Steelcloud Inc – ‘10-K’ for 10/31/99

On:  Tuesday, 2/15/00, at 9:35pm ET   ·   As of:  2/16/00   ·   For:  10/31/99   ·   Accession #:  912057-0-7193   ·   File #s:  0-24015, 333-48177   ·   Correction:  This Filing’s “Filed as of” Date was Corrected and “Changed as of” 6/23/04 by the SEC on 6/23/04. ®

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Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         50    281K 
 2: EX-10.25    Material Contract                                     11     33K 
 3: EX-10.26    Material Contract                                     55    185K 
 4: EX-10.27    Material Contract                                     27     96K 
 5: EX-10.28    Material Contract                                     26     70K 

10-K   —   Annual Report
Document Table of Contents

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 15, 2000 
                                                        REGISTRATION NO. 2-87197
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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K 

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

FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1999      COMMISSION FILE NUMBER: 0-24015

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

DUNN COMPUTER CORPORATION 

(Exact Name of Registrant as Specified in its Charter)

                                                                [Download Table]
                                                                             

               VIRGINIA                                      54-1890464      
     (State or Other Jurisdiction                         (I.R.S. Employer   
   of Incorporation or Organization)                   Identification Number)
           1306 SQUIRE COURT                                                 
           DULLES, VIRGINIA                                     20166        
(Address of principal executive office)                      (Zip Code)      

703-450-0400
Registrant's telephone number, including area code: 

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

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

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

SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE 

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

(Title of class)

    Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was required to  
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No                                                          

Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation K contained in this form, and no disclosure  
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K  
or any amendment to this Form 10-K. / /                                         

  The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed at $2.63 per share, the closing price of the Common  
Stock on January 31, 2000, was $16,933,384.                                     

The number of shares of the issuer's Common Stock outstanding as of     
January 31, 2000 was 9,419,509.                                                 

DOCUMENTS INCORPORATED BY REFERENCE 

  Certain information called for by Part III of the Form 10-K will either be
filed with the Commission under Regulation 14A under the Securities Exchange Act
of 1934, as amended or by amendment to this Form 10-K, in either case on or     
before February 28, 2000.                                                       

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS                       

 Certain statements contained in this Annual Report regarding matters that
are not historical facts are forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995). Because such          
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
changes in component costs, the U.S. Government's available funding for         
information technology purchases, the actions of competitors, the Company's     
ability to retain its existing contracts and to procure additional contracts or 
other selling vehicles and general economic conditions. These risks and others  
are discussed in more detail in context throughout this document. The Company   
disclaims any intent or obligation to update any forward-looking statement.     

TABLE OF CONTENTS 

PART I

                                                                [Download Table]
                                                                              
Item 1.    Business....................................................  p. 2 
Item 2.    Properties..................................................  p. 8 
Item 3.    Legal Proceedings...........................................  p. 8 
Item 4.    Submission of Matters to a Vote of Security Holders.........  p. 9 

                                   PART II                                    

Item 5.    Market for Registrant's Common Equity and Related                  
           Stockholder Matters.........................................  p. 10
Item 6.    Selected Financial Data.....................................  p. 11
Item 7.    Management's Discussion and Analysis of Financial Condition        
           and Results of Operations...................................  p. 12
Item 7A.   Quantitative and Qualitative Disclosures About Market              
           Risk........................................................  p. 16
Item 8.    Financial Statements and Supplementary Data.................  p. 16
Item 9.    Changes in and Disagreements with Accountants on Accounting        
           and Financial Disclosure....................................  p. 16

                                   PART III                                   

Item 10.   Directors and Executive Officers of the Registrant..........       
Item 11.   Executive Compensation......................................       
Item 12.   Security Ownership of Certain Beneficial Owners and                
           Management..................................................       
Item 13.   Certain Relationships and Related Transactions..............       
(Part III information is incorporated by reference to portions of the         
Company's definitive Proxy Statement to be filed pursuant to Regulation       
14A)                                                                          

                                   PART IV                                    

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form        
           8-K.........................................................  p. 17

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PART I

ITEM 1. BUSINESS                                                                

GENERAL                                                                         

   Dunn Computer Corporation (together with its wholly-owned subsidiaries, the
"Company" or "Dunn") manufactures custom computer systems and provides related  
services to departments, agencies and offices of the federal government (the    
"Government") and selected businesses. The Company provides its customers with  
single-source solutions by manufacturing its 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.
The Company currently derives revenues from hardware sales to the Government and
to medium and large businesses. The Company sells its 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 April 1997, the Company sold 1,000,000 shares of common stock ("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.                                                                          

In September 1997, Dunn completed the acquisition of STMS, Inc. a       
Virginia-based network services company ("STMS") which expanded Dunn's          
capabilities to provide a wide variety of services including network consulting,
project implementation and technical support. The STMS acquisition provided the 
Company new opportunities to sell computer hardware into the commercial         
marketplace as part of a total package of information technology ("IT") hardware
and services tailored to meet the commercial customers' needs. By manufacturing 
its own computer systems, the cost of which represents a significant portion of 
the cost of a total project, the Company believes it has a sustainable          
competitive advantage over other network service providers.                     

    On May 1, 1998, Dunn acquired International Data Products, Corp. ("IDP Co.")
and the net assets of IDP Co.'s Puerto Rican affiliate, Puerto Rico Industrial  
Manufacturing Operations, Corp. ("PRIMO" and together with IDP Co., "IDP"), for 
approximately $22 million, consisting of a combination of cash and Common Stock 
(the "IDP Acquisition"). When acquired, IDP was a leading supplier of portable  
and desktop computers to the Government. In May 1998, in connection with the IDP
Acquisition, the Company completed a public offering of 3,491,493 shares of     
Common Stock for net proceeds of $26,287,866.                                   

In fiscal year 1999, the Company recorded a significant Goodwill impairment     
charge of approximately $21 million associated with the IDP acquisition. This   
was the result of the Company's loss of a significant contract with the U.S. Air
Force which was terminated for the convenience of the government during fiscal  
1999. At acquisition date, the Company anticipated revenues from this contract  
to be approximately $100 million had all option years been exercised. The       
Company determined that the loss of this contract significantly impaired its    
ability to recover the Goodwill associated with the purchase. Accordingly, the  
Company recorded the Goodwill impairment charge. See "Management's Discussion   
and Analysis of Financial Condition and Results of Operations."                 

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

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PRODUCTS AND SERVICES                                                           

COMPUTER HARDWARE PRODUCTS                                              

 DESKTOPS:  The Company manufactures 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.      

 SERVERS:  The Company markets 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 Dunn's desktops provide the "wired for management"
technology to ensure high availability and consistently configured systems on   
the network. The Company believes 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 the Company. Additionally, servers sales          
complement the Company's services business due to the complexity of server      
installation and maintenance.                                                   

  LAPTOPS:  The Company assembles, 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:  The Company integrates, installs, and  
maintains major brand networking hardware and software. The Company has         
partnerships with companies like Network Associates, Inc (NAI), Cisco Systems,  
Inc (Cisco Systems) and Marconi, Inc.                                           

  ORIGINAL EQUIPMENT MANUFACTURE (OEM):  The Company manufactures, on an OEM
basis, hardware products for major network solutions providers.                 

TECHNICAL SERVICES                                                      

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

 STAFF AUGMENTATION:  The Company provides 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                                    

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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.                                                  

    Dunn's 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 Dunn to handle their IT support requirements.             

GOVERNMENT CONTRACTS                                                            

    In fiscal 1999, Dunn derived approximately 65% of its 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 ("BPA") 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 the Company from federal          
procurements, the termination of any of the Company's significant Government    
contracts or the imposition of such penalties could have a material adverse     
effect on the Company.                                                          

  Substantially all of the Company's Government customers purchase equipment
and services from the Company on a long-term contract basis. By contrast, most  
of the 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. The Company is 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. The Company cannot estimate any        
potential settlement amounts at this time.                                      

  Set forth below is a description of some of the Company's more significant
contracts as of October 31, 1999.                                               

  GSA CONTRACT.  The Company has a multiple award schedule contract with GSA
(the "GSA" Contract). The Company's 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,
the Company's GSA contract had sales of $5.9 million, which accounted for       
approximately 8.5% of the Company's 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 the Company provides 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 the Company periodically updates 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.  

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    PRSTARNET CONTRACT.  After several protest delays, the Company was awarded a
contract with the Puerto Rican Government on January 5, 2000. The Company was   
selected as one of several vendors to supply the Puerto Rican school systems    
with laptop computers. The terms of the contract require the Company to deliver 
approximately 11,000 computers to the Puerto Rican school system by             
August 2000. The Company anticipates 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. The Company will   
bid on Phase II during fiscal 2000, which will supply the school system with    
desktop computers for all students. The Company cannot predict the outcome of   
its bid proposal.                                                               

COMMERCIAL CONTRACTS                                                            

In fiscal year 1999, Dunn derived approximately 30% of its revenues from
sales of hardware and services to the commercial marketplace. The Company's     
commercial customer base consists of several Fortune 500 companies as well as   
certain small local commercial customers. The Company anticipates continuing to 
further increase its commercial customer base in the upcoming fiscal year. The  
Company has been successful in developing and maintaining key partnerships with 
industry leading companies such as Microsoft, Cisco, Sun and Network Associates.
These partnerships will enable the Company to further diversify its product mix 
and attract high quality customers.                                             

MANUFACTURING AND PRODUCTION                                                    

   The Company's production capacity is 100,000 units per year in the existing
Sterling County facility on a three-shift basis. The Company also leases 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 the Company's products and services are highly competitive.
Many of the Company's competitors offer broader product lines, have             
substantially greater financial, technical, marketing and other resources than  
the Company 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 the Company's arrangements. The Company also      
competes with a large number of computer systems integrators, resellers and IT  
services companies. The Company believes that it is likely that these           
competitive conditions will continue in the future. There can be no assurance   
that the Company will continue to compete successfully against existing or new  
competitors that may enter markets in which the Company operates.               

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
Government procures computers and related products and services. The most       
sweeping changes were (1) the repeal of the Brooks Act that had granted sole    
authority for purchasing IT to the GSA and, (2) 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 Dunn's ability to market 
and sell its products to Government users directly through its GSA contract and 
BPA's awarded under the GSA schedule. The Company continues 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 Dunn believes  
it has benefited from this reform, the                                          

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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. The Company currently competes with      
national commercial computer manufacturers such as Dell Computer Corporation    
("Dell") and Gateway 2000, Inc. ("Gateway") 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. The Company believes 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.                                    

 The following companies are significant competitors of the Company in the
Government market:                                                              

                                                                [Download Table]

COMPANY                                                   TYPE       
-------                                                   ----       
                                                                     
Dell.............................................  Manufacturer      
Gateway..........................................  Manufacturer      
Micron Technology, Inc. ("Micron")...............  Manufacturer      
Government Technology Services, Inc..............  Systems Integrator
Compaq...........................................  Manufacturer      

COMMERCIAL MARKET                                                       

  The microcomputer products industry is highly competitive. Pricing is very
aggressive in the industry and the Company expects 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.                                                    

  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. The Company believes its technical services can compete effectively in
the local market because it provides engineering services in conjunction with   
products from its strategic partners; e.g., Network Associates, Inc., Cisco,    
Microsoft, Marconi, Sun and Intel. The Company believes that its ability to     
integrate the computer hardware (Dunn brand or any other) and networking        
products provides its 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 the Company. The Company  
competes 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 the Company 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                                                               

The Company markets 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. The Company also   
views the commercial market as an increasingly important part of its business.  
The Company uses an in-house sales force and program managers to market its     
products and services. Although Dunn markets nationally, the Company's 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 the company's pursuit of new commercial business and the new           

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procurement legislation, which gives different Government users the ability to  
purchase directly from vendors, the Company believes that marketing is becoming 
increasingly important to its Government as well as to its commercial business. 

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

    The Company uses electronic commerce technologies and believes 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. The Company maintains a web
site on the Internet wherein its GSA catalogue and products can be referenced.  
In addition, the Company provides the capability for customers to download      
updated software and drivers that become available. The Company believes that   
its targeted customer base will have a greater acceptance of these interactive  
services because its customers tend to have a greater familiarity with          
technology products and services.                                               

SUPPLIERS                                                                       

 The Company devotes significant resources to establishing and maintaining
relationships with its suppliers. The Company, where possible, purchases        
directly from component manufacturers such as Intel, Microsoft, Hitachi-Nissei  
Sanyo America, Ltd., Cisco and Chicony Corp. The Company also purchases 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.                                                

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

INVENTORY                                                                       

Dunn has traditionally and will continue to purchase inventory to fill  
orders received from our customers. The Company minimizes their inventory held  
for warranty purposes and does not purchase inventory for speculative purposes. 

PATENTS, TRADEMARKS AND LICENSES                                                

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

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   The Company conducts its business under the trademarks and service marks of
"Dunn", "Dunn Computer Corporation", "International Data Products," and "IDP."  
The Company believes its trademarks and service marks have significant value and
are an important factor in the marketing of its products.                       

 Because most software used on the Company's computers is not owned by the
Company, the Company has entered into software licensing arrangements with      
several software manufacturers, including Microsoft.                            

EMPLOYEES                                                                       

    As of October 31, 1999, the Company employed 110 persons. Of such persons, 1
was employed in an executive capacity, 13 in sales and marketing, 19 in         
administrative capacities, 30 in technical services and 47 in operations. As of 
January 21, 2000 the Company employed 102 persons. None of Dunn's employees are 
covered by a collective bargaining agreement. Dunn considers its relationships  
with its employees to be good.                                                  

   The Company believes that its future success will depend in large part upon
its continued ability to attract and retain highly qualified management,        
technical and sales personnel. The computer industry is currently undergoing a  
shortage of trained and experienced technicians. The Company endeavors to be    
attractive to current and prospective employees and has an in-house training    
program to produce its own supply of highly qualified technicians and service   
providers. However, there can be no assurance that the Company will be able to  
attract and retain the qualified personnel necessary for its business.          

AVAILABLE INFORMATION                                                           

  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance        
therewith, files annual and quarterly reports on Forms 10-K and 10-Q, proxy     
statements and other information with the Securities and Exchange Commission    
(the "Commission"). The public may read and copy any such materials filed with  
the Commission at the Commission's Public Reference Room at 450 Fifth Street,   
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In    
addition, the Commission maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers, such as the
Company, that file such materials electronically with the Commission. The       
Commission's Internet address is http:\\www.sec.gov.                            

ITEM 2. DESCRIPTION OF PROPERTY                                                 

    The Company leases an approximately 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, the Company's President, and his wife Claudia 
Dunne, the Company's Vice President, sold the facility and assigned the lease to
a third party building management company.                                      

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

ITEM 3. 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 the     
Company dispute this claim. On June 1, 1998, the Company filed a Complaint for  
Declaratory Judgment in the U.S.                                                

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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 the Company 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 the Company believes  
that it has a meritorious claim for declaratory judgment and meritorious        
defenses to the counter-claim, there can be no assurance that the Company will  
be successful in this litigation and, if the appeals court rules against the    
Company, it may be required to pay a percentage of its past revenue under the   
Desktop V contract to the defendant.                                            

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 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. The Company is in the process of attempting to     
recover from the government a portion or all of 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 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     
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.                                                     

On December 18, 1998, the Office of the United States Attorney for the  
District of Maryland, Northern Division (the "U.S. Attorney"), informed the     
Company 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 the Company 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, the Company 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 the Company.                                                       

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

None.                                                                   

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PART II 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                

MARKET INFORMATION                                                              

   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]

                                                                    1998        
                                                             -------------------
                                                               HIGH       LOW   
                                                             --------   --------
                                                                                
First Quarter..............................................  $ 10.50     $6.625 
Second Quarter.............................................  $10.375     $8.188 
Third Quarter..............................................  $ 9.938     $7.483 
Fourth Quarter.............................................  $  4.75     $1.938 

                                                                [Download Table]

                                                                    1999        
                                                             -------------------
                                                               HIGH       LOW   
                                                             --------   --------
                                                                                
First Quarter..............................................  $  6.28     $2.781 
Second Quarter.............................................  $  4.94     $2.031 
Third Quarter..............................................  $  2.75     $ 1.97 
Fourth Quarter.............................................  $  2.41     $1.031 

On January 31, 2000 the closing price of the Company's Common Stock as  
reported by The Nasdaq National Market was $2.63 per share. There were          
approximately 1,500 shareholders of the Common Stock of the Company as of such  
date.                                                                           

The Company has not paid cash dividends on its Common Stock and does not
intend to do so in the foreseeable future.                                      

RECENT SALES OF UNREGISTERED STOCK                                              

    On May 1, 1998, in connection with the IDP acquisition, the Company acquired
all of the issued and outstanding capital stock of IDP Co. and substantially all
of the net assets of PRIMO. In consideration for the IDP acquisition, the       
Company paid the former owners an aggregate of $14.9 million in cash and an     
aggregate of 750,000 shares of Common Stock. In November 1998, the Company      
received 350,000 shares of the stock previously issued to the Fusters in        
connection with a Purchase Price Adjustment Agreement. The shares sold to the   
Fusters in the IDP acquisition were sold in reliance upon the exemption from    
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.

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ITEM 6. SELECTED FINANCIAL DATA                                                 

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". 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 Annual Report on Form 10-K. The consolidated         
statement of income data set forth below with respect to the fiscal years ended 
October 31, 1995 and 1996 and the consolidated balance sheet data as of         
October 31, 1995, 1996 and 1997 is derived from audited consolidated financial  
statements of Dunn not included in this annual report.                          

                                                        [Enlarge/Download Table]

                                                               YEAR ENDED OCTOBER 31,                
                                                ---------------------------------------------------- 
                                                  1995       1996     1997(2)    1998(3)      1999   
                                                --------   --------   --------   --------   -------- 
                                                                                                     
CONSOLIDATED STATEMENT OF OPERATIONS DATA:                                                           
Net revenues...................................  $7,491    $18,099    $21,766    $66,888    $ 34,475 
Costs of revenues..............................   6,046     14,103     17,549     54,969      27,981 
Gross profit...................................   1,445      3,996      4,217     11,919       6,494 
Selling, general and administrative............     966      1,972      2,198      9,983      37,749 
Income (loss) from operations..................     479      2,024      2,019      1,936     (31,255)
Other income (expense).........................       8         (9)        98       (270)     (2,911)
Net income (loss) before income taxes..........     487      2,015      2,117      1,666     (34,166)
Provision for (benefit from) income taxes......     244        776        795        686        (559)
Net income (loss)..............................  $  243    $ 1,239    $ 1,322    $   980    $(33,607)
Earnings (loss) per share(1)...................  $ 0.06    $  0.31    $  0.29    $  0.14    $  (3.57)
Earning (loss) per share assuming                                                                    
  dilution(1)..................................  $ 0.06    $  0.31    $  0.28    $  0.13    $  (3.57)
Weighted average shares outstanding(1).........   4,000      4,000      4,552      7,231       9,404 
Weighted average shares outstanding assuming                                                         
  dilution(1)..................................   4,000      4,000      4,679      7,492       9,404 

                                                        [Enlarge/Download Table]

                                                                   AT OCTOBER 31,                    
                                                ---------------------------------------------------- 
                                                  1995       1996       1997       1998       1999   
                                                --------   --------   --------   --------   -------- 
                                                                                                     
CONSOLIDATED BALANCE SHEET DATA:                                                                     
Working capital................................  $  512    $ 1,722    $ 4,339    $ 5,773    $ (1,422)
Total assets...................................   3,647      5,275     18,703     62,965      22,287 
Long-term debt.................................                            75         51       2,845 
Total liabilities..............................   3,047      3,335     10,465     24,592      17,470 
Stockholders' equity...........................     600      1,939      8,238     38,373       4,817 

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

(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 to the Company's        
consolidated financial statements.                                      

(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).                                                           

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

   Certain statements contained in this section are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of     
1995). Because such statements include risks and uncertainties, actual results  
may differ materially from those expressed or implied by such forward-looking   
statements. Factors that could cause actual results to differ materially        
include, but are not limited to, risks associated with the integration of       
businesses following an acquisition, competitors with broader product lines and 
greater resources, the termination of any of the Company's significant contracts
or the Company's inability to attract and retain highly qualified management,   
technical and sales personnel.                                                  

OVERVIEW OF FISCAL 1999                                                         

In fiscal year 1999, the Company experienced a significant change in its
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 the Company's 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 the
Company'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 the Company 
for all costs incurred in the performance of the contract. The Company is       
currently negotiating a settlement with the government and has submitted its    
reimbursement proposal. As of January 31, 2000, no settlement agreement has been
reached. The Company cannot anticipate the amount of the settlement, if any, at 
this time.                                                                      

 Under the terms of the DTV contract, the Company was 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,   
the Company recorded an inventory charge during fiscal 1999 of approximately    
$2 million relating to these items. The Company is seeking reimbursement of such
items in the settlement with the government.                                    

ARBITRATION AWARD                                                               

    In November 1998, a former employee of the Company (who had been an employee
and stockholder of STMS) filed a demand for arbitration with the American       
Arbitration Association, alleging breach of his employment agreement with the   
Company and sought "in excess of $2,350,000" in damages from the Company. During
fiscal 1999, the arbitration hearing was conducted resulting in a judgment in   
favor of the former employee for approximately $1.7 million. Of the             
$1.7 million, approximately $400,000 related to lost wages and benefits for the 
two remaining years under the agreement. The balance of the award,              
$1.3 million, represented the proceeds from stock options (fair market value    
less grant price) had the employee exercised all 550,000 options in             
November 1998. The options were granted to the former employee in               
September 1997 in conjunction with the STMS acquisition and had a three year    
vesting period. Under the judgment, the vesting period was accelerated so that  
the former employee became fully vested as of October 31, 1998. The calculation 
of the proceeds was based on the fair market value of $6.50,                    

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which was the highest selling price of the DNCC stock on the NASDAQ during the  
month of November 1998. Although the Company is actively pursuing a settlement  
with the former employee, management has properly accrued for the entire award  
amount in fiscal 1999.                                                          

DELAY OF A CONTRACT AWARD                                                       

In January 1999, the Company was 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 the Company was re-awarded the contract in January 2000. During    
that 12-month delay period, management determined to continue operations at the 
Company's Puerto Rican facility in anticipation of the contract. Accordingly,   
the Company incurred significant costs to maintain the facility which resulted  
in an operating loss for the Puerto Rican subsidiary for fiscal 1999.           

CHANGES IN FEDERAL CONTRACTS                                                    

In fiscal year 1999, the Company's revenues from computer sales to the  
federal government were adversely affected due to changes in procurement        
policies. The changes in the policies included: (1) decentralization of         
purchasing decisions outside of the Washington DC area, where Dunn has its most 
significant sales coverage; (2) the ability of computer manufacturers (i.e.     
Dell, Compaq) to sell directly to the federal government; (3) a continual       
decline in PC prices throughout 1999 which resulted in the Company not          
participating in certain government proposals for which adequate margins could  
not be achieved. The Company believes that this trend will continue in future   
periods. As such, the Company will focus its efforts on repeat federal          
government business as well as maintaining relationships with its current       
government customers which may provide additional opportunities within the      
federal market.                                                                 

INCREASES IN MEMORY PRICES                                                      

    Memory chip prices increased dramatically in late 1999. This resulted in the
Company's decision to hold and/or delay shipments until memory prices subsided  
and each transaction remained profitable. However, in certain circumstances, the
Company reduced its 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.                                                 

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

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RESULTS OF OPERATIONS                                                           

   The following table sets forth for the fiscal years ended October 31, 1995,
1996, 1997, 1998 and 1999, certain income and expense items of Dunn as a        
percentage of net revenues.                                                     

                                                        [Enlarge/Download Table]

                                              1995      1996      1997      1998      1999  
                                            --------  --------  --------  --------  --------
                                                                                            
Net Revenues............................... 100.00%   100.00%   100.00%   100.00%   100.00% 
Costs of revenues..........................  80.71%    77.92%    80.63%    82.18%    81.16% 
Gross profit...............................  19.29%    22.08%    19.37%    17.82%    18.84% 
Selling, general and administrative........  12.90%    10.90%    10.10%    14.92%   109.50% 
Income (loss) from operations..............   6.39%    11.18%     9.27%     2.90%   -90.66% 
Other income (expense).....................   0.11%    -0.05%     0.45%    -0.40%    -8.44% 
Net income (loss) before income taxes......   6.50%    11.13%     9.72%     2.50%   -99.10% 
Provision for (benefit from) income                                                         
  taxes....................................   3.26%     4.28%     3.65%     1.03%    -1.62% 
Net income (loss)..........................   3.24%     6.85%     6.07%     1.47%   -97.48% 

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

   Net revenues of Dunn for fiscal year ended October 31, 1999 ("fiscal 1999")
decreased approximately 48% to $34.5 million from $66.9 million for fiscal year 
ended October 31, 1998 ("fiscal 1998"). This decrease was primarily due to loss 
of the DTV contract with the U.S. Air Force. The Company 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 of Dunn 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 of Dunn decreased for fiscal 1999 by 37% to
$2.3 million from $3.7 million for fiscal 1998. During fiscal 1999, the Company 
consolidated its sales and marketing departments with that of IDP which resulted
in an overall decrease of expenses.                                             

    General and administrative expense of Dunn 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. Dunn 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 the Company considers 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 the employee arbitration award.  
In addition, overall interest expense increased as a result of interest 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, the Company recorded  
gains on the sale of certain leased assets which reduced the overall other      
expense. In addition, the Company recorded an income tax benefit of             
approximately $559,000 in fiscal 1999.                                          

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

   Net revenues of Dunn for fiscal year ended October 31, 1998 ("fiscal 1998")
increased 206% to $66.9 million from $21.8 million for fiscal year ended        
October 31, 1997 ("fiscal 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 of Dunn 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. The Company has closed the
production facility in Gaithersburg, Maryland.                                  

  Selling and marketing expense of Dunn 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 of Dunn 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. The Company charged $564,776 of IDP acquisition integration    
costs to G&A for the fiscal year. The Company also recognized approximately     
$545,000 in amortization expense for fiscal 1998 as compared to $22,000 for     
fiscal 1997. Dunn increased its costs in almost all aspects of general and      
administrative expenses as a result of the IDP acquisition. The Company has     
taken various actions to reduce general and administrative expenses in future   
periods. See Item 1 "Business."                                                 

 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. Dunn's 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. Dunn's 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                                                 

In fiscal 1999, Dunn generated approximately $335,000 in cash flow from 
operations. Dunn generated cash after the net loss from its reduction in        
accounts receivable of approximately $11.8 million, a reduction of inventories  
of approximately $5.4 million and a reduction of investment in sales-type leases
of approximately $3.1 million. The cash generated was used to reduce accounts   
payable by $7.3 million. The Company used approximately $2.5 million in its     
investing activities for the purchase of certain property, equipment and        
equipment to be leased.                                                         

  The Company's financing activities during fiscal 1999 were provided by the
Company's bank line of credit with First Union Bank. The line of credit expires 
on November 30, 2000 and currently bears interest at prime plus 1%. As of       
January 31, 2000, Dunn had an outstanding balance on the line of credit of      
$2.3 million and available borrowing capacity of approximately $115,000.        

In fiscal 1999, Dunn's subsidiary, IDP, had borrowing agreements with   
Deutsche Financial Services (DFS) for an aggregate of $25 million. The          
outstanding balance as of October 31, 1999 was approximately $4.7 million.      
Subsequent to year end, the Company executed an agreement terminating the       
borrowing agreement whereby $3.25 million was repaid to DFS prior to            
December 31, 1999. Approximately $832,000                                       

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of the outstanding balance at December 31, 1999 was converted to a 24 month note
accruing interest at the prime rate and the remaining principal of approximately
$750,000 was forgiven by DFS.                                                   

As of October 31, 1999, the Company had working capital deficit of      
$1.4 million. The Company believes the bank facility, together with cash on     
hand, cash generated from operations, sale of certain lease agreements and      
significant income tax refunds due will provide sufficient financial resources  
to finance the current operations of the Company through fiscal 2000.           

   Dunn has obligations under its operating lease commitments of approximately
$600,000 and obligations under its existing employment contracts of             
approximately $190,000 for fiscal 2000. In addition, there is an outstanding    
judgment against Dunn Computer Corporation for approximately $1.7 million.      

The Company expects to generate liquidity in fiscal 2000 through the    
issuance of preferred stock and through the recovery of income taxes previously 
paid.                                                                           

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK             

Not applicable.                                                         

ITEM 8. FINANCIAL STATEMENTS                                                    

FINANCIAL STATEMENTS OF DUNN COMPUTER CORPORATION                               

                                                                [Download Table]

                                                                PAGE  
                                                              --------
                                                                      
Report of Ernst & Young LLP, Independent Auditors...........    F-1   

Consolidated Balance Sheets.................................    F-2   

Consolidated Statements of Operations.......................    F-3   

Consolidated Statements of Stockholders' Equity.............    F-4   

Consolidated Statements of Cash Flows.......................    F-5   

Notes to the Consolidated Financial Statements..............    F-6   

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

None.                                                                   

PART III

  The Notice and Proxy Statement for the 1999 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Securities and Exchange Act of 
1934, as amended, which is incorporated by reference in this Annual Report on   
Form 10-K pursuant to General Instruction G (3) of Form 10-K, will provide the  
information required under Part III, including Item 10 (directors and executive 
officers of the Company), Item 11 (Executive Compensation), Item 12 (security   
ownership of certain beneficial owners and management), and Item 13 (certain    
relationships and related transactions).                                        

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PART IV 

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

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

1.  Financial Statements                                                        

Dunn Computer Corporation                                                       

Report of Ernst & Young LLP, Independent Auditors                               

Consolidated Balance Sheets                                                     

Consolidated Statements of Operations                                           

Consolidated Statements of Stockholders' Equity                                 

Consolidated Statements of Cash Flows                                           

Notes to Consolidated Financial Statements                                      

2.  Financial Statement Schedules                                               

Schedule II--Valuation and Qualifying Accounts                          

Statements not listed above have been omitted because they are not      
applicable or the information required to be set forth therein is included in   
the Consolidated Financial Statements or the notes thereto under Item 8.        

3.  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.)       

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       EXHIBIT                                                                     
       NUMBER                                  DESCRIPTION                         
---------------------  ------------------------------------------------------------
                                                                                   
         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).                          
         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.)           

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       EXHIBIT                                                                     
       NUMBER                                  DESCRIPTION                         
---------------------  ------------------------------------------------------------
                                                                                   
        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.)                                 
        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 Ernst & Young LLP, Independent Auditors.         
        *27.1          Financial Data Schedule.                                    

------------------------                                                        
*   Filed herewith                                                              

(b) Reports on Form 8-K                                                         

None                                                            

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SIGNATURES

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

                                                                [Download Table]
                                                                       
                         DUNN COMPUTER CORPORATION                     

                         By:                                           
                              -----------------------------------------
                                           Thomas P. Dunne             
Date: February 15, 2000         PRESIDENT AND CHIEF EXECUTIVE OFFICER  

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

                                                        [Enlarge/Download Table]

                   NAME                                 TITLE                    DATE      
                   ----                                 -----                    ----      
                                                                                           
            /s/ THOMAS P. DUNNE                                                            
-------------------------------------------  President, Chief Executive   February 15, 2000
              Thomas P. Dunne                  Officer and Director                        

           /s/ CLAUDIA N. DUNNE                                                            
-------------------------------------------  Vice President and Director  February 15, 2000
             Claudia N. Dunne                                                              

             /s/ JOHN VAZANNA                                                              
-------------------------------------------  Director                     February 15, 2000
               John Vazanna                                                                

         /s/ VADM E. A. BURKHALTER                                                         
-------------------------------------------  Director                     February 15, 2000
     VADM E. A. Burkhalter USN (Ret.)                                                      

            /s/ DANIEL SINNOTT                                                             
-------------------------------------------  Director                     February 15, 2000
              Daniel Sinnott                                                               

           /s/ BENJAMIN KREIGER                                                            
-------------------------------------------  Director                     February 15, 2000
             Benjamin Kreiger                                                              

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INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]
                                                                   
DUNN COMPUTER CORPORATION (A VIRGINIA CORPORATION)                 
Report of Ernst & Young LLP, Independent Auditors...........    F-1
Consolidated Balance Sheets as of October 31, 1998 and             
  1999......................................................    F-2
Consolidated Statements of Operations for the three years in       
  the period ended October 31, 1999.........................    F-3
Consolidated Statements of Stockholders' Equity for the            
  three years in the period ended October 31, 1999..........    F-4
Consolidated Statements of Cash Flows for the three years in       
  the period ended                                                 
  October 31, 1999..........................................    F-5
Notes to Consolidated Financial Statements..................    F-6

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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 consolidated   
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 consolidated 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                                                                

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DUNN COMPUTER CORPORATION 

CONSOLIDATED BALANCE SHEET

                                                        [Enlarge/Download Table]

                                                                     OCTOBER 31,        
                                                              ------------------------- 
                                                                 1998          1999     
                                                              -----------   ----------- 
                                                                                        
ASSETS                                                                                  
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. 

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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. 

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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. 

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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

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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.         

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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.

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                                  

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 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                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                                  

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.                                                            

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.                                                                     

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                                  

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 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:                      

                                                        [Enlarge/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.             

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.                                                                         

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                                                            

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. ACQUISITIONS (CONTINUED)                                                     

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.                            

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]

                                                              YEARS 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      

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. ACQUISITIONS (CONTINUED)                                                     

(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
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 Novmeber 30, 2000. The Company has classified this line of credit
as long term based on the amended maturity date.                                

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BANK LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)                           

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
                                                             =======    ========

  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).              

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.                                              

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.                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.           

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                                

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY (CONTINUED)                                            

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.                                              

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.                                                                       

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY (CONTINUED)                                            

  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 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.                          

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)                                                    

  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 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)
                                              ========   ========   =========== 

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)                                                    

   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 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.                                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RETIREMENT PLANS (CONTINUED)                                                

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.                                                                      

   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)
                                                         ========   ========= 

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RETIREMENT PLANS (CONTINUED)                                                

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%  

13. EARNINGS PER SHARE                                                          

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

                                                                [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)
                                         ==========   ==========   ============ 

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.                                                               

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.                                                          

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DUNN COMPUTER CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. CONTINGENCIES (CONTINUED)                                                   

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.                                                        

 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. has 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 approximately $60,000. 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 in the accompanying financial statements.        

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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                                                                

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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS 

DUNN COMPUTER CORPORATION 

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                                               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                                                     

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                                                                    EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

  We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-61557) pertaining to the Employee Stock Purchase Plan of   
Dunn Computer Corporation (a Virginia corporation), with respect to the         
consolidated financial statements and schedules of Dunn Computer Corporation    
included in the Annual Report (Form 10-K) for the year ended October 31, 1999.  

                         /s/ ERNST & YOUNG LLP

McLean, Virginia                                                                
February 15, 2000                                                               

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                                                                    EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

  We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-52419) pertaining to the 1997 Stock Option Plan of Dunn    
Computer Corporation (a Virginia corporation), with respect to the consolidated 
financial statements and schedules of Dunn Computer Corporation included in the 
Annual Report (Form 10-K) for the year ended October 31, 1999.                  

                         /s/ ERNST & YOUNG LLP

McLean, Virginia                                                                
February 15, 2000                                                               

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
Changed as of / Corrected on:		6/23/04
		3/31/02		5
		11/30/00		16
		10/31/00		37					10-K405
		2/28/00		1					DEF 14A
Filed as of:		2/16/00
Filed on:		2/15/00		1		50
		2/11/00		20		47
		2/1/00		23		47			NT 10-K
		1/31/00		1		16			10-Q
		1/21/00		9
		1/5/00		6		20
		12/31/99		16		35
		12/29/99		20
		12/10/99		10
		11/8/99		35
For Period End:		10/31/99		1		50			10-K/A,  NT 10-K
		10/8/99		5
		8/31/99		10		45
		8/27/99		10
		5/27/99		20
		5/1/99		10		42
		2/28/99		35
		2/26/99		10
		12/18/98		10
		11/25/98		38
		11/23/98		20
		10/31/98		12		48			10-K,  10-K/A,  NT 10-K
		7/31/98		10		45			10-Q
		6/1/98		9		45
		5/1/98		3		42
		4/23/98		18		20
		4/21/98		3		38
		4/20/98		20
		4/15/98		9
		3/18/98		18					S-4
		3/9/98		18
		3/5/98		18
		2/28/98		20
		2/26/98		18		28
		2/25/98		18
		1/30/98		19
		1/6/98		19
		10/31/97		12		48
		9/27/97		18
		9/12/97		12		33
		9/8/97		19
		7/23/97		19
		5/5/97		19
		4/22/97		11
		4/21/97		38
		4/4/97		19
		3/25/97		19
		3/14/97		19
		2/7/97		19
		1/6/97		28		43
		1/3/97		28
		11/1/96		34
		10/31/96		12		26
		8/8/96		6
		5/28/96		20
		11/21/95		19
		10/31/95		12		15
		7/11/95		20
		6/12/95		19
		4/1/95		42
		1/31/95		19
		10/31/94		19
		9/29/94		19
		7/15/94		20
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