<PAGE>


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

         /x/      Annual report under Section 13 or 15(d) of the Securities
                  Exchange Act of 1934 

                  For the fiscal year ended December 31, 1998

         / /      Transition report under Section 13 or 15(d) of the Securities
                  Exchange Act of 1934 

                  For the transition period from ____________________ 
                  to _____________________.

                     Commission file number:   000-21959

                            APEX PC SOLUTIONS, INC.
            (Exact name of registrant as specified in its charter)

            Washington                              91-1577634
   State or Other Jurisdiction of       (I.R.S. Employer Identification No.)
   Incorporation or Organization)

      20031 142nd Avenue, N.E.                         98072
      Woodinville, Washington                        (Zip Code)
(Address of Principal Executive Offices) 

                                 425-402-9393
                 (Issuer'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, no par value per share

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

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not 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 registrant's revenues for fiscal 1998 were $75.6 million.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 4, 1999 was approximately $275 million.

         The number of shares outstanding of the registrant's common stock as of
March 4, 1999 was 20,375,000.


<PAGE>

THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS RELATING TO THE APEX STRATEGY, BUSINESS PROSPECTS
AND FUTURE OPERATING RESULTS, PROSPECTS FOR INCREASING OEM AND BRANDED SALES,
COMPETITION, NEW PRODUCT INTRODUCTIONS, DEVELOPMENT OF ADDITIONAL SUPPLIER
RELATIONSHIPS, DEVELOPMENT OF RESELLER CHANNELS, PRODUCT RETURNS AND WARRANTY
CLAIMS, ABILITY TO OBTAIN AND PROTECT PROPRIETARY RIGHTS, CUSTOMER SERVICE,
DEVELOPMENT OF INTERNATIONAL SALES, FUTURE RESEARCH AND DEVELOPMENT
EXPENDITURES, FUTURE SALES AND MARKETING EXPENSES, FUTURE GENERAL AND
ADMINISTRATIVE EXPENSES, BACKLOG, AND FUTURE LIQUIDITY AND CAPITAL RESOURCES.
ALL SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION AVAILABLE TO THE
COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN, AND IN OTHER WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS MADE BY THE
COMPANY FROM TIME TO TIME, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "DESCRIPTION OF BUSINESS - RISK
FACTORS."

READERS SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH
REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT
SUBSEQUENT EVENTS OR CIRCUMSTANCES. READERS SHOULD ALSO CAREFULLY REVIEW THE
RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.

                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

         Apex PC Solutions, Inc. ("Apex" or the "Company") designs, manufactures
and sells stand-alone switching systems and integrated server cabinet solutions
for the client/server computing market. The Company's switching systems enable
client/server network administrators to manage multiple servers from a single
keyboard, video monitor and mouse configuration (a "console"). Specifically, the
Company's products reduce personnel, space, energy, depreciation and maintenance
costs that organizations increasingly face when adopting client/server
architecture. The Company's sophisticated switching and integrated server
cabinet solutions enable network administrators to more efficiently manage their
organizations' complex and growing server populations.

         The Company provides "plug and play" switching systems and 
integrated server cabinet solutions for many of the network administration, 
management and storage problems faced by organizations using client/server 
architecture. The Company's switching products, including OUTLOOK, 
OUTLOOK(4), VIEWPOINT and EMERGE, enable network administrators to access 
multiple servers from one or more centralized consoles, consolidate hardware 
requirements, and provide direct hardwired connections between the switch and 
the attached servers which facilitate access to servers even when the network 
is down. In addition, the Company's switching systems are able to work with 
heterogeneous server populations. Most of the Company's switching products 
utilize the Company's patented On Screen Configuration And Reporting 
("OSCAR") interface. OSCAR allows network administrators to immediately 
identify and access servers according to the administrators' own naming 
conventions. The Company also offers integrated server cabinet solutions to 
consolidate and store heterogeneous servers and related hardware in a single 
cabinet that facilitates more efficient physical access and safer performance 
of hardware maintenance tasks.

                                      -2-


<PAGE>

         The Company markets and sells its products through a direct sales force
and various distribution channels. A substantial portion of the Company's sales
are concentrated among a limited number of original equipment manufacturers that
purchase the Company's switching systems on a private-label basis ("OEMs" and
"OEM customers"). Apex supplies stand-alone switching systems to Compaq Computer
Corporation ("Compaq") and Hewlett-Packard Company ("Hewlett-Packard") under
private-label arrangements for integration into their product offerings. For
1998, 1997 and 1996, sales to Compaq represented approximately 43%, 51% and 30%,
respectively, of the Company's net sales. In addition, for 1996, sales to
Hewlett-Packard represented approximately 15% of the Company's net sales.
According to International Data Corporation, a market research firm, Compaq and
Hewlett-Packard shipped 45.1% of all PC servers shipped worldwide in 1998. The
Company also sells its branded switching products to various manufacturers of
servers and related networking products, such as Data General Corporation, Dell
Computer Corporation ("Dell"), Gateway 2000, International Business Machines
Corporation ("IBM"), SCI Systems, Inc. ("SCI"), Solectron and Unisys
Corporation. These customers integrate and sell the Company's branded switches
with their own products. The Company's end-user branded sales customers for 1998
included Comcast Corporation, Intel Corporation, Microsoft Corporation, Network
Associates, Inc., Pacific Gas & Electric, Peoplesoft Corporation, 3Com, Sequent
Computer Systems, Inc. and Starwave Corporation.

         OSCAR, OUTLOOK, SWITCHBACK and VIEWPOINT are registered trademarks 
of the Company. Apex PC Solutions, EMERGE, OUTLOOK(4), SUNDIAL, EL-40LC and 
DENSEPACK are trademarks of the Company. This annual report also includes 
trademarks of other companies.

INDUSTRY BACKGROUND

         Information technology has become increasingly critical to the
operation of most businesses as computers are utilized to perform multiple and
diverse functions throughout organizations. The desire of many organizations to
decentralize computing power while sharing technology resources and providing
broad access to enterprise data has resulted in the widespread adoption of
distributed network computing environments using a client/server architecture of
interconnected PCs. The typical client/server installation consists of a local
area network ("LAN") with multiple centralized PCs operating as "servers"
dedicated to performing specific functions for the many "client" PCs connected
to the LAN. According to International Data Corporation, worldwide shipments of
PC servers are expected to grow 16.7% on a compounded annual basis from 1999 to
2003, reaching approximately 6.5 million units shipped in the year 2003.

         The proliferation of PC-based LANs and wide-area networks ("WANs") has
created significant network administration and space problems for the
organizations that rely on them. Network administrators, who may supervise
thousands of servers, must identify and access relevant servers to add or delete
users, to add, change or upgrade applications, to tune systems for better
performance, and to diagnose and correct network failures. Client/server
networks utilize servers that were designed to operate as stand-alone systems,
each with its own console consisting of a keyboard, video monitor and mouse.
Thus, to perform network administration and management tasks, network
administrators must deal with an unwieldy number of consoles, whether centrally
located or dispersed throughout the organization. In addition, inadvertent
access to network servers can be difficult to prevent when there are many
consoles (and therefore, multiple access points) available.

         As network resources become more critical to organizations, constant
availability of the network becomes increasingly important. The time that a
network is down or degraded can cause significant inconvenience, loss of
productivity and financial loss. Because diagnosis and correction of anomalous
network behavior often requires the network staff to physically access each
affected server through its own console, quick and efficient "fault" management
can be difficult, especially when there are a large number of dispersed servers
involved. In addition, when a network fails, an administrator's ability to
quickly and efficiently diagnose and correct the problem is often hampered
because the administrator is not able to access the software tools that reside
on the network and that are normally used to manage network failures.

         In addition to these network administration and management problems, as
organizations' network computing needs increase, the number of servers, consoles
and other peripherals proliferates. Without efficient storage and configuration,
network hardware consumes substantial and often expensive floor space, creates
clutter that hampers network administration and management, and increases the
risk of physical damage to expensive hardware. The typical individual keyboard,
monitor and mouse console architecture of servers exacerbates this space
problem, as multiple consoles consume valuable and costly space. The increased
use of "heterogeneous" server configurations using different platforms, such as
Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc,
and different 

                                      -3-


<PAGE>

operating systems, such as Windows NT, Unix, NetWare and O/S 2, compounds the 
storage and administration problems faced by network administrators.

         The advent of console switching technology has facilitated more
effective network management by giving administrators the ability to control a
larger number of servers through fewer consoles. To date, however, most console
switching solutions have been difficult to install and configure, and many have
used proprietary cabling that has made network administrators reluctant to
embrace a solution that may restrict them from expanding or using a different
solution in the future. In addition, there have been a limited number of
solutions available for those users who want to control computers from a
distance, such as those who need access to computer resources in, but do not
want to expose those expensive resources to, harsh operating environments. The
space management solutions available to network administrators have generally
consisted of racks or cabinets designed to house only one type of server, and
most have not been technically designed for ease of access. Those with
distributed, heterogeneous client/server networks have often been left with no
customized solution.

THE APEX SOLUTION

         The Company provides "plug and play" stand-alone switching systems and
integrated server cabinet solutions for many of the network administration,
management and storage problems faced by organizations with client/server
networks. By providing both console switching and cabinet systems, the Company
offers a comprehensive solution to the space and administrative issues related
to client/server networks. The Company's products allow organizations to:

       - ACCESS MULTIPLE SERVERS FROM A CENTRAL LOCATION. Apex products allow
         network administrators to manage multiple platforms from a centralized
         console, to identify and access servers from a single screen according
         to the administrator's own naming conventions, and to solve distance
         problems by providing end-to-end connections of up to 850 feet.

       - CONSOLIDATE HARDWARE REQUIREMENTS. Apex products reduce the need for
         multiple keyboards, monitors and mice by allowing direct access to
         multiple servers from a single console, thereby facilitating more
         efficient network management and administration and reducing hardware
         costs.

       - PROVIDE "OUT-OF-BAND" ACCESS TO SERVERS. By providing direct hardwired
         connections to network servers, Apex switching systems enable network
         administrators to access each server as if they were physically present
         at that server, even when the network is down. Moreover, unlike the
         connectivity approach of many competitive products, which connect
         numerous switches to other switches in a continuous chain, the
         Company's switching products are designed so that each server has its
         own connection to the master switch in a two-tiered system. This direct
         linkage makes it easier for network administrators to isolate problems
         with individual servers.

       - PROVIDE CONNECTIVITY TO VIRTUALLY ALL MAJOR PLATFORMS. Apex switching
         products work in heterogeneous server environments, providing
         connectivity with Intel, Macintosh, IBM RS 6000, Hewlett-Packard 9000,
         DEC Alpha and Sun Sparc platforms.

       - MAXIMIZE SPACE EFFICIENCY. Apex integrated server cabinet solutions
         consolidate servers and other hardware in a single location to
         facilitate more efficient physical access for hardware maintenance
         tasks. The Company also provides customized cabinet solutions for the
         storage of heterogeneous server populations.

THE APEX STRATEGY

         The Company's objective is to be the leading provider of hardware
solutions for the administration, management and storage challenges inherent in
the client/server network environment. To achieve this objective, the Company is
pursuing the following strategies:

       - CONTINUE INNOVATIVE PRODUCT DEVELOPMENT. The Company believes that the
         continued, timely development of innovative products and enhancements
         to existing products is essential to maintaining its competitive
         position. By maintaining close contact with key customers who are often
         early-adopters of leading technologies, the Company seeks to develop
         new products, as well as modifications and improvements to existing
         products. Many of the Company's products are designed to accommodate
         future modifications and additional features, which the Company
         believes facilitates the development and integration of modifications
         and features if a 

                                      -4-


<PAGE>

         market need is perceived. The Company was recently granted a second 
         U.S. patent on its On Screen Configuration And Reporting ("OSCAR") 
         interface and has other United States and foreign patents pending.

       - LEVERAGE OEM EXPERIENCE TO INCREASE OEM SALES. The Company continues to
         leverage its significant experience in working with OEM customers to
         enter into new relationships with other manufacturers of servers in the
         United States and in Europe. The Company believes that the
         architecture, quality and reliability of its products, together with
         the Company's commitment to customer service, are attractive to server
         manufacturers.

       - INCREASE BRANDED SALES. To increase its market penetration, the Company
         is continuing to aggressively market its branded products to end users
         through a direct sales force and through a variety of reseller
         channels. The Company believes that its comprehensive and customized
         solutions will appeal to many organizations with heterogeneous server 
         populations whose problems are not effectively solved by competing 
         switching and cabinet products. For the years ended December 31, 1998, 
         1997, and 1996, sales of Apex-brand products represented approximately
         40%, 35%, and 29%, respectively, of the Company's net sales.

       - CREATE AN INTERNATIONAL DISTRIBUTION NETWORK. The Company has begun
         creating an international sales distribution network for the Company's
         branded switching products, focusing initially on the network computing
         market in Europe because of its large installed server base. The 
         Company presently has relationships with 21 international distributors
         in 18 foreign countries as part of an effort to build an international
         third-party distribution network. The Company is currently shipping 
         its switching systems to OEMs and other server manufacturers with 
         facilities in Europe. 

PRODUCTS

         The Company provides comprehensive solutions to many of the network
administration, management and storage problems inherent in client/server
network environments by offering a family of stand-alone switching systems
together with integrated server cabinet solutions designed to store servers
efficiently.

         SWITCHING SYSTEMS

         The Company's switching systems consolidate the control and monitoring
of multiple network servers to a centralized command center consisting of one or
more console positions. The Company's console switching products can work with
heterogeneous server populations that use different platforms, such as Intel,
Macintosh, IBM RS 6000, Hewlett-Packard 9000, DEC Alpha and Sun Sparc, and
different operating systems, such as Windows NT, Unix, NetWare and O/S 2. Most
of the Company's console switching products utilize the Company's proprietary
OSCAR interface that enables network administrators to immediately identify and
access servers according to the administrators' own naming conventions, as
opposed to predesignated numbers. The United States Patent and Trademark Office
("PTO") has issued Patent Number 5,721,842 and Patent Number 5,884,096 to the
Company for various aspects of its OUTLOOK and VIEWPOINT products and its OSCAR
interface. See "- Proprietary Technology." The Company's console switching
products operate on an out-of-band basis, meaning there is a direct hardwired
connection between the console and the attached servers through the switch. This
direct connection enables network administrators to access network servers and
locate the problem server even when the network is down. The Company also offers
EMERGE, an innovative remote management product for network servers.

         OUTLOOK, originally introduced in September 1995, enables
administrators to control up to eight servers using a single console and, by
integrating additional OUTLOOK switches, can be expanded to provide centralized
control of up to 64 servers. OUTLOOK offers programmable scanning to allow users
to vary the frequency and duration of monitoring individual servers. OUTLOOK
also enables network managers to reduce inadvertent access to the system by
eliminating additional consoles. OUTLOOK provides access to a wide range of
network elements such as servers, PBX monitors and database engines from a
single console.

         OUTLOOK(4), originally introduced in March 1996, includes the same
features as OUTLOOK, except that these multi-user systems allow network
administrators to administer up to 64 servers using one to four console
positions.

         VIEWPOINT, introduced in September 1995 to address the needs of very
large server-intensive organizations with large network administrative staffs,
includes all of the attributes of OUTLOOK except that it enables network
administration staff to control up to 32 servers from as many as 16 console
positions. Total capacity can be expanded to as 

                                      -5-


<PAGE>

many as 1024 servers by integrating the VIEWPOINT switch with additional 
VIEWPOINT switches, and VIEWPOINT'S technology allows access to a server up 
to 850 feet away. VIEWPOINT also supports remote diagnostics via a serial 
port.

         SUNDIAL, introduced in March 1996, enables administrators to control up
to 10 Sun Sparc workstations from a single console and, by integrating
additional SUNDIAL switches, can be expanded to provide centralized control of
up to 100 workstations. The SUNDIAL switch maintains communications with
attached workstations and, if power is interrupted, the unit's nonvolatile
memory helps restore the system's established settings. The SUNDIAL switch is
designed to work with the OUTLOOK, OUTLOOK(4) and VIEWPOINT switches.

         EMERGE, introduced in September 1998, is an innovative remote
management device that gives network administrators full keyboard and mouse
control of servers from remote locations. EMERGE is non-intrusive to servers 
and the network, thus freeing network resources for operational capacity. This
product is designed to be used alone or integrated with the OUTLOOK, 
OUTLOOK(4) and VIEWPOINT switch products.

         SWITCHBACK, introduced in March 1995, consists of a local unit and a
remote unit that allow users to control the attached server from either a
primary console position or a remote console position linked by a single cable.
SWITCHBACK'S intelligent circuits enable 100 mhz transmission of high resolution
video signals up to 600 feet away from the attached servers using
industry-standard UTP Category 5 cabling. The SWITCHBACK system includes a
lock-out feature that prevents system capture. The SWITCHBACK system can be
combined with the OUTLOOK and OUTLOOK(4) switches.

         The EL-40LC, introduced in March 1998, provides basic switch and
scanning functions that make network administration easy and cost-effective. The
system can be efficiently monitored with simple keystroke commands, or with
buttons located on the switch and it can provide periodic status updates on
attached computers. The EL-40LC lets users easily administer the resources of up
to four computers with a single keyboard, monitor and mouse.

         The current U.S. list prices of the Company's switching systems as of
March 1999, were as set forth below. The list prices of the Company's products
have changed in the past, and the prices set forth below are likely to change in
the future.

<TABLE>
<CAPTION>

    PRODUCT                                       U.S. LIST PRICE
    -------                                       ---------------
<S>                                               <C>
    OUTLOOK (4 PORT)                                         $839
    OUTLOOK (8 PORT)                                         $995
    OUTLOOK (2 X 8 PORT)                                   $1,895
    OUTLOOK(4)                                             $2,695
    VIEWPOINT (DEPENDING ON CONFIGURATION)        $13,000-$44,000
    SUNDIAL                                                $1,929
    EMERGE                                                 $3,999
    SWITCHBACK                                               $895
    EL-40LC                                                  $495
</TABLE>

                                      -6-


<PAGE>

         The Company's current switching products are described in the table
below:

<TABLE>
<CAPTION>

    PRODUCT NAME            KEY FEATURES                           BENEFITS
    ------------            ------------                           --------
<S>                 <C>                                <C>

OUTLOOK             -   ports: 1 x 4 and 1 x 8          -  reduces required space and hardware needs by allowing
                    -   capacity: 64 servers               one console to control up to four or eight servers per
                    -   multi-platform compatibility       switch
                    -   OSCAR interface                 -  multiple switches can be used to support up to 64
                                                           servers
                                                        -  supports major server platforms
                                                        -  OSCAR interface permits easy on-screen control of switch
-------------------------------------------------------------------------------------------------------------------

OUTLOOK(4)          -   ports: 2 x 8 and 4 x 8          -  offers the benefits of OUTLOOK as well as permits up to
                    -   capacity: 64 servers               four administrator consoles to control up to eight
                    -   multi-platform compatibility       servers per switch
                    -   OSCAR interface
-------------------------------------------------------------------------------------------------------------------

VIEWPOINT           -   ports: 16 x 32                  -  in addition to benefits of OUTLOOK and OUTLOOK(4), allows
                    -   capacity: 1024 servers             up to 16 network administrator consoles to access up to
                    -   850 ft. extension                  32 servers
                    -   multi-platform compatibility    -  multiple VIEWPOINTS can be used to support up to 1024
                    -   OSCAR interface                    servers
                                                        -  administrator consoles can be up to 850 ft. away from
                                                           server
-------------------------------------------------------------------------------------------------------------------

SUNDIAL             -   ports: 1 x 10                   -  enables control of large Sun Sparc workstation networks
                    -   capacity: 100 servers              using a single console
                    -   OSCAR interface                 -  may be combined with OUTLOOK, OUTLOOK(4) and VIEWPOINT
                                                           switches
-------------------------------------------------------------------------------------------------------------------

EMERGE              -   remote management of servers    -  remote console access
                    -   utilizes OSCAR interface        -  may be combined with OUTLOOK, OUTLOOK(4) and VIEWPOINT
                                                           switches
-------------------------------------------------------------------------------------------------------------------

SWITCHBACK          -  600 ft. extension product        -  100 mhz bandwidth transmission over industry-standard
                                                           UTP Category 5 cabling
                                                        -  allows the addition of a remote console up to 600 feet
                                                           away
                                                        -  remote lock-out feature
                                                        -  may be combined with OUTLOOK and OUTLOOK(4) switches
-------------------------------------------------------------------------------------------------------------------

EL-40LC             -   ports: 1 x 4                    -  entry-level product for small-business and desktop
                    -   capacity: 4 servers/computers      applications
                    -   multi-platform compatibility    -  reduces required space and hardware needs by allowing
                                                           one console to control up to four servers/computers
                                                        -  supports major server platforms
-------------------------------------------------------------------------------------------------------------------
</TABLE>

         DENSEPACK CABINET SOLUTIONS

         DENSEPACK cabinets are specifically designed to house network servers
and communication equipment, improve system administration and facilitate CPU
maintenance. DENSEPACK cabinets are typically customized to meet specific
customer needs and are pre-cabled to allow network administrators to quickly
install hardware and connect to their networks. DENSEPACK cabinets incorporate
the Company's OUTLOOK switching technology, as well as built-in ventilator fans,
large rear doors and optional slide-out shelves to facilitate access to cables,
connectors and servers. The DENSEPACK MODEL RS is a scaled-down version of the
Company's DENSEPACK and is designed for small businesses and stand-alone
departments. The DENSEPACK MODEL RS can be used in combination with full-sized
DENSEPACK cabinets.

                                     -7-


<PAGE>

SALES AND MARKETING

         The Company markets and sells its products through an internal sales
force and various distribution channels, including private-label OEM and
reseller arrangements. To date, the Company has marketed its products primarily
through advertisements in trade publications, participation in major industry
trade shows and the Company's website. As of December 31, 1998, the Company's
sales and marketing staff consisted of 24 employees. The Company's sales
personnel process written and telephonic orders, support existing customers and
respond to telephone inquiries.

         The Company currently sells various switching products to Compaq,
Hewlett-Packard and Wright Line, Inc. ("Wright Line") pursuant to private-label
arrangements. These private-label OEM customers integrate and sell the Company's
switches with their own networking products, including network servers and
integrated server cabinets. The Company devotes significant sales and customer
service resources to its OEM accounts. The Company also sells its branded
switching products to various other manufacturers of servers and related
networking products, such as Data General Corporation, Dell, Gateway 2000, IBM,
SCI, Solectron, and Unisys Corporation. These customers integrate and sell the
Company's branded switches with their own products. The Company intends to
leverage its significant experience in working with its OEM and other server
manufacturer customers to enter into new relationships with other manufacturers
of servers in the United States and Europe. The Company believes that the
architecture, quality and reliability of its products, together with the
Company's commitment to customer service, are attractive to server
manufacturers.

         The Company has relationships with a variety of resellers, distributors
(including Tech Data Product Management, Inc.), value-added resellers ("VARs")
and systems integrators, for the distribution and sale of Apex-brand switching
and cabinet products in the United States, Europe and elsewhere. The Company
devotes resources to educating its resellers as to the benefits of the Company's
products and training them in the proper installation and support of the
Company's products. The Company's strategy contemplates devoting additional
resources to increase these branded sales, and to that end, the Company intends
to pursue additional relationships with resellers both domestically and
internationally.

         The Company has focused and expects to continue to focus on contracting
with local, regional and international resellers who have the technical
capability and market presence to assist end-user customers in developing
network space management and access and control solutions to meet their
particular needs. The Company's future success will depend in part on its
ability to attract, train and motivate such resellers.

         The Company provides and expects to continue providing discounts and
other special pricing arrangements to its resellers. As a result of such
discounts and other arrangements, the Company's gross margins on sales through
resellers are expected to be lower than gross margins on direct sales. The
Company's agreements with its resellers generally are nonexclusive and may be
terminated on short notice by either party without cause. The Company's
resellers are not within the control of the Company, are not obligated to
purchase products from the Company and frequently offer products of several
different manufacturers, including products competitive with the Company's
products.

         The Company believes Compaq, Hewlett-Packard and many other
manufacturers of servers market and sell their own branded server cabinets.
Accordingly, the Company believes it has limited opportunities to sell its own
server cabinets to new purchasers of servers. Instead, the Company believes that
sales of its server cabinets have been and will continue to be limited primarily
to end-user customers who have a need to more efficiently configure and manage
existing network systems.

         The Company's strategy with regard to international sales is to create
an international sales distribution network for the Company's branded switching
products focusing initially on the network computing market in Europe because of
its large installed server base. The Company presently has relationships with 21
international distributors in 18 foreign countries as part of an effort to build
an international third-party distribution network. The Company is currently 
shipping private-label switching products to OEMs with facilities in Europe and
branded switching products to other manufacturers of servers and related 
networking products with facilities in Europe. To date, however, the Company's 
direct end-user or VAR, integrator, and reseller channel sales into Europe have
not been significant. The Company is continuing efforts to build a third party 
international distribution network.

                                    -8-


<PAGE>

CUSTOMERS

         To date, a substantial portion of the Company's net sales have been
generated from private-label sales of switches to OEMs for integration into
their product offerings. For 1998, 1997 and 1996, sales to the Company's
private-label OEM customers represented 60%, 65% and 71% of the Company's net
sales, respectively. While the Company has contracts with certain of its
existing private-label OEM customers, none of the Company's OEM customers is
obligated to purchase products from the Company except pursuant to binding
purchase orders. Consequently, any OEM customer could cease doing business with
the Company at any time. The Company also sells its branded switching products
to various other manufacturers of servers and related networking products, who
integrate and sell Apex-brand switches with their own products. The loss or
material decline in orders from certain of the Company's current private-label
OEM customers or certain of the Company's other customers who manufacture
servers and related networking products would have a material adverse effect on
the Company's business, financial condition and results of operations.

         For 1998, 1997 and 1996, sales to Compaq represented approximately 43%,
51%, and 30%, respectively, of the Company's net sales. In addition, for 1996,
sales to Hewlett-Packard represented approximately 15% of the Company's net
sales. IBM accounted for approximately 18% of the Company's net sales in 1996.

BACKLOG

         The Company's backlog was $10.1 million, $7.9 million and $9.2 million
at December 31, 1998, 1997 and 1996, respectively. Backlog consists of purchase
orders with delivery dates scheduled within the next six months. None of the
Company's customers is obligated to purchase products from the Company except
pursuant to binding purchase orders. Because of the timing of orders and the
possibility of customer changes to delivery schedules, the Company's backlog as
of any particular date may not be representative of actual sales for any
succeeding period. Moreover, with recent industry-wide initiatives to reduce all
channel inventories and shorten lead times, the Company views backlog as a less
important indicator of future results.

CUSTOMER SERVICE

         The Company emphasizes customer service by developing innovative, 
high quality products, encouraging customer feedback through contact with key 
customers, providing technical support and information on its website and 
providing a customer hot-line that offers technical support for the life of 
the Company's products. The Company's switches have a "plug and play" design 
and are intended not to require extensive configuration. The Company seeks to 
respond quickly to customers' requests for technical support and service, and 
the Company's engineering department often works with individual customers to 
troubleshoot problems and develop custom solutions. The Company offers 
warranties for parts and service on all of its products. To date, the Company 
has not experienced significant product returns. The Company may, as a result 
of competitive pressures, change its warranty policies in the future to 
provide warranty coverage that is greater in scope and duration than that 
currently offered. If the Company were to increase its warranty coverage, its 
risk of warranty claims and therefore its warranty reserves would likely 
increase.

PRODUCT DEVELOPMENT

         The Company believes that the continued, timely development of new
products and enhancements to its existing products is essential to maintaining
its competitive position. The market for the Company's switching products in
particular is characterized by rapid technological advances, frequent new
product introductions and enhancements, and significant price competition. The
introduction of products incorporating superior or alternative technologies
(such as switching software), the emergence of new industry standards or changes
in the market's pricing structure could render the Company's existing products
and products under development obsolete or unmarketable. The Company's switching
systems combine components, such as printed circuit boards, connectors, cable
assemblies, power supplies and enclosures, that are manufactured by other
companies and are generally available to the Company's competitors and potential
competitors. The Company's future success will depend in large part upon its
continued innovative application of such commercially available components to
the expansion and enhancement of its existing products and the development and
introduction of new products which address changing customer needs on a
cost-effective and timely basis.

         Due to the Company's significant reliance on private-label OEM
relationships, the Company's product development efforts are often focused on
developing new products or enhancements for OEM customers. At times, these new
products or enhancements may not be readily marketable to other customers.

                                      -9-


<PAGE>

         The Company's engineering and product development efforts focus on the
needs of its customers by providing practical, marketable products that have
immediate applications in their markets. By maintaining contact with customers
throughout the installation and technical support process, the Company is able
to identify and test potential design modifications and improvements as well as
new applications and extensions for existing products. The Company anticipates
that this process will enable the development of new product categories and
applications based on existing technology developed to meet specific customer
needs. Many of the Company's products are designed to accommodate future
modifications and additional features, which it believes facilitates the
development and integration of modifications and features if a market need is
perceived.

         For 1998, 1997 and 1996, the Company's engineering and product
development expenditures were approximately $3.2 million, $2.0 million, and $1.0
million, respectively. As of December 31, 1998, the Company's engineering staff
consisted of 18 employees. In addition, the Company uses independent contractors
from time to time. As of December 31, 1998, several independent contractors were
engaged by the Company in various development projects. To meet the challenges
of the rapidly changing technology in the computer industry, the Company expects
to make substantial investments in product development in the future.

MANUFACTURING

         The Company performs final assembly, quality assurance and testing of
its products. In order to avoid the capital investment required to establish and
maintain in-house manufacturing capabilities, the Company generally relies on
subcontractors in the United States for the assembly of printed circuit board
assemblies, subassemblies, chassis and equipment enclosures. The Company
believes that such assembly can typically be done by subcontractors at a lower
cost than if the Company assembled such items internally. Outsourcing
manufacturing operations allows the Company to concentrate its resources on
research and development, product design, quality assurance, sales and marketing
and customer service. Prior to shipping, the Company subjects its finished
products to quality and regulatory screenings and functional testing to assure
quality and reliability. The Company received ISO 9002 certification from 
Underwriters Laboratories, Inc. in March 1999.

         The Company relies on various third party manufacturers, including
Technical Services, Inc., for subassembly of the Company's products. These
outsourcing arrangements, and any future outsourcing arrangements, involve
numerous risks, including reduced control over product quality, delivery
schedules, manufacturing yields and costs. Moreover, although arrangements with
such manufacturers may contain provisions for warranty obligations on the part
of such manufacturers, the Company remains primarily responsible to its
customers for warranty obligations.

         The Company purchases industry-standard parts and components, including
power supplies, cable assemblies, line filters, enclosures and printed circuit
boards for the assembly of its products from multiple vendors and suppliers
through a worldwide sourcing program. The Company buys components under purchase
orders and generally does not have long-term agreements with its suppliers. No
custom integrated circuits are currently used in any product in production,
although custom integrated circuits may be used in the Company's products in the
future. Circuit boards are currently obtained from a number of sources,
including Technical Services, Inc. However, the Company believes that there are
adequate alternative sources for its components. Any termination of or
significant disruption in the Company's relationship with suppliers of its
switching product components may prevent the Company from filling customer
orders in a timely manner since the Company generally does not maintain large
inventories of its products or components. Certain of the components for the
Company's switching products are available from a limited number of suppliers.
For example, Pioneer-Standard Electronics, Inc. and Reptron Electronics, Inc.
supply the Company with power supply components, Carlyle supplies the Company
with cable components and Kent Electronics, Inc. supplies the Company with
various electronic components. In addition, the frames for the Company's server
cabinets are obtained from a single source, APW, and the sheet metal components 
are purchased locally from a small number of manufacturers, including Northwest 
Manufacturing. The Company maintains quality relationships and close contact 
with each of its suppliers.

COMPETITION

         The market for the Company's products is highly fragmented and
competitive, and the Company expects competition to increase in the future. In
the market for switching systems, the Company competes with independent third
parties such as Cybex Computer Products Corporation ("Cybex"), Raritan Computer
Inc., Rose Electronics, C-C-C

                                     -10-




<PAGE>

Group plc ("CCC"), Minicom Advanced Systems, Inc., Aten International Co., 
Ltd., CompuCable Mfg. Group, Belkin and StarTech Computer Accessories Ltd., 
some of which have substantially greater financial, marketing and technical 
resources than the Company. In addition, certain of the Company's OEM 
customers, such as Hewlett-Packard and Compaq, could decide to manufacture 
their own switch products or offer those supplied by the Company's 
competitors. In the market for server cabinets, the Company competes with a 
significant number of regional and international cabinet manufactures 
including APW, Ergotron Inc., Rittal Corporation, Hergo Corp. and Engineered 
Data Products Inc., many of which have substantially greater financial, 
marketing and technical resources than the Company. In addition, Compaq, 
Hewlett-Packard and Wright Line, all of whom are OEM customers for certain of 
the Company's switching products, sell their own branded integrated server 
cabinets. The Company's cabinet systems also compete with other types of 
lower density, unenclosed technology storage systems.

         In the market for integrated switches, the Company competes primarily
on the basis of technological advances, performance in relation to price,
quality, reliability, development capabilities and customer service. In the
market for server cabinets, the Company competes primarily on the basis of
available product features, quality, reliability, development capabilities and
customer service. In addition, the market for server cabinets and other
technology storage systems is characterized by intense price competition, and
many of the Company's competitors in this market offer products at significantly
lower price points.

         The Company's future success will be highly dependent upon timely
completion and introduction of new products and product features at competitive
price and performance levels which address the evolving needs of the Company's
customers. The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinet solutions and expects that pricing pressures will increase in the
future.

PROPRIETARY TECHNOLOGY

         The Company's future success is dependent in part upon its ability to
protect its proprietary rights in its products. The Company seeks to protect its
intellectual property rights by invoking the benefits of the patent, trademark,
copyright, trade secret and unfair competition laws of the United States, which
afford only limited protection. The PTO has issued Patent Number 5,721,842 and
Patent Number 5,884,096 to the Company for various aspects of its OUTLOOK and
VIEWPOINT products and its OSCAR interface. The Company has various
corresponding patent applications pending under the provisions of the Patent
Cooperation Treaty (which permits the filing of corresponding foreign patent
applications in numerous foreign countries within a limited time period). The
Company also has other United States and foreign patent applications pending.
There can be no assurance that any additional patents will issue from any of the
Company's pending applications, that any patents will be issued in any
additional countries where the Company's products can be sold, or that any
claims allowed in U.S. Patent Number 5,721,842, in Patent Number 5,884,096 or in
any pending patent applications will be of sufficient scope or strength for, or
provide any meaningful protection or any commercial advantage to, the Company.
Moreover, competitors of the Company may challenge the validity of, or be able
to design around, these patents or any other patents that may be issued to the
Company. The laws of certain foreign countries in which the Company's products
are or may be developed, manufactured or sold may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus increase the likelihood of piracy of the Company's
technology and products. 

         The Company believes that certain products of certain competitors 
infringe both U.S. patents. In early 1998, the Company filed lawsuits against 
certain companies, which were dismissed without prejudice by the agreement of 
the parties in early 1999 to allow certain patent issues raised in the 
litigation to be initially determined by the PTO Board of Appeals and 
Interpretations. The Company may file additional lawsuits against other 
companies regarding the alleged infringement. See "- Legal Proceedings." 
Patent litigation, and any other litigation relating to the Company's 
intellectual property to which the Company becomes a party, is subject to 
numerous risks and uncertainties, and there can be no assurance that the 
Company will be successful in any such litigation. See "- Risk Factors - 
Limited Protection of Proprietary Rights; Risks of Third Party Infringement." 
Although the Company is not currently aware of any infringement of its 
intellectual property rights, other than the two U.S. patents, or any 
violation of its trade secrets, nondisclosure or licensing arrangements, 
there can be no assurance that the steps taken by the Company to protect its 
intellectual property rights will be adequate to prevent misappropriation of 
its technology or that the Company's competitors will not independently 
develop technologies that are substantially equivalent or superior to the 
Company's technology. See "- Risk Factors - Limited Protection of Proprietary 
Rights; Risks of Third Party Infringement."

                                    -11-


<PAGE>

EMPLOYEES

         As of December 31, 1998, the Company employed 82 persons, 18 of whom
were in administration and management, 18 of whom were in engineering and
product development, four of whom were in service and technical support, 18 of
whom were in manufacturing and 24 of whom were in sales and marketing. The
Company's employees are not covered by any collective bargaining agreements with
respect to their employment by the Company. The Company believes that its
employee relations are good.

RISK FACTORS

         THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
VARY MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE
FOLLOWING:

FLUCTUATIONS IN OPERATING RESULTS

         The Company has experienced substantial fluctuations in its operating
results, on a quarterly and an annual basis, and the Company expects such
fluctuations to continue in the future. The Company's operating results are
affected by a number of factors, including: the volume and timing of orders,
particularly from private-label OEM and other large customers; the timing of
shipments; the timing of new product introductions and enhancements by the
Company and its competitors; changes in product or distribution channel mixes;
changes in pricing policies or price reductions by the Company; competition and
price reductions by the Company's competitors; the availability and cost of
supplies and components; sales and marketing expenses related to entering into
new markets, introducing new products and retaining current OEM and other large
customers; seasonal customer demand; and fluctuations in sales of servers due to
changes in economic conditions or capital spending levels.

         In general, the Company's sales cycle varies substantially and may be
lengthy, making revenues difficult to forecast. The Company has experienced
period to period variability in sales to each of its OEM customers and expects
this pattern to continue in the future. Although the Company's OEM customers
typically place orders for products up to several months prior to scheduled
shipment dates, these orders are subject to cancellation up to four to six weeks
prior to the scheduled shipment date. Under the "just-in-time" inventory
management system, which most hardware companies are using, title to products
does not transfer to the customer, and the Company does not recognize revenue
from these orders, until accepted by the Company's customer. The Company
generally must plan production, order components and undertake its manufacturing
activities prior to the time that these orders become firm or the products are
accepted. In addition, the Company's OEM customers have in the past requested,
and will likely continue to request from time to time, that the Company delay
shipment dates or cancel orders for products that are subject to firm orders.
Accordingly, sales to OEMs for future quarters are increasingly difficult to
predict. Moreover, any cancellation, rescheduling or reduction of orders by OEM
customers in the future could materially adversely affect the Company's
operating results. If the Company succeeds in increasing branded sales (i.e.,
sales to customers other than OEMs) as a percentage of net sales, the Company's
quarterly sales and operating results will become more dependent upon the volume
and timing of branded product orders received during the quarter. Because many
customers of the Company's branded products (including resellers) typically
place orders shortly before their requested shipment date, revenues from branded
sales are difficult to forecast. The failure of the Company to accurately
forecast the timing and volume of orders for branded products during any given
quarter could adversely affect the Company's operating results for such quarter
and, potentially, for future periods. With recent industry-wide initiatives to
reduce all channel inventories and to shorten lead times, trends with Apex's
major customers are, generally, to reduce the number of weeks of
forward-committed firm orders.

         Gross margins may vary significantly from period to period depending on
a number of factors, including: the ratio of OEM sales to branded sales since 
OEM sales typically have lower gross margins than branded sales; product mix,
including the percentage of integrated server cabinet solution sales, which
generally have lower gross margins than sales of stand-alone switching systems;
raw materials and labor costs; new product introductions by the Company and its
competitors; and the level of outsourcing of manufacturing and assembly services
by the Company. The Company expects that its gross margins will decline in the
future primarily due to increased competition and the introduction of new
technologies that may affect the prices of the Company's products. The Company
expects that its operating results will be affected by seasonal trends and by
general conditions in the server market. The Company believes that it has
experienced and will continue to experience some degree of seasonality due to
customer buying cycles. The Company believes that the third and fourth quarters
generally have higher net sales levels due to customer budgeting and 

                                    -12-


<PAGE>

procurement cycles, which correspondingly may depress net sales in other 
quarters. Because the Company's business and operating results depend to a 
significant extent on the general conditions in the server market, any 
adverse change in the server market due to adverse economic conditions, 
declining capital spending levels or other factors could have a material 
adverse effect on the Company's business, financial condition and results of 
operations. For example, Y2K concerns could cause corporate purchasers to 
restrict or delay IT capital spending in 1999. See "Management's Discussion 
and Analysis of Financial Condition and Results of Operations--Year 2000."

DEPENDENCE UPON A LIMITED NUMBER OF CUSTOMERS

         A substantial portion of the Company's sales is concentrated among a
limited number of private-label OEM customers. For 1998, 1997 and 1996, sales to
these OEMs represented approximately 60%, 65% and 71% of the Company's net
sales, respectively. For 1998, 1997 and 1996, sales to Compaq represented
approximately 43%, 51% and 30%, respectively, of the Company's net sales. For
1996, sales to Hewlett-Packard represented approximately 15% of the Company's
net sales. The Company's OEM business is subject to risks such as contract
termination, reduced or delayed orders, adoption of competing products developed
by third parties for the OEM or by the OEM's internal development team, and
change in corporate ownership, financial condition, business direction or
product mix by the OEM, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has experienced, and may continue to experience, significant reductions or
delays in orders from its OEM customers, which have had and may in the future
have a material adverse effect on the Company's quarterly sales and operating
results. See "- Fluctuations in Operating Results" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

         For example, during the third quarter of 1998, the Company 
implemented a change, at Compaq's request, in the terms of its shipments to 
Compaq from "FOB Origin" to "FOB Destination." The change required the 
Company to change the timing of revenue recognition for sales to Compaq. As a 
result of this change, and because during the third quarter of 1998 Compaq 
worked down its existing inventory of the Company's products, orders from -- 
and sales to --Compaq were lower in the third quarter of 1998. Similarly, in 
late 1995, one of the Company's OEM customers determined that its orders in 
the last half of 1995 exceeded its needs. Accordingly, at such customer's 
request, the Company delayed its scheduled deliveries to that OEM for the 
first half of 1996.

         The loss of certain OEM customers could have a material adverse effect
on the Company's business, financial condition and results of operations. For
example, in October 1995, the Company entered into a private-label OEM
arrangement with IBM for the production of an integrated server cabinet solution
incorporating the Company's switching products. While the products supplied by
the Company met IBM's requirements, IBM concluded that its program had not
achieved IBM's desired results and sought to terminate the program in mid-1996
after the Company had expended significant financial, product development and
operational resources in connection with this OEM arrangement. Although the
Company negotiated a settlement with IBM that reimbursed the Company for its
direct costs associated with the program, the Company's branded product
development efforts were delayed as a result of the Company's commitment of
substantial product development resources to the IBM program in the third and
fourth quarters of 1995 and the first quarter of 1996. For 1996, sales to IBM
represented approximately 18% of the Company's net sales. While the Company has
contracts with certain of its existing OEM customers, none of the Company's OEM
customers is obligated to purchase products from the Company except pursuant to
binding purchase orders. Consequently, any OEM customer could cease doing
business with the Company at any time. The Company's dependence upon certain
OEMs also results in a significant concentration of credit risk, as a
substantial portion of the Company's trade receivables outstanding from time to
time is concentrated among a limited number of customers. See "The Company and
Summary of Significant Accounting Policies" in the Notes to Consolidated
Financial Statements.

         The Company's business and results of operation are becoming more
dependent upon the Company's sales of branded switching products to other
manufacturers of servers and related networking products, who integrate and sell
Apex-brand switches with their own products. These manufacturers are not
obligated to purchase products from the Company except pursuant to binding
purchase orders and could cease doing business with the Company at any time. The
Company's business with these customers is subject to risks such as short order
cycles and difficulty in predicting sales, reductions or delays in orders,
adoption of competing products developed by third parties of the customer or by
the customer's own internal development team, and change in corporate ownership,
financial condition, business direction or product mix of the customer. The loss
of, or material decline in orders from, certain of these customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.

                                     -13-


<PAGE>

INTENSE COMPETITION

         The markets for the Company's products are highly fragmented and
intensely competitive. The Company's business is becoming increasingly sensitive
to new product introductions, price changes and marketing efforts by its
competitors. Accordingly, the Company's future success will be highly dependent
upon timely completion and introduction of new products and product features at
competitive price and performance levels which address the evolving needs of the
Company's customers. The Company is currently experiencing increased price
competition in both the market for stand-alone switching systems and the market
for integrated server cabinet solutions and expects that pricing pressures will
increase in the future. While the Company believes that the architecture,
quality and reliability of its products, together with the Company's commitment
to customer service, are attractive to server manufacturers, there can be no
assurance that the Company will be successful in its attempts to gain additional
OEM or branded server manufacturer customers. Increased competition could result
in price reductions and loss of market share, which would adversely affect the
Company's business, financial condition and results of operations. In the market
for switching systems, the Company competes with independent third parties such
as Cybex, Raritan Computer Inc., Rose Electronics, CCC, Minicom Advanced
Systems, Inc., Aten International Co., Ltd., CompuCable Mfg. Group, Belkin, and
StarTech Computer Accessories Ltd. In addition, certain of the Company's OEM
customers, such as Hewlett-Packard and Compaq, could decide to manufacture their
own switch products or offer those supplied by the Company's competitors. The
Company may in the future face competition from software providers who are able
to offer a software solution to address many of the problems the Company's
switching systems are designed to address. In the market for server cabinets,
the Company competes with a significant number of regional and international
manufacturers. Moreover, the Company's current OEM customers and certain of its
other branded server manufacturer customers sell their own branded integrated
server cabinets.

         The Company's server cabinets also compete with other types of lower
density, unenclosed technology storage systems. The market for server cabinets
and other technology storage systems is characterized by intense price
competition and low barriers to entry, and many of the Company's competitors in
this market offer products at significantly lower price points. The Company's
ability to compete successfully in this market will depend in part upon the
Company's ability to continue to differentiate its cabinet systems from
competing products.

         The Company's current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
the Company, may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties that enhance the ability of
their products to address the needs of the Company's prospective customers.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressure faced by the
Company will not have a material adverse effect on the Company's business,
financial condition and results of operations.

RAPID TECHNOLOGICAL CHANGE; NEED FOR NEW PRODUCT INTRODUCTIONS

         The market for the Company's switching products is characterized by
rapid technological advances, frequent new product introductions and
enhancements, and significant price competition. The introduction of products
incorporating superior or alternative technologies (such as switching software),
the emergence of new industry standards or changes in the market's pricing
structure could render the Company's existing products and products under
development obsolete or unmarketable. The Company's switching systems combine
components, such as printed circuit boards, connectors, cable assemblies, power
supplies and enclosures, that are manufactured by other companies and are
generally available to the Company's competitors and potential competitors. The
Company's future success will depend in large part upon its continued innovative
application of such commercially available components to the expansion and
enhancement of its existing products and the development and introduction of new
products which address changing customer needs on a cost-effective and timely
basis. The Company's failure to respond on a timely basis to technological
developments, changes in industry standards or customer requirements, software
innovations or any significant delay in product development or introduction
would have a material adverse effect on the Company's business, financial
condition and results of operations. Due to the Company's significant reliance
on OEM relationships, the Company's product development efforts are often
focused on developing new products or enhancements for OEM customers. At times,
these new products or enhancements may not be readily marketable to other
customers without significant modification. The termination or significant
disruption of the Company's relationship with certain OEMs or other customers
for whom the Company has devoted significant product development resources is
likely to result in lost opportunities with respect to the development of other
products or enhancements.

                                    -14-


<PAGE>

DEPENDENCE UPON SUPPLIERS AND OUTSOURCED MANUFACTURING

         The principal components of the Company's switching products are 
power supplies, cable assemblies, line filters, enclosures and printed 
circuit boards, all of which are purchased from outside vendors. The Company 
buys components under purchase orders and generally does not currently have 
long-term agreements with its suppliers. Any termination of or significant 
disruption in the Company's relationship with suppliers of its switching 
product components may prevent the Company from filling customer orders in a 
timely manner, as the Company generally does not maintain large inventories 
of its products or components. The Company purchases a number of the 
components for its switching products from sole or a limited number of 
suppliers. For example, the Company currently obtains printed circuit boards 
included in, and the partial assembly of, console switches from a single 
source. In addition, the frames for the Company's server cabinets are 
obtained from a single source and the sheet metal components are purchased 
locally from a small number of manufacturers. The Company has occasionally 
experienced and may in the future experience delays in delivery of such 
components. Although alternate suppliers are available for most of the 
components and services needed to produce the Company's products, the number 
of suppliers of some components is limited, and qualifying a replacement 
supplier and receiving components from alternate suppliers could take several 
months. The Company depends upon its suppliers to deliver components that are 
free from defects, competitive in functionality and cost and in compliance 
with the Company's specifications and delivery schedules. Disruption in 
supply, a significant increase in the cost of one or more components, failure 
of a third party supplier to remain competitive in functionality or price, or 
the failure of a supplier to comply with any of the Company's procurement 
needs could delay or interrupt the Company's ability to manufacture and 
deliver its products to customers on a timely basis, thereby adversely 
affecting the Company's business, financial condition and results of 
operations.

         The Company relies on third party manufacturers for subassembly of the
Company's products. These outsourcing arrangements and any future outsourcing
arrangements involve numerous risks, including reduced control over product
quality, delivery schedules, manufacturing yields and costs. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains primarily
responsible to its customers for warranty obligations.

RELIANCE ON CLIENT/SERVER MARKET; IMPROVING NETWORK RELIABILITY AND TOOLS

         The Company's business is dependent upon the continued acceptance of
the client/server model of network computing. Although distributed network
computing utilizing client/server architecture has gained increasing acceptance,
there can be no assurance that use of this networking model will continue to
grow or that it will not be replaced by new technologies for network computing,
thereby rendering the Company's products obsolete. In addition, the market for
the Company's switching products is driven in part by the inherent unreliability
of client/server networks. As client/server networks continue to proliferate,
however, server manufacturers and software developers or providers may develop
greater reliability and better tools for managing networks. To the extent that
greater reliability and better network management tools are successfully
developed, the Company's switching products could be rendered obsolete, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.

RISKS RELATING TO DEVELOPMENT OF EXPANDED RESELLER CHANNEL

         The Company expects to rely increasingly on resellers, including
distributors, VARs and systems integrators, for the distribution and sale of its
branded products, and the Company's strategy contemplates the expansion of its
reseller channel both domestically and internationally. The Company's future
success will depend in part on its ability to attract, train and motivate such
resellers. There can be no assurance that the Company will be successful in
expanding its reseller channel. The Company will be required to invest
significant additional resources in order to expand its reseller channel, and
there can be no assurance that the cost of the Company's investment in further
developing this channel will not exceed the revenues generated from such
investment. The Company provides and expects to continue providing discounts and
other special pricing arrangements to its resellers. As a result of such
discounts and other arrangements, the Company's gross margins on sales through
resellers are expected to be lower than gross margins on direct sales. Although
the Company's existing reseller arrangements generally do not afford material
rights of return, as the Company expands its reseller channel, the Company
expects that certain resellers will have significant rights of return. There can
be no assurance that actual returns in the future will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "- Product Returns and Warranty Claims." The Company's
agreements with its resellers generally are nonexclusive and may be terminated
on short notice by either party without cause. The Company's resellers are not
within the control of the Company, are not obligated to purchase 

                                     -15-


<PAGE>

products from the Company and frequently offer products of several different 
manufacturers, including products competitive with the Company's products. 
There can be no assurance that these resellers will not give higher priority 
to the sale of such other products. A reduction in sales efforts by the 
Company's resellers could lead to reduced sales by the Company and could 
materially adversely affect the Company's business, financial condition and 
results of operations.

DEPENDENCE ON KEY PERSONNEL

         The Company is dependent in large part upon its ability to retain its
key management and technical personnel. The future success of the Company will
be highly dependent upon the personal efforts of management and technical
personnel, and the loss of services of any one of them could have a material
adverse effect on the Company's business, financial condition and results of
operations. Mr. Kevin Hafer, the Company's President and Chief Executive
Officer, is the only executive officer or employee with whom the Company has
entered into an employment agreement and the only executive officer upon whom
the Company maintains "key-man" life insurance. The Company's success will also
be dependent in part upon its ability to attract, retain and motivate highly
skilled employees. Competition for employees with the skills required by the
Company, particularly engineering and other technical personnel, is intense, and
there can be no assurance that the Company will be able to attract and retain
highly skilled employees in sufficient numbers to sustain its current business
or to support future growth.

MANAGEMENT OF GROWTH

         In recent periods, the Company has experienced rapid revenue and 
customer growth and expansion in the number of its employees, its product 
offerings and the scope and complexity of its financial systems. This growth 
has placed significant strain on the Company's management, operational and 
financial resources and has resulted in new and increased responsibilities 
for management personnel. There can be no assurance that the Company's 
management, personnel, systems, procedures and controls will be adequate to 
support the Company's existing and future operations. The Company's ability 
to effectively manage its recent growth and any future growth will require 
the Company to continue to implement and improve its operational, financial 
and information systems and will likely require additional management 
personnel. In addition, the Company believes that it must continue to develop 
greater engineering, marketing, sales and customer service capabilities in 
order to develop new products and product enhancements, secure new customers 
at a rate necessary to achieve desired growth and effectively serve the 
evolving needs of present and future customers. There can be no assurance 
that the Company will be successful in strengthening these capabilities. 
Without adequate management, engineering, product development, marketing and 
sales and customer service capabilities, the Company's ability to effectively 
manage its growth, expand and enhance its product line, further penetrate its 
existing markets and develop new markets will be significantly limited. If 
the Company's management is unable to effectively manage the Company's 
growth, the business, financial condition and results of operations of the 
Company will be materially adversely affected.

PRODUCT RETURNS AND WARRANTY CLAIMS

         The Company's products carry warranties for parts and service. Although
the Company's historical product return and warranty claims have not been
significant, the Company's business, financial condition and results of
operations could be materially adversely affected should the rate of product
returns or warranty claims increase in the future. In addition, the Company may
change its warranty policies in the future as a result of competitive pressures.

LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS OF THIRD PARTY INFRINGEMENTS

         The Company's future success is dependent in part upon its ability 
to protect its proprietary rights in its products. The Company seeks to 
protect its intellectual property rights by invoking the benefits of the 
patent, trademark, copyright, trade secret and unfair competition laws of the 
United States, which afford only limited protection. The PTO has issued 
Patent Number 5,721,842 and Patent Number 5,884,096 to the Company for 
various aspects of its OUTLOOK and VIEWPOINT products and its OSCAR 
interface. The Company has various corresponding patent applications pending 
under the provisions of the Patent Cooperation Treaty (which permits the 
filing of corresponding foreign patent applications in numerous foreign 
countries within a limited time period). The Company also has other United 
States and foreign patent applications pending. There can be no assurance 
that any additional patents will issue from any of the Company's pending 
applications, that any patents will be issued in any additional countries 
where the Company's products can be sold, or that any claims allowed in the 
two U.S. patents or in any pending patent applications will be of sufficient 
scope or strength for, or provide meaningful protection or any commercial 
advantage to, the Company. Moreover,

                                     -16-


<PAGE>

competitors of the Company may challenge the validity of, or be able to 
design around, the two U.S. patents or any other patents that may be issued 
to the Company. The laws of certain foreign countries in which the Company's 
products are or may be developed, manufactured or sold may not protect the 
Company's products or intellectual property rights to the same extent as do 
the laws of the United States and thus increase the likelihood of piracy of 
the Company's technology and products. There can be no assurance that the 
steps taken by the Company to protect its intellectual property rights will 
be adequate to prevent misappropriation of its technology or that the 
Company's competitors will not independently develop technologies that are 
substantially equivalent or superior to the Company's technology.

         The network server, electronics and related industries are
characterized by vigorous pursuit and protection of intellectual property rights
or positions, which have resulted in significant and often protracted and
expensive litigation. The Company may from time to time be subject to
proceedings alleging infringement by the Company of intellectual property rights
owned by third parties. If necessary or desirable, the Company may seek licenses
under such intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered license will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend or cease the manufacture of products requiring such
technology.

         The Company filed complaints for infringement of U.S. Patent Number
5,721,842 in United States District Court for the Western District of Washington
at Seattle against Cybex and Rose Electronics on February 25, 1998, and against
CCC on June 1, 1998. The complaints allege that the products manufactured and
sold by each defendant embody the inventions claimed in U.S. Patent Number
5,721,842 and sought injunctive relief, damages, attorneys' fees and costs.

         The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates in the Cybex and Rose lawsuits were set for
November, 1999. In early 1999, Cybex filed multiple motions for partial summary
judgment, and brought a patent interference proceeding with the PTO seeking to
invalidate the 5,721,842 patent and claim ownership of the invention claimed by
the 5,721,842 patent as a result of a prior patent, United States Patent No.
5,732,212, which was formerly owned by Fox Network Systems Corporation, a
company Cybex recently acquired.

         Rather than proceeding simultaneously in two different forums (with the
attendant duplicative expenses), the Company agreed with Cybex to seek expedited
consideration by the PTO of the patent issues raised in the District Court
litigation, reserving its right to reinstate the District Court lawsuit at the
conclusion of that process. Pursuant to a mutual agreement and stipulation
between the Company and Cybex, the District Court lawsuit was dismissed without
prejudice, and the parties agreed that the patent issues raised in connection
with the District Court lawsuit should be initially determined by the Board of
Appeals and Interpretations of the PTO. The Company and Cybex also jointly
requested the District Court to urge accelerated consideration of these issues
by the PTO. The Company also entered into a mutual agreement and stipulation 
with Rose dismissing the Rose lawsuit without prejudice pending the PTO's 
decision. At the conclusion of the PTO proceeding, the District Court lawsuits
can be reinstated upon the request of any party.

         The complaint in the CCC lawsuit was filed but has not been formally
served on CCC. Under the present schedule imposed by the Court, the Company must
decide by the end of March 1999 whether to cause the litigation to become active
by serving the complaint or to permit the case to be dismissed without
prejudice. In view of the PTO's consideration of the patent issues raised in the
Cybex and Rose litigation, the Company has asked the District Court to stay the
CCC litigation pending the PTO's decision.

         The Company may initiate claims or litigation against additional third
parties for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. The existing litigation, and any
other litigation relating to the Company's intellectual property to which the
Company becomes a party, is subject to numerous risks and uncertainties, and
there can be no assurance that the Company will be successful in any such
litigation. The existing litigation or other litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event of
an adverse result in this litigation or any other such litigation, the Company
could be required to pay substantial damages, suspend or cease the manufacture,
use and sale of any infringing products it manufactures or sells, expend
significant resources to develop non-infringing technology, discontinue the use
of certain processes or obtain licenses to the infringing technology. There can
be no assurance that 

                                    -17-


<PAGE>

the Company would be successful in such development or that such licenses 
would be available on reasonable terms, or at all, and any such development 
or license could require expenditures by the Company of substantial time and 
other resources. In the event that any third party makes a successful claim 
against the Company or its customers and a license is not made available to 
the Company on commercially reasonable terms, the Company's business, 
financial condition and results of operations would be adversely affected.

INCREASED DEMANDS ON CUSTOMER SERVICE OPERATIONS

         Continued growth of the Company's branded sales is likely to be 
accompanied by increasing demands on the Company's customer service 
operations. As a result of the Company's commitment to a high level of 
customer service, the Company is likely to need to invest significant 
resources in the maintenance and improvement of its customer service 
resources. Any failure to maintain adequate customer service could cause 
customer dissatisfaction, result in reduced sales of the Company's products 
and, accordingly, materially adversely affect the Company's business, 
financial condition and results of operations.

RISKS RELATING TO DEVELOPMENT OF INTERNATIONAL DISTRIBUTION NETWORK AND 
INTERNATIONAL SALES

         The Company's strategy contemplates the development of an international
distribution network in an effort to increase international sales of its branded
switching products. There can be no assurance that the Company will be
successful in creating an international distribution network or in marketing and
selling its products in foreign markets. If the revenues generated by
international sales are not adequate to recover the expense of establishing,
expanding and maintaining an international distribution network, the Company's
business, financial condition and results of operations will be materially
adversely affected. If international sales become a more significant component
of the Company's net sales, the Company's business will become more vulnerable
to the risks inherent in doing business on an international level, including
difficulties in managing foreign resellers, longer payment cycles and problems
in collecting accounts receivable, the effects of seasonal customer demand,
changes in regulatory requirements, risks relating to intellectual property
rights, export restrictions, tariffs and other trade barriers, fluctuations in
currency exchange rates, potentially adverse tax consequences and political
instability. The existence or occurrence of any one of these factors could have
a material adverse effect on the Company's business, financial condition and
results of operations.

LIMITED INDEPENDENT OPERATING HISTORY

         The business of the Company was operated as a division of, and was
provided financial and operational support by, Apex Computer Company (the
"Predecessor") through January 1993. In February 1993, the net assets of that
division were spun off as a dividend to the sole shareholder of the Predecessor,
who contributed those assets to the Company as its initial capital. The
historical core business of the Company, computer maintenance services, was
discontinued in mid-1994. As a company with limited independent operating
history, the Company is subject to the risks inherent in a new business
enterprise, including limited predictability of future operating results,
competition from more established businesses, limited financial resources,
limited management resources, limited sales and distribution capabilities,
limited technical personnel resources and vulnerability to adverse economic
conditions. Although the Company was profitable for the years ended December 31,
1994 through 1998, there can be no assurance that growth in net sales will
continue or that the Company will be able to achieve or sustain profitability on
a quarterly or annual basis in the future.

ITEM 2.  DESCRIPTION OF PROPERTY.

         On March 8, 1999, the Company began a five-year lease of approximately
117,000 square feet in an industrial office building in Redmond, Washington. The
initial base rent under this lease is approximately $90,000 per month, plus
taxes, insurance and maintenance. The 117,000 square foot leased premises has
approximately 40,000 more square feet than the Company currently needs, and the
Company intends to sublease the excess space until needed for planned expansion.
However, there can be no assurance that the Company will be successful in
subleasing that excess space.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company filed complaints for infringement of U.S. Patent Number
5,721,842 in United States District Court for the Western District of Washington
at Seattle against Cybex and Rose Electronics on February 25, 1998, and against
CCC on June 1, 1998. The complaints allege that the products manufactured and
sold by each defendant 

                                    -18-


<PAGE>

embody the inventions claimed in U.S. Patent Number 5,721,842 and sought 
injunctive relief, damages, attorneys' fees and costs.

         The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates in the Cybex and Rose lawsuits were set for
November, 1999. In early 1999, Cybex filed multiple motions for partial summary
judgment, and brought a patent interference proceeding with the PTO seeking to
invalidate the 5,721,842 patent and claim ownership of the invention claimed by
the 5,721,842 patent as a result of a prior patent, United States Patent No.
5,732,212, which was formerly owned by Fox Network Systems Corporation, a
company Cybex recently acquired.

         Rather than proceeding simultaneously in two different forums (with 
the attendant duplicative expenses), the Company agreed with Cybex to seek 
expedited consideration by the PTO of the patent issues raised in the 
District Court litigation, reserving its right to reinstate the District 
Court lawsuit at the conclusion of that process. Pursuant to a mutual 
agreement and stipulation between the Company and Cybex, the District Court 
lawsuit was dismissed without prejudice, and the parties agreed that the 
patent issues raised in connection with the District Court lawsuit should be 
initially determined by the Board of Appeals and Interpretations of the PTO. 
The Company and Cybex also jointly requested the District Court to urge 
accelerated consideration of these issues by the PTO. The Company also entered 
into a mutual agreement and stipulation with Rose dismissing the Rose lawsuit 
without prejudice pending the PTO's decision. At the conclusion of the PTO 
proceeding, the District Court lawsuits can be reinstated upon the request of 
any party.

         The complaint in the CCC lawsuit was filed but has not been formally 
served on CCC. Under the present schedule imposed by the Court, the Company 
must decide by the end of March 1999 whether to cause the litigation to 
become active by serving the complaint or to permit the case to be dismissed 
without prejudice. In view of the PTO's consideration of the patent issues 
raised in the Cybex and Rose litigation, the Company has asked the District 
Court to stay the CCC litigation pending the PTO's decision.

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

         No matters were submitted for a vote of the shareholders in the fourth
quarter of 1998.

                                     -19-


<PAGE>


                                   PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK; HOLDERS OF RECORD

         The Company's Common Stock is quoted on the Nasdaq National Market
System under the symbol "APEX." The following table shows the high and low sales
prices for the Common Stock for the periods indicated, as reported by the Nasdaq
National Market System.

<TABLE>
<CAPTION>
                                                                        HIGH             LOW
                                                                       ------           ------
<S>                                                                    <C>              <C>
         Quarter ended December 31, 1998                               $20.83           $ 7.58
         Quarter ended September 25, 1998                              $23.50           $10.50
         Quarter ended June 26, 1998                                   $20.83           $15.00
         Quarter ended March 27, 1998                                  $21.17           $14.00

         Quarter ended December 31, 1997                               $26.42           $12.33
         Quarter ended September 26, 1997                              $27.83           $12.50
         Quarter ended June 27, 1997                                   $14.09           $ 4.59
         Quarter ended March 28, 1997                                  $ 7.00           $ 5.42
</TABLE>

         As of March 4, 1999, there were 53 holders of record of the Company's
Common Stock. All prices above reflect a three-for-two stock split effective
March 4, 1999.

DIVIDEND POLICY

         No cash dividends were declared or paid in 1998, 1997 or 1996, and for
the foreseeable future, the Company expects to retain earnings to finance the
expansion and development of its business. The payment of dividends is within
the discretion of the Company's Board of Directors and will depend on the
earnings, capital requirements and operating and financial condition of the
Company, among other factors. In addition, the Company's line of credit facility
prohibits the payment of dividends if any loans are outstanding under such
facility.

         From its inception through October 31, 1995, the Company was treated
for federal income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended. As a result, the Company's earnings
from its inception through October 31, 1995 (the "Termination Date") were for
federal income tax purposes taxed directly to the Company's sole shareholder, at
his individual federal income tax rate, rather than to the Company. Subsequent
to the Termination Date, the Company was no longer treated as an S Corporation
and, accordingly, has been subject to federal and state income taxes on its
earnings after October 31, 1995. In 1995, prior to the Termination Date, the
Company's Board of Directors declared dividends in the aggregate amount of
$4,614,322.

ITEM 6.  SELECTED FINANCIAL DATA

(Amounts in thousands, except per share data. Income before extraordinary item
and per share data pro forma for 1995 and 1994.)

<TABLE>
<CAPTION>

                                                             1998        1997        1996       1995        1994
                                                           -------     -------     -------    -------      ------
<S>                                                        <C>         <C>         <C>        <C>          <C>

Net sales..............................................    $75,640     $55,390     $33,622    $19,671      $7,311

Income before extraordinary item.......................    $15,710     $10,468     $ 3,608    $ 2,344      $1,017

Basic per share income before extraordinary item ......    $  0.78     $  0.59     $  0.42    $  0.20      $ 0.08

Diluted per share income before extraordinary item ....    $  0.75     $  0.55     $  0.29    $  0.20      $ 0.08

Total assets...........................................    $73,398     $55,271     $11,953    $ 9,048      $2,338

Long-term obligations and preferred stock..............         --          --     $28,316    $28,819      $  225

Cash dividends declared per share......................         --          --          --     $ 0.08      $ 0.07
</TABLE>

                                                                 
Per share data above reflects a three-for-two stock split effective 
March 4, 1999.

                                    -20-



<PAGE>

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

THE INFORMATION IN THIS ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING
STATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO THE COMPANY'S
REVENUES, EXPENSES, MARGINS, LIQUIDITY AND CAPITAL NEEDS. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "DESCRIPTION OF BUSINESS - RISK
FACTORS."

OVERVIEW

         The Company designs, manufactures and markets stand-alone switching
systems and integrated server cabinet solutions for the client/server computing
market. The Company operated as a division of Apex Computer Company (the
"Predecessor") through January 1993, providing computer maintenance services to
Microsoft and selling integrated server cabinets and, to a limited extent,
stand-alone switching systems, primarily to Microsoft. In February 1993, the
assets of that division were spun off as a dividend to the sole shareholder of
the Predecessor, who contributed those assets as the initial capital of the
Company. Throughout 1993, the Company derived revenue primarily from the
provision of computer maintenance services to Microsoft. In May 1994, the
Company began selling stand-alone switching systems to Compaq for integration
into server cabinets. In June 1994, the Company discontinued its computer
maintenance service business and determined to concentrate on sales of
stand-alone switching products and server cabinets, including server cabinets
with integrated switching systems.

         In December 1995, the Company effected a leveraged recapitalization
(the "Leveraged Recapitalization") pursuant to which (i) the Company redeemed
from one of its shareholders Common Stock representing a 50% voting interest in
the Company prior to the Leveraged Recapitalization for approximately $12.5
million in cash and a Class B Subordinated Promissory Note in the principal
amount of $10.0 million, and (ii) the Company sold to a group of entities
affiliated with TA Associates, Inc. (the "TA Group") Common Stock and Series A
Redeemable and Convertible Preferred Stock representing a 50% voting interest in
the Company after the Leveraged Recapitalization for $2.5 million and sold to
the TA Group Class A Subordinated Promissory Notes in the aggregate principal
amount of $10.0 million. As part of the Leveraged Recapitalization in late 1995,
Mr. Hafer was granted stock options for 1,058,820 shares of the Company's Common
Stock. Since that date, Mr. Hafer has received additional awards of stock
options for Company Common Stock, and he has exercised a number of his stock
options and now holds 483,774 shares of Apex Common Stock.

         In February 1997, the Company consummated an initial public offering of
its Common Stock (the "IPO") and received net proceeds of approximately $28.4
million. Approximately $20.0 million of such proceeds was used to repay the
subordinated promissory notes issued by the Company in connection with the
Leveraged Recapitalization. In connection with the IPO, all of the Series A
Redeemable and Convertible Preferred Stock was converted into shares of the
Company's Common Stock.

         In August 1997, the Company consummated a follow-on offering of its
Common Stock (the "follow-on offering") and received net proceeds of
approximately $30.3 million.

         A substantial portion of the Company's sales are concentrated among a
limited number of original equipment manufacturers that purchase the Company's
switching systems on a private-label basis ("OEMs" and "OEM customers"). For
1998, 1997, and 1996, sales to the Company's OEM customers represented
approximately 60%, 65%, and 71% of the Company's net sales, respectively. IBM
accounted for 18% of the Company's net sales in 1996.

         The Company's is increasing the mix of sales of branded switching
products to other manufacturers of servers and related networking products, who
integrate and sell Apex-brand switches with their own products. The Company does
not have contracts with any of these customers, who are obligated to purchase
products from the Company only pursuant to binding purchase orders.

         With recent industry-wide initiatives to reduce all channel inventories
and to shorten lead times, trends with Apex's major customers are, generally, to
reduce the number of weeks of forward-committed firm orders. As a result of 

                                     -21-


<PAGE>

this factor, which currently is affecting the Company's business with certain 
OEMs and certain other server manufacturers purchasing Apex-brand switches, 
the Company believes that its sales are becoming more difficult to predict.

         The Company is currently experiencing increased price competition in
both the market for stand-alone switching systems and the market for integrated
server cabinet systems and expects that pricing pressures will increase in the
future.

         In February 1998, the Company signed an agreement for a five-year lease
of approximately 117,000 square feet in an industrial office building in
Redmond, Washington for scheduled occupancy in April 1999. The initial base rent
under the lease, portions of which will be allocable to cost of sales and to
general and administrative expense, is approximately $90,000 per month, plus
taxes, insurance and maintenance, an increase of approximately $75,000 over the
Company's current monthly rent. Consequently, beginning in April 1999, the
Company's gross margin and net income may be adversely affected by the Company's
increased rent expense. See "Description of Property."

         As noted above, Mr. Hafer has exercised stock options for Company
Common Stock, and he now holds 483,774 shares of Company Common Stock. Since
November, 1997, Mr. Hafer has been selling (and/or making gifts of)
approximately 30,000 to 37,500 shares of Apex Common Stock each quarter. Mr.
Hafer has informed the Company that he intends to continue this disciplined
selling program on a regular quarterly basis. Mr. Hafer has also informed the
Company that, in order to diversify his investments and to provide liquidity, on
one or more occasions over the next year or two he is likely to substantially
increase the number of shares of Apex Common Stock that he sells over and above
the number he sells on a regular quarterly basis.

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:

<TABLE>
<CAPTION>

                                                                                       YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                      1998        1997        1996
                                                                                     ------      ------      ------
<S>                                                                                  <C>         <C>         <C>
Net sales.......................................................................     100.0%      100.0%      100.0%
Cost of sales...................................................................      53.1        55.0        57.2
                                                                                     -----       -----       -----
    Gross margin................................................................      46.9        45.0        42.8
                                                                                     -----       -----       -----
Operating expenses:
    Research and development....................................................       4.2         3.7         2.9
    Sales and marketing.........................................................       7.6         8.0         7.4
    General and administrative..................................................       7.3         6.8        10.7
                                                                                     -----       -----       -----
        Total operating expenses................................................      19.1        18.5        21.0
                                                                                     -----       -----       -----
Income from operations..........................................................      27.8        26.5        21.8
Interest income (expense) and other ............................................       3.5         1.7        (5.6)
                                                                                     -----       -----       -----
Income before income taxes and extraordinary item...............................      31.3        28.2        16.2
Provision for income taxes .....................................................      10.5         9.3         5.5
                                                                                     -----       -----       -----
Income before extraordinary item ...............................................      20.8        18.9        10.7
Extraordinary item - loss on early extinguishment of debt, net of applicable
   income tax benefit...........................................................       --         (0.3)         --
                                                                                     -----       -----       -----
Net income .....................................................................      20.8%       18.6%       10.7%
                                                                                     -----       -----       -----
                                                                                     -----       -----       -----
</TABLE>

                                     -22-


<PAGE>

YEARS ENDED DECEMBER 31, 1998 AND 1997

         NET SALES. The Company's net sales consist of sales of stand-alone
switching systems and integrated server cabinet solutions. Net sales increased
37% to $75.6 million for 1998 from $55.4 million for 1997. This increase was due
primarily to increased demand for stand-alone switching systems from
private-label OEM customers, and, to a lesser extent, to increased demand for
Apex-brand products. On a percentage basis, private-label OEM sales for 1998
increased 25% over 1997, and sales of Apex-brand switching systems and
integrated server cabinet solutions for 1998 increased 58% over 1997.
Private-label OEM sales and sales of Apex-brand products represented 60% and
40%, respectively, of net sales for 1998, compared to 65% and 35%, respectively,
of net sales for 1997.

         GROSS MARGIN. Gross margin is affected by a variety of factors,
including: the ratio of OEM sales to branded sales, as OEM sales typically have
lower gross margins than branded sales; product mix, including the percentage of
integrated server cabinet solution sales, which generally have lower gross
margins than sales of stand-alone switching systems; raw materials and labor
costs; new product introductions by the Company and its competitors; and the
level of outsourcing of manufacturing and assembly services by the Company.
Gross margin increased to 46.9% for 1998 from 45.0% for 1997, due primarily to
growth in the Company's branded switch sales, and to a lesser extent, higher
overall sales levels which absorb fixed expenses.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation for engineers and materials costs, and are expensed as they
are incurred. Research and development expenses increased to $3.2 million in
1998 from $2.0 million in 1997. As a percentage of net sales, research and
development expenses increased to 4.2% in 1998 from 3.7% in 1997. The increases
in absolute dollars and as a percentage of net sales were due primarily to
increased product development spending and, to a lesser extent, more
compensation expense associated with increased staffing. The Company believes
that the timely development of innovative new products and enhancements to
existing products is essential to maintaining its competitive position and,
therefore, expects research and development expenditures to increase in absolute
dollars.

         SALES AND MARKETING EXPENSES. Sales and marketing expenses include
advertising, promotional material, trade show expenses and sales and marketing
personnel costs, including sales commissions and travel. Sales and marketing
expenses increased to $5.7 million in 1998 from $4.4 million for 1997. As a
percentage of net sales, sales and marketing expenses decreased to 7.6% from
8.0% in 1997. The increase in absolute dollars was due primarily to increased
sales commissions and personnel costs associated with increased staffing levels,
and higher advertising and tradeshow expenses. The Company expects these
expenditures to increase in absolute dollars as it seeks to increase its branded
and international sales.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include personnel costs for administration, finance, human resources
and general management, as well as rent, utilities and legal and accounting
expenses, and provision for Washington State's gross receipts tax. General and
administrative expenses for 1998 increased to $5.6 million from $3.7 million for
1997. As a percentage of net sales, general and administrative expenses
increased to 7.3% in 1998 from 6.8% in 1997. The increases in absolute dollars
and as a percentage of net sales were due to increases in incentive
compensation, legal and accounting costs. The Company expects that general 
and administrative expenses will continue to increase to support the growth 
of the business.

         INTEREST INCOME (EXPENSE) AND OTHER, NET. Net interest income was 
$2.6 million in 1998, up from $0.9 million in 1997. The Company's cash and 
short-term investments increased significantly as a result of the Company's 
1998 operations and from the Company's IPO in February 1997, and follow-on 
offering in August 1997.

         PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $7.9 million for 1998. The effective federal tax rate for 1998 was
approximately 33.5%, compared to 32.9% for 1997.

         NET INCOME. Net income increased to $15.7 million for 1998 from $10.3
million net income for 1997, as a result of the above factors. As a percentage
of net sales, net income increased to 20.8% in 1998 from 18.6% in 1997.

YEARS ENDED DECEMBER 31, 1997 AND 1996

         NET SALES. Net sales increased 65% to $55.4 million for 1997 from $33.6
million for 1996. This increase was due primarily to increased demand for
stand-alone switching systems from private-label OEM customers, and, to a lesser
extent, to increased demand for Apex-brand products. On a percentage basis,
private-label OEM sales for 1997 increased 51% over 1996, and sales of
Apex-brand switching systems and integrated server cabinet solutions for 1997

                                    -23-


<PAGE>

increased 99% over 1996. Private-label OEM sales and sales of Apex-brand
products represented 65% and 35%, respectively, of net sales for 1997, compared
to 71% and 29%, respectively, of net sales for 1996.

         GROSS MARGIN. Gross margin increased to 45.0% for 1997 from 42.8% for
1996, due primarily to shifts in the Company's product mix to a larger
percentage of switch sales, and to a lesser extent, lower levels of warranty
expense.

         RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.0 million for 1997 from $965,000 for 1996. As a percentage of
net sales, research and development expenses increased to 3.7% in 1997 from 2.9%
in 1996. The increases in absolute dollars and as a percentage of net sales were
due primarily to increased project spending and, to a lesser extent, increased
compensation expense associated with increased staffing levels.

         SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$4.4 million for 1997 from $2.5 million for 1996. As a percentage of net sales,
sales and marketing expenses increased to 8.0% in 1997 from 7.4% in 1996. The
increases in absolute dollars and as a percentage of net sales were due
primarily to increased sales commissions and personnel costs associated with
increased staffing levels, and increased advertising and tradeshow expenses.

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for 1997 increased slightly to $3.7 million from $3.6 million for 1996.
As a percentage of net sales, general and administrative expenses declined to
6.8% in 1997 from 10.7% in 1996. Increased personnel costs, including
compensation expense associated with the addition of a Chief Financial Officer
and a Corporate Controller in late 1996, and increased legal, accounting and
other costs relating to the Company's being publicly held were partially offset
by the elimination of deferred compensation associated with the Leveraged
Recapitalization and, to a lesser extent, decreased bad debt expense.

         INTEREST INCOME (EXPENSE) AND OTHER, NET. Net interest income was
$781,000 in 1997. Net interest expense was $1.9 million in 1996. The increase in
net interest income for 1997, compared to 1996's interest expense, resulted from
elimination of all Company long-term debt immediately following the February
1997 IPO, and from interest income earned on the approximately $30.3 million of
net proceeds from the Company's August 1997 follow-on offering.

         PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $5.1 million for 1997, compared to $1.9 million for 1996. The
effective federal tax rate for 1997 was approximately 33%, compared to 34% for
1996. The rate declined due to the benefits associated with implementing a
foreign sales corporation in 1997.

         NET INCOME. Net income increased to $10.3 million for 1997 from $3.6
million net income for 1996. As a percentage of net sales, net income increased
to 18.6% in 1997 from 10.7% in 1996. The increase in absolute dollars and as a
percentage of net sales were due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1998 the Company's principal sources of liquidity
consisted of approximately $51.9 million in cash, cash equivalents, and current
investments.

         In addition, the Company has a combined line of credit and letter of
credit facility with a bank with aggregate borrowing capacity of $5.0 million at
prime. Under the line of credit, the Company may borrow up to a specified amount
based upon its accounts receivable. Under the letter of credit arrangement, the
bank will issue commercial letters of credit up to an aggregate of $5.0 million
(less any amounts outstanding under the line of credit). The combined line of
credit and letter of credit facility has a maturity date of April 30, 1999.
There were no borrowings under the line of credit and the letter of credit
facility from January 1, 1996 through March 30, 1999, and all $5.0 million was
available.

         The Company's operating activities generated cash of approximately
$11.7 million for 1998, $6.6 million for 1997, and $670,000 for 1996. The
increase in cash flow from operations in 1998, when compared with 1997, resulted
primarily from increased net income. At December 31, 1998, the Company's OEM
customers accounted for approximately 59% of the accounts receivable.

         The Company believes that existing cash balances, cash generated from
operations and the funds available to it under credit facilities, together with
the remaining proceeds from the IPO and from the follow-on offering, will be
sufficient to fund its operations through 1998.

                                     -24-


<PAGE>

YEAR 2000

         THE YEAR 2000 PROBLEM. The Year 2000 Problem, also known as the
"millennium bug" or simply "Y2K," had its origin earlier in this century when
programmers writing software code employed two digits instead of four to
represent the year in date fields. As a result, some computer systems and
programs could fail or make miscalculations due to interpreting a date including
"00" to mean the year 1900 rather than the year 2000. In addition, the Year 2000
Problem affects machines, equipment, and other systems that contain embedded
technology (such as microcontrollers). Compounding the problem are two
additional issues. First, some computer systems or programs may not recognize
that the year 2000 is a leap year because the year 1900 was not a leap year.
Second, some computer systems or programs make use of the digits "99" in the
number portion of a date field to represent unknown values, and these systems or
programs may not be able to interpret or calculate certain dates in the year
1999 (for example, 9/9/99).

         THE COMPANY'S PRODUCTS. The Company's products (other than EMERGE) 
are network switching devices that consolidate keyboard, video, and mouse 
functions from many computers or networks into one physical keyboard, video, 
and mouse. Since the Company's switching products function to pass on the 
information presented to them in the keyboard, video, and mouse signals and 
do not perform date calculations, the Company believes that its products 
(other than EMERGE) are year 2000 compliant. EMERGE, the Company's 
recently-introduced remote access device, uses Microsoft Windows NT as an 
operating system, and Microsoft has indicated that Windows NT is not yet 
fully year 2000 compliant. The Company is monitoring EMERGE'S year 2000 
compliance, but believes there is some risk that the product may not be fully 
compliant by the year 2000. In the event that EMERGE does not successfully 
and timely achieve year 2000 compliance, there could be a material adverse 
effect on the Company's business, financial condition, and results of 
operation.

         THE COMPANY'S INTERNAL SYSTEMS. The Year 2000 Problem could affect 
computers, software programs, equipment, and other systems used by the 
Company. Accordingly, the Company is reviewing its internal computers, 
software programs, equipment, and other systems to ensure that they will be 
year 2000 compliant. The Company believes that it has identified 
substantially all of the major computers, software applications, equipment, 
and systems used in connection with its internal operations that must be 
modified, upgraded, or replaced to minimize the possibility of a material 
disruption to its business. The Company presently believes that these 
internal computer systems will be year 2000 compliant by mid-1999. The 
Company has received informal assurance from the provider of its MRP 
(materials resource planning) software that this software is year 2000 
compliant. In addition to computers and related systems, the operation of the 
Company's office and facilities equipment, such as fax machines, photocopiers 
telephone switches, security systems, and other common devices may be 
affected by the Year 2000 Problem. The Company is currently assessing the 
potential effect of, and costs of remediating, the Year 2000 Problem on this 
equipment. The Company is in the process of formulating contingency plans in 
those areas where the Company feels there is some risk that a particular 
system may not be year 2000 compliant before the year 2000. While the 
historical costs of these efforts have not been, and estimated cost of these 
future efforts are not presently expected to be, material to the Company's 
financial condition or any year's results of operations, there can be no 
assurance that this is the case.

         THE COMPANY'S CUSTOMERS. The Company is also currently in the process
of assessing the readiness of the Company's major customers for the year 2000.
The Company currently has information concerning the year 2000 compliance status
of some of its customers, and the Company has received informal indications that
most of its customers are working on year 2000 compliance. The Company, however,
has limited or no control over the actions of these customers, and thus, there
can be no assurance that these customers will resolve any or all Year 2000
Problems with their own systems (and with their other suppliers and vendors)
before the occurrence of a material disruption or slowdown in their business
which could, in turn, have a material adverse effect on their demand for the
Company's products. In the event that any of the Company's significant customers
do not successfully and timely achieve year 2000 compliance, there could be a
material adverse effect on the Company's business, financial condition, and
results of operation.

         THE COMPANY'S SUPPLIERS, VENDORS, AND SERVICE PROVIDERS. The Company is
currently in the process of identifying those suppliers, vendors, and service
providers (including governmental agencies and utility providers) that are
believed to be critical to the Company's business operations after December
31, 1999, and the Company is attempting to ascertain their stage of readiness
through questionnaires, interviews, on-site visits, and other available means.
To the extent that responses to year 2000 readiness are unsatisfactory, the
Company's contingency plan 

                                     -25-


<PAGE>

involves changing suppliers, vendors, or service providers to those who have 
demonstrated year 2000 readiness. There can be no assurance, however, that 
the Company will be successful in finding such alternative suppliers, 
vendors, or service providers. In the event that any of the Company's 
significant suppliers, vendors, or service providers do not successfully and 
timely achieve year 2000 compliance, and the Company is unable to replace 
them with new or alternate suppliers, vendors, and service partners, the 
Company's business or operations could be materially adversely affected.

         MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to
identify those Year 2000 Problems that could materially adversely affect its
business operations by mid-1999. Management currently believes, however, that it
is not possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been or can be identified or corrected. The devices
that could be affected, and the interactions among these devices, are simply too
numerous, and the Company cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these failures. In the year 2000, management therefore expects
(i) a significant number of operational inconveniences and inefficiencies for
the Company and its customers, suppliers, vendors, and service providers that
may divert management's time and attention and financial and human resources
from its ordinary business activities, and (ii) a lesser number of serious
system failures that may require significant efforts by the Company to prevent
or alleviate material business disruptions.

         RISKS. The failure to correct a material year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the Year 2000 Problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party customers and suppliers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition.

THE ESTIMATES AND CONCLUSIONS CONTAINED IN THIS SECTION ARE FORWARD-LOOKING
STATEMENTS, AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS
TO COMPLETING THE PLAN INCLUDE THE AVAILABILITY OF RESOURCES, THE COMPANY'S
ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH
COULD HAVE A SERIOUS IMPACT ON SPECIFIC FACILITIES, AND THE ABILITY OF
CUSTOMERS, SUPPLIERS, VENDORS, AND SERVICE PROVIDERS TO BRING THEIR SYSTEMS INTO
YEAR 2000 COMPLIANCE.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

         The market risk inherent in the Company's financial instruments
represents the potential loss arising from adverse changes in interest rates.
The Company is exposed to market risk in the area of interest rate changes
impacting the fair value of its investment securities. The Company's investment
policy is to manage its investment portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio through the investment
of available funds. The Company diversifies the investment portfolio by
investing in a variety of highly-rated investment-grade securities and through
the use of different investment managers. The Company's marketable securities
portfolio is primarily invested in short-term securities with at least an
investment grade rating to minimize interest rate and credit risk as well as to
provide for an immediate source of funds. Market risk is estimated as the
potential change in fair value in the investment portfolio resulting from a
hypothetical 10 percent change in interest rates, which is not material at
December 31, 1998. The Company holds investments until maturity and carries the
securities at amortized cost, which approximates fair market value.

                                    -26-

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS.

                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                 PAGE
                                                                                               ---------
         <S>                                                                                   <C>
         Report of Independent Accountants.................................................       F-2
         Consolidated Financial Statements:
               Consolidated Balance Sheets.................................................       F-3
               Consolidated Statements of Income...........................................       F-4
               Consolidated Statements of Changes in Shareholders' Equity (Deficit)........       F-5
               Consolidated Statements of Cash Flows.......................................       F-6
               Notes to Consolidated Financial Statements..................................    F-7 - F-14
</TABLE>




<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Apex PC Solutions, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Apex PC Solutions, Inc. and its subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP
Seattle, Washington
January 27, 1999
Except as to 3-for-2 stock split and description of litigation described in
Subsequent Event as to which the date is March 4, 1999


                                     F-2
<PAGE>

                             APEX PC SOLUTIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   1998         1997
                                                                                 -------      -------
<S>                                                                              <C>          <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents..................................................    $34,585      $11,938
  Investments ...............................................................     17,339       28,145
                                                                                 -------      -------
    Total cash and investments...............................................     51,924       40,083
  Accounts receivable, less allowance for doubtful accounts..................     14,647        9,844
  Inventories................................................................      3,733        2,918
  Prepaid expenses...........................................................        285          243
  Deferred tax assets........................................................        702          555
                                                                                 -------      -------
    Total current assets.....................................................     71,291       53,643
                                                                                 -------      -------
Property and equipment, at cost..............................................      1,385        1,302
  Less accumulated depreciation..............................................        781          433
                                                                                 -------      -------
                                                                                     604          869
                                                                                 -------      -------
Investments and other........................................................      1,503          759
                                                                                 -------      -------
Total assets.................................................................    $73,398      $55,271
                                                                                 -------      -------
                                                                                 -------      -------
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...........................................................    $ 1,416      $   327
  Accrued wages and commissions..............................................        814          944
  Accrued warranty costs.....................................................        745          745
  Accrued income taxes.......................................................        278            -
  Other accrued expenses.....................................................        715          482
                                                                                 -------      -------
    Total current liabilities................................................      3,968        2,498
Deferred taxes...............................................................         23           35
                                                                                 -------      -------
Total liabilities............................................................      3,991        2,533
                                                                                 -------      -------
Commitments and contingencies

Shareholders' equity:
  Common stock, no par value;  100,000 shares authorized
   at December 31, 1998 and 1997; 20,315 and 20,151 shares
   issued and outstanding, respectively......................................     62,901       62,014
  Deferred compensation......................................................        (96)        (168)
  Retained earnings (deficit)................................................      6,602       (9,108)
                                                                                 -------      -------
    Total shareholders' equity...............................................     69,407       52,738
                                                                                 -------      -------
Total liabilities and shareholders' equity...................................    $73,398      $55,271
                                                                                 -------      -------
                                                                                 -------      -------
</TABLE>

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

                                     F-3
<PAGE>

                             APEX PC SOLUTIONS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                          1998         1997         1996
                                                                        -------      -------      -------
<S>                                                                     <C>          <C>          <C>
Net sales............................................................   $75,640      $55,390      $33,622
Cost of sales........................................................    40,168       30,488       19,239
                                                                        -------      -------      -------
  Gross profit.......................................................    35,472       24,902       14,383
                                                                        -------      -------      -------
Research and development.............................................     3,167        2,044          965
Sales and marketing..................................................     5,739        4,446        2,481
General and administrative...........................................     5,573        3,744        3,609
                                                                        -------      -------      -------
  Total operating expenses...........................................    14,479       10,234        7,055
                                                                        -------      -------      -------
Income from operations...............................................    20,993       14,668        7,328
Interest income (expense) and other, net.............................     2,646          928       (1,859)
                                                                        -------      -------      -------
Income before income taxes and extraordinary item....................    23,639       15,596        5,469
Provision for income taxes...........................................     7,929        5,128        1,861
                                                                        -------      -------      -------
  Income before extraordinary item...................................    15,710       10,468        3,608
Extraordinary item - loss on early extinguishment of debt,
 net of related income tax benefit of $72............................       -           (141)         -
                                                                        -------      -------      -------
    Net income.......................................................   $15,710      $10,327      $ 3,608
                                                                        -------      -------      -------
                                                                        -------      -------      -------
Per share data:
Basic:
  Income before extraordinary item...................................    $ 0.78      $  0.59       $ 0.42
  Extraordinary item.................................................       -          (0.01)         -
                                                                        -------      -------      -------
  Net income.........................................................    $ 0.78      $  0.58       $ 0.42
                                                                        -------      -------      -------
                                                                        -------      -------      -------
Diluted:
  Income before extraordinary item...................................    $ 0.75      $  0.55       $ 0.29
  Extraordinary item.................................................       -          (0.01)         -
                                                                        -------      -------      -------
  Net income.........................................................    $ 0.75      $  0.54       $ 0.29
                                                                        -------      -------      -------
                                                                        -------      -------      -------
Weighted average shares used in computing per share data:
  Basic..............................................................    20,215       17,781        8,658
                                                                        -------      -------      -------
                                                                        -------      -------      -------
  Diluted............................................................    21,011       18,977       12,461
                                                                        -------      -------      -------
                                                                        -------      -------      -------
</TABLE>

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

                                     F-4
<PAGE>

                           APEX PC SOLUTIONS, INC.
    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
            FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                               (IN THOUSANDS)

<TABLE>
<CAPTION>
                                           COMMON STOCK                     RETAINED
                                         ----------------      DEFERRED     EARNINGS
                                         SHARES    AMOUNT    COMPENSATION   (DEFICIT)     TOTAL
                                         ------   -------      -------       --------    --------
<S>                                      <C>      <C>        <C>            <C>          <C>
Balances, December 31, 1995.......        8,400   $   295      $(1,000)      $(23,043)   $(23,748)
Net income........................          -         -            -            3,608       3,608
Issuance of common stock options            -         170         (170)           -           -
Proceeds from employee stock
 plans and related tax benefit....          990       183          -              -           183
Amortization of deferred
 compensation.....................          -         -          1,077            -         1,077
                                         ------   -------      -------       --------    --------
Balances, December 31, 1996.......        9,390       648          (93)       (19,435)    (18,880)
Net income........................          -                      -           10,327      10,327
Proceeds from offerings of
 common stock.....................        7,125    58,844          -              -        58,844
Conversion of Series A
 redeemable and convertible
 preferred stock to common
 stock............................        3,600     2,205          -              -         2,205
Issuance of common stock options..                     99          (99)           -             -
Proceeds from employee stock
 plans and related tax benefit....           36       218          -              -           218
Amortization of deferred
 compensation.....................          -         -             24            -            24
                                         ------   -------      -------       --------    --------
Balances, December 31, 1997.......       20,151    62,014         (168)        (9,108)     52,738
Net income........................          -                      -           15,710      15,710
Cancellation of common stock
 options..........................          -         (15)          15            -          -
Proceeds from employee stock
 plans and related tax benefit....          164       902          -              -           902
Amortization of deferred
 compensation.....................          -         -             57            -            57
                                         ------   -------      -------       --------    --------
Balances, December 31, 1998.......       20,315   $62,901      $   (96)      $  6,602    $ 69,407
                                         ------   -------      -------       --------    --------
                                         ------   -------      -------       --------    --------
</TABLE>

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

                                     F-5
<PAGE>

                             APEX PC SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            1998         1997         1996
                                                                          --------     --------     -------
<S>                                                                       <C>          <C>          <C>
Cash flows from operating activities:
  Net income.......................................................       $ 15,710     $ 10,327     $ 3,608
  Adjustments to reconcile net income to net cash provided by
   operating activities:
    Depreciation and amortization..................................            348          243         154
    Amortization of deferred compensation..........................             57           25       1,077
    Extraordinary loss on early extinguishment of debt.............            -            213         -
    Deferred taxes.................................................           (159)         265        (732)
    Changes in:
      Accounts receivable, net.....................................         (4,803)      (3,674)     (1,671)
      Inventories, net.............................................           (815)      (1,265)       (395)
      Prepaid expenses.............................................            (42)        (113)         (6)
      Other assets.................................................            (93)          64         (69)
      Accounts payable.............................................          1,089         (204)       (399)
      Accrued wages and commissions................................           (130)         390      (1,185)
      Accrued warranty costs.......................................            -            115         630
      Accrued income taxes.........................................            278            6         -
      Other accrued expenses.......................................            233          194        (342)
                                                                          --------     --------     -------
        Total adjustments..........................................         (4,037)      (3,741)     (2,938)
                                                                          --------     --------     -------
        Net cash provided by operating activities..................         11,673        6,586         670
                                                                          --------     --------     -------
Cash flows from investing activities:
  Purchases of investments.........................................        (38,081)     (28,886)        -
  Sales of investments.............................................         48,236          -           -
  Purchases of property and equipment..............................            (83)        (643)       (374)
                                                                          --------     --------     -------
        Net cash provided by (used in) investing activities........         10,072      (29,529)       (374)
                                                                          --------     --------     -------
Cash flows from financing activities:
  Proceeds from Public Offerings of common stock...................            -         59,159         -
  Repayments of long-term debt and capital lease...................            -        (25,615)       (720)
  Redemption of Series B redeemable preferred stock................            -         (1,000)        -
  Proceeds from  employee stock plans and related tax benefit......            902          218         183
  Payment of deferred offering costs...............................            -            -          (316)
                                                                          --------     --------     -------
        Net cash provided by (used in) financing activities........            902       32,762        (853)
                                                                          --------     --------     -------
Net increase (decrease) in cash and cash equivalents...............         22,647        9,819        (557)
Cash and cash equivalents at beginning of period...................         11,938        2,119       2,676
                                                                          --------     --------     -------
Cash and cash equivalents at end of period.........................       $ 34,585     $ 11,938     $ 2,119
                                                                          --------     --------     -------
                                                                          --------     --------     -------
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest...........................       $    -       $    287     $ 1,913
                                                                          --------     --------     -------
                                                                          --------     --------     -------
  Cash paid for Federal income taxes...............................       $  7,262     $  4,630     $ 2,532
                                                                          --------     --------     -------
                                                                          --------     --------     -------
  Conversion of Series A preferred stock into common stock.........       $    -       $  2,205     $   -
                                                                          --------     --------     -------
                                                                          --------     --------     -------
</TABLE>

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

                                     F-6
<PAGE>

                            APEX PC SOLUTIONS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

         Apex PC Solutions, Inc. (the "Company") designs, manufactures and
markets stand-alone switching systems and integrated server cabinet solutions
for the client/server computing market. The Company's switching systems enable
client/server network administrators to manage multiple servers from a single
keyboard, monitor and mouse configuration, facilitating more efficient network
management and administration. The Company purchases material component parts
for the manufacture of switching systems and integrated server cabinets from
domestic suppliers, and generally contracts with third parties for the
subassembly of products. The financial statements of the Company are
consolidated and include the accounts of the Company and its wholly owned
subsidiary, Apex PC Solutions, Ltd. (a foreign sales corporation). Significant
intercompany transactions and balances have been eliminated.

CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.

INVESTMENTS

         Investments generally consist of highly rated commercial paper and
corporate debt which have original maturities between three months and two
years, are classified as held-to-maturity and are recorded at amortized cost,
which approximates market value.

INVENTORIES

         Inventories are recorded at the lower of first-in, first-out cost or
market.

PROPERTY AND EQUIPMENT

         Depreciation of property and equipment is computed on the basis of
estimated useful lives ranging from three to seven years using the straight-line
method. Maintenance and repairs are charged to expense as incurred. Significant
betterments are capitalized. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in the statement of income.

REVENUE RECOGNITION

         Revenue on equipment sales is recognized upon shipment, net of
allowances for potential returns. Certain customer contracts require equipment
installation at the customer's location and in those circumstances, revenue is
recognized after completion of the installation.

STOCK SPLITS

         On January 22, 1996 all outstanding shares of common stock were split
two for one. On December 9, 1996, all outstanding shares of common stock were
split four for one. On March 4, 1999, the Company effected a three-for-two stock
split in the form of a stock dividend. Shareholders of record as of February 10,
1999 received one additional share of common stock for every two shares they
owned on that date. Share and per share data for all periods presented herein
have been adjusted to give effect to the splits.

EARNINGS PER SHARE

         Prior to December 31, 1997, the Company presented pro forma income per
share based on the weighted average number of shares of common stock and common
equivalent shares outstanding, adjusted for stock splits

                                     F-7
<PAGE>

retroactively applied to all periods presented (see Shareholders' Equity).
Common stock and common stock equivalents issued at prices below the initial
public offering ("IPO") price of $6.00 during the 12 months immediately
preceding the date of the initial filing of the Registration Statement for the
Company's IPO in February 1997 were included in the calculation of earnings
per share, using the treasury stock method based on the assumed IPO price, as
if the common stock equivalents were outstanding for all periods presented.

         Effective December 31, 1997, the Company began reporting earnings per
share in accordance with Statement of Financial Accounting Standards Number 128
("SFAS 128"). SFAS 128 requires the presentation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing income available to
common shareholders (net income, in the Company's case) by the weighted average
common shares outstanding. Diluted earnings per share is computed in a manner
similar to computing basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential stock option common shares had been
issued. The number of dilutive common shares is computed using the treasury
stock method.

         The following table summarizes the computation of shares for basic and
diluted earnings per share under SFAS 128 for the years ended December 31:

<TABLE>
<CAPTION>
                                                                          1998       1997       1996
                                                                         ------     ------     ------
     <S>                                                                 <C>        <C>        <C>
     Basic weighted average shares use in computing basic earnings
      per share.....................................................     20,215     17,781      8,658

     Dilutive effect of:
       Potential additional common shares (treasury stock method):
         Stock options..............................................        796        713        203
         Series A preferred stock ..................................        -          483      3,600
                                                                         ------     ------     ------
     Diluted weighted average shares use in computing diluted
      earnings per share............................................     21,011     18,977     12,461
                                                                         ------     ------     ------
                                                                         ------     ------     ------
</TABLE>

USE OF ESTIMATES

         The preparation of the 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         For certain financial instruments, including investments, accounts
receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.

CONCENTRATIONS OF CUSTOMER BASE AND CREDIT RISK

         One of the Company's OEM customers accounted for 43%, 51%, and 30% of
the Company's net sales for the years ended December 31, 1998, 1997 and 1996,
respectively. The receivable from this customer totaled approximately 45% and
48% of trade receivables at December 31, 1998 and 1997, respectively. For the
year ended December 31, 1996, the Company had sales to two other OEM customers
which accounted for 18% and 15% of net sales.

         The Company sells a significant portion of its products to a small
number of computer industry customers: 71% of total sales for the year ended
December 31, 1998 were derived from eight customers. The Company's operating
results could be adversely affected if the financial condition and results of
operations of these key customers decline.

         For the remaining customers, management believes concentrations of
credit risk with respect to trade receivables are limited due to the nature of
the customers comprising the Company's customer base. The Company performs
credit reviews on major new customers, but rarely requires collateral.

         The Company sells its products internationally, and export sales were
approximately $24,035, $17,356 and $6,573 for the years ended December 31,
1998, 1997 and 1996, respectively.

                                     F-8
<PAGE>

         The Company places cash and investments in high quality financial
institutions and limits the credit exposure from any one institution or
instrument. To date, the Company has not experienced losses on any of these
investments.

MAJOR VENDORS

         The Company purchases all server cabinets from one vendor and has
another vendor sub-assemble its switching systems. Although there are a limited
number of vendors able to assemble concentrator switches, management believes
that other vendors could provide similar services on comparable terms. A change
in vendors, however, could cause a delay in manufacturing and possible loss of
sales, which would adversely affect operating results.

WARRANTY COSTS

         The Company provides, by a current charge to operations, the estimated
cost of future warranty obligations for products sold to date.

RESEARCH AND DEVELOPMENT

         Research and development costs are charged to expense as incurred.

ADVERTISING

         The Company expenses advertising costs as incurred. Advertising
expense was $1,097, $1,426 and $1,045 for the years ended December 31, 1998,
1997 and 1996, respectively.

ACCOUNTS RECEIVABLE:

         Accounts receivable consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                1998        1997
                                                              -------     -------
<S>                                                           <C>         <C>
Trade receivables...........................................  $15,068     $10,180
Less allowance for doubtful accounts........................     (421)       (336)
                                                              -------     -------
                                                              $14,647     $ 9,844
                                                              -------     -------
                                                              -------     -------
</TABLE>

INVENTORIES:

         Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                1998       1997
                                                              ------      ------
<S>                                                           <C>         <C>
Raw materials...............................................  $  922      $  979
Work-in-process.............................................   1,139         909
Finished goods..............................................   1,672       1,030
                                                              ------      ------
                                                              $3,733      $2,918
                                                              ------      ------
                                                              ------      ------
</TABLE>

LINE OF CREDIT AND LETTERS OF CREDIT:

         Under the terms of a credit agreement with a bank, the Company has a
combined line of credit and letter of credit facility with a bank with aggregate
borrowing capacity of $5,000 at prime. Under the line of credit, the Company may
borrow up to a specified amount based upon its accounts receivable. Under the
letter of credit arrangement, the bank will issue commercial letters of credit
up to an aggregate of $5,000 (less any amounts outstanding under the line of
credit). The agreement includes various restrictive covenants which, among other
things require the Company to maintain certain minimum working capital and net
worth amounts. The combined line of credit and letter of credit facility has a
maturity date of April 1999. There were no borrowings under the line of credit
and the letter of credit facility from January 1, 1996 through December 31,
1998.

                                     F-9
<PAGE>

OPERATING LEASE COMMITMENTS:

         During 1998, the Company leased its facilities for base rent of $21 per
month under an operating lease with a portion expiring April 30, 1999. The
Company pays taxes, insurance, normal maintenance and certain other operating
expenses in addition to the base rent.

         On February 24, 1998 the Company signed an agreement for a five year
lease of approximately 117 square feet in an industrial office building being
built in Redmond, Washington, for scheduled occupancy by the Company in April
1999. The initial base rent under this lease is approximately $90 per month,
plus taxes, insurance and maintenance. The lease includes stated provisions of
rent escalation, as reflected in the schedule of future minimum rents.

Future minimum payments as of December 31, 1998 under the non-cancelable
operating lease described in the preceding paragraph were as follows:

<TABLE>
<S>                                                          <C>
Year Ended December 31:
   1999....................................................  $  721
   2000....................................................   1,082
   2001....................................................   1,082
   2002....................................................   1,172
   2003....................................................   1,190
   Thereafter..............................................     198
                                                             ------
                                                             $5,445
                                                             ------
                                                             ------
</TABLE>

         Rent expense totaled $337, $269 and $217 for the years ended December
31, 1998, 1997 and 1996, respectively.

EMPLOYEE BENEFIT PLAN:

         The Company sponsors a 401(k) plan that covers eligible full-time
employees. Employer matching contributions are made at the discretion of the
Board of Directors. Employer contributions totaled $121, $84 and $59 for the
years ended December 31, 1998, 1997 and 1996, respectively.

SHAREHOLDERS' EQUITY:

         The Company is authorized to issue 100,000 shares of voting common
stock, no par value. At its discretion, the Board of Directors may declare
dividends on shares of common stock. Upon liquidation or dissolution, holders of
common stock will be paid only after Preferred Stock preferences have been
satisfied.

         During 1995 the Company authorized and issued 300 shares of Series A
Redeemable and Convertible Preferred Stock, no par value. All holders of Series
A Redeemable and Convertible Preferred Stock were entitled to vote on all
matters except election of directors with the holders of the common stock on an
"as if converted" basis. Each share of Series A Redeemable and Convertible
Preferred Stock was convertible into that number of shares as determined by
dividing the original per share purchase price by a conversion price. The Series
A Redeemable and Convertible Preferred Stock was convertible at the option of
the holder or automatically upon sale of the Company's common stock in a
Qualified Public Offering as defined in the Restated Articles of Incorporation
or upon the vote of the holders of 2/3 of the outstanding Series A Redeemable
and Convertible Preferred Stock in favor of conversion. As a result of the
common stock splits, the shares of Series A Redeemable and Convertible Preferred
Stock were convertible into 3,600 shares of common stock. Upon consummation of
the Company's IPO in February 1997, the Series A Redeemable and Convertible
Preferred Stock was converted into 3,600 shares of the Company's common stock.

         During 1995, the Company authorized and issued 200 shares of Series B
Redeemable Preferred Stock, no par value, to an officer as compensation for
future service. The Series B Redeemable Preferred Stock had no voting rights. At
its discretion, the Board of Directors could declare dividends on shares of
Series B Redeemable Preferred Stock. Upon liquidation or dissolution, after
payment in full of the liquidation preferences to holders of Series A Redeemable
and Convertible Preferred Stock, the holder of Series B Redeemable Preferred
Stock was entitled to the redemption value of the shares plus all accrued and
unpaid dividends. Under the terms of the officer's employment agreement, the
shares vested ratably over a period of six years. On December 9, 1996, the
employment agreement was modified whereby all 200 shares became fully vested on
January 1, 1997. Under the terms of the amendment, 80 shares became

                                     F-10
<PAGE>

redeemable at a price of $5 per share on January 1, 1997. The remaining 120
shares became redeemable at a price of $5 per share on the earlier of the
closing of a Qualified Public Offering of the Company's stock, or if no such
Qualified Public Offering occurred, 60 shares in each of December 2000 and
2001. The Series B Redeemable Preferred Stock was recorded at its redemption
price of $5 per share with a corresponding charge to shareholders' equity
(deficit) for deferred compensation. Pursuant to the amendment, deferred
compensation of $1,000 was fully amortized to expense in 1996. In 1997, the
Series B Redeemable Preferred Stock was fully redeemed by the Company.

STOCK OPTION AND PURCHASE PLANS:

         On December 9, 1996, the Company adopted an employee stock purchase
plan (the "ESPP"), through which qualified employees of the Company may
participate in stock ownership of the Company. Shares of common stock reserved
for the ESPP total 375. The price of shares purchased under the ESPP is the
lower of 85% of the fair market value of the shares on the first day of each
quarterly offering period, or 85% of the fair market value of the shares on the
last day of the quarterly offering period. Under the ESPP, the ESPP
administrator will administer and interpret all rules and regulations applicable
to the ESPP. Pursuant to the ESPP, 18 shares were issued at a weighted average
price of $11.80 per share for the year ended December 31, 1998, and 24 shares
were issued at a weighted average price of $7.32 per share for the year ended
December 31, 1997.

         The Company has adopted an employee stock option plan (the "Plan"),
which provides for nonqualified and incentive stock options for officers,
directors, employees, and consultants, and reserved a total of 5,493 shares of
common stock for issuance pursuant to the Plan. Options under the Plan will
generally expire 10 years from the date of grant, or 5 years in the case of an
optionee owning more than 10% of the voting power of all classes of stock. Under
the Plan, the Plan administrator will fix the conditions for the exercise of the
options. Purchase prices for common stock subject to options issued under the
Plan generally approximate fair market value of the related shares at the date
of grant. Generally, options vest over four years.

         The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair value of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.



                                     F-11
<PAGE>

         Information regarding activity of the option Plan is as follows:

<TABLE>
<CAPTION>
                                                                          WEIGHTED AVERAGE
                                                               SHARES      EXERCISE PRICE
                                                               ------     ----------------
<S>                                                            <C>        <C>
Options outstanding, January 1, 1996........................   1,059         $  0.12
Options granted February 1996...............................     607            0.12
Options granted June 1996...................................     159            0.12
Options granted September 1996..............................     155            0.12
Options granted October 1996................................      36            0.33
Options exercised...........................................    (990)           0.13
                                                               -----
Options outstanding, December 31, 1996......................   1,026            0.13

Options granted January 1997................................      36            1.40
Options granted February 1997...............................      33            6.00
Options granted June 1997...................................     332           12.50
Options granted October 1997................................     122           15.75
Options cancelled...........................................      (3)           6.00
Options exercised...........................................     (17)           0.12
                                                               -----
Options outstanding, December 31, 1997......................   1,529            4.21

Options granted March 1998..................................     690           14.94
Options granted August 1998.................................     485           11.42
Options granted September 1998..............................      22           11.67
Options granted October 1998................................     300           16.75
Options granted November 1998...............................      15           19.25
Options granted December 1998...............................     488           17.33
Options cancelled...........................................    (152)           4.94
Options exercised...........................................    (146)           0.60
                                                               -----
Options outstanding, December 31, 1998......................   3,231           10.98
                                                               -----
                                                               -----
Options available for grant at December 31, 1998............   1,109
                                                               -----
                                                               -----
</TABLE>

           The following table summarizes the weighted average fair values of
stock options granted for the years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                            1998      1997      1996
                                                                           ------     -----     -----
<S>                                                                        <C>        <C>       <C>
Weighted average fair value of options granted whose exercise price
 was equal to the fair value of the stock on the date of grant.......      $10.13     $8.08     $0.05
Weighted average fair value of options granted whose exercise price
 was less than the fair value of the stock on the date of grant......         -       $3.40     $0.97
</TABLE>

         For options issued in September and October 1996, and January 1997,
deferred compensation expense was recorded in the amounts of the excess of the
values of the underlying common stock based on an independent appraisal, over
the option prices. No compensation expense has been recorded for options granted
since January 1997 because the options granted were for prices equal to the fair
value of the related shares, based on the closing sales price on the date of the
grant.

         The following table summarizes information about fixed-price options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                    NUMBER OF     WEIGHTED AVERAGE   WEIGHTED AVERAGE    NUMBER OF    WEIGHTED AVERAGE
    RANGE OF         OPTIONS          REMAINING          EXERCISE         OPTIONS         EXERCISE
 EXERCISE PRICES   OUTSTANDING    CONTRACTUAL LIFE         PRICE        EXERCISABLE        PRICE
----------------   -----------    ----------------   ----------------   -----------   ----------------
<S>                <C>            <C>                <C>                <C>           <C>
 $0.12 -   $1.40        816          7.1 Years             $ 0.18            382          $ 0.18
 $6.00 -  $14.94      1,491          9.2 Years             $13.17             35          $11.31
$15.75 -  $19.25        924          9.8 Years             $16.97             44          $15.75
                      -----                                                  ---
                      3,231          8.8 Years             $10.98            461          $ 2.51
                      -----                                                  ---
                      -----                                                  ---
</TABLE>

                                     F-12
<PAGE>

         As of December 31, 1997, there were 32 options exerciseable at a
weighted average exercise price of $3.15, and as of December 31, 1996, there
were 35 options exerciseable at a weighted average exercise price of $0.12.

         The following table presents net income and per share amounts as if the
Company accounted for compensation expense related to stock options and the ESPP
under the fair value method prescribed by SFAS 123 for the years ended December
31:

<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                      -------     -------     ------
<S>                                                   <C>         <C>         <C>
Net income as reported .............................  $15,710     $10,327     $3,608
                                                      -------     -------     ------
                                                      -------     -------     ------
Net income pro forma ...............................  $14,316     $ 9,955     $3,476
                                                      -------     -------     ------
                                                      -------     -------     ------
Basic earnings per share as reported ...............  $  0.78     $  0.58     $ 0.42
                                                      -------     -------     ------
                                                      -------     -------     ------
Diluted earnings per share as reported .............  $  0.75     $  0.54     $ 0.29
                                                      -------     -------     ------
                                                      -------     -------     ------
Basic earnings per share pro forma..................  $  0.71     $  0.56     $ 0.40
                                                      -------     -------     ------
                                                      -------     -------     ------
Diluted earnings per share pro forma................  $  0.68     $  0.53     $ 0.28
                                                      -------     -------     ------
                                                      -------     -------     ------
</TABLE>

         The fair value of each option granted in 1998 and 1997 was estimated on
the date of grant using the Black-Scholes single option method. For options
granted prior to 1997 the fair value of each option granted was estimated on the
date of grant using the minimum value method. The following weighted average
assumptions were used for grants in 1998, 1997 and 1996:

<TABLE>
<CAPTION>
Assumption:                                             1998         1997            1996
                                                       -------      -------     --------------
<S>                                                    <C>          <C>         <C>
Risk free interest rate............................     5.61%        5.98%      5.38% to 6.77%
Expected holding period............................    5 years      5 years        10 years
Dividend yield.....................................      0.0%         0.0%           0.0%
Expected volatility................................     80.0%        70.0%           0.0%
</TABLE>

INCOME TAXES:

         The Company provides for income taxes under the principles of SFAS No.
109. This statement requires that income taxes be provided for taxes currently
due and for expected future tax effects of the temporary differences between the
book and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Deferred tax assets are reduced by valuation allowances when management
determines that their realization is not likely.

The significant components of the Company's deferred tax assets and liabilities
were as follows on December 31:

<TABLE>
<CAPTION>
                                                                  1998     1997
                                                                  ----     ----
<S>                                                               <C>      <C>
Deferred income tax assets:
  Receivable valuation.........................................   $147     $118
  Inventory valuation..........................................    220      135
  Accrued warranty costs.......................................    261      261
  Other .......................................................     74       41
                                                                  ----     ----
    Deferred income tax assets.................................    702      555
Deferred income tax liability:
  Depreciation.................................................     23       35
                                                                  ----     ----
    Net deferred tax asset.....................................   $679     $520
                                                                  ----     ----
                                                                  ----     ----
</TABLE>


         Although realization is not assured, management believes that it is
more likely than not that all of the net deferred tax asset will be realized
through future taxable income.

                                     F-13
<PAGE>

         The income tax (benefit) provision consisted of the following:

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                              ------------------------------
                                               1998        1997        1996
                                              ------      ------      ------
<S>                                           <C>         <C>         <C>
Current....................................   $8,088      $4,791      $2,593
Deferred...................................     (159)        264        (732)
                                              ------      ------      ------
                                              $7,929      $5,055      $1,861
                                              ------      ------      ------
                                              ------      ------      ------
</TABLE>

         Reconciliations of the effective income tax rate on income before taxes
with the Federal statutory rates of 35% for 1998 and 1997 and 34% for 1996 were
as follows:

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                     -------------------------
                                                     1998       1997      1996
                                                     ----       ----      ----
<S>                                                  <C>        <C>       <C>
Statutory Rate....................................   35.0%      35.0%     34.0%
Tax benefit of foreign sales corporation..........   (1.7)      (1.4)       -
Tax rate difference on income under $10,000.......     -        (0.6)       -
Other.............................................    0.2       (0.1)       -
                                                     ----       ----      ----
Effective tax rate................................   33.5%      32.9%     34.0%
                                                     ----       ----      ----
                                                     ----       ----      ----
</TABLE>

         Tax benefits realized upon exercise of common stock options of $598,
$99 and $56 for the years ended December 31, 1998, 1997 and 1996, respectively,
have been accounted for as an increase to shareholders' equity.

SUBSEQUENT EVENT:

         The Company filed complaints for infringement of U.S. Patent Number
5,721,842 in United States District Court for the Western District of Washington
at Seattle against Cybex Computer Products Corporation ("Cybex") and Rose
Electronics on February 25, 1998, and against C-C-C Group plc and its
subsidiaries ("CCC") on June 1, 1998. The complaints allege that the products
manufactured and sold by each defendant embody the inventions claimed in U.S.
Patent Number 5,721,842 and sought injunctive relief, damages, attorneys' fees
and costs.

         The defendants in the Cybex and Rose lawsuits each filed counterclaims
seeking to recover the expenses of the litigation (including fees and costs) and
to obtain a declaratory judgment that their respective products do not infringe
the 5,721,842 patent and that the 5,721,842 patent was invalid and
unenforceable. The Cybex and Rose lawsuits were consolidated for discovery but
not for trial, and trial dates in the Cybex and Rose lawsuits were set for
November, 1999. In early 1999, Cybex filed multiple motions for partial summary
judgment, and brought a patent interference proceeding with the U.S. Patent and
Trademark Office ("PTO") seeking to invalidate the 5,721,842 patent and claim
ownership of the invention claimed by the 5,721,842 patent as a result of a
prior patent, United States Patent No. 5,732,212, which was formerly owned by
Fox Network Systems Corporation, a company Cybex recently acquired.

         Rather than proceeding simultaneously in two different forums (with the
attendant duplicative expenses), the Company agreed with Cybex to seek expedited
consideration by the PTO of the patent issues raised in the District Court
litigation, reserving its right to reinstate the District Court lawsuit at the
conclusion of that process. Pursuant to a mutual agreement and stipulation
between the Company and Cybex, the District Court lawsuit was dismissed without
prejudice, and the parties agreed that the patent issues raised in connection
with the District Court lawsuit should be initially determined by the Board of
Appeals and Interpretations of the PTO. The Company and Cybex also jointly
requested the District Court to urge accelerated consideration of these issues
by the PTO. The Company also entered into a mutual agreement and stipulation 
with Rose dismissing the Rose lawsuit without prejudice pending the PTO's 
decision. At the conclusion of the PTO proceeding, the District Court lawsuits 
can be reinstated upon the request of any party.

         The complaint in the CCC lawsuit was filed but has not been formally
served on CCC. Under the present schedule imposed by the Court, the Company must
decide by the end of March 1999 whether to cause the litigation to become active
by serving the complaint or to permit the case to be dismissed without
prejudice. In view of the PTO's consideration of the patent issues raised in the
Cybex and Rose litigation, the Company has asked the District Court to stay the
CCC litigation pending the PTO's decision.

                                     F-14









<PAGE>

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

         None.


                                    -27-



<PAGE>

                                   PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>

NAME                                           AGE                                 POSITION
----                                           ---                                 --------
<S>                                            <C>        <C>
Kevin J. Hafer..........................       41         President, Chief Executive Officer and Director

Thomas M. Buiocchi......................       40         Vice President of Marketing

Barry L. Harmon.........................       45         Vice President, Chief Financial Officer and Treasurer

C. David Perry..........................       43         Vice President of Worldwide Sales

Samuel F. Saracino......................       47         Vice President of Business Development, General Counsel and
                                                             Secretary

Christopher L. Sirianni.................       45         Vice President

Jeffrey T. Chambers.....................       44         Director

Franz Fichtner..........................       47         Director

Edwin L. Harper.........................       54         Director

William McAleer.........................       47         Director
</TABLE>


         Kevin J. Hafer has been President of the Company since June 1995, and
has served as Chief Executive Officer of the Company since December 1995 and as
a Director of the Company since January 1996. From February 1993 to June 1995,
Mr. Hafer served as the General Manager of the Company, and from December 1989
to January 1993 he served as the Manager and Technical Operations Director of
the Predecessor. Prior to joining the Company's predecessor, Mr. Hafer was
employed at Harris Corporation from May 1979 to September 1989, serving in
various management capacities.

         Thomas M. Buiocchi has been Vice President of Marketing of the Company
since April 1998. From July 1997 to April 1998, Mr. Buiocchi was Vice President,
Marketing, of Enron Marketing, an energy services company. From December 1994 to
July 1997, Mr. Buiocchi was Executive Vice President and Chief Operating Officer
of FMES Incorporated, also an energy services company. From December 1993 to
December 1995, Mr. Buiocchi was Director of Planning for Hewlett-Packard
Computer Systems Organization, part of Hewlett-Packard Corporation, a computer
hardware company. From April 1992 to December 1993, Mr. Buiocchi was Director of
Marketing for HP Personal Computer Systems Organization.

         Barry L. Harmon has been Vice President, Chief Financial Officer and
Treasurer of the Company since January 1999. From February 1992 to January 1999,
Mr. Harmon was employed at Electro Scientific Industries, Inc., and served as
Vice President and Chief Financial Officer from January 1994 to January 1995,
and as Senior Vice President and Chief Financial Officer from January 1995 to
January 1999. Prior to 1992, Mr. Harmon spent six years with Citibank Global
Private Bank as a Divisional Controller and Chief Financial Officer. Mr. Harmon
also worked for Arthur Andersen LLP for seven years, serving as an Audit Manager
for three years.

         C. David Perry has been Vice President of Worldwide Sales of the
Company since November 1998. From March 1997 through September 1998, he served
as Acer America Corporation's Vice President of Sales - Commercial Division. Mr.
Perry was employed by Texas Instruments from 1979 until March 1997 and served as
Director of North American channel sales for Texas Instruments from 1993 until
1997.

         Samuel F. Saracino has been Vice President of Business Development and
General Counsel of the Company since February 1998, and Secretary of the Company
since March 1998. From January 1984 to February 1998, Mr. Saracino was a partner
at the Seattle law firm of Davis Wright Tremaine LLP, the Company's outside
general counsel.

         Christopher L. Sirianni has been a Vice President of the Company since
August 1996. From March 1994 to August 1996, Mr. Sirianni served as the
Company's Director of Sales and Marketing. From August 1992 to February 1994,
Mr. Sirianni served as the Director of Sales of Coastal Manufacturing, a metal
fabrication company. Mr. Sirianni 

                                    -28-


<PAGE>

served as a consultant/sales executive for National Precision Bearing, a 
distributor, from November 1991 to June 1992. From September 1982 to October 
1991, Mr. Sirianni served in various capacities, including Vice President of 
Sales and Marketing for Augat Communications, a telecommunications company.

         Jeffrey T. Chambers has served as a Director of the Company since
January 1996. Mr. Chambers has been employed by TA Associates, Inc., a venture
capital firm, or its predecessor, since 1980, has been a partner of affiliated
venture funds since 1984 and is currently a Managing Director of TA Associates,
Inc.

         Franz Fichtner has served as a Director of the Company since March
1998. Mr. Fichtner has been President of Diamond Multimedia Europe, a computer
hardware company, since October 1997. From January 1995 to October 1997, Mr.
Fichtner was President of 3Com Europe, a computer network company, and from
January 1991 to January 1995 was Managing Director of 3Com GmbH.

         William McAleer has served as a Director of the Company since June
1996. Mr. McAleer is currently Managing Director of Voyager Capital, which
provides venture financing to private information technology companies. From
1988 through 1994, he was Vice President Finance, Chief Financial Officer and
Secretary with Aldus Corporation, a publicly held software company. Prior to
joining Aldus, he was Vice President, Finance and Administration from 1987 to
1988 of Ecova Corporation and also served as a Vice President with Westin Hotels
Company from 1984 through 1987.

         Edwin L. Harper has served as a Director of the Company since October
1996. From June 1996 through December 1998, Mr. Harper served as President and
Chief Executive Officer of SyQuest Technology, a computer hardware company that
filed a petition under Chapter 11 of the Bankruptcy Code in November 1998. From
July 1993 to June 1996 Mr. Harper was employed as President and Chief Executive
Officer of ComByte, Inc., and from June 1988 to May 1993 Mr. Harper served in
various capacities, including President and Chief Executive Officer, at Colorado
Memory Systems, Inc. Mr. Harper is also a Director of Network Associates, a
network security management company.

         All members of the Board of Directors are elected to serve until 
their respective successors have been elected and qualified or until their 
earlier death, resignation or removal in the manner specified in the 
Company's Bylaws. The officers hold their respective offices until their 
respective successors have been elected, or their earlier death, resignation 
or removal in the manner specified by the Company's Bylaws.

KEY EMPLOYEE

         In addition to directors and executive officers, the Company has the
following key employee:

         Stephen J. McCarthy has served as the Company's Director of Product
Development since July 1995. From February 1994 to July 1995, Mr. McCarthy
served as the Company's Research and Development Manager, and from November 1987
to February 1994 he served as the Account Manager for the Company and for the
Predecessor's on-site service division.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

                  Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors and executive officers, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership of, and transactions in, the Company's
securities with the Securities and Exchange Commission and The Nasdaq Stock
Market, Inc. Such directors, executive officers and ten-percent shareholders are
also required to furnish the Company with copies of all Section 16(a) forms that
they file.

         Based solely on its review of the copies of such forms received by the
Company, or written representations from certain reporting persons, the Company
believes that during fiscal 1998, all Section 16(a) filing requirements
applicable to its directors, executive officers and ten-percent shareholders
were complied with, except that (i) Thomas M. Buiocchi, the Company's Vice
President of Marketing, filed SEC Form 3, relating to his initial ownership of
securities in the Company, late and (ii) Franz Fichtner, a director, filed SEC
Form 3, relating to his initial ownership of securities in the Company, late.

                                    -29-


<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF 
DIRECTORS ON EXECUTIVE COMPENSATION

         The Compensation Committee (the "Committee") of the Board of Directors
(comprised of two non-employee directors) reviews and approves individual
officer salaries, incentive performance goals, and stock option grants. The
Committee also reviews guidelines for compensation, bonus, and stock option
grants for non-officer employees.

         The Company's overall compensation philosophy is to provide competitive
levels of total compensation that will enable the Company to attract, motivate,
retain, and reward qualified employees. The Committee believes that compensation
should promote continued performance of corporate and personal goals and that
any long-term incentive should be aligned with the interest of the Company's
stockholders. The Company's executive compensation policies are designed to
provide competitive levels of compensation to motivate officers to achieve the
Company's business objectives and to reward these officers based on their
achievements. The executive compensation program primarily consists of (i) base
salary, (ii) incentive compensation in the form of an annual bonus, and (iii)
stock options awarded under the Company's Employee Stock Plan.

         Compensation for the Company's executive officers (including the Named
Executive Officers as defined below) consists of the following components:

         BASE SALARY. In setting compensation levels for executive officers, the
Committee reviews several salary surveys detailing information relating to
competitive compensation levels at other technology companies in the Pacific
Northwest and, to a lesser extent, in California. Recommendations by management
are examined by the Committee in the light of this reported information. Officer
base compensation may vary based on tenure with the Company, experience,
assessment of individual performance, duties and responsibilities, and other
factors of importance to the success of the Company.

         INCENTIVE BONUSES. The incentive bonus program provides a variable
compensation opportunity for the executive officers. Bonus payments are
discretionary and based on a combination of the Company's corporate financial
performance and individual officer performance relative to achievement of the
pre-established specified management and strategic objectives. Target bonuses
for executive officers range up to seventy-five percent of the base salary of
the individual executive officer.

         STOCK OPTIONS. The Committee believes that stock ownership provides 
significant incentive to employees by providing an opportunity to receive 
additional compensation by increasing shareholder value. This compensation 
element aligns the interests of employees with those of the stockholders. The 
long-term incentive is realized through the granting of stock options to 
employees and eligible Named Executive Officers. Stock options have value for 
the employee only if the price of the Company's stock increases above the 
exercise price, which is typically set at the fair market value of the Common 
Stock on the date the stock option is granted. The number of shares awarded 
with each stock option grant is based on the employee's current and 
anticipated future performance and ability to promote achievement of 
strategic corporate goals and anticipated future performance. The Committee 
reviews Named Executive Officers' stock option holdings annually to determine 
whether additional grants are appropriate. Initial stock options granted 
generally vest over a four-year period commencing one year after the option 
grant, and subsequent grants are generally exercisable at the end of the 
initial vesting period, thus providing an incentive to remain employed with 
the Company.

         OTHER. In addition to the compensation paid to the Named Executive
Officers as described above, executive officers and all other participating
regular employees of the Company are eligible to receive an annual matching
contribution up to a specified percentage (which is determined annually by the
Board of Directors) of their eligible compensation under the Company's 401(k)
plan. For 1998, the Company matched 100% of an employee's or officer's elective
contribution up to 5% of eligible compensation. Executive officers, subject to
plan provisions, and all other regular employees are also eligible to
participate in the Company's Employee Stock Purchase Plan (which qualifies under
Section 423 of the Internal Revenue Code).

         The Compensation Committee annually reviews and approves the
compensation of Kevin J. Hafer, the Company's President and Chief Executive
Officer. In setting the compensation level for the Chief Executive

                                    -30-

<PAGE>

Officer, the Committee reviews competitive information reflecting compensation
practices for technology companies and examines the Chief Executive Officer's
performance relative to the Company's financial performance and his specific
strategic objectives and goals. The Committee also considers the Chief
Executive Officer's achievements against the same pre-established objectives
and determines whether the Chief Executive Officer's base salary, bonus, and
total compensation approximate the competitive range of compensation for chief
executive officer positions in the technology industry. In establishing Mr.
Hafer's 1998 compensation, the Committee reviewed Mr. Hafer's experience and
past performance and compared them with chief executive officers of other
companies.

                                        COMPENSATION COMMITTEE:
                                        Edwin L. Harper (Chairman)
                                        Jeffrey T. Chambers


         SUMMARY COMPENSATION TABLE. The following table summarizes all
compensation earned by the Company's Chief Executive Officer and by the
Company's other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers") for services rendered in all capacities during the fiscal years ended
December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                                       LONG-TERM
                                                             ANNUAL COMPENSATION      COMPENSATION
                                                           -------------------------  ------------
                                                                                         STOCK         ALL OTHER
       NAME AND PRINCIPAL POSITION                 YEAR     SALARY        BONUS         OPTIONS      COMPENSATION
       ---------------------------                 ----    --------    -------------  ------------  ---------------
       <S>                                         <C>     <C>         <C>            <C>           <C>
       Kevin J. Hafer...........................   1998    $278,402    $120,313  (1)    199,500     $    8,000  (2)
       President and Chief Executive Officer       1997    $200,000    $167,500  (3)    240,375     $   10,119  (2)
                                                   1996    $157,692    $164,707  (4)     36,000     $1,009,619  (2)

       Christopher L. Sirianni..................   1998    $155,769    $ 37,500  (5)        -       $    7,788  (6)
       Vice President                              1997    $145,000    $108,750  (7)     33,000     $    8,000  (6)
                                                   1996    $ 89,123    $148,396  (8)    198,000     $    4,456  (6)

       Thomas M. Buiocchi (9)...................   1998    $128,077    $ 53,633 (10)    300,000     $    2,241 (11)
       Vice President of Marketing

       Samuel F. Saracino (12)..................   1998    $157,296    $ 66,828 (13)    300,000     $    2,577 (14)
       Vice President of Business Development,
        General Counsel and Secretary

       Douglas A. Bevis (15)....................   1998    $131,866         -               -              -
       Former Vice President and Chief Financial   1997    $120,000    $ 60,000 (17)     25,500     $    4,385 (16)
        Officer
</TABLE>

(1)   Includes $120,313 in bonus earned in 1998 and paid in 1999.
(2)   Includes $1,000,000 related to the vesting of Series B Redeemable 
      Preferred Stock in 1996, which was paid in 1997. Also represents 
      matching contributions in the aggregate amounts of $8,000, $8,000 and 
      $7,500 made by the Company in 1998, 1997 and 1996, respectively, to its 
      401(k) Profit Sharing Plan and Trust on behalf of Mr. Hafer and premium 
      payments in the aggregate amount of $2,119 and $2,119 paid by the 
      Company in 1997 and 1996, respectively, towards Mr. Hafer's life 
      insurance policy.
(3)   Includes $150,000 in bonus earned in 1997 and paid in 1998. 
(4)   Includes $80,000 bonus earned in 1996 and paid in 1997. 
(5)   Includes $18,750 bonus earned in 1998 and paid in 1999.
(6)   Represents matching contributions made by the Company to its 401(k) 
      Profit Sharing Plan and Trust on behalf of Mr. Sirianni.
(7)   Bonus earned in 1997 and paid in 1998.
(8)   Includes $54,894 bonus earned in 1996 and paid in 1997.
(9)   Mr. Buiocchi joined the Company in March 1998.
(10)  Includes $32,783 bonus earned in 1998 and paid in 1999.

                                     -31-
<PAGE>

(11)  Represents matching contributions made by the Company in 1998 to its
      401(k) Profit Sharing Plan and Trust on behalf of Mr. Buiocchi.
(12)  Mr. Saracino joined the Company in February 1998.
(13)  Includes $36,278 bonus earned in 1998 and paid in 1999
(14)  Represents matching contributions made by the Company in 1998 to its
      401(k) Profit Sharing Plan and Trust on behalf of Mr. Saracino.
(15)  Mr. Bevis left the Company in November 1998.
(16)  Represents matching contributions made by the Company in 1997 to its
      401(k) Profit Sharing Plan and Trust on behalf of Mr. Bevis.
(17)  Includes $15,000 bonus earned in 1997 and paid in 1998.


         OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
certain information with respect to individual grants to the Named Executive
Officers of options to purchase Common Stock of the Company made during the
fiscal year ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                              POTENTIAL REALIZED VALUE AT
                                                                                               ASSUMED ANNUAL RATES OF
                                                                                               STOCK PRICE APPRECIATION
                                  NUMBER OF      % OF TOTAL OPTIONS                                      FOR
                                 SECURITIES           GRANTED TO       EXERCISE                       OPTION TERM
                             UNDERLYING OPTIONS      EMPLOYEES IN     PRICE PER   EXPIRATION  --------------------------
NAME                               GRANTED            FISCAL YEAR       SHARE        DATE           5%            10%
----                         ------------------  ------------------   ---------   ----------   ----------    ----------
<S>                          <C>                 <C>                  <C>         <C>          <C>           <C>
Kevin J. Hafer.............         12,000                0.6%          $11.42     8/31/08     $   86,159    $  218,343
                                   187,500                9.4%          $11.42     8/31/08     $1,346,227    $3,411,605
Samuel F. Saracino.........        300,000               15.0%          $14.94      3/9/08     $2,818,240    $7,141,974
Thomas M. Buiocchi.........        300,000               15.0%          $14.94      3/9/08     $2,818,240    $7,141,974
</TABLE>

         AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES. The following table sets forth information with respect to option
exercises during the fiscal year ended December 31, 1998 by the Named Executive
Officers and 1998 year-end option values:

<TABLE>
<CAPTION>
                                               VALUE REALIZED     NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                                NUMBER OF     (MARKET PRICE AT   UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS
                             SHARES ACQUIRED   EXERCISE LESS   OPTIONS AT FISCAL YEAR END       AT FISCAL YEAR END
NAME                            ON EXERCISE    EXERCISE PRICE) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
----                         ---------------  ---------------- --------------------------- ------------------------------
<S>                          <C>              <C>              <C>                         <C>
Kevin J. Hafer............        82,500          $931,769           233,786/611,143          $3,789,212/$6,751,870
Christopher L. Sirianni...           -                 -              41,250/90,750            $789,216/$1,327,817
Samuel F. Saracino........           -                 -                - /300,000                 - /$1,295,240
Thomas M. Buiocchi........           -                 -                - /300,000                 - /$1,295,240
Douglas A. Bevis..........        41,845          $796,574                - / -                        - / -
</TABLE>

(1)  Based upon the fair market value of the Company's Common Stock at fiscal
year end of $19.25 per share less the exercise price payable for such shares.

COMPENSATION OF DIRECTORS

         Directors are reimbursed for their out-of-pocket expenses for
attendance at meetings. Mr. Fichtner, Mr. Harper, and Mr. McAleer receive annual
compensation of $6,000 for their services as Directors. On his election as a
director in March 1998, Mr. Fichtner was initially granted options to purchase
36,000 shares of the Company's Common Stock at $14.94 per share, exercisable pro
rata over thirty-six (36) months commencing April 1, 1998. Each individual who
was a Director of the Company in August 1998 was also granted options at that
time to purchase 12,000 shares of the Company's Common Stock at $11.42 per
share. These options vest monthly over a one-year period after the expiration of
the vesting period for currently outstanding options.

                                     -32-
<PAGE>

TEN-YEAR OPTION/SAR REPRICING

         The following table sets forth information regarding the cancellation
of and a replacement grant of a stock option to an executive officer:

<TABLE>
<CAPTION>
                                                                                                       LENGTH OF
                                                                              EXERCISE                 ORIGINAL
                                                               MARKET PRICE   PRICE AT                OPTION TERM
                                              SECURITIES        OF STOCK AT    TIME OF               REMAINING AT
                                           UNDERLYING NUMBER      TIME OF     REPRICING      NEW        DATE OF
                                            OF OPTIONS/SARS    REPRICING OR      OR       EXERCISE   REPRICING OR
NAME                             DATE     REPRICED OR AMENDED    AMENDMENT    AMENDMENT     PRICE      AMENDMENT
----                             ----     -------------------  ------------   ---------   --------   ------------
<S>                              <C>      <C>                  <C>            <C>         <C>        <C>
Samuel F. Saracino (1).......    3/9/98          300,000           $14.94      $17.75       $14.94      10 Years
Vice President of Business
 Development, General
 Counsel and Secretary
</TABLE>


(1)  Mr. Saracino was originally expected to join the Company in February 1998,
and on February 18, 1998, was initially awarded options to purchase 300,000
shares of Company Common Stock at $17.75 per share exercisable over 36 months 
commencing March 1, 1999. Because of continuing obligations to his prior 
employer, Mr. Saracino was not able to commence full-time employment with the 
Company until after the end of February, and as a result, his original stock 
option grant was cancelled (and was relinquished by him). Subsequently, on 
March 9, 1998 (at a time when the Compensation Committee granted a number of 
other stock options), Mr. Saracino was awarded options to purchase 300,000 
shares at $14.94 per share exercisable over 36 months commencing April 1, 1999.

PERFORMANCE GRAPH

         The following graph compares the total stockholder return (stock price
appreciation) on the company's common stock with the cumulative total return
(including reinvested dividends) on the NASDAQ US Index ("NASDAQ US") and the
NASDAQ Computer Index ("NASDAQ Computer") for the period beginning February 1,
1997, the first day of the month in which the Company became a public company,
and ending on December 31, 1998.

<TABLE>
<CAPTION>
                         2/1/97    12/31/97    12/31/98
                         ------    --------    --------
     <S>                 <C>        <C>         <C>
     APEX                100.00     246.11      320.83
     NASDAQ Computer     100.00     106.14      194.59
     NASDAQ US           100.00     114.39      161.19
</TABLE>


                                     -33-
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth as of March 4, 1999, certain information
with respect to the ownership of the Common Stock of the Company by (i) each
person (or group of affiliated persons) known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock, (ii)
each director of the Company, (iii) each of the Company's executive officers
named under "Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act Executive Officers and
Directors" and (iv) all executive officers and directors of the Company as a
group. Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to such shares, subject to community
property laws, where applicable.

<TABLE>
<CAPTION>
         NAME OF BENEFICIAL OWNER(1)                                            SHARES       PERCENTAGE
         ---------------------------                                           ---------     ----------
         <S>                                                                   <C>           <C>
         Alliance Capital Management L. P. .................................   3,294,450        16.2%
          1290 Avenue of the Americas
          New York, NY 10104
         J. & W. Seligman & Co., Inc. ......................................   2,559,450        12.6
          100 Park Avenue
          New York, NY  10006
         Pilgrim Baxter & Associates, Ltd...................................   1,330,500         6.5
          825 Duportail Road
          Wayne, PA  19087
         Nicholas Applegate Capital Management..............................   1,141,553         5.6
          600 West Broadway, Suite 2900
          San Diego, CA 92101
         Kevin J. Hafer(2)..................................................     642,947         3.1
         Christopher L. Sirianni(3).........................................      87,375         *
         Samuel F. Saracino(4)..............................................      84,850         *
         Thomas M. Buiocchi(5)..............................................      81,250         *
         Jeffrey T. Chambers(6).............................................      72,356         *
         Edwin L. Harper(7).................................................      31,900         *
         William McAleer(8).................................................      24,499         *
         Franz Fichtner(9)..................................................      13,999         *
         C. David Perry.....................................................       7,500         *
         Barry L. Harmon....................................................           -         0.0
         All directors and executive officers as a group (10 persons) (10)..   1,046,676         5.0%
</TABLE>

*    Less than 1%.

(1)  Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of the Company, 20031 142nd
Avenue, N.E., Woodinville, Washington 98072.

(2)  Includes 350,332 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at a
weighted average exercise price of $2.77 per share. Also includes 2,100 shares
owned by an irrevocable trust for the benefit of Mr. Hafer's children, and 61
shares owned by Mr. Hafer as custodian under various Uniform Transfer to Minors
Accounts for the benefit of his nieces and nephews, and Mr. Hafer disclaims 
beneficial ownership of all such 2,161 shares.

(3)  Includes 45,375 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $0.1225
per share.

(4)  Includes 81,250 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $14.94
per share. Also includes 2,100 shares owned by an irrevocable trust for the
benefit of Mr. Hafer's children, of which Mr. Saracino is trustee, and Mr.
Saracino disclaims beneficial ownership of all such 2,100 shares.

(5)  Includes 81,250 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $14.94
per share.

                                     -34-
<PAGE>

(6)  Includes 34,999 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $0.1225
per share, of which Mr. Chambers disclaims beneficial ownership. Also includes
6,987 shares owned by two irrevocable trusts for the benefit of Mr. Chambers'
children, of which Mr. Chambers is a co-trustee. Mr. Chambers disclaims
beneficial ownership of all such 6,987 shares.

(7)  Includes 13,000 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $0.33
per share.

(8)  Includes 16,999 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $0.1225
per share.

(9) Includes 13,999 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at $14.94
per share.

(10) Includes 637,204 shares of Common Stock issuable upon exercise of stock
options currently exercisable or becoming exercisable within 60 days at a
weighted average exercise price of $5.69 per share. See Notes (2), (3), (4),
(5), (6), (7), (8) and (9) above.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None.

ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      EXHIBITS.

   EXHIBIT
   NUMBER    EXHIBIT DESCRIPTION
   -------   -------------------
        3.1  Amended and Restated Articles of Incorporation. (Incorporated by
             reference to the Company's Registration Statement on Form SB-2
             (Registration No. 333-17753).)

        3.2  Amended and Restated Bylaws. (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-31697).)

        4.1  See Article III of Exhibit 3.1 and Articles II, IV and IX of
             Exhibit 3.2

       10.1  Registration Rights Agreement dated December 29, 1995.
             (Incorporated by reference to the Company's Registration
             Statement on Form SB-2 (Registration No. 333-17753).)

       10.2  S Corporation Indemnification Agreement dated December 29, 1995.
             (Incorporated by reference to the Company's Registration Statement
             on Form SB-2 (Registration No. 333-17753).)

     10.3.1  Employment Agreement dated December 29, 1995 by and between the
             Company and Kevin J. Hafer.  (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-17753).)

     10.3.2  First Amendment to Employment Agreement dated December 1996 by
             and between the Company and Kevin J. Hafer.  (Incorporated by
             reference to the Company's Registration Statement on Form SB-2
             (Registration No. 333-31697).)

       10.4  Credit Agreement dated December 28, 1995 by and between the
             Company and U.S. Bank of Washington, National Association.
             (Incorporated by reference to the Company's Registration
             Statement on Form SB-2 (Registration No. 333-17753).)

     10.5.1  Lease Agreement dated March 22, 1995 by and between the Company
             and Christopher L. Clark.  (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-17753).)

     10.5.2  Second Amendment to Lease dated March 13, 1997 by and between the
             company and Christopher L. Clark (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-31697).)

     10.6.1  Purchase Agreement dated September 19, 1994, by and between the
             Company and Compaq Computer Corporation, as amended (incorporated
             by reference to the Company's Registration statement on Form SB-2
             (Registration No. 333-31697)). +

     10.6.2  Amendment to Purchase Agreement effective as of August 6, 1998,
             by and between the Company and Compaq Computer Corporation. 
             (Incorporated by reference to the Company's quarterly report on 
             Form 10-Q for the quarter ended September 25, 1998.) +

                                     -35-
<PAGE>

       10.7  Private Label Agreement dated September 8, 1994 by and between the
             Company and Wright Line, Inc. (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-17753).)+

       10.8  Form of the Company's Proprietary Information and Noncompetition
             Agreement. (Incorporated by reference to the Company's Registration
             Statement on Form SB-2 (Registration No. 333-17753).)

       10.9  1995 Employee Stock Plan.  (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-17753).)

      10.10  Form of Nonstatutory Stock Option Letter Agreement related to 1995
             Employee Stock Plan. (Incorporated by reference to the Company's
             Registration Statement on Form SB-2 (Registration No. 333-17753).)

      10.11  Employee Stock Purchase Plan.  (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-17753).)

      10.12  Letter Agreements dated October 16, 1996 and October 24, 1996 by
             and between the Company and Pioneer-Standard Electronics, Inc.
             (Incorporated by reference to the Company's Registration Statement
             on Form SB-2 (Registration No. 333-17753).)+

      10.13  Stock and Subordinated Note Purchase Agreement dated December 29,
             1995. (Incorporated by reference to the Company's Registration
             Statement on Form SB-2 (Registration No. 333-17753).)

      10.14  Class A Subordinated Promissory Notes dated December 29, 1995.
             (Incorporated by reference to the Company's Registration Statement
             on Form SB-2 (Registration No. 333-17753).)

      10.15  Class B Subordinated Promissory Note dated December 29, 1995.
             (Incorporated by reference to the Company's Registration Statement
             on Form SB-2 (Registration No. 333-17753).)

    10.16.1  Business Loan Agreement dated March 27, 1997 by and between the
             Company and U.S. Bank of Washington, National Association
             (Incorporated by reference to the Company's Registration Statement
             on Form SB-2 (Registration No. 333-31697).)

    10.16.2  Alternative Rate Options Promissory Note dated as of May 1, 1998,
             by and between the Company and U.S. Bank of Washington, National
             Association. (Incorporated by reference to the Company's 
             quarterly report on Form 10-Q for the quarter ended June 26, 1998.)

       21.1  Subsidiaries of Registrant (Incorporated by reference to the
             Company's Registration Statement on Form SB-2 (Registration No.
             333-31697).)

       23.1  Consent of Independent Accountants

       24.1  Power of Attorney (set forth on pages 37 and 38 and incorporated
             herein by reference).

       27.1  Financial Data Schedule

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

        +    Portions of these agreements are subject to confidential treatment.

        (b)  REPORTS ON FORM 8-K.

             None.


                                     -36-






<PAGE>

                                    SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                        APEX PC SOLUTIONS, INC.


                                        By:  /s/ Kevin J. Hafer
                                           -------------------------------------
                                           Kevin J. Hafer
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER

                                           Date:    March 30, 1999


                                 POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

         That the undersigned officers and directors of Apex PC Solutions, Inc.
do hereby constitute and appoint Kevin J. Hafer the lawful attorney and agent
with power and authority to do any and all acts and things and to execute any
and all instruments which said attorneys and agents, or either of them,
determine may be necessary or advisable or required to enable Apex PC Solutions,
Inc. to comply with the Securities Exchange Act of 1934, as amended, and any
rules or regulations or requirements of the Securities Exchange Act of 1934, as
amended, and any rules or regulations or requirements of the Securities and
Exchange Commission in connection with this Form 10-K Report. Without limiting
the generality of the foregoing power and authority, the powers granted include
the power and authority to sign the names of the undersigned officers and
directors in the capacities indicated below to this Form 10-K Report of
amendments or supplements thereto, and each of the undersigned hereby ratifies
and confirms all that said attorneys and agents or either of them, shall do or
cause to be done by virtue hereof. This Power of Attorney may be signed in 
several counterparts.

         IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.



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<PAGE>

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
       SIGNATURE                                 TITLE                                   DATE
       ---------                                 -----                                   ----
<S>                               <C>                                               <C>
       /s/ Kevin J. Hafer         President and Chief Executive Officer and         March 30, 1999
-----------------------------     Director (Principal Executive Officer)
         Kevin J. Hafer

      /s/ Barry L. Harmon         Vice President, Chief Financial Officer           March 30, 1999
-----------------------------     and Treasurer (Principal Financial and
        Barry L. Harmon           Accounting Officer)

  /s/ Jeffrey T. Chambers         Director                                          March 30, 1999
-----------------------------
     Jeffrey T. Chambers

       /s/ Franz Fichtner         Director                                          March 30, 1999
-----------------------------
       Franz Fichtner

     /s/ Edwin L. Harper          Director                                          March 30, 1999
-----------------------------
      Edwin L. Harper

      /s/ William McAleer         Director                                          March 30, 1999
-----------------------------
      William McAleer
</TABLE>


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