ALPHANET SOLUTIONS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

---------------
FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

Commission File No. 0-27042

ALPHANET SOLUTIONS, INC.
------------------------
(Exact Name of Registrant as Specified in Its Charter)

New Jersey 22-2554535
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(State of Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)

7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
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(Address of Principal Executive Office, including Zip Code)

(973) 267-0088
--------------
(Registrant's telephone number
including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None
----

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.01 par value
----------------------------
(Title of Class)

Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
----------- ----------

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

At February 26, 1999, 6,245,610 shares of Common Stock of the Company
were outstanding. The aggregate market value of Common Stock held by
non-affiliates on February 26, 1999, based on the last sales price on such date,
was approximately $13,826,800.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference into this Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.

TABLE OF CONTENTS

Item Page

PART I 1. Business................................................2

2. Properties.............................................14

3. Legal Proceedings......................................14

4. Submission of Matters to a Vote of Security Holders....15

PART II 5. Market for the Company's Common Equity
and Related Shareholder Matters........................16

6. Selected Financial Data................................17

7. Management's Discussion and Analysis of
Results of Operations and Financial Condition..........19

7A. Quantitative and Qualitative Disclosure About Market
Risk...................................................33

8. Financial Statements and Supplementary Data............33

9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................33

PART III 10. Directors and Executive Officers of the Company........34

11. Executive Compensation.................................34

12. Security Ownership of Certain Beneficial
Owners and Management..................................34

13. Certain Relationships and Related Transactions.........34

PART IV 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................35

EXHIBIT INDEX................................................................36

FINANCIAL DATA AND SCHEDULES................................................F-1

SIGNATURE

1

PART I

Item 1. Business.
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General
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AlphaNet Solutions, Inc. (the "Company") is a single-source provider of
information technology ("IT") products, services and support to Fortune 1000 and
other large and mid-sized companies located primarily in the New
York-to-Philadelphia corridor. The Company is authorized by many
industry-leading manufacturers of IT products, including 3Com, Cisco Systems,
Compaq, Hewlett-Packard, IBM, Intel, Lucent Technologies, Microsoft, NEC, Nortel
Networks, Novell and Sun Microsystems to resell their products and provide
related services. Such products include workstations, servers, networking and
communications equipment, enterprise computing products and application
software. Through its established vendor alliances with Ingram Micro, Inc.
("Ingram") and Pinacor, Inc., an affiliate of MicroAge, Inc. ("Pinacor"), major
aggregators of computer hardware and software, the Company provides its
customers with competitive pricing and value-added services such as electronic
product ordering, product configuration, testing, warehousing and delivery.
Additionally, since 1990, the Company has been developing related IT services
and currently offers network consulting, workstation support, education,
application development, communications installation, help desk, IT staffing,
remote network management and internet-related services. The Company's major
customers include KPMG LLP, Nabisco, PSE&G, Polo-Ralph Lauren, Summit Bank,
Credit Suisse First Boston, Goldman Sachs & Co., MTA New York City Transit, an
agency of the Metropolitan Transportation Authority, State of New York (the
"MTA"), Mercedes-Benz of North America and Innovex.

The Company, a New Jersey corporation, was incorporated in 1984 under
the name AlphaTronics Associates, Inc. In December 1995 the Company changed its
name to AlphaNet Solutions, Inc. The address of the Company's principal
executive offices is 7 Ridgedale Avenue, Cedar Knolls, New Jersey 07927, and its
telephone number is (973) 267-0088.

"AlphaNet Solutions" and the Company's logo are registered trademarks
of the Company. All other trade names, trademarks or service marks appearing in
this Annual Report on Form 10-K are the property of their respective owners and
are not the property of the Company.

Forward-Looking Statements
- --------------------------

Certain statements are included in this Annual Report on Form 10-K
which are not historical and are "forward-looking," and may be identified by
such terms as "expect", "believe", "may", "will", and "intend" or similar terms.
These forward looking statements may include, without limitation, statements
regarding the anticipated growth in the IT products and services markets, the
continuation of the trends favoring outsourcing of management information
systems ("MIS") functions by large and mid-sized companies, the anticipated
growth in the services and support component of the Company's business, the
timing of the development and implementation of the Company's new service
offerings and the utilization of such services by the Company's customers, the
Company's objective to grow through strategic acquisitions, and trends in future

2

operating performance, are forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include risks and uncertainties, including, but not limited to: (i)
the substantial variability of the Company's quarterly operating results caused
by a variety of factors, some of which are not within the Company's control,
including (a) the short-term nature of the Company's customers' commitments, (b)
patterns of capital spending by customers, (c) the timing, size and mix of
product and service orders and deliveries, (d) the timing and size of new
projects, (e) pricing changes in response to various competitive factors, (f)
market factors affecting the availability of qualified technical personnel, (g)
the timing and customer acceptance of new product and service offerings, (h)
changes in trends affecting outsourcing of IT services, (i) disruption in
sources of supply, (j) changes in product, personnel and other operating costs,
and (k) industry and general economic conditions; (ii) changes in technical
personnel billing and utilization rates which are likely to be adversely
affected during periods of rapid and concentrated hiring; (iii) the intense
competition in the markets for the Company's products and services; (iv) the
Company's ability to manage its growth effectively which will require the
Company to continue developing and improving its operational, financial and
other internal systems, including a major upgrade of the Company's internal MIS
infrastructure; (v) the Company's ability to develop, market, provide, and
achieve market acceptance of new service offerings to new and existing
customers; (vi) the Company's ability to attract, hire, train, and retain
qualified technical personnel in an increasingly competitive market; (vii) the
Company's substantial reliance on a concentrated number of key customers; (viii)
uncertainties relating to potential acquisitions, if any, made by the Company,
such as its ability to integrate acquired operations and to retain key customers
and personnel of the acquired business; (ix) the Company's dependence on vendor
authorizations to resell certain computer products and to provide related
services; (x) the Company's dependence on certain aggregators for a substantial
portion of its products acquired for resale; (xi) the Company's reliance on the
continued services of key executive officers and salespersons; and (xii) the
possibility that the currently installed computer systems, software products or
other business systems of the Company or its distributors, manufacturers or
customers, working either alone or in conjunction with other software or
systems, will not accept input of, store, manipulate and output dates in the
year 2000 or thereafter without error or interruption. Such risks and
uncertainties may cause the Company's actual results to differ materially from
the results discussed in the forward-looking statements contained in this
Report.

Industry Background
- -------------------

Many organizations have become increasingly dependent on information
technology as a competitive tool in today's business environment. The need to
access and distribute data on a real-time basis throughout an organization and
between organizations has led to the rapid growth in network computing
infrastructures, which connect numerous and geographically dispersed end users
via local and wide area networks. This growth has been driven by the emergence
of industry standard hardware, software and communications tools, as well as the
significant improvement in the performance, capacity and utility of such
network-based equipment and applications.

The acquisition, development and implementation of computer networks
have become increasingly complex for many organizations due to rapid and
continual change in information technology. Organizations must determine: (i)
the type of workstation platform, computer peripherals, and software

3

applications to purchase among a vast array of product offerings; (ii) the
optimal design of the network, allowing for both the integration of new systems
and the upgrade of and migration from existing systems; and (iii) the level of
ongoing support required by the network and end users. As organizations rely
more heavily on IT as a key component of their operations and as end users
demand the latest technologies, MIS departments must continually adapt to rapid
change and the increasing complexity of designing, implementing and maintaining
networks and related applications.

As a result of the rapid changes in the IT products market and the
risks associated with large capital expenditures, organizations increasingly
rely on companies which offer and have knowledge of a wide variety of networking
products and the ability to perform related technical services in a
cost-effective manner. Additionally, many businesses are increasingly electing
to outsource some or all of the management and support of their networks. The
Company believes that the trend of outsourcing IT management functions is driven
by the significant costs associated with maintaining a full-service internal MIS
staff. Such organizations increasingly require MIS personnel with diverse
technology skill sets to effectively adapt to such constant change. As a result,
the costs of hiring, maintaining and continually educating an MIS department
have grown significantly as demand for qualified personnel has intensified.
These factors have motivated organizations to focus their resources on their
core businesses and seek the expertise of independent providers of IT products
and services.

The Company believes that by working with a single-source provider of
IT products, services and support, organizations will be able to adapt more
quickly to technological changes and reduce their overall IT costs. Those
companies which provide a broad range of product and service offerings,
including network consulting, workstation support, education, application
development, communications installation, help desk, IT staffing services,
remote network management and internet-related services, as well as the ability
to work as integral members of their customers' internal MIS teams, should be
well positioned to take advantage of the anticipated growth of the IT products
and services industry.

Products
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The Company resells IT products from leading hardware manufacturers and
software developers. In 1998, 68.2% of the Company's net sales and 43.2% of its
gross profits were generated from product sales. Such products include
workstations, servers, networking and communications equipment, enterprise
computing products and application software. Through its established vendor
alliances with Ingram and Pinacor, major aggregators of computer hardware and
software, the Company provides its customers with competitive pricing and
value-added services such as electronic product ordering, product configuration,
testing, warehousing and delivery. The Company resells products from numerous
industry-leading manufacturers of computer hardware, software and networking
equipment. Such manufacturers include:

3Com Dell Lexmark Oracle
APC Epson Lotus Seagate
Apple FORE Systems Lucent Technologies Storage Dimensions
AST Hayes Microsoft Sun Microsystems
Nortel Networks Hewlett-Packard NEC Sybase
Cisco Systems IBM Network Associates Symantec
Citrix Intel Novell Tektronix
Compaq Kingston Okidata Toshiba

4

The Company obtains products from such manufacturers primarily through
its relationships with Ingram and Pinacor. The Company's relationship with
Ingram and Pinacor allow it to minimize inventory risk by ordering products
primarily on an as-needed basis. The Company believes that, in most instances,
the cost-plus purchases from Ingram and Pinacor are at prices lower than those
which could be obtained independently from the various manufacturers and other
vendors. The Company utilizes electronic ordering and pricing systems that
provide real-time status checks on the aggregators' extensive inventories. The
Company maintains electronic data interchange links to other suppliers as well,
enabling the Company's sales team to schedule shipments accurately, arrange for
product configuration services and provide online pricing.

Services
- --------

The Company's breadth of services includes network consulting,
workstation support, education, application development, communications
installation, IT staffing, help desk, remote network management and
internet-related services. In 1998, services accounted for 31.8% of the
Company's net sales and 56.8% of its gross profit.

Network Consulting Services
- ---------------------------

The Company's network consultants ("Network Consultants") provide
customers with a wide array of IT and network consulting, integration and
support services, including network design, implementation, installation and
administration. The Network Consultants also provide technical staffing and
project management services, including LAN/WAN performance analyses, and system
migration and upgrade services. The Network Consultants also provide new
technology feasibility and impact analyses, as well as end-user group needs
studies and analyses. The Company provides its network consulting services 24
hours a day, seven days a week, on an as-needed basis.

The Network Consultants provide advanced network services and support,
utilizing products of many industry-leading manufacturers including 3Com, Nortel
Networks, Cisco Systems, Compaq, Hewlett-Packard, IBM, Intel, Microsoft, Novell
and Sun Microsystems. The Company's Network Consultants have knowledge and
experience in such LAN/WAN platforms as Microsoft Windows NT, Novell NetWare,
UNIX and IBM OS/2; and support both long and short-term engagements at customer
locations. As of December 31, 1998, most of the Company's Network Consultants
were on-site at various customer locations. The Company believes that as many
large and mid-sized corporations continue to outsource many of their MIS
requirements, there is an opportunity to expand the services it provides to
companies in its target markets.

During the 1998 fiscal year, the Company instituted a comprehensive
management training program for its Network Consultants ("Screamin' Eagles"),
pursuant to which the Company provides professional, sales and marketing and
management development skills. Currently, 26 employees participate in this
year-long training program, which the Company believes is unique in the industry
and adds significant value to its network consulting offerings.

5

Workstation Support Services
- ----------------------------

The Company's workstation support personnel ("Workstation Analysts")
provide customers with a wide array of IT services for end users, including
hardware and software installations, system upgrades and enhancements, remedial
and preventive maintenance, and management services. Several of the Company's
largest customers require the Workstation Analysts to be at the customers'
facilities on a fully dedicated basis. As of December 31, 1998, most of the
Company's Workstation Analysts were on-site at customer locations. Other
customers of the Company rely on the Company's ability to provide dispatched
on-site services in response to customer requests for service. Such support is
available 24 hours a day, seven days a week, depending on the needs of the
customer. The Company's Customer Technology Center ("CTC") in East Hanover, New
Jersey, allows the Company's Workstation Analysts to provide product
warehousing, customized configuration and testing, and depot, or drop off,
repair services. The Company tracks service requests through its customer
database, which maintains current status reports and historical logs of customer
communications. The Company's capabilities include call dispatching, tracking,
and escalation. The Workstation Analysts also provide customized configuration
of software and hardware for workstations and servers and perform asset
deployment services to customer sites.

The Workstation Analysts are authorized by many industry-leading
manufacturers, including AST, Compaq, Dell, Hewlett-Packard, IBM, NEC and
Toshiba, to perform both in- and out-of-warranty maintenance services. The
Company offers a warranty upgrade program to provide faster response and repair
times, additional hours of coverage, warranty extensions and warranty
administration services for customers who desire broader service offerings than
those of the manufacturer. Most of the Workstation Analysts employed by the
Company are "A+ Certified". The A+ Certification Program is sponsored by the
Microcomputer Industry Association and is recognized by leading manufacturers as
the industry-wide standard of professional competency for Workstation Analysts.
The Company's Workstation Analysts service and support a wide variety of IT
products, including microcomputers, printers and associated peripherals.

Education Services
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The Company operates five education facilities ("Learning Centers"),
offering technical education courses for customers, employees and the general
public. The Company's Learning Centers offer authorized Microsoft, Novell and
Lotus training classes on network operating systems, network hardware products
and application software. These Learning Centers are utilized by a variety of
customers including network administrators, MIS executives, professional and
administrative end users, as well as the Company's own technical staff.

The Company is a Microsoft Authorized Technical Education Center and
provides advanced education courses which lead to various Microsoft
certifications based on specific areas of technical expertise. Novell has
designated the Company as a Novell Authorized Education Center to offer training
to NetWare, UnixWare and GroupWise engineers and administrators. Through a
series of exams, these professionals have the opportunity to obtain various
levels of Novell Certifications. The Company is also certified as a Lotus
Authorized Education Center and provides training for Lotus Notes

6

administrators, developers and end users. Additionally, the Company participates
with another training organization to provide Cisco training classes for network
administrators, network specialists and engineers who configure and/or support
multiple protocol internetworks. The Learning Centers are Prometric Authorized
Testing Centers which provide independent testing services required for many
training courses that lead to various industry certifications.

The Learning Centers provide ancillary benefits to the Company,
reducing the cost to train Network Consultants, Help Desk Analysts, Application
Development Consultants and Workstation Analysts, providing the Company with
highly trained individuals. The Company believes that its education services,
coupled with its IT staffing services, provide it with a talented pool of
available Network Consultants, Help Desk Analysts, Application Development
Consultants and Workstation Analysts.

Application Development Services
- --------------------------------

As part of an enterprise management solution, the Company provides
application development consulting services, including customized application
design and development, enterprise resource planning, object oriented and
client/server development, and database development services. The Company's
staff of Application Development Consultants are highly trained professionals
with extensive experience in proven methodologies for application development
and project management. When developing applications, specific methodologies are
implemented for successful and timely completion of all projects. The Company's
staff of Application Development Consultants assist customers through all phases
of the application development process including gathering business
requirements, writing specifications, programming, testing and documenting.

Communications Installation Services
- ------------------------------------

As part of its strategy to offer customers a single-source solution for
their IT needs, the Company provides telecommunications and data system cabling
services, often in conjunction with other services. The Company's communications
technicians are certified by Berk-Tek, Ortronics, Leviton or Hubbell. The
Company's communications engineers design and install cabling networks for LANs
and telecommunication equipment, including voice, data and video.

Additionally, the Company sells, installs and services
telecommunications systems including the full line of Lucent Technologies'
Enterprise Communications Systems. The Company frequently coordinates with a
regional telephone service company to provide for customers' service
requirements.

Help Desk Services
- ------------------

The Company's Help Desk offers two distinct services, Help Desk Support
and Help Desk Consulting, providing advanced technical support and comprehensive
software application support to corporate end-users. The Help Desk is staffed
with experienced network consultants ("Help Desk Analysts") trained in multiple
software, hardware and networking products.

Help Desk Support provides corporate end-users with telephone support
on software, hardware and networking products. Help Desk Support is capable of
providing global coverage and its breadth of services includes automatic

7

dispatching of on-site support, flexible staffing for coverage 24 hours a day,
seven days a week and advanced call reporting.

The Company tracks and maintains Help Desk Support service calls with a
customized call management system. This system allows the Help Desk Analysts to
provide advanced support and dispatch on-site services. The Help Desk Analysts
coordinate with major vendor support systems on a regular basis and have access
to large volumes of technical information and documentation, personnel and
diagnostic techniques.

The Company's Help Desk Consulting services help customers fully
realize the benefits of their own internal Help Desk. The Company establishes a
solutions-oriented support system which encompasses a phased approach to
analyzing, designing and building complete Help Desks. Help Desk Consulting
services includes a support system audit, development of a strategic design,
integration of the solution and post-implementation review.

IT Staffing Services
- --------------------

The Company offers recruiting and placement services for technical
personnel for temporary assignments and permanent positions.

Internet Services
- -----------------

The Company provides internet-related services, including secure
Internet access, web site design, development and maintenance and training. As
an Internet Service Provider, the Company's customers' web sites are
independently maintained on a secure network using technologies including
firewalls and encryption devices. Additionally, the Company provides the
necessary consulting, hardware and software installation services so the
customer has direct access to the Internet while maintaining the web site at the
customer's location.

The Company offers web site design, development and maintenance
services, including user interface design, web site graphic design, content
creation and management. Through customized courses at its Learning Centers, the
Company also provides Internet training classes on Internet access and
navigation.

Remote Network Management Services
- ----------------------------------

As part of its overall mission to offer complete IT solutions, the
Company's Remote Network Management Center ("Center"), located at its
headquarters in Cedar Knolls, New Jersey, provides remote network monitoring,
resolution management, performance reporting, desktop management and system
administration services by means of dedicated communication links to its
customers' networks. As a single-point-of-contact installation, the Center is a
central component of the Company's total system management and support service
offerings. The Center is operational 24 hours a day, seven days a week and is
staffed with highly trained and experienced Network Consultants.

The Center offers proactive problem resolution by (i) monitoring
components of a customer's network, including file servers, routers, database
servers, concentrators, workstations and printers; (ii) managing the customers'
networks to maximize their efficiency and minimize system downtime, promptly
notifying customers of problems as they occur and remedying such problems. The
customers then focus on their own core business, while the Company monitors and
manages the day-to-day operations of the customers' network. The Center
represents the Company's continued investment in leading-edge technology and
dedication to providing its customers with advanced IT solutions.

The Company provides end-to-end network services to remote locations
from a single point in New Jersey. The Center will allow the Company to
productize and market its services to virtually any networked organization. The
high demand for technical resources, coupled with an increasing need for
operational efficiency and network security, will lead many organizations to
explore remote network service options as a way to maximize their labor
resources and ensure greater security, while realizing cost savings at the same
time.

Sales and Marketing
- -------------------

The Company currently focuses its sales and marketing efforts on major
corporations in its target markets through its sales and marketing departments
consisting of 114 people as of December 31, 1998. The Company believes that its
direct sales and support personnel provide effective account penetration and
management, enhanced communications and long-term relationships with its
existing customers. To date, the Company has focused its sales and marketing
efforts on Fortune 1000 and other large and mid-sized companies located
primarily in the New York-to-Philadelphia corridor. Given the concentration of
major corporations in such region and the trend to outsourcing of IT services,
the Company does not anticipate the need to expand the geographic scope of its
sales and marketing efforts outside of its traditional sales area in the near
future.

The Company has concentrated its efforts over the past few years on
increasing the size and quality of its direct sales force, expanding its sales
support infrastructure and developing a marketing department dedicated to
supporting the efforts of the Company's various business units. The Company's
direct sales force is comprised of 49 sales persons as of December 31, 1998.
Each salesperson's compensation is commission based. Sales personnel derive
sales leads from individual business contacts, leads generated by the marketing
department's efforts and customer referrals from suppliers and vendors.

The Company continues to support the growth of its network consulting
and other services businesses through the hiring of additional direct sales and
support personnel. The Company's sales and marketing focus continues to be
technology driven, with its Network Consultants and Workstation Analysts
participating with its direct sales personnel as part of the Company's team
approach to sales. The Company's sales personnel also participate in training
programs designed by manufacturers to introduce their new and upgraded products
as well as to provide industry information and sales technique instruction. The
Company believes that it maintains a competitive advantage by continually
educating its sales force on the latest technologies and through the increased
role of high-level technical personnel in the sales process.

The Company's marketing department is responsible for coordinating the
various sales and technical personnel that may be required in soliciting a
particular project. The Company's marketing efforts include the creation and
production of Company brochures, direct mail programs, new business marketing
strategies and sales presentation materials for prospects.

Customers
- ---------

The Company's major customers include many Fortune 1000 corporations in
a variety of industries. The Company's major customers include:

KPMG LLP Credit Suisse First Boston
Nabisco Goldman, Sachs & Co.
PSE&G MTA of New York
Polo-Ralph Lauren Mercedes-Benz of North America
Summit Bank Innovex

During 1998, KPMG LLP accounted for approximately 15% of the Company's
net sales. During the fiscal year ended December 31, 1997, two customers,
Nabisco and KPMG LLP, accounted for approximately 31% of the Company's net
sales, 16% and 15%, respectively. During the fiscal year ended December 31,
1996, Nabisco accounted for approximately 17% of the Company's net sales. No
other customer accounted for more than 10% of the Company's net sales during the
three years ended December 31, 1998. Sales to the Company's top ten customers
totaled approximately 63%, 69% and 66% of net sales for the three years ended
December 31, 1998, respectively. In December 1997, the Company entered into a
four-year, $20.4 million contract ("MTA Contract") with the MTA to furnish and
install local and wide-area computer network components throughout the MTA's
over 200 locations, including subway stations, electrical power substations and
a diverse group of train car maintenance facilities. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."

In general, there are no ongoing written commitments by customers to
purchase products from the Company. All product sales by the Company are made on
a purchase order basis. In addition, the Company normally ships products within
30 days of receiving an order and, therefore, does not customarily have a
significant backlog. However, in December 1997, the Company entered into the MTA
Contract, under which the Company is the prime contractor responsible for
project management, systems procurement and installation.

A significant reduction in orders from any of the Company's largest
customers could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company's largest customers will
continue to place orders with the Company, or that orders by such customers will
continue at their previous levels. Although the Company has service contracts
with many of its customers to provide systems integration and other services,
such service contracts generally are terminable upon relatively short notice.
There can be no assurance that the Company's service customers will continue to
enter into service contracts with the Company or that existing contracts will
not be terminated.

10

Suppliers
- ---------

The Company relies on manufacturers and aggregators of computer
hardware, software and peripherals to develop, manufacture and supply all of the
computer components sold and serviced by the Company. The Company primarily
utilizes Ingram and Pinacor, major aggregators of computer hardware and
software, to procure the majority of its products for resale to its customers.

The Company has purchased products on a cost-plus basis from Pinacor
since the Company's inception in 1984. In July 1994, the Company renewed its
agreement with Pinacor. Under such agreement, the Company is required to
purchase a minimum of $100,000 of products from Pinacor per quarter. During
1996, 1997 and 1998, the Company purchased from Pinacor approximately 48%, 36%
and 29%, respectively, of the products sold by the Company. Such purchases
totaled approximately $46.3 million, $47.0 million, and $ 30.1 million during
such respective periods. The Pinacor agreement may be terminated by the Company
with or without cause upon 90 days prior written notice and may be terminated by
Pinacor under limited circumstances upon 90 days prior written notice. The
Company also purchases computer products from Ingram on a cost-plus basis. The
Company's relationship with Ingram was initiated by the Company in late 1994 to
help ensure its customers of product availability and competitive pricing. The
Company's purchases from Ingram accounted for approximately 35%, 50% and 47% of
the Company's total product purchases in 1996, 1997 and 1998, respectively. Such
purchases totaled approximately $33.9 million, $65.1 million and $48.4 million
during such respective periods. The agreement with Ingram may be terminated with
or without cause by either party upon 30 days prior written notice. The
Company's agreements with Pinacor and Ingram provide for discounted pricing and
rebates provided that the Company meets agreed-upon purchase level targets. The
balance of the Company's purchased products were obtained from multiple sources,
none of which accounted for 10% or more of the products sold by the Company.

In addition to its agreements with Pinacor and Ingram, the Company
maintains standard authorized dealership agreements directly with many leading
manufacturers of computer hardware and software. Under the terms of these
agreements, the Company is authorized to resell to end users and provide
warranty service on the products of such manufacturers. The Company's status as
an authorized reseller is essential to the operation of the Company's business.
In general, the agreements do not require minimum purchases and include
termination provisions ranging from immediate termination to termination upon 90
days prior written notice. Many of such agreements are based upon the Company's
continued relationships with authorized aggregators. The Company, however,
generally does not purchase products directly from these manufacturers because
the Company believes that Pinacor and Ingram provide it with several advantages,
including competitive pricing, limited inventory risk, ready product
availability, product quality assurance, access to the various vendors which may
be required on a particular project, electronic product ordering, product
configuration, testing and warehousing. The Company has not entered into any
long-term contracts with its suppliers, electing to purchase computers, computer
systems, components and parts on a purchase order basis. As a result, there can
be no assurance that such products will be available as required by the Company
at prices or on terms acceptable to the Company.

11

Competition
- -----------

The markets for the Company's products and services are characterized
by intense competition. The Company believes that the principal competitive
factors in the market for IT products and services include price, customer
service, breadth of product and service offerings, product availability,
technical expertise, the availability of skilled technical personnel, adherence
to industry standards, financial stability and reputation. The Company's
competitors include established computer product manufacturers (some of which
supply products to the Company), distributors, aggregators, computer resellers
(many of which are able to purchase products at prices lower than the Company),
systems integrators and IT service providers. Many of the Company's current and
potential competitors have longer operating histories and financial, sales,
marketing, technical and other resources substantially greater than those of the
Company. As a result, the Company's competitors may be able to adapt more
quickly to changes in customer needs or to devote greater resources than the
Company to the sales of IT products and the provision of IT services. Such
competitors could also attempt to increase their presence in the Company's
markets by forming strategic alliances with other competitors or customers of
the Company, offer new or improved products and services to the Company's
customers or increase their efforts to gain and retain market share through
competitive pricing. As the market for IT products has matured, price
competition has intensified and is likely to continue to intensify and has
resulted in continued industry-wide downward pricing pressure. In addition,
competition for quality technical personnel has continued to intensify,
resulting in increased personnel costs for many IT service providers. Such
competition in IT products and services has adversely affected, and likely will
continue to adversely affect, the Company's gross profits, margins and results
of operations. Furthermore, the Company believes there are low barriers to entry
into its markets which enable new competitors to offer competing products and
services. There can be no assurance that the Company will be able to continue to
compete successfully with existing or new competitors.

The Company believes that it competes with its competitors by providing
a single-source solution for its customers' IT products and services needs and
by providing a wider range of high quality services to the MIS departments and
end users of its corporate customers. The Company also believes that it
distinguishes itself from its competition on the basis of its technical
expertise, competitive pricing, vendor alliances, relationships with Ingram and
Pinacor, direct sales strategy and customer service orientation. Based on the
level of the Company's recurring business with many of its large customers, the
Company believes that it compares favorably to many of its competitors with
respect to the principal competitive factors set forth above.

Employees
- ---------

As of December 31, 1998, the Company employed 694 full-time employees,
of whom 483 were technical personnel (consisting of 331 Network Consultants, 123
Workstation Analysts, 18 Communications Technicians and 11 Instructors), 114
were engaged in sales and marketing, and 97 were engaged in finance,
administration and management. The total number of technical personnel engaged
by the Company has grown significantly in recent years, from 38 at December 31,
1992, or 36% of its then workforce, to 483 at December 31, 1998, or 70% of its
current workforce. There was, however, a reduction in technical personnel as of
December 31, 1998 compared to December 31, 1997 of 62 technical personnel. The
Company implemented a reduction-in-force in June 1998 due to lower-than-expected
demand for the Company's services from certain clients. In addition, in January
1999, the Company implemented a second reduction, eliminating 42 positions
consisting principally of persons supporting products.

12

None of the Company's employees are represented by a collective
bargaining agreement. Substantially all of the Company's employees have executed
an invention assignment and confidentiality agreement. In addition, the Company
requires that all new employees execute such agreement as a condition of
employment by the Company. The Company believes that it has been successful in
attracting and retaining skilled and experienced personnel. There is increasing
competition for experienced sales and marketing personnel and technical
professionals. The Company considers relations with its employees to be good.

The Company's success depends in part on its ability to attract, hire,
train and retain qualified managerial, technical and sales and marketing
personnel, particularly for systems integration, support services and training.
Competition with other service providers and internal corporate MIS departments
for such personnel is intense, as many of the Company's larger competitors are
aggressively hiring technical personnel on a large scale. There can be no
assurance that the Company will be successful in attracting and retaining the
technical personnel it requires to conduct and expand its operations
successfully. The Company's ability to implement its strategy to expand and
broaden the services component of its business and its results of operations
could be materially adversely affected if the Company were unable to attract,
hire, train and retain qualified technical personnel.

13

Item 2. Properties.
- --------------------

The Company currently leases or subleases all of its facilities. The
Company leases its headquarters in Cedar Knolls, New Jersey, totaling
approximately 54,000 square feet of office space, of which 16,000 square feet
was subleased to the Company in fiscal 1998 pursuant to a sublease agreement
expiring in September 2000. The lease for the remaining 38,000 square feet
expires in September 2003 and contains renewal options for two additional
five-year terms. In addition, during fiscal 1998, the Company entered into a
lease for approximately 4,700 square feet of space at a facility adjacent to the
Company's headquarters, which space the Company has subsequently sublet. The
Company also leases a facility in Parsippany, New Jersey, which totals 5,253
square feet which the Company has sublet pursuant to a sublease agreement
expiring in May 2001. Additionally, the Company leases office space for two
Learning Centers in Iselin and Saddle Brook, New Jersey, as well as its 15,000
square foot Customer Technology Center located in East Hanover, New Jersey. The
Company leases approximately 5,410 square feet of office space in King of
Prussia, Pennsylvania for the Company's Philadelphia-area sales office and
Learning Center. In addition, the Company leases approximately 19,000 square
feet of office space in Manhattan for its New York City area sales office and
Learning Center, approximately 9,400 square feet of which space has recently
been sublet. The Company believes its headquarters, sales offices, Learning
Centers and Customer Technology Center are adequate to support its current level
of operations. See Note 8 of Notes to Consolidated Financial Statements.

Item 3. Legal Proceedings.
- ---------------------------

On February 13, 1996, the Company, as plaintiff, filed a complaint and jury
demand in the Superior Court of New Jersey Chancery Division: Morris County,
against two former employees of the Company and their current employer
(together, the "Defendants"). Such complaint relates to a civil action for
damages, a temporary restraining order and preliminary and permanent injunctive
relief against the Defendants and alleges theft of services, theft of Company
property, theft of corporate opportunity and unauthorized use of Company credit
cards by the Defendants. The Company is seeking restitution from certain of the
Defendants and additional compensatory damages from another Defendant. The
Defendants have asserted certain counterclaims against the Company and certain
of its directors with respect to which the Company and such directors believe
they have meritorious defenses. The Company intends to vigorously pursue all
available remedies against the Defendants. The parties consented to the
suspension of discovery pending mediation of all claims. Therefore, the Company
is currently unable to evaluate the likelihood of a favorable outcome for the
Company. The Company believes that some or all of its damages in connection with
the litigation may be covered by insurance. In any event, Stan Gang, the
Company's Chairman of the Board, President and Chief Executive Officer and
principal shareholder, has agreed to indemnify the Company for any and all
losses which the Company may sustain, up to $1,000,000, arising from or relating
to the alleged wrongful conduct of the Defendants. In connection therewith, Mr.
Gang has paid $675,000 of his personal funds to the Company. The Company will
reimburse Mr. Gang in the event and to the extent that the Company is awarded
and collects damages from the Defendants, receives sums as a result of a
settlement between the Company and the Defendants, or receives proceeds under an
insurance policy.

14

On June 30, 1998, Bruce Flitcroft ("Flitcroft"), the Company's former
Corporate Vice President, Technology Services, filed suit in the Superior Court
of New Jersey, Morris County, against the Company and its Chairman of the Board,
President and CEO alleging, among other things, breach by the Company of
Flitcroft's employment agreement and failure to pay an alleged bonus arising
from the Company's 1990 acquisition of Datar IDS Corp. and/or pay, pursuant to
an alleged oral promise, an alleged one million-dollar severance payment in lieu
of such bonus. The Company believes Flitcroft's claims are without merit and
intends to fully and vigorously defend such claims while pursuing all available
remedies. On July 16, 1998, without knowledge of the suit filed by Flitcroft,
the Company filed suit against Flitcroft and Alliant Technologies, Inc.
("Alliant"), a company believed to be owned and/or operated by Flitcroft,
alleging, among other things, breach of contract and conspiracy to usurp
corporate assets and opportunities. The Company seeks to enforce its employment
agreement with Flitcroft including (i) enjoining Flitcroft's employment with
Alliant; (ii) Flitcroft's solicitation of Company employees; (iii) Flitcroft
from disclosing Company confidential information; and (iv) Flitcroft from
soliciting Company customers. The Court has directed arbitration of the claims
in dispute in this matter, and such arbitration proceedings commenced as of
March 1999. The Company has obtained insurance coverage for some of the claims
in dispute. The Company's Board of Directors authorized the Company to defend
the Chairman, President and CEO and approved his indemnification by the Company.
Given the preliminary nature of this matter, the Company cannot determine at
this time whether its resolution or the expenses likely to be incurred in this
matter will have a material adverse impact on the Company's financial position,
results of operations or cash flow.

To the Company's knowledge, there is no other material litigation pending
to which the Company is a party or to which any of its property is subject.

Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------

No matter was submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended December 31, 1998.

15

PART II

Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
- --------------------------------------------------------------------------------

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol ALPH. The following table sets forth, for the periods indicated, the
high and low sales prices per share of Common Stock as reported by the Nasdaq
National Market.

Quarter ended
- -------------
1997 1998
High Low High Low
- --------------------------- ------- ------- ------- ---------
March 31 (1st qtr.) $17 1/4 $11 3/4 $14 5/8 $11 1/2

June 30 (2nd qtr.) 20 1/2 11 7/8 14 3/8 9 1/2

September 30 (3rd qtr.) 17 7/8 13 1/4 11 3/8 4 3/8

December 31 (4th qtr.) 15 7/8 9 5/8 5 7/8 2 7/8

The prices shown above represent quotations among securities dealers,
do not include retain markups, markdowns or commissions and may not represent
actual transactions.

On February 26, 1999, the closing sale price for the Common Stock on
the Nasdaq National Market was $4.00 per share. As of February 26, 1999, the
approximate number of holders of record of the Common Stock was 335 and the
approximate number of beneficial holders of the Common Stock was 3,900.

Prior to the consummation of the Company's initial public offering of
its Common Stock in March 1996, the Company had elected to be treated as an S
Corporation for federal income tax purposes from 1986 and for New Jersey State
income tax purposes from 1994. As a result, the net income of the Company for
federal and certain state income tax purposes for such periods was reported by,
and taxed directly to, the Company's then current shareholders. In 1995 and
1996, the Company made distributions to such shareholders in the form of
dividends ($8.6 million) and net loan payments ($719,000) totaling $9.3 million
(of which $3.1 million was to fund their 1994, 1995 and 1996 tax liabilities and
$6.2 million represented substantially all of the Company's previously taxed but
undistributed S Corporation earnings). See Note 10 of Notes to Consolidated
Financial Statements. Since such distributions and the termination of the
Company's S Corporation status, the Company has applied and currently intends to
continue to apply its retained and current earnings toward the developments of
its business and to finance the growth of the Company. Consequently, the Company
currently does not anticipate paying cash dividends in the foreseeable future.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources."

16

Item 6. Selected Financial Data.
- ---------------------------------

The selected consolidated financial data presented below has been derived
from the consolidated financial statements of the Company audited by
PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets
at December 31, 1997 and 1998 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998 and notes thereto appear elsewhere in this
Annual Report on Form 10-K. The selected financial data presented below at
December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and
1995 has been derived from audited financial statements of the Company, which
are not included in this Annual Report on Form 10-K.

The selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.

17

Year Ended December 31,
-----------------------------------------------------------------
1994 1995 1996(1) 1997(2) 1998
(in thousands, except per share data)

Statement of Income Data:
Net sales:
Product sales..................... $ 62,365 $ 62,516 $ 99,468 $147,602 $116,908
Services and support.............. 8,103 11,500 20,137 43,790 54,628
----- ------ ------ ------ ------
70,468 74,016 119,605 191,392 171,536
----- ------ ------ ------ ------
Cost of sales:
Product sales..................... 54,445 54,579 88,218 130,314 103,522
Services and support.............. 5,127 6,869 12,915 29,013 37,058
----- ------ ------ ------ ------
59,572 61,448 101,133 159,327 140,580
----- ------ ------ ------ ------
Gross profit:
Product sales..................... 7,920 7,937 11,250 17,288 13,386
Services and support.............. 2,976 4,631 7,222 14,777 17,570
----- ------ ------ ------ ------
10,896 12,568 18,472 32,065 30,956
----- ------ ------ ------ ------
Operating expenses:
Selling expenses.................. 3,946 4,468 7,301 13,224 14,602
General and administrative 3,767 3,925 5,446 9,537 12,903
expenses............................
Write-off of capitalized asset (3) - - - - 2.476
----- ------ ------ ------ ------
7713 8393 12,747 22,761 29,981
----- ------ ------ ------ ------
Operating income.................... 3,183 4,175 5,725 9,304 975
Other income (expense), net......... (107) (86) 129 61 359
----- ------ ------ ------ ------
Income before income taxes.......... 3,076 4,089 5,854 9,365 1,334
Provision for income taxes(4)....... 89 124 1,970 3,844 623
----- ------ ------ ------ ------
Net income.......................... $2,987 $3,965 $ 3,884 $ 5,521 $ 711
====== ====== ====== ====== ======
Earnings per share - Basic.......... $ 0.88 $ 1.17 $ 0.83 $ 0.97 $ 0.11
====== ====== ====== ====== ======
Weighted average shares outstanding. 3,400 3,400 4,690 5,719 6,272
====== ====== ====== ====== ======

Earnings per share - Diluted........ $ 0.88 $ 1.17 $ 0.82 $ 0.93 $ 0.11
====== ====== ====== ====== ======
Weighted average shares outstanding. 3,400 3,400 4,737 5,905 6,331
====== ====== ====== ====== ======

As of December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital.................... $4,524 $5,033 $14,407 $33,123 $35,375
Total assets....................... 16,697 18,770 43,647 72,541 61,894
Long term debt and capital lease
obligations, 1,455 590 41 - 49
less current portion.............
Shareholders' equity............... 3,909 6,574 18,921 41,722 42,536

(1) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations related
to the acquired assets of Lior are included in the accompanying consolidated
financial statements subsequent to July 24, 1996. See Note 2 of Notes to
Consolidated Financial Statements.

(2) On August 1, 1997, the Company consummated the acquisition of certain assets
and assumed certain liabilities of the Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services,
for $1.5 million, including acquisition costs. The original acquisition
price was $1.8 million, subsequently reduced by the return of $250,000 held
in escrow. The operations related to the acquired assets and liabilities of
Lande are included in the accompanying consolidated financial statements
subsequent to August 1, 1997. See Note 2 of Notes to Consolidated Financial
Statements.

(3) Reflects a one-time write-off of capitalized software and consulting fees
associated with the Company's termination of an integrated accounting
software program and implementation thereof.

(4) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, no provision for federal and a reduced provision for state income
taxes was recorded prior to that date. See Note 10 of Notes to Consolidated
Financial Statements.

18

Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
- -------------------------------------------------------------------------

General
- -------

The Company is a single-source provider of IT products, services and
support to Fortune 1000 and other large and mid-sized companies located
primarily in the New York-to-Philadelphia corridor. The Company was formed in
1984 as an authorized reseller of computer hardware and software products, and
since 1990 has been developing and offering related IT services. To date, most
of the Company's net sales have been derived from IT product sales. In 1998, net
product sales were 68.2% and services and support revenue was 31.8% of the
Company's net sales, compared with net product sales of 77.1% and services and
support revenue of 22.9% in 1997.

The Company has entered into distribution agreements with Ingram and
Pinacor, two of the nation's largest aggregators, to acquire most of its IT
products for resale. The Company's relationship with Pinacor commenced in 1984
and, as customer demand for IT products grew, the Company initiated its
relationship with Ingram in 1994. The distribution agreements with Pinacor and
Ingram give the Company access to such aggregators' extensive inventories and
provide the Company with electronic ordering capability, product configuration
and testing, warehousing and delivery. In general, the Company orders IT
products, including workstations, servers, enterprise computing products,
networking and communications equipment, and applications software from such
aggregators on an as-needed basis, thereby reducing the Company's need to carry
large inventories. During 1998, the Company acquired approximately 47% and 29%
of its products for resale from Ingram and Pinacor, respectively.

Except for the MTA Contract entered into in December 1997, in general,
there are no ongoing written commitments by customers to purchase products from
the Company and all product sales are made on a purchase order basis.
Furthermore, as the market for IT products has matured, price competition has
intensified and is likely to continue to intensify. During 1998, the Company's
gross profits, margins and results of operations were adversely affected by such
continued product pricing pressure and by a significant reduction in product
purchase orders from the Company's customers. In addition, the Company's gross
profits, margins and results of operations could be adversely affected by a
disruption in the Company's sources of product supply.

The Company offers network consulting, workstation support, applications
development, communications installation, education, help desk, remote network
management, IT staffing and internet-related services. Services and support
revenue is recognized as such services are performed. The Company's network
consulting, workstation support and communications installation services are
billed on a time and materials basis. The Company's education and IT staffing
services are fee-based on a per-course and per-placement basis, respectively.
Generally, the Company's service arrangements with its customers may be
terminated by such customers with limited advance notice and without significant
penalty. The most significant cost relating to the services component of the
Company's business is personnel costs which consist of salaries, benefits and
payroll-related expenses. Thus, the financial performance of the Company's
service business is based primarily upon billing margins (billable hourly rates
less the costs to the Company of such service personnel on an hourly basis) and
utilization rates (billable hours divided by paid hours). The future success of

19

the services component of the Company's business will depend in large part upon
its ability to maintain high utilization rates at profitable billing margins.
The competition for quality technical personnel has continued to intensify
resulting in increased personnel costs for the Company and many other IT service
providers, which has adversely affected the Company's billing margins. The
Company implemented a reduction-in-force in June 1998 due to lower-than-expected
demand for the Company's services from certain clients. In addition, in January
1999, the Company implemented a second reduction, eliminating 42 positions
consisting principally of persons supporting product sales.

The Company may receive manufacturer rebates resulting from equipment
sales. In addition, the Company receives volume discounts and other incentives
from certain of its suppliers. Except for products in transit or products
awaiting configuration at a Company facility, the Company generally does not
maintain large inventory balances. The Company's primary vendors have announced
or instituted changes in their price protection and inventory management
programs as a direct result of changes in such policies by manufacturers.
Specifically, they have announced that they will (i) limit price protection to
that provided by the manufacturer, generally less than 30 days, rather than the
unlimited protection previously available; and (ii) restrict product returns,
other than defective returns, to a percentage (the percentage varies depending
on the vendor and when the return is made) of product purchased, during a
defined period, at the lower of the invoiced price or the current price, subject
to the specific manufacturer's requirements and restrictions. At the present
time, the Company does not believe these changes in the vendor policies will
have a material impact on its business. Other than changes in such price
protection and return policies, the Company is unaware that any of its suppliers
or manufacturers have changed or intend to further change these programs. There
can be no assurances that any such rebates, discounts or incentives will
continue at historical levels, if at all. Further adverse modification,
restriction or reduction in such programs could have a material adverse effect
on the Company's financial position, results of operations, or cash flows.

The Company's cost of sales includes primarily, in the case of product
sales, the cost to the Company of products acquired for resale, and in the case
of services and support revenue, salaries and related expenses for billable
technical personnel. The Company's selling expenses consist primarily of
personnel costs, including sales commissions earned by employees involved in the
sales of IT products, services and support. These personnel include direct
sales, sales support and marketing personnel. Sales commissions are recorded as
revenue is recognized. General and administrative expenses consist of all other
operating expenses, including primarily salaries and related expenses,
depreciation and occupancy costs.

During the last three fiscal years, the gross margins earned on services
and support sales decreased from 35.9% for 1996, to 33.7% for 1997, and 32.2%
for 1998. This decline in gross margins is attributable to increased
competition, lower utilization rates, the impact of the MTA Contract and
services and support revenue increasing at a slower rate than related personnel
and recruiting costs. Recent declines in product and services support sales have
resulted in lower utilization rates and margins. In response to these trends,
the Company is emphasizing its higher margin, value-added services and support
offerings, including, among other services, network integration, applications

20

development and internet-related offerings. If these trends continue into 1999,
the Company will examine the advisability of additional reductions-in-force.

The Company believes that its ability to provide a broad range of technical
services, coupled with its traditional strength in satisfying its customers' IT
product requirements and its long-term relationships with large customers,
positions the Company to continue to grow the services component of its
business. As such, the Company anticipates that an increasing percentage of its
gross profits in the future will be derived from the services and support
component of its business. However, in the near term, the Company believes that
product sales will continue to generate a significant percentage of the
Company's gross profit. The Company's ability to be a single-source provider of
IT products, services and support enables it to earn margins higher than it
would earn if it sold products only.

The Company's net sales, gross profit, operating income and net income have
varied substantially from quarter to quarter and are expected to do so in the
future. Many factors, some of which are not within the Company's control, have
contributed and may in the future contribute to fluctuations in operating
results. These factors include: the short-term nature of the Company's
customers' commitments; patterns of capital spending by customers; the timing,
size, and mix of product and service orders and deliveries; the timing and size
of new projects; pricing changes in response to various competitive factors;
market factors affecting the availability of qualified technical personnel;
timing and customer acceptance of new product and service offerings; changes in
trends affecting outsourcing of IT services; disruption in sources of supply;
changes in product, personnel, and other operating costs; and industry and
general economic conditions. Operating results have been and may in the future
also be affected by the cost, timing and other effects of acquisitions,
including the mix of product and service revenues of acquired companies. The
Company believes, therefore, that past operating results and period-to-period
comparisons should not be relied upon as an indication of future operating
performance.

The Company experienced negative operating results during the quarter
ended September 30, 1998 primarily due to the one time write-off of capitalized
software and consulting fees associated with the Company's termination of an
integrated accounting software program and implementation thereof. During the
quarter ended December 31, 1998, the Company experienced negative operating
results primarily due to reduced unit volume and lower average selling prices on
product sales. In addition, reduced demand by certain customers for the
Company's services and support offerings lowered the utilization rates of
billable personnel during the quarter, and the effect of the MTA Contract (see
below) negatively impacted gross profits.

The Company's operating results have been and in the future will continue
to be impacted by changes in technical personnel billing and utilization rates.
Many of the Company's costs, particularly costs associated with services and
support revenue, such as administrative support personnel and facilities costs,
are for the most part fixed costs. The Company's expense levels are based in
part on expectations of future revenues. Technical personnel utilization rates
have been and are expected to continue to be adversely affected during periods
of rapid and concentrated hiring. Depending upon the availability of qualified
technical personnel, during periods of rapid growth the Company has utilized and

21

in the future is likely to utilize contract personnel, which also adversely
affects gross margins. Due to these and other factors, if the Company is
successful in expanding its service offerings and revenue, periods of
variability in utilization are likely to reoccur. In addition, during such
periods the Company is likely to incur greater technical training costs.
Quarterly results also may be impacted due to the fact that certain
compensation-based employment taxes are limited per employee per calendar year
and, as a result, the Company experienced a decrease in employment taxes as a
percentage of revenue during the calendar year.

In December 1997, the Company entered into a four-year, $20.4 million
contract with the MTA to furnish and install local and wide-area computer
network components including network and telecommunication hardware, software
and cabling throughout the MTA's over 200 locations to extend the benefits of
automation to the MTA's operations, including subway stations, electrical power
substations and a diverse group of train car maintenance facilities. The Company
is the prime contractor responsible for project management, systems procurement
and installation. The work is grouped in contiguous locations and payment is
predicated upon achieving specific milestone events. While the Company is
currently performing in accordance with the contract terms, there can be no
assurances that any such events would not occur. In the event of default, in
addition to all other remedies at law, the MTA reserves the right to terminate
the services of the Company and complete the contract itself at the Company's
cost. In the event of unexcused delay by the Company, the Company may be
obligated to pay, as liquidated damages, the sum of $100 per day. In addition
the contract is a fixed unit price contract, and the quantities are approximate,
for which the MTA has expressly reserved the right, for each item, to direct the
amount of equipment be increased, decreased or omitted entirely on 30 days
notice. Further, the MTA has the right to suspend the work on 10 days notice for
up to 90 days and/or terminate the contract, at any time, on notice, paying only
for the work performed to the date of termination. The project is subject to the
prevailing wage rate and classification for telecommunication workers, managed
by the New York City Controller's office, over which the Company has no control,
and which is generally adjusted in June of each year and may be so adjusted in
the future.

The Company has performed services and supplied products to the MTA since
the inception of the MTA Contract. The work performed to date has required
greater than estimated labor and other costs to complete. Such increased labor
and other costs may also be incurred at other sites. The Company has requested
the MTA for an equitable adjustment in the contract amount and terms. However,
there can be no assurance the MTA will approve, either in whole or in part, any
equitable adjustment in the contract amount or terms requested by the Company.
There can be no assurance that the Company can complete the contract without
incurring a loss. Currently, the Company is recording revenues under the MTA
Contract equal to costs incurred. However, if the Company is unsuccessful in
obtaining equitable adjustments, realizing increased performance efficiencies or
otherwise improving its margins, the Company believes it will sustain a loss
under the contract. The aggregate revenues generated and costs incurred from the
MTA Contract for the fiscal year ended December 31, 1998 were approximately $6
million.

Year 2000 Readiness Disclosure
- ------------------------------

Historically, certain computer programs have been written using two
digits rather than four to define the applicable year, which could result in
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,

22

and is generally referred to herein as the "Year 2000 Problem". Computer systems
that are able to deal correctly with dates after 1999 are referred to as "Year
2000-Compliant". Over the past several years, based upon its business needs, the
Company has purchased and installed hardware and software which is represented
by the manufacturers to be Year 2000-Compliant. The Company has reviewed its
state of readiness and has determined that, with the exception of the Company's
current integrated accounting systems, which is not Year 2000-Compliant, the
Company believes its installed base of computer hardware and software systems to
be Year 2000-Compliant. With respect to the Company's integrated accounting
system, in October of 1998 the Company announced the purchase of Platinum SQL
Software, to replace the current integrated accounting system. The project plan
establishes May 1999 for completion of implementation. Based upon the
representations of the manufacturers of hardware and software used by the
Company, and the provider of the Platinum SQL Software, the Company believes
upon implementation of Platinum SQL, the Company's internal business systems,
including its computer systems, will be Year 2000-Compliant. There can be no
assurance, however, that the Year 2000 Problem relating to the Company's systems
will not adversely affect its business, financial position, results of operation
or cash flows.

During the fourth quarter of 1998, the Company initiated formal
communications with its significant suppliers and large customers to determine
the extent to which the Company is vulnerable to the failure of those third
parties to remediate their own Year 2000 Problem. The Company expects to be
receiving and reviewing the responses to these communications and following up
with such suppliers and customers as needed or appropriate. The Company expects
this phase to be substantially completed by approximately June 30, 1999.
However, there can be no guarantee that the systems of other companies on which
the Company's system relies will be remedied in a timely manner, or that a
failure to remedy by another company will not have a material adverse effect on
the Company.

The Company resells IT products of leading hardware manufacturers and
software developers. As a result, the Company has no control over the
developments of computer systems, software products or other business systems
developed by such third parties. Consequently, there can be no assurance that
the computer systems, software products or other business systems sold by the
Company will accept input of, store, manipulate and/or output dates in the Year
2000 or thereafter without error or interruption. As a result, the Company, as a
reseller, may be liable for such failures. Given the Company's role in the
distribution of such products, the Company is not able to accurately determine
the extent, if any, of such potential liability.

In addition, the purchasing patterns of the Company's customers and
potential customers may be affected by issues associated with the Year 2000
Problem. As companies devote significant resources to become Year
2000-Compliant, these expenditures may result in reduced funds available to
purchase products or obtain services such as those offered by the Company. There
can be no assurance that the Year 2000 Problem will not adversely affect the
Company's business, financial position, results of operations or cash flows.

The total cost of the Company's Year 2000 compliance is being funded
through operating cash flows. The estimated cost to purchase and install
Platinum SQL is approximately $600,000. Excluding costs associated with Platinum

23

SQL and the write-off of the capitalized software and consulting fees, the
Company has expended approximately $2 million on hardware and software upgrades
for its Year 2000 compliance. The Company does not currently anticipate that it
will incur any additional material expenditures for such Year 2000 compliance.
The aforementioned costs do not include any costs associated with any third
party being Year 2000 non-compliant, nor do such costs include internal
personnel costs (primarily salaries and benefits), which the Company does not
separately track. Such costs also do not include any contingency plan costs at
this point.

The Company has not developed a contingency plan in the event the
Platinum SQL project is not completed in a timely manner or with respect to any
additional Year 2000-Compliant issues which may arise as a result of the
Company's inquiries of its suppliers and customers. Such plans may be developed
as and if the need for any such plans arise.

Statements included in this Year 2000 Readiness Disclosure are
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. Such forward-looking statements include risks and
uncertainties, including but not limited to the possibility that the currently
installed computer systems, software products or other business systems of the
Company or its distributors, manufacturers or customers, working either alone or
in conjunction with other software or systems, will not accept input of, store,
manipulate and/or output dates in the year 2000 or thereafter without error or
interruption. Such risks and uncertainties may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements contained in this Report.

24

Results of Operations
- ---------------------

The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales, and the percentage change in the
dollar amount of such data compared to the prior year:

Percentage
Percentage of Net Sales Increase
Year Ended December 31, (Decrease)
----------------------------------- ---------------------------
1997 1998
Over Over
1996(1) 1997(2) 1998 1996 1997
------- ------- ---- ---- ----

Net Sales:
Product Sales 83.2% 77.1% 68.2% 48.4% (20.8)%
Services and support...................... 16.8 22.9 31.8 117.5 24.7
---- ---- ---- ----- ----
100.0 100.0 100.0 60.0 (10.4)
Cost of sales.................................. 84.6 83.2 82.0 57.5 (11.8)
---- ---- ---- ----- ----
Gross profit................................... 15.4 16.8 18.0 73.6 (3.5)
---- ---- ---- ----- ----
Operating expenses:
Selling expense:.......................... 6.1 6.9 8.5 81.1 10.4
General and administrative expenses....... 4.5 5.0 7.5 75.1 35.3
Write-off of capitalized asset (3)........ - - 1.4 - 100
---- ---- ---- ----- ----
10.6 11.9 17.4 78.6 31.7

Operating income............................... 4.8 4.9 0.6 62.5 (89.5)
Other income (expense), net.................... 0.1 0.0 0.2 (52.7) 488.5
---- ---- ---- ----- ----
Income before pro forma income taxes........... 4.9 4.9 0.8 60.0 (85.8)
Pro forma provision for income taxes (4)....... 2.0 2.0 0.4 95.1 (83.8)
---- ---- ---- ----- ----
Pro forma net income........................... 2.9% 2.9% 0.4% 42.1 (87.1)
==== ==== ==== ===== ====
Gross profit (as a percentage of related net sales):
Product sales............................. 11.3% 11.7% 11.5% 53.7% (22.6)%
Service and support....................... 35.9% 33.7% 32.2% 104.6% 18.9%

(1) On July 24, 1996, the Company acquired certain assets of Lior, Inc., in a
business combination accounted for under the purchase method, for $1.1
million, including acquisition costs, financed with a portion of the
proceeds from the Company's initial public offering. The operations related
to the acquired assets of Lior are included in the accompanying consolidated
financial statements subsequent to July 24, 1996. See Note 2 of Notes to
Consolidated Financial Statements.

(2) On August 1, 1997, the Company consummated the acquisition of certain assets
and assumed certain liabilities of the Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services,
for $1.5 million, including acquisition costs. The original acquisition
price was $1.8 million, subsequently reduced by the return of $250,000 held
in escrow. The operations related to the acquired assets and liabilities of
Lande are included in the accompanying consolidated financial statements
subsequent to August 1, 1997. See Note 2 of Notes to Consolidated Financial
Statements.

(3) Reflects a one-time write-off of capitalized software and consulting fees
associated with the Company's termination of an integrated accounting
software program and implementation thereof.

(4) Prior to March 19, 1996, the Company had elected to be treated as an S
Corporation for federal and, in certain cases, state income tax purposes.
Therefore, no provision for federal and a reduced provision for state income
taxes was recorded prior to that date. See Note 10 of Notes to Consolidated
Financial Statements. In the above table, for comparative purposes, pro
forma income taxes have been provided as if the Company was a C Corporation
for periods prior to March 19, 1996.

Comparison of Years Ended December 31, 1998 and 1997
- ----------------------------------------------------

Net Sales. Net sales decreased by 10.4%, or $19.9 million, from $191.4
million in 1997 to $171.5 million in 1998. Product sales decreased by 20.8%, or
$30.7 million, from $147.6 million in 1997 to $116.9 million in 1998. This
decline in product sales was primarily attributable to increased competition,
reduced unit volume and lower average selling prices. This trend has been
accelerated by the ability of customers to purchase directly from certain
manufacturers at discounted prices. Services and support revenue increased by
24.7%, or $10.8 million, from $43.8 million in 1997 to $54.6 million in 1998.

25

This increase was primarily attributable to increased demand for the Company's
services and support offerings, particularly its network consulting services,
and an increase in the number and size of customer projects. Notwithstanding the
year-to-year increase in services and support revenue, the Company experienced a
decline in such revenue in the fourth quarter of 1998 as compared to the fourth
quarter of 1997. This decline was primarily attributable to decreased demand
from certain customers. In response, the Company is emphasizing its higher
margin, value-added services and support offerings, including, among other
services, network integration, applications development and internet-related
offerings. In 1998, sales to KPMG LLP accounted for approximately 15% of the
Company's net sales. There can be no assurance that such customer will continue
to place orders with the Company or engage the Company to perform services and
support at existing levels.

Gross Profit. The Company's gross profit declined by 3.5%, or $1.1 million,
from $32.1 million in 1997 to $31.0 million in 1998. The Company's overall gross
profit margin increased from 16.8% of net sales in 1997 to 18.0% in 1998
primarily due to the improved sales mix resulting from higher services and
support revenue. Gross profit margin attributable to product sales decreased
from 11.7% in 1997 to 11.5% in 1998 due to downward pricing pressure on
products. The Company is addressing this trend by increasing its emphasis on
comprehensive, higher-margin solution-based offerings. Gross profit margin
attributable to services and support revenue decreased from 33.7% of services
and support revenue in 1997 to 32.2% in 1998. This decrease was attributable
primarily to lower utilization of billable personnel, the effect of the MTA
Contract, several long-term staffing contracts, which typically yield lower
gross margins than projects, and services and support revenue increasing at a
slower rate than related personnel and recruiting costs.

Selling Expenses. Selling expenses increased by 10.4%, or $1.4 million,
from $13.2 million in 1997 to $14.6 million in 1998, and from 6.9% of net sales
in 1997 to 8.5% in 1998. The increase in selling expenses in absolute dollars
was primarily attributable to increased sales salaries and other support costs
and the increase in sales and marketing efforts associated with the Company's
services and support offerings. The increase in selling expenses as a percentage
of net sales was primarily due to the decrease in net sales in 1998.

General and Administrative Expenses. General and administrative expenses
increased by 35.3%, or $3.4 million, from $9.5 million in 1997 to $12.9 million
in 1998, an increase from 5.0% to 7.5% of net sales, respectively. The increase
in general and administrative expenses in absolute dollars and as a percentage
of net sales was due primarily to personnel and related expenses, training
costs, professional fees, depreciation and amortization charges, additional
leased facilities and related costs, communication costs and insurance premiums.
The increase in general and administrative expenses as a percentage of net sales
was also due to the decrease in net sales in 1998.

Write-off of Capitalized Software and Consulting Fees. In connection with
the one-time write-off of capitalized software and consulting fees associated
with the Company's termination of implementation of an integrated accounting
software program, the Company recorded a charge of $2.5 million.

26

Comparison of Years Ended December 31, 1997 and 1996
- ----------------------------------------------------

Net sales. Net Sales increased by 60.0%, or $71.8 million, from $119.6
million in 1996 to $191.4 million in 1997. Product sales increased by 48.4%, or
$48.1 million, from $99.5 million in 1996 to $147.6 million in 1997. This
increase was attributable primarily to increased demand from the Company's
established customer base and to product sales resulting from the Company's
August 1997 acquisition of certain assets and liabilities of Lande. Services and
support revenue increased by 117.5%, or $23.7 million, from $20.1 million in
1996 to $43.8 million in 1997. This increase was attributable primarily to
increased demand for the Company's services and support offerings, particularly
its network consulting services, due to an increase in the number and size of
customer projects. In 1997, sales to Nabisco and KPMG LLP, the Company's largest
customers accounted for approximately 16% and 15% respectively of the Company's
net sales. There can be no assurance that such customers will continue to place
product orders with the Company or engage the Company to perform services and
support at existing levels.

Gross profit. The Company's gross profit increased by 73.6%, or $13.6
million, from $18.5 million in 1996 to $32.1 million in 1997. The Company's
overall gross profit margin increased due to the improved sales mix resulting
from higher services and support revenue. Total gross margins increased from
15.4% of net sales in 1996 to 16.8% in 1997 primarily due to increased
manufacturer rebates and increased volume discounts earned resulting from the
higher sales volume. Gross profit margin attributable to product sales increased
from 11.3% in 1996 to 11.7% in 1997. However, the Company expects that downward
pricing pressure on products will continue and there can be no assurance that
the Company will be able to sustain its margins on product sales in the future.
Gross profit margin attributable to services and support revenue decreased from
35.9% of services and support revenue in 1996 to 33.7% in 1997. The decrease in
such gross profit margin was attributable primarily to the addition of several
long-term staffing contracts, which typically yield lower gross margins than
projects, and to the fact that services and support revenue increased at a
slower rate than related personnel and recruiting costs, as the Company
accelerated the hiring and training of technical personnel in anticipation of
the increased demand for its services. The Company increased its staff of
billable technical personnel from 242 at December 31, 1996 to 545 at December
31, 1997.

Selling expenses. Selling expenses increased by 81.1%, or $5.9 million,
from $7.3 million in 1996 to $13.2 million in 1997 and from 6.1% in 1996 to 6.9%
in 1997 of net sales. The increase in selling expenses in absolute dollars was
attributable primarily to increased salesperson commissions and other support
costs due to the increase in net sales, the increase in sales and marketing
efforts associated with the Company's services and support offerings and the
costs associated with the Company's new services offerings. The increase as a
percentage of net sales was due primarily to increased salesperson commission,
additional support personnel and related personnel costs.

General and administrative expenses. General and administrative expenses
increased by 75.1% or $4.1 million, from $5.4 million in 1996 to $9.5 million in
1997, and increase from 4.5% to 5.0% of net sales, respectively. The increases
in absolute dollar terms were primarily in personnel expenses, training costs,
professional fees, accounts receivable allowances, depreciation charges and

27

insurance premiums. The increase as a percentage of net sales was due primarily
to the additional personnel costs and depreciation.

Pro Forma Adjustments for Income Taxes
- --------------------------------------

Prior to the consummation of the Company's initial public offering of its
Common Stock in March 1996, the Company had elected S Corporation treatment for
federal income tax purposes from 1986 and for New Jersey state income tax
purposes from 1994. As a result, for such tax periods, the Company's earnings
were taxed directly to the Company's then current shareholders. The historical
financial statements for the years 1992 through 1995, therefore, do not include
a provision for federal and state income taxes for such periods, except for
certain state income taxes imposed at the corporate level. Accordingly, for such
periods and for the period January 1 through March 19, 1996 (the date on which
the Company terminated its S Corporation status and became subject to federal
and state income taxes at applicable C Corporation income tax rates) pro forma
adjustments for income taxes were calculated as if the Company had been fully
subject to federal and state income taxes based on the tax laws in effect for
the respective periods using the criteria established under Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes". The pro
forma effective tax rates for the years ended December 31, 1994, 1995 and 1996
were 40.5%, 40.4% and 40.8%, respectively. See Note 10 of Notes to Consolidated
Financial Statements.

Recently Issued Accounting Standards
- ------------------------------------

In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 applies to all public companies and is effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the financial statements
utilizing the management approach. The management approach is defined as the
manner in which management organizes the segments within the enterprise for
making operating decisions and assessing performance. The adoption of SFAS No.
131 did not have a material impact on the financial statements.

Liquidity and Capital Resources
- -------------------------------

In March and April 1996, the Company consummated an initial public offering
of 2,200,000 shares of its Common Stock at a price to the public of $10.50 per
share. Of the 2,200,000 shares sold, 1,700,000 shares (including 100,000 shares
issued and sold by the Company upon the exercise of the underwriters'
over-allotment option) were issued and sold by the Company and 500,000 shares
were sold by The Gang Annuity Trust. The Company did not receive any of the
proceeds from the sale of shares by such selling shareholder. The net proceeds
to the Company were $15.7 million.

On June 18, 1997, the Company consummated a follow-on public offering of
2,000,000 shares of its Common Stock at a price to the public of $16.50 per
share. Of such shares, 1,150,000 were issued and sold by the Company and an
aggregate of 850,000 shares were sold by Stan Gang, the Company's founder,
Chairman, President and Chief Executive Officer, and The Gang Annuity Trust. The
Company received $15.51 per share, before offering expenses, resulting in net
proceeds of approximately $17.2 million.

28

Since its inception, the Company has funded its operations primarily from
cash generated by operations, as well as with funds from borrowings under the
Company's credit facilities and the net proceeds from the Company's public
offerings of its Common Stock referenced above. The Company's cash used in
operations from the fiscal year ended December 31, 1997 was $11.9 million which
consisted primarily of an increase in accounts receivable from increased sales.
However, the Company's cash provided by operations for the fiscal year ended
December 31, 1998 was $14.6 million. Accounts receivable decreased by $17.3
million during 1998, primarily attributable to the decrease in net sales and the
timing of collection of accounts receivable. As measured in day sales
outstanding, the Company's accounts receivable decreased from 80 days at
December 31, 1997 to 78 days at December 31, 1998. During fiscal year 1998,
accounts payable and accrued expenses decreased by $12.3 million due to timely
payment of expenses.

The net income for fiscal year 1998 of $711,000 includes non-cash charges
of $5.1 million, consisting of depreciation and amortization expense of $2.6
million and the write-off of capitalized software and consulting fees of $2.5
million.

The Company's working capital was $33.1 million and $35.4 million at
December 31, 1997 and 1998, respectively.

The Company invested $3.1 million, $3.8 million and $4.0 million in capital
equipment and leasehold improvements in 1996, 1997 and 1998, respectively. The
increase in 1998 primarily related to purchases and upgrades of computer
equipment and software utilized in-house and consulting fees relating to
implementation of the Company's MIS. Except for the purchase of Platinum SQL,
there are no other material commitments for capital expenditures currently
outstanding. The Company anticipates additional capital expenditures to continue
the expansion of the services component of its business and for the enhancement
of its MIS infrastructure.

The Company repurchased 136,800 shares of its common stock during 1998 at
an average per share cost of $4.87. The shares are held in treasury at cost. As
of December 31, 1998, a total of 136,800 shares had been repurchased under the
225,000 share stock repurchase program announced in August 1998.

As of December 31, 1998, a total of 80,888 shares of common stock had been
sold to employees under the 500,000 share Employee Stock Purchase Plan approved
by the Company's shareholders in May 1998. The Company has received an aggregate
of $508,953 from such sales.

Since December 1996, the Company expended approximately $450,000 for
software, $2.1 million for consultant fees, and $571,000 for Company personnel
in implementing a third party developed enterprise-wide data and information
system (the "System"), as the foundation for the Company's MIS. The complexity
of the project and the lack of trained and knowledgeable personnel conversant
with the System resulted in significant project delays and increased costs. In
addition, the Company experienced delays in financial reporting and processing
of vendor invoices. During the third quarter of fiscal 1998, the Company
determined that successful implementation of the System was uncertain and that
an adequate alternative system should be installed. Accordingly, in October
1998, the Company terminated implementation of the System and purchased Platinum

29

SQL. It is presently anticipated that implementation of the Platinum SQL system
will be completed by June 1999. The Company estimates the costs to purchase and
install Platinum SQL (approximately $600,000) are substantially less than the
costs to have completed implementation of the System. At the present time, there
can be no assurance that the costs to complete implementation of Platinum SQL
will not exceed the estimate or that the amount of any such excess will not be
material.

The Company purchases certain inventory and equipment through financing
arrangements with Finova Capital Corporation. At December 31, 1998, there were
outstanding balances of $6.7 million for Finova Capital Corporation and $668,000
for IBM Credit Corporation under such arrangements. Obligations under such
financing arrangements are collateralized by substantially all of the assets of
the Company. In connection with the Loan and Security Agreement entered into on
September 30, 1998 with First Union National Bank (the "Bank"), the Bank entered
into an intercreditor agreement with respect to their relative interests in the
aforementioned collateral.

On June 30, 1997, the Company and the Bank executed a Loan and Security
Agreement whereby the Bank expanded the Company's credit facility to enable the
Company to borrow, based upon eligible accounts receivable, up to $15.0 million
for short-term working capital purposes. Such facility includes a $2.5 million
sublimit for letters of credit and a $5.0 million sublimit for acquisition
advances. Under the facility, the Company may borrow, subject to certain
post-closing conditions and covenants by the Company, (i) for working capital
purposes at the Bank's prime rate less 0.50% or LIBOR plus 1.25% and (ii) for
acquisitions at the Bank's prime rate less 0.25% or LIBOR plus 1.50%. The
Company's obligations under such facility are collateralized by a first priority
lien on the Company's accounts receivable and inventory, except for inventory
for which the Bank has or will have subordinated its position to certain other
lenders pursuant to intercreditor agreements. On September 30, 1998, the Company
and the Bank executed a Loan and Security Agreement whereby the Bank extended
the Company's credit facility for an additional year through September 30, 1999.

The Company believes that its available funds, together with existing and
anticipated credit facilities, will be adequate to satisfy its current and
planned operations for at least the next 24 months.

In 1997 and 1998, the Company was notified by the taxing authorities of
several jurisdictions concerning the Company's failure to meet certain reporting
and compliance requirements of such jurisdictions with respect to the Company's
tax obligations. During 1998, the Company implemented aggressive actions to
resolve any tax reporting and compliance delinquencies by properly reporting and
paying its obligations. The Company has recorded an amount for any unpaid taxes,
interest and/or penalties. The Company believes that the resolution of these
matters will not have a material impact on the Company's financial position,
results of operations, or cash flows.

The Company and its independent auditors have identified significant
deficiencies in the design and operation of its internal control structure. The
Company's independent auditors have determined such deficiencies are "reportable
conditions". The Company has implemented and is in the process of implementing
additional policies, procedures and controls to correct these deficiencies. The
Company does not believe that such deficiencies have had a material effect on
the Company's reported financial results. However, there can be no assurance
that such deficiencies will not have a material adverse effect on the Company's
ability to record, process, summarize and/or report its financial information.

30

SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The table on the following page presents certain condensed unaudited
quarterly financial information for each of the eight most recent quarters in
the period ended December 31, 1998. This information is derived from unaudited
consolidated financial statements of the Company that include, in the opinion of
the Company, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for such periods,
when read in conjunction with the audited Consolidated Financial Statements of
the Company and notes thereto appearing elsewhere in this Annual Report on Form
10-K.

[This space left blank intentionally]

31

------------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------------
Statement of Income Data: (in thousands, except per share data)
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997(1) 1997 1998 1998 1998 1998
------- ---------- ---------- ------- -------- -------- --------- ------

Net sales:
Product sales.................... $38,768 $31,609 $34,590 $42,635 $31,297 $29,823 $30,388 $25,400
Services and support............. 7,733 10,201 11,902 13,954 14,194 15,099 13,212 12,123
----- ------ ------ ------ ------ ------ ------ ------
46,501 41,810 46,492 56,589 45,491 44,922 43,600 37,523
----- ------ ------ ------ ------ ------ ------ ------
Cost of sales:
Product sales.................... 34,493 28,003 30,477 37,341 27,377 26,300 26,669 23,176
Services and support............. 5,028 6,736 7,962 9,287 9,395 10,424 8,661 8,578
----- ------ ------ ------ ------ ------ ------ ------
39,521 34,739 38,439 46,628 36,772 36,724 35,330 31,754
----- ------ ------ ------ ------ ------ ------ ------
Gross profit:
Product sales.................... 4,275 3,606 4,113 5,294 3,920 3,523 3,719 2,224
Services and support............. 2,705 3,465 3,940 4,667 4,799 4,675 4,551 3,545
----- ------ ------ ------ ------ ------ ------ ------
6,980 7,071 8,053 9,961 8,719 8,198 8,270 5,769
----- ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling expenses................. 2,918 2,943 3,547 3,816 3,967 3,749 3,830 3,056
General and administrative expenses 2,036 2,197 2,242 3,062 2,595 3,287 3,369 3,652
Write-off of capitalized asset (2) - - - - - - 2,476 -
----- ------ ------ ------ ------ ------ ------ ------
4,954 5,140 5,789 6,878 6,562 7,036 9,675 6,708
----- ------ ------ ------ ------ ------ ------ ------

Operating income (loss)............ 2,026 1,931 2,264 3,083 2,157 1,162 (1,405) (939)
Other income (expense), net........ (58) (67) 140 46 73 129 81 76
Income (loss) before income taxes.. 1,968 1,864 2,404 3,129 2,230 1,291 (1,324) (863)
Provision (benefit) for income taxes. 807 764 986 1,287 914 529 (543) (277)
----- ------ ------ ------ ------ ------ ------ ------
Net income......................... $1,161 $1,100 $1,418 $1,842 $1,316 $762 $(781) $(586)
===== ====== ====== ====== ====== ====== ====== ======
Net income (loss) per share (diluted) $0.22 $0.20 $0.22 $0.29 $0.21 $0.12 $(0.12) $(0.09)
===== ====== ====== ====== ====== ====== ====== ======
As a Percentage of Net Sales:
Net sales:
Product sales.................... 83.4% 75.6% 74.4% 75.3% 68.8% 66.4% 69.7% 67.7%
Services and support............. 16.6% 24.4% 25.6% 24.7% 31.2% 33.6% 30.3% 32.3%
----- ------ ------ ------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 85.0% 83.1% 82.7% 82.4% 80.8% 81.8% 81.0% 84.6%
----- ------ ------ ------ ------ ------ ------ ------
Gross profit....................... 15.0% 16.9% 17.3% 17.6% 19.2% 18.2% 19.0% 15.4%
----- ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling expenses................. 6.3% 7.0% 7.7% 6.7% 8.7% 8.3% 8.8% 8.1%
General and administrative expenses 4.4% 5.3% 4.8% 5.5% 5.7% 7.3% 7.7% 9.7%
Write-off of capitalized asset (2) - - - - - - 5.7% -
----- ------ ------ ------ ------ ------ ------ ------
10.7% 12.3% 12.5% 12.2% 14.4% 15.7% 22.2% 17.9%
----- ------ ------ ------ ------ ------ ------ ------
Operating income (loss)............ 4.3% 4.6% 4.8% 5.4% 4.7% 2.6% (3.2)% (2.5)%
Other income (expense), net........ (0.1)% (0.2)% 0.3% 0.1% 0.2% 0.3% 0.2% 0.2%
----- ------ ------ ------ ------ ------ ------ ------
Income before income taxes......... 4.2% 4.4% 5.1% 5.5% 4.9% 2.9% (3.0)% (2.3)%
Provision for income taxes......... 1.7% 1.8% 2.1% 2.3% 2.0% 1.2% (1.2)% (0.7)%
----- ------ ------ ------ ------ ------ ------ ------
Net income......................... 2.5% 2.6% 3.0% 3.2% 2.9% 1.7% (1.8)% (1.6)%
===== ====== ====== ====== ====== ====== ====== ======
Gross profit (as a percentage of
related net sales):
Product sales (3)................ 11.0% 11.4% 11.9% 12.4% 12.5% 11.8% 12.2% 8.8%
Services and support............. 35.0% 34.0% 33.1% 33.4% 33.8% 31.0% 34.4% 29.2%

(1) On August 1, 1997 the Company consummated the acquisition of certain assets
and assumed certain liabilities of the Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services,
for $1.5 million, including acquisition costs. The original acquisition
price was $1.8 million, subsequently reduced by the return of $250,000 held
in escrow. The operations related to the acquired assets and liabilities of
Lande are included in the accompanying consolidated financial statements
subsequent to August 1, 1997. See Note 2 of Notes to Consolidated Financial
Statements.

(2) Reflects a one-time write-off of capitalized software and consulting fees
associated with the Company's termination of an integrated accounting
software program and implementation thereof.

(3) Quarter ended December 31, 1998 reflects a year-end adjustment to reduce
inventory by $450,000.

32

Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------

Not applicable.

Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------

Reference is made to Item 14(a)(1) and (2) on page 35 for a list of
financial statements and supplementary data required to be filed pursuant to
this Item 8.

Reference is made to Item 7 "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Selected Unaudited Quarterly
Results of Operations" on pages 31-32 for selected unaudited quarterly financial
data.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------

Not applicable.

33

PART III

Item 10. Directors and Executive Officers of the Company.
- ---------------------------------------------------------

The information called for by this Item 10 relating to the Company's
directors and executive officers, which will be included under the headings
"Election of Directors" and "Executive Officers" in the Company's definitive
proxy statement for the 1999 Annual Meeting of Shareholders, to be filed within
120 days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.

Item 11. Executive Compensation.
- --------------------------------

The information called for by this Item 11, which will be included
under the heading "Executive Compensation" in the Company's definitive proxy
statement for the 1999 Annual Meeting of Shareholders, to be filed within 120
days after the end of the Company's fiscal year, is incorporated herein by
reference to such proxy statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------

The information called for by this Item 12, which will be included
under the heading "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Shareholders, to be filed within 120 days after the end of the
Company's fiscal year, is incorporated herein by reference to such proxy
statement.

Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------

The information called for by this Item 13, which will be included
under the heading "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders, to be filed within 120 days after the end of the Company's fiscal
year, is incorporated herein by reference to such proxy statement.

34

PART IV

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

(a) (1) Financial Statements.

Reference is made to the Index to Consolidated Financial
Statements on page F-1.

(a) (2) Financial Statement Schedules and Supplementary Data.

All financial statement schedules are omitted because the
information is not required, or is otherwise included in the
Consolidated Financial Statements or the notes thereto
included in this Annual Report on Form 10-K.

(a) (3) Exhibits.

Reference is made to the Index to Exhibits on pages 36-38.

(b) Reports on Form 8-K.

The Company filed no Current Reports on Form 8-K during the
last quarter of the period covered by this Annual Report.

35

EXHIBIT INDEX

Exhibit Description of
No. Exhibit
- ------ -----------

3.1* Amended and Restated Certificate of Incorporation.

3.2* Amended and Restated Bylaws.

4.1*# 1995 Stock Plan of the Company.

4.2*# 1995 Non-Employee Director Stock Option Plan.

4.3*# 401(k) Plan, adopted October 1991.

10.1*# Employment Agreement dated October 1, 1995 between the
Company and Stan Gang.

10.2*# Employment Agreement dated October 1, 1995 between the
Company and Bruce Flitcroft.

10.3*# Employment Agreement dated October 1, 1995 between the
Company and Philip M. Pfau.

10.4*# Employment Agreement dated October 1, 1995 between the
Company and Dennis Samuelson.

10.5*# Employment Agreement dated October 1, 1995 between the
Company and Lawrence Mahon.

10.6*# Employment Agreement dated October 1, 1995 between the
Company and John Centinaro.

10.7*# Employment Agreement dated October 1, 1995 between the
Company and John Crescenzo.

10.8*# Employment Agreement effective November 1, 1995 between
the Company and Gary S. Finkel.

10.9* Lease dated June 27, 1994 by and between Sutman Associates
and the Company, as amended.

10.10* Form of Invention Assignment and Confidentiality Agreement.

10.11* Agreement dated July 1, 1994 by and between the Company
and MicroAge Computer Centers, Inc., as amended.

36

10.12* Reseller Agreement dated November 7, 1994 by and between
the Company and Ingram Alliance Reseller Company, a division
of Ingram Micro, Inc. as amended.

10.13* Agreement for Wholesale Financing dated May 20, 1988
by and between the Company and IBM Credit Corporation.

10.14+ Dealer Loan and Security Agreement by and between the
Company and Finova Capital Corporation dated December
20, 1996.

10.15* Agreement by Stan Gang dated February 19, 1996 to indemnify
the Company for certain losses.

10.16| Asset Purchase Agreement dated July 18, 1996 by and between
Stan Gang and Lior, Inc.

10.17| Assignment of Asset Purchase Agreement dated July 24, 1996 by
and between Stan Gang and the Company.

10.18** Loan and Security Agreement dated June 30, 1997 by and
between First Union National Bank and AlphaNet Solutions, Inc.

10.19** Asset Purchase Agreement dated August 1, 1997 by and
between the Company and The Lande Group, Inc.

10.20## Assignment of lease dated August 1, 1997 by and
between The Lande Group, Inc., 460 West 34th
Street Associates, and the Company of a lease dated December
23, 1996 by and between 460 West 34th Street Associates and
The Lande Group, Inc.

10.21## Form of Indemnification Agreement entered into by past and
present Directors and Officers.

10.22*** First Amendment to and Reaffirmation of Loan Document dated
September 30, 1998 by and between First Union National Bank
and AlphaNet Solutions, Inc.

10.23*** Revolving Note dated September 30, 1998 by and between First
Union National Bank and AlphaNet Solutions, Inc.

10.24**** Sublease, American International Recovery, Inc. to AlphaNet
Solutions, Inc.

10.25***** Employee Stock Purchase Plan.

37

21+ Subsidiaries of the Company.

23 Consent of PricewaterhouseCoopers LLP.

27 Financial Data Schedule.

- ---------

* Incorporated by reference to the Company's Registration Statement of
Form S-1 (Registration Statement No. 33-97922) declared effective on
March 20, 1996.

** Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, filed with the Commission on August 13,
1997.

*** Incorporated by reference to the Company's Amended Form 10-Q for the
quarterly period ended September 30, 1998, filed with the Commission on
November 25, 1998.

**** Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1998, filed with the Commission on August 14 ,
1998.

***** Incorporated by reference to the Company's Registration Statement on
Form S-8 dated June 29, 1998.

| Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on August 5, 1996.

# A management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

All other exhibits are filed herewith.

+ Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996 filed with the Commission on March 27, 1997.

38

ALPHANET SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Accountants...................................................................... F-2

Consolidated balance sheets as of December 31, 1997 and 1998........................................... F-3

Consolidated statements of income for the years ended December 31, 1996, 1997, and 1998 ............... F-4

Consolidated statements of changes in shareholders' equity for the years ended December 31, 1996,
1997 and 1998.......................................................................................... F-5

Consolidated statements of cash flows for the years ended December 31, 1996, 1997 and 1998 ............ F-6

Notes to consolidated financial statements............................................................. F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of AlphaNet Solutions, Inc.:

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

PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ

March 30, 1999

F-2

ALPHANET SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

December 31,
-----------------------
1997 1998
---- ----
ASSETS

Current assets:
Cash and cash equivalents........................................... $ 2,689 $13,377
Accounts receivable, net............................................ 50,388 33,057
Inventories......................................................... 4,941 3,505
Deferred income tax asset........................................... 1,651 1,761
Prepaid expenses and other current assets........................... 3,598 2,309
------ ------
Total current assets........................................... 63,267 54,009

Property and equipment, net.............................................. 6,386 5,491
Other assets ............................................................ 2,888 2,394
------ ------
Total assets................................................... $72,541 $61,894
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of capital lease obligations........................ $ 44 $ 17
Accounts payable.................................................... 17,921 11,072
Accrued expenses.................................................... 12,179 6,730
Billings in excess of costs......................................... - 815
------ ------
Total current liabilities...................................... 30,144 18,634

Advance from principal shareholder....................................... 675 675
Capital lease obligations................................................ - 49
------ ------
Total liabilities.............................................. 30,819 19,358
------ ------
Commitments and contingencies (Note 8)...................................
Shareholders' equity:
Preferred stock -- $0.01 par value; authorized 3,000,000 shares,
none issued...................................................... - -
Common stock-- $0.01 par value; authorized 15,000,000 shares,
6,257,610 and 6,366,228 shares issued and outstanding in 1997
and 1998, respectively........................................... 63 63
Additional paid-in capital.......................................... 33,172 33,942
Retained earnings................................................... 8,487 9,198
Treasury stock-- at cost; 136,800 shares in 1998.................... - (667)
------ ------
Total shareholders' equity..................................... 41,722 42,536
------ ------
Total liabilities and shareholders' equity..................... $72,541 $61,894
====== ======

See accompanying notes to consolidated financial statements.

F-3

ALPHANET SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

Year Ended December 31,
-------------------------------------
1996 1997 1998
---- ---- ----

Net sales:
Product sales........................................... $ 99,468 $147,602 $116,908
Services and support.................................... 20,137 43,790 54,628
------- ------- -------
119,605 191,392 171,536
------- ------- -------
Cost of sales:
Product sales........................................... 88,218 130,314 103,522
Services and support.................................... 12,915 29,013 37,058
------- ------- -------
101,133 159,327 140,580
------- ------- -------

Gross profit................................................. 18,472 32,065 30,956
------- ------- -------
Operating expenses:
Selling expenses........................................ 7,301 13,224 14,602
General and administrative expenses..................... 5,446 9,537 12,903
Write-off of capitalized asset.......................... - - 2,476
------- ------- -------
12,747 22,761 29,981
------- ------- -------
Operating income............................................. 5,725 9,304 975
------- ------- -------
Other income (expense):
Interest income......................................... 217 219 436
Interest expense........................................ (106) (158) (77)
------- ------- -------
Gain on sale of marketable securities................... 18 - -
------- ------- -------
129 61 359
------- ------- -------
Income before income taxes................................... 5,854 9,365 1,334
Provision for income taxes................................... 1,970 3,844 623
------- ------- -------
Net income................................................... $3,884 $5,521 $ 711
======= ======= =======
Earnings per share - Basic................................... $0.83 $0.97 $0.11
======= ======= =======
Weighted average shares outstanding.......................... 4,690 5,719 6,272
======= ======= =======
Earnings per share -Diluted.................................. $0.82 $0.93 $0.11
======= ======= =======
Weighted average shares and share equivalents outstanding.... 4,737 5,905 6,331
======= ======= =======

See accompanying notes to consolidated financial statements.

F-4

ALPHANET SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)

Common Common Treasury Treasury Paid-In Retained
Shares Stock Shares Stock Capital Earnings Total
---------- ------------ ----------- ------------ ------------ ------------ -----------

Balance at January 1, 1996...... 3,400 $ 34 - $ - $ 156 $ 6,384 $ 6,574
Sales of common stock...... 1,700 17 - - 15,722 - 15,739
Exercise of stock options.. 3 - - - 26 - 26
Distributions to S
Corporation shareholders........ - - - - - (7,302) (7,302)
Net income................. - - - - - 3,884 3,884
---- ---- --- --- ----- ----- -----

Balance at December 31, 1996.... 5,103 51 - - 15,904 2,966 18,921

Sales of common stock...... 1,150 12 - - 17,200 - 17,212
Exercise of stock options.. 4 - - - 68 - 68
Net income................. - - - - - 5,521 5,521
---- ---- --- --- ----- ----- -----
Balance at December 31, 1997.... 6,257 63 - - 33,172 8,487 41,722

Exercise of stock options.. 28 - - - 261 - 261
Employee stock purchases... 81 - - - 509 - 509
Purchase of treasury stock. - - (137) (667) - - (667)
Net income................. - - - - - 711 711
----- ----- ---- ---- ------ ----- ------
Balance at December 31, 1998.... 6,366 $ 63 (137) ($667) $ 33,942 $ 9,198 $42,536
===== ===== ==== ==== ====== ===== ======

See accompanying notes to consolidated financial statements.

F-5

ALPHANET SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,
---------------------------------
1996 1997 1998
---- ---- ----

Cash flows from operating activities:
Net income............................................................. $ 3,884 $ 5,521 $ 711
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 651 1,671 2,662
Deferred income taxes................................................ (445) (1,206) (110)
Gain on sale of marketable securities................................ (18) - -
Write-off of capitalized asset....................................... - - 2,476
Increase (decrease) from changes in:
Accounts receivable............................................... (15,963) (17,978) 17,331
Inventories....................................................... (3,863) 35 1,436
Prepaid expenses and other current assets......................... (1,288) (1,652) 1,289
Other assets...................................................... (255) 302 324
Accounts payable.................................................. 10,647 (4,392) (6,849)
Accrued expenses.................................................. 2,030 5,820 (5,449)
Billing in excess of costs........................................ - - 815
------- -------- ------
Net cash provided by (used in) operating activities.................. (4,620) (11,879) 14,636
------- -------- ------

Cash flows from investing activities:
Proceeds from sale of marketable securities............................ 26 - -
Property and equipment expenditures.................................... (3,087) (3,842) (3,999)
Acquisition of businesses.............................................. (1,060) (380) -
Receipt of loan repayments............................................. 413 - -
------- -------- ------
Net cash used in investing activities................................ (3,708) (4,222) (3,999)
------- -------- ------
Cash flows from financing activities:
Repayment of long-term debt............................................ (736) - -
Repayment of capital lease obligations................................. (86) (100) (52)
Advance from principal shareholder..................................... 675 - -
Distributions paid to S Corporation shareholders....................... (7,302) - -
Net proceeds from sales of common stock................................ 16,138 17,212 509
Exercise of stock options.............................................. 26 68 261
Purchase of treasury stock............................................. - - (667)
------- -------- ------
Net cash provided by financing activities............................ 8,715 17,180 51
------- -------- ------
Net increase in cash and cash equivalents................................. 387 1,079 10,688
Cash and cash equivalents, beginning of period............................ 1,223 1,610 2,689
------- -------- ------
Cash and cash equivalents, end of period.................................. $ 1,610 $ 2,689 $13,377
======= ======== ======

See accompanying notes to consolidated financial statements.

F-6

ALPHANET SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:
- ----------------------------------------------

Nature of Business:
-------------------

AlphaNet Solutions, Inc. and its wholly-owned subsidiary (the "Company") is
a single-source provider of information technology products, services and
support. The Company markets computer products and provides a broad range of
information technology services, including network consulting, remote network
management, workstation support, education, communications installation and
technical placement services to Fortune 1000 and other large and mid-sized
companies in various industries located primarily in the New
York-to-Philadelphia corridor. Intercompany balances and transactions are
eliminated in consolidation.

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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Basis of Consolidation:
-----------------------

The consolidated financial statements include the accounts of AlphaNet
Solutions, Inc. and its wholly-owned subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents:
--------------------------

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
has bank balances, including cash equivalents, which at times may exceed
federally insured limits.

Inventories:
------------

Inventories, consisting entirely of goods for resale, are stated at the
lower of cost or market with cost determined on the weighted average method.

Property and Equipment:
-----------------------

Property and equipment are stated at cost less accumulated depreciation.
Repairs and maintenance costs which do not extend the useful lives of the assets
are expensed as incurred. The Company provides for depreciation on property and
equipment, except for leasehold improvements, on the straight-line method over
the estimated useful lives of the assets, generally three to seven years.
Leasehold improvements are amortized on the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining term of the
applicable lease.

F-7

Costs of computer software developed or obtained for internal use and costs
associated with technology under development are capitalized and amortized over
the estimated useful lives of the assets, generally three-to-five years.
Capitalization of costs begins when conceptual and design activities have been
completed, and when management has authorized and committed to fund a project.
Costs capitalized include external direct costs of materials and services. Costs
associated with training and general and administrative activities are expensed
as incurred.

Recoverability of Long-Lived Assets:
------------------------------------

The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.

Stock-Based Compensation:
-------------------------

In 1995, the Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") which requires companies
to measure stock compensation plans based on the fair value method of accounting
or to continue to apply APB No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and provide pro forma footnote disclosures under the fair value
method. Effective January 1, 1996, the Company adopted the disclosure-only
provisions of FAS 123 and continues to follow APB 25 and related interpretations
to account for the Company's stock compensation plans.

Leases:
-------

Leases which meet certain criteria evidencing substantive ownership by the
Company are capitalized and the related capital lease obligations are included
in current and long-term liabilities. Amortization and interest are charged to
expense, with rent payments being treated as payments of the capital lease
obligation. All other leases are accounted for as operating leases, with rent
payments being charged to expense as incurred.

Revenue Recognition:
--------------------

The Company recognizes sales of products when the products are shipped and
services and support revenue is recognized when the applicable services are
rendered. The Company recognizes revenue on service contracts on a prorated
basis over the life of the contracts. Revenues under the MTA Contract are
recognized on the percentage-of-completion method based on total costs incurred
relative to total estimated costs. Currently, total contract costs are estimated
to be equal to the total contract revenue. Prepaid fees related to the Company's
training programs are deferred and amortized to income over the duration of the
applicable training program. Deferred revenue is included in accrued expenses
and represents the unearned portion of each service contract and the unamortized
balance of prepaid training fees received as of the balance sheet date.

F-8

Income Taxes:
-------------

The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon differences arising from the carrying amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted.

Prior to March 19, 1996, the Company, with the consent of its shareholders,
had elected to be taxed under the Subchapter S of the Internal Revenue Code as
an S Corporation for federal income tax purposes. In lieu of corporate income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. As a result, the Company was not subject
to federal income taxes prior to March 19, 1996. The Company had also elected S
Corporation status in the State of New Jersey. The accompanying financial
statements include provisions for certain state and local income taxes which
were imposed at the corporate level.

On March 19, 1996, the Company terminated its status as an S Corporation
and became subject to federal and state income taxes thereafter at applicable C
Corporation income tax rates.

Retirement Plan:
----------------

The Company adopted a 401(k) retirement plan in 1991. Employees of the
Company who have attained the age of 21 are eligible to participate in the plan.
Employees can elect to contribute up to 15% of their gross salary to the plan.
The Company may make discretionary matching cash contributions up to 2% of the
salary of the participating individual employee. Participants vest in the
Company's contributions to the plan over a six-year period based upon years of
service. Participants are fully vested at all times in their employee
contributions to the plan. The Company incurred $117,000, $277,000 and $446,000
of expenses related to this plan in 1996, 1997 and 1998, respectively.

Financial Instruments:
----------------------

Fair Value of Financial Instruments - The carrying value of significant
financial instruments approximates fair value. The Company's financial
instruments are cash, cash equivalents, accounts receivable, accounts payable,
and accrued expenses. The Company does not have any off-balance sheet financial
instruments or derivatives.

F-9

Net Income per Share:
---------------------

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS No. 128"), which specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") of
entities with publicly held common stock or potential common stock. The
statement defines two earnings per share calculations, basic and diluted. The
objective of basic EPS is to measure the performance of an entity over the
reporting period by dividing income available to common stock by the weighted
average shares outstanding. The objective of diluted EPS is consistent with that
of basic EPS, that is to measure the performance of an entity over the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period. The calculation of diluted EPS is similar to
basic EPS except both the numerator and denominator are increased for the
conversion of potential common shares. In February 1998, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin No. 98 ("SAB 98")
revising previously issued statements to become consistent with SFAS No. 128
(Earnings per Share) and No. 130 (Reporting Comprehensive Income). SAB 98
requires the Company to revise its EPS computations to present historical EPS
including pre-IPO periods. The computations set forth in Note 11 incorporate SAB
98.

2. Business Combinations
- ------------------------

On July 24, 1996, the Company acquired certain assets of Lior, Inc.
("Lior"), a Pinacor affiliate located in Paramus, New Jersey, in a business
combination accounted for under the purchase method, for $1,060,000 including
acquisition costs, financed through the proceeds raised in its initial public
offering. Intangible assets of $1,060,000 which are included in other assets,
are being amortized on the straight-line method over periods not exceeding
fifteen years.

On August 1, 1997, the Company consummated the acquisition of certain
assets and assumed certain liabilities of The Lande Group, Inc. ("Lande"), a
computer equipment reseller and provider of systems integration services located
in New York City. The Company purchased, among other assets, the entire customer
list, accounts receivable and inventory of Lande for a purchase price of
$850,000, of which $750,000 was paid at closing. An additional $100,000 was paid
to Lande in two installments in August 1998 and February 1999. The Company also
assumed certain liabilities, including certain trade debt, which was paid by the
Company at closing, accounts payable and accrued expenses, and obligations under
a lease which expires in April 2008, for New York City office space which will
serve as the Company's New York headquarters. Intangible assets of approximately
$1.5 million, which are included in other assets, are being amortized on the
straight-line method over periods not exceeding fifteen years. The original
acquisition price was $1.8 million, subsequently reduced by the return of
$250,000 held in escrow.

Amortization of intangible assets for the years ended December 31, 1996,
1997, and 1998 was $42,000, $101,000 and $170,000, respectively. The operations
related to the acquired assets of Lior and Lande are included in the
accompanying consolidated financial statements subsequent to their respective
dates of acquisition.

F-10

3. Accounts Receivable, net
- ---------------------------

Accounts receivable, net consists of the following:

-----------------------
December 31,
(in thousands)
-----------------------

1997 1998
---- ----

Accounts receivable.......................................................... $51,643 $34,357
Less: Allowance for doubtful accounts........................................ 1,255 1,300
----- -----
$50,388 $33,057
====== =====

4. Property and Equipment, net
- ------------------------------

Property and equipment, net consists of the following:

-----------------------
December 31,
(in thousands)
-----------------------
1997 1998
---- ----
Furniture, fixtures and equipment............................................ $5,665 $9,035
Transportation equipment..................................................... 109 157
Leasehold improvements....................................................... 632 912
Construction in progress..................................................... 2,564 397
----- -----
8,970 10,501
Less-- Accumulated depreciation and amortization............................. 2,584 5,010
----- -----
$6,386 $5,491
====== =====

Depreciation expense and amortization of leasehold improvements for the
years ended December 31, 1996, 1997 and 1998 were $609,000, $1,570,000 and
$2,492,000, respectively.

5. Accrued Expenses
- -------------------

Accrued expenses consist of the following:

----------------------
December 31,
(in thousands)
----------------------
1997 1998
---- ----
Wages and benefits payable.................................................... $4,063 $1,880
Deferred revenue.............................................................. 2,031 1,888
Sales taxes................................................................... 1,425 986
Licensing fees payable........................................................ 483 342
Sales commissions............................................................. 1,152 618
Income taxes payable.......................................................... 1,498 -
Other......................................................................... 1,527 1,016
----- -----
$12,179 $6,730
====== =====

F-11

6. Debt and Capital Lease Obligations
- -------------------------------------

Notes Payable -- Bank:
----------------------

On June 30, 1997, the Company and First Union National Bank ("Bank")
executed a Loan and Security Agreement whereby the Bank expanded the Company's
credit facility to enable the Company to borrow, based upon eligible accounts
receivable, up to $15.0 million for short-term working capital purposes. Such
facility matured on June 30, 1998 and was subsequently extended through
September 30, 1999. The Loan and Security Agreement includes a $2.5 million
sublimit for letters of credit and a $5.0 million sublimit for acquisition
advances. Under the current facility, the Company may borrow, subject to certain
post-closing conditions and covenants by the Company, (i) for working capital
purposes at the Bank's prime rate less 0.50% or LIBOR plus 1.25% and (ii) for
acquisitions at the Bank's prime rate less 0.25% or LIBOR plus 1.50%. The
Company's obligations under such facility are collateralized by a first priority
lien on the Company's accounts receivable and inventory, except for inventory
for which the Bank has or will have subordinated its position to certain other
lenders pursuant to intercreditor agreements. As of December 31, 1998, the
Company had no outstanding balance under such credit facility.

Capital Lease Obligations:
--------------------------

During 1998, the Company assumed the telephone lease obligation of the
Lande Group, Inc. from Dana Commercial Credit Corp. At December 31, 1998, this
capital lease obligation totaled $66,000. Depreciation expense related to this
asset for the year ended December 31, 1998 was $8,200.

7. Stock Ownership and Compensation Plans
- -----------------------------------------

At December 31, 1998, the Company had two stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for its
plans. During 1996, 1997 and 1998, no compensation cost has been recognized for
its stock option plans, which are described below. Had compensation cost been
determined based on the fair value of the options at the grant dates consistent
with the method prescribed under FAS 123, the Company's pro forma net income and
pro forma earnings per share would have been reduced to the adjusted pro forma
amounts indicated below:

1996 1997 1998
---- ---- ----
(in thousands, except per share amounts)

Net income
As reported............................................ $3,884 $5,521 $711
As adjusted for FAS 123 method......................... 3,414 4,843 223
Earnings per share - diluted
As reported............................................ 0.82 0.93 0.11
As adjusted for FAS 123 method......................... 0.72 0.82 0.04

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1996,
1997 and 1998: dividend yield of 0%; expected volatility of approximately 67%;
risk free interest rates of approximately 6%; and an expected holding period of
six years.

F-12

1995 Stock Plan:
----------------

On August 25, 1995, the Company's 1995 Stock Plan (the "Plan") was adopted
by the Board of Directors and approved by the shareholders of the Company. A
total of 747,100 shares are reserved for issuance upon exercise of options
granted or to be granted under the Plan. The options, which expire ten years
after the date of grant, become exercisable in five equal annual installments
commencing one year after the date of grant provided that the optionee remains
an employee at the time of vesting of the installments.

1995 Non-Employee Director Stock Option Plan:
---------------------------------------------

In 1995, the Board of Directors adopted and the Company's shareholders
approved the Company's 1995 Non-Employee Director Stock Option Plan, which
provides for the grant of options to purchase a maximum of 100,000 shares of
Common Stock of the Company to non-employee Directors of the Company. Each
person who is or who becomes a Director of the Company after the effective date
of the Company's initial public offering and who is not also an employee or
officer of the Company shall be granted, on the effective date or the date on
which he or she becomes a Director, whichever is later, an option to purchase
20,000 shares of Common Stock, at an exercise price per share equal to the then
fair market value of the shares. The options, which expire ten years after the
date of grant, become exercisable in five equal annual installments commencing
one year after the date of grant provided that the optionee then remains a
Director at the time of vesting of the installments.

A summary of the stock options granted under the Plan and 1995 Non-Employee
Director Stock Plan as of and for the year ended December 31, 1996, 1997 and
1998 is presented below:

Year Ended December 31,

1996 1997 1998
----------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price

Outstanding at beginning of year.......... 260 $9.00 539 $ 9.44 670 $10.58
Granted................................... 290 9.82 203 14.05 63 6.72
Exercised................................. (3) 9.00 (5) 9.00 (28) 9.32
Forfeited................................. (8) 9.00 (67) 11.90 (163) 4.27
--- --- ---
Outstanding at end of year................ 539 9.44 670 10.58 542 5.15
=== === ===
Options exercisable at end of year........ 47 9.00 143 9.36 213 5.04

F-13

Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------

Range of Number Average Weighted Number Weighted Average
Exercise Outstanding at Remaining Average Exercisable Aveerage
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------

$ 4.27 471,160 7.59 $ 4.27 189,420 $ 4.27
11.38 28,000 5.35 11.38 16,000 11.38
10.50 20,000 7.22 10.50 8,000 10.50
12.00 20,000 9.41 12.00 - -
4.00 2,500 9.78 4.00 - -
4.27 ------- -------
541,660 213,420
======= =======

The weighted-average fair value of options granted during 1996, 1997 and
1998 was $6.56, $9.35 and $4.26, respectively. Effective December 15, 1998, all
stock options were repriced to $4.27 per share, except stock options issued
pursuant to the 1995 Non-Employee Director Stock Option Plan and 2,500 shares
previously issued at $4.00.

8. Commitments and Contingencies
- --------------------------------

The Company occupies eight facilities under operating leases which expire
at various dates through April 2008 and call for annual base rentals plus real
estate taxes. The future minimum payments under non-cancelable leases as of
December 31, 1998 are as follows:

Net
Lease Sublease Lease
Obligations Rentals Obligations
(in thousands)
-------------------------------------------------------

1999......................................................... $1,212 $268 $944
2000......................................................... 1,172 275 897
2001......................................................... 1,146 247 899
2002......................................................... 979 215 764
2003......................................................... 616 174 442
Thereafter................................................... 1,267 348 919
------ ------ ------
$6,392 $1,527 $4,865
====== ====== ======

Rent expense, including real estate taxes, for the years ended December 31,
1996, 1997 and 1998 was $688,000, $922,000, and $1,177,000 respectively.

The Company has obtained financing terms from IBM Credit Corporation and
Finova Capital Corporation for the purchase of inventory. In exchange for these
terms, and subject to the intercreditor agreements with First Union National
Bank, the payables are collateralized by substantially all the assets of the
Company. The balances included in accounts payable at December 31, 1996, 1997
and 1998 were $13,085,000, $15,981,000 and $7,407,000, respectively.

On February 13, 1996, the Company, as plaintiff, filed a complaint against
two former employees of the Company and their current employer (together, the
"Defendants"). Such complaint alleges theft of services, theft of the Company's

F-14

property, theft of corporate opportunity and unauthorized use of Company credit
cards by the Defendants. The Company is seeking restitution from certain of the
Defendants and additional compensatory damages from another Defendant. The
Defendants have asserted certain counterclaims against the Company and certain
of its directors, with respect to which the Company and such directors believe
they have meritorious defenses. The Company intends to vigorously pursue all
available remedies against the Defendants. The parties consented to the
suspension of discovery pending mediation of all claims. Therefore, the Company
currently is unable to evaluate the likelihood of a favorable outcome for the
Company. The Company believes that some or all of its damages in connection with
the litigation may be covered by insurance. In any event, Stan Gang, the
Company's founder, Chairman of the Board, President and Chief Executive Officer
and principal shareholder, has agreed to indemnify the Company for any and all
losses which the Company may sustain, up to $1,000,000 arising from or relating
to the alleged wrongful conduct of the Defendants. In connection therewith, Mr.
Gang has paid $675,000 of his personal funds to the Company, which is classified
as an advance from the principal shareholder. Pursuant to the terms of the
agreement between the Company and Mr. Gang, the Company shall reimburse Mr. Gang
in the event and to the extent that the Company is awarded and collects damages
from the Defendants, receives sums as a result of a settlement between the
Company and the Defendants, or receives proceeds under an insurance policy.
Management is of the opinion that the ultimate disposition of this matter will
not have a material adverse effect on the results of operations or financial
position of the Company.

On June 30, 1998, Bruce Flitcroft ("Flitcroft"), the Company's former
Corporate Vice President, Technology Services, filed suit in the Superior Court
of New Jersey, Morris County, against the Company and its Chairman of the Board,
President and CEO, alleging, among other things, breach by the Company of
Flitcroft's employment agreement and failure to pay an alleged bonus arising
from the Company's 1990 acquisition of Datar IDS Corp. and/or pay pursuant to an
alleged oral promise, an alleged one-million dollar severance payment in lieu of
such bonus. The Company believes Flitcroft's claims are without merit and
intends to fully and vigorously defend while pursuing all available remedies. On
July 16, 1998, without knowledge of the suit filed by Flitcroft, the Company
filed suit against Flitcroft and Alliant Technologies, Inc. ("Alliant"), a
company believed to be owned and/or operated by Flitcroft, alleging among other
things, breach of contract and conspiracy to usurp corporate assets and
opportunities. The Company seeks to enforce its employment agreement with
Flitcroft, including enjoining (i) Flitcroft's employment with Alliant; (ii)
Flitcroft's solicitation of Company employees; (iii) Flitcroft from disclosing
Company confidential information; and (iv) Flitcroft from soliciting Company
customers. The Court has directed arbitration of the claims in dispute in this
matter, and such arbitration proceedings commenced as of March 1999. The Company
has obtained insurance coverage for some of the claims in dispute. The Company's
Board of Directors authorized the Company to defend the Chairman, President and
CEO and approved his indemnification by the Company. Given the preliminary
nature of this matter, the Company cannot determine at this time whether its
resolution or the expenses likely to be incurred in this matter will have a
material adverse impact on the Company's financial position, results of
operation, or cash flow.

To the Company's knowledge, there is no other material litigation pending
to which the Company is a party or to which any of its property is subject.

F-15

9. Supplementary Cash Flow Information
- --------------------------------------

Following is a summary of supplementary cash flow information for the years
ended December 31, 1996, 1997 and 1998:

Year Ended December 31,
(in thousands)
----------------------------------

1996 1997 1998
---------- ---------- ----------

Interest paid.................................................... $ 97 $159 $ 77
Income taxes paid................................................ 1,977 3,917 2,678
Non cash investing and financing activities:
Equipment acquired under capital lease........................ - - 74

10. Income Taxes
- ----------------

The Company accounts for income taxes under the asset and liability method
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts and
the tax bases of the assets and liabilities.

The components of the provision for income taxes for 1996, 1997 and 1998
are as follows:

Year Ended December 31,
(in thousands)
---------------------------------------------

1996 1997 1998
------------ -------------- -------------

Current:
Federal........................................................ $1,733 $3,692 $547
State and local................................................ 682 1,358 186
------ ------ ----
2,415 5,050 733
------ ------ ----
Deferred:
Federal........................................................ (178) (841) (82)
State and local................................................ (57) (365) (28)
Benefit as a result of change in tax status.................... (210) - -
------- ------ -----
(445) (1,206) (110)
------ ------ -----
$1,970 $3,844 $623
====== ====== =====

Prior to March 19, 1996, the Company had elected under the Internal Revenue
Code to be an S Corporation for federal income and, in certain cases, state
income tax purposes.

A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1996, 1997 and 1998 is as follows:

F-16

Year Ended December 31,
---------------------------------------

1996 1997 1998
------------ ------------ -----------

Taxes at statutory rate................................................. 34.0% 34.0% 34.0%
State and local income taxes, net of federal tax benefit................ 6.1% 6.7% 7.8%
Income from S Corporation not subject to federal and state income
taxes................................................................ (37.4%) (7.2%) -
Other, net.............................................................. 0.3% 0.2% 4.9%
------ ----- -----
Effective tax rate...................................................... 3.0% 33.7% 46.7%
====== ===== =====

The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset at December 31, 1997 and 1998 are
as follows:

Year Ended
December 31,

1997 1998
------------- -------------

Accounts receivable allowances............................................................ $515 $540
Inventory reserves........................................................................ 259 428
Accrual for compensated absences.......................................................... 478 520
Accumulated depreciation and amortization................................................. (118) (11)
Other accruals............................................................................ 517 284
----- -----
$1,651 $1,761
====== ======

11. Earnings Per Share
- ----------------------

As described in Note 1 of Notes to Consolidated Financial Statements, the
Company has adopted the provisions of SFAS No. 128 and SAB No. 98. In 1998,
68,000 potential common shares were excluded from the computations of diluted
earnings per share because the effect would have been anti-dilutive. There were
no anti-dilutive common stock equivalents in 1996 and 183,300 such equivalents
in 1997. The following table is a reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per share as
required:

Year Ended December 31, 1996
(in thousands,
except per share amounts)
-----------------------------------------
Per Share
Amount
Income Shares
------------- ---------- ------------

Basic EPS:
Net income applicable to common shares.................................. $3,884 4,690 $0.83
Assuming Dilution:
Stock Options........................................................ - 47
------ -----
$3,884 4,737 $0.82
====== =====

F-17

Year Ended December 31, 1997
(in thousands,
except per share amounts)
-----------------------------------------
Per Share
Amount
Income Shares
------------- ---------- ------------

Basic EPS:
Net income applicable to common shares.................................. $5,521 5,719 $0.97
Assuming Dilution:
Stock Options........................................................ - 186
------ -----
$5,521 5,905 $0.93
====== =====

Year Ended December 31, 1998
(in thousands,
except per share amounts)
-----------------------------------------
Per Share
Amount
Income Shares
------------- ---------- ------------
Basic EPS:
Net income applicable to common shares.................................. $711 6,272 $0.11
Assuming Dilution:
Stock Options........................................................ - 59
------ -----
$711 6,331 $0.11
====== =====

12. Employee Stock Purchase Plan
- --------------------------------

On December 31, 1997, the Company adopted an Employee Stock Purchase Plan
(the "Plan") for employees of the Company and its subsidiaries. The Plan was
approved by the Company's shareholders at its 1998 Annual Meeting. The Plan was
adopted to provide a further incentive for employees to promote the best
interests of the Company and to encourage stock ownership by employees in order
to participate in the Company's potential economic progress. A total of 500,000
shares of common stock are authorized for issuance pursuant to the Plan.

In general, the Plan provides for eligible employees to designate in
advance of specified purchase periods (monthly) a percentage of compensation (up
to 10%) to be withheld from their pay and applied toward the purchase of such
number of whole shares of Common Stock as can be purchased at a price of 85% of
the stock's trading price at the end of each such period. No employee can
purchase more than $15,000 worth of stock annually, and no stock can be
purchased by any person which would result in the purchaser owning five percent
or more of the total combined voting power or value of all classes of stock of
the Company.

The Plan is intended to satisfy the requirements of Section 423(b) of the
Internal Revenue Code of 1986, as amended, which requires that it be approved by
shareholders within one year of the earlier of its adoption by the Board of
Directors or the plan's effective date. In addition, the Plan is intended to
comply with certain requirements of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.

During 1998, employees purchased 80,888 shares under the Plan for an
aggregate purchase price of $508,953.

F-18

13. Stock Repurchase Program
- ----------------------------

The Company's Board of Directors approved a 225,000 share stock repurchase
program in August 1998. As of December 31, 1998, a total of 136,800 shares at an
average per-share cost of $4.87 have been repurchased. The Company has paid an
aggregate of approximately $667,000 for such purchases.

14. Significant Customers and Vendors
- -------------------------------------

During 1998, KPMG LLP accounted for approximately 15% of the Company's
net sales. During the fiscal year ended December 31, 1997, two customers,
Nabisco and KPMG LLP, accounted for approximately 31% of the Company's net
sales, 16% and 15%, respectively. During the fiscal year ended December 31,
1996, Nabisco accounted for approximately 17% of the Company's net sales.

The Company purchases the majority of its products primarily from two
aggregators of computer hardware, software and peripherals. Agreements with
these aggregators provide for, among other things, certain discount pricing for
meeting agreed-upon purchase levels and minimum purchase commitments.

F-19

SIGNATURES

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

ALPHANET SOLUTIONS, INC.

By: STAN GANG
--------------------------------------------
Stan Gang, Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)

March 31, 1999

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

Signature Title Date
--------- ----- ----

/s/Stan Gang Chairman of the Board, President and
- ----------------------------- Chief Executive Officer (Principal March 31, 1999
Stan Gang Executive Officer)

/s/Robert G. Petoia Vice President and Chief Financial
- ----------------------------- Officer (Principal Financial and March 31, 1999
Robert G. Petoia Accounting Officer)

/s/ Michael Gang Director
- ----------------------------- March 31, 1999
Michael Gang

/s/Michael R. Bruce Director
- -----------------------------
Michael R. Bruce March 31, 1999

/s/Richard Miller Director
- -----------------------------
Richard Miller March 31, 1999

/s/Susan Wolford Director
- -----------------------------
Susan Wolford March 31, 1999