 14, 1999, the Company entered into an
Exchange Agreement with the Series A Preferred shareholders to
exchange their preferred shares for shares of Panda Common Stock at an
exchange rate of $.261. In connection with this agreement, the
Company issued an additional 171 shares of Series A Preferred stock to
the Series A Preferred shareholders in payment for penalties owed to
such shareholders. The Series A Preferred shareholders agreed to
waive all penalties owed by the Company. Additionally, in
consideration of the Exchange Agreement, the Series A Preferred
shareholders agreed to enter into a voting agreement in favor of the
Company's sale of its intellectual property portfolio and certain
fixed assets related to the interconnect and semiconductor
business.

On August 14, 1998, the Company completed the sale of 2,254,602
shares of Panda Common Stock and warrants in a private placement to
accredited investors with gross proceeds of $3.675 million. Upon
exercise of certain warrants, the investors may elect to receive a
reduced number of shares of common stock in lieu of tendering the
warrant exercise price in cash. The warrants have a term of five
years. The Company issued approximately 4,400,000 additional shares
associated with the fill-up provision. The Company is required to
issue approximately 6,000,000 additional shares of Panda Common Stock
as of August 15, 1999 in accordance with the Fill-up provision.

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During May, June and July 1998, the Company borrowed an aggregate of
$2 million from Helix PEI Inc. ("Helix"). The loans are secured by
the Company's intellectual property and were due August 7, 1998.
During August 1998, Helix agreed to extend the maturity date of all
the outstanding loans payable to February 15, 1999, from their
original due date in August 1998, in exchange for the issuance of a
warrant to purchase up to 2,000,000 shares of Panda Common Stock at an
exercise price equal to the fair market value of Panda Common Stock at
the date of issuance ($2.125). The loans bear interest at the Royal
Bank of Canada prime rate plus 2 percentage points per annum (9.40% at
June 30, 1999) payable monthly. The warrant has a term of two years.
The Company is currently in default on the Helix loans since the
Company did not repay the loan in February 1999.

On May 14, 1999, the Company, Helix and SBI entered into an
agreement whereas upon the closing of the acquisition of certain
assets of the Company by SBI, SBI will pay $1,000,000 to Helix. In
consideration of such payment, and the issuance of 1,000,000 shares of
Panda Common Stock to Helix, Helix released Panda from payment on all
accrued interest on the notes remaining unpaid as of the date of such
payment of $1,000,000. The remaining $1,000,000 and accrued interest
will be paid in eleven payments by SBI to Helix.

On December 15, 1998, the Company reduced the exercise price of
certain common stock purchase warrants if the warrant holders
accelerate the expiration date of their warrants from July 11, 2001 to
January 5, 1999. The exercise price was reduced from $11.00 to $0.75
per share. In January 1999, warrants representing 553,333 shares were
exercised at this reduced price, and the Company received net proceeds
of $415,000 upon such exercise. In February 1999, the Company
received $1,000,000 from Samtec, Inc. which includes a non-refundable
up-front license fee related to VSPA and a purchase of 666,667 shares
of Panda Common Stock.

In the third quarter 1999, the Company's payables were segmented
into the following categories: operational, professional, Systems and
Technology. Payables in the third quarter 1999 of approximately
$1,183,000 as compared to the third quarter 1998 of approximately
$1,208,000 increased or decreased as follows: Operations 15% versus
17%, professional fees 75% versus 21%, System 1% versus 34%, and
Technology 9% versus 297%, respectively. Payables related to
operations decreased slightly as a result of negotiated settlement
payments to vendors. Professional fees increased as a result of
increasing legal fees that were not current due to liquidity. The
decrease in payables related to Systems as a result of ceasing
operations related to the Systems business as well as successful
negotiations to settle outstanding accounts. The decrease in
technology payables is a result of our continued focus on technology
products, increasing customer interest and vendors requiring payments
on a COD basis. Accounts receivables (net of the allowance for
doubtful accounts for all System related receivables) related to the
third quarter of 1999 of approximately $8,500 represent Technology
related receivables whereas accounts receivables related to the third
quarter of 1998 of approximately $64,600 are approximately 80% related
to Computer Systems.

The Company has been able to obtain short-term financing through
secured promissory notes totalling $1,250,000 through October 1, 1999.
These funds have allowed the Company to fund certain monthly
obligations as well as certain payables. Additionally, the Company
has settled certain obligations through the issuance of Panda Common
Stock. In the event that the SBI transaction does not close, the
Company will seek additional financing from other alternatives. The
Company does not anticipate any additional liquidity from the letter
of intent, which expired May 1999, entered into by and between the
Company and Roundstone. Since the Company's current working capital
is insufficient to operate the Company, in the event that the Company
cannot seek additional financing, it will be forced to cease
operations.

The Company has entered into an agreement with SBI to sell its
intellectual property portfolio as well as the fixed assets related to
its interconnect and semiconductor business. As part of the sale, the
Company has restructured its outstanding loans with Helix that have
been in default since February 15, 1999. SBI will assume such Helix
loans upon closing. Additionally, the Company has entered into an
agreement with the Series A Preferred shareholders for the exchange
and conversion of the outstanding preferred shares into 22,995,919
common shares at a fixed price of $.261. The restructuring of these
agreements is partially contingent upon the closing of the sale to SBI
The transaction is subject to customary closing conditions, including
the approval of the Company' shareholders. Helix, Sarubbi and the
Series A Preferred shareholders have entered into a Voting Agreement
with SBI and such holders own sufficient shares, approximately 52%,
to assure the approval of the transaction by the Company's
shareholders. The Company will receive a 10% ownership interest in
SBI which will initially be capitalized with $6,000,000.

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In June, July, August and October 1999, the Company entered into
agreements with SBI pursuant to which SBI has loaned the Company
$1,250,000. In connection with the loan, the Company has granted to
SBI a security interest in substantially all of the assets of the
Company pursuant to the Security Agreement, dated October 1, 1999, by
and between the Company and SBI. The loan bears an interest rate of
6% per annum and is due and payable on February 24, 2000, pursuant to
Amendment 2 to the Asset Purchase Agreement.

Year 2000 Issues

Like many other companies, Year 2000 computer issues create certain
risks for the Company. If our financial, operational and information
systems do not correctly recognize the process date information beyond
the year 1999, it could have a significant adverse impact on the
Company's ability to process information, which could create
significant potential liability for the Company. To address potential
Year 2000 issues with its internal systems, we have evaluated these
systems. The initial assessment indicated that certain internal
systems should be upgraded or replaced as part of a solution to the
Year 2000 problem. The costs incurred to date related to these
programs have not been material. The estimated cost to be incurred by
us in the future is not expected to exceed $20,000. These estimates
do not include potential costs related to any customer or other claims
or the cost of internal software and hardware replaced in the normal
course of business. These estimates are based on our current
assessment of the projects and may change as the project progresses.

The Company believes that its potential liability related to its
products for Year 2000 compliance is not expected to exceed $5,000.
The Systems products Rock City, 5R, and 5S are year 2000 compliant.
The 4S may not, depending on the operating system used, make the
transition automatically. Specifically, 4S systems using the Pentium
100 and Pentium 166 Intel processors. Once the systems are assisted
by changing the date and time in the Bios, then the system is year
2000 compliant. The Company estimates that approximately 100 4S
computers with this potential problem were sold. The Semiconductor
and interconnect products are sold as components as opposed to
completed products and therefore there is no liability associated with
the year 2000 issue.

We are also working with key suppliers of products and services to
monitor their progress toward Year 2000 compliance. The failure of a
major supplier to become Year 2000 compliant on a timely basis could
have a material adverse affect on our business, financial condition
and operating results.

We have begun internal discussions concerning contingency planning
to address potential problem areas with internal systems and with
suppliers and other third parties. We expect assessment, remediation
and contingency planning activities to continue throughout the year
1999 with the goal of resolving all material internal and external
systems and third-party issues. While the Company has not completed
its detail plans with regards to this uncertainty, management
believes, based on discussions with vendors of its major business
applications and Year 2000 Compliance certificates received from the
related software developers, that the financial impact of making the
required systems changes, if any, will not be material to the
Company's financial position, results of operations or cash flows.

We deem "Year 2000 Compliant" to mean software that can
individually, and in combination with all other systems, products or
processes with which the software is designed to interface, continue
to operate successfully (both in functionality and performance in all
material respects) over the transition into the twenty-first century
when used in accordance with the documentation relating to such
software. Year 2000 Compliance includes being able to, before, on and
after January 1, 2000, substantially conform to the following:

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- use logic pertaining to dates which allow users to identify
and/or use the century portion of any date fields without special
processing;

- respond to all date elements and date input to resolve any
ambiguity as to century in a disclosed, defined and pre-determined
manner; and

- provide date information in ways which are unambiguous as to
century.

This may be achieved by permitting or requiring the century to be
specified or where the date element is represented without a century,
the correct century be unambiguous for all manipulations involving
that element.

Votes Required for Approval of Proposal 3

Approval of Proposal 3 requires that the number of votes cast in
favor or Proposal 3 exceed the number of votes cast against. Votes
for Proposal 3 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the Annual Meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in
voting shares for beneficial owners who have not provided voting
instructions, will not be included in vote totals for Proposal 3, but
will be counted for purposes of determining whether there is a quorum
at the Annual Meeting.

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PROPOSAL 4:

RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

On January 4, 1999, the Board, acting upon the recommendation of the
Audit Committee, voted to replace its independent public accountants,
PricewaterhouseCoopers LLP ("PWC"), which had served as the
independent public accountants of the Company since 1993. On October
21, 1998, PWC delivered notice it was terminating its client auditor
relationship with the Company. The reports of PWC for the two fiscal
years ended March 31, 1997 and 1996 and the transition period ended
December 31, 1997 did not contain any adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles. The opinion, however, did include an
explanatory paragraph expressing substantial doubt about the Company's
ability to continue as a going concern. During the fiscal years ended
March 31, 1997 and 1996, the transition period ended December 31, 1997
and the subsequent interim period through October 21, 1998 preceding
such termination, there were no disagreements between the Company and
PWC on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PWC, would have
caused it to make a reference to the subject matter of the
disagreements in connection with its report. In addition, during the
fiscal years ended March 31, 1997 and 1996, the transition period
ended December 31, 1997 or the subsequent interim period through
October 21, 1998, there were no "reportable events" within the meaning
of Item 304 of the Securities and Exchange Commission's Regulation S-
K.

The Board of Directors has appointed the firm of Grant Thornton LLP
to continue as independent certified public accountants for Panda for
the fiscal year ending December 31, 1999. Grant Thornton LLP has been
acting as independent certified public accountants of Panda since
January 4, 1999. Unless otherwise indicated, properly executed
proxies will be voted for the ratification of the appointment of Grant
Thornton LLP, independent certified public accountants, to audit the
books and accounts of Panda for the fiscal year ending December 31,
1999.

Representatives of Grant Thornton LLP are expected to be present at
the Annual Meeting, will be given an opportunity to make a statement
if they desire to do so, and will also be available to respond to
appropriate questions from shareholders.

The Board recommends that shareholders vote "FOR" the ratification
of the appointment of Grant Thornton LLP as independent public
accountants for Panda for the fiscal year ending December 31, 1999.

Votes Required for Approval of Proposal 4

Approval of Proposal 4 requires that the number of votes cast in
favor of Proposal 4 exceed the number of votes cast against. Votes
for Proposal 4 may be cast in favor of or against the proposal or may
abstain from voting. Abstentions may be specified on the proposal and
will be considered present at the annual meeting, but will not be
counted as affirmative votes. In addition, broker non-votes, where
brokers are prohibited from exercising discretionary authority in
voting shares for beneficial owners who have not provided voting
instructions, will not be included in vote totals for Proposal 4, but
will be counted for purposes of determining whether there is a quorum
at the annual meeting.

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EXPERTS

The financial statements of Panda contained in this Proxy
Statement for the year ended December 31, 1998 are included in
reliance on the report (which contains an explanatory paragraph
relating to The Panda Project, Inc.'s ability to continue as a going
concern as described in Note B of the financial statements) of Grant
Thornton LLP for the year ended December 31, 1998 and the report
(which contains an explanatory paragraph relating to The Panda
Project, Inc.'s ability to continue as a going concern as described in
Note 2 to the financial statements) as of December 31, 1997 and for
the nine-month period ended December 31, 1997 and for the year ended
March 31, 1997 of PricewaterhouseCoopers LLP. Such financial
statements are given upon the authority of such firms as experts in
accounting and auditing.

SHAREHOLDER PROPOSALS

Panda presently anticipates that its next Annual Meeting of
Shareholders will be held on or about May 15, 2000. Any proposal by a
shareholder intended to be presented at the 2000 Annual Meeting of
Shareholders must be received by Panda at its principal executive
offices not later than March 1, 2000 for inclusion in Panda's Proxy
Statement and form of Proxy relating to that Annual Meeting of
Shareholders.

SHAREHOLDER LIST

A list of shareholders entitled to vote at the Annual Meeting will
be available for inspection by any shareholder for any purpose germane
to the Annual Meeting during ordinary business hours of Panda for a
period of ten days prior to the Annual Meeting at Panda's principal
executive offices.

WHERE YOU CAN FIND MORE INFORMATION

Panda files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also
available to the public from commercial document retrieval services
and at the web site maintained by the SEC at "http://www.sec.gov."

You should rely only on the information contained this Proxy
Statement to vote on the Proposed Sale. We have not authorized anyone
to provide you with information that is different from what is
contained in this Proxy Statement. This Proxy Statement is dated
December 27, 1999. You should not assume that the information
contained in this Proxy Statement is accurate as of any date other
than such date, and neither the mailing of this Proxy Statement to
shareholders nor the issuance of SBI common stock in the Proposed Sale
shall create any implication to the contrary.

By Order of the Board of Directors,

Melissa F. Crane

Secretary

<PAGE>
Page F-1

The Panda Project, Inc.
Index to the Financial Statements
- - -----------------------------------------------------------------

Page

Interim Financial Statements (unaudited)

Condensed Balance Sheets............................. F-2

Condensed Statements of Operations................... F-3

Condensed Statements of Cash Flows................... F-4

Notes to Condensed Financial Statements............. F-5 to F-14

Reports of Independent Certified Public Accountants..F-16 to F-17

Financial Statements

Balance Sheets....................................... F-18
Statements of Operations............................. F-19
Statements of Changes in Stockholders'
(Deficit) Equity.................................... F-20 to F-21
Statements of Cash Flows............................ F-22 to F-23

Notes to Financial Statements...................... F-24 to F-44

<PAGE>
Page F-2
The Panda Project, Inc.
Condensed Balance Sheets
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS

Current Assets:
Cash and cash equivalents $ 80,535 $ 60,613
Accounts receivable-trade (net of
allowance of $295,292 at September 30,
1999 and at December 31, 1998) 8,496 64,206
Inventory, net 24,167 47,319
Other receivables 289,618 19,273
Prepaid expenses and other current
assets 43,128 637,947
------------- -------------
Total current assets 445,944 829,358
------------- -------------

Property and equipment, net 1,171,853 1,845,939
Restricted cash 80,000 80,000
Other assets 85,104 82,540
------------- -------------

Total assets $ 1,782,901 $ 2,837,837
============= =============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
Accounts payable $ 1,182,648 $ 1,207,662
Notes payable 2,950,000 2,000,000
Accrued expenses and other
current liabilities 2,282,584 1,356,069
------------- -------------
Total current liabilities 6,415,232 4,563,731
------------- -------------
Stockholders' Deficit:
Preferred stock, $.01 par value,
2,000,000 shares authorized: 1,000
shares designated as Series A, 529 shares
issued and outstanding at September 30,
1999 and 420 shares issued and
outstanding at December 31, 1998 4,864,137 3,967,057
Common Stock, $.01 par value, 50,000,000
shares authorized: 29,698,425 shares
issued and outstanding at September 30,
1999 and 16,744,088 shares issued
and outstanding at December 31, 1998 296,985 167,441
Additional paid-in capital 76,931,972 74,479,857
Accumulated deficit (86,725,425) (80,340,249)
------------ ------------
Total stockholders' deficit (4,632,331) (1,725,894)
------------ ------------
Total liabilities and stockholders'
deficit $ 1,782,901 $ 2,837,837
============= =============

See Notes to Condensed Financial Statements.

<PAGE>
Page F-3

<TABLE>
The Panda Project, Inc.
Condensed Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 101 $ 193,268 $ 403,841 $ 515,186
Licensing fees 250,000 - 750,000 -
Contract research and
development revenues - - - 135,673
Less returns and
Allowances - (3,239) - (3,239)
----------- ----------- ----------- -----------
Net revenues $ 250,101 $ 190,029 $ 1,153,841 $ 647,620

Costs and expenses:
Cost of sales 11,933 169,152 206,060 563,604
Research and
development 182,988 803,722 754,652 2,832,242
Selling, general
and administrative 858,127 2,076,024 3,582,071 6,316,268
Amortization of debt
issuance costs/
accrued penalties 177,000 1,246,000 2,695,500 2,475,514
Cost associated with
asset impairments 167,223 - 167,223 -
----------- ----------- ----------- -----------
Total costs and
expenses 1,397,217 4,294,898 7,405,506 12,187,628
----------- ----------- ----------- -----------
Operating loss (1,147,170) (4,104,869) (6,251,665) (11,540,008)

Interest income (expense) (599) 21,299 (302,938) (21,298)
Other income 105,287 (3,075) 111,059 47,311
Gain on Sale/
Disposal of Assets 3,695 - 58,368 -
----------- ----------- ----------- -----------

Net loss $(1,038,787) $(4,086,645) $(6,385,176)$(11,513,995)
============ =========== =========== ===========

Dividends and amortization
of beneficial conversion
feature related to
convertible preferred
stock - (177,872) (54,067) (689,713)
============ =========== =========== ===========

Net loss applicable to
common stock $(1,038,787)$(4,264,517) $(6,439,243) (12,203,708)
============ =========== =========== ===========

Basic and diluted loss
per common share $ (.04) $ (.31) $ (.26) $ (.95)
=========== =========== =========== ===========
Weighted average shares
outstanding 24,323,537 13,850,943 24,587,384 12,779,174
=========== =========== =========== ===========

See Notes to Condensed Financial Statements.

</TABLE>

Page F-4
The Panda Project, Inc.
Condensed Statements of Cash Flows (Unaudited)

Nine Months Ended
September 30,
1999 1998
------------- -------------

Net cash used in
operating activities (1,925,453) (9,274,041)

Cash flows from investing activities:
Additions to property and equipment - (647,601)
Dispositions of property and equipment 80,200 -
------------- -------------
Net cash provided by (used in)
investing activities 80,200 (647,601)

Cash flows from financing activities:
Proceeds from issuance of
convertible preferred stock - 6,000,000
Proceeds from issuance of
common stock 915,175 3,778,465
Proceeds from issuance of notes
payable 950,000 3,000,000
Repayment of notes payable - (2,000,000)
Payments of convertible preferred
stock - -
issuance costs - (193,013)
------------- -------------
Net cash provided by financing
activities 1,865,175 10,585,452
------------- -------------
Net increase in cash
and cash equivalents 19,922 663,810
------------- -------------
Cash and cash equivalents at
beginning of period 60,613 619,683
------------- -------------
Cash and cash equivalents at end
of period $ 80,535 $ 1,283,493
============= =============

See Notes to Condensed Financial Statements.

<PAGE>
Page F-5

The Panda Project, Inc.
Notes to Condensed Financial Statements
September 30, 1999

1. Basis of Presentation

The accompanying condensed financial statements of The Panda Project,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles on a basis consistent in all material
respects with those applied in the Annual Report on Form 10-K for the
twelve months ended December 31, 1998. The interim financial
information is unaudited, but reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to
provide a fair statement of results of operations for the interim
periods presented. The interim financial statements should be read in
connection with the financial statements in the Annual Report on Form
10-K for the twelve months ended December 31, 1998.

2. Inventory

The inventory as of September 30, 1999 is comprised of the Company's
VSPA raw materials and finished goods of $14,365 and the net
realizable value of the Systems inventory of $9,802 (net of reserves
of $1,557,934). The inventory as of December 31, 1998, is comprised
of the Company's VSPA raw materials and finished goods of $22,320 and
the net realizable value of the systems inventory of $25,000 (net of
reserves of approximately $1,778,837).

Product sales for the nine months ended September 30, 1999 includes
approximately $112,000 related to the sale of Systems inventory. These
sales had no related cost of sales as inventory items with original
cost of approximately $234,000 were reserved as of December 31, 1998.

3. Other Receivables

Other receivables consists of a $250,000 one time licensing fee with
Aju Exim, a Korean lead frame manufacturer. On October 27, 1999, the
company received payment of $250,000 related to the one time licensing
fee.

<PAGE>
Page F-6

4. Property and Equipment

During the three months ended September 30, 1999, the Company
determined that certain long-lived assets were impaired as a result of
changes in the functional use of the equipment. As a result, the
Company recorded charges totalling $167,223, related to certain
manufacturing equipment.

5. Accounts Payable

During the three months ended September 30, 1999, the Company settled
various trade receivables with vendors for less than the amount
originally expensed. This difference of $105,287 was recorded in
other income.

6. Notes Payable

The Company has outstanding loans from Helix in the aggregate
principal amount of $2,000,000. Such loans bear interest at an annual
rate equal to the prime rate of interest payable by the Royal Bank of
Canada plus 2%, are secured by the Company's intellectual property and
were due and payable on February 15, 1999. As of November 1, 1999,
this principal amount due Helix has not been repaid and is in default.
The inability of the Company to repay the Helix loans when due may
have a material adverse effect on the Company, including possible loss
of rights to its intellectual property through foreclosure which would
cause the Company to cease its operations. In connection with the
Helix loans, the Company has issued to Helix warrants to purchase an
aggregate of 2,850,000 shares of Common Stock at exercise prices
ranging from $1.63 to $2.125 per share (collectively, the "Helix
Warrants"). The Helix Warrants have expiration dates ranging from
December 19, 1999 to August 7, 2000. These warrants have been valued
at an aggregate of approximately $4,324,000 and have been recognized
as debt issuance costs and were fully amortized as of February 15,
1999. This accounting treatment has no impact on the Company's cash
balance. As of September 30, 1999, Helix and its affiliates hold
approximately 3.4% of the Company's outstanding Common Stock (not
including shares issuable upon exercise of warrants).
On May 14, 1999, the Company, Helix and Silicon Bandwidth, Inc.
("SBI") entered into an agreement ("Helix Agreement") whereas upon the
closing of the acquisition of certain assets of the Company by SBI,
SBI will pay $1,000,000 to Helix. In consideration of such payment,
and the issuance of 1,000,000 shares of Panda common stock to Helix,
Helix releases Panda from payment on all accrued interest on the notes
remaining unpaid as of the date of such payment of $1,000,000. The
remaining $1,000,000 and accrued interest will be paid in eleven
payments by SBI to Helix. (See exhibit 2.3)

<PAGE>
Page F-7

On June 11, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company $300,000. In connection
with the loan, the Company has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to the
Security Agreement, dated June 11, 1999, by and between the Company
and SBI. The loan bears an interest rate of 6% per annum and is due
and payable on February 24, 2000. (See Exhibit 4.9)

On July 15, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $325,000
with borrowed amounts totalling $625,000. In connection with the loan,
the Company has granted to SBI a security interest in substantially
all of the assets of the Company pursuant to the Security Agreement,
dated July 15, 1999, by and between the Company and SBI. The loan
bears an interest rate of 6% per annum and is due and payable on
February 24, 2000. (See Exhibit 4.10)

On August 17, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $325,000
with borrowed amounts totalling $950,000. In connection with the loan,
the Company has granted to SBI a security interest in substantially
all of the assets of the Company pursuant to the Security Agreement,
dated August 17, 1999, by and between the Company and SBI. The loan
bears an interest rate of 6% per annum and is due and payable on
February 24, 2000. (See Exhibit 4.11)

On October 1, 1999, the Company entered into an agreement with SBI
pursuant to which SBI has loaned the Company an additional $300,000
with borrowed amounts totalling $1,250,000. In connection with the
loan, the Company has granted to SBI a security interest in
substantially all of the assets of the Company pursuant to the
Security Agreement, dated October 1, 1999, by and between the Company
and SBI. The loan bears an interest rate of 6% per annum and is due
and payable on February 24, 2000. (See Exhibit 4.12)

7. Common Stock

In January 1999, the Company received approximately $415,000 from the
exercise of warrants to purchase 553,333 shares of the Company's
common stock related to the 1996 private placement. In February 1999,
the Company received $1,000,000 from Samtec, Inc. which includes a
non-refundable upfront license fee related to VSPA and, a purchase of
666,667 shares of the Company's common stock.

On May 18, 1999, the Company issued 1,000,000 shares of the Company's
common stock to Helix pursuant to the Helix Agreement dated May 14,
1999. The Company recorded $266,000 in loan interest expense
related to the issuance of the shares to Helix. Additionally, the
Company issued Mr. Sarubbi an additional 2,100,000 shares of the Company's
common stock pursuant to an amendment dated June 24, 1999 to
the original settlement agreement between the Company and Mr. Sarubbi
dated December 11, 1998 (See Legal Proceedings). $327,600 was
recorded in SG&A related to the issuance of the additional 2,100,000
shares of the Company's common stock and $585,000 was recorded
related to the 3,750,000 common shares to be issued upon shareholder
approval of additional authorized shares.

<PAGE>
Page F-8

8. SERIES A CONVERTIBLE PREFERRED STOCK

On February 11, 1998, the Company issued 600 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants ("Warrants") to purchase an aggregate of 150,000
shares of common stock for a total purchase price of $6,000,000. The
purchase price was allocated to the Series A Preferred and Warrants
based on their relative fair value. The Warrants, which have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share, were valued at $411,000
using the Black-Scholes option pricing model. Issuance costs of
approximately $193,000 were deducted on a pro rata basis from the
gross proceeds assigned to the Series A Preferred and the Warrants.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable either in cash or
as an accrual to the purchase price utilized in computing the number
of shares of Series A Preferred issuable upon conversion. Dividends
payable for the quarter ended March 31, 1999 in the amount of $54,067
have been accrued and added to the purchase price of the Series A
Preferred in lieu of a cash payment. Accrued dividends equal 30
shares of the Company's Series A Preferred stock through March 31,
1999.

Shares of Series A Preferred are convertible into shares of common
stock pursuant to a formula whereby the purchase price of the shares
to be converted plus any such dividends is divided by a conversion
price defined as the lower of (i) $3.50 subject to adjustment in the
event of certain dilutive issuances of securities by the Company or
for stock splits or similar events, or (ii) a percentage of the
average closing bid price of the common stock for the five days
immediately preceding conversion equal to 92%, if conversion occurs in
the period beginning 120 days and ending 180 days after issuance of
the Series A Preferred, or 90%, if conversion occurs after 180 days
from issuance of the Series A Preferred. However, On May 14, 1999 the
conversion price was set pursuant to the Exchange Agreement at $.261.
From July 1, 1998 through September 30, 1999, 272.14 shares of Series
A Preferred were converted into an aggregate of 4,666,492 shares of
common stock of the Company. As of September 30, 1999, 528.85 shares of
Series
A Preferred (including 171 penalty shares) have not been converted. However,
these shares will be converted five days prior to the record date into
20,262,681 Common shares calculated as (528.85 x 10,000 / .261).

<PAGE>
Page F-9

Under the terms of the transaction, as modified on July 2, 1998,
without the prior written approval of the holders of 66 2/3% of the
Series A Preferred shares that include GAM Arbitrage Fund L.P.,
AGR Halifax Fund, Ltd, Leonardo L.P., Ramius Fund, Ltd, Raphael L.P.,
AG Super Fund L.P.,, the Company shall not (1) consolidate or merge
with another corporation or other entity or person, whereby the
shareholders of the Company own in the aggregate less than 50%
of the ultimate parent or surviving entity, (2) transfer all or
substantially all of the Company's assets to another corporation or
other entity or person, or (3) fix a record date for the declaration
of a distribution or dividend, whether payable in cash, securities
or assets (other than shares of common stock).

In addition, a "Triggering Event" shall be deemed to have occurred
under the following circumstances: (1) the Company does not issue
shares of common stock registered for resale for any reason, including
(a) the Company does not have a sufficient number of shares of common
stock authorized and available, (b) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange or
inter-dealer quotation system from issuing such shares (including as a
result of the Series A Exchange Cap discussed below) or (c) fails to
have a sufficient number of shares of common stock registered for
resale under a registration statement, and if such condition remains
unremedied for a period of 30 days, (2) suspension for a period of 30
consecutive days of a registration statement covering shares issuable
upon conversion of Series A Preferred, (3) failure of the Common Stock
to be listed, or suspension of trading in the Company's Common Stock
on the NASDAQ National Market or the NASDAQ SmallCap Market for a
period of five consecutive days, or (4) notice by the Company to any
holder of Series A Preferred of its intention not to comply with
proper requests for conversion of Series A Preferred. After a
Triggering Event, the Company is required to pay the holders $100,000
on the first day of each month until the Triggering Event is remedied.

<PAGE>
Page F-10

In the event the Company is unable to issue shares of its common stock
pursuant to a request for conversion for any reason, including,
without limitation, because the Company (1) does not have sufficient
number of shares of Common Stock authorized and available, (2) is
otherwise prohibited by applicable law or by the rules or regulations
of any stock exchange from issuing such shares, or (3) fails to have a
sufficient number of shares of Common Stock registered for resale
under a registration statement, and if such condition remains
unremedied for a period of 30 days, the dividend rate for all shares
of Series A Preferred that cannot be converted into shares of Common
Stock pursuant to such limitations will increase on a formula basis
until such securities have been duly converted.

In connection with this transaction, the Company filed a registration
statement on form S-3 (the "form S-3") with the Securities and
Exchange Commission ("SEC") to effect the registration for resale of
2,000,000 shares of Common Stock issuable upon conversion of the
Series A Preferred and 150,000 shares of common stock issuable upon
exercise of the Warrants, plus an additional number of shares of
Common Stock, not to exceed the Exchange Cap, described below, that
may be usable upon conversion of the Series A Preferred as a result of
antidilution provisions. The Form S-3 has been declared effective by
the Securities and Exchange Commission. As of March 31, 1999,
3,650,214 shares of Common Stock issued upon conversion of Series A
Preferred had been sold pursuant to the Form S-3. As of September 30,
1999, an additional 987,096 shares of common stock were issued upon
conversion of Series A preferred and have been sold pursuant to Rule
144A.

The beneficial conversion feature associated with the Series A
Preferred shares has been recognized and allocated to additional paid-
in capital. The amount of the beneficial conversion feature of
approximately $510,000 was calculated using the most favorable
conversion rate as defined by the terms of the Series A Preferred
stock and was amortized over a period of six months. In the quarter
ending September 30, 1999 there was no additional amortization
expense.

On May 14, 1999 the Company entered into an Exchange Agreement with
the Series A Preferred Stock Holders ("Holders") to exchange their
preferred shares for the Company's common shares at an exchange rate
of $.261. In connection with this agreement the Company issued an
additional 171 shares of Series A Preferred stock to the Holders in
payment for penalties owed to such holders. The Holders hereby agree
to waive all penalties owed by the Company. Additionally, in
consideration of the Exchange Agreement the Holders have agreed to
enter into a voting agreement in favor of the Company's sale of its
intellectual property portfolio and certain fixed assets related to
the interconnect and semiconductor business. (See Exhibit 2.4)

<PAGE>
Page F-11

9. August Private Placement

On August 14, 1998, Panda completed an agreement for the sale of
2,346,626 shares of its Common Stock and 2,346,626 shares of Common
Stock issuable upon the exercise of Common Stock Purchase Warrants in
a private placement to accredited investors with gross proceeds of
approximately $3.8 million of which all but $200,000 has been funded
as of the date hereof (the "Private Placement"). Expenses of the
Private Placement were approximately $230,000. In addition to the
shares of Common Stock purchased by each investor in the Private
Placement, such investor received a warrant (the "Private Placement
Warrants") to purchase an equal number of shares of Common Stock,
subject to adjustment for stock splits and similar events, at an
exercise price of $2.55 per share. Upon exercise of the Private
Placement Warrants, an investor may elect to receive a reduced number
of shares of Common Stock in lieu of tendering the warrant exercise
price in cash. The Private Placement Warrants have a term of five
years expiring August 13, 2003. Issuance of shares of Common Stock
pursuant to exercise of the Private Placement Warrants requires the
approval of Panda's shareholders.

Under the terms of the Securities Purchase Agreement relating to the
Private Placement, if on either the six-month or the one-year
anniversary of the date of closing of the Private Placement (each an
"Anniversary Date"), the average closing bid price of the Common Stock
for the twenty-trading day period ending on the trading day
immediately prior to the applicable Anniversary Date is less than the
closing price ($2.0375) or the prior Anniversary Price in the event
the six-month Anniversary Price is less than the closing price,
respectively, Panda is required to issue a number of shares of Common
Stock within ten days after the Anniversary Date, equal to the product
of (i) (x) the difference between the closing price (or if the
measurement date is the one-year Anniversary Date, the six-month
Anniversary Price if the six-month Anniversary Price is less than the
closing price) and the applicable Anniversary Price, multiplied by
.85, multiplied by (y) the number of shares of Common Stock purchased
by the investors in the Private Placement and not sold or assigned to
non-affiliated third parties, divided by (ii)(x) the applicable
Anniversary Price multiplied by (y) .85. The shares issuable pursuant
to this formula are referred to as the "Fill-Up Shares." Issuance of
the Fill-up Shares pursuant to these provisions requires the approval
of Panda's shareholders.

As of the six month anniversary date Panda has issued 4,441,658 shares
of the Company's common stock pursuant to the Fill-Up provision. The
twelve month anniversary was August 15,1999 and the Company is
required to issue approximately 6,000,000 additional shares of Panda
common stock. As of the current date these shares have not been
issued. The Company intends to seek shareholder approval to increase
the number of shares allowed to be issued to fulfill its obligation.
Accordingly, the Company recorded $600,000 as part of accrued
expenses.

<PAGE>
Page F-12

In the event (i) the Common Stock is delisted or suspended from
trading on NASDAQ, (ii) the Fill-Up Shares and shares issuable upon
exercise of the Private Placement Warrants are not issuable or are not
listed with NASDAQ, or (iii) if Panda fails to issue Fill-Up Shares as
required, then Panda shall pay to the initial investors $100,000 for
each full 30-day period that the condition continues. Because the
Common Stock has been delisted from trading on NASDAQ, liabilities
under the Fill-Up Share provisions have been triggered. A portion of
this liability has been waived in an agreement by and between Panda
and the holders of the Series A Preferred whereby such holders have
agreed to waive all amounts due.

Panda has agreed to file a registration statement with the Commission
to effect the registration for resale of the Common Stock issued in
the Private Placement pursuant to the Fill-Up provisions. If the
registration statement is not declared effective by the Commission
within 90 days after the closing of the Private Placement, Panda may
be liable to investors for penalty payments for each month that such
registration statement has not been declared effective. As of July 9,
1999, the registration statement relating to these shares of Common
Stock has not been declared effective and Panda could be subject to
such penalty payments. Panda shall pay to the holders of the common
stock an amount ranging from 1% to 3% of the purchase price paid for
the common shares issued multiplied by: (i) the number of months
(prorated for partial months) after the end of such 90-day period and
prior to the date the Registration Statement is declared effective by
the Commission exclusive of certain delays which are attributable to
the holders, (ii) exclusive of Allowed Delays (as defined), the number
of months (prorated for partial months) that sales cannot be made
pursuant to the Registration Statement after the Registration
Statement has been declared effective and (iii) exclusive of Allowed
Delays the number of months (prorated for partial months) that the
Common Stock is not listed or included for quotation on the NASDAQ,
NYSE or AMEX or that trading there on is halted after the Registration
Statement has been declared effective.

10. Commitments and Contingent Matters

On October 16, 1998, a complaint was filed against Panda in the United
States District Court for the Southern District of New York by
Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by Panda for failing to proceed with a financing transaction
and seeks damages in an unspecified amount in excess of $270,000 or a
declaration that Panda is required to proceed with the financing
transaction. Panda has filed an answer to the complaint. At the
present time, the outcome of this litigation is both immeasurable and
undeterminable. There can be no assurance that Panda will be
successful in defending this litigation.

<PAGE>
Page F-13

On December 11, 1998, Panda and Joseph A. Sarubbi ("Sarubbi") entered
into a settlement agreement (the "Settlement Agreement") relating to
litigation in which Sarubbi has obtained a judgment against Panda in
the amount of $1,227,041. Sarubbi entered into a consulting agreement
with Panda in 1992. Sarubbi also later served as a director and
general manager of Panda. Under this consulting arrangement, Sarubbi
received 91,000 options to purchase shares of Panda Common Stock.
Sarubbi also served as a director of Panda in 1995 and 1996. In 1996,
Sarubbi notified Panda of his desire to exercise all of his options
and to sell all of the Panda Common Stock received upon the exercise
of such options. A Florida district court held Panda liable for
certain losses Sarubbi alleged he incurred in connection with the sale
of his Panda Common Stock and for fees for his previous service as
director. The court granted a judgment of $1,227,041 in favor of
Sarubbi. Under the Settlement Agreement, Panda has agreed to pay
Sarubbi total consideration worth $1,000,000 of which $240,000 has
been paid in cash in December 1998 and the remainder is to be
satisfied upon the sale of shares of Panda's Common Stock which have
been delivered to Sarubbi by Panda. Panda has registered 1,775,000
shares for Sarubbi pursuant to a registration statement, declared
effective on February 5, 1999. The parties have agreed to petition
the Florida Court of Appeals for the Fourth District to dismiss the
litigation within five business days after Panda's obligations in the
Settlement Agreement have been completed. If such obligations are not
completed, the judgment will remain in effect. This settlement amount
was recorded as a charge against Company earnings for the quarter
ended December 31, 1998. On April 14, 1999, Panda received a Notice
of Default on the Settlement Agreement. Sarubbi claimed that his
inability to sell the stock that he received in the settlement creates
a breach under the Settlement Agreement. Panda believes that it is in
full compliance with the Settlement Agreement and that no breach
exists. On June 25, 1999, the Settlement Agreement was amended to
allow Panda to extend its time to satisfy its obligations under the
Settlement Agreement (the "Amended Settlement Agreement"). Under the
Amended Settlement Agreement, the Company issued Sarubbi 2,100,000
shares of Panda Common Stock in the second quarter of 1999 and such
shares were recorded as an expense to SG&A at the closing price of
$0.156 totalling $327,600. Panda also agreed to issue Sarubbi an
additional 3,750,000 shares upon the increase in the number of shares
of Panda Common Stock authorized under Panda's Articles of
Incorporation. Panda will have 90 days to register such shares of
Panda Common Stock with the Securities and Exchange Commission after
the approval of the authorization of such shares. $585,000 has been
recorded in Panda's financial statements as part of SG&A for the
planned issuance of the additional 3,750,000 shares of Panda Common
Stock. The Amended Settlement Agreement imposed a deadline of

<PAGE>
Page F-14

September 1, 1999 for satisfaction of Panda's obligation to register
the 2,100,000 shares of Panda Common Stock with the Securities and
Exchange Commission. Panda has not satisfied its obligations under
the Amended Settlement Agreement. On November 2,1999, as stated in
form 8-K dated November 9,1999 Mr. Sarubbi alleged that the Company
was in default of the Letter Agreement dated June 24, 1999. Mr.
Sarubbi demanded payment within 10 days of approximately $505,000 in
exchange for the 2,100,000 shares previously issued as well as, the
3,750,000 shares which would be issued upon shareholder approval. As
a result, Mr. Sarubbi may assert remedies that he feels are available
to him under Florida law which may include a writ of execution as well
as levying on real property of the Company.

On July 18, 1999, a complaint was filed against the Company in Palm
Beach County, Florida by Liberty Property Limited Partnership
("Liberty"). The complaint alleges breach of contract by the Company
for non-monetary default of its lease agreement for the premises at
951 Broken Sound Parkway, Boca Raton, Florida. Liberty seeks
acceleration of future rent payments in the amount of approximately
$809,000. The Company has filed an answer to the complaint and the
outcome is both immeasurable and undeterminable. There can be no
assurance that the Company will be successful in defending this
litigation and the outcome to this litigation could have a material
adverse effect if the Company is unsuccessful.

Panda from time to time is involved in disputes that may lead to
litigation in the future. Panda cannot determine the impact of those
potential lawsuits at the current time. The disputes are not expected
to be material.

11. Subsequent Events

On November 9, 1999, the Company filed an 8-K stating Mr. Sarubbi has
alleged that the Company was in default of the Letter Agreement dated
June 24, 1999.. Mr. Sarubbi demanded payment within 10 days of
approximately $505,000 in exchange for the 2,100,000 shares previously
issued as well as, the 3,750,000 shares which would be issued upon
shareholder approval. As a result, Mr. Sarubbi may assert remedies
that he feels are available to him under Florida law which may include
a writ of execution as well as levying on real property of the
Company.

<PAGE>
Page F-15

REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

Board of Directors
The Panda Project, Inc.

We have audited the accompanying balance sheet of Panda Project, Inc.
As of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' (deficit) equity, and cash flows
for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 The Panda
Project, Inc. as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended, in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the
financial statements, the Company incurred a net loss of $17,474,696
during the year ended December 31, 1998, and, as of that date, the
Company's current liabilities exceeded its current assets by
$3,734,373 and its total liabilities exceeded its total assets by
$1,725,894. In addition, the Company is in default on $2,000,000 of
its notes payable. These factors, as discussed in Note B to the
financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.

We have also audited Schedule II of The Panda Project, Inc. for the
year ended December 31, 1998. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set
forth therein.

Grant Thornton LLP
Weston, Florida
March 18, 1999 (except for Note U,
as to which the date is April 14, 1999)

<PAGE>
Page F-16

Report of Independent Certified Public Accountants

To The Board of Directors and Stockholders of
The Panda Project, Inc.

In our opinion, the balance sheet and related statements of
operations, of changes in stockholders equity and of cash flows as of
December 31, 1997 and for the nine months ended December 31, 1997 and
year ended March 31, 1997 appearing on pages F4-F9 of this Annual
Report on Form 10-K present fairly, in all material respects, the
financial position, results of operations and cash flows of The Panda
Project, Inc. as of December 31, 1997 and for the nine months ended
December 31, 1997 and the year ended March 31, 1997, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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,
assessing the accounting principals used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the financial
statements of The Panda Project, Inc. for any period subsequent to
December 31, 1997.

The financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note B to the financial statements, the Company's recurring losses
from operations and limited capital resources raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to these matters is also described in
Note B. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 10, 1998

<PAGE>
Page F-17
The Panda Project, Inc. - Balance Sheets
- ---------------------------------------------------------------------
The Panda Project, Inc.
BALANCE SHEETS
December 31,
ASSETS
1998 1997
Current assets
Cash and cash equivalents $ 60,613 $ 619,683
Accounts receivable (net of allowance
of $295,292 at December 31, 1998 and
$10,006 at December 31, 1997) 64,206 224,851
Inventory 47,319 965,199
Other receivables 19,273 105,825
Prepaid expenses and other current assets 637,947 378,242
----------- -----------
Total current assets 829,358 2,293,800
Property and equipment, net 1,845,939 2,818,218
Restricted cash 80,000 260,000
Debt issuance costs, net - 340,513
Other assets 82,540 1,299
----------- -----------
Total assets $ 2,837,837 $ 5,713,830
=========== ===========

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

Current liabilities
Accounts payable $ 1,207,662 $ 1,651,540
Notes payable 2,000,000 1,000,000
Other current liabilities 1,356,069 964,586
----------- -----------
Total current liabilities 4,563,731 3,616,126

Commitments and contingencies - -

Stockholders' (deficit) equity
Preferred Stock, $.01 par value, 2,000,000
shares authorized; 420 shares outstanding
at December 31, 1998 3,967,057 -
Common stock, $.01 par value, 50,000,000
shares authorized; 16,744,088 and
12,215,522 shares issued and outstanding
at December 31, 1998 and 1997, respectively 167,441 122,155

Additional paid-in capital 74,479,857 64,841,102
Accumulated deficit (80,340,249) (62,865,553)
----------- -----------
Total stockholders' (deficit) equity (1,725,894) 2,097,704
----------- -----------
Total liabilities and stockholders'
(deficit) equity $ 2,837,837 $ 5,713,830
=========== ===========
The accompanying notes are an integral part of these statements.

<PAGE>
PAGE F-18
The Panda Project, Inc.
STATEMENTS OF OPERATIONS

Nine Months Year
Year Ended Ended Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
Revenues
Product sales $ 586,907 $ 923,792 $ 1,547,896
Licensing fees 100,000 350,000 100,000
Contract research and
development revenues 135,673 973,003 734,123
------------ ------------ ------------
Net revenues 822,580 2,246,795 2,382,019
Other expenses
Cost of sales 1,739,418 1,028,577 2,762,936
Research and development 3,395,577 3,255,335 5,722,717
Selling, general and
administrative 9,263,283 6,113,255 13,142,099
Cost associated with asset
impairments 125,038 - 2,056,025
------------ ------------ ------------
Total operating expenses 14,523,316 10,397,167 23,683,777
------------ ------------ ------------
Operating loss (13,700,736) (8,150,372) (21,301,758)
Interest expense (3,881,406) (955,014) -
Interest income 72,345 144,449 427,657
Other income 35,101 11,285 -
------------ ------------ ------------
Net loss $(17,474,696) $ (8,949,652) $(20,874,101)
============ ============ ============
Dividends and amort-
ization of beneficial
conversion feature
related to convertible
preferred stock (741,886) - -
------------ ------------ ------------
Net loss applicable
to common stock $(18,216,582) $ (8,949,652) $(20,874,101)
============ ============ ============
Basic and diluted loss
per share $ (1.33) $ (.78) $ (2.15)
============ ============ ============
Weighted average
shares outstanding 13,732,936 11,541,811 9,723,801
============ ============ ============
The accompanying notes are an integral part of these statements.

<PAGE>
PAGE F-19
<TABLE>
The Panda Project, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Year Ended December 31, 1998, Nine Months Ended December 31, 1997
and Year Ended March 31, 1997
<CAPTION>
Preferred Common Total
Stock Stock Addition- Stock
--------------------- ------------------ al Paid- Accumul- holders'
Par in ated Equity
Shares Value Shares Value Capital Deficit (Deficit)
---------- --------- ----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
April 1, 1996 - - 8,680,488 $ 86,805 $47,822,586 $(33,041,800) $ 14,867,591

Issuance of
common stock - - 1,087,833 10,878 9,163,252 - 9,174,130
Exercise of
stock options - - 305,487 3,056 1,373,193 - 1,376,249
Exercise of
warrants - - 33,335 333 124,673 - 125,006
Warrants issued
for services
received - - - - 39,000 - 39,000
Issuance of
common stock
in connection
with legal
settlement - - 17,500 175 104,825 - 105,000
Net loss - - - - - (20,874,101) (20,874,101)
---------- --------- ----------- -------- ----------- ------------ ------------
Balance at
March 31, 1997 - - 10,124,643 101,247 58,627,529 (53,915,901) 4,812,875

Conversion of
debentures - - 1,996,822 19,968 4,780,032 - 4,800,000
Beneficial
conversion
feature related
to convertible
debentures - - - - 907,317 - 907,317
Deferred
issuance costs
related to
converted
debentures - - - - (550,943) - (550,943)
Issuance of
stock in
payment of
interest - - 13,592 136 35,374 - 35,510
Warrants
issued
related to
debt
issuance - - - - 566,651 - 566,651
Issuance of
common stock
under 401(k)
Plan - - 16,985 170 69,738 - 69,908
Issuance of
stock for
services
rendered - - 54,380 543 305,270 - 305,813
Exercise of
stock options - - 100 1 474 - 475
Exercise of
warrants - - 9,000 90 60,660 - 60,750
Warrants issued
for services
received - - - - 39,000 - 39,000

Net loss - - - - - (8,949,652) (8,949,652)
---------- --------- ----------- -------- ----------- ------------ ------------

<PAGE>
Page F-20

Balance at
December 31,
1997 - - 12,215,522 122,155 64,841,102 (62,865,553) 2,097,704
Preferred Stock
offering, net 600 5,390,399 - - - - 5,390,399
Preferred Stock
dividends - 231,041 - - (231,041) - -
Warrants issued
related to
Preferred stock
offering, net - - - - 396,374 - 396,374
Private
Placement of
common Stock,
net - - 2,254,602 22,546 3,460,635 - 3,483,181
Issuance of
common stock - - 23,462 234 94,742 - 94,976
Warrants issued
related to
debt issuance - - - - 3,920,000 - 3,920,000
Warrants issued
for Services
received - - - - 299,534 - 299,534
Exercise of
stock options - - 3,000 30 12,220 - 12,250
Conversion of
preferred
stock to
common stock (180) (1,654,383) 2,234,363 22,344 1,632,039 - -
Issuance of
common stock
under 401(k)
Plan - - 13,139 132 54,252 - 54,384
Net Loss - - - - - (17,474,696) (17,474,696)
---------- --------- ----------- -------- ----------- ------------ ------------
Balance at
December 31,
1998 420 3,967,057 16,744,088 167,441 74,479,857 (80,340,249) (1,725,894)
</TABLE>

<PAGE>
Page F-21
The Panda Project, Inc.- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(17,474,696) $ (8,949,652) $(20,874,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,908,548 1,198,095 1,595,549
Provision for obsolete inventory 1,178,837 - -
Provision for doubtful accounts 285,286 60,905 236,303
Cost associated with asset impairments 125,038 - 2,056,025
Beneficial conversion feature related to
convertible debentures - 907,317 -
Other noncash charges - 188,322 144,000
Stock option compensation 298,130 - -
Changes in operating assets and liabilities
(Increase) in accounts receivable (124,641) (120,663) (90,021)
(Increase) decrease in other receivables 86,552 (86,920) 469,651
(Increase) decrease in prepaid expenses and
other current assets 265,295 (279,279) 147,979
(Increase) decrease in inventory (260,958) (142,890) 793,713
(Increase) decrease in restricted cash 180,000 (110,000) 600,000
Decrease (increase) in other assets (81,244) 13,448 83,300
Increase (decrease) in accounts payable,
and other current liabilities (52,394) 91,681 (1,165,645)
------------ ------------ ------------
Net cash used in operating activities (10,666,247) (7,229,636) (16,003,247)
Cash flows from investing activities:
Additions to property and equipment (331,126) (1,055,819) (2,160,173)
------------ ------------ ------------
Net cash used in investing activities (331,126) (1,055,819) (2,160,173)
Cash flows from financing activities:
Proceeds from issuance of convertible debentures - 4,800,000 -
Proceeds from issuance of preferred stock 6,000,000 - -
Payment of costs related to issuance of
preferred stock (206,486) - -
Debt issuance costs - (269,500) -
Proceeds from issuance of common stock 161,608 131,133 11,291,752
Proceeds from common stock private placement 3,674,500 - -
Payment of stock issuance costs (191,319) - (616,367)
Payment of notes payable (2,000,000) - -
Proceeds from issuance of notes payable 3,000,000 1,000,000 -
------------ ------------ ------------
Net cash provided by financing
activities 10,438,303 5,661,633 10,675,385
------------ ------------ ------------
Net (decrease) in cash and cash equivalents (559,070) (2,623,822) (7,488,035)
Cash and cash equivalents at beginning of period 619,683 3,243,505 10,731,540
------------ ------------ ------------

Cash and cash equivalents at end of period $ 60,613 $ 619,683 $ 3,243,505
============ ============ ============

Supplemental disclosure of cash flow information:
Interest paid $ 138,798 $ 6,328 $ -
============ ============ ============
Taxes paid $ - $ - $ -
============ ============ ============
</TABLE>

<PAGE>
Page F-22

Supplemental schedule of noncash investing and financing activities:

In 1998, the Company issued warrants to Helix (PEI) Inc. in
conjunction with its notes payable. The Company capitalized the
$3,920,000 fair market value of these warrants as part of deferred
issuance costs.

In 1998, approximately 180 shares of the Company's convertible
preferred stock was converted into 2,234,363 shares of the
Company's common stock.

In 1998, The Company paid Preferred Stock dividends of $231,041 in
the form of Preferred Stock.

The accompanying notes are an integral part of these statements.

The Panda Project, Inc.

NOTES TO FINANCIAL STATEMENTS

Year Ended December 31, 1998, Nine Months Ended December 31, 1997
and Year Ended March 31, 1997

NOTE A - DESCRIPTION OF BUSINESS

The Panda Project, Inc. (the "Company") designs, develops,
manufactures, markets and licenses various products incorporating the
Company's proprietary semiconductor packaging and interconnect
technology ("Technology"). The Company markets and sells its
Technologies directly to end users as well as through a network of
sales representatives. Through October 1998, the Company designed,
developed, manufactured, and marketed powerful modular universal
platform computers, including personal computers, servers and
workstations ("Systems"). The Company continues to service and
support its Systems but elected to discontinue all other aspects of
the Systems business. The decision to continue only with the
Technologies business was based on the Company's limited capital
resources and other business and market factors. Based in Boca Raton,
Florida the Company conducts operations worldwide and has an inactive
wholly owned subsidiary, Archistrat Corporation, a Delaware
corporation.

Change in Fiscal Year
- ---------------------

During September 1997, the Company decided to change its fiscal
year from April 1 through March 31 to January 1 through December 31.
The accompanying audited financial statements are for the year ended
December 31, 1998, the transition period April 1, 1997 through
December 31, 1997 and for the year ended March 31, 1997.

<PAGE>
Page F-23

The following table sets forth the results of operations for the
transition period ended December 31, 1997 and the unaudited results of
operations for the nine months ended December 31, 1996.

1996
1997 (Unaudited)
------------- ------------
Net revenues $ 2,246,795 $ 2,091,132
Net loss $ (8,949,652) $(17,217,703)
Basic and diluted loss per share $ (0.78) $ (1.79)

NOTE B - GOING CONCERN

The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The
Company's working capital is not sufficient to meet its obligations.
The Company is currently seeking additional financing, however, in the
event that the Company cannot obtain additional financing it will be
forced to cease operations. In addition, the Company did not repay
its notes to Helix (PEI) Inc. as of their due dates and is currently
in default. The negotiations are ongoing and the ultimate outcome
cannot be predicted. Should the Company be unable to renegotiate the
terms of the Notes, the Company may have to cease operations.

In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements on a continuing
basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates
- ----------------

The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at year end and the reported amounts of revenues and expenses during
the year. Actual results could differ from those estimates.

Cash and Cash Equivalents
- -------------------------

The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.

<PAGE>
Page F-24

Accounts Receivable
- --------------------

The Company has business activities with both large and small
corporations. The Company has adopted credit policies and standards
intended to accommodate industry growth and inherent risk. Management
believes that credit risks are moderated by the diversity of its
customers and geographic sales areas. The company performs ongoing
credit evaluations of its customers' financial condition and requires
collateral when it deems necessary. There can be no assurance that the
credit quality of the customers with which the Company transacts
business will be stable or that efforts to diversify receivables will
prevent the Company from incurring material losses.

Inventory
- - ---------

Inventory is stated at the lower of cost using a first-in, first-
out basis, or market. Reserves are provided for excess and obsolete
inventory.

Property and Equipment
- ----------------------

Property and equipment are recorded at cost and depreciated using
the straight-line method over their estimated useful lives, which
range from three to ten years. Maintenance and repair costs are
expensed as incurred.

Revenue Recognition
- -------------------

The Company recognizes revenue from product sales at the time of
shipment. Licensing fees are recognized as received. Contract
research and development revenue are recorded upon the achievement of
stated milestones.

Per Share Data
- --------------

The Company's earnings per share is computed in accordance with
FAS No. 128 " Earnings Per Share". FAS 128 requires the presentation
of both basic and diluted EPS. Due to losses from continuing
operations, the effect of stock options and warrants is antidilutive.
Accordingly, the Company's presentation of diluted earnings per share
is the same as that of basic earnings per share for all periods
presented.

Potential common shares in the amount of approximately 16,350,000
for the year ended December 31, 1998, 2,341,492 for the nine months
ended December 31, 1997 and 2,246,916 for the year ended March 31,
1997, respectively have been excluded from the computation of diluted
earnings per share as the effect of their inclusion is antidilutive.

<PAGE>
Page F-25

The exercise price of the warrants to acquire approximately 5,750,000
common shares range from $2.125 to $11.00. There is potentially
substantial dilution from the convertible preferred stock if it were
to be converted under current market conditions. Using the formula
approximately 10,158,730 would be issued which is calculated using
90% of the five day average closing price on the date of conversion.
The discounted price is assumed to be $.375.(the price per common
share on March 22, 1999). The Company is also required to issue an
additional 4,400,000 "Fill-Up" shares in connection with the August
1998 private placement of its common stock (Note M). During February
1999, the Company registered 1,775,000 common shares in connection
with the litigation settlement described in Note S. Additionally, in
February 1999, 666,667 shares of the Company's common stock were
issued to Samtec, Inc.

Income taxes
- ------------

The Company records deferred income taxes using the liability
method. Under the liability method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of
temporary differences between the financial statement and income tax
bases of the Company's assets and liabilities. An allowance is
recorded, based on currently available information, when it is more
likely than not that any or all of a deferred tax asset will not be
realized. The provision for income taxes includes taxes currently
payable, if any, plus the net change during the period presented in
deferred tax assets and liabilities recorded by the Company.

Long-Lived Assets
- -----------------

The Company reviews long-lived assets and reserves for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.

New Accounting Pronouncements
- ----------------------------

In June 1998, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." FAS No. 133 establishes standards for accounting
and reporting for derivative instruments, and conforms the
requirements for treatment of different types of hedging activities.
This statement is effective for all fixed quarters of years beginning
after June 1999. Management does not expect this standard to have a
significant impact on the Company's operations.

In 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." SOP 98-5 provides guidance on
accounting for start-up costs and organization costs, which must be
expensed as incurred. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1998.
Management does not expect this Statement to have a material impact on
the Company's financial statements.

<PAGE>
Page F-26

Stock-Based Compensation
- ------------------------

The Company's employee stock option plans are accounted for using
the intrinsic value method. The Company also provides disclosures of
certain pro forma information as if the fair value-based method had
been applied in measuring compensation expense (Note N).

Debt Issuance Costs
- -------------------

Deferred loan costs of approximately $3,920,000 incurred in
connection with debt financing (Note I) are being amortized on a
straight-line basis over the life of the debt. As of December 31,
1998, the Company had $525,000 of deferred debt costs net of
accumulated amortization of $3,395,000, which is included in prepaid
expenses and other current assets. As of December 31, 1997, the
Company had $340,513 of deferred debt costs, net of accumulated
amortization of $63,487.

NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash, accounts receivable, notes payable,
accounts payable, and accrued compensation and employee benefits
approximates fair value due to the relatively short-term maturity of
these instruments.

NOTE E - RESTRICTED CASH

Restricted cash as of December 31, 1998 was $80,000, which was
held in a restricted account to serve as security for a letter of
credit issued to one of the Company's landlords.

NOTE F - INVENTORY

As discussed in Note A the Company elected to exit its System
business as of November 1998. This decision, coupled with the rapid
technological development in the computer industry resulted in the
recognition of a write-down of substantially all of its Systems
inventory of $1,178,837. This write-down was recorded as a component of the
cost of goods sold. The inventory as of December 31, 1998 is
comprised of the Company's VSPA raw materials and finished goods of
$22,319 and the net realizable value of the Systems inventory of
$25,000. The inventory at December 31, 1997 net of reserves of
$600,000 consists of the following:

Raw Materials $ 879,756
Work in Process 14,024
Finished Goods 71,419
-----------
$ 965,199
===========

<PAGE>
Page F-27

NOTE G - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Estimated December 31, December 31,
Useful Lives 1998 1997
------------ ----------- ----------
Office furniture and
equipment 3 - 10 years $ 3,180,103 $3,311,648
Machinery and equipment 3 - 5 years 1,889,458 873,560
Trade show booth and exhibit 5 years 420,428 420,428
Motor vehicles 5 years 54,535 54,535
Leasehold improvement 5 years 13,173 519,298
Construction in progress 281,915 826,828
Less: accumulated depreciation (3,993,673) (3,188,079)
----------- ----------
Total property and equipment, net $ 1,845,939 $2,818,218
=========== ==========

Depreciation expense for the year ended December 31, 1998, the
nine months ended December 31, 1997, and for the year ended March 31,
1997 totalled $1,178,427, $1,061,399, and $1,595,549, respectively.

During the years ended December 31, 1998 and March 31, 1997, the
Company determined that certain long-lived assets were impaired.
During the year ended December 31, 1998 the impairment occurred when
the Company continued the downsizing of its operations. In the year
ended March 31, 1997, the impairment was the result of various events
and changes in circumstances (including efforts to streamline
operations and to increase the use of strategic alliances to
manufacture and market the Company's products). As a result, the
Company recorded charges totalling approximately $125,000 and
$2,056,000 during the years ended December 31, 1998 and March 31,
1997, respectively. The impairment recognized in 1998 was attributable
to Systems sales equipment. During the 1997 period, approximately
$1,040,000 related to computer equipment and software, approximately
$467,000 related to demonstration and promotional equipment and
approximately $520,000 related to production equipment and tooling.
The Company determined the amount of the asset impairment charges
using various valuation techniques.

NOTE H - SUBORDINATED CONVERTIBLE DEBENTURES

During April 1997, the Company completed a private placement of
$4.8 million of 4% subordinated convertible debentures. As of July
1997, all of such debentures had been converted into an aggregate of
1,996,822 shares of the Company's common stock. In connection with
such transaction, the Company paid placement fees of $384,000 of which
$192,000 was paid in cash and the balance was paid by issuing 30,918
shares of the Company's common stock. The Company also issued
warrants to two parties in connection with the transaction to purchase
70,096 shares of the Company's common stock. Warrants to purchase
42,667 shares and 27,429 shares are exercisable through April 2002 at
an exercise price of

<PAGE>
Page F-28

$6.75 and $7.00 per share, respectively. These warrants have been
recorded with a value of approximately $163,000. Total deferred
issuance costs, including the placement fees, and the value of the
warrants were amortized as interest expense. Upon conversion of the
related debentures, the pro rata portion of any unamortized deferred
issuance costs was charged to additional paid-in capital.

The value of the beneficial conversion feature related to the
1997 Subordinated Convertible Debentures of $907,317 was calculated at
the date of issuance as the difference between the conversion price
and the fair market value of the Company's common stock into which the
debentures are convertible, multiplied by the number of shares into
which the debentures are convertible. The debentures were fully
convertible into shares of the Company's common stock prior to June
30, 1997 and as such, a non-cash charge to interest expense and an
increase to additional paid-in capital was recorded in the amount of
$907,317 during the nine months ended December 31, 1997. The
accounting for this transaction has no effect on total stockholders'
equity.

NOTE I - NOTES PAYABLE

During December 1997 and January 1998, the Company entered into
two $1,000,000 short-term loans with Helix (PEI) Inc. ("Helix"). In
connection with these loans the Company issued to Helix warrants to
purchase 400,000 shares of the Company's common stock at exercise
prices ranging from $4.00 to $4.50 per share. The warrants have a
term of two years and were recorded as debt issuance costs at an
aggregate value of approximately $872,000 which was fully amortized
upon the repayment of the loans in February 1998. The loans accrued
interest at an annual rate equal to the prime rate of interest payable
by the Royal Bank of Canada on US dollar advances plus 2%. Such
interest was paid when the loans were settled. The Company repaid
these loans in part from the proceeds from the issuance of Preferred
Stock (Note J).

During May, June, and July 1998, Helix made additional short-term
loans to the Company under three notes ("Notes") totalling $2,000,000.
The Notes accrue interest at an annual rate equal to the prime rate of
interest payable by the Royal Bank of Canada on US dollar advances
plus 2% (9.4% as of December 31, 1998). Interest is payable monthly.
The Notes are secured by the Company's intellectual property. In
connection with issuance of these Notes, the Company issued warrants
to Helix to purchase an aggregate of 450,000 shares of the Company's
common stock at exercise prices ranging from $1.63 to $2.125 per
share, as adjusted. The warrants have a term of two years. The total
value of these warrants is approximately $932,000 and has been
recognized as debt issue costs and was fully amortized as of August
1998, the original due date of the Notes.

On August 7, 1998, Helix agreed to extend the maturity date of
the Notes to February 15, 1999 in exchange for the issuance of a
warrant to purchase up to 2,000,000 shares of the Company's common
stock at an exercise price of $2.125, the fair market value on the

<PAGE>
Page F-29

date of issuance. The Warrant has a term of two years and has been
valued at $2,520,000, which has been recognized as deferred loan
costs. As of December 31, 1998 the Company has amortized $1,995,000 of
the loan costs. The Company did not repay the notes as of their due
dates and is currently in default. The negotiations are ongoing and
the ultimate outcome cannot be predicted. Should the Company be unable
to re-negotiate the terms of the Notes, the Company may have to cease
its operations.

Helix and its affiliates currently hold approximately 5.7% as of
March 30, 1999 of the Company's common stock. At the time the above
transactions occurred James T. A. Wooder, a former director of the
Company, was a Vice President of Helix's parent, Helix Investments
(Canada), Inc.

NOTE J - CONVERTIBLE PREFERRED STOCK

On February 11, 1998, the Company issued 600 shares of its Series
A Convertible Preferred Stock ("Series A Preferred") and Common Stock
Purchase Warrants("Warrants") to purchase an aggregate of 150,000
shares of common stock for an aggregate purchase price of $6,000,000.
The purchase price allocated to the Series A Preferred and Warrants
was $5,589,000 and $411,000, respectively. The Warrants have a term
of five years and an exercise price, subject to adjustment for stock
splits and similar events, of $6.10 per share. The Company incurred
$213,000 of issuance costs in connection with this transaction.
Holders of Series A Preferred are entitled to a dividend of 5% per
annum of the purchase price for the shares, payable quarterly, at the
option of the Company either in cash or as an accrual to the purchase
price utilized in computing the number of shares of Series A Preferred
issuable upon conversion. So long as any Series A Preferred is
outstanding, no dividend may be paid nor shall any distributions be
made on Common Stock or other shares junior in rank to the Series A
Preferred ("Junior Shares") unless all dividends for all past
quarterly dividend periods have been paid or declared and a sum of
cash or amount of shares sufficient for the payment thereof set apart.
For the year ended December 31, 1998 $231,041 of dividends payable
have been accrued and added to the purchase price in lieu of cash
payment.

The terms of the Series A Preferred which permit the conversion
of the Series A Preferred at a discount to market is considered a
beneficial conversation feature (the "Beneficial Conversion Feature").
The Beneficial Conversion feature at the date of issuance of the
Series A Preferred was recognized as a dividend to the holders of the
Series A Preferred. Based upon the terms of the preferred stock
agreement and the market value of the Company's common stock, on the
date of issue, the Company valued the undiscounted Beneficial
Conversion Feature of the Series A Preferred at approximately $511,000
and recorded the amortization of the Beneficial Conversion Feature of
the same amount during the year ended December 31, 1998, as part of
preferred stock dividends. The beneficial dividend does not effect
the number Series A Preferred shares outstanding or the number of

<PAGE>
Page F-30

common shares issuable upon conversion of the Series A Preferred or
require any additional payments or compensation to the holders of the
Series A Preferred.

In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A
Preferred are entitled to receive in cash from assets of the Company,
before any amount shall be paid to holders of Junior Shares, an amount
per share of Series A preferred equal to the sum of (i) the purchase
price for such share and (ii) any accrued but unpaid dividends
thereon. If the amounts available for distribution are insufficient to
pay the full amount due to holders of Series A Preferred, and shares
of other classes or series of preferred stock of the Company that are
of equal rank to the Series A Preferred then each holder of Series A
Preferred stock and such other shares shall receive a percentage of
amounts available for distribution ratably in proportion to the
respective amounts of such assets to which they would otherwise be
entitled.

Holders of the Series A Preferred have no voting rights except
as required by law or as specified in the Articles of amendment, the
affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred is required for (I) any
amendment to the Company's Articles of Incorporation which would alter
the rights and preferences of the Series A preferred or otherwise
impair the rights of the holders of Series A Preferred relative to the
holders of the Common Stock or the holders of any other class of
capital stock or (ii) any issuance of more than 1000 shares of Series
A Preferred. In addition, without the prior written approval of the
holders of 66 2/3% of the Series A Preferred shares that include GAM
Arbitrage Fund L.P., AGR Halifax Fund, Ltd, Leonardo L.P., Ramius
Fund, Ltd, Raphael L.P., AG Super Fund L.P., the Company shall
not (1) consolidate or merge with another corporation or other entity
or person, whereby the shareholders of the Company own in the
aggregate less than 50% of the ultimate parent or surviving entity,
(2) transfer all or substantially all of the Company's assets to
another corporation or other entity or person or (3) fix a record date
for the declaration of a distribution or dividend, whether payable in
cash, securities or assets (other than shares of common stock).

Shares of Series A Preferred are convertible into shares of
Common Stock pursuant to a formula whereby the purchase price of the
shares to be converted plus any such dividends is divided by a
conversion price defined as the lower of (i) $3.50 subject to
adjustment in the event of certain dilutive issuance's of securities
by the Company or for stock splits or similar events("the Fixed
Conversion Price") or (ii) a percentage of the average closing bid
price of the Common Stock for the five days immediately preceding
conversion equal to 92%, if conversion occurs in the period beginning
120 days and ending 180 days after of the Series A Preferred, or 90%,
if conversion occurs after 180 days from issuance of the Series A
Preferred. All outstanding Series A Preferred will automatically
convert into Common Stock at the then applicable conversion price, on
the fifth anniversary of issuance. In addition, the Company has the
right to require that all unconverted shares of Series A Preferred be
converted at any time if the closing bid price of Common Stock is

<PAGE>
Page F-31

equal to or greater than $12.00 per share for a period of twenty
consecutive trading days. For the year ended December 31, 1998 180
shares of Series A Preferred were converted into an aggregate
2,234,363 shares of the Company's common stock.

The terms of the Series A Preferred, provide that upon the
occurrence of certain "Triggering Events" as defined by the agreement
including suspension of sales under the Registration Statement,
Failure of the Common Stock to be listed, or the suspension of trading
in the Company's common stock, on Nasdaq National or Nasdaq Small Cap
Market, or failure of the Company to convert shares of Series A
Preferred as required, the Company is required to pay the holders
$100,000 on the first day of each month until the Triggering Events
have been remedied. A Triggering Event occurred on December 16, 1998
when the Company's stock was delisted from the Nasdaq National Market.
This event has not been remedied and the Company has recognized a
$50,000 penalty in the Statement of Operations for the year ended
December 31, 1998. The Company commenced and continues to re-negotiate
with the Series A Preferred stock holders to modify the terms of the
Agreement. The outcome of such negotiations is not known. Should the
Company be unable to re-negotiate the terms of the Agreement along
with the re-negotiations discussed in Notes I and M individually or
together they could have a substantial detrimental effect on the
ability of the Company to continue its operations.

NOTE K - SETTLEMENT WITH CONTRACT MANUFACTURER

The agreement between the Company and a third-party for the
manufacture and assembly of the Company's computer systems expired in
September 1996. A dispute arose regarding liability for certain
inventory allegedly purchased on behalf of the Company. During
February 1998, the Company settled this dispute by purchasing
inventory from the contract manufacturer for $520,000.

NOTE L - OTHER CURRENT LIABILITIES

The components of other current liabilities are as follows:

December 31, December 31,
1998 1997
---------- ----------
Sarubbi Settlement liability (Note S) $ 760,000 $ -
Provision for warranties 200,000 200,000
Accrual for lease costs - 176,867
Accrual for professional fees 152,682 -
Other 243,387 587,719
---------- ----------
$1,356,069 $ 964,586
========== ==========

<PAGE>
Page F-32

NOTE M - COMMON STOCK

In August 1998, the Company completed the sale of 2,254,602
shares of its Common Stock in a private placement to accredited
investors with gross proceeds of approximately $3,675,000 (the
"Private Placement"). Costs related to the Private Placement were
approximately $191,000. In addition to the shares of Common Stock
purchased by each investor in the Private Placement, such investor
received a warrant (the "Private Placement Warrants") to purchase an
equal number of shares of Common Stock (the "Private Placement Warrant
Shares"), subject to adjustment for stock splits and similar events,
at an exercise price of $2.55 per share. Upon the exercise of the
Private Placement Warrants, an investor may elect to receive a reduced
number of shares of Common Stock in lieu of tendering the warrant
exercise price in cash. The Private Placement Warrants have a term of
five years expiring August 13, 2003.

Under the terms of the Securities Purchase Agreement relating to
the Private Placement, if on either the six-month or the one-year
anniversary of the date of closing of the Private Placement (each
"Anniversary Date"), the average closing bid price of the Common Stock
for the twenty-trading day period ending on the trading day
immediately prior to the applicable Anniversary Date (the "Anniversary
Price") is less than the Closing Price ($2.0375), or the prior
Anniversary Price in the event the six-month Anniversary Price is less
than the Closing Price, respectively, the Company is required to issue
a number of shares of Common Stock within ten days after the
Anniversary Date equal to the product of (i) (x) the difference
between the Closing Price (or if the measurement date is the one-year
Anniversary Date, the six-month Anniversary Price if the six-month
Anniversary Price is less than the Closing Price) and the applicable
Anniversary Price, multiplied by .85, multiplied by (y) the number of
shares of Common Stock purchased by the investors in the Private
Placement and not sold or assigned to non-affiliated third parties,
divided by (ii) (x) the applicable Anniversary Price multiplied by (y)
.85. The shares issuable pursuant to this formula are referred to as
the "Fill-Up Shares".

The Company has filed a Registration Statement with respect to
the shares of Common Stock issuable in the Private Placement. Such
registration statement has not yet been declared effective. As a
result of the non-effectiveness the Company could be liable for
penalties of up to $36,000 until the Registration Statement is
declared effective.

<PAGE>
Page F-33

In January 1999 the Company sold 666,667 shares of its common
stock without registration rights to Samtec, Inc. ("Samtec") for
$500,000. Simultaneous with this transaction the Company and Samtec,
entered into a license agreement for the Company's VSPA semiconductor
technology for $500,000. Under the terms of the agreement the Company
is entitled to a royalty related to each VSPA sale for a term that
continues until the expiration of the last to expire of the patents
covered by the agreement. The license granted to Samtec is non-
exclusive.

NOTE N - EMPLOYEE BENEFIT PLANS

Stock Incentive Plans
- ---------------------

The Company maintains three stock option plans as follows: 1993
Performance Incentive Plan ("1993 Plan"), Non-Employee Director Stock
Option Plan ("Director Plan"), and the 1995 Employee Stock Incentive
Plan ("1995 Plan"). Under the 1993 Plan and the 1995 Plan both
incentive options and non-qualified options may be granted. In
addition, stock appreciation rights and restricted stock may also be
granted under the Plans; however, no stock appreciation rights or
restricted stock have been granted to date.

The exercise price for incentive options under the 1993 Plan, the
1995 Plan and non-qualified options under the Director Plan is the
fair market value of the Company's common stock as of the date of
grant. Each stock option expires ten years from the grant date under
the 1993 Plan and the 1995 Plan, and five years under the Director
Plan.

The maximum number of shares of common stock with respect to
which options may be granted under the 1993 Plan is 5% of the
outstanding shares, not to exceed 1,000,000 shares. Under the 1995
Plan and the Director Plan, options to purchase up to 500,000 and
50,000 shares may be granted, respectively. As of December 31, 1998,
there were 558,554; 468,800, and 10,000 shares available for grant
under the 1993 Plan, the 1995 Plan and the Director Plan,
respectively.

In 1998, the Company issued options to outside consultants to
purchase up to 625,000 of the Company's common stock. The options
were issued with an exercise price that was equal to the market price
on the date of the grants. The total fair value of the options, as
determined by FAS 123, was 384,500 which is to be amortized over the
vesting period of the options. In 1998, the total expense associated
with nonemployee stock options total 298,130. The weighted average
fair value of options granted in 1998 was $.62.<PAGE>
Page F-34

A summary of the Company's stock option activity and related
information is presented below:

Year Ended Nine Months Ended
December 31, December 31,
1998 1997
----------------------- -------------------------
Weighted - Weighted -
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding,
beginning of year 654,450 $7.45 586,900 $8.83
Granted 568,500 $2.26 266,500 $5.13
Exercised (3,000) $4.08 (100) $4.75
Forfeited (404,050) $7.00 (198,850) $8.40
-------- ----- -------- -----
Outstanding at
end of year 815,900 $4.32 654,450 $7.45
======= ===== ======== =====
Exercisable at
end of year 257,350 221,700
======= ========

Had compensation expense for the Company's stock option plans
been determined based on the fair value of the underlying common stock
at the grant dates, consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation, the
Company's net loss and net loss per share would have been as follows:

Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1998 1997 1997
------------ ----------- ------------
Net loss:
As reported $(18,216,582) $(8,949,652) $(20,874,101)
Pro forma $(18,480,641) $(9,323,415) $(21,315,572)
Basic and diluted loss
per share:
As reported $ (1.33) $ (.78) $ (2.15)
Pro forma $ (1.35) $ (.81) $ (2.19)

The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the year ended December 31, 1998,
nine months ended December 31, 1997 and year ended March 31, 1997,
respectively. Risk-free interest rates of 5.5%, 6.2% and 6.3%;
dividend yields of 0% in all periods; volatility factors of the
expected market price of the Company's common stock ranging from 107%
to 119%, 97% and 98% and a weighted-average expected life of the
option of 4 years.

The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option pricing

<PAGE>
Page F-35

models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.

The following tables summarize information about outstanding and
exercisable stock options as of December 31, 1998:

Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted -
Average Weighted- Weighted-
Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (years) Price Shares Price
- - ------------ ------- ----------- -------- ------- ---------
$.78 375,000 9.5 years $ .78 - $ -
$2.75-$3.81 20,500 6.26 years $ 3.57 6,500 $ 3.28
$4.25-$6.13 301,650 8.53 years $ 5.20 168,350 $ 5.32
$7.75-$8.50 82,250 6.60 years $ 7.92 53,000 $ 7.87
$12.50-$14.25 16,000 6.00 years $13.10 14,000 $13.15
$28.25-$44.25 20,000 6.40 years $36.62 15,500 $31.63
------- ---- ----- ------- -----
815,900 8.62 years $ 4.32 257,350 $ 7.80

Employee Savings Plan
- - ----------------------

The Company has a defined contribution retirement plan ("Savings
Plan") that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. Eligibility for participation
commences six months from the date of hire. Under the Plan,
participating employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit or 15% of
pretax earnings. Through September 30, 1996, the Company matched 75%
of employee contributions, up to a maximum of 6% of the employee's
earnings. Contributions are invested at the direction of the employee
in one or more funds. Beginning April 1, 1997, employees were given
the choice to invest their contributions in common stock of the
Company. Employer contributions vest over five years. The Company's
matching contributions to the Savings Plan amounted to approximately
$73,000 for the year ended March 31, 1997. The employer matching
contribution was discontinued as of October 1, 1996.

<PAGE>
Page F-36

NOTE O - COMMON STOCK WARRANTS

For the year ended December 31, 1998, the Company entered into
various consulting agreements. Under these agreements, the Company
issued 625,000 warrants ranging in price from $.219 to $2.51 per
share. The issuance of these warrants have been recorded based on the
fair market value of the warrants issued. The Company has determined
that the value of these warrants to be $384,500 which was recorded as
SG&A expense in the statement of operations for the year ended
December 31, 1998.

During the nine months ended December 1997, the Company issued
warrants to purchase 270,096 shares of the Company's common stock.
These warrants were recorded at a value of approximately $567,000.

In September 1996, the Company entered into an agreement with a
consulting firm, which served as an investor relations counsel to the
Company. The agreement provides for a minimum monthly fee of $3,500
plus payment of expenses for the term of one year. In connection with
this agreement, the Company granted the principal of the consulting
firm, a warrant to purchase 400,000 shares of the Company's common
stock at an exercise price of $8.00 per share. The warrant has a term
of 10 years and is exercisable (i) as to 100,000 shares at any time
during the term of the warrant, and (ii) as to the remaining shares,
upon attainment of certain milestones specified in the warrant, none
of which have been achieved.

The issuance of these warrants has been recorded based on the
fair market value of the services to be received over the term of the
agreement. The Company has determined the value of these services to
be $78,000 of which $39,000 was expensed during the nine months ended
December 31, 1997 and $39,000 was expensed during the year ended March
31, 1997.

NOTE P - REVENUE

LG Cable & Machinery Ltd.
- -------------------------

In October 1996, the Company and Stanford W. Crane, Jr., the
Company's Chief Executive Officer and founder, entered into a
licensing agreement with LG Cable & Machinery Ltd. ("LG") with respect
to the Compass Connector Technology owned by Mr. Crane and certain
enhanced Compass Connector Technology owned by the Company whereby LG
was granted a license, for a term of ten years or until the expiration
of the last to expire of the patents covered by the agreement,
whichever is later. The license granted to LG is non-exclusive except
for certain limited exclusive manufacturing rights with respect to
specified Asian countries. In connection with this agreement, the
Company's portion of the license fee ($500,000) was immediately vested
upon signing the agreement and is payable as follows: $100,000 within
15 days after execution of the agreement and $100,000 on each of the
first four anniversaries of the agreement. Licensing fee revenue of
$100,000 was recorded during the year ended December 31, 1998, the nine
months ended December 31, 1997 and the year ended March 31, 1997

<PAGE>
Page F-37

representing the first three payments received. The remaining
$200,000 will be recognized as payments are received. In addition,
the Company is entitled to receive royalties on sales of the Compass
Connector products by LG or its affiliates. No royalties have been
received under the agreement as of December 31, 1998.

In July 1997, the Company entered into another licensing
agreement with LG Cable whereby LG Cable was granted a license with
respect to a semiconductor package product owned by the Company, for a
term that continues until the expiration of the last to expire of the
patents covered by the agreement. The license granted to LG is non-
exclusive except for certain limited exclusive manufacturing rights
with respect to specified Asian countries. In connection with this
agreement, the Company was entitled to a non-refundable license fee of
$250,000 that became immediately vested upon signing the agreement and
has been recorded as revenue during the nine months ended December 31,
1997. In addition, the Company is entitled to receive royalties on
sales of the semiconductor package products by LG Cable or its
affiliates. No royalties have been received under the agreement as of
December 31, 1998.

Defense Advanced Research Projects Agency
- -----------------------------------------

In October 1996, the Company entered into a cooperative
development agreement with the Defense Advanced Research Projects
Agency (DARPA) to develop the Company's VSPA electronic package
whereby the government contributed approximately $1.8 million to the
project over a period of 18 months. The agreement, as amended,
required the Company to match the $1.8 million with $2.7 million of
development costs associated with the project. The project was
successfully completed in April 1998.

Revenue was recognized over the term of the cooperative
development agreement based on the achievement of stated milestones.
For the year ended December 31, 1998, the nine months ended December
31, 1997 and the year ended March 31, 1997, the Company recognized
revenue related to the agreement of approximately $135,000, $973,000
and $684,000, respectively. Costs associated with the cooperative
agreement have not been separately disclosed on the face of the
Statement of Operations as such costs would have been incurred by the
Company regardless of the agreement. Of the $2.1 million and $1.2
million of expenses incurred during the nine months ended December 31,
1997 and year ended March 31, 1997, approximately $1,032,000 and
$610,000 are reflected in research and development and the balance is
included in selling, general and administrative expenses in the
Statement of Operations, respectively.

Other Revenue
- -------------

During fiscal 1997, the Company agreed to sell certain products
to a software developer in a non-cash exchange for certain products
and services. During the year ended March 31, 1997, the following
products and services were received from the software developer:<PAGE>
Page F-38

licenses to use the developer's software for internal purposes valued
at approximately $326,000 (recorded in property and equipment);
consulting and training services valued at $100,000 (recorded in
research and development expenses); and services associated with the
certification of the Company's 4s server to use the software
developer's CAD program and porting the software onto the 4s product.
These services were valued at approximately $570,000 and are reflected
equally between research and development expense and selling, general
and administrative expenses for the year ended March 31, 1997.

Revenues of approximately $923,000 were recorded during the year
ended March 31, 1997 as a result of this transaction. During the nine
months ended December 31, 1997, the Company shipped additional
computer systems to the software developer and recognized $37,000 of
revenue associated with this agreement.

Sales of computer systems to one customer accounted for 14% of
total revenue for the nine months ended December 31, 1997. No
individual customers accounted for more than 10% of total revenue for
the year ended December 31, 1998 and fiscal 1997.

NOTE Q - RELATED PARTY TRANSACTIONS

In January 1996, Mr. Crane entered into a license agreement
("the Crane/Panda License") with the Company with respect to the
Compass Connector which supersedes the prior agreements between Mr.
Crane and the Company with respect thereto. Pursuant to the
Crane/Panda License, the Company continues to have the right, on a
nonexclusive and royalty-free basis, to use and/or sell the Compass
Connector as a component in its computers or other higher level
assemblies or systems. The Company may also sublicense the Compass
Connector technology as part of a license of the Company's proprietary
technology provided that any royalty attributable to such sublicense
is to be shared by the Company and Mr. Crane.

In addition, Mr. Crane has granted the Company a nonexclusive
license to sell, lease, or transfer the Compass Connector as loose or
discrete components for specified royalties based on net sales of the
Compass Connectors, commencing when the accumulated net sales of the
Compass Connectors reaches $100,000 (the "Royalty Date"). For the
five year period following the Royalty Date, the Company is obligated
to pay to Mr. Crane royalties equal to 5% of the net sales price of
such Compass Connectors, including any such Compass Connectors sold
prior to the Royalty Date. The royalty decreases to 2.5% after five
years and 2.0% after ten years. The royalty decreases to 1.0% for any
period during which no valid patent exists anywhere with respect to
the Compass Connector. The royalty is also subject to reduction if
Mr. Crane grants a third party a license with respect to Compass
Connectors as loose or discrete components at a lower royalty than
that charged to the Company. To date, Mr. Crane has received no
royalties pursuant to the Crane/Panda License.

In August 1997, the Company hired Melissa Crane, wife of Stanford
W. Crane, Jr., as Director of Strategic Business at an annual salary
of $100,000 per year. In September 1997, Ms. Crane was granted an

<PAGE>
Page F-39

option to purchase 50,000 shares of Common Stock of the Company at an
exercise price of $6.13 per share. Such options expire on September
19, 2007. Options to purchase 10,000 of these shares of Common Stock
are exercisable six months from the date of grant and the remainder
become exercisable in equal annual installments on the first, second,
third and fourth anniversaries of grant. In October 1997, the Board
of Directors approved the payment of a bonus of $25,000 to Ms. Crane
in connection with the achievement of certain marketing objectives.
In November 1997, the Board of Directors elected Ms. Crane Vice
President of Strategic Business and authorized an increase in her
annual salary to $125,000 per year. In October 1998, the Board of
Directors appointed Ms. Crane as the acting Chief Financial Officer.

NOTE R - INCOME TAXES

As a result of tax losses incurred by the Company, no current tax
provision has been recorded for the year ended December 31, 1998, nine
months ended December 31, 1997 and the year ended March 31, 1997.

Deferred tax assets and deferred tax liabilities reflect the tax
effect of net operating loss carryforwards and differences between
financial statement carrying amounts and tax bases of assets and
liabilities as follows:

Nine Months
Year Ended Ended
December 31, December 31,
1998 1997
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 34,767,000 $28,504,000
Research and development credits 1,221,000 990,000
Write down of property and equipment 523,000 475,000
Inventory reserve 687,000 367,000
Allowance for doubtful accounts 114,000 4,000
Other 125,000 125,000
------------ -----------
Gross deferred tax asset 37,437,000 30,465,000

Deferred tax asset valuation
allowance (37,085,000) (30,113,000)
------------ -----------
Net deferred tax asset $ 352,000 $ 352,000
============ ===========
Deferred tax liabilities:
Tax depreciation and amortization
in excess of book $ (248,000) $ (248,000)
Other (104,000) (104,000)
------------ -----------
Deferred tax liability $ (352,000) $ (352,000)
============ ===========
Net deferred taxes $ - $ -
============ ===========

<PAGE>
Page F-40

A valuation allowance reducing the asset recognized must be
recorded if it is determined that it is more likely than not that the
asset will not be realized. Because of the uncertainty surrounding
realizability of future benefits due to cumulative losses, a valuation
allowance in the full amount of the net deferred tax asset has been
provided for financial reporting purposes.

At December 31, 1998, the Company has available approximately
$90.1 million in net operating loss ("NOL") carryforwards available to
offset future taxable income, if any, for federal and state income tax
purposes. If unutilized, these NOL carryforwards will expire at
various times beginning in the year 2009.

At December 31, 1998, unused credit carryforwards for increasing
research activities of approximately $1,221,000 are also available.
The credit carryovers will expire at various times beginning in the
year 2010.

Due to the change of control effected by the initial public
offering of the Company's common stock on May 24, 1994, as well as
certain stock offerings, exercise of stock options, warrants, and
conversion of preferred stock into common stock, the amount of future
taxable income that can be offset by the Company's net operating
losses incurred prior to the dates of the stock offerings, as well as
the amount of tax liability that can be offset by research and
development credit, may be limited.

NOTE S - COMMITMENTS AND CONTINGENCIES

Operating Leases
- ----------------

The Company leases various facilities and equipment under
noncancelable operating lease arrangements which expire at various
dates through year 2003. Rent expense under all operating leases was
approximately $831,500, $641,000, and $1,035,000 for the year ended
December 31, 1998, the nine months ended December 31, 1997 and for the
year ended March 31, 1997, respectively.

Minimum future rental payments under non-cancelable operating
leases with remaining lease terms in excess of one year are as
follows:

December 31,

1999 $ 483,254
2000 439,024
2001 447,348
2002 460,880
2003 295,564
----------
Total minimum future
rental payments $2,126,070
==========

<PAGE>
Page F-41

During the year ended March 31, 1997, the Company entered into
certain agreements with its landlord related to its primary facility
whereby the Company was released from portions of the leased space.
As consideration for the release, the Company agreed to make certain
lump-sum payments to the landlord and agreed to make additional
payments for the unused space. As a result, a charge of approximately
$480,000 was recognized and is included under the caption, selling,
general and administrative expenses in the Statement of Operations for
the year ended March 31, 1997. In 1998, The Company was released from
the lease of its prior corporate headquarters as well as the facility
in Hayward California.

Year 2000
- - ---------

The Year 2000 issue relates to limitations in computer systems
and applications that may prevent proper recognition of the Year 2000.
The potential effect of the Year 2000 issue on the Company and its
business partners will not be fully determinable until the Year 2000
and thereafter. If the Year 2000 modifications are not properly
completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition
could be adversely impacted.

Employment Agreements
- ---------------------
Under the terms of an employment agreement with Mr. Crane entered
into in November 1993, he serves as the Senior Vice President, Product
Design and Development, and at the discretion of the Board of
Directors, as the Chairman of the Board and the Company's President
and Chief Executive Officer. Mr. Crane's agreement has a base annual
salary with salary increases and bonuses available to him based on the
attainment of specified objectives established at the discretion of
the Company's Board of Directors. The term of the agreement extends
to January 1999. As of April 14, 1999 the contract had not been
renewed. For the years ended December 31, 1997 and December 31, 1998,
Mr. Crane's salary was $150,000 in each year.

Pursuant to the terms of the agreement, Mr. Crane has assigned to
the Company the rights to all improvements or related discoveries or
inventions developed or conceived by him during the term of the
agreement which relate to the technology developed by him and
previously assigned to the Company. The employment agreement also
provides that Mr. Crane may develop additional products or
technologies unrelated to the products currently being developed by
the Company.

Commitments
- -----------

During the year ended December 31, 1998, the Company issued
significant purchase orders to three suppliers to provide materials
for the production of the Company's VSPA semiconductor package. The

<PAGE>
Page F-42

aggregate commitment under these purchase orders is approximately $1.1
million as of December 31, 1998.

Litigation
- - ----------

The Company is involved in various lawsuits from time to time of
the type routinely encountered in the ordinary course of business.
Management aggressively defends these lawsuits and believes that the
ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial statements. Following are
litigation matters that management considers to be material in nature
such that disclosure is appropriate.

On December 11, 1998, the Company and Joseph Sarubbi, (a former
director of the Company) entered into a settlement agreement related
to litigation in which Sarubbi had obtained a judgment against the
Company in the amount of $1,227,041. Under the Settlement Agreement,
the Company paid Sarubbi total consideration worth $1,000,000 of which
$240,000 was paid in cash in December 1998 and the remaining $760,000
was paid via the issuance of 1,775,000 shares of the Company's common
stock. Under the Settlement Agreement the common stock was registered
in a registration statement filed in February 1999. The Company
recorded a $1,000,000 charge to selling general and administrative
expenses in December 1998. In the event that the 1,775,000 shares
does not generate sufficient precedes, the Company would have the
option to pay the difference in cash or additional shares of common
stock. Any further legal action taken by Mr. Sarubbi may be material to the
Company.

On October 16, 1998 a complaint was filed against the Company in
the United States District Court for the Southern District of New York
by Promethean Investment Group, L.L.C. The complaint alleges breach of
contract by the Company for failing to proceed with a financing
transaction and seeks damages in an unspecified amount in excess of
$270,000 or a declaration that the Company is to proceed with the
financing transaction. The outcome of this matter is both
undeterminable and immeasurable. Even if the Company is successful in
defending itself in this litigation, of which there is no assurance,
the diversion of critical resources involved in defending and settling
these actions could have a substantial material adverse effect on the
Company.

NOTE T - BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION

In 1998, the Company adopted SFAS No. 131., "Disclosures about
Segments of an Enterprise and Related Information", which changed the
way companies have reported information about operating segments.
With the Company's decision to discontinue all aspects of the Systems
business, the Company has one single reporting segment. The Company
markets and sells its Technologies directly to end users. The
Company's revenues are primarily derived from customers located in the
United States and all of the Company's long lived assets are located
in the United States.

<PAGE>
Page F-43

NOTE U - SUBSEQUENT EVENTS

On April 14, 1999, the Company received a Notice of Default on the
Settlement Agreement between Joseph A. Sarubbi and The Panda Project,
Inc. dated December 11, 1998. Mr. Sarubbi claimed that his inability
to sell the stock that he received in the settlement creates a breach
under the settlement agreement. The Company believes that it is in
full compliance with the agreement and that no breach exists. In the
event that the 1,775,000 shares does not generate sufficient proceeds
in accordance with the Settlement Agreement, the Company would have
the option to pay the difference in cash or additional shares of
common stock.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1997
Allowance for
doubtful accounts $ 171,943 $ 236,303 $ - $ (297,284)(1)$ 110,962
=========== =========== ========== ========== ===========
Inventory obsolescence
reserve $ 128,412 $ 1,030,335 $ - $ (908,747)(2)$ 250,000
=========== =========== ========== ========== ===========
Deferred tax asset
Valuation allowance $12,849,000 $13,537,000 $ - $ - $26,386,000
=========== =========== ========== ========== ===========
Nine months ended
December 31, 1987
Allowance for
doubtful accounts $ 110,962 $ 60,911 $ - $ (161,867) $ 10,006
=========== =========== ========== ========== ===========
Inventory obsolescence
reserve $ 250,000 $ 350,000 $ - $ - $ 600,000
=========== =========== ========== ========== ===========
Deferred tax asset
Valuation allowance $26,386,000 $ 3,727,000 $ - $ - $30,113,000
=========== =========== ========== ========== ===========
Year ended
December 31, 1998
Allowance for
doubtful accounts $ 10,006 $ 285,286 $ - $ - $ 295,292
=========== ========== ========== ========== ===========
Inventory obsolescence
reserve $ 600,000 $1,178,837 $ - $ - $ 1,778,837
=========== ========== ========== ========== ===========
<PAGE>
Page F-44

Deferred tax asset
Valuation allowance $30,113,000 $7,692,000 $ - $ - $37,085,000
=========== ========== ========== ========== ===========
(1) Write off of bad debts.
(2) Primarily relates to the revaluation of specific inventory items to net realizable value.
</TABLE>

<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedule

To the Board of Directors of
The Panda Project, Inc.

Our audits of the financial statements referred to in our report dated March
10,
1998, appearing on page F-16 of this Form 10-K of The Panda Project, Inc. also
included an audit of the information contained in the Financial Statement
Schedule appearing on page F-43 of this Form 10-K for the nine month period
ended December 31, 1997 and the year ended March 31, 1997. In our opinion,
this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein for the nine months ended December 31, 1997 and
the year ended March 31, 1997 when read in conjunction with the related
financial statements. We have not audited the financial statements of The
Panda
Project, Inc. for any period subsequent to December 31, 1997.

PricewaterhouseCoopers LLP
Fort Lauderdale, Florida

March 10, 1998

Annex A

ASSET PURCHASE AGREEMENT
between
SILICON BANDWIDTH, INC.
as Purchaser
and
THE PANDA PROJECT, INC.
as Seller

Dated as of July 19, 1999

TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS 1
SECTION 1.01 Certain Defined Terms 1
ARTICLE II PURCHASE AND SALE 7
SECTION 2.01 Assets to Be Sold 7
SECTION 2.02 Assumption and Exclusion of Liabilities 7
SECTION 2.03 Purchase Price; Allocation of Purchase Price 7
SECTION 2.04 Closing 7
SECTION 2.05 Closing Deliveries by Seller 7
SECTION 2.06 Closing Deliveries by Purchaser 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER 8
SECTION 3.01 Organization, Authority and Qualification
of Seller 8
SECTION 3.02 Corporate Condition 9
SECTION 3.03 Reporting Company 9
SECTION 3.04 No Conflict 9
SECTION 3.05 Governmental Consents and Approvals 10
SECTION 3.06 Reference Balance Sheet 10
SECTION 3.07 No Undisclosed Liabilities 10
SECTION 3.08 Receivables 11
SECTION 3.09 Inventories 11
SECTION 3.10 Conduct in the Ordinary Course; Absence of
Certain Changes, Events and Conditions 11
SECTION 3.11 Litigation 11
SECTION 3.12 Compliance with Laws 12
SECTION 3.13 Environmental and Other Permits and
Licenses; Related Matters 12
SECTION 3.14 Contracts 12
SECTION 3.15 Intellectual Property 12
SECTION 3.16 Year 2000 Compliant 14
SECTION 3.17 Assets 15
SECTION 3.18 Customers 15
SECTION 3.19 Suppliers 15
SECTION 3.20 Employee Benefit Matters 15
SECTION 3.21 Labor Matters 16
SECTION 3.22 Taxes 17
SECTION 3.23 Insurance 17
SECTION 3.24 Full Disclosure 17
SECTION 3.25 Brokers 18
SECTION 3.26 Authority Relative to this Agreement and
the Ancillary Agreements 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 18
SECTION 4.01 Organization and Authority of Purchaser 18
SECTION 4.02 No Conflict 19
SECTION 4.03 Governmental Consents and Approvals 19
SECTION 4.04 Capitalization 19
SECTION 4.05 Financing Commitments 19
SECTION 4.06 Brokers 19
ARTICLE V ADDITIONAL AGREEMENTS 19
SECTION 5.01 Conduct of Business Prior to the Closing 19
SECTION 5.02 Access to Information 20
SECTION 5.03 Regulatory and Other Authorizations;
Notices and Consents 21
SECTION 5.04 Notice of Developments 21
SECTION 5.05 Use of Intellectual Property 21
SECTION 5.06 Public Announcements 22
SECTION 5.07 Exclusivity 22
SECTION 5.08 Further Action 22
ARTICLE VI EMPLOYEE MATTERS 22
SECTION 6.01 Offer of Employment 22
ARTICLE VII TAX MATTERS 22
SECTION 7.01 Indemnity 22
SECTION 7.02 Conveyance Taxes 23
SECTION 7.03 Miscellaneous 23
ARTICLE VIII CONDITIONS TO CLOSING 23
SECTION 8.01 Conditions to Obligations of Purchaser. 23
SECTION 8.02 Conditions to Obligations of Seller. 26
ARTICLE IX INDEMNIFICATION 26
SECTION 9.01 Survival of Representations and Warranties. 26
SECTION 9.02 Indemnification by Seller 26
SECTION 9.03 Indemnification by Purchaser 27
SECTION 9.04 Indemnification Procedures 28
ARTICLE X TERMINATION AND WAIVER 29
SECTION 10.01 Termination 29
SECTION 10.02 Effect of Termination 30
SECTION 10.03 Waiver 30
ARTICLE XI MISCELLANEOUS 30
SECTION 11.01 Expenses 30
SECTION 11.02 Notices 30
SECTION 11.03 Public Announcements 30
SECTION 11.04 Headings 31
SECTION 11.05 Severability 31
SECTION 11.06 Entire Agreement 31
SECTION 11.07 Assignment 31
SECTION 11.08 No Third Party Beneficiaries 31
SECTION 11.09 Amendment 31
SECTION 11.10 Governing Law 31
SECTION 11.11 Arbitration 32
SECTION 11.12 Counterparts 32
SECTION 11.13 Specific Performance 32

ANNEX A ALLOCATION OF PURCHASE PRICE
ANNEX B KEY EMPLOYEES

EXHIBIT A TERMS OF STOCKHOLDERS' AGREEMENT

DISCLOSURE SCHEDULE

ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of July 19, 1999 (as
hereafter amended, modified or supplemented, this "Agreement"),
between Silicon Bandwidth, Inc., a Delaware corporation ("Purchaser")
and the Panda Project, Inc., a Florida corporation ("Seller").

W I T N E S S E T H:

WHEREAS, Seller owns and operates a semiconductor packaging
and interconnect devices business (collectively, the "Business"); and

WHEREAS, Seller desires to sell to Purchaser, and Purchaser
desires to purchase from Seller, substantially all of the Assets (as
defined below) relating to the Business and in connection therewith
Purchaser is willing to assume certain liabilities of Seller relating
thereto, all upon the terms and subject to the conditions set forth
herein;

NOW, THEREFORE, in consideration of the premises and the
mutual agreements and covenants hereinafter set forth, and intending
to be legally bound hereby, Purchaser and Seller hereby agree as
follows:

ARTICLE I

DEFINITIONS

Certain Defined Terms. Unless the context otherwise requires,
the following terms, when used in this Agreement, shall have the
respective meanings specified below:

"Acquisition Documents" shall mean this Agreement, the
Ancillary Agreements, and any certificate, Financial Statement,
Interim Financial Statement, report or other document delivered
pursuant to this Agreement or the transactions contemplated hereby.

"Action" shall mean any claim, action, suit, arbitration,
inquiry, proceeding or investigation by or before any Governmental
Authority.

"Affiliate" shall mean, with respect to any specified Person,
any other Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control
with, such specified Person.

"Ancillary Agreements" shall mean the Assumption Agreement and
the Bill of Sale.

"Approvals" shall mean all permits, authorizations, licenses
and other governmental and third party rights and privileges necessary
to operate the Business as currently conducted.

"Assets" shall mean all assets and property used in, or
necessary for the operation of, the Business, including, without
limitation, the Approvals, the Equipment, the Contracts, Intellectual
Property, Inventory, Receivables, Documents and the Intellectual
Property, and the Intellectual Property used in, or necessary for the
operation of, the computer systems business of Seller, but excluding
the Excluded Assets. Assets shall also include the intellectual
property assets of the computer systems business of Seller.

"Assumed Liabilities" shall mean: (a) the trade accounts
payable of Seller outstanding on the Closing Date (up to a maximum
amount of $300,000); (b) specific items included in the accrued
payroll and benefits account of Seller outstanding on the Closing,
which shall not exceed $100,000; (c) specific items included in the
"other current liabilities" listed on Schedule 1 hereto, account of
Seller outstanding on the Closing Date, which shall not exceed
$100,000; (d) the executory liabilities and obligations of Seller to
be performed after the Closing Date under each Contract in effect on
the Closing Date; and (e) up to $2,000,000 of indebtedness of Seller
to Helix (PEI) Inc., effective upon such indebtedness' restructuring
as described in Section 4 of the Voting Agreement (as herein defined).
Any liabilities not specifically listed in the preceding sentence
shall be Excluded Liabilities.

"Assumption Agreement" shall mean the Assumption Agreement to
be executed by Purchaser and Seller on the Closing Date in a form
mutually agreed to by Purchaser and Seller.

"Bill of Sale" shall mean the Bill of Sale and Assignment to
be executed by Seller on the Closing Date substantially in a form
mutually agreed to by Purchaser and Seller.

"Business" shall have the meaning specified in the recitals to
this Agreement.

"Business Day" shall mean any day that is not a Saturday, a
Sunday or other day on which banks are required or authorized by Law
to be closed in The City of New York.

"Closing" shall have the meaning specified in Section 2.04.

"Closing Date" shall have the meaning specified in Section
2.04.

"Code" shall mean the Internal Revenue Code of 1986, as
amended through the date hereof.

"Contracts" shall mean any and all contracts and other rights
used in or necessary for the operation of the Business, including,
without limitation, that certain Consulting Agreement, dated as of
September 30, 1998, as amended as of July 19, 1999, by and between
Archimedes Capital, LLC and Seller, except for contracts which are
Excluded Assets.

"Control" (including the terms "controlled by" and "under
common control with"), with respect to the relationship between or
among two or more Persons, shall mean the possession, directly or
indirectly or as trustee, personal representative or executor, of the
power to direct or cause the direction of the affairs or management of
a Person, whether through the ownership of voting securities, as
trustee, personal representative or executor, by contract or
otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the
board of directors or similar body governing the affairs of such
Person.

"Disclosure Schedule" shall mean the Disclosure Schedule
attached hereto, dated as of the date hereof, and forming a part of
this Agreement.

"Documents" shall mean all books, records, diskettes or other
electronics media, logos and manuals owned or, to the extent legally
transferable, used by the Business and related to its operations.

"Environment" shall mean surface waters, groundwaters, soil,
subsurface strata and ambient air.

"Environmental Laws" shall mean any Law, now or hereafter in
effect and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to the environment,
health, safety or Hazardous Materials.

"Equipment" shall mean all furniture, fixtures and all
equipment supporting the Business (including remanufacturing
equipment).

"ERISA" shall have the meaning specified in Section 3.20(a).

"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

"Excluded Assets" shall mean cash, accounting software, bank
accounts, minutes books and other corporate documents and tax refunds,
plus those assets (other than assets constituting Intellectual
Property) exclusively used in the computer systems business of Seller
which are not necessary or useful to carry on the Business, as now
conducted or as to be conducted by Purchaser in the future. Excluded
Assets shall also include the assets of Seller's computer systems
business other than the intellectual property assets.

"Excluded Liabilities" shall mean any liabilities of Seller
other than the Assumed Liabilities.

"Exclusivity Period" shall have the meaning specified in
Section 5.07.

"Financial Statements" shall have the meaning specified in
Section 3.02.

"Governmental Authority" shall mean any national, federal,
state, municipal or local or other government, governmental,
regulatory or administrative authority, agency or commission or any
court, tribunal, or judicial or arbitral body.

"Governmental Order" shall mean any order, writ, judgment,
injunction, decree, stipulation, determination or award entered by or
with any Governmental Authority.

"Hazardous Materials" shall mean (a) petroleum and petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, transformers or
other equipment that contain polychlorinated biphenyls, and radon gas,
(b) any other chemicals, materials or substances defined as or
included in the definition of "hazardous substances", "hazardous
wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances" "toxic pollutants",
"contaminants" or "pollutants", or words of similar import, under any
applicable Environmental Law, and (c) any other chemical, material or
substance exposure to which is regulated by any Governmental
Authority.

"Identified Employees" shall have the meaning specified in
Section 6.01.

"Indemnified Party" shall have the meaning specified in
Section 9.04(a).

"Indemnifying Party" shall have the meaning specified in
Section 9.04(a).

"Intellectual Property" shall mean patents, trade and service
marks, designs, drawings, software, tradenames, copyrights, mask
works, applications therefor, licenses thereof, and similar intangible
property.

"Inventory" shall mean all inventory used in connection with
the Business.

"IRS" shall mean the Internal Revenue Service of the United
States.

"Law" shall mean any national, federal, state, municipal or
local or other statute, law, ordinance, regulation, rule, code, order,
other requirement or rule of law.

"Letter of Intent" shall mean that Letter of Intent executed
by the Parties on May 14, 1998.

"Liabilities" shall mean any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured
or unmatured or determined or determinable, including, without
limitation, those arising under any Law (including, without
limitation, any Environmental Law), Action or Governmental Order and
those arising under any contract, agreement, arrangement, commitment
or undertaking.

"License Agreement" shall have the meaning specified in
Section 3.15(b).

"Licensed Intellectual Property" shall mean all Intellectual
Property licensed or sublicensed by Seller from a third party.

"Loss" shall have the meaning specified in Section 9.02(a).

"Material Adverse Effect" shall mean any circumstance, change
in, or effect on, the Business that, individually or in the aggregate
with any other circumstances, changes in, or effects on, the Business
(i) is, or could reasonably be expected to be, materially adverse to
the business, operations, assets or liabilities (including, without
limitation, contingent liabilities), employee relationships, customer
or supplier relationships, results of operations or the condition
(financial or otherwise) or prospects of the Business or (ii) could
materially adversely affect the ability of Purchaser to operate or
conduct the Business in the manner in which it is currently operated
or conducted by Seller.

"Owned Intellectual Property" shall mean all Intellectual
Property in and to which Seller has a right to hold, right, title and
interest.

"Permits" shall have the meaning specified in Section 3.13.

"Person" shall mean any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other
entity, as well as any syndicate or group that would be deemed to be a
person under Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended.

"Plans" shall have the meaning specified in Section 3.20(a).

"Proceeding" shall have the meaning specified in Section 3.01.

"Purchase Price" shall have the meaning specified in Section
2.03.

"Purchaser" shall have the meaning specified in the recitals
to this Agreement.

"Purchaser Common Stock" shall have the meaning specified in
Section 2.03 of this Agreement.

"Receivables" shall mean all accounts receivable of Seller
outstanding as of the Closing Date.

"Reference Balance Sheet" shall have the meaning specified in
Section 3.06.

"Reference Balance Sheet Date" shall mean March 31, 1999 until
Seller delivers the unaudited sheet of the Business as of June 30,
1999 pursuant to Section 3.06 then Reference Balance Sheet Date shall
mean June 30, 1999.

"Regulations" shall mean the Treasury Regulations (including
Temporary Regulations) promulgated by the United States Department of
Treasury with respect to the Code or other federal tax statutes.

"Release" shall mean disposing, discharging, injecting,
spilling, leaking, leaching, dumping, emitting, escaping, emptying,
seeping, placing and the like into or upon any land or water or air or
otherwise entering into the Environment.

"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning specified in Section
3.02.

"Securities Act" shall mean the Securities Act of 1933, as
amended.

"Seller" shall have the meaning specified in the recitals to
this Agreement.

"Software Programs" shall have the meaning specified in
Section 3.15(f).

"Tax" or "Taxes" shall mean any and all taxes, fees, levies,
duties, tariffs, imposts, and other charges of any kind (together with
any and all interest, penalties, loss, damage, liability, expense,
additions to tax and additional amounts or costs incurred or imposed
with respect thereto) imposed by any government or taxing authority,
to the extent Purchaser may be held liable for any such amount or to
the extent any such amount constitutes a lien on the Assets or the
Business.

"Third Party Claims" shall have the meaning specified in
Section 9.04(c).

"Threshold Amount" shall have the meaning specified in Section
9.02(b).

"Transferred Employee" shall have the meaning specified in
Section 6.01.

"U.S. GAAP" shall mean United States generally accepted
accounting principles and practices in effect from time to time
applied consistently throughout the periods involved.

"Voting Agreement" shall mean that certain Voting Agreement
among Purchaser, Seller and certain shareholders of Seller dated May
14, 1999.

ARTICLE II

PURCHASE AND SALE

Section 2.01 Assets to Be Sold. On the terms and subject to the
conditions of this Agreement, Seller shall, on the Closing Date, sell,
convey and assign to Purchaser, free and clear of all claims, liens
and interests except as is provided for herein, all of Seller's right,
title and interest in and to the Assets.

Section 2.02 Assumption and Exclusion of Liabilities (a) On the
terms and subject to the conditions of this Agreement, Purchaser
shall, on the Closing Date, assume only the Assumed Liabilities.

(b) Seller shall retain, and shall be responsible for
paying, performing and discharging when due, and Purchaser shall not
assume or have any responsibility for the Excluded Liabilities.
Purchase Price; Allocation of Purchase Price

Section 2.03 Purchase Price; Allocation of Purchase Price (a) The
aggregate purchase price (the "Purchase Price") for the Assets shall
be (i) shares of common Stock of the Purchaser ("Purchaser Common
Stock") initially representing 10% of the capital stock of Purchaser
on a fully diluted basis (including such shares underlying the options
available for issuance pursuant to Purchaser's stock option plans as
well as the 7,000,000 shares of Series A Preferred Stock of Purchaser
currently outstanding) and (ii) the assumption of the Assumed
Liabilities.

(b) The sum of the Purchase Price and the Assumed
Liabilities shall be allocated among the Assets as of the Closing Date
in accordance with Annex A. Any subsequent adjustments to the sum of
the Purchase Price and Assumed Liabilities shall be reflected in the
allocation hereunder in a manner consistent with Treasury Regulation
1.1060-1T(f). For all Tax purposes, Purchaser and Seller agree to
report the transactions contemplated in this Agreement in a manner
consistent with the terms of this Agreement, including the allocation
under Annex A, and that none of them will take any position
inconsistent therewith in any Tax return, in any refund claim, in any
litigation, or otherwise.

Section 2.04 Closing. Subject to the terms and conditions of this
Agreement, the sale and purchase of the Assets and the assumption of
the Assumed Liabilities contemplated by this Agreement shall take
place at a closing (the "Closing") to be held at the offices of
Brobeck, Phleger & Harrison LLP, Spear Street Tower, One Market, San
Francisco, California at 10:00 A.M. California time on the second
Business Day following the later to occur of the satisfaction or
waiver of all conditions to the obligations of the parties set forth
in Article VIII, or at such other place or at such other time or on
such other date as Seller and Purchaser may mutually agree upon in
writing (the day on which the Closing takes place being the "Closing
Date").

Section 2.05 Closing Deliveries by Seller. At the Closing, Seller
shall deliver or cause to be delivered to Purchaser:
(a) the Bill of Sale, and such other instruments, in form
and substance satisfactory to Purchaser, as may be requested by Purchaser to
transfer the Assets to Purchaser or evidence such transfer on the public
records;

(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement and
Stockholders' Agreement;

(d) the opinions, certificates and other documents required to
be delivered pursuant to Section 8.01.

Section 2.06 Closing Deliveries by Purchaser. At the Closing, Purchaser
shall deliver to Seller:

(a) The Purchaser Common Stock payable to Seller pursuant to
Section 2.03;

(b) executed counterparts of the Assumption Agreement,
Transition Services Agreement, Sublease Agreement, Supply Agreement and
Stockholders' Agreement; and

REPRESENTATIONS AND WARRANTIES
OF SELLER

As an inducement to Purchaser to enter into this Agreement, Seller
hereby represents and warrants to Purchaser as follows:

Section 3.01 Organization, Authority and Qualification of Seller.
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida and has all necessary corporate power
and authority to enter into this Agreement and the Ancillary Agreements, to
carry out its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. Seller is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the properties owned or leased by it or the operation of its business
makes such licensing or qualification necessary. The execution and delivery
of this Agreement and the Ancillary Agreements by Seller, the performance by
Seller of its obligations hereunder and thereunder and the consummation by
Seller of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Seller and its
shareholders. This Agreement has been, and upon their execution the
Ancillary Agreements and upon shareholder approval will be, duly executed and
delivered by Seller, and (assuming due authorization, execution and delivery
by Purchaser) this Agreement constitutes, and upon their execution the
Ancillary Agreements and upon Shareholder approval will constitute, legal,
valid and binding obligations of Seller enforceable against Seller in
accordance with their respective terms. Seller is not subject to any
pending, threatened or, to its knowledge, contemplated investigation or
administrative or legal proceeding (a "Proceeding") by the Internal Revenue
Service, the taxing authorities of any state or local jurisdiction, the SEC,
the National Association of Securities Dealers, Inc., the Nasdaq Stock
Market, Inc. or any state securities commission, or any other governmental
entity which has not been disclosed in the SEC Documents (as defined below).
None of the disclosed Proceedings, if any, will have a Material Adverse
Effect upon Seller.

Section 3.02 Corporate Condition. Each report or proxy statement
delivered to the Purchaser is a true and complete copy of such document as
filed by Seller with the SEC. Seller has filed in a timely manner all
documents that Seller was required to file with the SEC under Sections 13,
14(a) and 15(d) of the Exchange Act during the twelve (12) months preceding
the date of this Agreement. As of their respective filing dates, all
documents filed by Seller with the SEC on or prior to the date hereof (the
"SEC Documents") complied in all material respects with the requirements of
the Exchange Act or the Securities Act, as applicable. Each of the SEC
Documents, as of their respective dates, did not contain any untrue statement
of material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Seller included in the SEC Documents (the "Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto. Seller's condition is, in all material respects,
as described in the SEC Documents. Seller's Financial Statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied (except as otherwise permitted by Regulation S-X of the
Exchange Act), and fairly present the financial condition of Seller as of the
dates of the balance sheets included therein and the consolidated results of
its operations and cash flows for the periods then ended. Without limiting
the foregoing, there are no material liabilities, contingent or actual, that
are not disclosed in the SEC Documents (other than liabilities incurred by
Seller in the ordinary course of its business, consistent with its past
practice, after the period covered by the SEC Documents). Seller has paid all
material taxes, which are due, except for taxes which it reasonably disputes.
This Agreement and the SEC Documents do not contain any untrue statement of a
material fact and do not omit to state any material fact required to be stated
therein or herein necessary to make the statements contained therein or herein
not misleading in the light of the circumstances under which they were made.
No event or circumstance exists relating to Seller which, under applicable
law, requires public disclosure but which has not been so publicly announced
or disclosed.

Section 3.03 Reporting Company. Seller is subject to the reporting
requirements of the Exchange Act, has a class of securities registered under
Section 12 of the Exchange Act, and has filed all reports required by the
Exchange Act since the date Seller first became subject to such reporting
obligations. Seller undertakes to furnish Purchaser with copies of such
reports as may be reasonably requested by Purchaser prior to the Closing.

Section 3.04 No Conflict. The execution, delivery and performance of this
Agreement and the Ancillary Agreements by Seller do not and will not (a)
violate, conflict with or result in the breach of any provision of the charter
or by-laws (or similar organizational documents) of Seller, (b) conflict with
or violate (or cause an event which could have a Material Adverse Effect as a
result of) any Law or Governmental Order applicable to Seller or any of its
assets, properties or businesses, including, without limitation, the Assets
and the Business, or (c) except as set forth in Section 3.04 of the Disclosure
Schedule, conflict with, result in any breach of, constitute a default (or
event which with the giving of notice or lapse of time, or both, would become
a default) under, require any consent under, or give to others any rights of
termination, amendment, acceleration, suspension, revocation or cancellation
of, or result in the creation of any encumbrance on any of the assets or
properties of Seller pursuant to, any note, bond, mortgage or indenture,
contract, agreement, lease, sublease, license, permit, franchise or other
instrument or arrangement to which Seller is a party or by which any of such
assets or properties is bound or affected.

Section 3.05 Governmental Consents and Approvals. The execution, delivery
and performance of this Agreement and each Ancillary Agreement by Seller do
not and will not require any consent, approval, authorization or other order
of, action by, filing with or notification to, any Governmental Authority,
except as described in Section 3.03 of the Disclosure Schedule.

Section 3.06 Reference Balance Sheet (a) Seller has delivered true and
complete copies of the unaudited balance sheet of the Business as of March 31,
1999, which shall be replaced within twenty (20) days of this Agreement by an
unaudited balance sheet of the Business as of June 30, 1999 for which all
representations and warranties in this Agreement related to the "Reference
Balance Sheet" shall also be true and correct. The Reference Balance Sheet
(i) was prepared in accordance with the books of account and other financial
records of Seller, (ii) presents fairly the financial condition and results of
operations of Seller related to the Business as of the date thereof or for the
period covered thereby, (iii) has been prepared in accordance with U.S. GAAP
applied on a basis consistent with the past practices of Seller and throughout
the period involved, and (iv) will include all adjustments (consisting only of
normal recurring accruals) that are necessary for a fair presentation of the
financial condition of Seller related to the Business and the results of the
operations of Seller related to the Business as of the date thereof for the
period covered thereby.

(b) The books of account and other financial records of Seller as
they relate to the Business: (i) reflect all items of income and expense and
all assets and Liabilities required to be reflected therein in accordance with
U.S. GAAP applied on a basis consistent with the past practices of Seller and
throughout the periods involved, (ii) are in all material respects complete
and correct, and do not contain or reflect any material inaccuracies or
discrepancies, and (iii) have been maintained in accordance with good business
and accounting practices.

Section 3.07 No Undisclosed Liabilities. There are no Liabilities of Seller
related to the Business other than Liabilities (i) reflected or reserved
against on the Reference Balance Sheet, (ii) disclosed in Section 3.07 of the
Disclosure Schedule, or (iii) incurred since the date of this Agreement in the
ordinary course of business, consistent with past practice, of Seller related
to the Business and which do not and could not have a Material Adverse Effect.
Reserves are reflected on the Reference Balance Sheet against all Liabilities
of Seller related to the Business, other than Liabilities relating to the
Excluded Liabilities, in amounts that have been established on a basis
consistent with the past practices of Seller related to the Business and in
accordance with U.S. GAAP.

Section 3.08 Receivables. Except to the extent, if any, reserved for on the
Reference Balance Sheet, all Receivables reflected on the Reference Balance
Sheet related to the Business arose from, and the Receivables existing on the
Closing Date related to the Business will have arisen from, the sale of
Inventory or services to Persons not affiliated with Seller and in the
ordinary course of the Business consistent with past practice and, except as
reserved against on the Reference Balance Sheet, constitute or will
constitute, as the case may be, only valid, undisputed claims of Seller not
subject to valid claims of set-off or other defenses or counterclaims other
than normal cash discounts accrued in the ordinary course of the Business
consistent with past practice.

Section 3.09 Inventories. The Inventories do not consist of obsolete
inventories or items that are damaged or otherwise slow-moving. The
Inventories do not consist of any items held on consignment. Seller is not
under any obligation or liability with respect to accepting returns of items
of Inventory or merchandise in the possession of its customers. The
Inventories are in good and merchantable condition in all material respects,
are suitable and usable for the purposes for which they are intended and are
in a condition such that they can be sold in the ordinary course of the
Business consistent with past practice.

Section 3.10 Conduct in the Ordinary Course; Absence of Certain Changes,
Events and Conditions. Since the Reference Balance Sheet Date, except as
disclosed in Section 3.10 of the Disclosure Schedule, the Business has been
conducted in the ordinary course and consistent with past practice. Seller has
not permitted or suffered any liens or encumbrances on the Assets, made any
unusual payments, purchases, transactions, capital expenditures or agreements.
As amplification and not limitation of the foregoing, since the Reference
Balance Sheet Date, Seller has not:

(i) written down or written up (or failed to write
down in accordance with U.S. GAAP consistent with past
practice) the value of any Inventories or Receivables or
revalued any assets of Seller related to the Business other
than in the ordinary course of business consistent with past
practice and in accordance with U.S. GAAP;

(ii) (A) granted any increase, or announced any
increase, in the wages, salaries, compensation, bonuses,
incentives, pension or other benefits payable by Seller related
to the Business to any of its employees, including, without
limitation, any increase or change pursuant to any Plan, or (B)
established or increased or promised to increase any benefits
under any Plan, in either case except as required by Law or any
collective bargaining agreement and involving ordinary
increases consistent with the past practice of Seller related
to the Business; or

(iii) suffered any Material Adverse Effect related to
the Business.

Section 3.11 Litigation. Except as set forth in Section 3.11 of the
Disclosure Schedule, there are no Actions by or against Seller related to the
Business, or affecting any of the Assets or the Business, pending before any
Governmental Authority (or, to the best knowledge of Seller after due inquiry,
threatened to be brought by or before any Governmental Authority). Except as
set forth in Section 3.11 of the Disclosure Schedule, neither Seller nor any
of its assets or properties, including, without limitation, the Assets, is
subject to any Governmental Order (nor, to the best knowledge of Seller after
due inquiry, are there any such Governmental Orders threatened to be imposed
by any Governmental Authority).

Section 3.12 Compliance with Laws. To the best of Seller's knowledge, it has
conducted and continues to conduct the Business in accordance with all Laws
and Governmental Orders applicable to Seller or any of its properties or
assets, including, without limitation, the Assets and the Business, and Seller
is not in violation of any such Law or Governmental Order.

Section 3.13 Environmental and Other Permits and Licenses; Related Matters.
Seller currently holds all the health and safety and other permits, licenses,
authorizations, certificates, exemptions and approvals of Governmental
Authorities (collectively, "Permits") necessary or proper for the current use,
occupancy and operation of the Assets and the conduct of the Business, and all
such Permits are in full force and effect. There is no existing practice,
action or activity of Seller and no existing condition of the Assets and the
Business, which will give rise to any civil or criminal Liability under, or
violate or prevent compliance with, any health or occupational safety or other
applicable Environmental Law. Seller has not received any notice from any
Governmental Authority revoking, canceling, rescinding, materially modifying
or refusing to renew any Permit or providing written notice of violations
under any Environmental Law related to the Assets or the Business. Seller is
in all respects in compliance with the Permits and the requirements thereof.

Section 3.14 Contracts. (a) Except as disclosed in Section 3.14(a) of the
Disclosure Schedule, each Contract: (i) is legal, valid and binding on the
respective parties thereto and is in full force and effect, (ii) is freely and
fully assignable to Purchaser without penalty or other adverse consequences,
and (iii) upon consummation of the transactions contemplated by this Agreement
and the Ancillary Agreements, except to the extent that any consents set forth
in Section 3.04 of the Disclosure Schedule are not obtained, shall continue in
full force and effect without penalty or other adverse consequence. Seller is
not in breach of, or default under, any Contract.

(b) Except as disclosed in Section 3.14(b) of the Disclosure
Schedule, no other party to any Contract is in breach thereof or default
thereunder.

Section 3.15 Intellectual Property. (a) The Disclosure Schedule contains a
true and complete list of Seller's patents, patent applications, trademarks,
trademark applications, trade names, service marks, service mark applications,
Internet domain names, Internet domain name applications, copyrights and
copyright registrations and applications and other filings and formal actions
made or taken pursuant to federal, state, local and foreign laws by Seller to
protect its interests in the Intellectual Property.

(b) The Intellectual Property consists solely of items and rights
which are: (i) owned Intellectual Property; (ii) in the public domain; or
(iii) Licensed Intellectual Property, the parties and date of each such
license agreement (each, a "License Agreement") being set forth on Section
3.15(c) of the Disclosure Schedule. Seller has all rights in Intellectual
Property necessary to carry out Seller's current activities (and had all
rights necessary to carry out its former activities at the time such
activities were being conducted), including without limitation, to the extent
required to carry out such activities, rights to make, use, reproduce, modify,
adopt, create derivative works based on, translate, distribute (directly and
indirectly), transmit, display and perform publicly, license, rent and lease
and, other than with respect to the Licensed Intellectual Property, assign and
sell, the Intellectual Property.

(c) To the Seller's knowledge, the reproduction, manufacturing,
distribution, licensing, sublicensing, sale or any other exercise of rights in
any Intellectual Property owned by the Seller, product, work, technology or
process as now used or offered or proposed for use, licensing or sale by
Seller does not infringe on any copyright, trade secret, trademark, service
mark, trade name, trade dress, firm name, Internet domain name, logo, trade
dress, mask work or of any person or the patent of any person. With the
exception of the patents and patent applications listed in Disclosure Schedule
B and the claim set forth in Disclosure Schedule C, no claims (i) challenging
the validity, effectiveness or ownership by Seller of any of the Intellectual
Property, or (ii) to the effect that the use, distribution, licensing,
sublicensing, sale or any other exercise of rights in any product, work,
technology or process as now used or offered or proposed for use, licensing,
sublicensing or sale by Seller infringes or will infringe on any intellectual
property or other proprietary right of any person have been asserted or, to
the knowledge of Seller, are threatened by any person, nor are there, to
Seller's knowledge, any valid grounds for any bona fide claim of any such
kind. All registered, granted or issued patents, trademarks, Internet domain
names and copyrights held by Seller are enforceable and subsisting. To the
best of Seller's knowledge, , there is no unauthorized use, infringement or
misappropriation of any of the Intellectual Property owned by the Seller by
any third party, employee or former employee.

(d) With the exception of the patents and patent applications
listed in Disclosure Schedule B, all personnel, including employees, agents,
consultants and contractors, who have contributed to or participated in the
conception and development of the Intellectual Property owned by the Seller on
behalf of Seller (i) have been a party to a "work-for-hire" arrangement or
agreements with Seller in accordance with applicable national and state law
that has accorded Seller full, effective, exclusive and original ownership of
all tangible and intangible property thereby arising, or (ii) have executed
appropriate instruments of assignment in favor or Seller as assignee that have
conveyed to Seller effective and exclusive ownership of all tangible and
intangible property thereby arising.

(e) Seller is not, nor as a result of the execution or delivery of
this Agreement, or performance of Seller's obligations hereunder, will Seller
be, in violation of any license, sublicense, agreement or instrument to which
Seller is a party or otherwise bound, nor will execution or delivery of this
Agreement, or performance of Seller's obligations hereunder, cause the
diminution, termination or forfeiture of any Intellectual Property.

(f) Section 3.15(f) of the Disclosure Schedule contains a true and
complete list of all of Seller's software programs (the "Software Programs").
Seller owns full and unencumbered right and good, valid and marketable title
to such Software Programs free and clear of all mortgages, pledges, liens,
security interests, conditional sales agreements, encumbrances or charges of
any kind.

(g) The source code and system documentation relating to the
Software Programs (i) have at all times been maintained in strict confidence,
(ii) have been disclosed by Seller only to employees who have a "need to know"
the contents thereof in connection with the performance of their duties to
Seller and who have executed the nondisclosure agreements referred to in
Section 3.15, and (iii) have not been disclosed to any third party.

Section 3.16 Year 2000 Compliant. (or, as the context may require, "Year 2000
Compliance") means that any particular hardware or software will: (i) process
date data from at least the years 1900 through 2101, or involving date
information from more than one century, without error, interruption,
malfunction, corruption, ceasing to function, generating incorrect data or
otherwise producing incorrect results or adversely impacting current or future
operations; (ii) maintain functionality with respect to the introduction,
processing and output of records containing dates falling on or after January
1, 2000; and (iii) support numeric and date transitions from the twentieth
century to the twenty-first century, and back (including, without limitation,
all calculations, aging, reporting, printing, displays, reversals, disaster
and vital records recoveries) without error, interruption, malfunction,
corruption, ceasing to function, generating incorrect data or otherwise
producing incorrect results or adversely impacting current or future
operations.

(a) Except as set forth in Section 3.16(a)(i) of the Disclosure
Schedule, all of Seller's products and services (including products sold to
date, products currently being sold or future products), both individually and
when operating in conjunction with all other systems, products or services
with which they are designed to interface (assuming such other systems,
products or services are Year 2000 Compliant), and all computer software and
hardware (including, without limitation, microcode, firmware, system and
application programs, files, databases, computer services and
microcontrollers, including those embedded in computer and noncomputer
equipment) contained in Seller's products or services (including products and
services sold to date, products and services currently being sold or future
products and services) are Year 2000 Compliant.

(b) All of Seller's internal computer systems are, both
individually and in conjunction with all other systems with which they
interface (assuming such other systems, products or services are Year 2000
Compliant), Year 2000 Compliant.

(c) Seller has made inquiries of its key suppliers of services and
products and, to its knowledge, Seller is not relying on the products or
services of any third party whose systems, products or services are not Year
2000 Compliant.

(d) Except as set forth in Section 3.16(a)(ii), Seller does not
have any material expenses or other material liabilities associated with
securing Year 2000 Compliance, or making contingency arrangements to address
Year 2000 Compliance issues, with respect to Seller's products or services
(including products and services sold to date, products and services currently
being sold or future products and services), internal computer systems (to the
knowledge of Seller) or the computer systems of Seller's key suppliers or
customers.

(e) Seller has not made any representations or warranties
specifically relating to the ability of any product or service sold, licensed,
rendered, or otherwise provided by Seller in the conduct of its business to be
Year 2000 Compliant.

Section 3.17 Assets. (a) Except as disclosed in Section 3.17(a) of the
Disclosure Schedule, Seller owns, leases or has the legal right to use all the
Assets and has good and marketable title to, or, in the case of leased or
subleased Assets, valid and subsisting leasehold interests in, all the Assets,
free and clear of all encumbrances.

(b) The Assets constitute all the properties, assets and rights
forming a part of, used, held or intended to be used in, and all such
properties, assets and rights as are necessary in the conduct of, the
Business.

(c) Except as set forth in Sections 3.15(b), 3.16(b), 3.17(a) or
3.17(c) of the Disclosure Schedule, Seller has the complete and unrestricted
power and unqualified right to sell, assign, transfer, convey and deliver the
Assets to Purchaser without penalty or other adverse consequences.

Section 3.18 Customers. Seller has not received any notice, written or
otherwise, from any significant customer (defined for purposes of this Section
3.18 to be a customer who has purchased $25,000 of products produced by the
Business, in the aggregate, in any twelve (12) month period in any of the last
three (3) fiscal years) of Seller has ceased, or will cease, to use the
products of Seller produced by the Business or has substantially reduced, or
will substantially reduce, the use of such products at any time.

Section 3.19 Suppliers. Seller has not received any notice, written or
otherwise, that any significant supplier will not sell raw materials,
supplies, merchandise and other goods related to the Business to Seller at any
time after the Closing Date on terms and conditions similar to those imposed
on current sales to the Business, subject only to general and customary price
increases.

Section 3.20 Employee Benefit Matters. (a) Plans and Material Documents.
Section 3.20(a) of the Disclosure Schedule lists all employee benefit plans
(as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) and all bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans, programs
or arrangements, and all employment, termination, severance or other contracts
or agreements, whether legally enforceable or not, to which Seller is a party
with respect to the Business, with respect to which Seller has any obligation
or which are maintained, contributed to or sponsored by Seller for the benefit
of any current or former employee, officer or director of Seller with respect
to the Business (collectively, "Plans").

(b) Absence of Certain Liabilities and Events. There has been no
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan. Seller has not incurred any
liability for any excise tax arising under Section 4971, 4972, 4980 or 4980B
of the Code and to the best of Seller's knowledge no fact or event exists
which could give rise to any such liability. Seller has not incurred any
liability under, arising out of or by operation of Title IV of ERISA (other
than liability for premiums to the Pension Benefit Guaranty Corporation
arising in the ordinary course), including, without limitation, any liability
in connection with (i) the termination or reorganization of any employee
benefit plan subject to Title IV of ERISA, or (ii) the withdrawal from any
Multiemployer Plan or Multiple Employer Plan, and no fact or event exists
which could give rise to any such liability. No complete or partial
termination has occurred within the five years preceding the date hereof with
respect to any Plan. No reportable event (within the meaning of Section 4043
of ERISA) has occurred or is expected to occur with respect to any Plan
subject to Title IV of ERISA. No Plan had an accumulated funding deficiency
(within the meaning of Section 302 of ERISA or Section 412 of the Code),
whether or not waived, as of the most recently ended plan year of such Plan.

Section 3.21 Labor Matters. Except as set forth in Section 3.21 of the
Disclosure Schedule, (a) Seller is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by
Seller with respect to the Business, and currently there are no organizational
campaigns, petitions or other unionization activities seeking recognition of a
collective bargaining unit which could affect the Business; (b) there are no
controversies, strikes, slowdowns or work stoppages pending or, to the best
knowledge of Seller after due inquiry, threatened between Seller and any of
the employees of the Business, and Seller has not experienced any such
controversy, strike, slowdown or work stoppage within the past three years;
(c) Seller has not breached or otherwise failed to comply with the provisions
of any collective bargaining or union contract with respect to the Business
and there are no grievances outstanding against Seller under any such
agreement or contract; (d) there are no unfair labor practice complaints
pending against Seller with respect to the Business before the National Labor
Relations Board or any other Governmental Authority or any current union
representation questions involving employees of the Business; (e) Seller is
currently in compliance with all applicable Laws relating to the employment of
labor, including those related to wages, hours, collective bargaining,
employee benefits and the payment and withholding of taxes and other sums as
required by the appropriate Governmental Authority with respect to the
Business and has withheld and paid to the appropriate Governmental Authority
or is holding for payment not yet due to such Governmental Authority all
amounts required to be withheld from employees of the Business and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing; (f) Seller has paid in full to all employees
of the Business or adequately accrued for in accordance with U.S. GAAP
consistently applied all wages, salaries, commissions, bonuses, benefits and
other compensation due to or on behalf of such employees; (g) there is no
claim with respect to payment of wages, salary or overtime pay that has been
asserted or is now pending or threatened before any Governmental Authority
with respect to any Persons currently or formerly employed by Seller in the
Business; (h) Seller is not a party to, or otherwise bound by, any consent
decree with, or citation by, any Governmental Authority relating to employees
or employment practices with respect to the Business; (i) there is no charge
or proceeding with respect to a violation of any occupational safety or health
standards that has been asserted or is now pending or threatened with respect
to the Business; and (j) there is no charge of discrimination in employment or
employment practices, for any reason, including, without limitation, age,
gender, race, religion or other legally protected category, which has been
asserted or is now pending or threatened before the United States Equal
Employment Opportunity Commission, or any other Governmental Authority in any
jurisdiction in which Seller has employed or currently employs any Person with
respect to the Business.

Section 3.22 Taxes. All returns and reports in respect of Taxes required to
be filed have been timely filed and all Taxes required to be shown on such
returns and reports or otherwise due have been timely paid. All such returns
and reports are true, correct and complete in all material respects. There
are no Tax liens on the Assets or the Business.

Section 3.23 Insurance. (a) All material assets, properties and risks of the
Business are, and for the past five years have been, covered by valid and,
except for policies that have expired under their terms in the ordinary
course, currently effective insurance policies or binders of insurance
(including, without limitation, general liability insurance, property
insurance and workers' compensation insurance) issued in favor of Seller, in
each case with responsible insurance companies, in such types and amounts and
covering such risks as are consistent with customary practices and standards
of companies engaged in businesses and operations similar to those of Seller
with respect to the Business.

(b) At no time subsequent to December 31, 1996 has Seller (i) been
denied any insurance or indemnity bond coverage which it has requested with
respect to either the Assets or the Business, (ii) made any material reduction
in the scope or amount of its insurance coverage with respect to either the
Assets or the Business, or received notice from any of its insurance carriers
that any insurance premiums will be subject to increase in an amount
materially disproportionate to the amount of the increases with respect
thereto (or with respect to similar insurance) in prior years or that any
insurance coverage referred to in Section 3.23(a) will not be available in the
future substantially on the same terms as are now in effect or (iii) suffered
any extraordinary increase in premium for renewed coverage with respect to
either the Assets or the Business. Since December 31, 1996, no insurance
carrier has cancelled, failed to renew or materially reduced any insurance
coverage for Seller with respect to either the Assets or the Business or given
any notice or other indication of its intention to cancel, not renew or reduce
any such coverage with respect to either the Assets or the Business.

Section 3.24 Full Disclosure. (a) Seller is not aware of any facts
pertaining to Seller or the Business which affect adversely Seller or the
Business or which are likely in the future to affect adversely Seller or the
Business and which have not been disclosed in this Agreement, the Disclosure
Schedule, the Financial Statements, the Reference Balance Sheet, or otherwise
disclosed to Purchaser by Seller in writing.

(b) No representation or warranty of Seller in this Agreement, nor
any statement or certificate furnished or to be furnished prior to or at the
Closing to Purchaser pursuant to this Agreement, or in connection with the
transactions contemplated by this Agreement, contains or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading.

Section 3.25 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements based
upon arrangements made by or on behalf of Seller.

Section 3.26 Authority Relative to this Agreement and the Ancillary
Agreements. Seller has all necessary corporate power to and authority to
execute and deliver this Agreement and the Ancillary Agreements, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
by Seller and the consummation of the transaction contemplated hereby have
been duly and validly authorized by all necessary corporate action and no
other corporate proceedings on the part of Seller are necessary to authorize
this Agreement or to consummate such transactions (other than the approval and
adoption of this Agreement by a majority of the holders of 66 2/3% of the
Series A Preferred shares that include GAM Arbitrage Fund L.P., AGR Halifax
Fund, Ltd, Leonardo L.P., Ramius Fund, Ltd, Raphael L.P., AG Super Fund L.P.
of common stock of Seller. Securityholders of Seller holding sufficient
shares of capital stock of Seller to assure all necessary shareholder
approvals of this Agreement, the Ancillary Agreements and the transactions
contemplated hereby and thereby have executed the Voting Agreement. This
Agreement has been duly executed and delivered by Seller and, assuming due
delivery by Purchaser, constitutes the legal, valid and binding obligation of
seller, enforceable against Seller in accordance with its terms.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES
OF PURCHASER

As an inducement to Seller to enter into this Agreement, Purchaser hereby
represents and warrants to Seller as follows:

Section 4.01 Organization and Authority of Purchaser. Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all necessary corporate power and
authority to enter into this Agreement and the Ancillary Agreements, to carry
out its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Ancillary Agreements by Purchaser, the performance by
Purchaser of its obligations hereunder and thereunder and the consummation by
Purchaser of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of Purchaser. This Agreement
has been, and upon their execution the Ancillary Agreements will be, duly
executed and delivered by Purchaser, and (assuming due authorization,
execution and delivery by Seller) this Agreement constitutes, and upon their
execution the Ancillary Agreements will constitute, legal, valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with
their respective terms.

Section 4.02 No Conflict. Except as may result from any facts or
circumstances relating solely to Seller, the execution, delivery and
performance of this Agreement and the Ancillary Agreements by Purchaser, do
not and will not violate, conflict with or result in the breach of any
provision of the Articles of Incorporation or by- laws (or other
organizational documents) of Purchaser, (b) conflict with or violate any Law
or Governmental Order applicable to Purchaser or (c) conflict with, or result
in any breach of, constitute a default (or an event which with the giving of
notice or lapse of time, or both, would become a default) under, require any
consent under, or give to others any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, or result in the
creation of any encumbrance on any of the assets or properties of Purchaser
pursuant to, any note, bond, mortgage or indenture, contract, agreement,
lease, sublease, license, permit, franchise or other instrument or arrangement
to which Purchaser is a party or by which any of such assets or properties is
bound or affected, which would have a material adverse effect on the ability
of Purchaser to consummate the transactions contemplated by this Agreement or
by the Ancillary Agreements.

Section 4.03 Governmental Consents and Approvals. The execution, delivery
and performance of this Agreement and each Ancillary Agreement to which it is
a party by Purchaser do not and will not require any consent, approval,
authorization or other order of, action by, filing with, or notification to,
any Governmental Authority.

Section 4.04 Capitalization. As of the Closing Date, the authorized capital
stock of Purchaser shall consist of 10,000,000 shares of preferred stock,
7,000,000 of which shall be issued and outstanding, and 30,000,000 shares of
common stock, 1,000,000 of which shall be issued and outstanding to Seller
pursuant to Section 2.03 hereof.

Section 4.05 Financing Commitments. Purchaser has received irrevocable
commitments from investors to provide Purchaser equity capital of not less
than $6,000,000 in cash and commitments, subject only to the Closing in
accordance with the terms and conditions of this Agreement.

Section 4.06 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements based
upon arrangements made by or on behalf of Purchaser.

ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.01 Conduct of Business Prior to the Closing. (a) Seller covenants
and agrees that, between the date hereof and the Closing, Seller shall not
conduct the Business other than in the ordinary course and consistent with
Seller's past practice. Without limiting the generality of the foregoing,
Seller shall (i) continue its advertising and promotional activities, and
pricing and purchasing policies, in accordance with past practice; (ii) not
shorten or lengthen the customary payment cycles for any of its payables or
receivables; (iii) use its commercially reasonable efforts to (A) preserve
intact its business organization and the business organization of the
Business, (B) keep available to Purchaser the services of the employees of
Seller, (C) continue in full force and effect without material modification
all existing policies or binders of insurance currently maintained in respect
of Seller and the Business, and (D) preserve its current relationships with
its customers, suppliers and other persons with which it has significant
business relationships; and (iv) not engage in any practice, take any action,
fail to take any action or enter into any transaction which could cause any
representation or warranty of Seller to be untrue or result in a breach of any
covenant made by Seller in this Agreement.

(b) Except as described in Section 5.01(b) of the Disclosure Schedule,
Seller covenants and agrees that, prior to the Closing, without the prior
written consent of Purchaser, Seller will not do any of the things enumerated
in Section 3.08.

Section 5.02 Access to Information. (a) Seller will provide Purchaser,
together with its accountants, counsel and other authorized representatives,
full and complete access during normal business hours to all properties,
books, records, agreements and facilities of Seller (insofar as the same are
relevant to the Business or the Assets), wherever located, and Seller will
make its officers, employees, attorneys, agents, independent accountants and
actuaries available to discuss with Purchaser and its accountants, counsel and
other authorized representatives such aspects of the business, financial
condition or prospects of the Business and the Assets as Purchaser may deem
necessary or desirable. To the extent that the transactions contemplated
hereby are not consummated, all written information provided by Seller to
Purchaser or its aforementioned representatives will promptly be returned
following Seller's written request to Purchaser. All material non-public
information provided by Seller will be treated as confidential and will not be
disclosed by Purchaser or its representatives to any third party (other than
its accountants, counsel and authorized representatives and prospective debt
and equity investors for the sole purpose of evaluating the transactions
contemplated herein) without the prior written consent of Seller, except as
required by law or in connection with any civil, administrative, criminal or
other legal proceedings and investigations.

(b) In order to facilitate the resolution of any claims made
against or incurred by Seller prior to the Closing, for a period ending on the
close of business on the 120th day following the expiration of the applicable
statute of limitations with respect to Tax liabilities, Purchaser shall (i)
retain the books and records of Seller which are transferred to Purchaser
pursuant to this Agreement relating to periods prior to the Closing in a
manner reasonably consistent with the prior practices of Seller, and (ii) upon
reasonable notice, afford the officers, employees and authorized agents and
representatives of Seller reasonable access (including the right to make
photocopies at Buyer's expense), during normal business hours, to such books
and records.

(c) In order to facilitate the resolution of any claims made by or
against or incurred by Purchaser after the Closing or for any other reasonable
purpose, for a period ending on the close of business on the 120th day
following the expiration of the applicable statute of limitations with respect
to Tax liabilities, Seller shall retain all books and records of Seller which
are not transferred to Purchaser pursuant to this Agreement and which relate
to Seller, its operations or the Business for periods prior to the Closing and
which shall not otherwise have been delivered to Purchaser, and (ii) upon
reasonable notice, afford the officers, employees and authorized agents and
representatives of Purchaser reasonable access (including the right to make
photocopies at Purchaser's expense), during normal business hours, to such
books and records.

Section 5.03 Regulatory and Other Authorizations; Notices and Consents. (a)
Seller shall use commercially reasonable efforts to obtain all authorizations,
consents, orders and approvals of all Governmental Authorities and officials,
customers, vendors and other parties who may have or be able to assert legal
rights with respect to this transaction that may be or become necessary for
execution and delivery of this Agreement, and the performance of Seller's
obligations pursuant to, this Agreement and the Ancillary Agreements and will
cooperate fully with Purchaser in promptly seeking to obtain all such
authorizations, consents, orders and approvals.

(b) Seller and Purchaser agree that, in the event any consent,
approval or authorization necessary or desirable to preserve for the Business
or Purchaser any right or benefit under any lease, license, contract,
commitment or other agreement or arrangement to which Seller is a party is not
obtained prior to the Closing, Seller will, subsequent to the Closing,
cooperate with Purchaser in attempting to obtain such consent, approval or
authorization as promptly thereafter as practicable. If such consent,
approval or authorization cannot be obtained, Seller will use its commercially
reasonable efforts to provide Purchaser with the rights and benefits of the
affected lease, license, contract, commitment or other agreement or
arrangement for the term of such lease, license, contract or other agreement
or arrangement, and, if Seller provides such rights and benefits, Purchaser
shall assume the obligations and burdens thereunder.

Section 5.04 Notice of Developments. Prior to the Closing, Seller shall
promptly notify Purchaser in writing of (a) all events, circumstances, facts
and occurrences arising subsequent to the date of this Agreement which could
have a Material Adverse Effect on the Business, and (b) all other material
developments affecting the Assets, Liabilities, business, financial condition,
operations, results of operations, customer or supplier relations, employee
relations or projections of the Business.

Section 5.05 Use of Intellectual Property. Seller shall not use any of the
Intellectual Property after the Closing Date.

Section 5.06 Public Announcements. Seller and Purchaser agree to cooperate
on making, and coordinate the making of, any public announcements concerning
this Agreement, the Ancillary Agreements and the transactions contemplated
hereby and thereby.

Section 5.07 Exclusivity. From the date of execution of this Agreement until
September 30, 1999 (the "Exclusivity Period"), none of Seller nor any of its
respective directors, officers, agents or representatives will (i) solicit,
encourage, initiate or participate in any negotiations or discussions with
respect to, any offer or proposal to acquire all or any portion of the
Business or the Assets whether by purchase of assets or otherwise, (ii)
disclose any information not customarily disclosed to any person concerning
the Business or the Assets or afford to any person or entity access to the
properties, books or records of the Business or the Assets, or (iii) cooperate
with any person to make any proposal to purchase all or any part of the assets
of the Business or the Assets (directly or indirectly) other than inventory or
- -essential or excess assets sold in the ordinary course of business; provided,
however, that nothing contained in this Section 5.08 shall prohibit the board
of directors of Seller (i) form complying with Rule 14d-9 or 14e-2(a)
promulgated under the Exchange Act with regard to a tender of exchange offer
not made in violation of this Section 5.08 or (ii) prior to receipt of the
approval by the shareholders of Seller of this Agreement and the transaction
contemplated hereby from providing information in connection with, and
negotiating, another unsolicited, bona fide written proposal regarding a
competing transaction (a "Competing Transaction") that (i) the Seller's board
of directors shall have concluded in good faith, after considering applicable
state law, on the basis of a written opinion of independent outside counsel of
nationally recognized reputation, that such action is necessary to prevent
Seller's board of directors from violating its fiduciary duties to Seller's
shareholders under applicable law, (ii) if any cash consideration is involved,
shall not be subject to any financing contingency, and with respect to
Seller's board of directors shall have determined (based upon the advice of
Seller's independent financial advisors of nationally recognized reputation)
in the proper exercise of its fiduciary duties to Seller's stockholders that
the acquiring party is capable of consummating such Competing Transaction on
the terms proposed, and (iii) Seller's board of directors shall have
determined in the proper exercise of its fiduciary duties to Seller's
stockholders that such Competing Transaction provides greater value to the
shareholders of Seller than the transaction contemplated hereby (based upon
the written opinion of Seller's independent financial advisors of nationally
recognized reputation that such Competing Transaction is superior from a
financial point of view).

Section 5.08 Further Action. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do
or cause to be done all things necessary, proper or advisable under applicable
Laws, including obtaining any necessary consents or approvals from, or making
any necessary filings with the U.S. or any foreign regulatory agencies, and
execute and deliver such documents and other papers, as may be required to
carry out the provisions of this Agreement, cause the conditions to Closing
set forth in Article VIII of this Agreement to be satisfied, and consummate
and make effective the transactions contemplated by this Agreement.

ARTICLE VI

EMPLOYEE MATTERS

Section 6.01 Offer of Employment. Following the Closing Date Purchaser shall
offer employment to all of the employees of the Business other than selected
individuals to be identified by Purchaser at least five (5) days prior to the
Closing Date (collectively, the "Identified Employees"). Shares of Purchaser
Common Stock equal to 20% of the initial capital stock of Purchaser (computed
on a fully diluted basis including the issuance to Seller and the issuance of
7,000,000 shares of Series A Preferred Stock of Purchaser) will be reserved
for issuance to Purchaser's employees, officers and directors (specifically
including the Identified Employees) upon the exercise of employee stock
options with terms and conditions, including vesting tied to continued
employment by Purchaser, customary to venture capital backed start-up
companies.

ARTICLE VII

TAX MATTERS

Section 7.01 Indemnity. Seller agrees, to indemnify and hold harmless
Purchaser against the following Taxes and against any loss, damage, liability
or expense, including reasonable fees for attorneys and other outside
consultants, incurred in contesting or otherwise in connection with any such
Taxes: (i) Taxes imposed on Purchaser or the Business with respect to taxable
periods ending on or before the Closing Date; (ii) with respect to taxable
periods beginning before the Closing Date and ending after the Closing Date,
Taxes imposed on Purchaser or the Business which are allocable, to the portion
of such period ending on the Closing Date; and (iii) Taxes imposed on
Purchaser as a result of any breach of warranty or misrepresentation under
Section 3.19 of this Agreement. Purchaser shall be responsible for Taxes of
the Business for periods after the Closing Date.

Section 7.02 Conveyance Taxes. Seller and Purchaser shall equally bear all
real property transfer or gains, sales, use, transfer, value added, stock
transfer, and stamp taxes, any transfer, recording, registration, and other
fees, and any similar Taxes which become payable in connection with the
transactions contemplated by this Agreement and the Ancillary Agreements.

Section 7.03 Miscellaneous. (a) Seller and Purchaser agree to treat all
payments made by either to or for the benefit of the other under this Article
VII, under other indemnity provisions of this Agreement and for any
misrepresentations or breach of warranties or covenants, as adjustments to the
Purchase Price or as capital contributions for Tax purposes and that such
treatment shall govern for purposes hereof except to the extent that the laws
of a particular jurisdiction provide otherwise, in which case such payments
shall be made in an amount sufficient to indemnify the relevant party on an
after-tax basis.

(b) Notwithstanding any provision in this Agreement to the
contrary, the obligations of Seller and Parent to indemnify and hold harmless
Purchaser pursuant to this Article VII, and the representations and warranties
contained in Section 3.19, shall terminate at the close of business on the
120th day following the expiration of the applicable statute of limitations
with respect to the Tax liabilities in question (giving effect to any waiver,
mitigation or extension thereof).

(c) For purposes of this Article VII, "Purchaser" and "Seller",
respectively, shall include each member of the affiliated group of
corporations of which it is or becomes a member.

ARTICLE VIII

CONDITIONS TO CLOSING

Section 8.01 Conditions to Obligations of Purchaser. Unless waived in
writing by Purchaser, Purchaser's obligation to consummate the Acquisition
shall be subject to the satisfaction of the following conditions:

(a) Representations, Warranties and Covenants. The representations
and warranties of Seller and Parent contained in this Agreement shall have
been true and correct when made and shall be true and correct as of the
Closing with the same force and effect as if made as of the Closing, other
than such representations and warranties as are made as of another date, the
covenants and agreements contained in this Agreement to be complied with by
Seller on or before the Closing shall have been complied with, and Purchaser
shall have received a certificate of Seller to such effect signed by a duly
authorized officer thereof;

(b) No Proceeding or Litigation. No Action shall have been
commenced or threatened by or before any Governmental Authority against either
Seller or Purchaser, seeking to restrain or materially and adversely alter the
transactions contemplated hereby which in the good faith determination of
Purchaser is likely to render it impossible or unlawful to consummate the
transactions contemplated by this Agreement or otherwise render inadvisable
the consummation by Purchaser of the transactions contemplated by this
Agreement; provided, however, that the provisions of this Section 8.01(b)
shall not apply if Purchaser has solicited or encouraged any such Action;

(c) Resolutions of Seller. Purchaser shall have received a true
and complete copy, certified by the Secretary or an Assistant Secretary of
Seller, of the resolutions duly and validly adopted by the Board of Directors
of Seller evidencing its authorization of the execution and delivery of this
Agreement and the Ancillary Agreements and the consummation of the
transactions contemplated hereby and thereby;

(d) Legal Opinion. Purchaser shall have received from Morgan,
Lewis & Bockius, LLP, counsel to Seller, an opinion, addressed to Purchaser
and dated the Closing Date, in a form satisfactory to Purchaser.

(e) Consents and Approvals. Purchaser and Seller shall have
received, each in form and substance reasonably satisfactory to Purchaser in
its sole and absolute discretion, all authorizations, consents, orders and
approvals of all Governmental Authorities and officials and all third party
consents and estoppel certificates which Purchaser reasonably deems necessary
or desirable for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements;

(f) Ancillary Agreements. Seller shall have executed and delivered
to Purchaser each of the Ancillary Agreements to which it is a party;

(g) Contracts. Purchaser shall have received, each in form and
substance reasonably satisfactory to Purchaser, amendments or novations of
each Contract identified in Section 3.14(a) of the Disclosure Schedule which
Purchaser reasonably deems necessary or desirable for the consummation of the
transactions contemplated by this Agreement, the Ancillary Agreements and the
ongoing operation of the Business, including, without limitation, all third
party consents required under any Contracts;

(h) No Material Adverse Effect. No circumstance, change in, or
effect on the Business shall have occurred which has a Material Adverse
Effect;

(i) Due Diligence. Completion of, and satisfaction with the
results of, financial, business, technical and legal due diligence reviews of
Seller by the Purchaser;

(j) Approval of Holders of Seller's Common Stock. Seller shall
have solicited and received the approval of the holders of common stock of
Seller necessary to effect the sale of substantially all of the assets of
Seller;

(k) Approval of Holders of Seller's Preferred Stock. If necessary
to consummate the Acquisition, Seller shall have solicited and received the
approval of the holders of 66-2/3% of the shares of Series A Preferred Stock
of Seller;

(l) Approvals. Purchaser shall have received all Approvals which
shall not contain any condition or restriction which materially impairs
Purchaser's ability to use, operate or enjoy the Assets;

(m) No Injunction, Stay, Order. There shall not be in effect any
injunction, stay or restraining order issued by a court of competent
jurisdiction, whether foreign or domestic, staying the effectiveness of any
Approval, and there shall not be any pending request for such an injunction,
stay or restraining order;

(n) Litigation. There shall not be threatened or pending any suit,
action, investigation, inquiry or other proceeding by or before any court of
competent jurisdiction or governmental agency which, in Purchaser's reasonable
judgment, could have a material adverse effect on Purchaser's ability to
acquire, use, operate or enjoy the Assets;

(o) Deliveries by Seller. Seller shall have delivered to Purchaser
the items set forth in Section 2, satisfactory in form and substance to
Purchaser;

(p) Stockholders' Agreement. Seller shall have delivered to
Purchaser a signed counterpart of a stockholders' agreement including the
terms set forth in Exhibit A hereto and otherwise satisfactory to Purchaser
(the "Stockholders' Agreement");

(q) Bulk Sale. Purchaser shall be satisfied that applicable bulk
sale or similar requirements shall have been complied with by Seller on a
timely basis;

(r) Financial Statements. Purchaser shall have received the
Financial Statements and the Reference Balance Sheet;

(s) Key Employees. All of the employees of Seller prior to the
Closing Date designated by the Purchaser as key employees on Annex B ("Key
Employees") shall have accepted the offer of employment by Purchaser made
pursuant to Section 6.01 above;

(t) Purchaser Satisfaction. Purchaser shall be satisfied in its
sole discretion that Seller is able to sell, convey and assign to Purchaser,
free and clear of all claims, liens and interests except as is provided for
herein, all of Seller's right, title and interest in and to the Assets; and

(u) Seller Compliance. Seller shall have complied in all material
respects with its covenants and agreements hereunder.

Section 8.02 Conditions to Obligations of Seller. Unless waived in writing
by Seller, Seller's obligation to consummate the transactions contemplated
hereby shall be subject to the satisfaction of the following conditions:

(a) the conditions set forth above in Section 8.01 (j) and (k)
shall have been satisfied;

(b) Purchaser and its current stockholders shall each have
delivered to Seller a signed counterpart of the Stockholders' Agreement;

(d) Purchaser shall have complied in all material respects with its
covenants and agreements hereunder.

ARTICLE IX

INDEMNIFICATION

Section 9.01 Survival of Representations and Warranties. The representations
and warranties of Seller contained in this Agreement and the Ancillary
Agreements, and all statements contained in the Acquisition Documents, shall
survive the Closing until twelve (12) months thereafter; provided, however,
that (a) the representations and warranties dealing with Tax matters shall
survive as provided in Section 7.03(b), and (b) insofar as any claim is made
by Purchaser for the breach of any representation or warranty of Seller
contained herein, which claim arises out of allegations of personal injury or
property damage suffered by any third party on or prior to the Closing Date or
attributable to products or Inventory sold or shipped, or activities or
omissions that occur, on or prior to the Closing Date, such representations
and warranties shall, for purposes of such claim by Purchaser, survive until
thirty (30) calendar days after the expiration of the applicable statute of
limitations governing such claims. Neither the period of survival nor the
liability of Seller with respect to Seller's representations and warranties
shall be reduced by any investigation made at any time by or on behalf of
Purchaser. If written notice of a claim has been given prior to the
expiration of the applicable representations and warranties by Purchaser to
Seller, then the relevant representations and warranties shall survive as to
such claim until the claim has been finally resolved.

Section 9.02 Indemnification by Seller. (a) Indemnifiable Losses.
Subject to Section 9.02(b) and (c) below, Purchaser and its Affiliates,
officers, directors, employees, agents, successors and assigns shall be
indemnified and held harmless by Seller for any and all Liabilities, losses,
damages, claims, costs and expenses, interest, awards, judgments and penalties
actually suffered or incurred by them (including, without limitation, any
Action brought or otherwise initiated by any of them) (a "Loss"), arising out
of or resulting from the following:

(i) the breach of any representation or warranty made by
Seller contained in the Acquisition Documents;

(ii) the breach of any covenant or agreement by Seller
contained in the Acquisition Documents;

(iii) any and all Losses suffered or incurred by
Purchaser by reason of or in connection with any claim or
cause of action of any third party to the extent arising out
of any action, inaction, event, condition, liability or
obligation of Seller occurring or existing prior to the
Closing; and

(iv) liabilities, whether arising before or after the
Closing Date, that are not expressly assumed by Purchaser
pursuant to this Agreement, including, without limitation the
Excluded Liabilities.

(b) Claims; Threshold Amount. Notwithstanding the foregoing, Seller
shall have no liability with respect to the matters described in paragraph
(a)(i) above unless and until the aggregate amount of Losses thereunder of
which Seller receives written notice exceeds $50,000 (the "Threshold Amount").
At such time as the aggregate Losses with respect to matters described in
paragraph (a)(i) exceed the Threshold Amount, Purchaser shall be indemnified
to the full extent of all such Losses (including Losses counted in determining
whether the aggregate Losses equal or exceed the Threshold Amount); provided,
however, that Seller shall be liable for any such Losses arising out of any
intentional or fraudulent breach of any representation or warranty.

(c) Limits on Indemnification. Notwithstanding anything to the contrary
contained in this Agreement, the maximum amount of indemnifiable Losses which
may be recovered from Seller arising out of or resulting from the causes
enumerated in Section 9.02(a) shall be an amount equal to $200,000, provided,
however, that such limitation shall not apply to Article VII or Section 3.19.

Section 9.03 Indemnification by Purchaser. Seller and each of its
Affiliates, officers, directors, employees, agents, successors and assigns
shall be indemnified and held harmless by Purchaser for any and all Losses out
of or resulting from:

(i) a breach of any representation, warranty,
covenant or agreement of Purchaser contained in this Agreement
which has not been expressly waived by Seller in writing;

(ii) any claim, suit, action or proceeding to the
extent the same pertains to the ownership, organization,
operation or conduct of the Business on or after the Closing;
and

(iii) all liabilities, obligations, responsibilities
and Losses, attributable to Assumed Liabilities which were not
in existence on the Closing Date.

Section 9.04 Indemnification Procedures. (a) For purposes of this Section
9.04, "Indemnified Party" shall mean (i) each of Purchaser and its Affiliates,
officers, directors, employees, agents, successors and assigns, when being
indemnified by Seller pursuant to Section 9.02, and (ii) each of and its
Affiliates, officers, directors, employees, agents, successors and assigns,
when being indemnified by Purchaser pursuant to Section 9.03, and
"Indemnifying Party" shall mean (x) Seller when indemnifying Purchaser and its
Affiliates, officers, directors, employees, agents, successors and assigns
pursuant to Section 9.02, and (y) Purchaser when indemnifying Seller and its
Affiliates, officers, directors, employers, agents, successors and assigns
pursuant to Section 9.03.

(b) A Indemnified Party shall give the Indemnifying Party notice of
any matter which an Indemnified Party has determined has given or could give
rise to a right of indemnification under this Agreement, within sixty (60)
days of such determination, stating the amount of the Loss, if known, and
method of computation thereof, a brief description of the facts upon which
such claim is based and containing a reference to the provisions of this
Agreement in respect of which such right of indemnification is claimed or
arises. If, after the amount of the claim is specified by the Indemnified
Person, the Indemnifying Party objects to any such claim, it may give written
notice to the Indemnified Person within thirty (30) days of the later of
receipt of the Indemnified Person's notice of claim or the specification by
the Indemnified Person of the amount of the claim, advising the Indemnified
Person of its objection. If no such notice is timely received from the
Indemnifying Party by the Indemnified Person, the Indemnified Person will be
entitled to payment from the Indemnifying Party in the amount of the Loss
arising out of the claim specified in its notice of claim. If the
Indemnifying Party advises the Indemnified Person within such thirty (30) day
period that it objects to such claim, the Indemnified Person and the
Indemnifying Party shall promptly meet and use their best efforts to settle
the dispute in writing. If the Indemnified Person and the Indemnifying Party
are unable to reach agreement within thirty (30) days after the Indemnifying
Party objects to the claim, then the disputed portion of the claim shall be
submitted to arbitration in accordance with Section 11.11. If the arbitrator
shall determine that the Indemnified Person is entitled to indemnification
with respect to the dispute submitted, the Indemnified Person will be entitled
to obtain payment from the Indemnifying Party within thirty (30) days in the
amount determined by the arbitrator.

(c) The obligations and Liabilities of the Indemnifying Party under
this Article IX with respect to Losses arising from claims of any third party
which are subject to the indemnification provided for in this Article IX
("Third Party Claims") shall be governed by and contingent upon the following
additional terms and conditions: if an Indemnified Party shall receive notice
of any Third Party Claim, the Indemnified Party shall give the Indemnifying
Party notice of such Third Party Claim within thirty (30) days of the receipt
by the Indemnified Party of such notice; provided, however, that the failure
to provide such notice shall not release the Indemnifying Party from any of
its obligations under this Article IX except to the extent the Indemnifying
Party is materially prejudiced by such failure and shall not relieve the
Indemnifying Party from any other obligation or Liability that it may have to
any Indemnified Party otherwise than under this Article IX. If the
Indemnifying Party acknowledges in writing its obligation to indemnify the
Indemnified Party hereunder against any Losses that may result from such Third
Party Claim, then the Indemnifying Party shall be entitled to assume and
control the defense of such Third Party Claim at its expense and through
counsel of its choice if it gives notice of its intention to do so to the
Indemnified Party within five (5) days of the receipt of such notice from the
Indemnified Party; provided, however, that if there exists or is reasonably
likely to exist a conflict of interest that would make it inappropriate in the
judgment of the Indemnified Party, in its reasonable discretion, for the same
counsel to represent both the Indemnified Party and the Indemnifying Party,
then the Indemnified Party shall be entitled to retain its own counsel, in
each jurisdiction for which the Indemnified Party determines counsel is
required, at the expense of the Indemnifying Party. In the event the
Indemnifying Party exercises the right to undertake any such defense against
any such Third Party Claim as provided above, the Indemnified Party shall
cooperate with the Indemnifying Party in such defense and make available to
the Indemnifying Party at the Indemnifying Party's expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by the Indemnifying Party. Similarly, in the event the
Indemnified Party is, directly or indirectly, conducting the defense against
any such Third Party Claim, the Indemnifying Party shall cooperate with the
Indemnified Party in such defense and make available to the Indemnified Party,
at the Indemnifying Party's expense, all such witnesses, records, materials
and information in the Indemnifying Party's possession or under the
Indemnifying Party's control relating thereto as is reasonably required by the
Indemnified Party. No such Third Party Claim may be settled by the
Indemnifying Party without the prior written consent of the Indemnified Party.

(d) To the extent that the Indemnifying Parties' undertakings set
forth in this Article IX may be unenforceable, the Indemnifying Parties shall
be obligated, jointly and severally, to contribute the maximum amount that it
is permitted to contribute under applicable Law to the payment and
satisfaction of all Losses incurred by the Indemnified Parties.

ARTICLE X

TERMINATION AND WAIVER

Section 10.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by Purchaser if, between the date hereof and the time scheduled
for the Closing an event or condition occurs that has resulted in or that
Purchaser reasonably believes may result in a Material Adverse Effect;
(b) by either Seller or Purchaser if the Closing shall not have
occurred by October 31, 1999; provided, however, that the right to terminate
this Agreement under this Section 10.01(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement shall have been
the cause of, or shall have resulted in, the failure of the Closing to occur
on or prior to such date;

(c) by either Purchaser or Seller in the event that any
Governmental Authority shall have issued an order, decree or ruling or taken
any other action restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and nonappealable; or

(d) by the mutual written consent of Seller and Purchaser.

Section 10.02 Effect of Termination. In the event of termination of this
Agreement as provided in Section 10.01, this Agreement shall forthwith become
void and there shall be no liability on the part of either party hereto except
(i) as set forth in Section 11.01 and (ii) that nothing herein shall relieve
either party from liability for any willful breach of this Agreement.

Section 10.03 Waiver. Either party to this Agreement may (a) extend the time
for the performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered by the other party
pursuant hereto, or (c) waive compliance with any of the agreements or
conditions of the other party contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the
party to be bound thereby. Any waiver of any term or condition shall not be
construed as a waiver of any subsequent breach or a subsequent waiver of the
same term or condition, or a waiver of any other term or condition, of this
Agreement. The failure of any party to assert any of its rights hereunder
shall not constitute a waiver of any of such rights.

ARTICLE XI

MISCELLANEOUS

Section 11.01 Expenses. Except as otherwise specified in this Agreement, all
costs and expenses, including, without limitation, fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses, whether or not the Closing shall have
occurred.

Section 11.02 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, or by courier service, cable, telecopy, telegram, or registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties hereto at their addresses set forth on the signature pages to this
Agreement (or at such other address for a party hereto as shall be specified
in a notice given in accordance with this Section 11.02).

Section 11.03 Public Announcements. No party to this Agreement shall make,
or cause to be made, any press release or public announcement in respect of
this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without the prior written consent of the other
party and the parties shall cooperate as to the timing and contents of any
such press release or public announcement.

Section 11.04 Headings. The descriptive headings contained in this Agreement
are for convenience of reference only and shall not affect in any way the
meaning, construction or interpretation of this Agreement.

Section 11.05 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any Law or public
policy, all other terms and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner in order that the transactions contemplated hereby are consummated as
originally contemplated to the greatest extent possible.

Section 11.06 Entire Agreement. This Agreement (including the Annexes,
Exhibits and Disclosure Schedule) constitutes the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements (including the Letter of Intent), representations,
undertakings and understandings, both written and oral, between Seller and
Purchaser with respect to the subject matter hereof.

Section 11.07 Assignment. This Agreement may not be assigned by operation of
Law or otherwise without the express written consent of Seller and Purchaser
(which consent may be granted or withheld in the sole discretion of Seller and
Purchaser); provided, however, that Purchaser may assign this Agreement to an
Affiliate of Purchaser without the consent of Seller and without diminishing
Purchaser's obligations hereunder.

Section 11.08 No Third Party Beneficiaries. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto and their permitted
assigns and nothing herein, express or implied, is intended to or shall confer
upon any other Person, including, without limitation, any union or any
employee or former employee of Seller, any legal or equitable right, benefit
or remedy of any nature whatsoever, including, without limitation, any rights
of employment for any specified period, under or by reason of this Agreement.

Section 11.09 Amendment. This Agreement may not be amended, modified or
supplemented except (a) by an instrument in writing signed by, or on behalf
of, Seller and Purchaser or (b) by a waiver in accordance with Section 10.03.

Section 11.10 Governing Law. IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS OF
EACH PARTY ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
EXECUTED IN AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO
THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF
THE UNITED STATES OF AMERICA.

Section 11.11 Arbitration. The parties shall submit any dispute concerning
this interpretation of or the enforcement of rights and duties under this
Agreement to final and binding arbitration pursuant to the American
Arbitration Association. At the request of any party, the arbitrators,
attorneys, parties to the arbitration, witnesses, experts, court reports, or
other persons present at the arbitration shall agree in writing to maintain
the strict confidentiality of the arbitration proceedings. Arbitration shall
be conducted by a single, neutral arbitrator, appointed in accordance with the
Commercial Arbitration Rules of the American Arbitration Association in the
City of [San Francisco, California]. The award of the arbitrator(s) shall be
enforceable according to the applicable provisions of the [California] Code of
Civil Procedure. The arbitrator(s) may award damages and/or permanent
injunctive relief, but in no event shall the arbitrator(s) have the authority
to award punitive or exemplary damages. Notwithstanding the foregoing, a
party may apply to a court of competent jurisdiction for relief in the form of
a temporary restraining order or preliminary injunction, or other provisional
remedy pending final determination of a claim through arbitration in
accordance with the paragraph. If proper notice of any hearing has been
given, the arbitrator(s) will have full power to proceed to take evidence or
to perform any other acts necessary to arbitrate the matter in the absence of
any party who fails to appear.

Section 11.12 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.

Section 11.13 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at Law or equity, without the necessity of demonstrating the
inadequacy of money damages.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.

THE PANDA PROJECT, INC.
By /s/ Stanford W. Crane, Jr.
----------------------------
Name: Stanford W. Crane, Jr.
Title: President
951 Broken Sound Parkway
Boca Raton, FL 33487
Telephone: (561) 994-2300
Telecopy: (561) 994-0191

By /s/ Alan E. Salzman
-----------------------------
Name: Alan E. Salzman
Title: Chairman
1001 Bayhill Drive, Suite 140
San Bruno, CA 94066
Telephone: (650) 866-3100
Telecopy: (650) 869-6078

AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT

AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT, dated as of September 7,
1999 (this "Amendment"), between Silicon Bandwidth, Inc., a Delaware
corporation ("Purchaser"), and The Panda Project, Inc., a Florida corporation
("Seller").

W I T N E S S E T H:

WHEREAS, Seller and Purchaser have entered into that certain Asset
Purchase Agreement, dated as of July 19, 1999 (as hereafter amended, modified
or supplemented, the "Agreement"); and

WHEREAS, Seller and Purchaser desire to amend the Agreement pursuant to
the terms of this Amendment;

NOW THEREFORE, in consideration of the premises and the mutual agreements
and covenants hereinafter set forth, and intending to be legally bound hereby,
Purchaser and Seller hereby agree as follows:

1. Section 10.01(b) of the Agreement is hereby amended by replacing
the phrase "October 31, 1999" therein by the phrase "December 30, 1999."

2. From and after the date hereof each reference in the Agreement to
"this Agreement," "the Agreement," "hereunder," "hereof," "herein," or words
of like import shall mean and be a reference to the Agreement as amended by
this Amendment.

3. Except as specifically amended above, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed.

4. This Amendment may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.

IN WITNESS WHEREOF, Seller and Purchaser have caused this Amendment to be
executed as of the date first written above by their respective officers
thereunto duly authorized.

THE PANDA PROJECT, INC. SILICON BANDWIDTH, INC.

By: /s/ Stanford W. Crane, Jr. By: /s/ Alan E. Salzman
- - ----------------------------- -----------------------
Name: Stanford W. Crane, Jr. Name: Alan E. Salzman
Title: President and CEO Title: Chairman

AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT

AMENDMENT NO. 2 TO ASSET PURCHASE AGREEMENT, dated as of October28, 1999
(this "Amendment"), between Silicon Bandwidth, Inc., a Delaware corporation
("Purchaser"), and The Panda Project, Inc., a Florida corporation ("Seller").

W I T N E S S E T H:

WHEREAS, Seller and Purchaser have entered into that certain Asset
Purchase Agreement, dated as of July 19, 1999 (as hereafter amended, modified
or supplemented, the "Agreement"); and WHEREAS, Seller and Purchaser
desire to amend the Agreement pursuant to the terms of this Amendment;

NOW THEREFORE, in consideration of the premises and the mutual agreements
and covenants hereinafter set forth, and intending to be legally bound hereby,
Purchaser and Seller hereby agree as follows:

1. Section 10.01(b) of the Agreement is hereby amended by replacing the
phrase "December 30, 1999" therein by the phrase"February 24, 1999."

2. Section 5.07 of the Agreement is hereby amended by replacing the
phrase "December 30, 1999" therein by the phrase "February 24,1999."

3. From and after the date hereof each reference in the Agreement to
"this Agreement," "the Agreement," "hereunder," "hereof,""herein," or words of
like import shall mean and be a reference to the Agreement as amended by this
Amendment.

4. Except as specifically amended above, the Agreement shall remain in
full force and effect and is hereby ratified and confirmed.

5. This Amendment may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.

IN WITNESS WHEREOF, Seller and Purchaser have caused this Amendment to be
executed as of the date first written above by their respective officers
thereunto duly authorized.

THE PANDA PROJECT, INC. SILICON BANDWIDTH, INC.

By: /s/ Stanford W. Crane, Jr. By: /s/ Alan E. Salzman
----------------------------- -----------------------
Name: Stanford W. Crane, Jr. Name: Alan E. Salzman
Title: President and CEO Title: Chairman

Annex B

Text of Proposed Amendment to Panda's Articles of Incorporation

The Articles of Incorporation of this corporation are to be amended as
follows:

The first sentence of Article III is amended in its entirety to read as
follows:

A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 102,000,000 shares, consisting of
(i) 100,000,000 shares of Common Stock, $.01 par value (the "Common Stock"),
and (ii) 2,000,000 shares of Preferred Stock, $.01 par value ("Preferred
Stock").

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

THE PANDA PROJECT, INC.
951 Broken Sound Parkway
Boca Raton, Florida 33487

The undersigned hereby appoints Melissa F. Crane, with the power to
appoint her substitute, proxy to represent the undersigned and vote as
designated below all of the shares of Common Stock of The Panda Project, Inc.
(the "Company") held of record by the undersigned on January 20, 2000, at the
Annual Meeting of Shareholders to be held on February 18, 2000 and at any
adjournment thereof.

1. Approval of the Asset Purchase Agreement, dated as of July 19, 1999,
between the Company and Silicon Bandwidth, Inc. and related transactions for
the sale of substantially all of the operating assets of the Company.

[ ] FOR

[ ] AGAINST

[ ] ABSTAIN

2. Approval of an amendment to the Company's Articles of Incorporation to
increase the authorized shares of the Company's common stock, par value $.01
per share, from 50,000,000 to 100,000,000.

[ ] FOR

[ ] AGAINST

[ ] ABSTAIN

3. Election of William E. Ahearn to serve on the Company's Board of
Directors until the 2003 Annual Meeting and until his successor is duly
elected and qualified.

[ ] FOR the nominee [ ] WITHHOLD AUTHORITY to vote
for the nominee

4. Approval of Grant Thornton LLP as independent accountants for the
current fiscal year.

[ ] FOR

[ ] AGAINST

[ ] ABSTAIN

5. In his or her discretion, the proxy is authorized to vote upon such
other business as may properly come before the meeting.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE DIRECTOR NOMINEE AND "FOR" PROPOSALS 1, 2 AND 4.

Dated: _____________________________

_____________________________________
Signature

_____________________________________
Signature if held jointly

Please sign exactly as name appears to
the left. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.