<PAGE>
                                       
                                 United States
                         Securities and Exchange Commission
                             Washington, D.C. 20549
 
                                  FORM 10-KSB
 
(Mark One)
 
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
    For the Fiscal Year ended October 31, 1997 

[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange 
    Act of 1934 
    For the transition period from __________ to __________
 
Commission file number 0-22263
 
                           DUNN COMPUTER CORPORATION
          (Name of small business issuer as specified in its charter)
 
<TABLE>
<S>                                            <C>
                  Delaware                                      54-1424654
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>
 
                               1306 Squire Court
                            Sterling, Virginia 20166
                    (Address of principal executive offices)
 
                                 (703) 450-0400
                          (Issuer's telephone number)
 
Securities registered under Section 12(b) of the Exchange Act:
 
     None
 
Securities registered under Section 12(g) of the Exchange Act: 
     Common Stock
 
Check whether the issuer (1) has filed all reports required to be filed by 
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 
months (or for such shorter period that the issuer was required to file such 
reports), and (2) has been subject to such filing requirements for the past 
90 days.   Yes X   No

Check if there is no disclosure of delinquent filers in response to Item 405 
of Regulation S-B 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-KSB or any amendment to this Form 10-KSB. { }
 
Issuer's revenues for its most recent fiscal year: $21,766,465.
 
Aggregate market value of the voting and non-voting common equity held by 
non-affiliates computed at $9 1/2 per share, the closing price of the Common 
Stock on January 27, 1998: $48,925,000.
 
The number of shares of the issuer's Common Stock, $.01 par value, 
outstanding as of January 28, 1998 was 5,150,000.
 
Documents Incorporated by Reference: None

Transitional Small Business Format. Yes____  No X
 
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                             PAGE
                                                                                             -----
<S>                                                                                           <C>
 
PART I ...................................................................................     1
 
  ITEM 1. DESCRIPTION OF BUSINESS ........................................................     1
  ITEM 2. DESCRIPTION OF PROPERTY ........................................................     5
  ITEM 3. LEGAL PROCEEDINGS ..............................................................     6
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................     6
 
PART II ..................................................................................     7

  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS.............................................................     7
  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ...........................................     8
  ITEM 7. FINANCIAL STATEMENTS ...........................................................    10
  ITEM 8. CHANGES IN AND DISAGREEMENTS
          WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL ISSUES ...............................................................    10

PART III .................................................................................    11
 
  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS 
           AND CONTROL PERSONS; COMPLIANCE WITH  
           SECTION 16(a) OF THE EXCHANGE ACT .............................................    11
  ITEM 10. EXECUTIVE COMPENSATION ........................................................    12
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN                                            
           BENEFICIAL OWNERS AND MANAGEMENT ..............................................    14
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................    15
  ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ..............................................    15
</TABLE>
 
<PAGE>
                                     PART I
 
FORWARD-LOOKING STATEMENTS
 
    Statements in this report that are not historical in nature, including 
references to beliefs, anticipations or expectations, are forward-looking. 
Such statements are subject to a wide variety of risks and uncertainties that 
could cause actual results to differ materially from those projected. The 
Company undertakes no obligation and does not intend to update, revise or 
otherwise publicly release the results of any revisions to these 
forward-looking statements, which revisions may be made to reflect any future 
events or circumstances, other than through its regular quarterly and annual 
financial statements, and through the accompanying discussion and analysis 
contained in the Company's Quarterly Reports on Form 10-QSB and Annual Report 
on Form 10-KSB.
 
ITEM 1. DESCRIPTION OF BUSINESS
 
GENERAL
 
    Dunn Computer Corporation (together with its subsidiaries, "Dunn" or the 
"Company") manufactures custom computer systems and provides information 
technology ("IT") services to the Government and selected businesses. The 
Company provides its customers with a single-source solution for their IT 
needs by offering a broad range of products and services. The products the 
Company manufactures include desktop computers, high performance network 
client servers and portable computers. The technical services the Company 
offers include network consulting, project implementation, support services, 
and staff augmentation. Dunn's customers include the Department of the Army, 
the Department of the Navy, Administrative Office of the U.S. Courts, 
Lockheed Martin Corporation , Social Security Administration, General 
Services Administration, and Blue Cross and Blue Shield Association, among 
others. The Company was formed as a Delaware corporation in January 1997 as a 
holding company for Dunn Computer Corporation, a Virginia corporation in 
operation since 1987.
 
PRODUCTS
 
    DESKTOP COMPUTERS.  The Company manufactures a high performance line of 
Pentium and Pentium II desktop computers that may be used on a standalone 
basis or as part of a network. The desktops incorporate the newest Intel 
technology and can accommodate all the Intel Pentium processors, including 
the new high performance 300 Mhz Pentium II processor. The Company strives to 
keep ahead of the competition by regularly testing and incorporating the 
latest technology into its products.
 
    NETWORK CLIENT SERVERS.  The Company markets a single, dual and quad 
version of the Intel Pentium server. All Dunn servers are Microsoft Windows 
NT, Novell, Banyan, and Token Ring compatible. The Company believes that its 
servers offer the latest or "best of the breed" technology that provide it 
with a price-performance advantage over major competition such as Hewlett 
Packard Company ("HP") and Compaq Computer Corporation. The Company believes 
that the server market provides opportunities for higher profit margins 
compared to other segments in the computer hardware industry. In addition, 
because of the complexity of server installation and maintenance, server 
sales complement the Company's support services business.
 
    PORTABLE COMPUTERS.  The Company manufactures, on a brand name basis, a 
state-of-the-art portable computer line based on 166 MMX, 200 MMX, and 233 
MMX processors with a 12.1 inch, 13.3 inch or 14.1 inch display and many 
other advanced features. The system is assembled and configured in the United 
States by Dunn and meets the Federal Government's stringent Buy American and 
Trade Agreement Act requirements. The Company markets the portables in both 
the commercial and Government markets. At this time, the Company's portable 
computer product line is a small portion of its business.

    NETWORKING HARDWARE & SOFTWARE.  The Company integrates, installs, and
maintains major-brand networking hardware and software, which enables the
Company to be a full solutions provider for its customers. A partial list of the
manufacturers whose products the Company is authorized to resell include 3COM,
Banyan , Cisco, Lotus, Microsoft, Novell and Santa Cruz Operation.


<PAGE>

    NETWORK CONSULTING.  Dunn provides its clients with network consulting 
services with respect to requirements analysis, network audits, security 
audits, security policy planning, network capacity planning, server capacity 
planning, and technology and feasibility studies. These services are 
generally provided on a fixed hourly fee basis with specific deliverables.
 
    PROJECT IMPLEMENTATION.  Dunn performs full life cycle project work for 
which it assumes responsibility for all deliverables and project completion. 
Providing project management is a key component of Dunn's strategy of being a 
full solutions provider.
 
    SUPPORT SERVICES.  Dunn also offers clients that do not need full-time, 
on-site support a family of support products under the "SafetyNet" program. 
These products provide a wide range of support options and can be customized 
to each client's specific needs. For example, through "Block Services," 
clients may purchase blocks of Dunn's technical personnel hours for up to a 
period of three years from the purchase date, allowing clients to plan ahead 
and take advantage of volume discounts. Under its "Term Maintenance" program, 
Dunn provides full service, term maintenance contracts on specific server and 
networking equipment. These contracts are based on a fixed price and term and 
include all parts and labor. Alternatively, under the "Extended Value 
Support" program, clients may opt for a labor-only product. Finally, the 
"ClockWork" program provides clients with standard technical resources on a 
recurring regular basis. One or two days per week or per month, clients can 
augment their existing staff with additional expertise.
 
    The Company believes that its dedication to prompt, efficient customer 
service and technical support are important factors in customer retention and 
overall satisfaction. The Company provides toll-free technical support to its 
customers 24 hours a day, 365 days a year. Product support technicians assist 
customers with questions concerning compatibility, installation, 
determination of defects and general questions of product use. Company 
employees provide on-site service to its customers in the Washington, D.C. 
area and maintains arrangements with national service organizations to 
provide repair service on a world-wide basis.
 
    STAFF AUGMENTATION.  Dunn provides clients with service professionals 
whose full time personnel do not meet all of their IT service needs. The 
client generally assumes all responsibility for the management of Dunn's 
service personnel, who may work full time with a particular client for 
varying lengths of time, generally between one week and one year. The 
Company's technical staff can get support twenty four hours a day, seven days 
a week from Novell, Microsoft, 3COM, Cisco, and others, allowing them to tap 
resources beyond their own individual knowledge and capabilities. The Company 
believes the availability of this third-party support sets it apart from its 
competition.
 
MARKET
 
    The worldwide market for computer hardware totaled $130 billion in 1996 
and is projected to grow to $141 billion in 1997 and $149 billion in 1998. 
The U.S. computer hardware market was $55 billion in 1996 and is projected to 
grow to $60 billion in 1997 and $63 billion in 1998.
 
    Mobile computing, which covers portables, pen computers, palmtops and 
their peripherals, is amongst the fastest growing segment of the computer 
hardware industry. According to International Data Corporation ("IDC"), this 
segment of the market is estimated to grow at an annual compound rate of 
19.3% between 1996 and 2000. Additionally, IDC predicts global portable 
computer systems shipments of approximately 24.0 million units in 2000, 
double the shipments reported in 1996. Furthermore, Frost & Sullivan, a 
market research firm, estimates that the notebook computer systems market 
will reach $99.9 billion by year 2003, a 16.0% compounded annual growth rate.
 
    According to industry sources, the worldwide systems integration market 
increased 9.4% in 1996 to $35.3 billion and is estimated to grow at a 
compound annual growth rate of 11.3% over the next five years. The U.S. 
systems integration market, which accounts for 49.7% of the worldwide market, 
increased 13.0% in 1996 to $17.6 billion and is estimated to grow at a 
compound annual growth rate of 12.2% over the next five years.

 
                                       2
<PAGE>

    GOVERNMENT MARKET
 
    The Office of Management and Budget ("OMB") submitted to Congress in 
January 1998 a Government IT budget of $29.5 billion. According to market 
researcher Input, Inc., the IT budget is expected to grow at an increasing 
rate over the next four years by an additional percentage point each year, 
from 3 percent in 1999 to 6 percent in 2002, to $35 billion. Civilian 
agencies will control 61 percent of the total IT budget in 1998; by 2002, the 
figure is projected to be 66 percent. In addition, the Electronic Industries 
Association, a major industry trade association, estimated that Government 
agencies that are not required to report their information technology 
expenditures, including the intelligence community, spent an additional $20 
billion in the Government's fiscal year 1997 on such technology. The Company 
believes that while Government down sizing has decreased the number of 
federal employees, there has been a corresponding increase in the demand for 
productivity tools, such as computers. In addition, the requirements to 
outsource both products and services is expected to continue to escalate in 
coming years.
 
    The Year 2000 Issue is the result of computer programs being written 
using two digits rather than four to define the applicable year. Any of the 
Company's computer programs that have date-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. The Office of 
Management and Budget ("OMB") has notified all Government agencies that the 
funds required to correct the Year 2000 programming problem must come from 
existing funding. OMB has stated that one third of the systems affected does 
not need to be corrected. One third of the systems, however, will require 
software corrections. The balance will be corrected by replacing the systems 
with client/server networks. The Company believes it will be able to sell 
both client/server equipment and program services to help solve this problem 
in the Government. Most agencies prefer to solve the problem by migrating the 
application to upgraded client/server networks similar to the equipment 
manufactured by the Company.
 
    The Information Technology Reform Act (the "ITRA"), which took effect on 
August 8, 1996, has had a profound effect on the way Government procures 
computers and related products and services. The changes were made in an 
effort to reduce costs and expedite the information technology procurement 
process. The most sweeping changes were the repeal of the Brooks Act that had 
granted sole authority for purchasing IT to the General Services 
Administration ("GSA") and the change in the GSA Schedule from a single year 
small purchase contracting program to a multi-year, Indefinite Delivery, 
Indefinite Quantity ("IDIQ") contract with no limit on the value of 
purchases. Prior to the new legislation, the GSA was responsible for 
overseeing all IT purchases as well as assuring fair and open competition. 
The new legislation has expanded Dunn's ability to market and sell its 
products to Government users directly through a GSA Schedule. The Company has 
invested significantly to expand its marketing and sales efforts to take 
advantage of these changes in the federal market.
 
    PRIVATE SECTOR
 
    Heightened competition, deregulation, globalization and rapid 
technological advances are forcing organizations to make fundamental changes 
in their business processes. These pressures have compelled organizations to 
improve the quality of products and services, shorten time to market, reduce 
costs and strengthen client relationships. Increasingly, organizations are 
addressing these issues by utilizing IT solutions that facilitate the rapid 
and flexible collection, analysis and dissemination of information. 
Accordingly, an organization's ability to integrate and deploy new 
information technologies in a cost-effective manner has become critical to 
competing successfully in today's rapidly changing business environment.
 
    During this time of increasing reliance on IT, rapid technological change 
is challenging the capabilities of Management Information System departments 
within these organizations. The pace of this change quickly renders existing 
IT infrastructure obsolete and makes it more difficult for organizations to 
maintain the requisite internal expertise needed to evaluate, develop and 
integrate new technologies. As a result, organizations are increasingly 
turning to third-party IT service providers to help them develop and support 
complex IT systems and applications.
 
    The advent of open architecture networks has also impacted the market for 
information technology services. Wider use of complex networks involving a 
variety of manufacturers' equipment, operating systems and applications 
software has made it increasingly difficult to diagnose problems and maintain 
the technical knowledge and repair parts necessary to provide support 
services. The Company believes that increased outsourcing of more 
sophisticated support services by business has resulted from the technical 
complexities created by multi-manufacturer and supplier network systems and 
rapid 

                                       3

<PAGE>

technological change. Increasingly, organizations seeking computer products 
often require prospective vendors not only to offer products from many 
manufacturers and suppliers, but to have available and proficient service 
expertise to assist them in product selection, system design, installation 
and post-installation assistance and service. The Company believes that the 
ability to offer customers a comprehensive solution to their information 
technology needs, including the ability to work within customers' corporate 
environments as integral members of their management information system 
staff, are increasingly important in the marketplace.

CONTRACTS
 
    Dunn's largest federal contract is with the General Services 
Administration (the "GSA Contract"). The Company's GSA Contract was awarded 
in April 1996 and is valid through March 31, 1999. The GSA Schedule enables 
all Government IT purchasers to acquire their requirements from selected 
vendors holding GSA contracts. For fiscal year ended 1997, the Company's GSA 
Contract generated sales of $4.6 million, or 21.3% of the Company's annual 
revenues. Since being awarded the contract in April 1996, the Company has 
received GSA Contract orders totaling over $6.9 million. Prior to being 
awarded the GSA Contract, the Company had consecutive one-year contracts with 
the GSA, but for the three years preceding March 31, 1996, the Company had 
received less than an aggregate of $5,000 in GSA Schedule orders.
 
    Under its contract with Lockheed Martin Corporation ("Lockheed"), the 
Company provides computer network servers to Lockheed for the Worldwide 
Defense Messaging System ("DMS"). DMS is intended to be the largest private 
messaging network in the world, supporting approximately 2,000,000 users. 
Lockheed is the prime contractor on the DMS contract, which is a five year 
contract with an initial value of approximately $1.5 billion. In fiscal 1997, 
the Company generated net revenues of $2.4 million from the Lockheed 
contract, which accounted for approximately 11.2% of the Company's net 
revenues. The contract is a year to year contract which has been renewed 
twice and can be renewed for up to three additional years. The Company 
anticipates, although there can be no assurance, that net revenues from this 
contract for fiscal 1998 and beyond will be significant.
 
    Dunn has a contract with the Administrative Office of the U.S. Courts 
("U.S. Courts") to provide desktop computer systems and components, operating 
system software and peripheral devices and interfaces. The initial estimated 
value on the contract was in excess of $15 million but there can be no 
assurance that the actual revenue generated will amount to that. For fiscal 
year 1997, revenues were $4.6 million, or 21% of Dunn's net revenues. 
Although the contract terminates in September 1998, the Company expects to 
generate significant revenues from the U.S. Courts' contract in fiscal 1998.
 
    In May 1997, the Company was awarded a contract with an agency of the 
Government responsible for certain intelligence activities. The estimated 
value of the contract is $24 million. The Company has obtained a facility 
security clearance in order to perform the contract. At 1997 fiscal year end, 
the Company had received orders in excess of $4 million.
 
    In March 1997, the Company entered into a contract with the Social 
Security Administration (the "SSA") to provide multimedia workstations. Net 
revenues in fiscal 1997 from this contract amounted to $1.6 million. The 
Company's contract with the SSA terminates in March 1999. The Company expects 
to generate significant net revenues from the SSA contract in fiscal 1998 and 
1999.
 
COMPETITION
 
    GOVERNMENT MARKET
 
    Since the passage of the ITRA, the Government has increased the amount of 
information products acquired through the GSA Schedule. Although Dunn 
believes it has benefited from this reform, the emergence of the GSA Schedule 
as a significant procurement vehicle has also enabled traditional mass market 
commercial computer companies such as Dell Computer Corporation, Gateway 2000 
and Micron Electronics, Inc. to enter the Government market.
 
    The Government continues to rely on agency-specific contracts for its 
more complex computer requirements. The Company believes that national brand 
companies often are dissuaded from bidding for these agency-specific 
contracts due to their complex terms and conditions and technical 
specifications. The Company principally competes against large regional 
manufactures and system integrators such as International Data Products, 
Corp., BTG, Inc., Winn Laboratories, Inc. and Vanstar (formerly Sysorex 
Information Systems, Inc.) for these agency-specific 

                                       4
 
<PAGE>

contracts. The Company believes that the Government's selection criteria for 
vendor selection consists of price, quality, familiarity with the vendor, and 
size and financial capability of the vendor.

    PRIVATE SECTOR
 
    The private sector for IT products and services is a highly fragmented 
market served by thousands of IT service companies. These companies typically 
service a small geographic area and resell national brand computer hardware. 
The Company believes it competes effectively in its market because it 
provides IT services for Dunn manufactured products. The Company believes 
that its ability to manufacture hardware products provides a competitive 
advantage.
 
    The Company competes in the Mid-Atlantic region with hundreds of IT 
service companies. The principal elements of competition are price, technical 
expertise and support, reputation and product reliability and quality. There 
can be no assurance that the Company will in the future be able to compete 
effectively against existing competitors, especially companies that have 
historically focused their energies on the commercial market or have greater 
financial resources.
 
SOURCES AND AVAILABILITY OF RAW MATERIALS
 
    The Company acquires products for resale both directly from manufacturers 
and indirectly through distributors. During the fiscal year ended October 31, 
1997, the Company purchased approximately 13% of its components from Decision 
Support Systems, Inc. In the event that the Company is unable to continue to 
purchase certain components from Decision Support Systems, Inc. in the 
future, the Company believes that alternative suppliers are readily available 
without material impact to the Company's ability to fulfill its customers' 
orders. The Company did not purchase more than 10% of its components from any 
other supplier.
 
RECENT ACQUISITION
 
    In September 1997, Dunn acquired all of the outstanding stock of STMS, 
Inc., a Virginia-based IT services company. This acquisition expanded the 
Company's capabilities to provide a wide variety of IT services including 
network consulting, project implementation, support services and staff 
augmentation.
 
EMPLOYEES
 
    As of October 31, 1997, the Company employed 85 persons on a full-time 
basis. Of such persons, 3 were employed in executive capacities, 20 in sales 
and marketing, 13 in administrative capacities, 23 in technical services and 
26 in operations.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
FACILITIES
 
    The Company operates in a 35,100 square foot facility in Loudoun County, 
VA. The facility is owned and operated by C&T Partnership, an entity 
comprised of Thomas Dunne, the Company's President, and his wife Claudia 
Dunne, the Company's Vice President. In addition, the mortgage on the 
facility is guaranteed by the Company. See "Item 12--Certain Relationships 
and Related Transactions." The Company presently utilizes approximately 
20,000 square feet of the facility. The remaining 15,000 square feet are 
occupied by two non-affiliated tenants with concurrent leases terminating in 
May of 1998. The Company plans to occupy the additional space. The existing 
space in the facility can produce approximately 35,000 systems per year on a 
single shift basis. The Company's non-cancelable operating lease rate is 
$8.74 per square foot, including facility maintenance. The Company's lease 
expires in 1999, but it has an option to renew for an additional five years.

                                       5

<PAGE>
 
    The Company also leases approximately 20,000 square feet of office space 
in Reston, VA under a five-year non-cancelable operating lease that expires 
in 2002. The lease rate is approximately $13 per square foot, including 
facility maintenance.

ITEM 3. LEGAL PROCEEDINGS
 
    The Company is not a party to any pending legal proceeding other than 
routine litigation that is incidental to the business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None.

                                     6

<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
(A) MARKET INFORMATION
 
    Since April 1997, the Company's common stock has been traded in the 
over-the-counter market and prices are quoted on The Nasdaq Stock Market 
under the symbol DNCC. The following table sets forth the high and low 
selling prices for the Company's common stock as reported by The Nasdaq Stock 
Market for the fiscal year ended October 31, 1997. These quotations reflect 
inter-dealer prices, without retail mark-up, mark-down or commission and may 
not represent actual transactions.
 
<TABLE>
<CAPTION>
                                                                     1997
                                                             -----------------------
                                                               HIGH           LOW
                                                             ---------     ---------
<S>                                                          <C>           <C>
First Quarter..............................................        not public
Second Quarter.............................................  $  7 1/8       $   5
Third Quarter..............................................  $  7 1/4       $   5 5/8
Fourth Quarter.............................................  $  7 5/16      $  5 1/2
</TABLE>
 
    On January 21, 1998, the closing price of the Company's common stock as 
reported by The Nasdaq Stock Market was $9.95 per share. There were 
approximately 1,000 shareholders of the common stock of the Company as of 
such date. The Company has not paid cash dividends on its common stock and 
does not intend to do so in the foreseeable future.

(B) CHANGES IN SECURITIES AND USE OF PROCEEDS
 
<TABLE>
<S>                                                           <C>

Effective date of the registration statement for which        April 21, 1997
the use of proceeds information is being disclosed:

SEC file number assigned to the registration statement:       333-19635

Offering Date                                                 April 21, 1997

Name of managing underwriter:                                 Network 1 Financial
                                                              Securities, Inc.
Title of security:                                            Common Stock, par value $.001
                                                              per share

FOR THE ACCOUNTS OF SELLING SECURITYHOLDERS

Amount registered                                             150,000 shares

Amount sold                                                   150,000 shares

Aggregate offering price of amount sold                       $750,000


FOR THE ACCOUNT OF THE ISSUER

Amount registered                                             1,000,000 shares

Aggregate price of offering amount registered                 $5,000,000

Amount sold                                                   1,000,000 shares

Aggregate offering price of amount sold                       $5,000,000

Direct or indirect payments to others for:

Underwriting discounts and commissions                        $500,000

Other expenses                                                $583,336

Total expenses                                                $1,083,336

NET OFFERING PROCEEDS TO THE COMPANY                          $3,916,664
 
                                       7

<PAGE>

DIRECT OR INDIRECT PAYMENTS TO OTHERS FOR:

Acquisition of STMS, Inc.                                     $1,000,000

Repayment of indebtedness                                     $1,500,000

Working capital                                               $1,416,664

TOTAL                                                         $3,916,684

</TABLE>
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
 
GENERAL
 
    Dunn Computer Corporation, (together with its subsidiaries, "Dunn" or the 
"Company") manufactures and sells custom computer systems and provides 
information technology ("IT") services to the Government and selected 
businesses. The Company provides its customers with a single-source solution 
for their IT needs by offering a broad range of products and services. The 
Company generates revenues in the Government market through sales under its 
GSA Schedule and agency-specific contracts with various Government entities. 
The Company also generates revenues from sales to selected businesses by 
means of task and open purchase orders.
 
    The Company derives over two-thirds of its revenues from the Government. 
The Company has experienced gross margin improvements over the life of its 
Government contracts due to cost savings from technological improvements and 
shorter component life cycles. Management believes the Government contracts 
permit it to reduce its inventory risks because Dunn procures inventory to 
satisfy firm fixed price contracts. In addition, the Government is a reliable 
payer, enabling the Company to predict cash flows and avoid bad debts. 
However, the Company has also experienced fluctuating quarterly results due 
to uneven purchasing patterns under its Government contracts, as well as 
changes in policy on budgetary measures that adversely affect government 
contracts in general.
 
RECENT ACQUISITION
 
    In September 1997, Dunn acquired all of the outstanding stock of STMS, 
Inc., a Virginia-based IT services company. This acquisition expanded the 
Company's capabilities to provide a wide variety of IT services including 
network consulting, project implementation, support services and staff 
augmentation.
 
RESULTS OF OPERATIONS
 
    Set forth below is a common-size income statement for the Company for the 
years ended October 31, 1996 and 1997.

<TABLE>
<CAPTION>
                                                               1996       1997
                                                             ---------  ---------
<S>                                                          <C>        <C>
Net revenues...............................................     100.00%    100.00%


                                       8
<PAGE>

Costs of revenues..........................................       77.9%      80.6%
Gross profit...............................................       22.1%      19.4%
Selling, general and administrative........................       10.9%      10.1%
Income from operations.....................................       11.2%       9.3%
Other income (expense).....................................       (0.1%)       0.4%
Net income (loss) before income taxes......................       11.1%       9.7%
Provision for income taxes.................................        4.3%       3.6%
Net income.................................................        6.8%       6.1%
</TABLE>

 
 
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
  1996
 
    Revenues for the fiscal year ended October 31, 1997 ("fiscal 1997") 
increased 20.3% to $21.8 million from $18.1 million for fiscal year ended 
October 31, 1996 ("fiscal 1996"). This increase was primarily due to the 
fourth quarter acquisition of STMS, Inc. and increased revenues from 
Government contracts.
 
    Gross profit for fiscal 1997 increased 5.5% to $4.2 million from $4.0 
million for fiscal 1996. However, the gross profit as a percentage of 
revenues during the same periods decreased to 19.4% from 22.1%. The decrease 
in gross profit margins is a result of an increase in the percentage of lower 
margin third party hardware sales, initial lower margins realized on two new 
contracts and increased production costs.
 
    Selling and marketing expense increased for fiscal 1997 by 77.2% to 
$842,000 from $475,000 for fiscal 1996. During the same periods, as a 
percentage of revenue, selling and marketing expenses increased to 3.9% from 
2.6% The increase was primarily attributable to increased advertising in 
selected publications, increased attendance at trade shows and the 
development of a marketing campaign aimed at the commercial market.
 
    General and administrative expenses declined 9.5% for fiscal 1997 to $1.4 
million from $1.5 million for fiscal 1996. As a percentage of revenue, 
general and administrative expense declined to 6.2% for fiscal 1997 from 8.3% 
for fiscal 1996. Although the Company increased its costs in almost all 
aspects of general and administrative expenses, the increased costs were 
offset by a decline in executive incentive compensation.
 
    Other income (expense) increased to $98,000 for fiscal 1997 from an 
expense of $9,000 for fiscal 1996. See "Item 5--Market for Common Equity and 
Related Stockholder Matters--Use of Proceeds From Registered Securities." The 
increase is a result of use of the IPO proceeds to reduce debt obligations 
and to invest in tax-exempt securities. The effective tax rate declined to 
37.5% for fiscal 1997 from 38.5% for fiscal 1996 of taxable income as a 
result of the non-taxable interest income. As a result, the Company's net 
income grew by 6.7% for fiscal 1997 to $1.3 million from $1.2 million for 
fiscal 1996. Net income as a percentage of revenue during the same periods, 
declined to 6.1% from 6.8%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    In 1997 the Company used $3.5 million in its operations. Although the 
Company generated cash from its net income of $1.3 million, the increase in 
accounts receivable and inventories of $8.2 million was the principal use of 
funds. The increase in revenue for fiscal 1997 from fiscal 1996 results in 
the increase in accounts receivable in the fourth quarter. The $2.9 million 
increase in inventory reflects the increased requirement for components to 
fill orders in the first quarter of the fiscal year ended October 31, 1998 
("fiscal 1998"). The use of funds was partially offset by the increase in 
accounts payable of $3.9 million. The Company used $1.0 million in its 
investing activities, of which $900,000 was used in the acquisition of STMS, 
Inc. and the balance used for property and equipment.
 
                                       9
<PAGE>

    The Company received $3.9 million in net proceeds from its public 
offering in April 1997. Other significant financing activities were provided 
by the Company's bank line of credit. In May 1997, the Company negotiated its 
line of credit with First Union Bank (formerly Signet Bank). The interest 
rate was reduced to prime and the personal guarantees of the principal 
stockholders were removed. The Company has met its net worth requirement of 
$1.2 million as of October 31, 1997. In December 1997 the Bank agreed to 
increase the line from $2.0 to $4.0 million. The line of credit expires on 
February 28, 1998. The Company is currently negotiating a new credit facility.
 
    On October 31, 1997, the Company had working capital of $4.3 million. The 
Company believes the increase in the bank facility, together with cash on 
hand and the cash generated from operations will provide sufficient financial 
resources to finance the current operations of the Company through fiscal 
1998. From time to time, the Company may pursue strategic acquisitions or 
mergers which will require significant additional capital and, in such event, 
the Company may seek additional financing of debt and/or equity.
 
    The Company is guarantor on $1.0 million of mortgage debt for a 
partnership owned and controlled by the President and Vice President of the 
Company. The mortgage debt is for the facilities currently occupied by the 
Company. See "Item 2--Description of Property--Facilities." In addition, the 
Company has obligations under its operating lease commitments of 
approximately $500,000 and obligations under its employment contracts of 
approximately $1.0 million for fiscal 1998.
 
    The Year 2000 Issue is the result of computer programs being written 
using two digits rather than four to define the applicable year. Any of the 
Company's computer programs that have date-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities. While the 
Company believes that its software applications are year 2000 compliant, 
there can be no assurance until the year 2000 that all systems then will 
function adequately. Further, if the software applications of others on whose 
services the Company depends are not year 2000 compliant, such noncompliance 
could have a material adverse effect on the Company.
 
RECENT PRONOUNCEMENTS
 
    In February 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings 
per Share", which is required to be adopted in the October 31, 1998 
consolidated financial statements. At that time, the Company will be required 
to change the method currently used to compute earnings per share and to 
restate all prior periods. Under the new requirements for calculating primary 
earnings per share, the dilutive effect of stock options will be excluded. 
See "Item 7--Financial Statements."
 
    In June 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive 
Income", which is required to be adopted in the year ended October 31, 1998 
consolidated financial statements. SFAS 130 requires that an enterprise (a) 
classify items of other comprehensive income by their nature in the financial 
statements and (b) display the accumulated balance of other comprehensive 
income separately from retained earnings and additional paid-in capital in 
the Statement of Stockholders' Equity. The Company does not expect the 
adoption of SFAS 130 to be material to its financial statements.
 
    In June 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about 
Segments of an Enterprise and Related Information", which is required to be 
adopted in the year ended October 31, 1998 consolidated financial statements. 
SFAS 131 changes the way public companies report segment information in 
annual financial statements and also requires those companies to report 
selected segment information in interim financial reports to stockholders. 
The disclosure for segment information in the consolidated financial 
statements is not expected to be material to the current financial statement 
presentation.

ITEM 7. FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                           -----
<S>                                                                                  <C>
Report of Ernst & Young LLP, Independent Auditors..................................             F-2
Consolidated Balance Sheets........................................................             F-3
Consolidated Statements of Income..................................................             F-4
Consolidated Statements of Stockholders' Equity....................................             F-5
Consolidated Statements of Cash Flows..............................................             F-6
Notes to Consolidated Financial Statements.........................................             F-7
</TABLE>
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL ISSUES
 
    None.
 
                                       10

<PAGE>

                                    PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
    DIRECTORS AND EXECUTIVE OFFICERS
 
    The following table sets forth certain information concerning the 
Directors and Executive Officers of the Company:
 
<TABLE>
<CAPTION>
NAME                                          AGE                            POSITION
-------------------------------------------   ---      -----------------------------------------------------
<S>                                              <C>          <C>
Thomas P. Dunne                                        Chief Executive Officer, President and Chairman of
                                               55      the Board
John D. Vazzana                                        Executive Vice President, Chief Financial Officer,
                                               54      Director
Claudia N. Dunne                               38      Vice President, Director
VADM E. A. Burkhalter, Jr., USN                69      Director
Daniel Sinnott                                 63      Director
</TABLE>
 
    The term of office of each Director is until the next annual meeting of 
shareholders and until a successor is elected and qualified or until the 
Director's earlier death, resignation or removal from office. Executive 
officers hold office until their successors are chosen and qualify, subject 
to earlier removal by the Board of Directors. Set forth below is a 
biographical description of each director, executive officer and significant 
employee of the Company based on information supplied by each of them.
 
    THOMAS P. DUNNE  has been Chairman, Chief Executive Officer and President 
of the Company since he founded the Company in 1987. From 1982 to 1987, Mr. 
Dunne was the Director of Sales of Syntrex Inc., a corporation that supplies 
computer hardware and software to the legal profession. Prior thereto, Mr. 
Dunne spent 12 years with the computer division of Perkin Elmer Corporation, 
where he held several positions, including Director of North American Sales. 
Mr. Dunne also served in the United States Army for two years where he was a 
Senior Instructor with the Army Electronics Command. Mr. Dunne is married to 
Ms. Claudia Dunne, the Vice President of the Company.
 
    JOHN D. VAZZANA  has been the Executive Vice President and Chief 
Financial Officer of the Company and a Director since 1994. From 1992 to 
1994, Mr. Vazzana was the CEO of Hitchler Industry, a manufacturer of plastic 
lumber made from recycled plastic. From 1986 to 1992, Mr. Vazzana was founder 
and CEO of NRM Steelastic, a company engaged in the manufacture of capital 
equipment for the tire industry. Prior thereto, Mr. Vazzana was Executive 
Vice President for C3, Inc., a federal computer systems integrating company, 
which he joined in 1974.
 
    CLAUDIA N. DUNNE,  a co-founder of the Company, has been Vice President 
and a Director of the Company since its inception. From 1985-1987, Ms. Dunne 
was Federal Proposal Manager for Syntrex, Inc. From 1983-1985, Ms. Dunne was 
Proposal Manager for Harris & Paulson, which also sold minicomputers and 
proprietary time and accounting software for law firms. Ms. Dunne is married 
to Mr. Thomas Dunne, the President of the Company.
 
    VICE ADMIRAL E. A. BURKHALTER, JR.,  has been a director of the Company 
since January 1997. Mr. Burkhalter is currently the President of Burkhalter 
Associates, Inc. a consulting firm providing services in the areas of 
international and domestic strategy, management policy and technology 
applications, for both government and industry. Mr. Burkhalter spent 40 years 
as a member of the United States Navy, during which time he held several 
positions, including Director of Strategic Operations for the Chairman of the 
Joint Chiefs of Staff. He is currently the Chairman of the Attorney General's 
Policy Advisory Panel for Law Enforcement Technology, a member of the 
Director of Central Intelligence (DCI) Military Advisory Panel and an
 

                                       11

<PAGE>

advisor to the Defense Intelligence Agency. He is also an Officer and 
Director of the Navy Submarine League.
 
    DANIEL SINNOTT  has been a member of the Board since January 1997. Mr. 
Sinnott is currently President and Chief Executive Officer of Worldwide 
Internet Solutions Network, Inc. ("WIZnet"). WIZnet is a worldwide leader in 
electronic commerce and the creator of "The Purchasing ExtraNet" with a multi 
national customer base. WIZnet provides electronic catalogs and adaptive 
recognition search technology and links buyers and sellers via secure mail. 
Mr. Sinnott has been serving as CEO of WIZnet since 1995. In 1992 Mr. Sinnott 
was a founder of SINNOTT BRUNO & Company ("SB&C"). SB&C is a management 
consulting firm providing advisory services to executive and management 
organizations that are in the emerging transition stages of development. Mr. 
Sinnott was full time with SB&C from 1992 until joining WIZnet. In 1995, the 
Company purchased shares of Common Stock of WIZnet for an aggregate of 
$150,000. See "Item 12--Certain Relationships and Related Transactions." From 
1979 to 1992, Mr. Sinnott was the founder, President and CEO of Syntrex Inc. 
Due to the rapid development of the computer, Syntrex Inc. was sold to 
Phoenix Technologies in 1992 in a chapter 11 restructuring. Prior to founding 
Syntrex, Inc., Mr. Sinnott founded Interdata Incorporated, a company that 
developed, designed and manufactured the first 32-bit mini-computer. 
Interdata Incorporated was subsequently acquired by Perkin Elmar.
 
    COMPENSATION OF DIRECTORS
 
    The Company has not paid and does not presently propose to pay 
compensation to any director for acting in such capacity, except for nominal 
sums for attending Board of Directors meetings and reimbursement for 
reasonable expenses in attending those meetings. As an incentive, outside 
Directors will be granted a stock option for 20,000 shares of Common Stock at 
an exercise price which management believes approximates their fair market 
value at the time of grant. On January 6, 1997, Mr. Burkhalter, an outside 
director, was granted a stock option to purchase 10,000 shares of Common 
Stock at $4.15 per share. The grant was increased to 20,000 on January 14, 
1997. Also on January 14, 1997, the Company granted Daniel Sinnott, an 
outside director of the Company, a stock option to purchase 20,000 shares of 
Common Stock at $4.15 per share.
 
    SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
 
    Section 16(a) of the Securities Exchange Act of 1934 requires Dunn's 
officers and directors, and persons who own more than 10% of a registered 
class of Dunn's equity securities ("insiders"), to file reports of ownership 
and changes in ownership with the Securities and Exchange Commission (the 
"SEC"). Insiders are required by SEC regulation to furnish Dunn with copies 
of all Section 16(a) forms they file. Based solely on its review of the 
copies of such forms furnished to Dunn, John D. Vazzana, Thomas P. Dunne, 
Claudia N. Dunne, VADM. E. A. Burkhalter, Jr. USN. and Daniel Sinnott failed 
to timely file a Form 3, Initial Statement of Beneficial Ownership of 
Securities. In addition, John D. Vazzana and Thomas P. Dunn failed to file a 
Form 4, Statement of Changes in Beneficial Ownership.
 
ITEM 10. EXECUTIVE COMPENSATION
 
    The following table sets forth certain information regarding compensation 
paid by the Company during each of the last two fiscal years to the Company's 
Chief Executive Officer and to each of the Company's executive officers who 
earned in excess of $100,000.
 
                                       12

<PAGE>

                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>                                                                                                   LONG-TERM
                                                                    ANNUAL COMPENSATION                    COMPENSATION
                                                            -----------------------------------    --------------------------
NAME AND PRINCIPAL POSITION                                   YEAR      SALARY($)    BONUS($)       NUMBER OF OPTIONS GRANTED
----------------------------------------------------------  ---------  -----------  -----------  -------------------------------
<S>                                                         <C>        <C>          <C>          <C>
Thomas P. Dunne...........................................       1995    $240,000          -0-                    -0-
  Chairman, Chief Executive Officer and President                1996    $240,000     $275,000                    -0-
                                                                 1997    $240,000          -0-                    -0-
John D. Vazzana...........................................       1995    $240,000          -0-                    -0-
  Executive Vice President, Chief Financial Officer,             1996    $240,000     $275,000                    -0-
  Director                                                       1997    $240,000          -0-                    -0-
</TABLE>
 
EMPLOYMENT AGREEMENTS
 
    The Company has employment agreements with Tom Dunne and John Vazzana 
(each an "Employee" and collectively the "Employees"). The agreements for Mr. 
Vazzana and Mr. Dunne run for a term of three years effective April 1997 and 
automatically renew for additional one year terms unless terminated by either 
the Company or the Employee. Both agreements provide for a $240,000 annual 
salary and a bonus at the discretion of the Company's Board of Directors. The 
bonus may not exceed 5% of the Company's pre-tax income for the preceding 
fiscal year or $250,000. The employment contracts contain confidentiality 
provisions and covenants not to compete with the Company for a period of one 
year following the termination of the agreements.
 
INCENTIVE STOCK OPTION PLAN
 
    Under the Company's Incentive Stock Option Plan (the "Plan"), options to 
purchase a maximum of 2,200,000 shares of Common Stock of the Company 
(subject to adjustments in the event of stock splits, stock dividends, 
recapitalizations and other capital adjustments) may be granted to employees, 
officers and directors of the Company and other persons who provide services 
to the Company. As of the date hereof, 1,857,000 of such options have been 
granted at a weighted average exercise price of $6.18. As of the date hereof, 
none of these options have been exercised. The options to be granted under 
the Plan are designated as incentive stock options or non-incentive stock 
options by the Board of Directors which also has discretion as to the persons 
to be granted options, the number of shares subject to the options and the 
terms of the option agreements. Only employees, including officers and part 
time employees of the Company, may be granted incentive stock options. 
Officers and directors who currently own more than 5% of the outstanding 
stock are not eligible to participate in the Plan.
 
RETIREMENT PLANS
 
    The Company established a discretionary contribution plan effective April 
1, 1995 (the "401(k) Plan") for its employees who have completed three months 
of service with the Company. The 401(k) Plan is administered by the Company 
and permits pre-tax contributions by participants pursuant to Section 401(k) 
of the Internal Revenue Code of 1986, as amended ("the Code") up to the 
maximum allowable contributions as determined by the Code. The Company may 
match participants's contributions on a discretionary basis. In fiscal 1995 
and 1996, the Company contributed $.25 for each $1.00 contributed by the 
employees.

    During the fiscal year ended October 31, 1995, the Company established a 
defined benefit plan covering substantially all salaried employees (the 
"Pension Plan"). The Pension Plan benefits are based on the years of service 

                                       13

<PAGE>

and the employee's compensation. The Company contributes, on an annual basis, 
amounts sufficient to meet the minimum funding requirements set forth in the 
Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions are 
intended to provide not only for benefits attributed to service to date, but 
also for those expected to be earned in the future. The assets of the Pension 
Plan are invested in money markets and corporate debt and equity instruments. 
The Company contributed an aggregate of approximately $135,000 for the 
Pension Plan years ending October 31, 1995 and 1996, which amount met the 
minimum funding requirements under ERISA. The Company has accrued but not yet 
paid $51,450 representing its minimum funding requirements under ERISA for 
1997.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The following table sets forth certain information, as of the date 
hereof, with respect to the beneficial ownership of the Company's Common 
Stock by each beneficial owner of more than 5.0% of the outstanding shares 
thereof, by each director, each nominee to become a director, each executive 
named in the Summary Compensation Table and by all executive officers and 
directors of the Company as a group.
 
<TABLE>
<CAPTION>
                                                                          PERCENTAGE OF 
                                                                           OUTSTANDING  
                                          AMOUNT AND NATURE                COMMON STOCK
NAME AND ADDRESS  OF                       OF BENEFICIAL                    BENEFICIALLY 
BENEFICIAL  OWNER                            OWNERSHIP                          OWNED 
---------------------------------         --------------------         -------------------
  <S>                                     <C>                              <C>
                                        
Thomas  P. Dunne(1)...................       2,695,000(2)                    52.3%
John  D. Vazzana(1)...................       1,155,000                       22.4%
Claudia  N. Dunne(1)..................       2,695,000(3)                    52.3%
VADM E.A. Burkhalter(1)...............          10,000(4)                      *
Daniel Sinnott(1).....................          10,000(4)                      *
All Executive Officers and              
 Directors as a Group (5 persons).....       3,870,000(5)                    74.8%
</TABLE>
 
------------------------
 
*   less than 1%
 
(1) The address of each such individual is c/o Dunn Computer Corporation, 1306
    Squire Court, Sterling Virginia 21066.
 
(2) Includes 560,000 shares of Common Stock held by Claudia Dunne, the 
    Company's Vice President, and Mr. Dunne's wife, of which Mr. Dunne 
    disclaims beneficial ownership.
 
(3) Includes 2,135,000 shares of Common Stock held by Thomas Dunne, the 
    Company's President and CEO, and Ms. Dunne's husband, of which Ms. Dunne 
    disclaims beneficial ownership.
 
(4) Represents shares of the Company's Common Stock that may be acquired 
    pursuant to stock options exercisable within 60 days from the date hereof.
 
(5) Includes 20,000 shares of the Company's Common Stock that may be acquired
    pursuant to stock options exercisable within 60 days from the date hereof.


                                       14

<PAGE>

 COMPENSATION  LONG-TERM

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    The Company leases one of its facilities from C&T Partnerships, an entity 
owned and controlled by Thomas and Claudia Dunne, both affiliates of the 
Company. The lease agreement terminates in October 1999, but provides for a 
five year renewal at the Company's option. Rent expense under this lease was 
$154,000 for each of the years ended October 31, 1996 and 1997. In addition, 
mortgage on the facility of approximately $1.0 million, which has a 25 year 
term and bears interest at 2.0% over prime, is guaranteed by the Company. The 
Company has been advised that all payments with respect to the mortgage are 
current. For additional terms of the lease and a description of the facility, 
see "Item 2--Description of Property-Facilities."
 
    On January 6, 1997, the Company entered into a share exchange agreement 
(the "Share Exchange Agreement") with Dunn Computer Corporation, a Virginia 
corporation, whereby such Virginia corporation became a wholly-owned 
subsidiary of the Company. Pursuant to the Share Exchange Agreement, the 
Company exchanged its stock on a 2,799.160251 for 1 basis with the holders of 
stock of the Virginia corporation.
 
    In April 1996, the Company entered into a line of credit agreement with a 
bank whereby the Company could borrow up to $2,000,000. Outstanding 
borrowings bore interest at prime plus three-fourths of one percent. The line 
of credit was secured by the assets of the Company. In addition, the 
principal stockholders of the Company personally guaranteed the line of 
credit. In May 1997 the loan agreement was modified to reduce the interest 
rate to prime and cancel the personal guarantee of the principal stockholders 
of the Company.
 
    In November 1995, the Company loaned Thomas Dunne, the President of the 
Company, approximately $30,000. Such loan bore no interest. The loan was 
repaid by Mr. Dunne in October 1996.
 
    In July, 1994, John Vazzana, an officer of the Company, acquired an 
aggregate of 428.7 shares of the Virginia corporation's Common Stock for an 
aggregate consideration of $100,000. The Company believes that the price paid 
represented the fair market value of the shares at the time of the purchase, 
based on the Company's net worth. In 1997, pursuant to the Share Exchange 
Agreement, these shares were exchanged for 1,200,000 shares of the Company's 
Common Stock.
 
    In 1995, the Company made a stock investment of $150,000 in WIZnet, an 
Internet related company. Daniel Sinnott, a director of the Company is the 
President and Chief Executive Officer of WIZnet. Mr. Sinnott was not a 
director of the Company at the time of the investment. The Company believes 
that the transaction was fair and reasonable.
 
    Future transactions with affiliates will be approved by a majority of the 
independent and/or disinterested members of the Board of Directors.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
(A) EXHIBITS.
 
<TABLE>
<CAPTION>

EXHIBIT NO.                                                DESCRIPTION:
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>
 
2.1            Stock Purchase Agreement, dated September 12, 1997, by and among STMS Acquisition Corp., the Company, STMS, Inc., 
               John Signorello, Timothy McNamee, Steve Salmon and certain other stockholders of the Company (Filed as Exhibit 2.1 
               to the Company's Current Report on Form 8-K, dated September 12, 1997, filed September 27, 1997 and hereby 
               incorporated by reference)

3.1            Certificate of Incorporation and amendments thereto of Dunn Computer Corporation (Filed as Exhibit
               3.1 to the Company's Registration Statement on Form SB-2, dated January 13, 1997 (File No. 333-19635
               and hereby incorporated by reference)
 
3.2            By-Laws and amendments thereto of Dunn Computer Corporation (Filed as Exhibit 3.3 to the Company's
               Registration Statement, on Form SB-2, dated January 13, 1997 (File No. 333-19635) and hereby
               incorporated by reference)
 
                                       15

<PAGE>

4.1            Form of Underwriters Warrants (Filed as Exhibit 4.2 to the Company's Registration Statement on Form
               SB-2, dated January 13, 1997 (File No. 333-19635) and hereby incorporated by reference)
 
4.2            Loan and Security Agreement, dated as of May 28, 1996 by and 
               between the Company and SIGNET BANK and Amendment Nos. 1, 2 and 
               3 thereto

10.1           GSA Schedule (Filed as Exhibit 10.2 to the Company's Registration Statement on Form SB-2, Amendment
               1, dated March 14, 1997 (File No. 333-19635) and hereby incorporated by reference)
 
10.2           Agreement dated November 21, 1995 by and between GCH Systems, Inc. and the Company regarding Lockheed
               (Filed as Exhibit 10.4 to the Company's Registration Statement on Form SB-2, Amendment 1, dated March
               14, 1997 (File No. 333-19635) and hereby incorporated by reference)
 
10.3           Agreement dated March 25, 1997 by and between the Company and the Social Security Administration
               (Filed as Exhibit 10.5 to the Company's Registration Statement on Form SB-2, Amendment 2, dated April
               4, 1997 (File No. 333-19635) and hereby incorporated by reference)
 
10.4           Agreement dated June 12, 1995 by and between the Company and the Office of the U.S. Courts (Filed as
               Exhibit 10.6 to the Company's Registration Statement on Form SB-2, Amendment 2, dated April 4, 1997
               (File No. 333-19635) and hereby incorporated by reference)
 
10.5           Agreement dated September 29, 1994 by and between the Company and the Health Care Finance
               Administration (Filed as Exhibit 10.7 to the Company's Registration Statement on Form SB-2,,
               Amendment 2, dated April 4, 1997 (File No. 333-19635) and hereby incorporated by reference)
 
10.6           Agreement effective September 8, 1997 by and between Virginia Contracting Authority and The Company
 
10.7           Employment Agreement by and between the Company and John D. Vazzana (Filed as Exhibit 99.1 to the
               Company's Registration Statement on Form SB-2, Amendment 2, dated April 4, 1997 (File No. 333-19635)
               and hereby incorporated by reference)
 
10.8           Employment Agreement by and between the Company and Thomas P. Dunne (Filed as Exhibit 99.2 to the
               Company's Registration Statement on Form SB-2, Amendment 2, dated April 4, 1997 (File No. 333-19635
 
                                       16
<PAGE>

               and hereby incorporated by reference)
 
10.9           Deed of Lease dated October 31, 1994 between C&T Partnership and the Company and addendums thereto.

10.10          Deed of Lease dated February 7, 1997 between APA Properties No. 6 L.P. and STMS, Inc. and First 
               Amendment thereto dated July 23, 1997
 
10.11          1997 Stock Option Plan
 
11.1           Computation of Per Share Earnings
 
21.1           List of Subsidiaries
 
27.1           Financial Data Schedules
</TABLE>
 
(B) REPORTS ON FORM 8-K
 
    Form 8-K, dated September 12, 1997 filed on September 27, 1997, containing 
the following items: Item 2. Acquisition of STMS, Inc..
 
    Form 8-K/A, Amendment No. 1, dated September 12, 1997, filed on 
November 26, 1997 containing the following items: Item 2. Acquisition of 
STMS, Inc.
 
                                       17
<PAGE>

                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the registrant caused this report to be signed on its 
behalf by the undersigned, thereunto duly authorized.
 
                           DUNN COMPUTER CORPORATION
 
                           By:      /s/ Thomas P. Dunne
                               --------------------------------------
                                        Thomas P. Dunne
                              President and Chief Executive Officer
 
Date: January 29, 1998
 
    Pursuant to and in accordance with the requirements of the Securities 
Exchange Act of 1934, this report has been signed by the following persons on 
behalf of the registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>

SIGNATURE                                                          TITLE                             DATE
---------------------------------------------  ---------------------------------------------  -------------------
<S>                                            <C>                                            <C>
 
   /s/ Thomas P. Dunne                         Chief Executive Officer, President (Principal     January 29, 1998
  -------------------------------------        Executive Officer) and Chairman of the Board
  Thomas P. Dunne                                                                             
 
   /s/ John D. Vazzana                         Executive Vice President, Chief Financial         January 29, 1998
  -------------------------------------        Officer (Principal Financial and Accounting
  John D. Vazzana                              Officer) and Director
                                                                              
 
   /s/ Claudia N. Dunne                        Vice President and Director                       January 29, 1998
  -------------------------------------
  Claudia N. Dunne                                                                            

</TABLE>
 
                                       18
<PAGE>
                           DUNN COMPUTER CORPORATION
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
<S>                                                                                                             <C>
 
Report of Ernst & Young LLP, Independent Auditors.............................................................   F-2
 
Consolidated Balance Sheets...................................................................................   F-3
 
Consolidated Statements of Income.............................................................................   F-4
 
Consolidated Statements of Stockholders' Equity...............................................................   F-5
 
Consolidated Statements of Cash Flows.........................................................................   F-6
 
Notes to Consolidated Financial Statements....................................................................   F-7
</TABLE>

                                       F-1

<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
THE BOARD OF DIRECTORS
 
    We have audited the accompanying consolidated balance sheets of Dunn
Computer Corporation as of October 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
two years in the period ended October 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dunn Computer Corporation at October 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the two years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
 
Vienna, Virginia
January 7, 1998                                          /s/ Ernst & Young LLP
 
                                       F-2

<PAGE>
                           DUNN COMPUTER CORPORATION
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                               OCTOBER 31,
                                                                                       ---------------------------
<S>                                                                                    <C>            <C>
                                                                                           1997           1996
                                                                                       -------------  ------------
ASSETS

Current assets:

  Cash and cash equivalents..........................................................  $     341,966  $    897,664

  Accounts receivable, net...........................................................      9,712,010     3,174,060

  Inventory, net.....................................................................      4,487,301       985,603

  Prepaid expenses and other assets..................................................         87,457       --
                                                                                       -------------  ------------

Total current assets.................................................................     14,628,734     5,057,327
 
Property and equipment, net..........................................................        633,428        63,763
 
Goodwill and other intangible assets, net............................................      2,974,840       --
 
Investments..........................................................................        275,000       150,000
 
Other assets.........................................................................        191,075         3,540
                                                                                       -------------  ------------
 
Total assets.........................................................................  $  18,703,077  $  5,274,630
                                                                                       -------------  ------------
                                                                                       -------------  ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable...................................................................  $   9,296,497  $  2,452,161

  Accrued expenses...................................................................        490,970       285,244

  Income taxes payable...............................................................           --         519,308

  Deferred tax credit................................................................           --          11,086

  Notes payable--current portion.....................................................         12,840           --

  Obligations under capital leases-current portion...................................         66,294           --
 
  Unearned revenue...................................................................        422,907        67,640
                                                                                       -------------  ------------
 
Total current liabilities............................................................     10,289,508     3,335,439

 
Notes payable-long-term portion......................................................         49,952           --
 
Obligations under capital leases-long-term portion...................................         25,462           --
 
Deferred tax credit..................................................................        100,000           --
 
Stockholders' equity:
 
  Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares
     issued and outstanding.........................................................            --             --

  Common Stock, $.001 par value; 20,000,000 shares authorized,
     5,150,000 and 4,000,000 shares issued and outstanding at October 31, 1997
     and 1996, respectively..........................................................          5,150         4,000
 
  Additional paid-in capital.........................................................      5,087,371       111,857

  Retained earnings..................................................................      3,145,634     1,823,334
                                                                                       -------------  ------------

Total stockholders' equity...........................................................      8,238,155     1,939,191
                                                                                       -------------  ------------
 
Total liabilities and stockholders' equity...........................................  $  18,703,077  $  5,274,630
                                                                                       -------------  ------------
                                                                                       -------------  ------------
</TABLE>
 
                                  See accompanying notes.

                                       F-3

<PAGE>

                           DUNN COMPUTER CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                                       YEARS ENDED OCTOBER 31,
                                                                                     ----------------------------
<S>                                                                                  <C>            <C>
                                                                                         1997           1996
                                                                                     -------------  -------------
Net revenues.......................................................................  $  21,766,465  $  18,098,638

Costs of revenues..................................................................     17,549,655     14,102,442
                                                                                     -------------  -------------

Gross profit.......................................................................      4,216,810      3,996,196

Selling and marketing..............................................................        842,281        475,471

General and administrative.........................................................      1,355,423      1,496,979
                                                                                     -------------  -------------

Income from operations.............................................................      2,019,106      2,023,746

Other income (expense):

    Other income...................................................................       --               49,343

    Interest income................................................................        109,877       --

    Interest expense...............................................................        (11,813)       (57,925)
                                                                                     -------------  -------------

Net income before income taxes.....................................................      2,117,170      2,015,164

Provision for income taxes.........................................................        794,870        776,000
 
Net income.........................................................................  $   1,322,300  $   1,239,164
                                                                                     -------------  -------------
                                                                                     -------------  -------------

Earnings per share.................................................................  $        0.25  $        0.31
                                                                                     -------------  -------------
                                                                                     -------------  -------------

Number of common and common equivalent shares outstanding pursuant to APB 15.......      5,977,000      4,050,150
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>
 
                               See accompanying notes.

                                       F-4

<PAGE>

                           DUNN COMPUTER CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                         COMMON STOCK        ADDITIONAL   RECEIVABLE
                                     ---------------------    PAID-IN        FROM        RETAINED
                                       SHARES     AMOUNT      CAPITAL     STOCKHOLDER    EARNINGS       TOTAL
                                     ----------  ---------  ------------  -----------  ------------  ------------
<S>                                  <C>         <C>        <C>           <C>          <C>           <C>           
Balance at October 31,1995.........   4,000,000  $   4,000  $    111,857   $(100,000)  $    584,170  $    600,027
 
Cash receipts from stockholder.....      --         --           --          100,000        --            100,000
 
Net income.........................      --         --           --           --          1,239,164     1,239,164
                                     ----------  ---------  ------------  -----------  ------------  ------------
 
Balance at October 31, 1996........   4,000,000      4,000       111,857      --          1,823,334     1,939,191
 
Issuance of common stock, net of
  offering expenses of $1,083,336..   1,000,000      1,000     3,916,664      --            --          3,917,664
 
Issuance of stock related to
  acquisition of STMS..............     150,000        150       974,850      --            --            975,000
 
Issuance of options related to STMS
  acquisition recorded at fair
  value............................      --         --            84,000      --            --             84,000
 
Net income.........................      --         --           --           --          1,322,300     1,322,300
                                     ----------  ---------  ------------  -----------  ------------  ------------
 
Balance at October 31, 1997........   5,150,000  $   5,150  $  5,087,371      --       $  3,145,634  $  8,238,155
                                     ----------  ---------  ------------  -----------  ------------  ------------
                                     ----------  ---------  ------------  -----------  ------------  ------------
</TABLE>

                                  See accompanying notes.

                                       F-5

<PAGE>


                           DUNN COMPUTER CORPORATION

                    CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         YEARS ENDED OCTOBER 31,
                                                                                        --------------------------
<S>                                                                                     <C>           <C>
                                                                                           1997          1996
OPERATING ACTIVITIES                                                                   ------------  ------------

Net income............................................................................  $  1,322,300  $  1,239,164

Adjustments to reconcile net income to net cash (used in) provided by operating
  activities:

    Depreciation and amortization of property and equipment...........................        46,029        32,300

    Amortization of goodwill and other intangible assets..............................        22,448       --

    Changes in operating assets and liabilities:

      Accounts receivable.............................................................    (5,354,279)     (951,553)

      Inventory.......................................................................    (2,865,750)      211,763

      Prepaid expenses and other assets...............................................       (85,966)        9,460

      Accounts payable................................................................     3,920,267       471,636

      Accrued expenses................................................................        51,930      (193,084)

      Income taxes payable............................................................      (519,308)      260,947

      Deferred tax credit.............................................................        88,914       (66,276)

      Unearned revenue................................................................      (110,734)       67,640
                                                                                       ------------  ------------
 
Net cash (used in) provided by operating activities...................................    (3,484,149)    1,081,997
 
INVESTING ACTIVITIES
 
Purchases of property and equipment...................................................       (93,389)      (21,040)
 
Acquisition of STMS, net of cash acquired.............................................      (927,550)      --
 
Purchase of investments...............................................................       --           (150,000)
                                                                                       -------------  ------------

Net cash used in investing activities.................................................    (1,020,939)     (171,040)
 
FINANCING ACTIVITIES
 
Net proceeds from issuance of common stock............................................     3,916,664       --
 
Proceeds of loans for purchase of vehicle.............................................        64,226       --
 
Payments on notes payable.............................................................       (10,551)      --
 
Proceeds from bank line of credit.....................................................       --          2,122,245
 
Payments on bank line of credit.......................................................       --         (2,374,476)
 
Repayment from stockholder............................................................       --            100,000
 
Payments on capital leases............................................................       (20,949)      --
                                                                                        ------------  ------------
 
Net cash provided by (used in) financing activities...................................     3,949,390      (152,231)
 
Net (decrease) increase in cash and cash equivalents..................................      (555,698)      758,726

Cash and cash equivalents at beginning of the year....................................       897,664       138,938
                                                                                        ------------  ------------

Cash and cash equivalents at end of the year..........................................  $    341,966  $    897,664
                                                                                        ------------  ------------
                                                                                        ------------  ------------

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid.........................................................................  $     11,813  $     57,925
                                                                                        ------------  ------------
                                                                                        ------------  ------------

Income taxes paid.....................................................................  $  1,323,308  $    581,000
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>

                            See accompanying notes.

                                       F-6

<PAGE>

                         DUNN COMPUTER CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION
 
    Dunn Computer Corporation (the "Corporation") was incorporated on July 27,
1987 under the laws of the Commonwealth of Virginia.
 
    On January 3, 1997, Dunn Computer Corporation (the "Company"), a Delaware
corporation, was formed as a holding company for the stock of Dunn Computer
Corporation, the Virginia corporation. On January 6, 1997, the Board of
Directors and stockholders of the Corporation approved and effected a
2,799.160251 for 1 stock exchange with the Company whereby the holders of the
Corporation's Common Stock would receive 2,799.160251 shares of Common Stock in
the Company for each share of Common Stock in the Corporation. All references in
the accompanying consolidated financial statements as to the number of shares of
Common Stock and per-share amounts have been restated to reflect the stock
exchange. Also, the Company authorized 2,000,000 shares of Preferred Stock with
rights and preferences to be determined by the Board of Directors at a later
date.
 
    The Company is engaged in the business of providing custom computer systems
and related equipment to businesses and government agencies.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
    The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
 
PRINCIPLES OF CONSOLIDATION
 
    The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions eliminate upon consolidation.
 
CASH AND CASH EQUIVALENTS
 
    The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.

INVESTMENTS
 
    At October 31, 1997 and 1996, investments consisted of shares of common
stock of a privately-held internet company, Worldwide Internet Solutions
Network, Inc. ("WIZnet"), with a cost basis of approximately $150,000. The
Company believes that this carrying amount represents the lower of cost or
market. The Company is accounting for this investment using the cost method
since the Company's

                                       F-7

<PAGE>

                         DUNN COMPUTER CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS (CONTINUED)

investment represents less than 20% of the
privately-held internet company's outstanding stock. The President and Chief
Executive Officer of WIZnet is a member of the Company's Board of Directors.
 
    In connection with the acquisition of STMS, the Company also purchased a 47%
interest in Glacier Corporation. This investment was recorded at its fair value
of $125,000 on the purchase date. The Company is accounting for this investment
using the equity method. The Company believes that the carrying amount
represents the lower of cost or market at October 31, 1997. During the period
from the acquisition date (September 12, 1997) to October 31, 1997, the
Company's portion of net income (loss) related to the Glacier investment was
immaterial to the financial statements.
 
INVENTORY
 
    Inventory is stated at the lower of cost or market as determined by the
first-in first-out (FIFO) method. The Company periodically evaluates its
inventory obsolescence reserve to ensure inventory is recorded at net realizable
amounts.
 
GOODWILL AND OTHER INTANGIBLE ASSETS
 
    Goodwill and other intangible assets (contracts), which resulted from the
Company's acquisition of STMS, Inc. ("STMS") in September 1997, are being
amortized on a straight-line basis over twenty and five years, respectively. At
October 31, 1997, intangible assets were comprised of:
 
<TABLE>
<S>                                                                               <C>
Goodwill........................................................................  $2,397,287
 
Contracts.......................................................................    600,000
 
Less accumulated amortization...................................................    (22,447)
                                                                                  ----------
 
                                                                                  $2,974,840
                                                                                  ----------
                                                                                  ----------
</TABLE>
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
    Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121, ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The
Company made no adjustments to the carrying values of the assets during the
years ended October 31, 1997 and 1996.

STOCK COMPENSATION
 
    In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation" which is effective for the Company's fiscal 1997
consolidated financial statements. SFAS 123 allows companies to account for
stock-based compensation under either the new provisions of SFAS 123 or the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," but requires pro forma disclosure in the
footnotes to the consolidated financial statements as if the measurement

                                       F-8

<PAGE>

                         DUNN COMPUTER CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
STOCK COMPENSATION (CONTINUED)

provisions of SFAS 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the
provisions of APB 25.
 
REVENUE RECOGNITION

    The Company generally recognizes revenues based on shipment of products.
Revenues are earned principally pursuant to various contracts with agencies of
the Federal government and commercial customers. The Company generally does not
require collateral on such contracts. The length of the Company's contracts
generally range from one to three years.
 
    The products sold are generally covered by a warranty for periods ranging
from two to three years. The Company accrues a warranty reserve for revenues
recognized during the year to record estimated costs to provide warranty
services.
 
    Unearned revenue relates to cash received from credit card sales as of year
end for which the related inventory was shipped subsequent to year end.
 
    During the year ended October 31, 1997, the Company had revenues from one
agency of the Federal government and one Federal government contractor which
represented 21% and 11% of total revenues, respectively. As of October 31, 1997,
accounts receivable from agencies of the Federal government represented 64% of
total accounts receivable. During the year ended October 31, 1996, the Company
had revenues from two agencies of the Federal government which represented 22%
and 14% of total revenues. In addition, during 1996, the Company had revenues
from one Federal government contractor and one commercial customer which
represented 17% and 16% of total revenues, respectively. As of October 31, 1996,
accounts receivable from agencies of the Federal government represented 92% of
total accounts receivable.
 
INCOME TAXES
 
    The Company provides for income taxes in accordance with the liability
method.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
 
    Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, investments and accounts receivable.
The cash is held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers'
financial

                                       F-9

<PAGE>

                         DUNN COMPUTER CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK (CONTINUED)

condition and generally does not require collateral. The Company maintains 
reserves for credit losses, and such losses have been within management's 
expectations. The concentration of credit risk is mitigated by the diverse 
customer base and the amount of receivables due by the Federal government. 
The carrying amount of the receivables approximates their fair value.
 
EARNINGS PER SHARE
 
    The Company's earnings per share calculations are based upon the number 
of shares of Common Stock and Common Equivalent outstanding according to 
Accounting Principles Board opinion No.15 ("APB 15"). Pursuant to the 
requirements of Securities and Exchange Commission Staff Accounting Bulletin 
No. 83, options to purchase Common Stock issued at prices below the initial 
public offering (the "IPO") price during the twelve months immediately 
preceding the contemplated initial filing of the registration statement 
relating to the IPO, have been included in the computation of the earnings 
per share as if they were outstanding for all periods presented (using the 
treasury stock method assuming repurchase of Common Stock at the estimated 
IPO price). In subsequent periods, stock options and warrants under the 
treasury stock method will be included to the extent that they are dilutive 
pursuant to APB 15.
 
RECENT PRONOUNCEMENTS
 
    In February 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings 
per Share", which is required to be adopted in the October 31, 1998 
consolidated financial statements. At that time, the Company will be required 
to change the method currently used to compute earnings per share and to 
restate all prior periods. Under the new requirements for calculating primary 
earnings per share, the dilutive effect of stock options will be excluded. 
For the years ended October 31, 1997 and 1996, the basic earnings per share 
(calculated on the basis prescribed in SFAS 128) would have been $         
0.28 and $         0.31, respectively. The impact of SFAS 128 on the 
calculation of diluted earnings per share for the periods presented herein is 
not expected to be materially different from the basic earnings per share.
 
    In June 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive 
Income", which is required to be adopted in the year ended October 31, 1998 
consolidated financial statements. SFAS 130 requires that an enterprise (a) 
classify items of other comprehensive income by their nature in the financial 
statements and (b) display the accumulated balance of other comprehensive 
income separately from retained earnings and additional paid-in capital in 
the Statement of Stockholders' Equity. The Company will be required to 
restate earlier periods provided for comparative purposes, but doesn't 
believe that the adoption of SFAS 130 will be material to the Company's 
financial statements.

    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information", which is required to be adopted in
the year ended October 31, 1998 consolidated financial statements. SFAS 131
changes the way public companies report segment information in annual financial

                                       F-10

<PAGE>

                         DUNN COMPUTER CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
RECENT PRONOUNCEMENTS (CONTINUED)

statements and also requires those companies to report selected segment 
information in interim financial reports to stockholders. The disclosure for 
segment information on the consolidated financial statements is not expected 
to be material.
 
3. PROPERTY AND EQUIPMENT
 
    Property and equipment, including leasehold improvements, are stated at 
cost. Property and equipment are depreciated and amortized using the 
straight-line method over the estimated useful lives of five years. Leasehold 
improvements are amortized over the lesser of the related lease term or the 
useful life.
 
    Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                                                                 OCTOBER 31,
                                                                                            ----------------------
 <S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
Computer and office equipment.............................................................  $  505,920  $   69,626
 
Furniture and fixtures....................................................................      57,076      20,663
 
Leasehold improvements....................................................................      96,326      27,424
 
Other.....................................................................................     143,060      78,742
                                                                                            ----------  ----------
 
                                                                                               802,382     196,455
 
Less accumulated depreciation and amortization............................................    (168,954)   (132,692)
                                                                                            ----------  ----------
 
                                                                                            $  633,428  $   63,763
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
4. ACQUISITION OF STMS, INC.
 
    On September 12, 1997, the Company acquired all of the outstanding stock 
of STMS, Inc., a Virginia corporation ("STMS"), for 150,000 shares of the 
Company's Common Stock, 25,000 options to purchase the Company's Common 
Stock, and $1,044,500 in cash used specifically to repay certain of STMS' 
debt. The transaction was accounted for using the purchase method. The 
150,000 shares of Common Stock were valued at the market price of the 
Company's common stock ($975,000) on the date of transaction. The 25,000 
options issued to a stockholder/creditor of STMS were valued at fair value 
($84,000) using the Black-Scholes option-pricing fair value model. The 
purchase price was allocated to the assets and liabilities acquired based on 
their estimated fair values. In conjunction with the acquisition, the Company 
recorded goodwill in the amount of $2,397,287 and other intangible assets 
(contracts) in the amount of $600,000. The operations of STMS are included in 
the consolidated financial statements of the Company for the year ended 
October 31, 1997 since the date of acquisition.

    The Company granted options to purchase 1,330,000 shares of the Company's
Common Stock, at an exercise price equivalent to its fair market value at the
date of grant, to the former stockholders of STMS in

                                       F-11

<PAGE>

                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4. ACQUISITION OF STMS, INC. (CONTINUED)

conjunction with their three-year employment agreements (see Note 7). The
options vest over a three-year period.


    The selected pro forma information for the years ended October 31, 1996 and
1997 includes the operating results of STMS as if the Company acquired STMS on
November 1, 1995.

<TABLE>
<CAPTION>
                                                                    YEAR ENDED OCTOBER 31,
                                                                 ----------------------------
<S>                                                              <C>            <C>
                                                                     1997           1996
                                                                 -------------  -------------
                                                                         (UNAUDITED)
Pro Forma net revenues.........................................  $  34,409,000  $  38,348,000
                                                                 -------------  -------------
                                                                 -------------  -------------
 
Pro Forma net income...........................................  $    (518,000) $   1,548,000
                                                                 -------------  -------------
                                                                 -------------  -------------
 
Pro Forma earnings per share...................................  $       (0.11) $        0.37
                                                                 -------------  -------------
                                                                 -------------  -------------
 
Pro Forma weighted average shares outstanding..................      4,769,833      4,200,150
                                                                 -------------  -------------
                                                                 -------------  -------------
</TABLE>
 
5. BANK LINES OF CREDIT AND NOTES PAYABLE
 
    In April 1996, the Company entered into a line of credit agreement with a 
bank whereby the Company could borrow up to $2,000,000. Outstanding 
borrowings bear interest at the prime rate. As of October 31, 1997, there 
were no outstanding borrowings under this line of credit facility. The 
Company pays a commitment fee equivalent to a certain percentage 
(approximately .3/8%) of the unused borrowings under the line of credit 
facility. The line of credit is secured by all assets of the Company. Under 
the line of credit agreement, the Company is required to maintain a net worth 
of $1,250,000 as well as submit periodic financial statements. For the years 
ended October 31, 1997 and 1996, the Company is in compliance with these 
covenants. The line of credit agreement expires February 28, 1998.
 
    During July 1997, the Company obtained a certain asset in the amount of 
$64,227 through loan proceeds bearing interest annually at 7.9%. The Company 
is required to make monthly payments of $1,303 until July, 2004.
 
6. RELATED PARTY TRANSACTION
 
    Thomas Dunne, the Company's President, and his wife, Claudia Dunne, the 
Company's Vice President, acquired a building for the purpose of leasing 
office space to the Company. In connection with the acquisition of the 
building, the Company guaranteed the building's $1 million mortgage. The term 
of the mortgage is 25 years. The Company subsequently executed a 
noncancelable operating lease with Mr. and Mrs. Dunne. The Company believes 
that the lease agreement is on terms no less favorable to the Company than 
could be obtained from unaffiliated third parties (see Note 7).

                                       F-12

<PAGE>

                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7. COMMITMENTS
 
OPERATING LEASES
 
    The Company leases office space under a noncancelable operating lease 
agreement with two stockholders (see Note 6). The lease agreement terminates 
in October 1999, but provides for a five year renewal at the Company's 
option. Additionally, the Company leases various office equipment under 
non-cancelable operating leases. Rent expense under these leases was $175,000 
and $154,000 for the years ended October 31, 1997 and 1996, respectively.
 
    Future minimum lease payments under noncancelable operating leases,
including the lease assumed in the STMS purchase, at October 31, 1997 are as
follows:
 
<TABLE>
<S>                                                               <C>
1998............................................................  $ 468,995
 
1999............................................................    454,982
 
2000............................................................    286,170
 
2001............................................................    285,709
 
2002............................................................    293,843
 
Thereafter......................................................    225,304
                                                                  ---------
 
Total...........................................................  $2,015,003
                                                                  ---------
                                                                  ---------
</TABLE>
 
CAPITAL LEASES
 
    In connection with the acquisition of STMS, the Company assumed certain 
capital lease obligations. The capital leases are related to the use of 
certain computer equipment, and are included in fixed assets and depreciated 
accordingly. The total obligation under capital lease agreements at October 
31, 1997 was $91,756, at an imputed interest rate of 8%. Future minimum lease 
payments are $66,294 and $25,462 for the years ending October 31, 1998 and 
1999, respectively.
 
EMPLOYMENT AGREEMENTS
 
    During the year ended October 31, 1997, the Company executed employment 
agreements with certain key executives under which the Company is required to 
pay the following base salaries annually over the next three years:
 
<TABLE>
<S>                                                                       <C>
1998....................................................................  $1,005,000
 
1999....................................................................   1,005,000
 
2000....................................................................     637,501
                                                                           ---------
 
Total...................................................................  $2,647,501
                                                                          ----------
                                                                          ----------
</TABLE>
 
                                       F-13

<PAGE>

                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8. STOCKHOLDERS' EQUITY
 
EQUITY TRANSACTIONS
 
    On April 21, 1997, the Company sold 1,000,000 shares of Common Stock in 
an initial public offering for net proceeds of $3,916,664. In connection with 
the offering, warrants were issued to the underwriter for 100,000 shares of 
Common Stock at an exercise price of $6.00 per share. Beginning April 21, 
1998, the warrants are exercisable for a period of four years.
 
STOCK OPTION PLAN
 
    On January 6, 1997, the Company adopted the 1997 Stock Option Plan (the 
"Option Plan") which permits the Company to grant up to 600,000 options to 
officers, directors and employees who contribute materially to the success of 
the Company. In September 1997, the Company increased the number of options 
available for grant under the plan to 2,200,000. Stock options are generally 
granted at prices which the Company's Board of Directors believes 
approximates the fair market value of its Common Stock at the date of grant. 
The options vest over a stated period of time not to exceed four years. The 
contractual term of the options is ten years.
 
    Common stock option activity was as follows:
 
<TABLE>
<CAPTION>
                                                                                                         WEIGHTED-
                                                                                                          AVERAGE
                                                                                                         EXERCISE
                                                                                              SHARES       PRICE
                                                                                            ----------  -----------
<S>                                                                                         <C>         <C>
Outstanding at October 31, 1996...........................................................      --       $
 
Options granted...........................................................................   1,927,000        6.11
 
Options exercised.........................................................................      --          --
 
Options canceled or expired...............................................................      70,000        4.15
                                                                                            ----------       -----
 
Outstanding at October 31, 1997...........................................................   1,857,000   $    6.18
                                                                                            ----------       -----
 
Exercisable at October 31, 1997...........................................................      --       $  --
                                                                                            ----------       -----
                                                                                            ----------       -----
</TABLE>
 
    As of October 31, 1997, there were 343,000 options available for future
grants under the Option Plan.
 
    The following table summarizes information about fixed-price stock options
outstanding at October 31, 1997:
 
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING
                      --------------------------------------------
      <S>             <C>             <C>              <C>
                          NUMBER          AVERAGE       WEIGHTED-
         RANGE OF     OUTSTANDING AT     REMAINING       AVERAGE
         EXERCISE      OCTOBER 31,      CONTRACTUAL     EXERCISE
          PRICES           1997            LIFE           PRICE
      --------------  --------------  ---------------  -----------
      $ 4.01 - $6.00        275,000           4.20      $    4.44
 
      $ 6.01 - $8.00      1,582,000           4.96           6.48
                      --------------           ---          -----
 
      $ 4.01 - $8.00      1,857,000           4.67      $    6.18
                      --------------           ---          -----
                      --------------           ---          -----
</TABLE>
 
                                      F-14

<PAGE>
                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLAN (CONTINUED)

    Had compensation expense related to the stock option plan been determined 
based on the fair value at the grant date for options granted during the 
years ended October 31, 1997 and 1996 consistent with the provisions of SFAS 
123, the Company's net income and earnings per share would have been as 
follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED OCTOBER 31,
                                                              --------------------------
<S>                                                           <C>           <C>
                                                                  1997          1996
                                                              ------------  ------------
Net income--pro forma.......................................  $  1,098,900  $  1,239,164
                                                              ------------  ------------
                                                              ------------  ------------
Earnings per share--pro forma...............................  $       0.24  $       0.31
                                                              ------------  ------------
                                                              ------------  ------------
</TABLE>
 
    The effect of applying SFAS 123 on 1997 and 1996 pro forma net income as 
stated above is not necessarily representative of the effects on reported net 
income for future years due to, among other things, the vesting period of the 
stock options and the fair value of additional stock options in future years.
 
    The fair value of each option grant is estimated on the date of grant 
using the Black-Scholes option-pricing fair value model with the following 
weighted-average assumptions used for grants in 1997: dividend yield of 0%, 
expected volatility of 46%; risk-free interest rate of 5.75%; and expected 
life of the option term of 5 years. The weighted average fair values of the 
options granted in 1997 with a stock price equal to the exercise price is 
$6.18.
 
9. INCOME TAXES
 
    Deferred income taxes reflect the net tax effects of temporary 
differences between the carrying amounts of assets and liabilities for 
financial reporting purposes and the amounts used for income tax purposes.
 
    Components of the Company's net deferred tax asset (credit) balance are 
as follows:
 
<TABLE>
<CAPTION>
                                                                                                 OCTOBER 31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
Deferred tax assets:
 
    Accrued expenses......................................................................  $   24,800  $   50,037
 
    Net operating loss carryforwards......................................................     454,000      --
 
    Asset reserves........................................................................      14,000      14,000
                                                                                            ----------  ----------
 
Total deferred assets.....................................................................     492,800      64,037
 
Deferred tax credit:
 
    Change from cash to accrual method for tax purposes...................................     (38,800)    (75,123)
 
Valuation allowance.......................................................................    (454,000)     --
                                                                                            ----------  ----------
 
    Net deferred tax asset (credit).......................................................  $   --      $  (11,086)
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
                                      F-15

<PAGE>
                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
9. INCOME TAXES (CONTINUED)

    As of October 31, 1997, the Company had approximately $1,100,000 in net 
operating loss carryforwards primarily related to STMS, which expire at 
varying dates through 2012. These carryforwards may be significantly limited 
under Section 382 of the Internal Revenue Service Code and the SRLY rules. 
The Company has fully reserved the net deferred tax assets because 
realizability of such assets is uncertain.
 
    The components of the provision for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                                                             YEARS ENDED OCTOBER
                                                                                                     31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
Current tax expense:
 
    Federal...............................................................................  $  671,070  $  709,195
 
    State.................................................................................     125,900     133,081
                                                                                            ----------  ----------
 
                                                                                               796,970     842,276
 
Deferred tax expense:
 
    Federal...............................................................................      (1,800)    (55,800)
 
    State.................................................................................        (300)    (10,476)
                                                                                            ----------  ----------
 
                                                                                                (2,100)    (66,276)
                                                                                            ----------  ----------
 
Total provision for income taxes..........................................................  $  794,870  $  776,000
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
    The reconciliation of income tax from the statutory rate of 34% is:
 
<TABLE>
<CAPTION>
                                                                                             YEARS ENDED OCTOBER
                                                                                                     31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
Tax at statutory rates....................................................................  $  719,838  $  685,156
 
Non-deductible expenses...................................................................       8,291       9,610
 
State income tax net of federal benefit...................................................      66,741      81,234
                                                                                            ----------  ----------
 
                                                                                            $  794,870  $  776,000
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
10. RETIREMENT PLANS
 
401(K) PLAN
 
    Effective April 1, 1995, the Company adopted a 401(k) Plan (the "Plan"). 
Employees are eligible to participate after completing six months of service 
and attaining age 18. Employees can defer up to 15 percent of compensation. 
Employee contributions are subject to Internal Revenue Service limitations. 
All employees who contribute to the Plan are eligible to share in 
discretionary Company matching contribution. During the years ended October 
31, 1997 and 1996, the Company contributed $11,855 and $3,300, respectively, 
to the Plan.

                                      F-16

<PAGE>

                           DUNN COMPUTER CORPORATION
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
10. RETIREMENT PLANS (CONTINUED)

DEFINED BENEFIT PLAN
 
    During the fiscal year ended October 31, 1995, the Company implemented a 
defined benefit plan (the "Pension Plan") covering substantially all salaried 
employees. The Pension Plan benefits are based on years of service and the 
employee's compensation. The Company's funding policy is to annually 
contribute amounts sufficient to meet minimum funding requirements set forth 
in the Employee Retirement Income Security Act of 1974 ("ERISA"). 
Contributions are intended to provide not only for benefits attributed to 
service to date, but also for those expected to be earned in the future. The 
assets of the Pension Plan are invested in money markets and corporate debt 
and equity instruments. The Company contributed approximately $135,000 and $0 
for the Pension Plan during the years ending October 31, 1997 and 1996, 
respectively, which met the minimum funding requirements under ERISA.
 
    On January 6, 1997, the Company amended the Pension Plan to change the 
benefits to be paid out after retirement from 100% to 40% of its initial 
liability. This will result in a reduction of the projected benefit 
obligation by $150,000.
 
    The following table sets forth the Pension Plan's funded status as reported
on activity, and amounts recognized in the Company's consolidated financial
statements:
 
<TABLE>
<CAPTION>
                                                                                                OCTOBER 31,
                                                                                          ------------------------
<S>                                                                                       <C>          <C>
                                                                                             1997         1996
                                                                                          -----------  -----------
Actuarial present value of benefit obligations:
 
Accumulated benefit obligation, including vested benefits of ($171,593) and ($238,619)
  at October 31, 1997 and 1996, respectively............................................  $  (321,599) $  (320,973)
                                                                                          -----------  -----------
                                                                                          -----------  -----------
 
Projected benefit obligation............................................................     (321,559)    (320,973)
 
Pension Plan assets at fair value.......................................................      147,041      168,336
                                                                                          -----------  -----------
 
Funded status--projected benefit obligation in excess of fair value of Pension Plan
  
assets................................................................................  $  (174,518) $  (152,637)
                                                                                          -----------  -----------
                                                                                          -----------  -----------
</TABLE>

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED OCTOBER
                                                                                                     31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
Net periodic pension cost:
 
Service cost..............................................................................  $   44,140  $   59,066
 
Interest cost.............................................................................      19,355      17,892
 
Actual return on assets...................................................................      21,295     (33,982)
 
Net amortization and deferral.............................................................     (33,340)     38,127
                                                                                            ----------  ----------
 
Total net periodic pension cost...........................................................  $   51,450  $   81,103
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

                                       F-17

<PAGE>

10. RETIREMENT PLANS (CONTINUED)

DEFINED BENEFIT PLAN

    Key assumptions used in the actuarial valuation were:
 
<TABLE>
<CAPTION>
                                                                                                    OCTOBER 31,
                                                                                                   -------------
<S>                                                                                           <C>          <C>
                                                                                                 1997         1996
                                                                                                 -----        -----
Weighted average discount note...........................................................         7.5%         7.5%
 
Rate of return on assets:
 
    Pre-retirement.......................................................................         8.0%         8.0%
 
    Post-retirement......................................................................         8.0%         8.0%
</TABLE>
 
11. SUBSEQUENT EVENT
 
    On December 10, 1997, the Company increased the amount available under the
current line-of-credit arrangement with a bank from $2,000,000 to $4,000,000.




                                      F-18