REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of Spanlink Communications, Inc.


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




/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 12, 1999

<PAGE>


BALANCE SHEET
<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                                1998              1997
---------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>       
Assets
Current assets:
   Cash and cash equivalents                                                $    11,358        $  553,458
   Restricted cash                                                              150,200           150,200
   Accounts receivable, less allowance for doubtful accounts of
       $216,000 and $218,000                                                  2,871,108         2,113,271
   Inventory                                                                    505,787           345,775
   Costs and estimated earnings in excess of billings                         1,703,186           554,572
   Other current assets                                                         162,831           148,072
---------------------------------------------------------------------------------------------------------
       Total current assets                                                   5,404,470         3,865,348

Property and equipment                                                        1,227,089         1,264,160
Intangible assets                                                               491,015           611,619
Other assets                                                                    138,500           113,500
---------------------------------------------------------------------------------------------------------
       Total assets                                                         $ 7,261,074        $5,854,627
=========================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
   Loan payable                                                             $   985,000        $
   Accounts payable                                                           1,259,812           631,263
   Accrued expenses                                                             294,167           560,933
   Current portion of long-term obligations                                     107,755           300,570
   Deferred maintenance revenue                                                 439,697           432,809
   Other current liabilities                                                    451,613           452,466
---------------------------------------------------------------------------------------------------------
       Total current liabilities                                              3,538,044         2,378,041
=========================================================================================================

Long-term obligations                                                           365,889           445,083
---------------------------------------------------------------------------------------------------------
       Total liabilities                                                      3,903,933         2,823,124

Shareholders' equity:
   Preferred stock; undesignated par value;
     5,000,000 shares authorized; none issued or outstanding
   Common stock; no par value; 25,000,000 shares authorized and
     5,105,289 and 5,080,500 shares issued and outstanding
     at December 31, 1998 and 1997, respectively                              8,255,348         8,193,663
   Accumulated deficit                                                       (4,898,207)       (5,162,160)
---------------------------------------------------------------------------------------------------------
       Total shareholders' equity                                             3,357,141         3,031,503
---------------------------------------------------------------------------------------------------------
       Total liabilities and shareholders' equity                           $ 7,261,074        $5,854,627
=========================================================================================================
</TABLE>
See accompanying notes to the financial statements.


<PAGE>


STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                   For the Years Ended
                                                                      December 31,
                                                                 1998              1997
------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>        
Revenues                                                     $11,083,239       $ 6,637,018
Cost of revenues                                               5,047,616         2,842,424
------------------------------------------------------------------------------------------
       Gross profit                                            6,035,623         3,794,594
------------------------------------------------------------------------------------------

Operating expenses:
   Sales, general and administrative                           4,440,679         4,562,239
   Research and product development                            1,282,549         1,463,905
------------------------------------------------------------------------------------------

       Total operating expenses                                5,723,228         6,026,144
------------------------------------------------------------------------------------------

Income (loss) from operations                                    312,395        (2,231,550)

Interest income (expense), net                                   (48,442)           86,020
------------------------------------------------------------------------------------------

Net income (loss)                                         $      263,953       $(2,145,530)
==========================================================================================

Net income (loss) per share-- basic and diluted           $          .05       $      (.42)
==========================================================================================
</TABLE>



See accompanying notes to the financial statements.


STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                             Common Stock                                   Total
                                                      Number                           Accumulated      Shareholders'
                                                     of Shares          Amount           Deficit           Equity
-------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>              <C>             <C>                <C>       
Balances at December 31, 1996                        5,080,500        $8,193,663      $(3,016,630)       $5,177,033

Net loss                                                                               (2,145,530)       (2,145,530)
-------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1997                        5,080,500         8,193,663       (5,162,160)        3,031,503

Exercise of employee stock options                       8,910            17,820                             17,820

Stock purchased through employee stock
   purchase plan                                        15,879            43,865                             43,865

Net income                                                                                263,953           263,953
-------------------------------------------------------------------------------------------------------------------

Balances at December 31, 1998                        5,105,289        $8,255,348      $(4,898,207)       $3,357,141
===================================================================================================================
</TABLE>



See accompanying notes to the financial statements.


<PAGE>


STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                            For the Years Ended
                                                                                               December 31,
                                                                                          1998              1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>         
Cash flows from operating activities:
   Net Income (loss)                                                               $      263,953       $(2,145,530)
   Reconciliation of net income (loss) to net cash used by operating activities:
     Depreciation and amortization                                                        467,257           181,250
     Provision for doubtful accounts                                                       50,000           215,000

     Changes in current assets and liabilities:
       Restricted cash                                                                                     (150,200)
       Accounts receivable                                                               (807,837)         (334,604)
       Costs and estimated earnings in excess of billings                              (1,148,614)         (535,915)
       Other current assets                                                              (174,771)         (242,948)
       Accounts payable                                                                   628,549          (293,327)
       Accrued expenses                                                                  (266,766)         (241,488)
       Other current liabilities                                                            6,035           197,603
-------------------------------------------------------------------------------------------------------------------
         Net cash used by operating activities                                           (982,194)       (3,350,159)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Maturities of marketable securities                                                                    2,092,553
   Purchase of product line                                                                                (116,819)
   Additions to property and equipment                                                   (309,582)         (302,322)
-------------------------------------------------------------------------------------------------------------------
         Net cash provided (used) by investing activities                                (309,582)        1,673,412
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Other assets                                                                           (25,000)
   Principal payments on capital lease                                                    (50,892)          (54,747)
   Principal payments on other long-term obligations                                     (221,117)
   Proceeds from issuance of loan payable                                                 985,000
   Proceeds from employee common stock issuances                                           61,685
-------------------------------------------------------------------------------------------------------------------
         Net cash provided (used) by financing activities                                 749,676           (54,747)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                     (542,100)       (1,731,494)
Cash and cash equivalents at beginning of year                                            553,458         2,284,952
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                           $       11,358      $    553,458
===================================================================================================================
Supplemental disclosures of cash flow information:
   Cash paid during the year for interest                                          $       72,725      $     32,887
===================================================================================================================
Noncash operating and financing activities:
   Capital lease obligations incurred                                              $           --      $    300,400
===================================================================================================================
</TABLE>

See accompanying notes to the financial statements.


<PAGE>


       NOTE 1  DESCRIPTION OF BUSINESS ACTIVITIES
--------------------------------------------------------------------------------
       Spanlink Communications, Inc. (the Company) was incorporated in 1988 and
designs, develops and markets streamlined computer telephony software solutions
that help call centers rapidly automate and manage the customer interaction
process via the telephone or the internet. The Company markets its specialized
software systems through its sales organization and licensed sales
representatives throughout North America.



       NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
       Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.

       Cash Equivalents. Cash equivalents consist of highly liquid investments
with original maturities of three months or less which are readily convertible
to cash.

       Fair Value of Financial Instruments. Cash and cash equivalents are valued
at their carrying amounts which are reasonable estimates of fair value. The fair
value of all other financial instruments approximates cost as stated.

       Concentration of Credit Risk. Financial instruments which potentially
subject the Company to credit risk consist primarily of accounts receivable. The
Company grants credit to customers in the ordinary course of business and
generally requires a customer deposit upon the signing of any system
installation contracts. No single region or industry represents a significant
concentration of credit risk. See Note 11 for discussion of major customer and
economic relationships.

         Revenue Recognition. The Company adopted AICPA Statement of Position
97-2, "Software Revenue Recognition," effective January 1, 1998. The adoption
did not have a material effect on the Company's revenue recognition policies.
Revenues derived from system installation contracts are recognized over the
period the Company satisfies its obligations using the percentage-of-completion
method. Progress on the contracts is measured by the percentage of labor cost
incurred to-date to the total estimated labor cost for each contract. Management
considers cost to be the best available measure of progress on these contracts.
Changes in conditions may result in revisions of estimated costs and earnings
during the course of the contract and are reflected in the accounting period in
which the facts which require the revision become known. In the normal course of
business, the Company also may be subject to a risk of loss by incurring costs
to complete a contract in excess of the fixed bid price.

       Revenues derived from software license fees which are not sold as part of
a system installation contract are recognized upon execution of a license
agreement, shipment of the software, fulfillment by the Company of all of its
significant contractual obligations and when collection is probable. Revenues
derived from maintenance contracts are deferred and recognized ratably over the
contract period. The Company provides a 120-day warranty on sales of Company
software products. Estimated warranty costs are accrued at the time of product
shipment.

       Revenues derived from hardware which is not sold as part of a system
installation contract are recognized upon shipment.

       Inventory. Inventory consists primarily of computer hardware components
for voice messaging systems and is stated at the lower of cost or market, with
cost being determined by the first-in, first-out (FIFO) method.

       Property and Equipment. The Company's property and equipment is stated at
cost. Depreciation is calculated using straight-line and accelerated methods
over the estimated lives of the assets. Estimated useful lives generally range
from three to ten years. Significant additions or improvements extending asset
lives are capitalized, while repairs and maintenance are charged to expense as
incurred. Property and equipment includes assets under a capital lease with a
cost of $300,400 at December 31, 1998 and 1997.


<PAGE>
       Intangible Assets. Intangible assets relate to the purchase of the
FastCall product line (Note 12) and are being amortized over a five-year life.
Accumulated amortization at December 31, 1998 and 1997 was $128,564 and $5,200,
respectively.

       Research and Product Development. Expenditures for research and software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven marketability
of the product are established. Costs otherwise capitalizable after
technological feasibility is achieved have also been expensed because they have
not been significant.

       Income Taxes. Income taxes are accounted for on the liability method
under the provisions of Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes."

       Net Income (Loss) Per Share The Company's net income (loss) per share is
computed under SFAS No. 128, "Earnings Per Share". Basic earnings per share
includes no dilution and is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of the Company.


       NOTE 3  CONTRACTS IN PROGRESS
--------------------------------------------------------------------------------
       Costs, estimated earnings and billings on uncompleted contracts are
summarized as follows:

                                                     December 31,
                                                1998              1997
--------------------------------------------------------------------------------
Costs incurred on uncompleted contracts      $3,240,601       $ 2,239,395
Estimated earnings                            2,948,751         1,839,011
--------------------------------------------------------------------------------
                                              6,189,352         4,078,406
Billings to-date                             (4,937,777)       (3,961,262)
--------------------------------------------------------------------------------

                                             $1,251,575       $   117,144
--------------------------------------------------------------------------------

       This activity is included in the accompanying balance sheet under the
following captions:

                                                     December 31,
                                                   1998           1997
--------------------------------------------------------------------------------
Costs and estimated earnings in
  excess of billings                         $1,703,186       $   554,572
Billings in excess of costs and
  estimated earnings                           (451,611)         (437,428)
--------------------------------------------------------------------------------
                                             $1,251,575       $   117,144
--------------------------------------------------------------------------------

       These amounts are included in current assets and other current
liabilities as all contracts in progress are expected to be completed within one
year.


       NOTE 4  PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
       Property and equipment consists of:
                                                     December 31,
                                                   1998           1997
--------------------------------------------------------------------------------
Equipment                                     $1,585,879        $1,337,482
Office furniture and fixtures                    431,546           394,266
Leasehold improvements                           172,340           152,611
--------------------------------------------------------------------------------
                                               2,189,765         1,884,359
Less: Accumulated depreciation
  and amortization                              (962,676)         (620,199)
--------------------------------------------------------------------------------
   Total property and equipment               $1,227,089        $1,264,160
--------------------------------------------------------------------------------

<PAGE>

       NOTE 5  LONG-TERM OBLIGATIONS
--------------------------------------------------------------------------------
       At December 31, 1998, long-term obligations are comprised as follows:

Remaining minimum obligation
  in connection with acquisition
  of product line (Note 12)                            $ 278,883
Obligations under capital lease (Note 7)                 194,761
--------------------------------------------------------------------------------
                                                         473,644
Less current portion                                    (107,755)
--------------------------------------------------------------------------------
                                                       $ 365,889

       NOTE 6  INCOME TAXES
--------------------------------------------------------------------------------
       The Company has available net operating loss carryforwards for income tax
purposes of approximately $4,600,000 at December 31, 1998 which begin to expire
in the year 2011. A valuation allowance exists for the entire net tax benefit
associated with the tax loss carryforwards and temporary differences at December
31, 1998 and 1997 as their realization presently is not assured.

       Deferred tax assets consist of the following:

                                              December 31,
                                         1998             1997
--------------------------------------------------------------------------------
Loss carryforward                 $1,727,000              $ 1,727,000
Allowance for doubtful accounts       81,099                   81,549
Vacation accrual                      20,615                   14,764
Rent accrual                               0                   69,091
Other accruals                        15,540                   33,350
--------------------------------------------------------------------------------
                                   1,844,254                1,925,754
Valuation allowance               (1,844,254)              (1,925,754)
--------------------------------------------------------------------------------
                                  $        0              $         0
--------------------------------------------------------------------------------


       NOTE 7  LEASES
--------------------------------------------------------------------------------
       Operating Leases. The Company leases certain office space and equipment
under noncancelable operating lease agreements. The office space lease requires
the Company to pay certain annual operating costs, including maintenance,
insurance and real estate taxes. Rental expense under these operating leases,
excluding operating expenses for the office space lease, for the years ended
December 31, 1998 and 1997 was approximately $248,699 and $329,220,
respectively. At December 31, 1998, future minimum lease payments under these
operating leases are as follows:

Year Ending December 31,
--------------------------------------------------------------------------------

1999                                           $260,023
2000                                            260,023
2001                                            260,023
2002                                            156,213
2003                                              9,065
                                            -----------
Total minimum payments required                $945,347
--------------------------------------------------------------------------------

<PAGE>

       Capital Leases. The Company acquired $300,400 of fixed assets during 1997
under a capital lease arrangement. Borrowings bear interest at 11.5% and are due
in monthly installments of $7,179, including interest, through 2001. Future
minimum payments are as follows:

Year Ending December 31,
--------------------------------------------------------------------------------
1999                                          $  76,608
2000                                             80,892
2001                                             80,892
--------------------------------------------------------------------------------
Total minimum lease payments                    238,392
Less: Amount representing interest             (43,631)
--------------------------------------------------------------------------------
Present value of net minimum lease payments    194,761
Less: Current portion                          (57,755)
--------------------------------------------------------------------------------
                                               $137,006
--------------------------------------------------------------------------------


       NOTE 8  SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
       Warrants. In February 1996, the Company issued warrants in a private debt
offering to purchase a total of 80,000 shares of common stock. The warrants are
exercisable for a period of five years from the date of issuance at $3.60 per
share. As part of the Company's initial public offering in May 1996, the
underwriters were granted a five-year warrant to purchase 182,748 shares of
common stock at $4.80 per share.

       Stock Options. On January 31, 1996, the Company's Board of Directors and
shareholders approved the Company's 1996 Omnibus Stock Plan (the Plan). Under
this fixed Plan, 1,000,000 common shares have been reserved for issuance of
restricted shares or for options to be granted to employees, consultants and
non-employee directors. Options granted generally are exercisable over a
four-year or a five-year period from the date of grant at prices not less than
the fair market value at the date the options are granted and expire 10 years
after the date of grant. The Plan allows for the grant of incentive stock
options, nonqualified stock options, reload stock options, stock appreciation
rights and restricted stock. In 1996, the Company also granted 100,000 fixed
options outside of the Plan. In addition, the Company in 1998 granted 195,000
fixed options outside the plan. These options generally follow the provisions of
the Plan.

       The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
date consistent with the provision of SFAS No. 123, the Company's net income
(loss) and net income (loss) per share would have increased to the pro forma
amounts indicated below:


Year Ended December 31,                         1998              1997
--------------------------------------------------------------------------------
Net income (loss)-- as reported             $  263,953        $(2,145,530)
Net loss-- pro forma                        $ (192,105)       $(2,502,033)
Net income (loss) per share -- basic and
  diluted as reported                       $     0.05        $      (.42)
Net loss per share-- basic and
  diluted pro forma                         $     (.04)       $      (.49)

       The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during 1998 and 1997: dividend yield of 0%; expected
volatility of 58% and 55%; risk-free interest rate of 5.4% and 6.2%; and
expected lives of 8.0 and 8.8 years. The weighted average fair value of options
granted during 1998 and 1997 was $2.07 and $1.49, respectively.



<PAGE>


       There are 1,295,000 shares of common stock reserved for issuance upon
exercise of stock options as of December 31, 1998. A summary of stock option
activity is as follows:

                                                                    Weighted
                                                         Weighted    Average
                Options Outstanding                      Average    Remaining
                             Shares         Price        Exercise   Contractual
               Total      Exercisable     Per Share       Price        Life
--------------------------------------------------------------------------------
Outstanding
  at December
   31, 1996    811,863       365,071     $2.00-$3.50       $2.59      8.6 years
Granted        218,050                   $2.00-$2.56
Canceled      (199,413)                  $2.00-$3.50
--------------------------------------------------------------------------------
Outstanding
  at December
  31, 1997     830,500       439,490     $2.00-$3.50       $2.49      7.8 years
Granted        495,000                   $2.19-$3.81
Exercised     (  8,910)                  $2.00
Canceled       (65,500)                  $2.00-$3.50
--------------------------------------------------------------------------------
Outstanding
  at December
  31, 1998   1,251,090       554,210     $2.00-$3.81       $2.76      7.2 years


The following table summarizes information about stock options outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
                                                      Options Outstanding                       Options Exercisable
  Range of Exercise    Number Outstanding    Weighted-Average     Weighted-Average    Number Exercisable    Weighted-Average
       Prices                                    Remaining         Exercise Price                            Exercise Price
                                             Contractual Life

<S>                     <C>                    <C>                     <C>               <C>                    <C>  
$2.00-2.88                735,340               7.8 years               $2.28             211,710                $2.00

$3.00-3.81                515,750               6.2 years                3.45             342,500                 3.51
---------------------- -------------------- -------------------- -------------------- -------------------- --------------------

                        1,251,090               7.2 years               $2.76             554,210                $2.93
</TABLE>


         Employee Stock Purchase Plan. The Company has an Employee Stock
Purchase Plan (ESPP) which is available to eligible employees. Under terms of
the plan, eligible employees may designate from 1% to 10% of their compensation
to be withheld through payroll deductions for the purchase of common stock at
85% of the lower of the market price on the first or last day of the offering
period. Under the plan 200,000 shares of common stock have been reserved for
issuance. As of December 31, 1998, 15,879 shares have been issued under the
plan. Related fair value disclosures under SFAS No. 123 are immaterial.


<PAGE>

          NOTE 9  EARNINGS PER SHARE
-------------------------------------------------------------------------------
       A reconciliation of the denominators of the basic and diluted earnings
per share (EPS) computations for the years ended December 31 is presented below.

                                                          1998           1997
                                                          ----           ----

    Net Income (Loss)                                   $ 263,953   $(2,145,530)
    ------------------------------------------------    ---------   -----------
    Shares Calculation:
      Weighted average basic shares outstanding         5,085,706     5,080,500
      Effect of dilutive securities
        Options                                           144,312   
        Warrants                                                 
                                                        ---------   -----------
          Total shares used to compute diluted 
            earnings per share                          5,230,018     5,080,500
    ------------------------------------------------    ---------   -----------

    Net Income (Loss) per Share:
      Basic                                               $   .05      $   (.42)
      Diluted                                             $   .05      $   (.42)
    ------------------------------------------------    ---------   -----------


       NOTE 10  BENEFIT PLAN
--------------------------------------------------------------------------------
       The Company sponsors a profit sharing and 401(k) plan which provides that
eligible employees may contribute up to 15% of their annual earnings, not to
exceed the maximum allowed under the Internal Revenue Code. The plan covers
substantially all employees after specified periods of service and the
attainment of minimum age requirements. Company contributions are discretionary.
There were no Company contributions to the plan during 1998 or 1997.


       NOTE 11  MAJOR CUSTOMER AND ECONOMIC RELATIONSHIPS
--------------------------------------------------------------------------------
       The Company generates a significant portion of its revenues from Lucent
Technologies, Inc. (Lucent) under a number of agreements that provide royalties
and product sales to the Company. These agreements terminate at various times
but Lucent may extend them, as they have in the past.

       Total revenues from Lucent were approximately $4,957,061 and $3,693,000
for the years ended December 31, 1998 and 1997, respectively, which represented
45% and 56% of total revenues for 1998 and 1997, respectively. Accounts
receivable from Lucent represented approximately 59% and 53% of total accounts
receivable at December 31, 1998 and 1997, respectively.


       NOTE 12  PURCHASE OF PRODUCT LINE
--------------------------------------------------------------------------------
       In December 1997, the Company acquired certain intellectual property
rights related to the FastCall product line from Aurora Systems, Inc. Under the
agreement, the purchase price was established as a minimum of $600,000 subject
to a maximum obligation of $1,100,000 dependent upon future sales of the
FastCall product by the Company over a five-year period. The Company recorded
the acquired rights as intangible assets based on the contractual minimum
obligation of $600,000 plus acquisition-related costs of $16,819. The purchase
price was funded by an initial payment of $100,000, with the balance due over
the five-year term of the agreement. The long and short-term components of the
remaining obligation are determined based on estimated sales of the product by
the Company.


       NOTE 13  RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
       As of December 31, 1998, the company has three notes receivable
outstanding totaling $138,500 with current and former officers. The notes bear
interest at 5.99 % to 6.31%. The notes and accrued interest are due in full in
2002 and 2003. The notes receivable are recorded in other assets on the balance
sheet.

<PAGE>

       NOTE 14  LOAN PAYABLE
--------------------------------------------------------------------------------
       As of December 31, 1998, the Company has a $1 million working capital
line of credit with a bank which expires April 30, 1999. Borrowings are limited
to the lesser of $1 million or 80% of eligible accounts receivable. Borrowings
bear interest at 1% above the bank's prime rate (7.75% at December 31, 1998) and
are collateralized by all of the Company's assets. As of December 31, 1998,
$985,000 was outstanding under the line of credit.


         Subsequent to year-end the amount of the line of credit was increased
by $1.7 million. Management believes that upon the April 30, 1999 expiration of
the line, the agreement will be renewed or replaced at similar terms.