SEC Info - Steelcloud Inc - S-1

SEC Info

Home

Help

Please Sign In

Steelcloud Inc · S-1 · On 5/1/00

Filed On 5/1/00 5:16pm ET · SEC File 333-36022 · Accession Number 912057-0-20765

  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 5/01/00  Steelcloud Inc                    S-1                    4:96                                     Merrill Corp/FA

Registration Statement (General Form) — Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)                 93    447K 
 2: EX-5.1      Opinion re: Legality                                   1      7K 
 3: EX-23.1     Consent of Experts or Counsel                          1      5K 
 4: EX-23.2     Consent of Experts or Counsel                          1      5K

S-1 — Registration Statement (General Form)
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business Capitalization Dividend Policy Dunn Computer Corporation Exhibits and Financial Statement Schedule Experts Indemnification of Directors and Officers Index to Financial Statements Legal Matters Management Management's Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated Financial Statements Offering, The Other Expenses of Issuance and Distribution Plan of Distribution Principal Stockholders Recent Sales of Unregistered Securities Report of Ernst & Young LLP, Independent Auditors Report of KPMG LLP, Independent Auditors Risk Factors Selling Security Holders Shares Eligible for Future Sale Special Note Regarding forward-looking Statements Stms Stockholders' equity The Offering Thomas P. Dunne Undertakings Use of Proceeds
1	1st Page - Filing Submission
"	Thomas P. Dunne
3	Dunn Computer Corporation
6	The Offering
8	Risk Factors
10	Special Note Regarding forward-looking Statements
"	Use of Proceeds
11	Dividend Policy
"	Capitalization
"	Stockholders' equity
14	Management's Discussion and Analysis of Financial Condition and Results of Operations
19	Business
26	Management
31	Principal Stockholders
36	Shares Eligible for Future Sale
37	Selling Security Holders
38	Plan of Distribution
39	Legal Matters
"	Experts
41	Index to Financial Statements
42	Report of Ernst & Young LLP, Independent Auditors
47	Notes to Consolidated Financial Statements
52	Stms
71	Report of KPMG LLP, Independent Auditors
83	Item 13. Other Expenses of Issuance and Distribution
"	Item 14. Indemnification of Directors and Officers
85	Item 15. Recent Sales of Unregistered Securities
87	Item 16. Exhibits and Financial Statement Schedule
90	Item 17. Undertakings

S-1 1st Page of 93 TOC Top Previous Next Bottom Just 1st

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000

REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
DUNN COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

[Enlarge/Download Table]

COMMONWEALTH OF VIRGINIA 5060 54-1890464
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)

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

1306 SQUIRE COURT, STERLING VIRGINIA 20166 TEL. (703) 450-0400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------

THOMAS P. DUNNE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DUNN COMPUTER CORPORATION
1306 SQUIRE COURT
STERLING, VIRGINIA 20166
(703) 450-0400
(Name, Address Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
------------------------------

COPIES TO:

JAY M. KAPLOWITZ
GERSTEN, SAVAGE & KAPLOWITZ, LLP
101 EAST 52(ND) STREET, 9(TH) FLOOR
NEW YORK, N.Y. 10022
(212) 752-9700
------------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------

CALCULATION OF REGISTRATION FEE

[Enlarge/Download Table]

PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER SECURITY PRICE FEE

Shares of Common Stock, $.001 par value(1)... 3,777,475 $2.39 $9,028,165.30 $2,383.43
Shares of Common Stock, $.001 par value...... 247,525 $3.64 900,991.00 261.63
Shares of Common Stock, $.001 par value...... 75,000 $4.57 342,750.00 90.49
Total registration fee....................... 4,100,000 $2,735.55

(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee. Based upon the average of the high and low sale prices on
April 27, 2000, as reported on the Nasdaq National Market System, pursuant
to Rule 457(c) of the Securities Action of 1933, as amended.

(1) Estimated solely for purposes of calculating the registration fee and based
upon the average of the high and low sale price of Dunn Computer
Corporation, as reported on the Nasdaq National Market on April 27, 2000.
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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

S-1 2nd Page of 93 TOC 1st Previous Next Bottom Just 2nd

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

S-1 3rd Page of 93 TOC 1st Previous Next Bottom Just 3rd

4,100,000 SHARES

DUNN COMPUTER CORPORATION

COMMON STOCK

This is an offering of 4,100,000 shares of common stock of Dunn Computer
Corporation, 3,875,000 of which may be sold upon the conversion of Series A
Convertible Preferred Stock and the exercise of 322,525 warrants. All of the
shares are being offered by the selling security holders named in this
prospectus. The proceeds from the sale of common stock will be received directly
by the selling stockholders. No proceeds will be received by the Company from
the sale of common stock offered hereby although we will receive approximately
$1,243,741 if all of the warrants, the underlying shares of which are being
registered herein, are exercised for cash. Our common stock is traded on the
Nasdaq National Market System under the symbol DNCC. On April 27, 2000, the last
reported sale price of our common stock on Nasdaq was $2.38.

PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is April 28, 2000

S-1 4th Page of 93 TOC 1st Previous Next Bottom Just 4th

TABLE OF CONTENTS

[Download Table]

PAGE
--------

Prospectus Summary.......................................... 1

Risk Factors................................................ 4

Special Note Regarding forward-looking Statements........... 6

Use of Proceeds............................................. 6

Price Range of Common Stock................................. 6

Dividend Policy............................................. 7

Capitalization.............................................. 7

Selected Historical Financial and Other Data................ 8

Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10

Business.................................................... 15

Management.................................................. 22

Principal Stockholders...................................... 27

Certain Relationships and Related Transactions.............. 28

Description of Capital Stock................................ 28

Shares Eligible for Future Sale............................. 32

Selling Security Holders.................................... 33

Plan of Distribution........................................ 34

Legal Matters............................................... 35

Experts..................................................... 35

Index to Financial Statements............................... F-1

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
OTHER DOCUMENTS TO WHICH WE REFER YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT
IS LEGAL TO SELL THESE SECURITIES.

S-1 5th Page of 93 TOC 1st Previous Next Bottom Just 5th

SUMMARY

THE SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS, THE FINANCIAL STATEMENTS AND THE NOTES THERETO. THE FOLLOWING
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN CONJUNCTION WITH,
THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO WE, US AND OUR REFER TO DUNN COMPUTER CORPORATION AND ITS
WHOLLY-OWNED SUBSIDIARIES DUNN COMPUTER CORPORATION, A DELAWARE CORPORATION,
DUNN COMPUTER OPERATING COMPANY, A VIRGINIA CORPORATION, STMS, INC., A VIRGINIA
CORPORATION, INTERNATIONAL DATA PRODUCTS INC., A MARYLAND CORPORATION AND PUERTO
RICO INDUSTRIAL MANUFACTURING OPERATIONS ACQUISITION CORP., A PUERTO RICO
CORPORATION, UNLESS OTHERWISE INDICATED.

We manufacture and market build-to-order computer systems and provide
related services to departments, agencies and offices of the federal government
and selected businesses. We provide our customers with single-source solutions
by manufacturing our own brand of desktop and portable computers and high
performance network client servers and by offering services, which include
network consulting, project implementation and technical support. We currently
derive most of our revenue from computer hardware sales to the U.S. Government,
but we also sell computer hardware and services to medium and large businesses.

In September 1997, we acquired STMS, Inc., a Virginia-based network services
company. This acquisition expanded our capabilities to provide a wide variety of
computer services, including network consulting, project implementation and
technical support. Additionally, the STMS acquisition provided us with new
opportunities to sell computer hardware into the commercial marketplace as part
of a total network solution. We believe that the rapid technological change and
increased complexity of the computer industry will result in an increasing
number of entities outsourcing total network solutions to third party providers.

On May 1, 1998, we acquired International Data Products, Corp. ("IDP") and
its affiliate, Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"),
a manufacturer of notebooks, desktops and high performance network servers. At
the date of the acquisition, IDP held a contract with the U.S. Air Force which
had potential revenues of approximately $100 million through fiscal 2003. In
May 1999, the U.S. Air Force determined not to exercise the remaining option
years under the contract and therefore terminated the contract for the
convenience of the government. As a result of the termination, the
recoverability of the Company's goodwill associated with the IDP acquisition was
significantly impaired. Accordingly, management recorded an impairment charge of
approximately $21 million during 1999. During fiscal 2000, PRIMO was awarded a
$16 million contract with the Puerto Rican Government which will require the
assembly of notebooks in our ISO 9000 certified facility in Puerto Rico. In
addition, we are currently proposing on phase II of the contract with the Puerto
Rican Government which will be awarded in fiscal 2000.

We sell our products and services to more than 950 customers, including
customers from agencies within the Department of Defense, Department of Justice,
Administrative Office of the U.S. Courts, Social Security Administration,
Lockheed Martin Corporation, Blue Cross and Blue Shield Association and Inova
Health Care Systems, Inc. In addition, we have been expanding our commercial
sales to Fortune 1000 companies.

We intend to continue our strategy of increasing revenues and profits by
providing the Government market and selected businesses with single-source
computer network solutions. We plan to achieve this objective by:

- leveraging our Government customer base to increase sales of products and
network services;

S-1 6th Page of 93 TOC 1st Previous Next Bottom Just 6th

- targeting the commercial market to expand the sales of our brand name
computer hardware as part of a total network solution; and

- focusing on product quality.
------------------------

Our principal executive offices are located at 1306 Squire Court, Sterling,
Virginia 20166 and our telephone number is (703) 450-0400.

THE OFFERING

[Enlarge/Download Table]

Common stock offered......................... 4,100,000 shares
Common stock outstanding..................... 9,424,680 shares
Use of proceeds.............................. We will not receive any proceeds from the
sale of the shares of common stock by the
selling security holders, although we will
receive approximately $1,243,741 if all of
the warrants, the underlying shares of which
are being registered herein, are exercised
for cash.
Nasdaq National Market Symbol................ DNCC

The number of shares of common stock outstanding is 9,424,680 as of
April 27, 2000. This does not include 2,222,575 shares issuable upon the
exercise of currently outstanding stock options and warrants.

S-1 7th Page of 93 TOC 1st Previous Next Bottom Just 7th

DUNN SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The summary consolidated financial information set forth below is qualified
by and should be read in conjunction with the consolidated financial statements
and the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.

[Enlarge/Download Table]

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................... 21,766 66,888 34,475 11,712 7,128
Gross profit................................... 4,217 11,919 6,494 2,027 1,481
Income (loss) from operations.................. 2,019 1,936 (31,255) (562) (425)
Net income (loss).............................. 1,322 980 (33,607) (548) 161
Earnings (loss) per share (1).................. $ 0.29 $ 0.14 $ (3.57) $ (0.06) $ 0.02
Earnings (loss) per share assuming dilution
(1).......................................... $ 0.28 $ 0.13 $ (3.57) $ (0.06) $ 0.02
Weighted average shares outstanding............ 4,552 7,231 9,404 9,391 9,423
Weighted average shares assuming dilution...... 4,679 7,492 9,404 9,391 9,423

[Download Table]

JANUARY 31, 2000
----------------
(UNAUDITED)

CONSOLIDATED BALANCE SHEET DATA:
Working Capital............................................. 844
Total assets................................................ 21,048
Long-term debt.............................................. 2,703
Total liabilities........................................... 16,055
Stockholders' equity........................................ 4,993

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

(1) The earnings per share amounts prior to fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE. For further discussion of earnings per share
and the impact of Statement No. 128, see Note 2 of the notes to Dunn's
consolidated financial statements included herein.

S-1 8th Page of 93 TOC 1st Previous Next Bottom Just 8th

RISK FACTORS

PURCHASING SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. BEFORE
DOING SO, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS.

IF WE CONTINUE TO EXPERIENCE SIGNIFICANT LOSSES OUR OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED.

We incurred a loss of approximately $33,600,000 during the fiscal year ended
October 31, 1999 and may incur losses in the future. Any future losses that are
significant could materially adversely affect our operations.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

The market for our products and services is highly competitive. Many of our
competitors offer broader product lines and have substantially greater
financial, technical, marketing and other resources than us, which could
seriously harm our net sales and results of operation. Additionally, our
competitors may receive beneficial prices from purchasing component parts in
large quantities and may be party to product and process technology license
arrangement that are more favorable in terms of pricing and availability than
our arrangements. As a result, we may have difficulty increasing our market
share.

RAPID CHANGE IN TECHNOLOGY MAY CAUSE A PORTION OF OUR INVENTORY TO BECOME
OBSOLETE.

The computer products market is characterized by rapid technological change
and the frequent introduction of new products and enhancements. While we strive
to maintain a just-in-time inventory systems, there are certain computer
products held in our inventory can become obsolete at any given time, which
could materially adversely affect our financial condition and results of
operation.

IF WE ARE UNABLE TO ATTRACT, ASSIMILATE AND RETAIN TECHNICAL PERSONNEL, OUR
BUSINESS COULD BE SERIOUSLY HARMED.

Our future success is largely dependent upon our ability to identify,
attract, hire, train, retain and motivate highly skilled technical personnel.
Competition in this market is intense, and we cannot be certain that we will be
able to attract, assimilate or retain sufficiently qualified personnel. Our
inability to do so could have a material adverse effect on our business, results
of operations and financial condition.

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FLUCTUATE.

Our operating results have in the past fluctuated widely and we expect this
trend to continue in the future. As a result the market price of our common
stock could be volatile. In the past, following periods of volatility in the
market price of stock, many companies have been the object of securities class
action litigation. If we were to be sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources which could adversely effect our results of operations.

WE ARE DEPENDENT ON THE GOVERNMENT MARKET.

For the three months ended January 31, 2000 and for the fiscal years ended
October 31, 1999 and 1998 approximately 62%, 65% and 75%, respectively, of our
revenues were derived from government contract programs. If we are unable to
continue to participate in government contract programs or if government
contracting policies are changed our business and results of operations could be
materially harmed. Additionally, most government contracts are subject to
modification or termination in the

S-1 9th Page of 93 TOC 1st Previous Next Bottom Just 9th

event of changes in funding and our contractual costs and revenues are subject
to adjustment as a result of governmental audits.

A significant amount of our revenues are derived from sales made through
major procurement programs awarded by the government, which include contracts
with General Services Administration, Department of Defense and the
Administration Office of the U.S. Courts. If we are unable to renew or replace
those contracts our results of operations could be materially adversely
affected.

ANY ACQUISITION THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE.

We have in the past acquired or invested in complementary businesses,
technologies, services and products. At present time, we do not anticipate that
we will execute additional acquisitions. Should the opportunity for a
acquisition present itself in the future, we will make every effort to handle
such acquisitions and investments in an efficient manner. However, they could
disrupt our ongoing business, distract our management and employees and increase
our expenses. For example, if we acquire a company, we could have difficulty in
assimilating that company's personnel, operations, technology and software, and
the target company's key personnel may decide not to work for us. Additionally,
we may decide to pay for future acquisitions, if any, by issuing shares of
common stock or debt or equity securities convertible into shares of common
stock. This would result in dilution of your investment.

THE LOSS OF THE SERVICES OF THOMAS P. DUNNE, COULD SERIOUSLY HARM OUR BUSINESS.

Our future success depends, to a significant extent, on the continued
services of our senior management and our ability to retain and motivate our
other key employees. Specifically the loss of the services of Mr. Dunne, would
have a material adverse effect on our business, results of operations and
financial condition. We do not currently maintain key-man life insurance on any
of our senior management or other key employees.

OUR PRESIDENT CONTROLS A SIGNIFICANT PORTION OF OUR COMMON STOCK, THEREFORE YOU
MAY HAVE NO EFFECTIVE VOICE IN OUR MANAGEMENT.

Our President, Mr. Dunne, owns approximately 25% of our common stock.
Accordingly, our President will be able to exercise significant influence over
all matters requiring stockholder approval, including the election of all
directors and approval of significant corporate transactions. If you purchase
shares of our common stock, you may have no effective voice in our management.

IF OUR COMPETITORS COMMENCE PROTEST PROCEEDINGS OF OUR GOVERNMENT CONTRACTS OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED.

In the past some of our competitors have commenced proceedings protesting
our Government contracts. We have in the past either settled or defended these
actions based on our assessment of the proceedings. In the past one or more of
these proceedings or settlement agreements have had a material impact on the
operations of IDP, our wholly-owned subsidiary. If protest proceedings are
brought against us or any of our subsidiaries in the future our business could
be materially harmed.

S-1 10th Page of 93 TOC 1st Previous Next Bottom Just 10th

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information included in this prospectus may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. This information may be subject to factors that
may cause our actual results to be materially different from future results
expressed or implied by any forward-looking statements. These factors include
the risks described in Risk Factors. Forward-looking statements involve
assumptions and describe our future plans, strategies and expectations, and you
can generally identify them by their use of the words may, will, should, expect,
anticipate, estimate, believe, intent or project or the negative of these words
or other variations on these words or similar terminology.

USE OF PROCEEDS

We will receive no proceeds from the sale of shares of common stock owned by
the selling security holders, although we would receive approximately $1,243,741
if all the warrants, the underlying shares of which are being registered herein,
are exercised for cash. All proceeds from the sale of shares of common stock
owned by the selling security holders will be for their own accounts. See
"Selling Security Holders."

PRICE RANGE OF DUNN'S COMMON STOCK

Prior to the quotation of the Company's Common Stock beginning on April 22,
1997, there was no established trading market for the Company's common stock.
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on The Nasdaq National Market under the symbol DNCC. The following
table sets forth the high and low selling prices as reported by The Nasdaq
National Market for the fiscal quarter indicated. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.

[Download Table]

FISCAL 1998 HIGH LOW
----------- -------- --------

First Quarter............................................... $10.500 $6.625
Second Quarter.............................................. $10.375 $8.188
Third Quarter............................................... $ 9.938 $7.483
Fourth Quarter.............................................. $ 4.750 $1.938

[Download Table]

FISCAL 1999 HIGH LOW
----------- -------- --------

First Quarter............................................... $ 6.281 $2.781
Second Quarter.............................................. $ 4.938 $2.031
Third Quarter............................................... $ 2.750 $1.969
Fourth Quarter.............................................. $ 2.406 $1.031

[Download Table]

FISCAL 2000 HIGH LOW
----------- -------- --------

First Quarter............................................... $ 4.844 $1.000
Second Quarter (through April 27, 2000)..................... $ 4.281 $2.000

On April 27, 2000 the closing price of our common stock as reported by The
Nasdaq National Market was $2.37 per share. There were approximately 1,500
shareholders of record of our common stock as of such date.

S-1 11th Page of 93 TOC 1st Previous Next Bottom Just 11th

DIVIDEND POLICY

We have never paid or declared a dividend. The payment of cash dividends, if
any, in the future is within the discretion of our Board of Directors and will
depend upon our earnings, capital requirements, financial condition and other
relevant factors. We intend, for the foreseeable future, to retain future
earnings for use in our business.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
January 31, 2000: (i) on an actual basis; and (ii) on a pro forma basis to
reflect the sale of $3.0 million of Series A Convertible Preferred Stock and the
immediate conversion to 1,382,818 shares of Common Stock. This table should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.

[Enlarge/Download Table]

JANUARY 31, 2000
-------------------------
ACTUAL PRO FORMA
----------- -----------
(UNAUDITED)

Long-term debt:
Notes payable............................................. 403,234 403,234
Line of credit............................................ 2,300,000 2,300,000
----------- -----------
Total long-term debt.................................... 2,703,234 2,703,234

Stockholders' equity:
Series A Convertible Preferred Stock, $0.001 par value per
share; 3,000 shares authorized; no shares issued and
outstanding -- --
Common Stock, $0.001 par value per share;
20,000,000 shares authorized; 9,424,680 and
10,807,498 shares issued and outstanding for Actual and
Pro Forma, respectively (2)............................. 9,425 10,808
Additional paid-in capital (1)............................ 37,737,057 41,568,408
Treasury stock, 400,000 shares............................ (3,432,500) (3,432,500)
Accumulated deficit (1)................................... (29,320,888) (30,253,622)
----------- -----------
Total stockholders' equity.............................. 4,993,094 7,893,094
----------- -----------
Total capitalization.................................. 7,696,328 10,596,328
=========== ===========

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

(1) The Series A Convertible Preferred Stock is convertible into Common Stock at
a price equal to the lesser of 85% of the average of the three lowest
closing bid prices of the Common Stock for the 25 days preceding the
conversion date or $3.64. In addition, the conversion price cannot drop
below $1.60 for the 90-day period following the closing date. The intrinsic
value of this feature is reflected as an addition to accumulated deficit and
an increase to additional paid-in capital based on the assumed conversion to
Common Stock.

(2) Excludes (i) 2,500,000 shares reserved for issuance under the 1997 Stock
Option Plan (see Management--Incentive Stock Option Plan), (ii) 100,000
shares reserved for issuance upon the exercise of outstanding stock purchase
warrants and (iii) 322,525 shares reserved for issuance upon the exercise of
a stock purchase warrant granted in connection with the Series A Convertible
Preferred Stock offering.

S-1 12th Page of 93 TOC 1st Previous Next Bottom Just 12th

DUNN SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected consolidated financial data of Dunn should be read in
conjunction with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The consolidated statement of operations
data set forth below with respect to the fiscal years ended October 31, 1997,
1998 and 1999 and the consolidated balance sheet data as of October 31, 1998 and
1999 is derived from and is referenced to the audited consolidated financial
statements of Dunn included elsewhere in this Prospectus. The consolidated
balance sheet data as of October 31, 1995, 1996 and 1997 and the consolidated
statement of operations for the years ended October 31, 1995 and 1996 are
derived from audited consolidated financial statements of Dunn not included in
this Prospectus.

In the opinion of Dunn's management, the interim financial data reflect all
adjustments necessary to present fairly the results of operations for the three
months ended January 31, 1999 and 2000 and Dunn's financial position at
January 31, 2000. These adjustments are of a normal, recurring nature. The
results of operations of the interim periods are not necessarily indicative of
results that may be expected for a year.

[Enlarge/Download Table]

THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------------------------- --------------------
1995 1996 1997 (2) 1998 (3) 1999 1999 2000
-------- -------- -------- -------- -------- -------- ---------
(UNAUDITED)

CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net Revenues......................... $7,491 $18,099 $21,766 66,888 34,475 11,712 7,128
Costs of revenues.................... 6,046 14,103 17,549 54,969 27,981 9,685 5,647
Gross profit......................... 1,445 3,996 4,217 11,919 6,494 2,027 1,481
Selling, general and
administrative..................... 966 1,972 2,198 9,983 37,749 2,589 1,906
Income (loss) from operations........ 479 2,024 2,019 1,936 (31,255) (562) (425)
Other income (expense)............... 8 (9) 98 (270) (2,911) (211) (164)
Net income (loss) from operations
before extraordinary item.......... 487 2,015 2,117 1,666 (34,166) (773) (589)
Extraordinary Gain--early
extinguishments of debt............ 0 0 0 0 0 0 750
Net income (loss) before income
taxes.............................. 487 2,015 2,117 1,666 (34,166) (773) 161
Provision for (benefit from) income
taxes.............................. 244 776 795 686 (559) (225) 0
Net income (loss).................... $ 243 $ 1,239 $ 1,322 980 (33,607) (548) 161
Earnings (loss) per share (1)........ $ 0.06 $ 0.31 $ 0.29 $ 0.14 $ (3.57) (0.06) 0.02
Earning (loss) per share(1) assuming
dilution........................... $ 0.06 $ 0.31 $ 0.28 $ 0.13 $ (3.57) (0.06) 0.02
Weighted average shares
outstanding(1)..................... 4,000 4,000 4,552 7,231 9,404 9,391 9,423
Weighted average shares
outstanding(1) assuming
dilution(1)........................ 4,000 4,000 4,679 7,492 9,404 9,391 9,423

S-1 13th Page of 93 TOC 1st Previous Next Bottom Just 13th

[Enlarge/Download Table]

OCTOBER 31, JANUARY 31,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)

CONSOLIDATED BALANCE SHEET DATA:
Working Capital................................. $ 512 $1,722 $ 4,339 5,773 (1,422) (844)
Total assets.................................... 3,647 5,275 18,703 62,965 22,287 21,048
Long-term debt.................................. -- -- 75 51 2,845 2,703
Total liabilities............................... 3,047 3,335 10,465 24,592 17,470 16,055
Stockholders' equity............................ 600 1,939 8,238 38,373 4,817 4,993

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

(2) Includes the activity of STMS from September 12, 1997 (date of acquisition).

(3) Includes the activity of IDP and PRIMO from May 1, 1998 (date of
acquisition).

S-1 14th Page of 93 TOC 1st Previous Next Bottom Just 14th

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

OVERVIEW

We manufacture custom computer systems and provide related service to
departments, agencies and offices of the federal government and selected
businesses. We provide our customers with single-source solutions by
manufacturing our own brand of desktop and portable computers and high
performance network client servers and offering services, which include network
consulting, project implementation, and technical support. We currently derive
revenues from hardware sales to the government and to medium and large
businesses. We sell our products and services to more than 300 customers,
including entities within the Department of Defense, Administrative Office of
the U.S. Courts, Lockheed Martin Corporation, Blue Cross and Blue Shield
Association and the District of Columbia Government.

We derive a majority of our revenues from government contracts. Government
contracts, by their terms, generally can be terminated at anytime, without cause
for the convenience of the government. If a government contract is so
terminated, the contractor generally is entitled to receive compensation for the
services provided or certain costs incurred at the time of termination and a
reasonable profit on the contract work performed prior to the date of
termination. In addition, all government contracts require compliance with
various contract provisions and procurement regulations and in certain cases,
accounting and audit requirements. If not cured, certain violations of these
regulations could result in the termination of the contract, imposition of
fines, and suspension or debarment from competing for or receiving awards of
additional government contracts. If we were excluded from federal procurements,
or if any of our significant government contracts or the imposition of penalties
could have a material adverse effect on our business.

OVERVIEW OF FISCAL 1999

In fiscal year 1999, we experienced a significant change in our financial
results as compared to fiscal year 1998 as discussed below.

TERMINATION OF A SIGNIFICANT CONTRACT

In May 1999, the U.S. Air Force determined not to exercise the remaining
option years under the "Desktop V" (DTV) contract and therefore terminated the
contract for all participating vendors. Initially awarded to IDP, the DTV
contract was our largest contract. Management believed at the date of the IDP
acquisition, the contract would be renewed by the government through fiscal year
2003 and would generate over $100 million in revenues during that time. As a
result of the termination of this contract, the recoverability of Dunn's
goodwill associated with the IDP acquisition was significantly impaired.
Accordingly, management recorded an impairment charge of approximately
$21 million during 1999.

Additionally, the Small Business Administration (SBA) ruled that the U.S.
Air Force must terminate the contract for the convenience of the government.
Under a termination for convenience, the government shall reimburse Dunn for all
costs incurred in the performance of the contract. We are currently negotiating
a settlement with the government and have submitted our reimbursement proposal.
As of January 31, 2000, no settlement agreement has been reached. We cannot
anticipate the amount of the settlement, if any, at this time.

Under the terms of the DTV contract, we were required to maintain certain
inventory spares for warranty purposes. Due to the termination of the contract,
a considerable amount of these spares became obsolete. Accordingly, we recorded
an inventory charge during fiscal 1999 of approximately

S-1 15th Page of 93 TOC 1st Previous Next Bottom Just 15th

$2 million relating to these items. We are seeking reimbursement of these items
in the settlement with the government.

DELAY OF A CONTRACT AWARD

In January 1999, we were one of several vendors to be awarded a contract to
supply laptops to the Puerto Rican government. The contract was protested and
hence delayed due to negotiations between the government and vendors in order to
resolve the protest issues. The protest was ultimately resolved and we were
re-awarded the contract in January 2000. During that 12-month delay period,
management determined to continue operations at our Puerto Rican facility in
anticipation of the contract. Accordingly, we incurred significant costs to
maintain the facility which resulted in an operating loss for our Puerto Rican
subsidiary for fiscal 1999.

CHANGES IN FEDERAL CONTRACTS

In fiscal year 1999, our revenues from computer sales to the federal
government were adversely affected due to changes in procurement policies. The
changes in the policies included: (a) decentralization of purchasing decisions
outside of the Washington DC area, where Dunn has its most significant sales
coverage; (b) the ability of computer manufacturers (i.e. Dell, Compaq) to sell
directly to the federal government; (c) a continual decline in PC prices
throughout 1999 which resulted Dunn's not participating in certain government
proposals for which adequate margins could not be achieved. Management believes
that this trend will continue in future periods. As such, we intend to focus our
efforts on repeat federal government business as well as maintaining
relationships with our current government customers which may provide additional
opportunities within the federal market.

INCREASES IN MEMORY PRICES

Memory chip prices increased dramatically in late 1999. As a result we
decided to hold and/or delay shipments until memory prices subsided and each
transaction remained profitable. However, in certain circumstances, we reduced
our gross profit margin on certain sales in order to meet contractual
requirements and accommodate the increasing price of memory. It should be noted
that the increase in memory prices have significantly subsided subsequent to
October 31, 1999.

Management believes it has taken the appropriate actions to avoid and/or
mitigate Dunn's exposure to these types of factors in future years. These
actions include greater saturation in the commercial markets, diversification of
our product mix and developing partnerships with key commercial organizations
within the industry. While we are confident that approach will mitigate our
exposure, there can be no assurance that we will be successful with the
implementation of these actions or that the profit levels from these actions
will increase.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED
JANUARY 31,1999.

Net revenues for the quarter ended January 31, 2000 were $7,128,063 as
compared to $11,711,620 for the quarter ended January 31, 1999, a decrease of
39%. The decrease in revenues is primarily due to the May 1999 termination of a
significant contract with the U.S. Air Force. During fiscal 2000, the Company
has executed strategies to develop new markets and continue to diversify its
product mix in order to continue the revenue growth.

Gross margin, as a percentage of sales, increased to 20.8% from 17.3% for
the quarter ended January 31, 2000 and 1999, respectively. The increase in gross
margin is due to a growth in higher margin sales in our product mix.

S-1 16th Page of 93 TOC 1st Previous Next Bottom Just 16th

For the quarters ended January 31, selling and marketing expenses decreased
from $750,887 in fiscal 1999 to $299,810 in fiscal 2000. The decrease is
attributable to the elimation of expensive marketing programs as well as the
utilization of co-operative marketing arrangements with certain vendors which
reduced the overall marketing costs.

General and administrative expenses decreased from $1,646,914 for the
quarter ended January 31, 1999 to $1,519,265 for the quarter ended January 31,
2000. The decrease is a result of improved cost controls as well as planned cost
reductions of certain operating expenses that were implemented during the
quarter. We will continue to focus on cost controls so that the projected
revenue growth will not be offset by proportionate increases in operating
expenses.

Interest expense, net of interest income, decreased from $211,170 for the
quarter ended January 31, 1999 to $160,919 for the quarter ended January 31,
2000. This decrease is a direct result of the reduction of our outstanding debt.
During the first quarter, we utilitized cash proceeds provided from operations
to extinguish debt from the line of credit assumed with our purchase of
International Data Products. On December 29, 1999, we paid the financial
institution approximately $3.0 million towards the outstanding principal
balance. In conjunction with the payment, the financial instituition forgave
$750,000 of the outstanding debt which was has properly recorded as an
extraordinary gain for the quarter ended January 31, 2000. The remaining
outstanding principal balance of approximately $832,000 was converted to a two
year note maturing in January 2002 bearing interest at the prime rate plus one
percent.

We reported net income of $160,702 for the quarter ended January 31, 2000 as
compared to a net loss of $547,673 for the same period in the prior year. This
is the result of our cost controls, improved margins, product diversification
and market focus as mentioned above.

FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998

Net revenues for fiscal year ended October 31, 1999 decreased approximately
48% to $34.5 million from $66.9 million for fiscal year ended October 31, 1998.
This decrease was primarily due to loss of the DTV contract with the U.S. Air
Force. We anticipated that this contract would generate revenues of
approximately $65 million for fiscal years 1999, 2000 and 2001. Fiscal year 1998
and 1999 revenues under this contract were approximately $18 million and
$3 million, respectively.

Gross profit for fiscal 1999 decreased by approximately 46% to $6.5 million
from $11.9 million. This decrease is in proportion with the decrease in net
revenues. Gross profit as a percentage of net revenues during the same periods
slightly increased to 18.8% from 17.8%. The gross profit percentage increase is
a direct result of greater proportion of higher-margin sales of services.

Selling and marketing expense decreased for fiscal 1999 by 37% to
$2.3 million from $3.7 million for fiscal 1998. During fiscal 1999, we
consolidated our sales and marketing departments with that of IDP which resulted
in an overall decrease of expenses.

General and administrative expense for fiscal 1999 increased 171% to
$14.1 million from $5.2 million for fiscal 1998. As a percentage of net
revenues, general and administrative expense increased to 41% for fiscal 1999
from 7.8% for fiscal 1998. We incurred significant general and administrative
costs during fiscal 1999. These costs were associated with the termination of
the DTV contract, the consolidation and integration of the IDP facilities and
resources, termination of certain benefit plans, and legal expenses associated
with all of these factors. Although we consider a majority of the 1999 general
and administrative expenses to be nonrecurring, appropriate actions have been
taken to significantly reduce general and administrative expenses in future
periods.

Other expense including interest for fiscal 1999 increased to approximately
$2,911,000 from approximately $271,000 for fiscal 1998. The increase was
primarily due to the accrual of $2 million for an employee arbitration award. In
addition, overall interest expense increased as a result of interest

S-1 17th Page of 93 TOC 1st Previous Next Bottom Just 17th

expenses required to support the debt assumed with the acquisition of IDP,
interest expenses associated with the new debt obtained in 1999, and interest
expense associated with certain operating leases. In fiscal 1999, we recorded
gains on the sale of certain leased assets which reduced the overall other
expense. In addition, we recorded an income tax benefit of approximately
$559,000 in fiscal 1999.

FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997

Net revenues for fiscal year ended October 31, 1998 increased 206% to
$66.9 million from $21.8 million for fiscal year ended October 31, 1997. This
increase was primarily due to additional revenue resulting from the third
quarter acquisition of International Data Products, Inc. Net revenues derived
from IDP's operations for fiscal 1998 amounted to approximately $40.5 million.

Gross profit for fiscal 1998 increased 183% to $11.9 million from
$4.2 million for fiscal 1997. However, the gross profit as a percentage of net
revenues during the same periods decreased to 17.8% from 19.4%. The decrease in
gross profit margin is a result of an increase in the percentage of lower margin
hardware sales by IDP and excess production capacity. We closed the production
facility located in Gaithersburg, Maryland.

Selling and marketing expense increased for fiscal 1997 by 336% to
$3,672,000 from $842,000 for fiscal 1997. During the same periods, as a
percentage of net revenues, selling and marketing expenses increased to 5.5%
from 3.9%. The increase was primarily attributable to the acquisition of IDP,
increased advertising in selected publications, increased attendance at trade
shows and the development of a marketing campaign aimed at selected businesses.

General and administrative expense for fiscal 1998 increased 365% to
$6.3 million from $1.4 million for fiscal 1997. As a percentage of net revenues,
general and administrative expense increased to 9.4% for fiscal 1998 from 6.2%
for fiscal 1997. We charged $564,776 of IDP acquisition integration costs to G&A
for the fiscal year. We also recognized approximately $545,000 in amortization
expense for fiscal 1998 as compared to $22,000 for fiscal 1997. Our costs
increased in almost all aspects of general and administrative expenses as a
result of the IDP acquisition. We have taken various actions to reduce general
and administrative expenses in future periods.

Other income (expense) including interest for fiscal 1998 decreased to an
expense of $271,000 from an income of $98,000 for fiscal 1997. The decrease was
a result of increased interest expense required to support the additional debt
assumed as a result of the acquisition of IDP, and interest expense associated
with certain operating leases. Our effective tax rate increased to 41% for
fiscal 1998 from 37.5% for fiscal 1997 as a result of the increase in the
amortization of goodwill which is not deductible for tax purposes. Our net
income declined by 26% for fiscal 1998 to $980,000 from $1.3 million for fiscal
1997. Net income as a percentage of net revenues during the same periods
declined to 1.5% from 6.1%.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended January 31, 2000, we produced cash flow of
$4,377,963 from our operating activities. We generated cash of $1,433,119 and
$1,416,493 from the net collection of accounts receivable and net receipts for
unearned products and services, respectively. The purchase of inventory of
$253,427 and the net payment of accounts payable of $1,425,866 were the
principal use of funds.

Funds used for investing activities consisted of the purchase of property
and equipment of $247,416. Net cash used for financing activities consisted of
repayments on the line of credit of $3,790,705 and payments on notes payable of
$23,478. In February 2000, we restructured our existing line of credit from
$15 million to $5 million with an expiration date of November 30, 2000 bearing
interest at the prime rate plus 1%. As of January 31, 2000, our outstanding
balance on the line of credit was $2,300,000.

S-1 18th Page of 93 TOC 1st Previous Next Bottom Just 18th

On March 13, 2000, we received gross proceeds of approximately $3,000,000
for the sale of Series A Convertible Preferred Stock. The Company utilized the
proceeds from this transaction to settle certain litigation and to fund
continuing operations.

As of January 31, 2000, we had a working capital deficit of approximately
$844,000. We believe the bank facility, together with cash on hand, cash
generated from operations, sales of certain lease agreements and significant
income tax refunds due will provide sufficient financial resources to finance
the current operations through fiscal 2000.

From time to time, we may pursue strategic acquisitions or mergers which may
require significant additional capital, and additional capital may be required
to satisfy unusual or infrequent expenses. In such event, we may seek additional
financing through the issuance of debt and/or equity.

S-1 19th Page of 93 TOC 1st Previous Next Bottom Just 19th

BUSINESS

GENERAL

We manufacture custom computer systems and provide related services to
departments, agencies and offices of the federal government and selected
businesses. We provide our customers with single-source solutions by
manufacturing our own brand of desktop and portable computers and high
performance network client servers and offering services, which include network
consulting, project implementation, and technical support. We currently derive
revenues from hardware sales to the government and to medium and large
businesses. We sell our products and services to more than 300 customers,
including entities within the Department of Defense, Administrative Office of
the U.S. Courts, Lockheed Martin Corporation, Blue Cross and Blue Shield
Association and the District of Columbia Government.

In September 1997, we completed the acquisition of STMS, Inc. a
Virginia-based network services company which expanded our capabilities to
provide a wide variety of services including network consulting, project
implementation and technical support. The STMS acquisition provided us with new
opportunities to sell computer hardware into the commercial marketplace as part
of a total package of information technology hardware and services tailored to
meet the commercial customers' needs. By manufacturing our own computer systems,
the cost of which represents a significant portion of the cost of a total
project, we believe that we have a sustainable competitive advantage over other
network service providers.

On May 1, 1998, we acquired International Data Products, Corp. and the net
assets of IDP's Puerto Rican affiliate, Puerto Rico Industrial Manufacturing
Operations, Corp. for approximately $21 million, consisting of a combination of
cash and common stock. When we acquired IDP, was a leading supplier of portable
and desktop computers to the government. In May 1998, in connection with the IDP
acquisition, we completed a public offering of 3,491,493 shares of common stock
for net proceeds of $26,287,866.

In fiscal year 1999, we recorded a significant goodwill impairment charge of
approximately $21 million associated with the IDP acquisition. This was the
result of our loss of a significant contract with the U.S. Air Force which was
terminated for the convenience of the government during fiscal 1999. On the date
we acquired IDP we anticipated revenues from this contract to be approximately
$100 million had all option years been exercised. We later determined that the
loss of this contract significantly impaired our ability to recover the goodwill
associated with the purchase. Accordingly, we recorded the goodwill impairment
charge.

We intend to establish ourselves as a leading provider of network solutions
to both the government and commercial markets. One of the key elements of this
strategy is integrating our hardware and network services into a total solution
for our government customers. In the commercial market, management plans to
leverage its customer relationships developed through sales of our network
services to expand sales of our hardware products.

OUR PRODUCTS AND SERVICES

Computer Hardware Products

DESKTOPS: We manufacture a high performance line of Pentium II and Pentium
III based desktop computers that may be used on a standalone basis or as part of
a network. These systems are based on Intel motherboards to guarantee high
reliability and are "wired for management" to allow these desktops, when
connected to the network, to be monitored and controlled, by the network. This
technology helps ensure that desktops connected to a network are properly
configured and consistently operating the same level of software.

S-1 20th Page of 93 TOC 1st Previous Next Bottom Just 20th

SERVERS: We market a single, dual or quad processor version of the Intel
Pentium III and Zeon processor based systems. These servers are designed to give
the customer the highest level of performance and reliability available in the
market today. Based on Intel motherboards, these systems when installed in
conjunction with our desktops provide the "wired for management" technology to
ensure high availability and consistently configured systems on the network. We
believe that the server market offers opportunities for higher profit margins
compared to other sectors in the industry. With the ever increasing popularity
of the Internet, the server market represents a significant growth sector for
us. Additionally, server sales complement our services business due to the
complexity of server installation and maintenance.

LAPTOPS: We assemble, on a brand name basis, a state-of-the-art line of
Laptops. These Laptops are produced in our Puerto Rico facility.

NETWORKING HARDWARE & SOFTWARE: We integrate, install, and maintain major
brand networking hardware and software. We have partnerships with companies like
Network Associates, Inc (NAI), Cisco Systems, Inc (Cisco Systems) and
Marconi, Inc.

ORIGINAL EQUIPMENT MANUFACTURE (OEM): We manufacture, on an OEM basis,
hardware products for major network solutions providers.

TECHNICAL SERVICES: We provide network design, implementation, and support
services for wide-area and local-area networks. These services are provided to
commercial, federal government and state/local government clients in two
methods: Project-based and staffing-based engagements.

PROJECT-BASED ENGAGEMENTS: We provide network analysis, design, and
implementation services primarily in the form of short-term (less than three
months) projects. Specific completion criteria are achieved and deliverables
submitted to signify the end of the project. These network-engineering services
are performed for a fixed-fee upon completion or on an hourly labor basis at the
pre-negotiated price and estimated levels of effort.

Specific project-based services that we perform include network design,
systems implementation, integration, network security, software migrations, and
messaging system implementation. We strive to maintain expertise in specific
areas and technologies rather than be generalists in all IT areas. By
maintaining a focus, we believe we can provide highly skilled professionals and
services that leverage our experience for maximum benefit to the client. Project
management is the key component of our strategy and success in project-based
engagements.

STAFF AUGMENTATION: We provide network support services to our clients in
the form of fixed-rate hourly engineering services. Contracts with commercial
and government clients typically range from one month to one year in length.
Staffing services consist of placing one or more network engineers, user support
technicians, or programmers on-site with a client. These professionals perform
work as a "virtual" employee for the client and typically work under the
direction and changing needs of the client's management. We provide skilled
technical professionals to our customers, along with technical support from our
vendor partners such as Microsoft, Novell, Cisco, and Network Associates.

Our success in this area is achieved largely due to contract renewals and
increasing staffing requirements from existing customers. The market for
staffing is consistently increasing as customers try to focus on their core
business and contract us to handle their IT support requirements.

GOVERNMENT CONTRACTS

In fiscal 1999, we derived approximately 65% of our revenues from sales of
hardware and services to the Government pursuant to contracts with the General
Services Administration (GSA) or other agency-specific contracts. Most of these
contracts are leasing of equipment, blanket purchase agreement

S-1 21st Page of 93 TOC 1st Previous Next Bottom Just 21st

or "indefinite delivery, indefinite quantity" ("IDIQ") contracts. Government
contracts, by their terms, generally can be terminated at anytime, without cause
for the convenience of the government. If a government contract is so
terminated, the contractor generally is entitled to receive compensation for the
services provided or certain costs incurred at the time of termination and a
reasonable profit on the contract work performed prior to the date of
termination. In addition, all government contracts require compliance with
various contract provisions and procurement regulations and in certain cases,
accounting and audit requirements. If not cured, certain violations of these
regulations could result in the termination of the contract, imposition of
fines, and suspension or debarment from competing for or receiving awards of
additional government contracts. Exclusion of Dunn from federal procurements,
the termination of any of our significant government contracts or the imposition
of such penalties could have a material adverse effect on our operations and
financial condition.

Substantially all of our government customers purchase equipment and
services from us on a long-term contract basis. By contrast, most of our
commercial customers purchase equipment and services by means of task and open
purchase orders.

DESKTOP V CONTRACT. Initially awarded to IDP, this contract was not renewed
in May 1999 and was officially terminated for the convenience of the government
on October 8, 1999. We are currently negotiating a settlement with the
government for recovery of certain costs incurred to support the contract. A
settlement proposal has been submitted to the government, however, no agreement
has been reached as of January 31, 2000. We cannot estimate any potential
settlement amounts at this time.

Set forth below is a description of some of our more significant contracts
as of April 27, 2000.

GSA CONTRACT. We have a multiple award schedule contract with GSA. Our GSA
contract was awarded in April 1996 and is valid through March 31, 2002. GSA
contracts enable government IT purchasers to acquire all of their requirements
from a particular vendor and largely limits the competition to selected vendors
holding GSA contracts. For fiscal year 1999, our GSA contract had sales of
$5.9 million, which accounted for approximately 8.5% of our revenues.

IT-21 CONTRACT. In January 1998, IDP was awarded a contract by the Fleet &
Industrial Supply Center, Norfolk Philadelphia Detachment for the IT-21 program
at the CINCLANTFLT Norfolk, VA. This contract is a five-year equipment lease
program in which we provide a full spectrum of IT products and services to the
CINCLANTFLT headquarters. A unique aspect of this program is its "Technology
Refresh" feature in which we periodically update the installed equipment to the
latest technology at no incremental cost to the government. The leased equipment
includes servers, workstations, desktops, hubs, switches and printers. On-site
sparing and 4-hour response time are also part of the contract requirements. The
contract to date total revenue is $4.5 million.

PRSTARNET CONTRACT. After several protest delays, we were awarded a
contract with the Puerto Rican Government on January 5, 2000. We were selected
as one of several vendors to supply the Puerto Rican school systems with laptop
computers. The terms of the contract require us to deliver approximately 11,000
computers to the Puerto Rican school system by August 2000. We anticipate that
this contract will generate approximately $16 million in revenues for fiscal
year 2000.

This contract represents Phase I of the Puerto Rican Government's plan to
increase the technological education in their school system. We will bid on
Phase II during fiscal 2000, which will supply the school system with desktop
computers for all students. We cannot predict the outcome of our bid proposal.

COMMERCIAL CONTRACTS

In fiscal year 1999, we derived approximately 30% of our revenues from sales
of hardware and services to the commercial marketplace. Our commercial customer
base consists of several Fortune 500

S-1 22nd Page of 93 TOC 1st Previous Next Bottom Just 22nd

companies as well as certain small local commercial customers. We anticipate
continuing to increase our commercial customer base in the upcoming fiscal year.
We have been successful in developing and maintaining key partnerships with
industry leading companies such as Microsoft, Cisco, Sun and Network Associates.
These partnerships will enable us to further diversify our product mix and
attract high quality customers.

MANUFACTURING AND PRODUCTION

Our production capacity is 100,000 units per year in our existing Loudoun
County facility on a three-shift basis. We also lease an approximately 34,000
square-foot facility in Guayama, Puerto Rico, which is used for manufacturing,
technical support, and personal computer board level repair. The Guayama
facility is ISO 9002 certified, and has the capability to manufacture 200,000
systems per year.

COMPETITION AND MARKETING

The markets for our products and services are highly competitive. Many of
our competitors offer broader product lines, have substantially greater
financial, technical, marketing and other resources than us and may benefit from
component volume purchasing and product and process technology license
arrangements that are more favorable in terms of pricing and availability than
our arrangements. We also compete with a large number of computer systems
integrators, resellers and IT services companies. We believe that it is likely
that these competitive conditions will continue in the future. There can be no
assurance that we will continue to compete successfully against existing or new
competitors that may enter markets in which we operate.

FEDERAL GOVERNMENT MARKET. The Information Technology Reform Act (the
"ITRA") which took effect on August 8, 1996 has had a profound effect on the way
the government procures computers and related products and services. The most
sweeping changes were (a) the repeal of the Brooks Act that had granted sole
authority for purchasing IT to the GSA and, (b) the change in the GSA Schedule
from a single-year small purchase contracting program to a multi-year, IDIQ
contract with no limit on the value of purchases. Prior to the new legislation,
the GSA was responsible for overseeing all IT purchases as well as assuring fair
and open competition. The new legislation has expanded our ability to market and
sell our products to government users directly through our GSA contract and
BPA's awarded under the GSA schedule. We continue to make marketing and sales
efforts to take advantage of these changes in the federal market.

Since the passage of the ITRA, the government has increased the amount of
information products acquired through the GSA Schedule. Although we believe we
have benefitted from this reform, the emergence of the GSA Schedule as a
significant procurement vehicle has also enabled traditional mass-market
commercial computer companies to be more responsive to government requirements.
We currently compete with national commercial computer manufacturers such as
Dell Computer Corporation and Gateway 2000, Inc. for a portion of the government
market.

There has been a consolidation in the industry as a result of acquisitions
and the failure of many firms. The competition for computer sales has settled
into a small group of competitors comprised of manufacturers and systems
integrators. We believe that the government's selection criteria for vendor
selection consists of price, quality, familiarity with the vendor, and size and
financial capability of the vendor.

COMMERCIAL MARKET. The microcomputer products industry is highly
competitive. Pricing is very aggressive in the industry and we expect pricing
pressures to continue to intensify. The microcomputer products industry is also
characterized by rapid changes in technology and consumer preferences, short
product life cycles and evolving industry standards.

S-1 23rd Page of 93 TOC 1st Previous Next Bottom Just 23rd

The commercial market for IT services is a highly fragmented market served
by thousands of small value-added resellers. These companies typically service a
small geographic area and resell national brand computer and/or network
hardware. We believe that our technical services can compete effectively in the
local market because provide engineering services in conjunction with products
from our strategic partners; e.g., Network Associates, Inc., Cisco, Microsoft,
Marconi, Sun and Intel. We believe that our ability to integrate the computer
hardware (Dunn brand or any other) and networking products provides our
technical services group a competitive advantage.

Microcomputers are marketed through several distribution channels including
direct marketing, traditional microcomputer retailers, computer superstores,
consumer electronic and office supply superstores and other resellers. There are
many manufacturers of microcomputers; substantially all of which have greater
financial, marketing and technological resources than us. We compete with
manufacturers such as Compaq, Dell, Gateway, IBM and Packard Bell NEC, Inc. The
principal elements of competition are product reliability and quality,
customization, price, customer service, technical support, IT services and
product availability. There can be no assurance that we will in the future be
able to compete effectively against existing competitors, especially companies
who have historically focused their energies on the commercial market.

MARKETING: We market to select commercial accounts and a wide array of
government organizations including agencies within the Department of Defense,
civilian agencies and the judicial branch of the government. We also view the
commercial market as an increasingly important part of our business. We use an
in-house sales force and program managers to market our products and services.
Although we market nationally, our marketing efforts are concentrated in the
Washington, D.C. metropolitan area and in the state of Florida. Sales were made
primarily to target commercial accounts. In light of our pursuit of new
commercial business and the new procurement legislation, which gives different
government users the ability to purchase directly from vendors, we believe that
marketing is becoming increasingly important to our government as well as to our
commercial business.

We strive to build a strong relationship with our customers. We believe that
a key to building customer loyalty is a team of knowledgeable and responsive
account executives and technical and support staff. We assign each customer a
trained account executive, to whom subsequent calls will be directed. We believe
that these strong one-on-one relationships improve the likelihood that the
customer may consider us for future purchases. Product support technicians are
available 24 hours per day, seven days a week. We intend to continue to provide
our customers with products and technical services that offer the customer the
best value.

We use electronic commerce technologies and believe that both the government
and commercial customers will continue to expand the utilization of these
technologies. Internet and on-line computer services are being used by the
government and commercial accounts to advertise opportunities, reference vendor
information and in some cases make actual purchases. We maintain a web site on
the Internet wherein our GSA catalogue and products can be referenced. In
addition, we provide the capability for customers to download updated software
and drivers that become available. We believe that our targeted customer base
will have a greater acceptance of these interactive services because our
customers tend to have a greater familiarity with technology products and
services.

SUPPLIERS

We devote significant resources to establishing and maintaining
relationships with our suppliers. Whenever possible, we purchase directly from
component manufacturers such as Intel, Microsoft, Hitachi-Nissei, Sanyo
America, Ltd., Cisco and Chicony Corp. We also purchase multiple products
directly from large national and regional distributors such as TechData
Corporation, Ingram Micro Incorporated, Decision Support Systems Incorporated,
Wyle Electronics and Bell Micro.

S-1 24th Page of 93 TOC 1st Previous Next Bottom Just 24th

Suppliers provide us with incentives in the form of discounts, rebates,
credits, and cooperative advertising and market development funds. In accordance
with the terms of certain of our government contracts, we provide periodic
reporting of pertinent supplier contract terms and conditions to contracting
officials. As a product reseller, we must continue to obtain products at
competitive prices from leading suppliers in order to provide competitively
priced products for our customers. In the event we are unable to purchase
components from these suppliers, we have alternative suppliers we can rely upon.
We believe our relationships with our key suppliers to be good and believe that
generally there are multiple sources of supply available should the need arise.

INVENTORY

We have traditionally and will continue to purchase inventory to fill orders
received from our customers. We minimize our inventory held for warranty
purposes and do not purchase inventory for speculative purposes.

PATENTS, TRADEMARKS AND LICENSES

We do not maintain a traditional research and development group, but we work
closely with computer product suppliers and other technology developers to stay
abreast of the latest developments in computer technology. While we do not
believe that our continued success will depend upon the rights to a patent
portfolio, there can be no assurance that we will continue to have access to
existing or new technology for use in our products.

We conduct our business under the trademarks and service marks of "Dunn",
"Dunn Computer Corporation", "International Data Products," and "IDP." We
believe our trademarks and service marks have significant value and are an
important factor in the marketing of our products.

Because most software used on our computers is not owned by us, we have
entered into software licensing arrangements with several software
manufacturers, including Microsoft.

PROPERTIES

We lease a 35,000 square foot facility in Sterling, Virginia which is used
primarily for manufacturing and administrative services. The lease expires in
October 2004. During fiscal 1999, C&T Partnership, an entity comprised of Thomas
Dunne, our President, and his wife Claudia Dunne, our Vice President, sold the
facility and assigned the lease to a third party building management company.

We also lease a 20,000 square-foot facility in Guayama, Puerto Rico, which
is used for manufacturing, technical support, and personal computer board level
repair. We believe that our current facilities are adequate for our existing
needs and that additional suitable space will be available as required.

S-1 25th Page of 93 TOC 1st Previous Next Bottom Just 25th

LEGAL PROCEEDINGS

By letter dated April 15, 1998, DDI, a competitor of IDP, asserted that IDP
is bound by a settlement agreement entered into in connection with certain
litigation, calling for payments to the competitor of 1.8% of the first
$250 million of IDP's gross sales under the Desktop V contract. IDP and we
dispute this claim. On June 1, 1998, we filed a Complaint for Declaratory
Judgment in the U.S. District Court of the Eastern District of Virginia seeking
a declaration that DDI is not entitled to receive payments under the settlement
agreement. The defendant counter-claimed against us claiming it did not breach
the settlement agreement and is entitled to the payments. These matters were
litigated and on February 26, 1999, DDI was awarded $1,500 in satisfaction of
its claim. DDI has filed an appeal of the judgment. While we believe that it has
a meritorious claim for declaratory judgment and meritorious defenses to the
counter-claim, there can be no assurance that we will be successful in this
litigation and, if the appeals court rules against us, it may be required to pay
a percentage of our past revenue under the Desktop V contract to the defendant.

On July 31, 1998, we received notice from the SBA that it was denying the
request of the U.S. Air Force to waive the requirement to terminate IDP's
Desktop V contract for the convenience of the Government upon the change in
control of IDP to Dunn. We appealed the denial of the SBA to the SBA's Office of
Hearings and Appeals. On August 31, 1999, the SBA denied the appeal and ruled
that the U.S. Air Force must terminate-for-convenience the Desktop V contract.
Under a termination-for-convenience, the government is required generally to
reimburse a contractor for all costs incurred in the performance of the
contract. We are in the process of attempting to recover from the government a
portion or all of our unreimbursed costs associated with the Desktop V Contract.
Prior to this ruling by the SBA, the U.S. Air Force determined not to exercise
any of the remaining option years under the Desktop V contract on May 1, 1999.

In November 1998, a former employee of Dunn filed a demand for arbitration
with the American Arbitration Association, alleging a breach of his employment
agreement with us and seeking in excess of $2,350,000 in damages from the
Company. The Company filed an answer denying the claimant's allegations and
stating a counterclaim against the former officer for breach of the employment
agreement and for conversion of certain of our property. In a Final Arbitration
Award dated August 27, 1999, the arbitrator found in favor of the former
employee on certain of the issues presented at the arbitration and awarded the
former employee in excess of $1.6 million in damages and attorneys' fees. On
December 10, 1999, the Fairfax County Circuit Court denied our motion to vacate
the award and confirmed the award. On March 3, 2000, we executed a settlement
with the former employee whereby we paid the plaintiff $1 million and issued
approximately 225,000 shares of Common Stock. In addition, the settlement
agreement required us to file a registration statement by April 14, 2000. We are
currently in default of this provision but have received an extension through
May 2, 2000.

On December 18, 1998, the Office of the United States Attorney for the
District of Maryland, Northern Division, informed us that it was of the view
that a civil False Claims Act violation was assessable against certain parties,
including IDP, George and Oscar Fuster (the former principal owners of IDP) and
us involving allegations of fraudulent misrepresentations by the Fusters in
IDP's 1994 application for participation in the Section 8(a) program
administered by the SBA. On February 26, 1999, we and the other parties entered
into a settlement agreement with respect to this matter with the U.S. Attorney
pursuant to which the matter was settled without determination of liability
against or monetary payment by the Company.

There are routine legal claims pending against the Company, but in the
opinion of management, liabilities, if any, arising from such claims will not
have a material adverse effect on the financial condition and results of
operation of Dunn.

S-1 26th Page of 93 TOC 1st Previous Next Bottom Just 26th

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

[Enlarge/Download Table]

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

Thomas P. Dunne 58 Chairman of the Board, Chief Executive Officer, and
President

John D. Vazzana 56 Director

Claudia N. Dunne 40 Vice President, Director

VADM E. A. Burkhalter, Jr. USN 70 Director

Daniel Sinnott 65 Director

Benjamin Krieger 64 Director

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

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

JOHN D. VAZZANA has been a Class I Director of Dunn since 1994 and was Executive
Vice President and Chief Financial Officer until his resignation effective
August 31, 1999. From 1992 to 1994, Mr. Vazzana was the Chief Executive Officer
of Hitchler Industry; a manufacturer of plastic lumber made from recycled
plastic. From 1986 to 1992, Mr. Vazzana was founder and Chief Executive Officer
of NRM Steelastic, a company engaged in the manufacture of capital equipment for
the tire industry. Prior thereto, Mr. Vazzana was Executive Vice President of
C3, Inc., a federal computer systems integrating company, which he joined in
1974.

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

VICE ADMIRAL E. A. BURKHALTER, JR., USN (RET.) has been a Class II Director of
Dunn since January 1997. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc.; a consulting firm providing services in the areas of
international and domestic strategy, management policy and technology
applications, for both government and industry. Mr. Burkhalter spent 40 years as
a member of the United Stated Navy, during which time he held several positions,
including Director of Strategic

S-1 27th Page of 93 TOC 1st Previous Next Bottom Just 27th

Operations for the Chairman of the Joint Chiefs of Staff. He is currently the
Chairman of the Attorney General's Policy Advisory Panel for Law Enforcement
Technology, a member of the Director of Central Intelligence (DCI) Military
Advisory Panel and an advisor to the Defense Intelligence Agency. He is also an
Officer and Director of the Navy Submarine League.

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

BENJAMIN KRIEGER was appointed by the Board of Directors as a Class III Director
of Dunn to fill a vacancy created by the resignations of Jorge and Oscar Fuster
in November 1998. Mr. Kreiger is currently a Partner with Corporate Development
International (CDI). CDI specializes in the Pulp & Paper, Packaging, Graphic
Arts and Distribution Industries. Prior to his current employment, Mr. Krieger
was President, CEO and a Director of Ris Paper Company. Mr. Krieger began his
career with Mead Corporation which he was promoted through the Company during
his 25 year tenure.

COMMITTEES OF THE BOARD

Our board of directors has an audit Committee, comprised of the two outside
directors. In fiscal year 1999, the audit committee met 2 times. The audit
committee reviews and approves the scope of the annual audit undertaken by our
independent certified public accountants and meets with them on a regular basis
to review the progress and results of their work as well as any recommendations
they may make. Our board of directors also has a compensation committee,
comprised of the two outside Directors and Thomas P. Dunne. In fiscal year 1999,
the compensation committee met 2 times. All of the members of each committee
attended at least 75% of the meeting held by each committee on which he served.

COMPENSATION OF DIRECTORS

Dunn has not paid, and we do not presently propose to pay, compensation to
any director for acting in such capacity, except for nominal sums for attending
board of directors meetings and reimbursement for reasonable expenses in
attending those meetings. In January 1997, we granted each of our two outside
directors a stock option to purchase 20,000 shares of our common stock at an
exercise price of $4.15 per share. We believe the exercise price of $4.15 per
share was the fair market value at the time of the grants. In January 1999, we
granted each two of our outside directors, Daniel Sinnott and VADM Burkhalter
stock options to purchase an additional 10,000 shares of our common stock at an
exercise price of $5.375 per share. We believe the exercise price of $5.375 per
share was the fair market value at the time of the grants. In June 1999, we
granted two of our outside directors, Daniel Sinnott and VADM Burkhalter stock
options to purchase an additional 10,000 shares of common stock at an exercise
price of $2.03 per share. We believe the exercise price of $2.03 per share was
the fair market value at the time of the grants. All of the options granted to
the outside directors were pursuant to our 1997 Stock Option Plan described
below.

S-1 28th Page of 93 TOC 1st Previous Next Bottom Just 28th

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding compensation
paid by Dunn during each of the last three fiscal years to our Chief Executive
Officer and to each of our executive officers who were paid in excess of
$100,000.

SUMMARY COMPENSATION TABLE

[Enlarge/Download Table]

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------
---------------------- NUMBER OF OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) GRANTED
--------------------------- -------- ---------- --------- -----------------

Thomas P. Dunne................................... 1997 $240,000 -0- -0-
Chairman, Chief Executive 1998 $240,000 -0- -0-
Officer and President 1999 $240,000 -0- -0-

John D. Vazzana................................... 1997 $240,000 -0- -0-
Executive Vice President, Chief 1998 $240,000 -0- -0-
Financial Officer, and Director 1999 $160,000* -0- -0-

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

* Resigned as Executive Vice President and Chief Financial Officer effective
August 31, 1999.

EMPLOYMENT AGREEMENTS

We have an employment agreement with Thomas P. Dunne. The agreement for
Mr. Dunne has a term of three years commencing April 1997 and automatically
renew for additional one year terms unless terminated by either Dunn or the
employee. The agreement provides for a $240,000 salary and a bonus at the
discretion of the board of directors. The bonus may not exceed the lesser of 5%
of pre-tax income for the preceding fiscal year or $250,000.

INCENTIVE STOCK OPTION PLAN

Under Dunn's 1997 Stock Option Plan (the "Option Plan"), options to purchase
a maximum of 2,500,000 shares of common stock of Dunn (subject to adjustments in
the event of stock splits, stock dividends, recapitalizations and other capital
adjustments) may be granted to employees, officers and directors of Dunn and
certain other persons who provide services to Dunn.

EMPLOYEE STOCK PURCHASE PLAN

In August, 1998, the board of directors adopted an Employee Stock Purchase
Plan whereby employees may purchase Dunn stock through a payroll deduction plan.
The purchase price of the stock is 85% of the market price. All employees,
including officers but not directors, are eligible to participate in this plan.
Neither Thomas Dunne nor John Vazzana participated in this plan during fiscal
1999. The current executive officers are presently ineligible to participate in
the plan because their stock ownership exceeds five percent of the outstanding
common stock.

RETIREMENT PLANS

Dunn established a discretionary contribution plan effective May 1, 1999
(the "401(k) Plan") for its employees who have completed one month of service
with Dunn. The 401(k) Plan is administered by Merrill Lynch and permits pre-tax
contributions by participants pursuant to Section 401(k) of the Internal Revenue
Code of 1986, as amended, up to the maximum allowable contributions as
determined by the Code. Dunn may match participants' contributions on a
discretionary basis. In fiscal 1995 and 1996, Dunn contributed $0.25 for each
$1.00 contributed by the employee. Dunn contributed

S-1 29th Page of 93 TOC 1st Previous Next Bottom Just 29th

$1,800 in fiscal 1998 with respect to each of Mr. Dunne and Mr. Vazzana in
connection with their participation in the 401(k) Plan. No contributions were
made to any officers or employees during fiscal 1999.

Effective November 1, 1995, Dunn established a defined benefit plan covering
substantially all salaried employees who have completed twelve months of service
with Dunn. The Pension Plan benefits are based on the years of service and the
employee's compensation. Dunn contributes, on an annual basis, amounts
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974 ("ERISA"). Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. The assets of the Pension Plan are invested
in money markets and investment-grade corporate debt and equity instruments.
Dunn contributed an aggregate of approximately $250,000 for the Pension Plan
years ending October 31, 1995, 1996, 1997, 1998, which amount met the minimum
funding requirements under ERISA. On October 31, 1999, Dunn terminated the
defined benefit plan, which resulted in the immediate vesting of all
participants at that time. Benefits of the plan will be distributed during
fiscal year 2000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our board of directors has a compensation committee comprised of VADM
Burkhalter, Mr. Sinnott and Mr. Dunne. Mr. Dunne is our chief executive officer
and chairman of the board of directors.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

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

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

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

The compensation committee annually reviews and approves the compensation of
Thomas Dunne. Mr. Dunne participates in the bonus plan, with his bonus tied to
pre-tax income goals. His maximum possible bonus for fiscal 1999 was 104% of his
base salary. Based on our performance for fiscal 1999, Mr. Dunne was awarded no
cash bonus for fiscal 1999.

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

S-1 30th Page of 93 TOC 1st Previous Next Bottom Just 30th

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return on Dunn's common
stock since its public offering with the Russell 3000 Index and the Nasdaq
Computer and Data Index during the same period. The graph shows the value, at
the end of each fiscal quarter, or $100 invested in Dunn's common stock or the
indices on April 28, 1997, the date of Dunn's initial public offering, and
assumes reinvestment of all dividends. The graph depicts the change in the value
of Dunn's common stock relative to the noted indices as of the end of each
fiscal quarter and not for any interim period. Historical stock price
performance is not necessarily indicative of future stock performance.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

Stock Performance Chart

[Download Table]

DNCC RUSSELL 3000 INDEX NASDAQ INDEX

May-97 100.00 100.00 100.00
Aug-97 80.88 107.24 115.60
Nov-97 97.06 113.26 111.80
Feb-98 97.80 123.99 128.00
May-98 94.86 127.71 124.91
Aug-98 41.18 109.35 120.02
Oct-98 33.82 125.37 144.22
Jan-99 49.29 145.89 230.65
Apr-99 24.59 152.02 217.54
Jul-99 32.35 151.36 229.53
Oct-99 14.00 154.36 271.33

DUNN COMPUTER CORPORATION STOCK PERFORMANCE CHART

[Enlarge/Download Table]

DUNN CLOSING RUSSELL 3000 NASDAQ
MEASUREMENT PERIOD PRICE* DNCC R3000 CP INDEX NICP INDEX
------------------ ------------ -------- -------- ------------ -------- --------

May-97......................... 8.50 100.00 470.600 100.00 594.750 100.00
Aug-97......................... 6.88 80.88 504.740 107.24 687.550 115.60
Nov-97......................... 8.25 97.06 533.080 113.26 664.950 111.80
Feb-98......................... 8.31 97.80 583.580 123.99 761.300 128.00
May-98......................... 8.06 94.86 601.060 127.71 742.880 124.91
Aug-98......................... 3.50 41.88 514.670 109.35 713.800 120.02
Oct-98......................... 2.88 33.82 590.080 125.37 857.760 144.22
Jan-99......................... 4.19 49.29 686.630 145.89 1371.800 230.65
Apr-99......................... 2.09 24.59 715.490 152.02 1293.830 217.54
Jul-99......................... 2.75 32.35 712.370 151.36 1365.120 229.53
Oct-99......................... 1.19 14.00 726.500 154.36 1613.720 271.33
Amount invested.................. 100.00
IPO Price...................... 8.50 470.66 594.75

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

* for May 97, price is IPO price; all other figures are closing price.

S-1 31st Page of 93 TOC 1st Previous Next Bottom Just 31st

PRINCIPAL STOCKHOLDERS

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

[Enlarge/Download Table]

PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------ ------------------ ------------------

Thomas P. Dunne (1)......................................... 2,399,375(2) 25.7%
John D. Vazzana (1)......................................... 581,875 6.2%
Claudia N. Dunne (1)........................................ 2,399,375(3) 25.7%
VADM E.A. Burkhalter (1).................................... 40,000(4) *
Daniel Sinnott (1).......................................... 40,000(4) *
All Executive Officers and Directors as a Group............. 2,981,250(5) 31.6%

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

* Persons less than 1%

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

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

(3) Includes 1,839,375 shares of Common Stock held by Thomas Dunne, the
Company's President and CEO, and Ms. Dunne's husband, of which Ms. Dunne
disclaims beneficial ownership.

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

(5) Does not include 80,000 shares of Common Stock underlying options which are
held by the Company's two outside directors.

S-1 32nd Page of 93 TOC 1st Previous Next Bottom Just 32nd

CERTAIN TRANSACTIONS

Thomas Dunne, our President, and his wife, Claudia Dunne, our Vice
President, acquired a building for the purpose of leasing office space to Dunn.
In connection with the acquisition of the building, Dunn guaranteed the
building's $1 million mortgage. The term of the mortgage is 25 years. Dunn
subsequently executed a noncancelable operating lease with Mr. and Mrs. Dunne.
We believe that the lease agreement is on terms no less favorable to the Company
than could be obtained from an unaffiliated third party. In June 1999, the
building was sold by Mr. and Mrs. Dunne and the lease was assigned to the new
owner, an unaffiliated third party.

All current transactions between us and our officers, directors and principal
stockholders or any affiliates thereof are, and in the future will be, on terms
no less favorable to us that could be obtained from unaffiliated third parties.

DESCRIPTION OF SECURITIES

The following is a description of all material terms and features of our
securities, but does not purport to be complete and is subject in all respects
to applicable Virginia law and to the provisions of our amended articles of
incorporation and bylaws.

GENERAL

Dunn is authorized by its Articles of Incorporation to issue an aggregate of
20,000,000 shares of common stock, $.001 par value per share, and 2,000,000
shares, $.001 par value per share, of preferred stock. There are currently
9,424,680 shares of common stock and 3,000 shares of 5% Series A convertible
Preferred Stock outstanding. All shares of common stock are of the same class
and have equal rights and attributes.

PREFERRED STOCK

We are authorized by our Articles of Incorporation to issue a maximum of
2,000,000 shares of Preferred Stock, in one or more series and containing such
rights, privileges and limitations, including voting rights, dividend rates,
conversion privileges, redemption rights and terms, redemption prices and
liquidation preferences, as the Board of Directors of the Company may, from time
to time, fix by amendment of the Articles of Incorporation. In March 2000, 3,000
shares of Preferred Stock were issued.

COMMON STOCK

The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the company's stockholders. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefore, subject to the payment of preferential dividends with
respect to any shares of preferred stock that may be outstanding from time to
time. In the event of the dissolution, liquidation or winding up of the company,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of all liabilities of the company, subject to the prior
distribution rights of the holders of any preferred stock that may be
outstanding at that time. All outstanding shares of common stock are duly
authorized fully paid and nonassessable.

Holders of common stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if we were
to issue additional shares of common stock current shareholders would have no
right to purchase additional shares and, as a result, their percentage equity
interest in the Company would be reduced.

S-1 33rd Page of 93 TOC 1st Previous Next Bottom Just 33rd

The holders of common stock do not have cumulative voting rights.
Accordingly, all directors will be elected by the affirmative vote of the
holders of a majority of the company's outstanding common stock. The Board is
empowered to fill any vacancies on the Board created by the resignation, death
or removal of directors.

SERIES A CONVERTIBLE PREFERRED STOCK

There are 3,000 shares of Series A convertible preferred stock outstanding.

Voting Rights

Shares of Series A Convertible Preferred Stock are not entitled to vote.

The affirmative vote or consent of the holders of 85% of the outstanding
shares of the Series A Preferred Stock, voting separately as a class, will be
required to:

- change the rights of the Series A convertible preferred stock

- create any new class or series of capital stock with rights equal or
superior to those of the Series A convertible preferred stock as to
payment of dividends or distribution of assets upon liquidation or change
the rights of any senior securities so as to affect adversely the
Series A convertible preferred stock.

- increase the authorized number of shares of Series A convertible preferred
stock

- take any action not authorized by the Certificate of Designation of the
Series A convertible preferred stock that would result in the Series A
holders being taxed under Section 305 of the Internal Revenue Code of
1986, as amended, or any comparable provision of the Internal Revenue
Code.

DIVIDENDS

Holders of shares of Series A convertible preferred stock are entitled to
receive a preferential cumulative dividend of $50 a share per fiscal year,
payable quarterly.

LIQUIDATION

Upon liquidation, the holders of shares of Series A convertible preferred
stock will be entitled to receive a liquidation preference of $1,000 per share.

CONVERSION PRICE

Each share of Series A convertible preferred stock is convertible into a
number of shares of common stock equal to the stated value of $1,000 divided by
the lower of the following:

- $3.64; or

- the average of the three lowest closing bid prices on the Nasdaq during
the period of twenty-five consecutive trading days ending with the last
trading day prior to the date of conversion.

Provided, however, that for a period of 90 days following March 13, 2000,
the conversion price shall not be less than $1.60

CONVERSION PROCESS

The Series A holders may convert their shares into common stock on the
effective date of a registration statement permitting the resale of shares
underlying the Series A convertible preferred stock.

S-1 34th Page of 93 TOC 1st Previous Next Bottom Just 34th

In no event may a holder convert shares of Series A convertible preferred
stock if doing so would result in that holder owning more than 9.9% of the
number of shares common stock issued and outstanding.

We are subject to penalties if upon conversion of any shares of Series A
convertible preferred stock we fail to issue within a stated period of time one
or more certificates representing the resulting shares of common stock.

REDEMPTION

We have the right to redeem all of the then outstanding shares of Series A
Convertible Preferred Stock any time the conversion price is less than $1.50 per
share, at a price equal to 115% of the stated value of $1,000 per share plus all
accrued but unpaid dividends.

Additionally, we are obligated to redeem in whole the then outstanding
shares of Series A Convertible Preferred Stock at a price equal to 110% of the
stated value of $1,000 plus all accrued but unpaid dividends should certain
events occur.

WARRANTS

We currently have 422,525 warrants outstanding. Of those warrants, 247,525
are exercisable at $3.64 per share, 75,000 are exercisable at $4.57 per share
and the remaining 100,000 are exercisable at $6.00 per share. All of the
warrants are exercisable for a period of four and five years commencing
April 21, 1998 and March 13, 2000, respectively.

VIRGINIA ANTI-TAKEOVER LAW

Under the Virginia Control Share Acquisition statute (Section 13.1-728 et
seq. of the Virginia Stock Corporation Act ("VSCA")), a person (the "acquirer")
who makes a bona fide offer to acquire, or acquires, shares of stock of a
Virginia corporation that when combined with shares already owned, would
increase the acquirer's ownership to at least 20%, 33 1/3%, or a majority of the
voting stock of the corporation, must obtain the approval of a majority in
interest of the shares held by all shareholders (except the acquirer and
officers and inside directors of the corporation) in order to vote the shares
acquired. The statute does not apply to mergers pursuant to a merger or plan of
share exchange effected in compliance with the relevant provision of the VSCA.
The Control Share Acquisition statute permits a Virginia corporation to elect
not to be governed by these provisions by including such an election in its
articles of incorporation or bylaws, and does not apply to companies with less
than 300 shareholders. The Company has elected not to be governed by the Control
Share Acquisition statute in its Articles of Incorporation.

Virginia's Affiliated Transactions statute (Section 13.1-725 et seq. of the
VSCA) provides that if a person acquires 10% or more of the stock of a Virginia
corporation without the approval of its board of directors (an "interested
shareholder"), such person may not engage in certain transactions with the
corporation (including a merger and purchase or sale of greater than 5% of the
corporation's assets or voting stock) for a period of three years, and then only
with the specified supermajority shareholder vote, disinterested director
approval or fair price and procedural protections. Virginia's statute includes
certain exceptions to this prohibition; for example, if a majority of
disinterested directors approves the acquisition of stock or the transaction
prior to the time that the person became an interested shareholder, or if the
transaction is approved by the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock which is not owned by the interested
shareholder, the prohibition does not apply.

The VSCA contains provisions which permit a corporation to take the steps
necessary to implement a shareholder rights plan, sometimes referred to as a
"poison pill", whereby all

S-1 35th Page of 93 TOC 1st Previous Next Bottom Just 35th

shareholders, except for the acquiror, have certain economically powerful rights
that are activated upon an acquiror obtaining a 20% (or other percentage) stock
ownership position. The Company has not implemented a "poison pill." The
Company's Articles of Incorporation do provide for preferred stock as to which
the board of directors has authority to determine the terms of such stock, which
is generally a prerequisite to implementing a "poison pill."

PERSONAL LIABILITY OF DIRECTORS

Under the VSCA, the liability of an officer or director for a single
transaction in a proceeding brought by or in the right of a corporation or on
behalf of shareholders is limited to damages not exceeding the lesser of
(i) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the
bylaws, as a limitation on or elimination of the liability of the officer or
director; or (ii) the greater of $100,000 or the amount of cash compensation
received by the officer or director from the corporation during the 12 months
immediately preceding the act or omission for which liability was imposed. The
liability of an officer or director may not be so limited if the officer or
director engaged in willful misconduct or a knowing violation of the criminal
law or of any federal or state securities law, including, without limitation,
any claim of federal or state securities law, including, without limitation, any
claim of unlawful insider trading or manipulation of the market for any
security.

The Company's Articles of Incorporation include a provision eliminating, to
the fullest extent permitted by law, the personal liability of directors.

The Articles of Incorporation provide for the indemnification of, and
advancement of litigation expenses to, the directors and officers of the Company
to the fullest extent permitted by Virginia law. Furthermore, the Company may
enter into indemnification agreements with its directors and officers for the
indemnification of and advancing of expenses to such person to the fullest
extent permitted by law.

Dunn has directors' and officers' liability insurance in the amount of
$3.0 million.

TRANSFER AGENT

The Transfer Agent for our common stock is Continental Stock Transfer &
Trust Company.

S-1 36th Page of 93 TOC 1st Previous Next Bottom Just 36th

SHARES ELIGIBLE FOR FUTURE SALE

As of the date of this prospectus 9,424,680 shares of Common Stock will be
outstanding and Dunn will also have outstanding options and warrants to purchase
up to a total of 2,222,525 shares of Common Stock.

Of the 9,424,680 shares of Common Stock outstanding 6,443,430 shares are
freely tradable and the remaining 2,981,250 shares of Common Stock to be
outstanding as of the date will be "restricted securities" as that term is
defined under Rule 144, and may not be sold unless registered under the Act or
exempted therefrom.

In general, under the Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
the Company, as that term is defined in Rule 144, (or persons whose shares are
aggregated), who for at least one year has beneficially owned restricted
securities acquired directly or indirectly from the Company or an affiliate of
the Company in a private transaction is entitled to sell in brokerage
transactions within any three-month period, a number of shares that does not
exceed the greater of (i) 1% of the total number of outstanding shares of the
same class, or (ii) if the stock is quoted on the Nasdaq National Market, the
average weekly trading volume in the stock during the four calendar weeks
preceding the day notice is given to the Securities and Exchange Commission with
respect to such sale. A person (or persons whose shares are aggregated) who is
not an affiliate and has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned restricted
securities for at least two years is entitled to sell such shares pursuant to
subparagraph (k) of Rule 144 without regard to any of the limitations described
above. Under Rule 144, an affiliate of the Company may sell shares of Common
Stock that are not "restricted securities" without regard to the one-year
holding period applicable in the case of restricted securities, subject to the
satisfaction of other conditions set forth in Rule 144. The foregoing summary of
Rule 144 is not intended to be a complete description thereof.

2,981,250 shares of restricted Common Stock will be held by affiliates as of
the date of this prospectus. So long as such stock remains in the hands of
affiliates, unless sold pursuant to a registration statement, it will be subject
to all of the conditions of Rule 144, except for the holding period. If the
holders of such stock cease to be affiliates (and, in the case of restricted
stock, the two-year holding period of Rule 144(k) has been met), such shares may
become freely tradable, without regard to most of Rule 144 restrictions,
including the volume limitation. In addition, the Company has agreed to register
4,100,000 shares of Common Stock issuable upon the exercise of certain
outstanding warrants. As a result, shares of Common Stock, 225,000 of which are
issuable to a former employee and upon the conversion of Series A Convertible
Preferred Stock and upon exercise of such outstanding options and warrants will
be freely tradeable without restriction except for the contractual restrictions
described below.

Sales of significant amounts of the Company's Common Stock by stockholders
in the future, under Rule 144 or otherwise, may have a depressive effect on the
price of the Company's Common Stock.

S-1 37th Page of 93 TOC 1st Previous Next Bottom Just 37th

SELLING SECURITY HOLDERS

The table below sets forth certain information regarding the beneficial
ownership of the common stock by the selling security holders and as adjusted to
give effect to the sale of the shares offered in this prospectus.

[Enlarge/Download Table]

PERCENTAGE OF
BENEFICIAL COMMON STOCK
OWNERSHIP OF SHARES OF BENEFICIALLY
COMMON STOCK COMMON STOCK OWNED AFTER
NAME OF SELLING SECURITY HOLDER PRIOR TO SALE TO BE SOLD THE OFFERING (2)
------------------------------- ------------- ------------ ----------------

Briarcliff Investors LLC (1)........................ 3,875,000 3,875,000 0%
John Signorello..................................... 225,000 225,000 0%

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

(1) The number of shares of common stock shown as beneficially owned and offered
by the selling security holders represents the number of shares which we
have initially agreed to register. Pursuant to Rule 416 under the Securities
Act, the number of shares of common stock offered by the selling security
holders hereby and included in the registration statement of which this
prospectus is a part also includes an indeterminate number of additional
shares as may be issued on conversion o the preferred stock and in payment
of dividends thereon pursuant to the provisions of the certificate of
designations of the preferred stock regarding determination of the
applicable conversion price and the dividend calculation rate. Accordingly,
the actual number of shares of common stock issued or issuable upon the
conversion of the preferred stock and the payment of dividends thereon is
subject to adjustments depending upon factors which cannot be predicated by
us at this time, including, among others, the future market prices of the
common stock and the payment of dividends on the preferred stock in
additional shares of common stock. Pursuant to the terms of the certificate
of designations governing the preferred stock, the preferred stock is
convertible by each holder thereof and dividend are payable in common stock
only to the extent that the number of shares of common stock then
beneficially owned by such holder and its related persons (not including
shares underlying unconverted shares of preferred stock or unexercised
warrants) would not exceed 4.9% of the then outstanding shares of common
stock as determined in accordance with Section 13 (d) and 16 of the Exchange
Act. Accordingly, the number of shares of common stock set forth for the
selling security holder may exceed the actual number of shares of common
stock that the selling security holder could own beneficially at any given
time through its ownership of the preferred stock and the warrants. The
above numbers assume that the selling security holders will exercise the
warrants for cash. If the selling security holders use the cashless exercise
alternative, the actual number of shares of common stock issued will be
fewer, depending on the market value of the underlying shares of common
stock immediately prior to exercise.

(2) Assumes all of the shares of common stock offered are sold.

Briarcliff Investors, LLC and their respective officers and directors have
not held any positions or offices or had any material relationship with Dunn
Computer or any of its affiliates within the past three years. John Signorello
was a former Vice President of the Company through October 1998.

In recognition of the fact that the selling security holders may wish to be
legally permitted to sell their shares of common stock when they deem
appropriate, we agreed with the selling security holders to file with the United
States Securities and Exchange Commission, under the Securities Act of 1933, as
amended, a registration statement on form S-1, of which this prospectus is a
part, with respect to the resale of the shares of common stock, and have agreed
to prepare and file such amendments and supplements to the registration
statement as may be necessary to keep the registration statement effective until
the shares of common stock are no longer required to be registered for the sale
thereof by the selling security holders.

S-1 38th Page of 93 TOC 1st Previous Next Bottom Just 38th

PLAN OF DISTRIBUTION

The shares of common stock offered hereby by the selling security holders
may be sold from time to time by the selling security holders, or by pledgees,
donees, transferees and other successors in interest. Such pledgees donees,
transferees and other successors in interest will be deemed Aselling security
holders for the purposes of this prospectus. Such sales may be made on one or
more exchanges or in the over-the-counter market (including the OTC Electronic
Bulletin Board), in privately negotiated transactions, through the writing of
private options on the shares, or otherwise at market prices then prevailing or
at prices related to the then-current market price, at fixed prices that may be
changed, or at negotiated prices. The shares of common stock may be sold to or
through brokers or dealers, who may act as agent or principal, or in direct
transactions between the selling security holders and purchasers. In addition,
the selling security holder may, from time to time, sell short the common stock,
and in such instances, this prospectus may be delivered in connection with such
short sale and the shares of common stock offered hereby may be used to cover
such short sale.

Transactions involving brokers or dealers may include, without limitation,
(a) ordinary brokerage transactions, (b) transactions in which the broker or
dealer solicits purchasers, (c) block trades in which the broker or dealer will
attempt to sell the shares of common stock as agent but may position and resell
a portion of the block as principal to facilitate the transaction, and
(d) purchases by a broker as a principal and resale by such broker or dealer for
its account. In effecting sales, brokers and dealers engaged by the selling
security holders or the purchasers of the shares of common stock may arrange for
other brokers or dealers to participate. Such brokers or dealers may receive
discounts, concessions or commissions from the selling security holders and/or
the purchasers of the shares of common stock for whom such broker or dealer may
act as agent or to whom they may sell as principal, or both (which compensation
as to a particular broker or dealer may be in excess of customary commissions).
The selling security holders and such brokers and dealers who act in connection
with the sale of the shares of common stock may be deemed to be underwriters
within the meaning of the Securities Act of 1933, as amended, and any commission
received by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.

We are bearing all of the costs relating to the registration of the shares
of common stock other than certain fees and expenses, if any, of counsel or
other advisors to the selling security holders. Any commissions, discounts or
other fees payable to brokers or dealers in connection with any sale of the
shares of common stock will borne by the selling security holders, the
purchasers participating in such transaction, or both. None of the proceeds from
the sale of the shares of common stock by the selling security holders will be
received by us, except for the exercise price of the warrants. Dunn computer and
the selling security holders, have each agreed to indemnify the other against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended.

Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933, as amended may be sold under
Rule 144 rather than pursuant to this prospectus.

S-1 39th Page of 93 TOC 1st Previous Next Bottom Just 39th

LEGAL MATTERS

Gersten, Savage & Kaplowitz, LLP, New York, New York, will pass upon the
validity of the shares of common stock for us in connection with this offering.

EXPERTS

The consolidated financial statements of Dunn Computer Corporation, a
Virginia corporation, at October 31, 1999 and 1998, and for each of the three
years in the period ended October 31, 1999, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.

The combined financial statements of International Data Products, Corp. and
Combined Company, at September 30, 1997, and for each of the two years in the
period ended September 30, 1997, have been included herein and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in accounting and auditing.

S-1 40th Page of 93 TOC 1st Previous Next Bottom Just 40th

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedule thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, the Northeast Regional Office located at 7 World Trade Center, 13th
Floor, New York, New York, 10048, and the Midwest Regional Office located at
Citicorp Center, 500 West Madison Street, 14th floor, Chicago, Illinois
60661-2511, and copies of all or any part thereof may be obtained from the
Public Reference Branch of the Commission upon the payment of certain fees
prescribed by the Commission. In addition, the Registration Statement may be
accessed electronically at the Commission's site on the World Wide Web located
at http://www.sec.gov.

Until the Closing, Dunn is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected without charge and
copies may be had at the prescribed fees at the Commission's addresses set forth
above and at the Commission's website. Dunn common stock is listed on the Nasdaq
National Market under the symbol "DNCC", and material filed by Dunn can be
inspected at the offices of the Nasdaq National Market, 1735 K Street,
Washington, D.C. 20006.

S-1 41st Page of 93 TOC 1st Previous Next Bottom Just 41st

INDEX TO FINANCIAL STATEMENTS

DUNN COMPUTER CORPORATION

[Download Table]

PAGE
--------

Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of October 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the three years in
the period
ended October 31, 1999.................................... F-4
Consolidated Statements of Stockholders' Equity for the
three years in the period
ended October 31, 1999.................................... F-5
Consolidated Statements of Cash Flows for the three years in
the period
ended October 31, 1999.................................... F-6
Notes to the Consolidated Financial Statements.............. F-7

INTERIM FINANCIAL INFORMATION

[Download Table]

Consolidated Balance Sheets as of October 31, 1999 and as of
January 31, 2000 (unaudited).............................. F-26
Consolidated Statements of Operations for the three months
ended January 31, 1999 and 2000 (unaudited)............... F-27
Consolidated Statements of Cash Flows for the three months
ended January 31, 1999 and 2000 (unaudited)............... F-28
Notes to the Consolidated Financial Statements
(unaudited)............................................... F-29

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

[Download Table]

PAGE
--------

Report of KPMG LLP, Independent Auditors.................... F-31
Combined Balance Sheet as of September 30, 1997............. F-32
Combined Statements of Operations and Retained Earnings for
the two years in the period ended September 30, 1997...... F-33
Combined Statements of Cash Flows for the two years in the
period ended September 30, 1997........................... F-34
Notes to the Combined Financial Statements.................. F-35

F-1

S-1 42nd Page of 93 TOC 1st Previous Next Bottom Just 42nd

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Dunn Computer Corporation

We have audited the accompanying consolidated balance sheets of Dunn
Computer Corporation (a Virginia Corporation) as of October 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years in the period ended October 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dunn Computer
Corporation as of October 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for the three years in the period ended
October 31, 1999, in conformity with accounting principles generally accepted in
the United States.

/s/ ERNST & YOUNG LLP

February 1, 2000, except for Note 6
as to which the date is February 11, 2000
McLean, Virginia

F-2

S-1 43rd Page of 93 TOC 1st Previous Next Bottom Just 43rd

DUNN COMPUTER CORPORATION

CONSOLIDATED BALANCE SHEET

[Enlarge/Download Table]

OCTOBER 31,
--------------------------
1998 1999
----------- ------------

Current assets:
Cash and cash equivalents................................. -- $ 655,450
Accounts receivable, net of allowance for doubtful
accounts of $46,000 and $100,000 as of October 31, 1998
and 1999, respectively.................................. 16,675,204 5,063,041
Employee and stockholder advances......................... 71,287 --
Other receivables......................................... 117,685 --
Investment in sales-type leases, net current portion...... 959,243 --
Inventory, net............................................ 10,928,736 5,497,634
Deferred tax asset........................................ 630,000 1,282,695
Income tax receivable..................................... 597,325 585,769
Prepaid expenses and other current assets................. 248,143 118,594
----------- ------------
Total current assets........................................ 30,227,623 13,203,183
Property and equipment, net................................. 1,927,148 1,323,696
Equipment on lease, net..................................... 4,096,483 3,906,011
Investment in sales-type leases, net long term portion...... 2,140,099 --
Goodwill and other intangible assets, net................... 24,231,852 3,559,005
Investments................................................. 150,000 150,000
Other assets................................................ 191,395 145,121
----------- ------------
Total assets................................................ $62,964,600 $ 22,287,016
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $12,151,163 $ 4,822,979
Accrued expenses.......................................... 4,726,765 2,515,653
Accrued litigation costs.................................. -- 2,000,000
Line of credit............................................ 3,256,060 3,790,705
Notes payable, current portion............................ 33,514 324,933
Notes payable, related parties............................ 905,960 --
Unearned revenue.......................................... 3,381,291 1,170,417
----------- ------------
Total current liabilities................................... 24,454,753 14,624,687

Notes payable, long-term portion............................ 51,265 545,250
Line of credit--long term................................... -- 2,300,000
Other long-term liabilities................................. 85,890 --
Stockholders' equity:
Preferred stock $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.001 par value; 20,000,000 shares
authorized, 9,391,493 and 9,419,509 shares issued and
outstanding at October 31, 1998 and 1999,
respectively............................................ 9,392 9,420
Additional paid-in capital.................................. 37,670,245 37,721,749
Treasury stock, 400,000 shares at October 31, 1998 and 1999,
respectively.............................................. (3,432,500) (3,432,500)
Retained earnings........................................... 4,125,555 (29,481,590)
----------- ------------
Total stockholders' equity.................................. 38,372,692 4,817,079
----------- ------------
Total liabilities and stockholders' equity.................. $62,964,600 $ 22,287,016
=========== ============

See accompanying notes

F-3

S-1 44th Page of 93 TOC 1st Previous Next Bottom Just 44th

DUNN COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

[Enlarge/Download Table]

YEARS ENDED OCTOBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------

Net revenues.......................................... $21,766,465 $66,888,478 $ 34,475,297
Costs of revenues..................................... 17,549,655 54,969,061 27,981,691
----------- ----------- ------------
Gross profit.......................................... 4,216,810 11,919,417 6,493,606
Selling and marketing................................. 842,281 3,671,765 2,311,091
General and administrative............................ 1,332,975 5,201,745 14,112,227
Amortization of goodwill and other intangible
assets.............................................. 22,448 544,687 675,743
Acquisition integration costs......................... -- 564,776 --
Impairment of goodwill................................ -- -- 20,649,335
----------- ----------- ------------
Income (loss) from operations......................... 2,019,106 1,936,444 (31,254,790)
Other income (expense):
Interest income..................................... 109,877 104,606 27,998
Interest expense.................................... (11,813) (494,504) (962,004)
Settlement of litigation............................ -- -- (2,000,000)
Gain on sale of assets.............................. -- -- 193,516
Other, net.......................................... -- 119,375 (170,621)
----------- ----------- ------------
Net income (loss) before income taxes................. 2,117,170 1,665,921 (34,165,901)
=========== =========== ============
Provision for (benefit from) income taxes............. 794,870 686,000 (558,756)
----------- ----------- ------------
Net income (loss)..................................... $ 1,322,300 $ 979,921 $(33,607,145)
=========== =========== ============
Earnings (loss) per share............................. $ 0.29 $ 0.14 $ (3.57)
Earnings (loss) per share--assuming dilution.......... $ 0.28 $ 0.13 $ (3.57)

See accompanying notes.

F-4

S-1 45th Page of 93 TOC 1st Previous Next Bottom Just 45th

DUNN COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

[Enlarge/Download Table]

COMMON STOCK ADDITIONAL
-------------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
--------- -------- ----------- ----------- ------------ -----------

Balance at October 31, 1996.... 4,000,000 $4,000 $ 111,857 -- $ 1,823,334 $ 1,939,191
Issuance of common stock, net
of offering expenses of
$1,083,336................. 1,000,000 1,000 3,916,664 -- -- 3,917,664
Issuance of stock related to
acquisition of STMS........ 150,000 150 974,850 -- -- 975,000
Issuance of options related
to acquisition of STMS,
recorded at fair value..... -- -- 84,000 -- -- 84,000
Net income................... -- -- -- -- 1,322,300 1,322,300
--------- ------ ----------- ----------- ------------ -----------
Balance at October 31, 1997.... 5,150,000 5,150 5,087,371 -- 3,145,634 8,238,155
Repurchase of common stock
originally issued in the
acquisition of STMS........ -- -- -- (457,500) -- (457,500)
Repurchase of stock option
originally issued in the
acquisition of STMS........ -- -- (75,750) -- -- (75,750)
Issuance of common stock, net
of offering expenses of
$1,330,229................. 3,491,493 3,492 26,284,374 -- -- 26,287,866
Issuance of stock related to
acquisitions of IDP and
PRIMO...................... 750,000 750 6,374,250 -- -- 6,375,000
Return of common stock
originally issued in the
acquisitions of IDP and
PRIMO...................... -- -- -- (2,975,000) -- (2,975,000)
Net income................... -- -- -- -- 979,921 979,921
--------- ------ ----------- ----------- ------------ -----------
Balance at October 31, 1998.... 9,391,493 9,392 37,670,245 (3,432,500) 4,125,555 38,372,692
Issuance of common stock
under employee stock
purchase plan.............. 28,016 28 51,504 -- -- 51,532
Net loss..................... -- -- -- -- (33,607,145) (33,607,145)
--------- ------ ----------- ----------- ------------ -----------
Balance at October 31, 1999.... 9,419,509 $9,420 $37,721,749 $(3,432,500) $(29,481,590) $ 4,817,079
========= ====== =========== =========== ============ ===========

See accompanying notes.

F-5

S-1 46th Page of 93 TOC 1st Previous Next Bottom Just 46th

DUNN COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

[Enlarge/Download Table]

YEARS ENDED OCTOBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------

OPERATING ACTIVITIES
Net income (loss).................................... $ 1,322,300 $ 979,921 $(33,607,145)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment........................................ 46,029 1,139,210 2,779,926
Amortization of goodwill and other intangibles..... 22,448 544,687 675,743
Impairment of goodwill............................. -- -- 20,649,335
Gain on sale of assets............................. -- -- (193,516)
Changes in operating assets and liabilities:
Accounts receivable............................ (5,354,279) 2,057,540 11,801,135
Employee and stockholder advances.............. -- 10,234 --
Income tax receivable.......................... -- 316,461 11,556
Investment in sales-type leases................ -- (3,099,342) 3,099,342
Inventory...................................... (2,865,750) 7,015,014 5,431,102
Prepaid expenses and other assets.............. (85,966) 31,480 175,823
Accounts payable............................... 3,920,267 (9,542,573) (7,328,184)
Accrued expenses............................... 51,930 900,886 (211,112)
Income taxes payable........................... (519,308) (13,290) --
Deferred tax asset (credit).................... 88,914 (761,714) (652,695)
Unearned revenue and other liabilities......... (110,734) 2,958,384 (2,296,764)
----------- ------------ ------------
Net cash provided by (used in) operating
activities......................................... (3,484,149) 2,536,898 334,546
INVESTING ACTIVITIES
Purchases of property and equipment.................. (93,389) (945,794) (2,532,509)
Acquisitions, net of cash acquired................... (928,550) (14,185,021) (652,231)
Proceeds from sale of assets......................... -- 7,315 740,023
----------- ------------ ------------
Net cash used in investing activities................ (1,021,939) (15,123,500) (2,444,717)
FINANCING ACTIVITIES
Proceeds from issuance of common stock............... 3,917,664 26,287,866 51,532
Proceeds of loans for purchase of certain assets..... 64,226 -- --
Repurchase of common stock and options............... -- (533,250) --
Payments on notes payable............................ (10,551) (928,980) (46,248)
Payments on notes payable to related parties......... -- (587,181) (905,960)
Proceeds from (repayments on) lines of credit, net... -- (11,993,819) 3,666,297
Payments on capital leases........................... (20,949) -- --
----------- ------------ ------------
Net cash provided by financing activities............ 3,950,390 12,244,636 2,765,621
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ (555,698) (341,966) 655,450
Cash and cash equivalents at beginning of year....... 897,664 341,966 --
----------- ------------ ------------
Cash and cash equivalents at end of year............. $ 341,966 $ -- $ 655,450
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................ $ 11,813 $ 494,504 $ 962,004
=========== ============ ============
Income taxes paid.................................... $ 1,323,308 $ 525,000 $ 223,850
=========== ============ ============

See accompanying notes

F-6

S-1 47th Page of 93 TOC 1st Previous Next Bottom Just 47th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 31, 1997, 1998 AND 1999

1. ORGANIZATION

Dunn Computer Corporation (the "Corporation") was incorporated on July 27,
1987 under the laws of the Commonwealth of Virginia. On January 3, 1997, Dunn
Computer Corporation ("Dunn"), a Delaware corporation, was formed as a holding
company for the stock of Dunn Computer Corporation, the Virginia corporation. On
January 6, 1997, the Board of Directors and stockholders of the Corporation
approved and effected a 2,799.160251 for 1 stock exchange with Dunn whereby the
holders of the Corporation's common stock would receive 2,799.160251 shares of
common stock in Dunn for each share of common stock in the Corporation.

On September 12, 1997, Dunn acquired all of the outstanding stock of
STMS, Inc. (STMS), a Virginia Corporation.

On February 26, 1998, Dunn Computer Corporation (the "Company") was
incorporated in the Commonwealth of Virginia to become a holding company for
Dunn and International Data Products Corp. ("IDP"), as provided for in the
Acquisition Agreement. Simultaneous with the Company's formation, the
Corporation was renamed Dunn Computer Operating Company, a Virginia Corporation.

The Acquisition Agreement provided for the acquisition of all of the stock
of IDP by the Company and the acquisition of substantially all of the net assets
of Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"), an
affiliate of IDP, by the Company. Effective May 1, 1998, the Company's
acquisitions of IDP and PRIMO were consummated. Each outstanding share of common
stock of Dunn was exchanged on a one-for-one basis for a share of common stock
of the Company and each outstanding option and warrant of Dunn was converted
into an option or warrant, respectively, of the Company on substantially the
same terms as applied to each option or warrant of Dunn immediately prior to the
merger. Dunn became a wholly-owned subsidiary of the Company. All references in
the accompanying consolidated financial statements as to the number of shares of
common stock and per-share amounts have been restated to reflect the stock
exchanges described above. Also, the Company authorized 2,000,000 shares of
preferred stock with rights and preferences to be determined by the Board of
Directors at a later date. The Company expects to issue preferred stock in
fiscal 2000 to raise equity capital.

The Company is engaged in the business of selling build-to-order computer
systems and related equipment and providing computer training and maintenance
service to businesses and government agencies. In addition, the Company provides
Information Technology (IT) support and services to certain government and
commercial entities. The Company operates in a competitive environment subject
to technological change and the emergence of new technologies, although the
Company believes that its products and services are, or would be, upgradable to
new technologies.

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

F-7

S-1 48th Page of 93 TOC 1st Previous Next Bottom Just 48th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company maintains demand deposits with several financial institutions.
At times, deposits exceed federally insured limits, but management does not
consider this a significant concentration of credit risk. The Company considers
all highly liquid investments with a maturity of three months or less at the
time of purchase to be cash equivalents. At October 31, 1998, the Company's cash
management process resulted in an overdraft of $741,000 included in accounts
payable.

INVESTMENTS

At October 31, 1998 and 1999, investments consisted of shares of common
stock of a privately-held internet company, Worldwide Internet Solutions
Network, Inc. ("WIZnet"), with a cost basis of approximately $150,000. The
Company believes that this carrying amount represents the lower of cost or
market. The Company is accounting for this investment using the cost method
since the Company's investment represents less than 20% of the privately-held
internet company's outstanding stock. The President and Chief Executive Officer
of WIZnet is a member of the Company's Board of Directors.

INVENTORY

Inventory is stated at the lower of cost or market as determined by the
first-in first-out (FIFO) method. The Company periodically evaluates its
inventory obsolescence reserve to ensure inventory is recorded at net realizable
value.

IMPAIRMENT OF LONG-LIVED ASSETS

Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company made no adjustments to the carrying values of the assets during the
years ended October 31, 1997 and 1998. During fiscal year 1999, management
determined that goodwill associated with the purchase of IDP was impaired.
Accordingly, the Company recorded an impairment charge of approximately
$20.6 million (see Note 5).

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangibles represent the unamortized excess of the cost
of acquiring subsidiary companies over the fair values of such companies' net
tangible assets at the dates of acquisition. Goodwill related to the Company's
acquisitions as described in Note 5 is being amortized on a straight-line basis
over periods ranging from ten to twenty years. Other intangibles, including
contracts, are being amortized on a straight-line basis over a five year period.

ACQUISITION-RELATED LIABILITIES

During fiscal year 1998, the Company recorded $1,376,000 of
acquisition-related liabilities in connection with the IDP Acquisition. These
liabilities were recorded after certain actions had been

F-8

S-1 49th Page of 93 TOC 1st Previous Next Bottom Just 49th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
identified, quantified and approved by management of the Company having
authority to commit the Company to the plan. Those certain actions included
closing the IDP facility in Maryland, integrating IDP and the Company's
production, warehouse, sales, marketing and administrative functions,
eliminating duplicative jobs and expanding space in the Company's office space
in Virginia. During fiscal years 1998 and 1999, $232,000 and $894,000,
respectively, of costs were charged against the liability. The
acquisition-related liabilities remaining at October 31, 1999 amounted to
$250,000, consisting of severance payments to be made in future periods.

STOCK COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, but requires pro forma disclosure in the footnotes to the
consolidated financial statements as if the measurement provisions of SFAS 123
had been adopted. The Company continues accounting for its stock-based
compensation in accordance with the provisions of APB 25.

REVENUE RECOGNITION

The Company generally recognizes revenues from computer sales and sales-type
leases at the time of shipment. Revenues are earned principally pursuant to
various contracts with agencies of the Federal government and commercial
customers. The length of the Company's contracts generally range from one to
three years.

Service revenues are recognized over the contractual period as the services
are provided. Revenues from operating leases are recognized over the contract
term. In 1998, the Company assigned payments from one of its operating leases to
a financing company in exchange for the present value of the minimum lease
payments. The Company recorded this amount as unearned revenues and recognized
revenues over the lease term as payments were received by the financing company.
As of October 31, 1999, revenues associated with this transaction have been
fully recognized.

The products sold are generally covered by a warranty for periods ranging
from one to three years. The Company accrues a warranty reserve for revenues
recognized during the year to record estimated costs to provide warranty
services.

Unearned revenue also relates to cash received from credit card sales as of
year end for which the related inventory was shipped subsequent to year end and
advance payments on operating leases.

During the year ended October 31, 1997, the Company had revenues from one
agency of the Federal government and one Federal government contractor which
represented 21% and 11% of total revenues, respectively. As of October 31, 1997,
accounts receivable from agencies of the Federal government represented 64% of
total accounts receivable. During the year ended October 31, 1998, the Company
had revenues from one agency of the Federal government which represented 40% of
total revenues. As of October 31, 1998, accounts receivable from agencies of the
Federal government represented 67% of total accounts receivable. During the year
ended October 31, 1999, the Company had revenues from two Federal government
agencies which approximated 12% of total revenues. As of October 31, 1999,
accounts receivable from agencies of the Federal government represented
approximately 40% of total accounts receivable.

F-9

S-1 50th Page of 93 TOC 1st Previous Next Bottom Just 50th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the years ended October 31, 1998 and 1999, approximately 27% and 9%,
respectively, of the Company's revenues were from Federal contracts that were
awarded under Section 8(a) of the Small Business Act.

ADVERTISING EXPENSES

The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $61,000, $468,000 and $130,000 during fiscal 1997,
1998 and 1999, respectively.

INCOME TAXES

The Company provides for income taxes in accordance with the liability
method.

EARNINGS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER SHARE. SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. The definition of diluted earnings per share is very
similar to the previous definition of fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the SFAS 128 requirements.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, investments and accounts receivable.
The cash is held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses. The concentration of credit risk is
mitigated by the diverse customer base and the amount of receivables due by the
Federal government. The carrying amount of the receivables approximates their
fair value.

SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES

[Enlarge/Download Table]

YEARS ENDED OCTOBER 31,
------------------------
1997 1998
---------- -----------

Fair value of assets acquired............................... $5,970,000 $58,951,000
Less: Cash paid............................................. 1,044,000 14,900,000
Stock issued, net of value of stock returned (See Note
10)....................................................... 1,059,000 3,400,000
---------- -----------
Liabilities assumed (including $1,376,000 of
acquisition-related liabilities in 1998).................. $3,867,000 $40,651,000
========== ===========

RECENT PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, ("SAB 101"). SAB 101 requires that four
basic criteria must be met before

F-10

S-1 51st Page of 93 TOC 1st Previous Next Bottom Just 51st

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue can be recognized: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered, (3) the fee is fixed
and determinable, and (4) collectibility is reasonably assured. The Company is
required to comply with SAB 101 for transactions entered into on or after
February 1, 2000, but does not expect it to have a material impact on the
Company's consolidated financial position or results of operation.

3. PROPERTY AND EQUIPMENT AND EQUIPMENT ON LEASE

Property and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated and amortized using the
straight-line method over the estimated useful lives ranging from five to seven
years. Leasehold improvements are amortized over the lesser of the related lease
term or the useful life.

Property and equipment consisted of the following:

[Download Table]

OCTOBER 31,
-----------------------
1998 1999
---------- ----------

Computer and office equipment........................ $1,443,992 $1,515,017
Furniture and fixtures............................... 302,741 302,741
Leasehold improvements............................... 454,913 491,059
Other................................................ 416,018 412,766
---------- ----------
2,617,664 2,721,583
Less accumulated depreciation and amortization....... (690,516) (1,397,887)
---------- ----------
$1,927,148 $1,323,696
========== ==========

The Company owns equipment that is currently at customer sites under
operating lease agreements (See Note 2 Revenue Recognition). The cost of the
equipment was $6,821,801 and $5,085,287 at October 31, 1999 and 1998,
respectively. The related accumulated depreciation on the equipment was
$2,915,790 and $988,804 at October 31, 1999 and 1998, respectively.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets were comprised of:

[Download Table]

OCTOBER 31,
------------------------
1998 1999
----------- ----------

Goodwill............................................ $24,198,986 $3,485,855
Contracts........................................... 600,000 600,000
Less accumulated amortization....................... (567,134) (526,850)
----------- ----------
$24,231,852 $3,559,005
=========== ==========

See discussion of goodwill impairment recorded during fiscal 1999 in
Note 5.

F-11

S-1 52nd Page of 93 TOC 1st Previous Next Bottom Just 52nd

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. ACQUISITIONS

STMS

On September 12, 1997, the Company acquired all of the outstanding stock of
STMS, Inc., a Virginia corporation ("STMS"), for 150,000 shares of the Company's
common stock, options to purchase 25,000 shares of the Company's common stock,
and $1,044,500 in cash used specifically to repay certain debt of STMS. The
transaction was accounted for using the purchase method. The 150,000 shares of
common stock were valued at the market price of Company's common stock or
$975,000 on the date of the transaction. The options to purchase 25,000 shares
of common stock were issued to a stockholder/creditor of STMS and were valued at
fair value of $84,000 using the Black-Scholes option-pricing model. The purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values. In conjunction with the acquisition, the Company recorded
goodwill in the amount of $2,397,287 and other intangible assets (contracts) in
the amount of $600,000. The operations of STMS are included in the consolidated
financial statements of the Company beginning September 12, 1997 (date of
acquisition).

The Company granted options to purchase an aggregate of 1,330,000 shares of
the Company's common stock, at an exercise price equivalent to its fair market
value at the date of grant, to the former stockholders of STMS in conjunction
with their three-year employment agreements. The options vest over a three-year
period. Certain of these options were repriced during fiscal 1999 in accordance
with the employment agreements (see Note 10).

During February 1998, the Company repurchased an aggregate of 50,000 shares
of common stock and the option to purchase 25,000 shares of common stock
originally issued in connection with the STMS acquisition (see Note 10).

IDP AND PRIMO

On May 1, 1998, the Company acquired all of the outstanding stock of IDP and
substantially all of the net assets of PRIMO for $14.9 million in cash and
750,000 shares of common stock of the Company, both subject to adjustment in the
event that the combined net assets of IDP and PRIMO fell below a certain level
stipulated in the Acquisition Agreement (See Note 10). The transaction was
accounted for using the purchase method. The 750,000 shares of common stock were
valued at the market price of the Company's common stock ($8.50 per share) on
the date of the transaction. The purchase price was preliminarily allocated to
the assets and liabilities acquired based on their estimated fair values. In
conjunction with the acquisition, the Company recorded goodwill (as adjusted) in
the amount of $22,453,929. The operations of IDP, including PRIMO, are included
in the consolidated financial statements of the Company beginning May 1, 1998
(date of acquisition).

In connection with the IDP acquisition, two of the IDP sellers entered into
employment agreements with the Company pursuant to which they each received
options to purchase 300,000 shares of the Company's common stock. The grant
price of the options was equivalent to the fair market value of the underlying
common stock on the grant date and the options vested immediately.

During November 1998, the Company entered into an Employment Agreement
Termination Agreement and a Purchase Price Adjustment Agreement with the two
former stockholders of IDP whereby employment of the former stockholders of IDP
was terminated and the former IDP stockholders agreed to return 350,000 shares
of the Company's common stock originally issued in connection with the IDP
Acquisition. See Note 10 for additional information.

F-12

S-1 53rd Page of 93 TOC 1st Previous Next Bottom Just 53rd

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. ACQUISITIONS (CONTINUED)
The selected unaudited pro forma information for the years ended
October 31, 1997 and 1998 includes the operating results of the Company as if
the Company acquired STMS, IDP, and PRIMO on November 1, 1996.

[Download Table]

YEAR ENDED
OCTOBER 31, 1998
----------------
(UNAUDITED)

Pro Forma net revenues...................................... $110,310,000
Pro Forma net income (loss)................................. $ (6,768,000)
Pro Forma earnings per share................................ $ (0.75)
Pro Forma earnings per share assuming dilution.............. $ (0.75)
Pro Forma weighted average shares outstanding............... 8,981,000
Pro Forma weighted average shares outstanding assuming
dilution.................................................. 8,981,000

IMPAIRMENT OF GOODWILL

Statement of Financial Accounting Standards No. 121 (SFAS 121) ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.

In May 1999, the U.S. Government determined not to exercise the remaining
option years on one of the Company's significant contracts. This contract was a
significant component of the Company's acquisition of IDP. At the date of
termination, the Company anticipated that the contract would have generated
future revenues of approximately $65 million had all option years been renewed.
The former IDP operations have been substantially curtailed as a result of this
contract loss. In addition, significant future business is not expected from IDP
operations as the majority of its sales force has separated from the Company.

The Company determined that these factors indicated that the carrying amount
of goodwill associated with the IDP and PRIMO acquisition may not be
recoverable. The Company performed an analysis of the goodwill in accordance
with SFAS 121 and determined that the fair value of the remaining goodwill
(estimated using the present value of expected future cash flows) was
approximately $1.1 million at the time of the analysis. Accordingly, the Company
recorded an impairment charge of approximately $20.6 million during fiscal year
1999.

6. BANK LINES OF CREDIT AND NOTES PAYABLE

IDP LINE OF CREDIT

In conjunction with the purchase of IDP, the Company assumed a credit
facility of $25,000,000 secured by inventory and accounts receivable of IDP. The
outstanding balance on this line of credit at October 31, 1998 and 1999 was
approximately $3,055,000 and $4,622,000, respectively. The interest rate
applicable to this line of credit as of October 31, 1998 and 1999 was 7.33% and
8.05%, respectively.

On November 8, 1999, the Company executed an agreement with the financial
institution to terminate this facility. Under the terms of the agreement, the
Company repaid approximately $3.0 million of the principal outstanding at
October 31, 1999 prior to December 31, 1999. In addition, outstanding principal
totaling approximately $832,000 was converted to a term note bearing interest at

F-13

S-1 54th Page of 93 TOC 1st Previous Next Bottom Just 54th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BANK LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)
the prime rate and maturing in January 2002. The remaining amount of
approximately $750,000 was forgiven by the financial institution and will be
reflected as a gain on debt restructuring in fiscal year 2000. The Company has
classified this facility between short and long-term based on the revised
payment terms.

OPERATING LINE OF CREDIT

In April 1996, the Company entered into a line of credit agreement with a
bank that was subsequently amended in December 1997. The amended credit
agreement expired on February 28, 1999. Accordingly, the Company established a
new credit agreement with the same financial institution. The agreement allows
the Company to borrow an amount limited to the minimum of its borrowing base or
$15,000,000. As of October 31, 1999, the Company's borrowing base, which is
based on certain percentages of total accounts receivable less overdue accounts,
is approximately $2.5 million. Outstanding borrowings bear interest at the prime
rate.

As of October 31, 1998, the Company had borrowed $201,000 against this line
of credit facility and had an unused borrowing capacity of $758,843. As of
October 31, 1999, the Company had borrowed $2.3 million against this line of
credit facility and had an unused borrowing capacity of approximately $200,000.
The Company pays a commitment fee based on the unused borrowings under the line
of credit facility. The line of credit is secured by all assets of the Company
and its subsidiaries. On February 11, 2000, the Company amended the line of
credit facility whereby the maximum availability was reduced to $5 million and
the interest rate was increased to the prime rate plus 1%. The amended line of
credit expires November 30, 2000. The Company has classified this line of credit
as long term based on the amended maturity date.

Notes payable consisted of the following:

[Download Table]

OCTOBER 31,
-------------------
1998 1999
-------- --------

Bank term note, bearing interest at the prime rate;
payable in monthly installments of $34,652 plus accrued
interest, due in January 2002.......................... $ -- $831,652
Asset loans, bearing interest at annual interest rates
ranging from 7.9% to 10.46%; due in aggregate monthly
payments of $2,695 and $1,303 at October 31, 1998 and
1999, respectively, due through August 2002, secured by
certain assets of the Company.......................... 78,549 38,531
Other.................................................... 6,230 --
------- --------
84,779 870,183
Less current portion..................................... 33,514 324,933
------- --------
Notes payable, long-term................................. $51,265 $545,250
======= ========

F-14

S-1 55th Page of 93 TOC 1st Previous Next Bottom Just 55th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BANK LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)
Principal payments on the long-term debt for each of the fiscal years from
2000 to 2002 are due as follows:

[Download Table]

YEAR ENDED
OCTOBER 31,
-----------

2000........................................................ $324,933
2001........................................................ 429,960
2002........................................................ 115,290
--------
Total....................................................... $870,183
========

Notes payable to related parties are payable to certain stockholders and
their relatives, and employees. These notes payable were assumed by the Company
in the IDP Acquisition. All notes payable to related parties are classified as
current liabilities as the outstanding balances are due upon demand. Notes
payable to related parties bear interest at annual interest rates ranging from
8% to 11%. The total amounts outstanding on these related parties' notes payable
were approximately $905,960 and $0 at October 31, 1998 and 1999, respectively.
Interest expense on these notes payable amounted to $58,297 during the period
from May 1, 1998 through October 31, 1998. The total amounts outstanding on
these notes payable were repaid in fiscal year 1999 (See Note 10).

7. RELATED PARTY TRANSACTION

Thomas Dunne, the Company's President, and his wife, Claudia Dunne, the
Company's Vice President, acquired a building for the purpose of leasing office
space to the Company. In connection with the acquisition of the building, the
Company guaranteed the building's $1 million mortgage. The term of the mortgage
is 25 years. The Company subsequently executed a noncancelable operating lease
with Mr. and Mrs. Dunne. The Company believes that the lease agreement is on
terms no less favorable to the Company than could be obtained from an
unaffiliated third party. In June 1999, the building was sold by Mr. and
Mrs. Dunne and the lease was assigned to the new owner, an unaffiliated third
party.

8. COMMITMENTS

OPERATING LEASES

The Company leased office space under a noncancelable operating lease
agreement with two stockholders (see Note 7). In June 1999, the two stockholders
sold the building and assigned the lease to the new owner, an unaffiliated third
party, under the same terms. The lease agreement was renewed in October 1999 for
an additional five years under the renewal option within the original lease.
Additionally, the Company leases various office equipment and other office space
under non-cancelable operating leases. Rent expense under these leases was
approximately $175,000, $499,100 and $321,000 for the years ended October 31,
1997, 1998 and 1999, respectively.

F-15

S-1 56th Page of 93 TOC 1st Previous Next Bottom Just 56th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases,
including the leases assumed in the STMS and IDP acquisitions, at October 31,
1999 are as follows:

[Download Table]

2000........................................................ $ 595,245
2001........................................................ 613,102
2002........................................................ 631,495
2003........................................................ 573,085
2004 and thereafter......................................... 455,166
----------
Total....................................................... $2,868,093
==========

In addition, the Company will receive $1,446,516 in aggregate sublease
income through fiscal 2003.

EMPLOYMENT AGREEMENTS

The Company has employment agreements with certain key executives under
which the Company is required to pay a fixed annual base salary. Commitments
under these arrangements are approximately $620,000 for fiscal year 2000. All
contracts expire prior to October 31, 2000.

9. INVESTMENTS IN SALES-TYPE LEASES

During 1998, the Company leased equipment to certain customers under
sales-type leases. The components of the Company's net investment in sales-type
leases at October 31, 1998 were as follows:

[Download Table]

OCTOBER 31,
1998
-----------

Total minimum lease payments receivable..................... $3,446,095
Less unearned interest...................................... (346,753)
----------
Net investment in sales-type leases......................... 3,099,342
Less current portion........................................ 959,243
----------
$2,140,099
==========

In fiscal year 1999, the Company sold all of its investment in sales-type
leases resulting in net gains of approximately $213,000. Accordingly, the
Company's investment in sales-type leases at October 31, 1999 was $0.

F-16

S-1 57th Page of 93 TOC 1st Previous Next Bottom Just 57th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY

EQUITY TRANSACTIONS

On April 21, 1997, the Company sold 1,000,000 shares of common stock in an
initial public offering for net proceeds of $3,917,664. In connection with the
offering, warrants were issued to the underwriter for 100,000 shares of common
stock at an exercise price of $6.00 per share. Beginning April 21, 1998, the
warrants are exercisable for a period of four years.

During February 1998, the Company repurchased 50,000 shares of its common
stock held by former stockholders of STMS. The shares were repurchased at the
current market price of $9.15 per share. The Company accounted for the
repurchase as a treasury stock transaction. The Company also repurchased options
to purchase 25,000 shares of the Company's common stock that were originally
issued in connection with the STMS acquisition. The repurchase price of $75,750
represents the difference between the fair market value of the underlying common
stock on the repurchase date and the grant price multiplied by the 25,000
options. The Company accounted for the repurchase as a reduction of additional
paid-in capital.

The IDP Acquisition Agreement provided for an adjustment of the purchase
price if the combined net worth of IDP and PRIMO exceeded or was below a
specified level. Since the net worth on the closing balance sheet of IDP and
PRIMO was below the specified level, the Company and the former IDP stockholders
agreed to adjust the purchase price. In November 1998, the Company entered into
a Purchase Price Adjustment Agreement with the two former stockholders of IDP
whereby 350,000 shares of the Company's common stock originally issued in
connection with the IDP acquisition were returned to the Company. The Company
accounted for the return as a treasury stock transaction and valued such shares
at the fair market value of the Company's common stock on the date of
acquisition. In connection with the transaction, the Company and the two former
stockholders also agreed to cancel the employment agreements in exchange for
payments totaling $500,000, for which the Company recorded an adjustment to its
purchase price allocation. In addition, the Company agreed and paid the balance
of the notes payable to related parties of $905,960 in full by November 25,
1998. The two former stockholders retained their options to purchase the
Company's common stock subject to all original terms and conditions. (See
Note 5)

In connection with the acquisitions of IDP and PRIMO, the Company completed
a public offering of 3,491,493 shares of common stock for net proceeds of
$26,287,866.

STOCK OPTIONS

On January 6, 1997, the Company adopted the 1997 Stock Option Plan (the
Option Plan) which permits the Company to grant up to 600,000 options to
officers, directors and employees who contribute materially to the success of
the Company. In September 1997, the Company increased the number of options
available for grant under the plan to 2,200,000. Stock options are generally
granted at prices which the Company's Board of Directors believes approximates
the fair market value of its common stock at the date of grant. The options vest
ratably over a stated period of time not to exceed four years. The contractual
term of the options is five years.

F-17

S-1 58th Page of 93 TOC 1st Previous Next Bottom Just 58th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
Common stock option activity was as follows:

[Download Table]

WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------

Outstanding at October 31, 1997................... 1,857,000 $6.18
Options granted................................... 865,400 7.46
Options exercised................................. -- --
Options canceled or expired....................... (226,583) 5.35
---------- -----
Outstanding at October 31, 1998................... 2,495,817 $6.70
Options granted................................... 413,000 2.87
Options exercised.................................
Options canceled or expired....................... (1,026,384) 5.56
---------- -----
Outstanding at October 31, 1999................... 1,882,433 $5.22
========== =====
Exercisable at October 31, 1999................... 1,289,098 $6.00
========== =====

The total options outstanding include 600,000 options granted to the former
IDP stockholders that are not included in the Option Plan.

As of October 31, 1999, there were 317,567 options available for future
grants under the Option Plan.

During fiscal 1999, the Company repriced approximately 750,000 stock options
granted to certain executives in accordance with their employment agreements. No
compensation expense was recognized as the exercise price for the repriced
options was at or above fair market value of the underlying stock on the date
repriced.

The following table summarizes information about fixed-price stock options
outstanding at October 31, 1999:

[Download Table]

NUMBER AVERAGE WEIGHTED-
OUTSTANDING REMAINING AVERAGE
AT OCTOBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE
------------------------ -------------- ----------- ---------

$1.75-$4.15................................ 1,087,933 6.60 $3.17
$4.50-$6.50................................ 189,500 3.49 5.73
$6.75-$8.75................................ 605,000 8.95 8.73
--------- ---- -----
$1.75-$8.75................................ 1,882,433 7.05 $5.22
========= ==== =====

Had compensation expense related to the stock options been determined based
on the fair value at the grant date for options granted during the years ended
October 31, 1997, 1998, and 1999 consistent

F-18

S-1 59th Page of 93 TOC 1st Previous Next Bottom Just 59th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY (CONTINUED)
with the provisions of SFAS 123, the Company's net income and earnings per share
would have been as follows:

[Download Table]

YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------

Net income (loss) pro forma............ $1,098,900 $(2,535,579) $(34,865,823)
Earnings (loss) per share pro forma.... $ 0.24 $ (0.35) $ (3.71)
Earnings (loss) per share assuming
dilution pro forma................... $ 0.23 $ (0.35) $ (3.71)

The effect of applying SFAS 123 on pro forma net income as stated above is
not necessarily representative of the effects on reported net income for future
years due to, among other things, the vesting period of the stock options and
the fair value of additional options in the future years.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999: dividend
yield of 0%, expected volatility of 46%, 84% and 86%, respectively; risk-free
interest rates of 5.75%, 5.50% and 6.70%, respectively; and expected life of the
option term of five years. The weighted average fair values of the options
granted in 1997, 1998 and 1999 with a stock price equal to the exercise price is
$6.18, $5.21 and $2.02, respectively. The weighted average fair value of options
granted in 1998 with a stock price greater than the exercise price is $7.36.

11. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Components of the Company's net deferred tax asset balance are as follows:

[Download Table]

OCTOBER 31,
-------------------------
1998 1999
----------- -----------

Deferred tax asset:
Accrued expenses................................... $ 810,378 $ 280,100
Net operating loss carryforwards................... 970,689 5,569,085
Basis differences of acquired assets............... 939,468 411,334
Asset reserves..................................... 1,106,423 1,294,156
----------- -----------
Total deferred asset............................... 3,826,958 7,554,675
Deferred tax credit:
Acquisition of intangible assets................... (100,000) (100,000)
Depreciation....................................... (35,789) (205,674)
Valuation allowance................................ (3,061,169) (5,966,306)
----------- -----------
Net deferred tax asset............................. $ 630,000 $ 1,282,695
=========== ===========

As of October 31, 1999, the Company had approximately $14.4 million in net
operating loss carryforwards which expire between 2012 and 2019. Approximately
$1.5 million of those net operating

F-19

S-1 60th Page of 93 TOC 1st Previous Next Bottom Just 60th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
loss carryforwards relate to STMS and IDP and may be significantly limited under
Section 382 of the Internal Revenue Service Code and the SRLY rules. The Company
has recorded a valuation allowance for a portion of the deferred tax assets
because realizability of those assets is uncertain. The Company expects to file
claims for tax refunds using its net operating loss carryback in fiscal 2000.

The components of the provision for income taxes are as follows:

[Download Table]

YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- ----------

Current tax expense (benefit):
Federal...................................... $671,070 $411,709 $ (974,781)
State........................................ 125,900 91,144 (213,975)
-------- -------- ----------
796,970 502,853 (1,188,756)

Deferred tax expense:
Federal...................................... (1,800) 155,675 535,500
State........................................ (300) 27,472 94,500
-------- -------- ----------
(2,100) 183,147 630,000
-------- -------- ----------
Total provision for (benefit from) income
taxes...................................... $794,870 $686,000 $ (558,756)
======== ======== ==========

The reconciliation of income tax from the Federal statutory rate of 34% is:

[Download Table]

YEARS ENDED OCTOBER 31,
----------------------------------
1997 1998 1999
-------- -------- ------------

Tax at statutory rates:.................... $719,838 $566,413 $(11,536,368)
Non-deductible expenses.................... 8,291 35,480 7,277,936
Valuation allowance........................ -- -- 4,278,322
State income tax, net of federal benefit... 66,741 84,107 (578,646)
-------- -------- ------------
$794,870 $686,000 $ (558,756)
======== ======== ============

In September 1997 and in May 1998, respectively, the Company acquired the
stock of STMS and IDP in tax-free exchanges. The stock acquisitions were
accounted for using the purchase method. Included in the Company's deferred tax
assets at October 31, 1999 is approximately $3.8 million representing the
differences between the assigned values and tax bases of the assets and
liabilities acquired, as well as net operating loss carry forwards acquired.
These deferred tax assets were fully reserved at the dates of acquisition. To
the extent these deferred tax assets are subsequently realized, the resulting
tax benefit will be applied to reduce goodwill recorded in connection with the
acquisitions and there will be no impact on income tax expense.

12. RETIREMENT PLANS

401(K) PLANS

Effective April 1, 1995, the Company adopted a 401(k) plan (the "Former
Plan"). Employees are eligible to participate after completing six months of
services and attaining age 18. Employees can defer

F-20

S-1 61st Page of 93 TOC 1st Previous Next Bottom Just 61st

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RETIREMENT PLANS (CONTINUED)
up to 15% of compensation. Employee contributions are subject to Internal
Revenue Service limitations. All employees who contributed to the Former Plan
are eligible to share in discretionary Company matching contributions. During
the years ended October 31, 1997, 1998 and 1999, the Company contributed
$11,855, $0 and $0, respectively, to the Former Plan.

In connection with the IDP Acquisition, the Company assumed IDP's
tax-deferred savings plan under Section 401(k) of the Internal Revenue Code
which is offered to all employees who have attained the age of 21. The plan
provides for contributions by employees as well as matching and discretionary
contributions by the Company. The Company made contributions of approximately
$123,000 during the period from May 1, 1998 through October 31, 1998.

Effective May 1, 1999 the Company amended and terminated the existing plans.
Simultaneous to the termination, the Company adopted a new 401(k) (the "Plan")
for all current employees. Under the Plan, employees are eligible to participate
after completing 90 days of service and attaining the age of 18. Employees can
defer up to 15% of compensation. Employee contributions are subject to Internal
Revenue Service limitations. All employees who contributed to the Plan are
eligible to share in discretionary Company matching contributions. Company
contributions vest over 5 years. The Company did not contribute to the Plan in
1999.

DEFINED BENEFIT PLAN

The Company has a defined benefit plan (the "Pension Plan") covering
substantially all salaried employees. The Pension Plan benefits are based on
years of service and the employee's compensation. The Company's funding policy
is to annually contribute amounts sufficient to meet minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974
("ERISA"). Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future. The assets of the Pension Plan are invested in money market and
corporate debt and equity instruments. The Company contributed approximately
$63,777 for the Pension Plan year ending October 31, 1997. The Company has
accrued, but not yet paid, approximately $104,000, which amount represents its
minimum funding requirements under ERISA for fiscal years 1998 and 1999.

On January 6, 1997, the Company amended the Pension Plan to change the
benefits to be paid out after retirement from 100% to 40% of its initial
liability. This resulted in a reduction of the projected benefit obligation by
approximately $150,000.

On October 31, 1999, the Company amended and terminated the Defined Benefit
Plan. Under the termination, no additional benefits accrued to participants in
the Plan after that date. In addition, all existing participants in the Plan
became 100% vested in their accrued benefits in the Plan as of that date. No
gain or loss was recognized as a result of the termination of the Pension Plan.
The Company will distribute the vested benefits to the participants in fiscal
year 2000.

F-21

S-1 62nd Page of 93 TOC 1st Previous Next Bottom Just 62nd

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RETIREMENT PLANS (CONTINUED)
The following table sets forth the Pension Plan's funded status as reported
on activity, and amounts recognized in the Company's consolidated financial
statements:

[Download Table]

OCTOBER 31,
--------------------
1998 1999
-------- ---------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................ $321,559 $ 376,404
Service cost........................................... 48,195 48,195
Interest cost.......................................... 27,034 28,230
Actuarial gain (loss).................................. (20,384) 60,770
-------- ---------
Benefit obligation at end of year...................... 376,404 513,599
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year......... 147,041 306,341
Actual return on plan assets........................... 95,523 81,840
Employer contributions................................. 63,777 --
-------- ---------
Fair value of plan assets at end of year............... 306,341 388,181
FUNDED STATUS:
Unrecognized actuarial loss............................ (70,063) (125,418)
Unrecognized transition asset.......................... (11,339) 3,028
Unrecognized prior service cost........................ 11,477 --
-------- ---------
Accrued benefit cost................................... $(69,925) $(122,390)
======== =========

Components of net periodic benefit cost

[Download Table]

YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------

Service cost................................... $ 44,140 $ 48,195 $ 48,195
Interest cost.................................. 19,355 27,034 28,230
Actual return on assets........................ 21,295 (95,523) (81,840)
Net amortization and deferral.................. (33,340) 90,219 57,880
-------- -------- --------
Total net periodic pension cost................ $ 51,540 $ 69,925 $ 52,465
======== ======== ========

Key assumptions used in the actuarial valuation were:

[Enlarge/Download Table]

YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------

Weighted average discount rate.............................. 7.5% 7.5% 6.5%
Rate of return on assets:
Pre-retirement............................................ 8.0% 8.0% 8.0%
Post-retirement........................................... 8.0% 8.0% 8.0%

F-22

S-1 63rd Page of 93 TOC 1st Previous Next Bottom Just 63rd

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
per share:

[Enlarge/Download Table]

YEARS ENDED OCTOBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ------------

Numerator:
Net income (loss)....................................... $1,322,300 $ 979,921 $(33,607,145)
Denominator:
Denominator for basic earnings per share-
weighted-average shares............................... 4,552,055 7,231,397 9,403,775
Effect of dilutive securities:
Employee stock options.................................. 124,906 251,132 --
Warrants................................................ 1,887 9,722 --
---------- ---------- ------------
Dilutive potential common shares........................ 126,793 260,854 --
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions....... 4,678,848 7,492,251 9,403,775
Basic earnings per share................................ $ 0.29 $ 0.14 $ (3.57)
Diluted earnings per share.............................. $ 0.28 $ 0.13 $ (3.57)

14. CONTINGENCIES

EMPLOYEE TERMINATION

In November 1998, a former employee of the Company (who had previously been
an employee and stockholder of STMS) filed a demand for arbitration with the
American Arbitration Association, alleging a breach of his employment agreement
with the Company and seeking "in excess of $2,350,000" in damages from the
Company. The Company filed an answer denying the former employee's allegations
and a counterclaim for this former employee's breach of the employment agreement
and for conversion of certain of the Company's property. In August 1999, the
arbitrator entered a judgment in favor of the former employee for approximately
$1.7 million plus attorney's fees and costs. The decision was upheld on appeal
in September 1999. The Company has properly accrued for this claim. Included in
the loss accrual is an estimate of interest and legal costs included in the
award. Although the former employee has not submitted a claim for such costs,
the Company believes its estimated accrual for these costs is adequate. The
Company is currently reviewing whether a further appeal is warranted.

TEAMING PARTNERSHIP TERMINATION

In May 1999, a former contract teaming partner filed a demand for
arbitration with the American Arbitration Association, alleging breach of a
certain contract agreement with the Company. The issue relates to disputed
commissions due to the former teaming partner. The former teaming partner is
seeking damages of approximately $186,000. The matter is currently in
arbitration. Although the Company is aggressively defending this claim, it has
accrued this potential liability in the consolidated financial statements as of
October 31, 1999.

F-23

S-1 64th Page of 93 TOC 1st Previous Next Bottom Just 64th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. CONTINGENCIES (CONTINUED)
IDP ACQUISITION

In May 1997, the U.S. Air Force awarded a contract to IDP. Dynamic
Decisions, Inc. (DDI), a competitor for this contract, protested the contract
award to the Small Business Administration (SBA), which protest was denied. DDI
filed suit against the SBA and Air Force seeking review of the award decision.
IDP intervened in the litigation and the litigation was subsequently settled.
Based on the terms of the settlement, IDP agreed to pay DDI 1.8% of the first
$250 million of IDP's gross sales under the contract. On June 1, 1998, the
Company filed a Complaint for Declaratory Judgment in U.S. District Court for
the Eastern District of Virginia seeking a declaration that DDI is not entitled
to receive payments under the settlement agreement. This filing is based on the
Company's position that DDI breached the settlement agreement. DDI has
counter-claimed against the Company denying it breached the settlement agreement
and seeking the payments. The U.S. District Court has ruled in DDI's favor
awarding damages of $1,500. DDI is currently appealing this decision. The
Company is aggressively pursuing all avenues of defense against this appeal.

On July 31, 1998 the Company received notice from the SBA that it was
denying the request of the U.S. Air Force to waive the requirement to terminate
IDP's Desktop V contract for the convenience of the Government upon the change
in control of IDP to the Company. The Company appealed the denial by the SBA to
the SBA's Office of Hearings and Appeals. On August 31, 1999, the SBA denied the
appeal and ruled that the U.S. Air Force must terminate-for-convenience the
Desktop V contract. Under a termination-for-convenience, the Government shall
reimburse the Company for all costs incurred in the performance of the contract.
The Company expects to recover from the Government a portion or all of its
unreimbursed costs. The Company is currently in negotiations with the Government
regarding this matter.

MICROSOFT LICENSING AGREEMENT

IDP entered into a Government Integrator Agreement, as amended, with
Microsoft Corporation (Microsoft) in 1998 for the licensing of certain Microsoft
software. During 1999, Microsoft asserted that the Company owed approximately
$800,000 under this agreement due primarily to amended billings by Microsoft
concerning sales by the Company. The Company has accrued for amounts due
Microsoft based on the original billing terms. The Company believes that it has
meritorious defenses to Microsoft's allegations and intends to vigorously defend
itself if a suit is filed. The Company can't estimate at this time the amount of
the liability to be incurred, if any, but does not believe that this matter will
have a material adverse effect upon the Company's financial position or results
of operations and as such, the Company has not recorded any amount relating to
this matter, beyond amount accrued as noted above, in the accompanying financial
statements.

MONARCH TECHNOLOGY, INC.

F-24

S-1 65th Page of 93 TOC 1st Previous Next Bottom Just 65th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. CONTINGENCIES (CONTINUED)
estimate at this time the amount of the liability to be incurred, if any, but
does not believe that this matter will have a material adverse effect upon the
Company's financial position or results of operations and as such, the Company
has not recorded any amount relating to this matter in the accompanying
financial statements.

F-25

S-1 66th Page of 93 TOC 1st Previous Next Bottom Just 66th

INTERIM INFORMATION

DUNN COMPUTER CORPORATION

CONSOLIDATED BALANCE SHEETS

[Enlarge/Download Table]

OCTOBER 31, JANAURY 31,
1999 2000
------------ ------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 655,450 $ 987,127
Accounts Receivable, net.................................. 5,063,041 3,629,922
Inventory, net............................................ 5,497,634 5,751,061
Deferred Tax Asset........................................ 1,282,695 1,330,262
Income tax receivable..................................... 585,769 585,769
Prepaid expenses and other current assets................. 118,594 223,999
------------ ------------
Total current assets........................................ 13,203,183 12,508,140

Property and equipment, net............................... 1,323,696 1,165,076
Equipment on lease, net................................... 3,906,011 3,583,513
Goodwill and other intangible assets, net................. 3,559,005 3,471,539
Investments............................................... 150,000 150,000
Other assets.............................................. 145,121 170,096
------------ ------------
Total assets.............................................. $ 22,287,016 $ 21,048,364
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,822,979 $ 3,397,113
Accrued expenses.......................................... 2,515,653 4,924,542
Accrued litigation costs.................................. 2,000,000 2,000,000
Line of credit............................................ 3,790,705 --
Notes payable, current portion............................ 324,933 443,471
Unearned Revenue.......................................... 1,170,417 2,586,910
------------ ------------
Total Current Liabilities................................... 14,624,687 13,352,036

Notes payable, long-term portion.......................... 545,250 403,234

Line of credit--long-term................................. 2,300,000 2,300,000
Stockholders' equity
Preferred stock $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.001 par value: 20,000,000 shares
authorized, 9,419,509 and 9,424,680 shares issued and
outstanding at October 31, 1999 and January 31, 2000,
respectively;........................................... 9,420 9,425
Additional paid in capital................................ 37,721,749 37,737,057
Treasury stock, 400,000 shares;........................... (3,432,500) (3,432,500)
Retained earnings......................................... (29,481,590) (29,320,888)
------------ ------------
Total stockholders' equity.................................. 4,817,079 4,993,094
------------ ------------
Total liabilities and stockholders' equity.................. $ 22,287,016 $ 21,048,364
============ ============

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

F-26

S-1 67th Page of 93 TOC 1st Previous Next Bottom Just 67th

INTERIM INFORMATION

DUNN COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

[Enlarge/Download Table]

THREE MONTHS ENDED
JANUARY 31,
-------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)

Net revenues................................................ $11,711,620 $7,128,063
Cost of revenue............................................. 9,684,993 5,646,745
----------- ----------
Gross profit................................................ 2,026,627 1,481,318

Selling and marketing....................................... 750,887 299,810
General and administrative.................................. 1,646,914 1,519,265
Amortization of goodwill.................................... 190,329 87,466
----------- ----------
Loss from operations........................................ (561,503) (425,223)

Interest expense............................................ (211,170) (160,919)
Other expense............................................... -- (3,156)
----------- ----------
Net loss from operations before extraordinary item.......... (772,673) (589,298)

Extraordinary gain--early extinguishment of debt............ -- 750,000
----------- ----------
Net income (loss) before income taxes....................... (772,673) 160,702

Provision for (benefit from) income taxes................... (225,000) --
----------- ----------
Net income (loss)........................................... $ (547,673) $ 160,702
=========== ==========
Basic earnings (loss) per share............................. (.06) 0.02

Diluted earnings (loss) per share........................... (.06) 0.02

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

F-27

S-1 68th Page of 93 TOC 1st Previous Next Bottom Just 68th

INTERIM INFORMATION

DUNN COMPUTER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

[Enlarge/Download Table]

THREE MONTHS ENDED
JANUARY 31,
-------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)

OPERATING ACTIVITIES
Net income (loss)........................................... $ (547,673) $ 160,702
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities................ :
Depreciation and amortization of property and equipment..... 604,531 728,534
Amortization of goodwill and other intangibles.............. 190,329 87,466
Changes in operating assets and liabilities:
Accounts receivable....................................... 7,675,082 1,433,119
Investment in sales-type leases........................... 552,248 --
Inventory................................................. 1,032,364 (253,427)
Prepaid expenses and other assets......................... 80,090 (130,380)
Accounts payable.......................................... (8,474,232) (1,425,866)
Accrued expenses.......................................... (2,213,506) 2,408,889
Deferred tax asset........................................ -- (47,567)
Unearned revenue and other liabilities.................... (1,031,270) 1,416,493
----------- -----------
Net cash provided by (used in) operating activities......... (2,132,037) 4,377,963

INVESTING ACTIVITIES
Purchases of property and equipment......................... (20,451) (247,416)
----------- -----------
Net cash used in investing activities....................... (20,451) (247,416)

FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... -- 15,313
Payments on notes payable................................... (957,031) (23,478)
Purchase of treasury stock.................................. (2,125) --
Proceeds from (repayments on) lines of credit, net.......... 5,740,886 (3,790,705)
----------- -----------
Net cash provided by (used in) financing activities......... 4,781,730 (3,798,870)
Net increase in cash and cash equivalents................... 2,629,242 331,677
----------- -----------
Cash and cash equivalents at beginning of year.............. -- 655,450
----------- -----------
Cash and cash equivalents at end of year.................... $ 2,629,242 $ 987,127
=========== ===========

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 216,507 $ 165,365
Income taxes paid........................................... -- --

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

F-28

S-1 69th Page of 93 TOC 1st Previous Next Bottom Just 69th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements for the three months ended
January 31, 2000 and 1999 are unaudited and include all adjustments which, in
the opinion of management, are necessary to present fairly the results of
operations for the periods then ended. All such adjustments are of a normal and
recurring nature. These consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K of Dunn Computer Corporation
(the "Company") which includes consolidated financial statements and notes
thereto for the years ended October 31, 1999 and 1998.

2. EARLY EXTINGUISHMENT OF DEBT

In conjunction with the purchase of IDP, the Company assumed a credit
facility of $25,000,000 secured by inventory and accounts receivable of IDP. The
outstanding balance on this line of credit at October 31, 1999 was approximately
$4,622,000. The interest rate applicable to this line of credit at that date was
8.05%.

On November 8, 1999, the Company executed an agreement with the financial
institution to terminate this facility. Under the terms of the agreement, the
Company repaid approximately $3.0 million of the outstanding principal balance
prior to December 31, 1999. In conjunction with the agreement, approximately
$750,000 ($.08 per share) was forgiven by the financial institution and the
remaining principal balance of approximately $832,000 was converted into a two
year note maturing in January 2002 bearing interest at the prime rate. The
Company has properly reflected the $750,000 as an extraordinary gain for the
quarter ended January 31, 2000.

3. LEASE TRANSACTION

In December 1999, the Company assigned payments from one of its operating
leases to a financing company in exchange for the present value of the minimum
lease payments. The Company has recorded this amount as unearned revenue and
will recognize the revenue over the lease term. The lease term expires on
September 30, 2000.

4. RESTRUCTURE OF LOAN

On February 11, 2000, the Company amended its primary line of credit
facility whereby the maximum availability was reduced from $15 million to
$5 million and the interest rate was increased to the prime rate plus 1%. The
amended line of credit expires November 30, 2000.

5. CONTINGENCIES

EMPLOYEE TERMINATION

In November 1998, a former employee of the Company filed a demand for
arbitration with the American Arbitration Association, alleging a breach of his
employment agreement with the Company and seeking in excess of $2,350,000 in
damages from the Company. The Company filed an answer denying the claimant's
allegations and stating a counterclaim against the former officer for breach of
the employment agreement and for conversion of certain of the Company's
property. In a Final Arbitration Award dated August 27, 1999, the arbitrator
found in favor of the former employee on certain of the issues presented at the
arbitration and awarded the former employee in excess of $1.6 million in damages
and attorneys' fees. On December 10, 1999, the Fairfax County Circuit Court

F-29

S-1 70th Page of 93 TOC 1st Previous Next Bottom Just 70th

DUNN COMPUTER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. CONTINGENCIES (CONTINUED)
denied the Company's motion to vacate the award and confirmed the award. The
Company has filed a writ with the Virginia Supreme Court seeking an appeal of
the Circuit Court's ruling.

MICROSOFT LICENSING AGREEMENT

IDP entered into a Government Integrator Agreement, as amended, with
Microsoft Corporation (Microsoft) in 1998 for the licensing of certain Microsoft
software. During 1999, Microsoft asserted that the Company owed approximately
$800,000 under this agreement due primarily to amended billings by Microsoft
concerning sales by the Company. The Company has accrued for amounts due
Microsoft based on the original billing terms. The Company believes that it has
meritorious defenses to Microsoft's allegations and intends to vigorously defend
itself if a suit is filed. The Company cannot estimate at this time the amount
of the liability to be incurred, if any, but does not believe that this matter
will have a material adverse effect upon the Company's financial position or
results of operations and as such, the Company has not recorded any amount
relating to this matter, beyond amounts accrued as noted above, in the
accompanying financial statements.

MONARCH TECHNOLOGY, INC.

In July 1999, Monarch Technology, Inc. ("Monarch") named the Company as a
cross-claim defendant in a legal action pending in Orange County, California in
which Worldnet Computers, Inc. had filed suit against Monarch. Monarch's cross
claims are that the Company is liable for actions of a former employee who
allegedly engaged in a scheme that resulted in Monarch paying $130,000 to the
employee and not receiving products which the employee allegedly stated that the
Company would sell to Monarch or its agent. Monarch claims that the Company is
liable for the $130,000 plus interest, attorneys fees and other consequential
damages totaling an approximately $60,000. The Company cannot estimate at this
time the amount of the liability to be incurred, if any, but does not believe
that this matter will have a material adverse effect upon the Company's
financial position or results of operations and as such, the Company has not
recorded any amount relating to this matter in the accompanying financial
statements.

F-30

S-1 71st Page of 93 TOC 1st Previous Next Bottom Just 71st

REPORT OF KPMG LLP, INDEPENDENT AUDITORS

The Boards of Directors
International Data Products, Corp. and Puerto Rico Industrial Manufacturing
Operations, Corp.:

We have audited the accompanying combined balance sheets of International
Data Products, Corp. and combined company as of September 30, 1997, and the
related combined statements of income and retained earnings and cash flows for
each of the years in the two year period ended September 30, 1997. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of International Data
Products, Corp. and combined company as of September 30, 1997, and the results
of their operations and their cash flows for each of the years in the two year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.

/s/ KPMG LLP

McLean, Virginia
November 7, 1997

F-31

S-1 72nd Page of 93 TOC 1st Previous Next Bottom Just 72nd

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

COMBINED BALANCE SHEET

[Download Table]

1997
----------

ASSETS
Current assets:
Cash and cash equivalents................................... 1,013,198
Accounts receivable-trade (net of allowance of $131,821 as
of September 30, 1997).................................... 5,724,022
Employee and stockholder advances........................... 119,390
Inventory, net.............................................. 15,991,331
Income taxes receivable..................................... 401,775
Deferred income taxes....................................... 443,415
Prepaid expenses............................................ 790,160
Other current assets........................................ 327,150
Total current assets........................................ 24,810,441
Fixed assets, net of accumulated depreciation and
amortization.............................................. 2,252,851
Deferred income taxes....................................... 17,631
Investment in joint venture, at cost........................ 31,200
----------
Other assets................................................ 199,732
Total assets................................................ 27,311,855
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................................. 5,634,687
Accounts payable trade...................................... 12,810,200
Accrued expenses............................................ 1,446,074
Income taxes payable........................................ 58,456
Notes payable--current portion.............................. 368,792
Notes payable--related parties.............................. 1,498,397
----------
Other liabilities........................................... 58,950
Total current liabilities................................... 21,875,556

Long-term liabilities:
Notes payable, net of current portion....................... 164,308
Deferred income taxes....................................... --
Deferred rent............................................... 163,165
----------
Total liabilities........................................... 22,203,029
Commitments and contingencies
Stockholders' equity:
International Data Products, Corp. common stock, no par
value, 5,000 shares authorized, 100 shares issued and
outstanding............................................... 40,000
Puerto Rico Industrial Manufacturing Operations Corp. common
stock, no par value, 10,000 shares authorized, 7,000
shares issued and outstanding............................. 132,000
Retained earnings........................................... 4,936,826
----------
Total stockholders' equity.................................. 5,108,826
Total liabilities and stockholders' equity.................. 27,311,855
==========

See accompanying notes to combined financial statements.

F-32

S-1 73rd Page of 93 TOC 1st Previous Next Bottom Just 73rd

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

[Enlarge/Download Table]

YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997
----------- -----------

Sales....................................................... 84,291,838 71,920,739
Cost of sales............................................... 71,889,685 58,995,644
---------- ----------
Gross profit................................................ 12,402,153 12,925,095
Operating expenses.......................................... 11,232,702 11,598,705
---------- ----------
Income from operations...................................... 1,169,451 1,326,390
Other income (expenses):
Bid protest settlement.................................... 750,000 --
Interest income........................................... 120,369 31,359
Interest expense.......................................... (884,818) (593,012)
Miscellaneous, net........................................ 5,742 (1,109)
---------- ----------
Income before income taxes.................................. 1,160,744 763,628
Income tax expense (benefit)................................ (17,708) (417,447)
---------- ----------
Net income.................................................. 1,178,452 1,181,075
---------- ----------
Retained earnings, beginning of year........................ 2,577,299 3,755,751
Retained earnings, end of year.............................. 3,755,751 4,936,826

See accompanying notes to combined financial statements.

F-33

S-1 74th Page of 93 TOC 1st Previous Next Bottom Just 74th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

COMBINED STATEMENTS OF CASH FLOWS

[Enlarge/Download Table]

YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997
----------- -----------

Cash flows from operating activities:
Net income................................................ 1,178,452 1,181,075
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 411,979 573,228
Deferred income taxes................................... (363,121) (462,026)
Loss on disposal of fixed assets........................ 3,963 --
(Increase) decrease in:
Accounts receivable--trade, net....................... 9,167,428 911,968
Employee and stockholder advances..................... 102,282 (9,507)
Inventory, net........................................ (6,374,158) (651,489)
Prepaid expenses and other assets..................... (731,624) 339,654
Income taxes receivable............................... -- (401,775)
Increase (decrease) in:
Accounts payable--trade............................... (3,151,190) 1,155,796
Accrued expenses...................................... 148,761 700,277
Other liabilities..................................... 184,064 (156,660)
Income taxes payable.................................. (137,269) (121,916)
---------- ----------
Net cash provided by (used in) operating activities......... 439,567 3,058,625
Cash flows from investing activities:
Acquisitions of fixed assets.............................. (882,550) (1,186,157)
Proceeds from sale of fixed assets........................ 15,723 --
---------- ----------
Net cash used in investing activities....................... (866,827) (1,186,157)
Cash flows from financing activities:
Net (repayments) borrowings on line of credit............. (1,336,363) (951,002)
Proceeds from notes payable............................... 2,789,644 320,758
Principal payments on notes payable....................... (811,781) (543,703)
---------- ----------
Net cash (used in) provided by financing activities......... 641,500 (1,173,947)

Net increase (decrease) in cash and cash equivalents........ 214,240 698,521
Cash and cash equivalents, beginning of year................ 100,437 314,677
---------- ----------
Cash and cash equivalents, end of year...................... 314,677 1,013,198
========== ==========

Supplemental Cash Flow Information:

The Company paid income taxes of approximately $224,000 and $713,000, and
paid interest of approximately $629,000 and $496,000, during the years ended
September 30, 1996, and 1997, respectively.

See accompanying notes to combined financial statements.

F-34

S-1 75th Page of 93 TOC 1st Previous Next Bottom Just 75th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS

SEPTEMBER 30, 1996, AND 1997

(1) BASIS OF PRESENTATION AND RELATED MATTERS

ORGANIZATION

The International Data Products, Corp. combined financial statements include
the accounts of International Data Products, Corp. ("IDP") and Puerto Rico
Industrial Manufacturing Operations, Corp. ("PRIMO"). IDP and PRIMO are under
common family ownership control. All material intercompany accounts and
transactions have been eliminated in combination. IDP and PRIMO combined is
hereinafter referred to as the "Company".

IDP was incorporated in Maryland on February 27, 1984. The Company sells
computer equipment and provides computer training and maintenance service
primarily to agencies and suppliers of the federal government. For each of the
two years ended September 30, 1996 and 1997, approximately 8 percent and
6 percent, respectively, of the Company's revenue was from federal contracts
that were awarded under section 8(a) of the Small Business Act.

Puerto Rico Industrial Manufacturing Operations, Corp. is incorporated under
the laws of the Commonwealth of Puerto Rico. PRIMO manufactures computers and
peripheral equipment for IDP. Substantially all of PRIMO's sales are to IDP,
which have been eliminated in the accompanying combined financial statements.

The Company operates in a competitive environment subject to technological
change and the emergence of new technologies, although the Company believes that
its products and services are, or would be, upgradable to new technologies.

CASH AND CASH EQUIVALENTS

The Company maintains demand deposits with several financial institutions.
At times, deposits exceed federally insured limits, but management does not
consider this a significant concentration of credit risk. Cash equivalents
consist of highly liquid investments with original maturities of 90 days or
less. The fair market value of such instruments approximates cost.

INVENTORY

Inventory consists of parts and material and is stated at the lower of cost,
using weighted average cost method, or market. The Company has established
reserves for obsolete and excess inventory at $796,404 as of September 30, 1997.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and depreciated using the
straight-line method based on estimated useful lives of three to seven years.
Maintenance and repair costs are charged to expense as incurred. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
improvement or the remaining term of the lease.

REVENUE RECOGNITION

The Company recognizes revenues from hardware and software sales at time of
receipt by the customer. Service revenues are recognized over the contractual
period as the service is provided.

F-35

S-1 76th Page of 93 TOC 1st Previous Next Bottom Just 76th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(1) BASIS OF PRESENTATION AND RELATED MATTERS (CONTINUED)
ADVERTISING

The Company expenses the production costs of advertising the first time the
advertising is published, except for direct response advertising, which is
capitalized and amortized over its expected period of future benefit (generally
three months) based on the ratio of current direct response revenue to estimated
total direct response revenue. Direct response advertising consists primarily of
magazine advertisements which include item order numbers unique to the
advertising campaign.

At September 30, 1997, there were no advertising costs reported as prepaid
expenses. For the years ended September 30, 1996 and 1997, total advertising
expense was approximately $255,000, and $535,000, respectively.

WARRANTY EXPENSE

The Company reserves for estimated future warranty costs that may be
required to satisfy contractual requirements. Such provisions are accrued as the
related revenue is recognized. The typical warranty period ranges from one to
three years.

INCOME TAXES

The Company applies the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts and income tax
bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. The income tax provisions for IDP and PRIMO are
prepared separately and combined for financial reporting purposes.

PRIMO has been granted a tax exemption, with certain normal reservations,
from Puerto Rico income (90%), property (90%), and municipal license taxes (60%)
on its manufacturing operations under the Puerto Rico Tax Incentives Act of
1987, Act No. 8, as amended. This tax exemption is for a period of 20 years
ending on September 12, 2014.

CHANGE IN REPORTING PERIODS

PRIMO's reporting periods, as previously audited, were the nine months ended
September 30, 1996. For purposes of presenting the combined financial statements
of the Company, PRIMO's financial statements were conformed to reflect the year
ended September 30, 1996.

USE OF ESTIMATES

The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported assets and liabilities and
disclosures of contingent assets and liabilities. Actual results may differ from
those estimates.

F-36

S-1 77th Page of 93 TOC 1st Previous Next Bottom Just 77th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(2) ACCOUNTS RECEIVABLE

Accounts receivable, which are substantially all billed or billable, at
September 30, 1997 consist of the following:

[Download Table]

1997
---------

U.S. Government and agencies................................ 5,236,309
Commercial.................................................. 327,535
JTP Joint Venture (note 3).................................. 160,178
---------
5,724,022

Management of the Company believes that substantially all of the outstanding
accounts receivable will be collected within one year.

Revenues from several U.S. government agencies totaled approximately
$69,111,000 and $57,871,000, for the years ended September 30, 1996 and 1997,
respectively, including approximately $22,117,000 and $15,282,000 from the JTP
Joint Venture in 1996 and 1997, respectively (see note 3).

(3) INVESTMENT IN JOINT VENTURE

In November 1993, IDP formed a joint venture entity, Justice Technology
Partners Joint Venture ("JTP") with two other companies for the purpose of
obtaining and performing under a certain contract. JTP has a contract with a
federal government agency involving the sale and maintenance of computer
equipment. IDP provides the computer equipment to the joint venture and records
sales at cost plus its estimated share of the joint venture profits.

IDP has a 24 percent interest in JTP and the initial investment of $31,200
is recorded at cost. IDP's equity in the estimated earnings of the joint venture
is included in accounts receivable.

Summarized financial information for this unconsolidated joint venture
entity, as of and for the year ended December 1996, is as follows:

[Download Table]

DECEMBER 31, 1996
-----------------
(IN THOUSANDS)

Contract revenue............................................ 43,417
Net income.................................................. 5,992
Total current assets........................................ 12,252
Total assets................................................ 12,293
Total liabilities........................................... 9,979

Distributions received in excess of profit recognized, amounting to
approximately $59,000 is included as a reduction of accounts receivable at
September 30, 1996; and profits recognized in excess of distributions received,
amounting to approximately $116,000 is included in accounts receivable at
September 30, 1997.

F-37

S-1 78th Page of 93 TOC 1st Previous Next Bottom Just 78th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(4) FIXED ASSETS

Fixed assets as of September 30, 1997 consist of the following:

[Download Table]

1997
----------

Furniture and equipment..................................... 2,385,410
Transportation equipment.................................... 445,353
Leasehold improvements...................................... 357,123
Testing lab and equipment................................... 340,072
Production equipment........................................ 143,585
----------
Total....................................................... 3,671,543
Less accumulated depreciation and amortization.............. (1,418,692)
----------
Fixed assets, net........................................... 2,252,851
==========

(5) INDEBTEDNESS

Notes payable consists of the following:

[Download Table]

SEPTEMBER 30, 1997
------------------

Secured demand bank loan, interest at 10.25%................ 291,689
Secured automobile loans, interest ranging from 3.7% to
11.5%..................................................... 241,411
-------
Total notes payable......................................... 533,100
Less current portion........................................ 368,792
-------
Notes payable, noncurrent................................... 164,308
=======

F-38

S-1 79th Page of 93 TOC 1st Previous Next Bottom Just 79th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

Principal payments on the long-term debt for each of the fiscal years from 1998
to 2002 and thereafter are due as follows:

[Download Table]

YEAR ENDING SEPTEMBER 30,
-------------------------

1998........................................................ $368,792
1999........................................................ 65,723
2000........................................................ 49,292
2001........................................................ 42,598
2002........................................................ 6,695
--------
$533,100

Other notes payable consist of automobile loans and a demand bank loan. The
automobile loans are secured by the respective automobile, and the demand loan
is secured by the Company's accounts at the respective bank. The notes mature at
intervals between November 1997 and September 2001. Interest rates on the notes
range from 3.7 percent to 11.5 percent.

Notes payable to related parties are payable to certain stockholders and
their relatives, and employees. All notes payable to related parties are
classified as current liabilities as they are callable by the holder at any
time. Notes payable to related parties bear interest at rates ranging from 8 to
11 percent. The total amounts outstanding on these related party notes payable
were approximately $1,498,000 at September 30, 1997.

The Company has a line of credit facility of $15,000,000, of which
$5,000,000 is secured by the Company's inventory and $10,000,000 is secured by
accounts receivable. The outstanding balance on this line of credit at
September 30, 1997 was approximately $5,635,000. The interest rates applicable
to this line of credit as of September 30, 1997 was 8.5 percent. Subsequent to
year-end, the amounts available under this credit facility were increased to
$25,000,000 with an additional temporary overline of $7,000,000 available
through January 31, 1998. There is no formal expiration date on this facility
although it is subject to annual re-evaluation by the financial institution.

(6) INCOME TAXES

For combined financial reporting purposes, income (loss) before income taxes
for the years ended September 30, 1996 and 1997 include the following
components:

[Download Table]

1996 1997
--------- ----------

Income (loss) before income taxes:
Domestic (IDP)...................................... (222,933) (1,769,240)
Foreign (PRIMO)..................................... 1,383,677 2,532,868
--------- ----------
1,160,744 763,628

As discussed in Note 2, PRIMO has been granted a 90 percent exemption, with
certain reservations, for income taxes on its manufacturing operations under the
Tax Incentives Act of Puerto Rico of 1987, Act No. 8, as amended. This exemption
is for a period of twenty years and ends in September 2014. Further, PRIMO has
no temporary differences that would create deferred tax assets or liabilities as
of September 30, 1997.

F-39

S-1 80th Page of 93 TOC 1st Previous Next Bottom Just 80th

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(6) INCOME TAXES (CONTINUED)
The components of income tax expense (benefit) for the Company for the years
ended September 30, 1996 and 1997 are as follows:

[Download Table]

1996 1997
-------- --------

Current:
Federal............................................... 232,015 (60,439)
State................................................. 51,363 (13,380)
Foreign (PRIMO)....................................... 62,035 118,398
-------- --------
345,413 44,579
-------- --------

Deferred:
Federal............................................... (297,303) (356,045)
State................................................. (65,818) (105,981)
-------- --------
(363,121) (462,026)
-------- --------
(17,708) (417,447)
======== ========

Income tax expense (benefit) amounted to ($17,708) for 1996, an effective
rate of (2) percent; and ($417,447) for 1997, an effective rate of
(55) percent. The actual expense (benefit) differs from the "expected expense
(benefit)" for those years, computed by applying the U.S. federal corporate tax
rate of 34 percent in 1996 and 1997 to earnings (loss) before income tax
expense, as follows:

[Download Table]

1996 1997
-------- --------

Computed "expected" tax expense (benefit)................... 394,653 259,634
Increase (decrease) in income taxes resulting from:
Foreign income not subject to U.S. federal taxes, net of
foreign taxes........................................... (408,416) (742,756)
State and local income tax expense (benefit), net of
federal benefit......................................... (15,605) (78,710)
Increase in valuation allowance........................... -- 122,690
Nondeductible meals and entertainment expenses............ 27,199 17,581
Other, net................................................ (15,539) 4,114
-------- --------
(17,708) (417,447)
======== ========

F-40

S-1 81st Page of 93 TOC 1st Previous Next Bottom Just 81st

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1997 are
presented below:

[Download Table]

1997
--------

Deferred tax assets:
Inventory obsolescence reserve............................ 267,870
Warranty reserve.......................................... 76,799
Accrued interest on related party notes................... 116,331
Deferred rent............................................. 85,779
Section 263(A) inventory adjustment....................... 45,020
Accrued vacation.......................................... 43,977
Allowance for doubtful accounts........................... 50,908
Other..................................................... 30,242
--------
Total gross deferred tax assets............................. 716,926
Less: valuation allowance................................... (122,690)
--------
Net deferred tax assets..................................... 594,236
========
Deferred tax liabilities:
Income from JTP joint venture............................. (133,190)
Other..................................................... --
--------
Total deferred tax liabilities.............................. (133,190)
Net deferred tax asset (liability).......................... 461,046
========

The net deferred tax asset (liability) is reflected in the accompanying
balance sheets as:

[Download Table]

1997
--------

Current deferred tax assets................................. 443,415
Noncurrent deferred tax assets.............................. 17,631
Noncurrent deferred tax liabilities......................... --
-------
Net deferred tax asset (liability).......................... 461,046
=======

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible. Management considers scheduled
reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies that can be implemented by IDP in making this assessment.
Management has established a valuation allowance of $122,690 in 1997 to reduce
the deferred tax asset to a level where based upon the level of historical
taxable income, scheduled reversal of deferred tax liabilities, and projections
of future taxable income over the periods in which the temporary differences
become deductible based on available tax planning strategies, management
presently believes that it is more likely than not that IDP will realize the
benefits of these deductible differences.

F-41

S-1 82nd Page of 93 TOC 1st Previous Next Bottom Just 82nd

INTERNATIONAL DATA PRODUCTS, CORP. AND COMBINED COMPANY

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1996, AND 1997

(7) COMMITMENTS AND CONTINGENCIES

LEASES

The Company is obligated under various noncancelable operating leases for
office/warehouse space and office equipment. The future minimum lease
obligations under these noncancelable operating leases as of September 30, 1997
are approximately as follows:

[Download Table]

YEAR ENDING SEPTEMBER 30,
-------------------------

1998........................................................ $ 625,283
1999........................................................ 661,680
2000........................................................ 292,397
2001........................................................ 38,568
2002 and thereafter......................................... --
----------
$1,617,928

Rent expense under these operating leases amounted to approximately
$556,000, and $538,000 for the periods ended September 30, 1996, and 1997,
respectively. Rent payments are being expensed on a straight-line basis over the
life of the lease, with the difference recorded as deferred rent.

BID PROTEST SETTLEMENT

During the year ended September 30, 1996, IDP settled a contract award
dispute with a third party and recorded a $750,000 gain on settlement. Costs
relating to the bid protest were expensed in the period incurred and recorded as
operating expenses.

(8) RETIREMENT PLAN

IDP maintains a tax-deferred savings plan under Section 401(k) of the
Internal Revenue Code which is offered to all employees who have attained the
age of 21. The plan provides for contributions by employees as well as matching
and discretionary contributions by IDP. IDP made contributions of approximately
$210,000, and $261,000 to the plan during the years ended September 30, 1996,
and 1997.

F-42

S-1 83rd Page of 93 TOC 1st Previous Next Bottom Just 83rd

PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the Offering described in this
Registration Statement, all of which shall be paid by the Company. All of such
amounts (except the SEC Registration Fee, and the NASD Filing Fee) are
estimated.

[Download Table]

SEC Registration Fee........................................ 2,736
NASD Filing Fee............................................. 2,500
Nasdaq Filing Fee........................................... 2,500
Legal Fees and Expenses..................................... 25,000
Accounting Fees and Expenses................................ 25,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Miscellaneous............................................... 37,264
Total................................................... 100,000

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

VIRGINIA STOCK CORPORATION ACT

Section 697 A of the Virginia Stock Corporation Act ("VSCA") provides that a
corporation may indemnify an individual made a party to a proceeding because he
is or was a director against liability incurred in the proceeding if (1) he
conducted himself in good faith, (2) he believed, in the case of conduct in his
official capacity with the corporation, that his conduct was in its best
interests, and, in all other cases, that his conduct was at least not opposed to
its best interests, and (3) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. Section 697 C of the VSCA
provides that the termination of a proceeding by judgment, order, settlement or
conviction is not, of itself, determinative that the director did not meet the
standard of conduct set forth in Section 697 A.

Section 697 D of the VSCA provides that a corporation may not indemnify a
director under Section 697 in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation, or
in connection with any other proceeding charging improper personal benefit to
him, whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 697 of the VSCA in connection with
a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.

Section 698 of the VSCA states that, unless limited by its articles of
incorporation, a corporation shall indemnify a director who entirely prevails in
the defense of any proceeding to which he was a party because he is or was a
director of the corporation against reasonable expenses incurred by him in
connection with the proceeding.

Section 701 of the VSCA provides that a corporation may not indemnify a
director under Section 697 unless authorized in the specific case after a
determination has been made that indemnification of the director is permissible
in the circumstances because he has met the standard of conduct set forth in
Section 697. Such determination is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors not at the time parties to the
proceeding, (2) if such a quorum is not obtainable, by majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or more
directors not at the time parties to the proceeding, (3) by special legal
counsel selected as set forth in the

II-1

S-1 84th Page of 93 TOC 1st Previous Next Bottom Just 84th

statute, or (4) by the shareholders (without the vote of shares owned by or
voted under the control of directors who are at the time parties to the
proceeding).

Section 699 of the VSCA provides that a corporation may pay for or reimburse
the reasonable expenses incurred by a director who is a party to a proceeding in
advance of the final disposition of the proceeding if (1) the director furnishes
the corporation a written statement of his good faith belief that he has met the
standard of conduct described in Section 697, (2) the director furnishes the
corporation a written undertaking to repay the advance if it is ultimately
determined that he did not meet the standard of conduct, and (3) a determination
is made that the facts then known to those making the determination would not
preclude indemnification. Determinations and authorizations of payments under
Section 699 are to be made in the manner specified in Section 701 of the VSCA.

Under Section 700.1 of the VSCA, an individual who is made a party to a
proceeding because he is or was a director of a corporation may apply to a court
for an order directing the corporation to make advances or reimbursement for
expenses or to provide indemnification. The court shall order the corporation to
make advances and/or reimbursement for expenses or to provide indemnification if
it determines that the director is entitled to such advances, reimbursement or
indemnification and shall also order the corporation to pay the director's
reasonable expenses incurred to obtain the order. With respect to a proceeding
by or in the right of the corporation, the court may (1) order indemnification
of the director to the extent of his reasonable expenses if it determines that,
considering all the relevant circumstances, the director is entitled to
indemnification even though he was adjudged liable to the corporation and
(2) also order the corporation to pay the director's reasonable expenses
incurred to obtain the order of indemnification.

Section 702 of VSCA states that, unless limited by a corporation's articles
of incorporation, (1) an officer of the corporation is entitled to mandatory
indemnification under Section 698 of the VSCA, and is entitled to apply for
court-ordered indemnification under Section 700 of the VSCA, to the same extent
as a director, and (2) the corporation may indemnify and advance expenses to an
officer, employee or agent of the corporation to the same extent as to a
director.

Section 703 of the VSCA provides that a corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against liability asserted against
him or incurred by him in that capacity, or arising from his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of Sections 697 or 698 of the VSCA.

Section 704 of the VSCA states that a corporation shall have power to make
any further indemnity, including indemnity with respect to a proceeding by or in
the right of the corporation, and to make additional provision for advances and
reimbursement of expenses, to any director, officer, employee or agent that may
be authorized by its articles of incorporation or any bylaw made by the
shareholders or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against (1) his willful misconduct, or (2) a
knowing violation of the criminal law. Unless the articles of incorporation, or
any such bylaw or resolution expressly provide otherwise, any determination as
to the right to any further indemnity shall be made in accordance with
Section 701 B of the VSCA. Each such indemnity may continue as to a person who
has ceased to have the capacity referred to above and may inure to the benefit
of the heirs, executors and administrators of such person.

CERTIFICATE OF INCORPORATION

Article 11 of the Company's Articles of Incorporation provides that the
Company shall, to the fullest extent permitted by the law of Virginia, indemnify
an individual who is or was a director or

II-2

S-1 85th Page of 93 TOC 1st Previous Next Bottom Just 85th

officer of the Company and who was, is, or is threatened to be made, a named
defendant or respondent in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
formal or informal (collectively, a "proceeding"), against any obligation to pay
a judgment, settlement, penalty, fine (including any excise tax assessed with
respect to any employee benefit plan) or other liability and reasonable expenses
(including counsel fees) incurred with respect to such a proceeding, except such
liabilities and expenses as are incurred because of such director's or officer's
willful misconduct or knowing violation of criminal law.

Article 11 also provides that unless a determination has been made that
indemnification is not permissible, the Company shall make advances and
reimbursements for expenses reasonably incurred by a director or officer in a
proceeding as described above upon receipt of an undertaking from such director
or officer to repay the same if it is ultimately determined that such director
or officer is not entitled to indemnification.

Article 11 also provides that the determination that indemnification is
permissible, the authorization of such indemnification (if applicable), and the
evaluation as to the reasonableness of expenses in a specific case shall be made
as provided by law. Special legal counsel selected to make determinations under
such Article 11 may be counsel for the Company. The termination of a proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent shall not of itself create a presumption that a director or
officer acted in such a manner as to make him or her ineligible for
indemnification.

For the purposes of Article 11, every reference to a director or officer
includes, without limitation, (1) every individual who is a director or officer
of the Company, (2) an individual who, while a director or officer, is or was
serving at the Company's request as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, (3) an individual who
formerly was a director or officer of the Company or who, while a director or
officer, occupied at the request of the Company any of the other positions
referred to in clause (2) of this sentence, and (4) the estate, personal
representative, heirs, executors and administrators of a director or officer of
the Company or other person referred to herein. Service as a director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
controlled by the Company is deemed service at the request of the Company. A
director or officer is deemed to be serving an employee benefit plan at the
Company's request if such person's duties to the Company also impose duties on,
or otherwise involve services by, such person to the plan or to participants in
or beneficiaries of the plan.

INDEMNIFICATION AGREEMENTS

The Company may enter into indemnification agreements with its directors and
officers for the indemnification of and advancing of expenses to such persons to
the fullest extent permitted by law.

INSURANCE

Dunn has purchased directors and officers liability insurance in the amount
of $1.0 million.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following information relates to securities of Dunn Delaware issued or
sold within the past three years which were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof:

During the past three years, the Company sold securities in the transactions
described below. There were no underwriters involved in the transactions and
there were no underwriting discounts or

II-3

S-1 86th Page of 93 TOC 1st Previous Next Bottom Just 86th

commissions paid in connection therewith, except as disclosed below. The
issuance of these securities were considered to be exempt from registration
under Section 4(2) of the Act, as amended, and the regulations promulgated
thereunder. The purchasers of the securities in such transactions represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the certificate for the securities issued in such
transaction. The purchaser of the securities in such transactions had adequate
access to information about the Registrant.

In September, 1997 Dunn Delaware issued 150,000 shares of common stock to
the shareholders of STMS, a Virginia-based IT services company, as consideration
valued at $975,000 for all of the outstanding shares of common stock of STMS. In
addition, two selling stockholders received an option to purchase an additional
25,000 shares of Dunn common stock at an exercise price of $6.125 per share,
exercisable at any time prior to September 12, 2000. In November 1997, Dunn
reacquired 2,257 shares of its common stock in connection with a loan
forgiveness of approximately $63,000. In March 1998, Dunn repurchased from two
of the STMS selling stockholders 50,000 shares of its common stock and an option
to acquire 25,000 shares of its common stock for $457,500 and $75,750,
respectively.

In connection with Dunn's initial public offering in April 1997, Dunn sold
to the underwriter a warrant to purchase up to 100,000 shares of Dunn's common
stock, exercisable at $6.00 per share for a period of four years commencing
April 21, 2002.

As of the date of this prospectus under Dunn's 1997 Stock Option Plan, Dunn
has granted 1,832,000 options to purchase shares of Dunn.

On March 13, 2000, we sold 3,000 shares of our 5% Series A Convertible
Preferred Stock in a private placement transaction pursuant to Regulation D
Rule 506 of the Securities Act of 1933, as amended. In connection with the sale
we received gross proceeds of $3.0 million and issued 247,525 warrants
exercisable at $3.64 per share and 75,000 warrants at $4.57 per share.

On March 3, 2000, we issued 225,000 shares to John Signorello pursuant to
section 4(2) of the Securities Act of 1933, as amended. The shares were issued
to Mr. Signorello pursuant to the settlement agreement between Dunn and
Mr. Signorello.

II-4

S-1 87th Page of 93 TOC 1st Previous Next Bottom Just 87th

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.

(a) Exhibits.

[Download Table]

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

2.1 Acquisition Agreement, dated March 9, 1998, by and among
Dunn, the Company, George D. Fuster, D. Oscar Fuster, Carol
N. Fuster and Wendy E. Fuster (refiling to add index of
exhibits and schedules). (Filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)

2.2 Agreement of Merger, dated as of March 18, 1998, by and
among Dunn Merger Corp., a Delaware corporation, Dunn and
the Company. (Filed as Exhibit 2.2 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)

2.3 Stock Purchase Agreement, dated September 12, 1997, by and
among STMS Acquisition Corp., Dunn, STMS, Inc., John
Signorello, Timothy McNamee, Steve Salmon and certain other
stockholders of Dunn. (Filed as Exhibit 2.3 to Dunn's
Current Report on Form 8-K, dated September 12, 1997, filed
September 27, 1997 (File No. 0-22263) and hereby
incorporated by reference).

3.1 Articles of Incorporation of the Company, dated February 25,
1998, and effective as of February 26, 1998. (Filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Amendment No. 1, dated April 23, 1998 (File No.
333-47631) and hereby incorporated by reference.)

3.2 By-laws of the Company, effective as of March 5, 1998.
(Filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)

4.1 Specimen common stock certificate for the Company. (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Amendment No. 2, dated April 23, 1998 (File No.
333-47631) and hereby incorporated by reference.)

5.1 Opinion of Gersten, Savage & Kaplowitz, LLP

10.1 GSA Schedule (Filed as Exhibit 10.2 to Dunn's Registration
Statement on Form SB-2, Amendment 1, dated March 14, 1997
(File No. 333-19635) and hereby incorporated by reference).

10.2 Agreement, dated November 21, 1995, by and between GCH
Systems, Inc. and Dunn regarding Lockheed (Filed as Exhibit
10.4 to Dunn's Registration Statement on Form SB-2,
Amendment 1, dated March 14, 1997 (File No. 333-19635) and
hereby incorporated by reference).

10.3 Agreement, dated March 25, 1997, by and between Dunn and the
Social Security Administration (Filed as Exhibit 10.5 to
Dunn's Registration Statement on Form SB-2, Amendment 2,
dated April 4, 1997 (File No. 333-19635) and hereby
incorporated by reference).

10.4 Agreement, dated June 12, 1995, by and between Dunn and the
Administrative Office of the U.S. Courts (Filed as Exhibit
10.6 to Dunn's Registration Statement on Form SB-2,
Amendment 2, dated April 4, 1997 (File No. 333-19635) and
hereby incorporated by reference).

II-5

S-1 88th Page of 93 TOC 1st Previous Next Bottom Just 88th

[Download Table]

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.5 Agreement, dated September 29, 1994, by and between Dunn and
the Health Care Finance Administration (Filed as Exhibit
10.7 to Dunn's Registration Statement on Form SB-2,
Amendment 2, dated April 4, 1997 (File No. 333-19635) and
hereby incorporated by reference).

10.6 Agreement effective September 8, 1997, by and between
Virginia Contracting Authority and Dunn (Filed as Exhibit
10.6 to Dunn's Form 10-KSB, dated January 30, 1998 (File No.
0-22263) and hereby incorporated by reference).

10.7 Employment Agreement by and between Dunn and John D. Vazzana
(Filed as Exhibit 99.1 to Dunn's Registration Statement on
Form SB-2, Amendment 2, dated April 4, 1997 (File No.
333-19635) and hereby incorporated by reference).

10.8 Employment Agreement by and between Dunn and Thomas P. Dunne
(Filed as Exhibit 99.2 to Dunn's Registration Statement on
Form SB-2, Amendment 2, dated April 4, 1997 (File No.
333-19635) and hereby incorporated by reference).

10.9 Deed of Lease, dated October 31, 1994, between C&T
Partnership and Dunn and addenda thereto (Filed as Exhibit
10.9 to Dunn's Form 10-KSB, dated January 30, 1998 (File No.
0-22263) and hereby incorporated by reference).

10.10 Deed of Lease, dated February 7, 1997, between APA
Properties No. 6 L.P. and STMS, Inc. and First Amendment
thereto, dated July 23, 1997 (Filed as Exhibit 10.10 to
Dunn's Form 10-KSB, dated January 30, 1998 (File No.
0-22263) and hereby incorporated by reference).

10.11 1997 Stock Option Plan, as amended. (Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1,
Amendment No. 2, dated April 23, 1998 (File No. 333-47631)
and hereby incorporated by reference.)

10.12 General Service Administration Schedule for International
Data Products, Corp. (Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)

10.13 Agreement, dated May 5, 1997, by and between International
Data Products, Corp. and the U.S. Air Force, the Desktop V
Contract. (Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)

10.14 Agreement, dated January 6, 1998, by and between
International Data Products, Corp. and the Department of the
Navy. (Filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)

10.15 Deed of Lease, dated January 31, 1995, between Northtech
Business Park and International Data Products. (Filed as
Exhibit 10.15 to the Company's Registration Statement on
Form S-1, Amendment No. 2, dated April 23, 1998 (File No.
333-47631) and hereby incorporated by reference.)

10.16 Deed of Lease, dated July 15, 1994, between Puerto Rico
Industrial Development Company and Puerto Rico Industrial
Manufacturing Operations, Corp. (Filed as Exhibit 10.16 to
the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)

II-6

S-1 89th Page of 93 TOC 1st Previous Next Bottom Just 89th

[Download Table]

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

10.17 Agreement, dated July 11, 1995, by and between International
Data Products, Corp. and the Social Security Administration.
(Filed as Exhibit 10.17 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)

10.18 Form of Employment Agreement by and between the Company and
each of George D. Fuster and D. Oscar Fuster (refiling to
reflect revised form). (Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)

10.19 Consent Agreement by and among Dunn, the Company, Network 1
Financial Securities, Inc., a Texas corporation, and Damon
Testaverde, William Hunt and Richard Hunt, dated as of April
20, 1998. (Filed as Exhibit 10.20 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)

10.20 Loan and Security Agreement, dated as of May 28, 1996 by and
between Dunn and SIGNET BANK and Amendment Nos. 1, 2 and 3
thereto (Filed as Exhibit 4.2 to Dunn's Form 10-KSB, for the
fiscal year ended October 31, 1997 (File No. 0-22263) and
hereby incorporated by reference).

10.21 Amendment No. 4, dated February 28, 1998 to the Loan and
Security Agreement by and between Dunn and First Union
National Bank, successor by merger to Signet Bank, dated as
of May 28, 1996. (Filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)

10.22 Employee Stock Purchase Plan.

10.23 Employment Agreement, Termination Agreement, by and among
the Company, George D. Fuster and D. Oscar Fuster, dated as
of November 23, 1998.

10.24 Purchase Price Adjustment Agreement by and among the
Company, George D. Fuster and D. Oscar Fuster, dated as of
November 23, 1998.

10.25 Termination agreement, Promissory Note, dated December 29,
1999 by and between Dunn and Deutsche Financial Services.

10.26 Loan and Security Agreement, dated May 27, 1999 by and
between Dunn and First Union Commercial Corporation.

10.27 Modification Agreement, dated February 11, 2000 by and
between Dunn and First Union National Bank.

10.28 PR Starnet Contract, dated January 5, 2000, by and between
Dunn and Office of Budget and Management of Puerto Rico.

*21.1 List of Subsidiaries.

*23.1 Consent of Ernst & Young LLP, Independent Auditors.

*23.2 Consent of KPMG LLP, Independent Auditors.

23.3 Consent of Gersten, Savage & Kaplowitz, LLP (included in
Exhibit 5.1)

II-7

S-1 90th Page of 93 TOC 1st Previous Next Bottom Just 90th

[Download Table]

EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------

*27.1 Financial Data Schedule.

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

* Filed herewith.

(b) Financial Statement Schedule.

Schedule II--Valuation and Account Reserve.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned hereby undertakes that:

(i) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or
497(h), under the Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective.

(ii) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the Securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering of those securities.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

II-8

S-1 91st Page of 93 TOC 1st Previous Next Bottom Just 91st

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Sterling, Commonwealth of
Virginia on April 28, 2000.

[Download Table]

DUNN COMPUTER CORPORATION

By:
-----------------------------------------
Thomas P. Dunne
PRESIDENT

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

[Enlarge/Download Table]

CAPACITY IN
SIGNATURE WHICH SIGNED DATE
--------- ------------ ----

Chairman, Chief Executive Officer
-------------------------------------- and President (Principal Executive April 28, 2000
Thomas P. Dunne Officer)

Director
-------------------------------------- April 28, 2000
John D. Vazzana

Vice President and Director
-------------------------------------- April 28, 2000
Claudia N. Dunne

Director
-------------------------------------- April 28, 2000
VADM E.A. Burkhalter, Jr., USN (Ret.)

Director
-------------------------------------- April 28, 2000
Daniel Sinnott

[Download Table]

/s/ THOMAS P. DUNNE
-------------------------------------------
Thomas P. Dunne

II-9

S-1 92nd Page of 93 TOC 1st Previous Next Bottom Just 92nd

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors
Dunn Computer Corporation

We have audited the consolidated financial statements of Dunn Computer
Corporation (a Virginia corporation) as of October 31, 1998 and 1999, and for
each of the three years in the period ended October 31, 1999 and have issued our
report thereon dated February 1, 2000, except for Note 6 as to which the date is
February 11, 2000 (included elsewhere in this Form 10-K). Our audit also
included the consolidated financial statement schedule listed in Item 14 of this
Form 10-K. The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.

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

/S/ ERNST & YOUNG LLP

McLean, Virginia
February 1, 2000

S-1 Last Page of 93 TOC 1st Previous Next Bottom Just 93rd

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DUNN COMPUTER CORPORATION

[Enlarge/Download Table]

BALANCE AT BALANCE
BEGINNING OF AT END OF
CLASSIFICATION YEAR ADDITIONS DEDUCTIONS YEAR
-------------- ------------ ---------- ---------- ----------

Allowance for doubtful accounts:
Year ended October 31, 1997.................. $ 15,000 $ 62,000 -- $ 77,000
Year ended October 31, 1998.................. $ 77,000 $ 59,000 $ 90,000(1) $ 46,000
Year ended October 31, 1999.................. $ 46,000 $1,400,000 $1,346,000(1) $ 100,000

Inventory reserve:
Year ended October 31, 1997.................. $ 20,000 $ 230,000 -- $ 250,000
Year ended October 31, 1998.................. $250,000 -- -- $ 250,000
Year ended October 31, 1999.................. $250,000 $2,241,000 $ 362,000(2) $2,129,000

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

(1) Write-offs of accounts receivable

(2) Write-offs of inventory

S-1	1st Page of 93	TOC	Top	Previous	Next	Bottom	Just 1st

S-1	2nd Page of 93	TOC	1st	Previous	Next	Bottom	Just 2nd

S-1	3rd Page of 93	TOC	1st	Previous	Next	Bottom	Just 3rd

S-1	4th Page of 93	TOC	1st	Previous	Next	Bottom	Just 4th

S-1	5th Page of 93	TOC	1st	Previous	Next	Bottom	Just 5th

S-1	6th Page of 93	TOC	1st	Previous	Next	Bottom	Just 6th

S-1	7th Page of 93	TOC	1st	Previous	Next	Bottom	Just 7th

S-1	8th Page of 93	TOC	1st	Previous	Next	Bottom	Just 8th

S-1	9th Page of 93	TOC	1st	Previous	Next	Bottom	Just 9th

S-1	10th Page of 93	TOC	1st	Previous	Next	Bottom	Just 10th

S-1	11th Page of 93	TOC	1st	Previous	Next	Bottom	Just 11th

S-1	12th Page of 93	TOC	1st	Previous	Next	Bottom	Just 12th

S-1	13th Page of 93	TOC	1st	Previous	Next	Bottom	Just 13th

S-1	14th Page of 93	TOC	1st	Previous	Next	Bottom	Just 14th

S-1	15th Page of 93	TOC	1st	Previous	Next	Bottom	Just 15th

S-1	16th Page of 93	TOC	1st	Previous	Next	Bottom	Just 16th

S-1	17th Page of 93	TOC	1st	Previous	Next	Bottom	Just 17th

S-1	18th Page of 93	TOC	1st	Previous	Next	Bottom	Just 18th

S-1	19th Page of 93	TOC	1st	Previous	Next	Bottom	Just 19th

S-1	20th Page of 93	TOC	1st	Previous	Next	Bottom	Just 20th

S-1	21st Page of 93	TOC	1st	Previous	Next	Bottom	Just 21st

S-1	22nd Page of 93	TOC	1st	Previous	Next	Bottom	Just 22nd

S-1	23rd Page of 93	TOC	1st	Previous	Next	Bottom	Just 23rd

S-1	24th Page of 93	TOC	1st	Previous	Next	Bottom	Just 24th

S-1	25th Page of 93	TOC	1st	Previous	Next	Bottom	Just 25th

S-1	26th Page of 93	TOC	1st	Previous	Next	Bottom	Just 26th

S-1	27th Page of 93	TOC	1st	Previous	Next	Bottom	Just 27th

S-1	28th Page of 93	TOC	1st	Previous	Next	Bottom	Just 28th

S-1	29th Page of 93	TOC	1st	Previous	Next	Bottom	Just 29th

S-1	30th Page of 93	TOC	1st	Previous	Next	Bottom	Just 30th

S-1	31st Page of 93	TOC	1st	Previous	Next	Bottom	Just 31st

S-1	32nd Page of 93	TOC	1st	Previous	Next	Bottom	Just 32nd

S-1	33rd Page of 93	TOC	1st	Previous	Next	Bottom	Just 33rd

S-1	34th Page of 93	TOC	1st	Previous	Next	Bottom	Just 34th

S-1	35th Page of 93	TOC	1st	Previous	Next	Bottom	Just 35th

S-1	36th Page of 93	TOC	1st	Previous	Next	Bottom	Just 36th

S-1	37th Page of 93	TOC	1st	Previous	Next	Bottom	Just 37th

S-1	38th Page of 93	TOC	1st	Previous	Next	Bottom	Just 38th

S-1	39th Page of 93	TOC	1st	Previous	Next	Bottom	Just 39th

S-1	40th Page of 93	TOC	1st	Previous	Next	Bottom	Just 40th

S-1	41st Page of 93	TOC	1st	Previous	Next	Bottom	Just 41st

S-1	42nd Page of 93	TOC	1st	Previous	Next	Bottom	Just 42nd

S-1	43rd Page of 93	TOC	1st	Previous	Next	Bottom	Just 43rd

S-1	44th Page of 93	TOC	1st	Previous	Next	Bottom	Just 44th

S-1	45th Page of 93	TOC	1st	Previous	Next	Bottom	Just 45th

Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This S-1 Filing	Date	First	Last	Other Filings

	7/15/94	88
	9/29/94	88
	10/31/94	88
	1/31/95	88
	4/1/95	60
	6/12/95	87
	7/11/95	89
	10/31/95	12	29
	11/1/95	29
	11/21/95	87
	5/28/96	89
	8/8/96	22
	9/30/96	74	82
	10/31/96	12	45
	11/1/96	53
	12/31/96	77
	1/3/97	47
	1/6/97	47	61
	2/7/97	88
	3/14/97	87
	3/25/97	87
	4/4/97	87	88
	4/21/97	57
	4/22/97	10
	4/28/97	30
	5/5/97	88
	7/23/97	88
	9/8/97	88
	9/12/97	13	87
	9/27/97	87
	9/30/97	39	82
	10/31/97	12	93
	11/7/97	71
	1/6/98	88
	1/30/98	88
	1/31/98	79
	2/25/98	87
	2/26/98	47	87
	2/28/98	89
	3/5/98	87
	3/9/98	87
	3/18/98	87		S-4
	4/15/98	25
	4/20/98	89
	4/21/98	34	57
	4/23/98	87	89
	5/1/98	5	61
	6/1/98	25	64
	7/31/98	25	64	10-Q
	10/31/98	8	93	10-K, 10-K/A, NT 10-K
	11/23/98	89
	11/25/98	57
	12/18/98	25
	1/31/99	12	69	10-Q
	2/26/99	25
	2/28/99	54
	5/1/99	25	61
	5/27/99	89
	8/27/99	25	69
	8/31/99	25	64
	10/8/99	21
	10/31/99	8	93	10-K/A, 10-K, NT 10-K
	11/8/99	53	69
	12/10/99	25	69
	12/29/99	16	89
	12/31/99	53	69
	1/5/00	21	89
	1/31/00	7	69	10-Q
	2/1/00	42	92	NT 10-K
	2/11/00	42	92
	3/3/00	25	86
	3/13/00	18	86
	4/14/00	25
	4/27/00	1	21
	4/28/00	3	91	DEF 14A
Filed On / Filed As Of	5/1/00	1
	5/2/00	25
	9/12/00	86
	9/30/00	69
	10/31/00	56		10-K405
	11/30/00	17	69
	3/31/02	21
	4/21/02	86
	9/12/14	76

Top				List All Filings

Filing Submission 0000912057-00-020765 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

			in		Show		and
Help...		Wildcards: ? (any letter), * (many). *Logic:* for Docs: & (and), \| (or); for Text: \| (anywhere), "(&)" (near).

Steelcloud Inc · S-1 · On 5/1/00

Filed On 5/1/00 5:16pm ET · SEC File 333-36022 · Accession Number 912057-0-20765

﻿Registration Statement (General Form) — Form S-1Filing Table of Contents

﻿S-1 — Registration Statement (General Form)Document Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

Registration Statement (General Form) — Form S-1
Filing Table of Contents

S-1 — Registration Statement (General Form)
Document Table of Contents