BELL MICROPRODUCTS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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COMMISSION FILE NUMBER: 0-21528

BELL MICROPRODUCTS INC.
(Exact name of registrant as specified in its charter)

CALIFORNIA 94-3057566
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
(Address of principal executive office, including zip code)

Registrant's telephone number, including area code: (408) 451-9400

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

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 the 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).

Yes X No
---

The aggregate market value of the voting stock held by non-affiliates
of the registrant, as June 30, 2004, was approximately $152,088,683 based upon
the last sale price reported for such date on the Nasdaq National Market.

The number of shares of Registrant's Common Stock outstanding as of
March 11, 2005 was 28,861,435

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for the Company's 2005 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Form 10-K.

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PART I

ITEM 1. BUSINESS

FORWARD LOOKING DISCLOSURE

This Annual Report on Form 10-K ("Report") contains "forward-looking statements"
within the meaning of the Private Litigation Reform Act of 1995 regarding future
events and the future results of Bell Microproducts Inc. that are based on
current expectations, estimates, forecasts, and projects as well as the beliefs
and assumptions of Bell Microproducts Inc. management. Words such as "outlook",
"believes", "expects", "appears", "may", "will", "should", "anticipates" or the
negative thereof or comparable terminology, are intended to identify such
forward looking statements. These forward-looking statements are only
predictions and are subject to risks, uncertainties and assumptions that are
difficult to predict. Therefore actual results may differ materially and
adversely from those expressed in any forward-looking statements. Factors that
might cause or contribute to such differences include, but are not limited to,
those discussed in this Report under the section entitled "Risk Factors" and
elsewhere, and in other reports Bell Microproducts Inc. files with the
Securities and Exchange Commission, specifically the most recent reports on Form
8-K and Form 10-Q. You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K.
Bell Microproducts Inc. undertakes no obligation to revise or update publicly
any forward-looking statements for any reason.

GENERAL

Founded in 1987, Bell Microproducts Inc. together with its
subsidiaries, is a leading value-added distributor of storage products and
systems, semiconductors and computer products and peripherals. We market and
distribute our products at various levels of integration, from raw components to
fully integrated, tested and certified systems. We carry over 130 brand name
product lines as well as our own proprietary Rorke Data storage products and
Markvision memory modules. Across our product lines, we emphasize our ability to
combine our extensive product portfolio with comprehensive value-added services.

We offer components that include disk drives, semiconductors, flat
panel displays and related products, and other storage products and
custom-configured computer products. Our products also include value-added
services such as system design, integration, installation, maintenance and other
consulting services combined with a variety of storage and computer hardware and
software products. In addition, we offer network attached storage (NAS), storage
area network (SAN) and other storage systems, computer platforms, tape drives
and libraries and related software. Our selection of products and technologies,
together with our independence, allows us to offer the best available hardware,
software and service solutions for each customer. Customers can purchase our
components as stand-alone products or in combination with certain value-added
services.

AVAILABLE INFORMATION

All reports filed electronically by Bell with the Securities and
Exchange Commission ("SEC"), including its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and proxy
statements, and other information and amendments to those reports filed (if
applicable), are accessible at no cost on the Company's web site at
www.bellmicro.com, and they are available by contacting our Investor Relations
at ir@bellmicro.com or 408-451-9400. These filings are also accessible on the
SEC's web site at www.sec.gov. The public may read and copy at prescribed rates
any materials filed by the Company with the SEC at the SEC's

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Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information for the Public Reference Room by calling the SEC at
1-800-SEC-0330.

INDUSTRY

The storage, semiconductor and computer industries have experienced
significant growth over the past decade, due to rapid growth in Internet usage
and e-commerce; enterprise applications such as enterprise resource planning and
data mining; server, desktop and laptop computers; and wireless communications
as well as a variety of emerging consumer products and applications.

Traditionally, manufacturers have sold storage, semiconductor and
computer products directly to end users and through both direct and indirect
distribution channels. The use of distribution channels is growing rapidly as
manufacturers focus on core activities such as product design, development and
marketing and begin to divest or outsource other functions. The growth of the
indirect channel reflects the need for manufacturers to increasingly use
distributors for servicing OEMs, VARs, CEMs and system integrators. Customers
are also driving the trend toward indirect distribution due to the value-added
services that distributors often provide. The rapid growth of storage
requirements and the need for sophisticated networked storage systems, such as
NAS and SAN, have also increased enterprise customers' dependence on value-added
service suppliers that can design, integrate, service and support their storage
needs.

During the onset of the market downturn that started more than three
years ago, distributors and vendors experienced a slowdown of demand and
increased competitive market conditions, resulting from industry maturation,
historical technology overspending and other cyclical factors. With the return
of economic growth that occurred during the latter half of 2003 and continued
through 2004, there has been a return of growth and market demand for technology
products.

Network Attached Storage. NAS appliances are advanced storage systems
that attach directly to a local area network. A NAS appliance can be thought of
as a thin file server with built-in storage. Similar to general-purpose servers,
NAS appliances include a central processing unit, an operating system and
internal hard disk drive storage.

Storage Area Networks. A SAN is an architecture that directly connects
multiple independent servers and storage subsystems through a network dedicated
to storage. A SAN consists of a variety of heterogeneous networking equipment
such as switches, hubs and routers; storage products such as disk subsystems,
tape libraries and optical drives; and storage management software. A SAN is
often connected using a protocol known as Fibre Channel.

Both the NAS and SAN markets are projected to grow rapidly over the
next few years. The complexity of sophisticated data storage solutions such as
NAS and SAN combined with a shortage of qualified information technology
personnel often requires companies to outsource the research, design,
implementation and support of their networked storage solutions. Accordingly,
significant growth in SAN and NAS is expected to be through indirect
distribution channels.

In recent years, a growing number of manufacturers began to reduce the
number of distributors they use. Distributors themselves are also choosing to
consolidate because of the competitive advantages that arise from expanded
product offerings and economies of scale. The rapidly changing nature of the
storage, semiconductor and computer industries has required distributors to
significantly expand both their customer base and product and service offerings,
to compete effectively. To be successful within these areas, we believe
distributors must emphasize time-to-market and total cost reductions and focus
on markets in which they have advantages in service, flexibility and component
content. Distributors also need to distinguish themselves through a combination
of value-added services such as consulting, design, integration, implementation
and maintenance as well as more knowledgeable service and technical support.

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OUR STRATEGY

Our goal is to expand our position as a leading distributor of storage
solutions and systems and computer products and peripherals. We intend to
achieve this goal by leveraging our strengths and implementing the following
strategies:

Continue to Focus on the Storage Market. We plan to continue to take
advantage of the market opportunities in the storage industry by maintaining our
strategic focus on providing complete storage solutions. For example, we have
devoted significant resources to broadening our range of value-added services,
expanding our marketing efforts, deepening the expertise of our sales force and
offering an extensive range of technologically-advanced products. We believe
that we are well positioned to benefit from the strong growth and favorable
market dynamics of the storage industry.

Expand our Storage and Complementary Product Lines. We believe that our
ability to offer customers an extensive line of leading storage products across
technologies and manufacturers will continue to be a strong competitive
advantage for us, particularly as it relates to SAN and NAS solutions. Our
selection of products and technologies, together with our independence, allows
us to reliably deliver the optimal package of appropriate hardware, software and
services for each project.

Expand our International Presence. We intend to deepen our presence in
the United States, and expand our coverage in the major international markets we
serve, including Canada, Latin America and Europe, through internal growth and
strategic acquisitions. Increasingly, multinational companies, including our
manufacturers and customers, requiring products and solutions that are able to
address local operational and reporting requirements, but which are also
heterogeneous and interoperable among countries, regions and offices. As we
expand our global presence, we believe that we will be better able to address
the demands of multinational customers, gain more access to multinational
manufacturers and leverage our expertise.

Deepen Relationships with Industry Leaders. We intend to leverage our
position as a leading distributor of storage solutions to broaden our existing
strategic relationships with industry leaders and to create new strategic
relationships. We believe that distribution channels will continue to
consolidate and leading manufacturers will align with those distributors that
are best able to offer value-added services and access new customers. We believe
being aligned with leading manufacturers will allow us to identify innovative
products, exchange critical information, gain access to new technologies and
create cross-marketing opportunities. We have developed strategic relationships
with a number of vendors, including AMD, Brocade, EMC, Emulex, Hitachi, HP, IBM,
Intel, Legato, LG Electronics, Maxtor, Microsoft, Network Associates, Qlogic,
Seagate, StorageTek, Symantec, Veritas and Western Digital.

Continue Cost Structure and Profitability Improvements. We intend to
continue to improve our cost structure by maximizing the efficiency of personnel
and resources throughout our global organization. During the past few years, we
have undertaken various performance improvement initiatives such as realigning
and streamlining operations. We have also made significant progress in reducing
non-personnel related expenditures. We will continue to review our business and
take advantage of opportunities to improve cost efficiencies. We also intend to
continue to optimize our profitability by managing our assets and working
capital through actions such as maximizing early payment discounts and other
profit enhancement opportunities offered by vendors.

Pursue Selective Acquisitions. We intend to pursue opportunities to
acquire businesses that help us achieve our various strategic goals including
further developing our solutions offerings, expanding key vertical product
offerings and broadening our geographic footprint.

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PRODUCTS AND SERVICES

We market and distribute more than 140 brand name product lines, as
well as our own Rorke Data storage products and Markvision memory modules. We
offer the following products as discrete components or as part of our solutions
offering.

Storage Products and Related Software

Our storage products include network attached storage, storage area
network products, fibre channel networking products and systems, tape libraries
and disk drives, as well as storage-related software products. We partner with
the best-in-class storage providers in the industry to provide the most
comprehensive cost effective solutions to enterprise customers worldwide. We
offer a comprehensive set of products and services, supported through a network
of worldwide integration and solution centers with more than 400 dedicated
storage professionals available to serve our customer's enterprise needs. Our
customer base includes leading Var2000 and vertical solution providers
worldwide.

Semiconductor and Other Components

We distribute a variety of semiconductor components, including DRAM
and Flash memory components and modules, microprocessors, microcontrollers,
fiber optics, power management components, application-specific integrated
circuits (ASICs), graphics and video devices, communications and power supplies.

Computer Products and Software

Our computer products include disk drives, a variety of standard and
custom-configured motherboards, flat panel displays and related components,
monitors, keyboards, chassis, scanners, servers, board level products and
network interface controller (NIC) cards, as well as related software. Among the
computer products we offer are our own proprietary Markvision memory modules
that complement the other products and technologies we provide.

Value-Added Services

We offer our customers a variety of value-added services as described
below. Many of our value-added services are product focused, while others
provide our customers assistance with a variety of product management
activities.

Storage System Consulting Services. We work with customers to determine
data storage needs to make decisions regarding their storage strategies and to
design storage systems to address these needs. Our consulting services draw from
our core competencies in enterprise storage integration solutions. We perform
tasks such as storage audit or feasibility studies, supplement specialist
elements of a pre-defined project or provide full project management and
implementation.

NAS and SAN Solutions. We offer a broad range of professional services
including design and consultation, installation, training and on-site service
programs relating to NAS and SAN solutions. We have established a dedicated
enterprise storage systems team that can address the challenges associated with
enterprise storage systems. Our service programs also offer customers fibre
channel interoperability testing and fully integrated turnkey storage solutions.
For example, we integrate SANs with fibre channel-based technology including
switches, bridges, archive libraries and network software.

Storage Subsystems. We provide standard and custom subsystem products
to our customers. We integrate standard products for our Rorke Data brand
storage products. We also configure custom products to meet the needs of
customers that cannot be served by industry-standard product offerings.

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Component Product Services. We provide value-added services to a full
range of storage and computer products, including semiconductor device
programming, tape and reeling, special labeling for disk drives. We provide
image duplication, firmware modification, software downloading, special labeling
and other hardware modification services. For other computer product components
we provide kitting, testing and various configuration services.

Flat Panel Integration. We offer a comprehensive portfolio of Flat
Panel Displays, technologies and integration services that include off-the-shelf
solutions for Kiosk, point-of-sale (POS), Digital Display Signage, Medical
Instrumentation, KVM (keyboard, video, mouse) and many other OEM applications.
We also offer fully custom designs to support applications such as full sunlight
readability and harsh environmental deployment.

Board and Blade Level Building Blocks. We provide both standard and
custom configured Board and Blade offerings geared for applications to include
computers, servers, medical equipment, video/graphics, security, test and
measurement and networking products offered in a variety of industry standard
form factors including ATX, Micro-ATX, PCI and Compact PCI. We also provide
complete integration services, manufacturing assembly, interoperability testing
and application support.

Application Support Services. Our application support services provide
design support and product recommendations, training programs, maintenance
options and testing, technical advice and prompt incident detection and
resolution.

Supply Chain Management. We provide a variety of materials-management
solutions, including e-procurement services, Internet-enabled, real-time pricing
and delivery quotations, electronic data interface programs, just-in-time
inventory programs, bonded inventories, on-site consignment inventory and
kitting.

Retail Packaging and Software Duplication. We provide a value-added
service to storage manufacturers, retailers and software/game customers, which
combines the strengths of our hard drive value capabilities with custom
third-party packaging. Our retail packaging programs deliver end consumer-ready
storage products. These products are produced in high volume and require high
quality software duplication, testing and drive assembly to meet demanding
retail launch and release dates. The core materials planning and logistics
capabilities of our distribution operations enable us to deliver retail-ready
product to our customers' distribution centers or directly to their retail
outlets.

SALES AND MARKETING

Our customer base primarily consists of OEMs, VARs, system integrators,
contract electronic manufacturers, storage solution customers and retailers. For
customers primarily seeking our solution offerings, our sales and marketing
efforts often involve proactive efforts of our sales people and field
application engineers. Sales and technical personnel focusing on these customers
tend to spend time at customers' facilities assessing the customers' needs,
developing and providing solutions as well as providing proof of concept
supported by our technical capabilities and experience. Our component offering
marketing efforts involve supply chain management programs, consignment and
bonded inventory programs and end-of-life programs. Sales of our component
offerings are principally driven by these factors, our design services, product
breadth and depth, pricing and on-time availability.

We also believe that our relationships with manufacturers provide us
with significant opportunities to increase our sales and customer base. We work
closely with many manufacturers to develop strategies to penetrate both targeted
markets and customers. In many cases, our sales presentations to customers are a
joint effort with manufacturers' sales representatives.

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We believe our e-commerce program will enhance our sales and marketing
efforts by:

o providing our customers with detailed product information, including
availability and pricing;

o providing customers additional channels to purchase our products;

o reducing time and expenditures involved in customers' product
procurement activities; and

o providing our customers with resource planning tools to more accurately
manage their product requirements.

COMPETITION

In the distribution of storage, semiconductor components and computer
products, we generally compete for customer relationships with numerous local,
regional and national and international authorized and unauthorized
distributors. We also compete for customer relationships with manufacturers,
including some of our manufacturers and customers. Consistent with our sales and
marketing efforts, we tend to view our competition, whether arising from the
direct or indirect distribution channel, on a customer-category basis. We
believe that our most significant competition for customers seeking both
products and value-added services arises from Arrow Electronics, Avnet, and
European value-added distributors including IN Technology, Magirus and ECT
Best'Ware. We believe that our most significant competition for customers
seeking commodity products comes from Ingram Micro, Tech Data and Synnex.

Another key competitive factor in the electronic component and computer
product distribution industry as a whole is the need to carry a sufficient
amount of inventory to meet rapid delivery requirements of customers. However,
to minimize its exposure related to valuation of inventory on hand, the majority
of our product lines are purchased pursuant to non-exclusive distributor
agreements which provide certain protections to us for product obsolescence and
price erosion in the form of rights of return and price protection. Furthermore,
these agreements are generally cancelable upon 30 to 180 days notice and, in
most cases, provide for inventory return privileges upon cancellation. In
addition, we enhance our competitive position by offering a variety of
value-added services which entail the performance of services and/or processes
tailored to individual customer specifications and business needs such as point
of use replenishment, testing, assembly, supply chain management and materials
management.

We believe that competition for customers is based on product line
breadth, depth and availability, competitive pricing, customer service,
technical expertise, value-added services and e-commerce capabilities. We
believe that we compete favorably with respect to each of these factors. We
directly compete with numerous distributors, many of which possess superior
brand recognition and financial resources. In the area of storage products and
solutions, however, we believe that none of our competitors offers the full
range of storage products and solutions that we provide.

ACQUISITIONS

In connection with our solution offerings, we have completed a number
of strategic acquisitions. Through these acquisitions, we gained expertise in
storage solutions and greater access to international markets.

Our acquisition in June 2004 of OpenPSL Limited ("OpenPSL"), a company
headquartered in Manchester, England, with offices in Dublin, Ireland, Leeds,
Bracknell and Nottingham, has further enabled us to expand our enterprise,
storage solutions and service offerings in the United Kingdom and Ireland.
OpenPSL is a value-added distributor of a broad range of IT products and
technical services to VARs, system integrators and software companies, including
server, storage, networking, technical computing, thin client, emulation, fax
and security technologies. Their line card includes Hewlett Packard, IBM,
Oracle, Veritas, Allied Telesyn and Microsoft.

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Our acquisition in October 2003 of EBM Mayorista (EBM), a company
headquartered in Merida, Mexico with branch locations in Cancun, Monterrey,
Oaxaca, Villahermosa, Tampico, Veracruz, Tuxla, Torreon, Puebla and
Aguascaliente has enabled us to expand our presence in Latin America and
provided us the ability to gain additional market share in the rapidly growing
market in Mexico. EBM provides a diverse product line of computer hardware and
software to Mexican resellers, retail locations and system integrators,
including the Intel, Samsung, Epson and U.S. Robotics lines.

Our 2001 acquisition of Total Tec, a company headquartered in Edison,
NJ, and with sales offices in the eastern and southern United States, has
significantly expanded our ability to address challenging SAN initiatives. Total
Tec is one of Hewlett-Packard's ("HP") enterprise distributors and one of the
nation's premier enterprise (computing and storage) solutions providers focused
on implementing comprehensive IT solutions to Fortune 1000 firms. Their
methodology addresses key business data concerns including availability,
reliability, performance, scalability and manageability. During the fourth
quarter of 2001, we expanded our U.K. HP/Compaq relationship to include the U.S.
market for Proliant servers and StorageWorks enterprise storage systems. Through
this distribution agreement, Bell Microproducts offers leading HP/Compaq
enterprise products, services and solutions to its large customer base of VARs,
resellers, OEMs and system integrators in the U.S.

Our 2001 acquisition of Touch The Progress Group BV, a company based in
the Netherlands and with offices in Germany, Belgium and Austria, has added
enterprise storage solutions including storage management software products,
integrated storage technology, infrastructure, and support services to our
strategic effort. The company offers an extensive portfolio of storage solutions
from some of the world's leading manufacturers. This portfolio allows the
company and its business partners to provide a total storage management solution
for multiple heterogeneous computing platforms, including IBM, HPQ, Veritas and
other leading manufacturers.

Our 2001 acquisition of Forefront Graphics, a company headquartered in
Toronto, Canada, and with offices in Ottawa, Montreal, Calgary and Vancouver,
has added high performance computer graphics, digital audio and video, storage
and multimedia products targeted at both the computer reseller marketplace and
the video production reseller marketplace.

EMPLOYEES

At December 31, 2004, we had a total of 1,480 employees, including 731
in sales and marketing functions, 566 in general administrative functions and
183 in technical and value-add integration functions. Of our total employees,
772 are located at our facilities outside of the United States, including 479 in
the United Kingdom. None of our employees are represented by a labor union. We
have not experienced any work stoppages and consider our relations with our
employees to be good. Many of our current key personnel have substantial
experience in our industry and would be difficult to replace. The labor market
in which we operate is highly competitive and, as a result, we may not be able
to retain and recruit key personnel. If we fail to recruit, retain or adequately
train key personnel, we will experience difficulty in implementing our strategy,
which could negatively affect our business, financial condition and stock price.

RISK FACTORS

You should consider carefully the risks described below together with
all of the other information included in this Form 10-K. The risks and
uncertainties described below and elsewhere in this Form 10-K are not the only
ones facing us. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In that case,
the trading price of our common stock could fall, and you may lose all or part
of your investment.

OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.

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Our future revenues and operating results are likely to vary
significantly from quarter to quarter due to a number of factors, many of which
are outside our control. Accordingly, you should not rely on quarter-to-quarter
comparisons of our operating results as an indication of future performance. It
is possible that in some future periods our operating results will be below the
expectations of public market analysts and investors. In this event, the price
of our stock will likely decline. Factors that may cause our revenues, gross
margins and operating results to fluctuate include:

o the loss of key manufacturers or customers;

o changes in vendor rebate and incentive programs;

o heightened price competition;

o problems incurred in managing inventories;

o a change in the product mix sold by us;

o customer demand (including the timing of purchases from
significant customers);

o changing global economic conditions;

o our ability to manage credit risk and collect accounts
receivable;

o our ability to manage foreign currency exposure;

o availability of product and adequate credit lines from
manufacturers; and

o the timing of expenditures in anticipation of increased sales.

Due primarily to manufacturer rebate programs and increased sales
volumes near the end of each quarter, a larger portion of our gross profit has
historically been reflected in the third month of each quarter than in each of
the first two months of such quarter. If we do not receive products from
manufacturers or complete sales in a timely manner at the end of a quarter, or
if rebate programs and marketing development funds are changed or discontinued,
our operating results in a particular quarter could suffer.

As a result of intense price competition, we have narrow gross profit
margins. These narrow margins magnify the impact of variations in sales and
operating costs on our operating results. Because our sales in any given quarter
depend substantially on sales booked in the third month of the quarter, a
decrease in such sales is likely to adversely and disproportionately affect our
quarterly operating results. This is because our expense levels are partially
based on our expectations of future sales, and we may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Due to our narrow margins and our limited ability to quickly adjust costs, any
shortfall in sales in relation to our quarterly expectations will likely have an
adverse impact on our quarterly operating results.

WE RELY ON A RELATIVELY SMALL NUMBER OF KEY MANUFACTURERS FOR PRODUCTS THAT MAKE
UP A SIGNIFICANT PORTION OF OUR NET SALES AND THE LOSS OF A RELATIONSHIP WITH A
KEY MANUFACTURER COULD HAVE AN ADVERSE EFFECT ON OUR NET SALES.

We receive a significant portion of our net sales from products we
purchase from a relatively small number of key manufacturers. In each of 2003
and 2004, five key manufacturers provided products that represented 53% and 50%,
respectively, of our net sales. We believe that products from a relatively small
number of manufacturers will continue to account for a significant portion of
our net sales for the foreseeable future, and the portion of our net sales from
products purchased from such manufacturers could continue to increase in the
future. These key manufacturers have a variety of distributors to choose from
and therefore can make substantial demands on us. In addition, our standard
distribution agreement allows the manufacturer to terminate its relationship
with us on short notice. Our ability to maintain strong relationships with our
key manufacturers, both domestically and internationally, is essential to our
future performance. The loss of a relationship with a key manufacturer could
have an adverse effect on our net sales.

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In addition, the recent downturn in the economy in general, and in the
technology sector of the economy in particular, has led to increased
consolidation among our manufacturers and may result in some manufacturers
exiting the industry. Further, manufacturers have been consolidating the number
of distributors they use. These events could negatively impact our relationships
with our key manufacturers and may have an adverse effect on our net sales.

WE OPERATE IN AN INDUSTRY WITH CONTINUAL PRICING AND MARGIN PRESSURE.

The nature of our industry and our business is highly
price-competitive. There are several distributors of products similar to ours in
each of the markets in which we operate. As a result, we face pricing and margin
pressure on a continual basis. Additionally, the mix of products we sell also
affects overall margins. If we increase revenue from products that are more
widely distributed, these products may carry lower gross margins that can reduce
our overall gross profit percentage. There can also be a negative impact on
gross margins from factors such as freight costs and foreign exchange exposure.
These factors, alone or in combination, can have a negative impact on our gross
profit percentage.

THE FAILURE OF OUR KEY SUPPLIERS TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES
IN OUR INDUSTRY AND TO SUCCESSFULLY DEVELOP NEW PRODUCTS COULD CAUSE OUR SALES
TO DECLINE AND OUR REVENUES TO DECREASE.

Our ability to generate increased revenues depends significantly upon
the ability and willingness of suppliers to develop new products on a timely
basis in response to rapid technological changes in our industry. Our suppliers
must commit significant resources each time they develop a product. If they do
not invest in the development of new products, then sales of our products to our
customers may decline and our revenues may decrease. The ability and willingness
of our suppliers to develop new products is based upon a number of factors
beyond our control.

THE TECHNOLOGY PRODUCTS MARKETPLACE HAS BEEN MATURING WHICH MAY AFFECT DEMAND
FOR OUR PRODUCTS AND IMPACT OUR PRICING AND GROSS MARGINS.

Over the past several years, the growth rate in spending on the types
of technology products we distribute has decreased from the growth rates
experienced prior to 2000. While there has been an increase in the rate of
spending over the past 18 months as compared with 2001 through mid-2003, this
increase may not be sustainable at its current level and there may be declines
in technology spending in the future. A reduction in spending may result in a
decline in our net sales and gross margins due to decreased sales volumes and
price competition.

OUR INVENTORY MAY DECLINE IN VALUE DUE TO INVENTORY SURPLUS, PRICE REDUCTIONS OR
TECHNICAL OBSOLESCENCE THAT COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

The value of our inventory may decline as a result of surplus
inventory, price reductions or technological obsolescence. Our distribution
agreements typically provide us with only limited price protection and inventory
return rights. In addition, we purchase significant amounts of inventory under
contracts that do not provide any inventory return rights or price protection.
Without price protection or inventory return rights for our inventory purchases,
we bear the sole risk of obsolescence and price reductions. Even when we have
price protection and inventory return rights, there can be no guarantee we will
be able to return the products to the manufacturer or to collect refunds for
those products in a timely manner, if at all.

SUPPLY SHORTAGES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS.

We are dependent on the supply of products from our vendors. Our
industry is characterized by periods of product shortages due to vendors'
difficulty in projecting demand. When such shortages occur, we typically receive
an allocation of product from the vendor. There can be no assurance that vendors
will be able to

10

maintain an adequate supply of products to fulfill all of our customers' orders
on a timely basis. If we are unable to enter into and maintain satisfactory
distribution arrangements with leading vendors and an adequate supply of
products, we may be late in shipping products, causing our customers to purchase
products from our competitors which could adversely affect our net sales,
operating results and customer relationships.

OUR FINANCIAL OBLIGATIONS MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.

The agreements governing our revolving lines of credit and our 9%
senior subordinated notes contain various restrictive covenants that, among
other things, require us to comply with or maintain certain financial tests and
ratios that limit our ability to operate our business. If we do not comply with
the covenants contained in the agreements governing our revolving lines of
credit and our 9% senior subordinated notes, our lenders may demand immediate
repayment of amounts outstanding. Additionally, under the terms of our 3 3/4%
Convertible Subordinated Notes, Series B due 2024, holders have the right to
convert their notes upon the occurrence of certain events, including but not
limited to the closing price of our common stock exceeding a certain threshold
for at least 20 of the last 30 days in preceding fiscal quarters and upon
specified corporate transactions, all as described in more detail in the
prospectus filed in connection with the exchange offer. Upon the occurrence of
any such conversion event, we have an obligation to deliver, at a minimum, cash
in an amount equal to the principal amount of each note tendered for conversion.
Our ability to comply with these debt obligations will depend upon our future
operating performance, which may be affected by prevailing economic conditions
and financial, business and other factors described herein and in our other SEC
filings, many of which are beyond our control. If we are unable to meet our debt
obligations, we may be forced to adopt one or more strategies such as reducing
or delaying capital expenditures or otherwise slowing our growth strategies,
selling assets, restructuring or refinancing our indebtedness or seeking
additional equity capital. We do not know whether any of these actions could be
effected on satisfactory terms, if at all. Additionally, any equity financing
may be on terms that are dilutive or potentially dilutive. If we are unable to
successfully manage our debt burden, and the potential short-term obligation
relating to our convertible notes, our financial condition would suffer
considerably. Changes in interest rates may also have a significant effect on
our operating results. Furthermore, we are dependent on credit from our
manufacturers to fund our inventory purchases. If our debt burden increases to
high levels, our manufacturers may restrict our credit. Our cash requirements
will depend on numerous factors, including the rate of growth of our sales, the
timing and levels of products purchased, payment terms and credit limits from
manufacturers, the timing and level of our accounts receivable collections and
our ability to manage our business profitably.

SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW.

Our revolving lines of credit and our 9% senior subordinated notes
impose significant debt service obligations on us and expose us to certain risks
associated with being a substantially leveraged company. Upon the occurrence of
certain events, our lenders may demand immediate repayment of amounts
outstanding under our existing lines of credit and our 9% senior subordinated
notes. In March 2004, we issued our 3 3/4% convertible subordinated notes,
resulting in net proceeds of $106,300,000. We used all of the net proceeds of
the offering to repay a portion of amounts outstanding under our revolving lines
of credit and our 9% senior subordinated notes. In December 2004, we exchanged
99.6% of the Old Notes for our 3 3/4% Convertible Subordinated Notes, Series B
due 2024 (the "New Notes") pursuant to an exchange offer with holders of the Old
Notes. As a result of the issuance of the notes, our leverage and debt service
obligations may increase. Under the terms of the New Notes, holders have the
right to convert their notes upon the occurrence of certain events, including
but not limited to the closing price of our common stock exceeding a certain
threshold for at least 20 of the last 30 days in preceding fiscal quarters and
upon specified corporate transactions, as described in more detail in the
prospectus filed in connection with the exchange offer. Upon the occurrence of
any such conversion event, we have an obligation to deliver to holders electing
to convert their New Notes, at a minimum, cash in an amount equal to the
principal amount of each note tendered for conversion. There is the possibility
that we may be unable to generate cash sufficient to pay the principal of,
interest on and other amounts due in respect of our indebtedness when due.

11

Our substantial leverage could also have significant negative
consequences, including:

o increasing our vulnerability to general adverse economic and
industry conditions;

o increasing our exposure to fluctuating interest rates;

o restricting our credit with our manufacturers which would limit
our ability to purchase inventory;

o limiting our ability to obtain additional financing;

o requiring the dedication of a portion of our expected cash flow
from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes,
including capital expenditures;

o limiting our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and

o placing us at a possible competitive disadvantage relative to
less leveraged competitors and competitors that have better
access to capital resources.

We are not restricted under the indenture governing the notes from
incurring additional debt in the future. As a result of using the net proceeds
to pay down amounts outstanding on our revolving lines of credit, we may also
incur substantial additional debt under the facilities. If new debt is added to
our current levels, our leverage and debt service obligations would increase and
the related risks described above could intensify.

IF WE DO NOT CONTROL OUR OPERATING EXPENSES, WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY IN OUR INDUSTRY.

Our strategy involves, to a substantial degree, increasing revenues
while at the same time controlling operating expenses. In furtherance of this
strategy, we have engaged in ongoing, company-wide efficiency activities
intended to increase productivity and reduce costs. These activities have
included significant personnel reductions, reduction or elimination of
non-personnel expenses and realigning and streamlining operations and
consolidating business lines. We cannot assure you that our efforts will result
in the increased profitability, cost savings or other benefits that we expect.
Moreover, our cost reduction efforts may adversely affect the effectiveness of
our financial and operational controls, our ability to distribute our products
in required volumes to meet customer demand and may result in disruptions that
affect our products and customer service.

OUR ABILITY TO OPERATE EFFECTIVELY COULD BE IMPAIRED IF WE WERE TO LOSE THE
SERVICES OF KEY PERSONNEL, OR IF WE ARE UNABLE TO RECRUIT QUALIFIED MANAGERS AND
KEY PERSONNEL IN THE FUTURE.

Our success largely depends on the continued service of our management
team and key personnel. If one or more of these individuals, particularly W.
Donald Bell, our Chairman, Chief Executive Officer and President, were to resign
or otherwise terminate their employment with us, we could experience a loss of
sales and vendor relationships and diversion of management resources.
Competition for skilled employees is intense and there can be no assurance that
we will be able to recruit and retain such personnel. If we are unable to retain
our existing managers and employees or hire and integrate new management and
employees, we could suffer material adverse effects on our business, operating
results and financial condition.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS WHICH MAY HURT OUR
PROFITABILITY.

Our international revenues represented 62% of our revenues in both 2004
and 2003. We believe that international sales will represent a substantial, and
potentially increasing portion of our net sales for the foreseeable future. Our
international operations are subject to a number of risks, including:

o Fluctuations in currency exchange rates;

12

o vendor programs, terms and conditions in multiple countries;

o political and economic instability;

o longer payment cycles and unpredictable sales cycles;

o difficulty in staffing and managing foreign operations;

o import and export license requirements, tariffs, taxes and other trade
barriers; and

o the burden of complying with a wide variety of foreign laws, treaties
and technical standards and changes in those regulations.

The majority of our revenues and expenditures in our foreign
subsidiaries are transacted in the local currency of the country where the
subsidiary operates. For each of our foreign subsidiaries, the local currency is
also the functional currency. Fluctuations in currency exchange rates could
cause our products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. To the extent our revenues and expenses are denominated in currencies
other than U.S. dollars, gains and losses on the conversion to U.S. dollars may
contribute to fluctuations in our operating results. In addition, we have
experienced foreign currency remeasurement gains and losses because a
significant amount of our foreign subsidiaries' remeasurable net assets and
liabilities are denominated in U.S. dollars rather than the subsidiaries'
functional currency. As we continue to expand globally and the amount of our
foreign subsidiaries' U.S. dollar or non-functional currency denominated,
remeasurable net asset or liability position increases, our potential for
fluctuations in foreign currency remeasurement gains and losses will increase.
We have in the past, and expect in the future, to enter into hedging
arrangements and enter into local currency borrowing facilities to reduce this
exposure, but these arrangements may not be adequate.

OUR INABILITY TO EFFECTIVELY MANAGE OUR ACCOUNTS RECEIVABLE COULD HAVE A
SIGNIFICANT NEGATIVE IMPACT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND LIQUIDITY.

A significant portion of our working capital consists of accounts
receivable from customers. If customers responsible for a significant percentage
of our accounts receivable were to become insolvent or otherwise unable to pay
for products and services, or were to become unwilling or unable to make
payments in a timely manner, our operating results and financial condition could
be adversely affected. If there is an economic downturn which has a significant
negative impact on our business, it could also have an adverse effect on the
servicing of our accounts receivable, which could result in longer payment
cycles, increased collection costs and defaults in excess of management's
expectations. A significant deterioration in our ability to collect on accounts
receivable could also impact the cost or availability of financing. Further, our
revolving lines of credit enable us to borrow funds for operations based on our
levels of accounts receivable and inventory and the agreement governing our
senior subordinated notes restricts the amount of additional debt we can incur
based on our levels of accounts receivable and inventory. If our accounts
receivable and inventories are not at adequate levels, we may face liquidity
problems in operating our business.

IF WE ARE UNABLE TO EFFECTIVELY COMPETE IN OUR INDUSTRY, OUR OPERATING RESULTS
MAY SUFFER.

The markets in which we compete are intensely competitive. As a result,
we will face a variety of significant challenges, including rapid technological
advances, price erosion, changing customer preferences and evolving industry
standards. Our competitors continue to offer products with improved price and
performance characteristics, and we will have to do the same to remain
competitive. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share, any
of which would have a material adverse effect on our business. We cannot be
certain that we will be able to compete successfully in the future.

We compete for customer relationships with numerous local, regional,
national and international distributors. We also compete for customer
relationships with manufacturers, including some of our

13

manufacturers and customers. We believe our most significant competition for
customers seeking both products and services arises from Arrow Electronics,
Avnet and European value-added distributors including IN Technology, Magirus and
ECT Best'Ware. We believe our most significant competition for customers seeking
only products arises from Ingram Micro, Tech Data and Synnex. We also compete
with regionalized distributors in North America, Europe and Latin America who
use their localized knowledge and expertise as a competitive advantage.
Competition for customers is based on product line breadth, depth and
availability, competitive pricing, customer service, technical expertise,
value-added services and e-commerce capabilities. While we believe we compete
favorably with respect to these factors, some of our competitors have superior
brand recognition and greater financial resources than we do. If we are unable
to successfully compete, our operating results may suffer.

We also compete with other distributors for relationships with
manufacturers. In recent years, a growing number of manufacturers have begun
consolidating the number of distributors they use. This consolidation will
likely result in fewer manufacturers in our industry. As a result of this
consolidation we may lose existing relationships with manufacturers. In
addition, manufacturers have established and may continue to establish
cooperative relationships with other manufacturers and data storage solution
providers. These cooperative relationships may enable manufacturers to offer
comprehensive solutions that compete with those we offer and the manufacturers
may have greater resources to devote to internal sales and marketing efforts. If
we are unable to maintain our existing relationships with manufacturers and
establish new relationships, it could harm our competitive position and
adversely affect our operating results.

IF WE ARE UNABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS MAY SUFFER.

Many of the products we sell are used in the manufacture or
configuration of a wide variety of electronic products. These products are
characterized by rapid technological change, short product life cycles and
intense competition and pricing pressures. Our continued success depends upon
our ability to continue to identify new vendors and product lines that achieve
market acceptance, emerging technologies, develop technological expertise in
these technologies and continually develop and maintain relationships with
industry leaders. If we are unsuccessful in our efforts, our results of
operations and financial condition may suffer.

FAILURE TO IDENTIFY ACQUISITION OPPORTUNITIES AND INTEGRATE ACQUIRED BUSINESSES
INTO OUR OPERATIONS SUCCESSFULLY COULD REDUCE OUR REVENUES AND PROFITS AND MAY
LIMIT OUR GROWTH.

An important part of our growth has been the acquisition of
complementary businesses. We may choose to continue this strategy in the future.
Our identification of suitable acquisition candidates involves risks inherent in
assessing the value, strengths, weaknesses, overall risks and profitability of
acquisition candidates. We may be unable to identify suitable acquisition
candidates. If we do not make suitable acquisitions, we may find it more
difficult to realize our growth objectives.

The process of integrating new businesses into our operations,
including our recently completed acquisitions, poses numerous risks, including:

o an inability to assimilate acquired operations, information systems,
and internal control systems and products;

o diversion of management's attention;

o difficulties and uncertainties in transitioning the business
relationships from the acquired entity to us; and

o the loss of key employees of acquired companies.

14

In addition, future acquisitions by us may be dilutive to our
shareholders, cause us to incur additional indebtedness and large one-time
expenses or create intangible assets that could result in significant
amortization expense. If we spend significant funds or incur additional debt,
our ability to obtain necessary financing may decline and we may be more
vulnerable to economic downturns and competitive pressures. We cannot guarantee
that we will be able to successfully complete any acquisitions, that we will be
able to finance acquisitions or that we will realize any anticipated benefits
from acquisitions that we complete.

IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER.

Our growth since our initial public offering in 1993 has placed, and
continues to place, a significant strain on our management, financial,
operational, technical, sales and administrative resources. We intend to
continue to grow by increasing our sales efforts and completing strategic
acquisitions. To effectively manage our growth, we must, among other things:

o engage, train and manage a larger sales force and additional service
personnel;

o expand the geographic coverage of our sales force;

o expand our information systems;

o identify and successfully integrate acquired businesses into our
operations; and

o enforce appropriate financial and administrative control procedures.

Any failure to effectively manage our growth may cause our business to
suffer and our stock price to decline.

WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN
PLACE, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING
COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF
2002.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the company's internal control over financial
reporting in their annual reports on Form 10-K that contains an assessment by
management of the effectiveness of the company's internal control over financial
reporting. In addition, the independent registered public accounting firm
auditing the company's financial statements must attest to and report on
management's assessment of the effectiveness of the company's internal control
over financial reporting. We have performed the system and process evaluation
and testing required in an effort to comply with the management certification
and auditor attestation requirements. While we intend to conduct a rigorous
review of our internal control over financial reporting in order to assure
compliance with the Section 404 requirements, if our independent auditors
interpret the Section 404 requirements and the related rules and regulations
differently from us or if our independent auditors are not satisfied with our
internal control over financial reporting or with the level at which it is
documented, operated or reviewed, they may decline to attest to management's
assessment or issue a qualified report. Additionally, if we are not able to
continue to meet the requirements of Section 404 in a timely manner or with
adequate compliance, we might be subject to sanctions or investigation by
regulatory authorities, such as the SEC or the New York Stock Exchange. Any such
actions could result in an adverse reaction in the financial markets due to a
loss of confidence in the reliability of our financial statements, which could
cause the market price of our common stock to decline.

SOME OF OUR OPERATIONS ARE LOCATED IN CALIFORNIA AND, AS A RESULT, ARE SUBJECT
TO NATURAL DISASTERS, WHICH COULD RESULT IN A BUSINESS STOPPAGE AND NEGATIVELY
AFFECT OUR OPERATING RESULTS.

Our business operations depend on our ability to maintain and protect
our facilities, computer systems and personnel. Our corporate headquarters and a
significant portion of our business operations, computer

15

systems and personnel are located in the San Francisco Bay area which is in
close proximity to known earthquake fault zones. Our facilities and
transportation for our employees are susceptible to damage from earthquakes and
other natural disasters such as fires, floods and similar events. Should an
earthquake or other catastrophes, such as fires, floods, power loss,
communication failure or similar events disable our facilities, we have limited
available alternative facilities from which we could conduct our business, which
stoppage could have a negative effect on our operating results.

ITEM 2. PROPERTIES

In the Americas, we maintain 49 sales offices in a variety of
locations, including the U.S., Canada, Argentina, Brazil, Chile and Mexico. In
Europe, we maintain sales offices in Austria, Belgium, England, Ireland, France,
Germany, Italy, the Netherlands and Sweden. In addition to our sales offices, we
operate six integration and service facilities and 11 warehouses. We currently
operate four significant management and distribution centers. Our corporate
headquarters is located in San Jose, California, where we currently lease office
space and distribution facilities with approximately 160,000 square feet of
space. The leases expire in 2007. In Chessington, England, we acquired a
facility with approximately 102,000 square feet that serves as our center for
directing and managing our operations in the United Kingdom and Europe. Our
European distribution center is located in Birmingham, England where we lease a
warehouse facility with approximately 130,000 square feet of space. This lease
expires in 2019. In Manchester, England, we acquired a facility with
approximately 23,000 square feet that serves as our center for directing and
managing our value added and storage solutions services in the United Kingdom
and Ireland. In Miami, Florida, we currently lease a facility with approximately
65,000 square feet that serves as our center for directing and managing our
business in Latin America. The lease expires in 2010, with one 5-year options to
extend. In Montgomery, Alabama, we currently lease a facility with approximately
37,000 square feet that serves as our corporate technology and data center and
our primary customer call center. The lease on this facility expires in October
2007. We believe that our existing facilities are adequate for our current
operational needs.

ITEM 3. LEGAL PROCEEDINGS

Bell and/or its subsidiaries are parties to various other legal
proceedings arising from time to time in the normal course of business. While
litigation is subject to inherent uncertainties, management currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on our financial position,
cash flow or overall results of operations.

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

None.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock is traded on the Nasdaq National Market under the
symbol "BELM." The following table sets forth for the periods indicated the high
and low sale prices of the Common Stock as reported by Nasdaq.

On March 11, 2005, the last sale price of the Common Stock as reported
by Nasdaq was $8.65 per share.

As of March 11, 2005, there were approximately 365 holders of record of
the Common Stock (not including shares held in street name).

To date, we have paid no cash dividends to our shareholders. We have no
plans to pay cash dividends in the near future. Our line of credit agreements
prohibit the payment of dividends or other distributions on any of our shares
except dividends payable in our capital stock.

17

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated operations data for 2004, 2003 and 2002 and
consolidated balance sheet data as of December 31, 2004 and 2003 set forth below
have been derived from our consolidated financial statements and are qualified
by reference to the consolidated financial statements included herein audited by
PricewaterhouseCoopers LLP, independent registered public accounting firm. The
selected consolidated operations data for 2001 and 2000 and the consolidated
balance sheet data as of December 31, 2002, 2001 and 2000 have been derived from
our audited consolidated financial statements not included herein. These
historical results are not necessarily indicative of the results of operations
to be expected for any future period.

(1) 2004 Statement of Operations data and Balance Sheet data include the results
of operations of OpenPSL Holdings Limited since acquisition on June 22,
2004. See Note 4 of Notes to Consolidated Financial Statements.

18

(2) 2003 Statement of Operations data and Balance Sheet data include the results
of operations of EBM Mayorista S.A. de C.V. since acquisition on October 15,
2003. See Note 4 of Notes to Consolidated Financial Statements.

(3) 2001 Statement of Operations data and Balance Sheet data include the results
of operations of Touch The Progress Group BV since acquisition on May 22,
2001, Forefront Graphics on May 24, 2001 and Total Tec Systems, Inc. on
November 13, 2001.

(4) 2000 Statement of Operations data and Balance Sheet data include the results
of operations of Rorke Data, Inc. since acquisition on May 15, 2000 and
Ideal Hardware Limited on August 3, 2000.

(5) All per share amounts have been restated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". Earnings per
share and shares used in per share calculations have been retroactively
restated to reflect the 3-for-2 stock split the Company declared on July 31,
2000.

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

For an understanding of the significant factors that influenced our
performance during the past three years, the following discussion should be read
in conjunction with the consolidated financial statements and the other
information appearing elsewhere in this report.

Due to the severity and length of the downturn in the electronic
component and computer product industry and in the global economy as a whole, we
have recorded charges in recent years that are discussed more fully in
"Restructuring and Other Charges" in this MD&A. These charges have had a
significant impact on our results of operations for the years ended December 31,
2003 and 2002 presented in this Report as discussed further below.

In addition to disclosing financial results that are determined in
accordance with accounting principles generally accepted in the United States
("GAAP"), we may also disclose pro forma or non-GAAP measures that may exclude
certain items. Management believes that providing this additional information is
useful to the reader to better assess and understand operating performance,
especially when comparing results with previous periods or forecasting
performance for future periods. Management believes the pro forma measures also
help indicate underlying trends in the business. Management also uses pro forma
information to establish operational goals and, in some cases, for measuring
performance for compensation purposes. However, analysis of results and outlook
on a pro forma or non-GAAP basis should be used as a complement to, and in
conjunction with, data presented in accordance with GAAP.

When used in this report, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A under the
Securities Act of 1933 and Section 21E under the Securities Exchange Act of
1934. Such statements include but are not limited to statements regarding the
ability to obtain favorable product allocations and the ability to increase
gross profit while controlling expenses. These statements are subject to risks
and uncertainties that could cause actual results to differ materially,
including those risks described under "Risk Factors" in Item 1 hereof.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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. Our estimates, judgments and assumptions are

19

continually evaluated based on available information and experience; however
actual amounts could differ from those estimates.

The Securities and Exchange Commission defines critical accounting
polices as those that are, in management's view, most important to the portrayal
of our financial condition and results of operations and those that require
significant judgments and estimates. Management believes our most critical
accounting policies relate to:

Revenue recognition

Bell's policy is to recognize revenue from sales to customers when the
rights and risks of ownership have passed to the customer, when persuasive
evidence of an arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. Under specific
conditions, we permit our customers to return or exchange products. The
provision for estimated returns is recorded concurrently with the recognition of
revenue based on historical sales returns and analysis of credit memorandum
data.

We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required payments. We
make our estimates of the collectibility of our accounts receivable by analyzing
historical bad debts, specific customer creditworthiness and current economic
trends. At December 31, 2004 the allowance for doubtful accounts was $13.6
million and at December 31, 2003 it was $17.6 million. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. In 2004,
our bad debt expense was $9.0 million compared to $7.6 million in 2003. In 2002,
restructuring and special charges of $1.7 million were recorded in the second
quarter that related to a rapid deterioration in the financial condition of
certain customers in Latin America resulting in their inability to make
payments. Events giving rise to this provision related to the economic crisis in
Argentina and the devaluation of the Argentinean peso.

Valuation of Inventory

Inventories are recorded at the lower of cost (first in -- first out)
or estimated market value. Our inventories include high-technology components,
embedded systems and computing technologies sold into rapidly changing, cyclical
and competitive markets whereby such inventories may be subject to early
technological obsolescence. We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand, selling prices and market conditions. In the first quarter of 2003, we
recorded inventory charges of $1.5 million of charges related to excess
inventory on hand. These additional write-downs resulted from market conditions,
changes to certain vendor relationships and the decision to discontinue certain
product lines. These charges were included in the Statement of Operations within
the caption "Cost of Sales." We evaluate inventories for excess, obsolescence or
other factors that may render inventories unmarketable at normal margins.
Write-downs are recorded so that inventories reflect the approximate net
realizable value and take into account our contractual provisions with our
suppliers governing price protection, stock rotation and return privileges
relating to obsolescence. Because of the large number of transactions and the
complexity of managing the process around price protections and stock rotations,
estimates are made regarding adjustments to the carrying amount of inventories.
Additionally, assumptions about future demand, market conditions and decisions
to discontinue certain product lines can impact the decision to write down
inventories. If assumptions about future demand change or actual market
conditions are less favorable than those projected by management, additional
write-downs of inventories may be required. In any case, actual amounts could be
different from those estimated.

20

Special and Acquisition-Related Charges

We have been subject to the financial impact of integrating acquired
businesses and charges related to business reorganizations. In connection with
such events, management is required to make estimates about the financial impact
of such matters that are inherently uncertain. Accrued liabilities and reserves
are established to cover the cost of severance, facility consolidation and
closure, lease termination fees, inventory adjustments based upon
acquisition-related termination of supplier agreements and/or the evaluation of
the acquired working capital assets (inventory and accounts receivable),
change-in-control expenses, and write-down of other acquired assets including
goodwill. Actual amounts incurred could be different from those estimated.

Valuation of Accounts Payable

Our accounts payable has been reduced by amounts claimed to vendors for
returns, price protection and other amounts related to incentive programs.
Amounts related to price protection and other incentive programs are recorded as
adjustments to product costs or selling, general and administrative expenses,
depending on the nature of the program. There is a time delay between the
submission of a claim by us and confirmation of agreement by our vendors.
Historically, our estimated claims have approximated amounts agreed to by our
vendors.

Accounting for Income Taxes

Management judgment is required in determining the provision for income
taxes, deferred tax assets and liabilities and the valuation allowance recorded
against net deferred tax assets. The carrying value of our net foreign operating
loss carry-forwards is dependent upon our ability to generate sufficient future
taxable income in certain tax jurisdictions. In addition, we consider historic
levels of income, expectations and risk associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing a tax valuation allowance. Should we determine that we are not able to
realize all or part of our deferred tax assets in the future, a valuation
allowance is recorded against the deferred tax assets with a corresponding
charge to income in the period such determination is made.

Valuation of Goodwill and Intangible Assets

At December 31, 2004, goodwill amounted to $92.6 million and
identifiable intangible assets amounted to $9.4 million.

We regularly evaluate whether events and circumstances have occurred
that indicate a possible impairment of goodwill. In determining whether there is
an impairment of goodwill, we calculate the estimated fair value of our company
based on the closing sales price of our common stock and projected discounted
cash flows as of the date we perform the impairment tests. We then compare the
resulting fair value to our respective net book value, including goodwill. If
the net book value of our company exceeds its fair value, we measure the amount
of the impairment loss by comparing the implied fair value of our goodwill with
the carrying amount of that goodwill. To the extent that the carrying amount of
our goodwill exceeds its implied fair value, we recognize a goodwill impairment
loss. We perform this impairment test annually and whenever facts and
circumstances indicate that there is a possible impairment of goodwill. We
completed the required annual impairment test, which resulted in no impairment
for fiscal year 2004. We believe the methodology we use in testing impairment of
goodwill provides us with a reasonable basis in determining whether an
impairment charge should be taken.

Hedge Accounting

We generate a substantial portion of our revenues in international
markets, which subjects our operations and cash flows to the exposure of
currency exchange fluctuations. We seek to minimize the risk associated with
currency exchange fluctuations by entering into forward exchange contracts to
hedge certain foreign currency

21

denominated assets or liabilities. These derivatives do not qualify for SFAS 133
hedge accounting treatment. Accordingly, changes in the fair value of these
hedges are recorded immediately in earnings on line item 'Interest Expense and
Other Income' to offset the changes in the fair value of the assets or
liabilities being hedged.

RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

Bell Microproducts' results for the fourth quarter and full year 2004
improved significantly over the prior year's results. We achieved record
revenues for both reporting periods and generated revenue improvement in all
geographies and all major product categories compared to the same periods last
year. Gross profit margins also increased for both reporting periods as compared
to the prior year. The higher gross margins, combined with controlling operating
expenses, resulted in a significant increase in operating margins and overall
profitability, both year-over-year and sequentially by quarter. Efforts to drive
increased profitability throughout the company, coupled with the acquisition of
OpenPSL in the middle of 2004, resulted in a strong performance in the Americas
and significant improvement in our European operations.

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

Net sales were $2,827.8 million for the year ended December 31, 2004,
which represented an increase of $597.5 million, or 27% over 2003. The sales
increase was driven by an increase of $343.8 million in Solutions sales as well
as an increase of $253.7 million in sales of Components and Peripherals. The
Solutions sales increase was due to the growth of this market, a growth in
market share and the acquisition of OpenPSL Limited ("OpenPSL") in June of 2004.
OpenPSL contributed approximately $120 million of our Solutions sales in 2004.
The increase in sales of Components and Peripherals was due primarily to growth
in components sales in North America.

Our gross profit for 2004 was $221.4 million, an increase of $53.3
million, or 32% from 2004. The increase in gross profit was primarily due to an
increase in sales volume, product mix and the acquisition of OpenPSL in June
2004. The acquisition of OpenPSL contributed approximately $19.3 million in
2004. Our gross profit margin increased to 7.8% in 2004, compared to 7.5% in
2003.

Selling, general and administrative expenses increased to $185.2
million in 2004 from $157.1 million in 2003, an increase of $28.1 million, or
18%. As a percentage of sales, selling, general and administrative expenses
decreased to 6.6% compared to 7.0% in 2003. The increase in expenses was
primarily attributable to the increase in sales volume. Additionally, our
acquisition of OpenPSL added approximately $10.2 million to our consolidated
expenses and we incurred approximately $3.5 million related to our profitability
improvement actions in Europe which included involuntary terminations,
consolidation of facilities and other non-personnel costs, and $1.3 million
related to Sarbanes Oxley compliance.

Interest expense and other income increased to $16.9 million from $16.1
million in 2003, an increase of approximately $800,000, or 5%. The increase in
interest expense and other income was primarily due to overall increased bank
borrowings during 2004 for worldwide working capital purposes and the
acquisition of OpenPSL. The average interest rate in 2004 was 5.5% versus 6.8%
in 2003.

In 2004, we recorded an effective tax rate of 41% on the income before
taxes compared to an effective tax benefit rate of 13% on losses before taxes
for 2003. The change in the tax rate was primarily related to the shift to
profitability in 2004 compared to a loss in 2003 and also related to the
jurisdictions in which the profits were earned. The tax benefit rate for the
2003 loss was primarily driven by deferred tax valuation allowances established
related to losses incurred in certain foreign jurisdictions.

22

Restructuring Plan

In the second quarter of 2004, we were released from certain
contractual obligations related to excess facilities in the U.S. for which
restructuring charges had been recorded in 2002. Accordingly, we released
approximately $300,000 of our restructuring reserve related to that facility.
Additionally, we revised our estimates for future lease obligations for
non-cancelable lease payments for excess facilities in Europe and recorded an
additional $300,000 of restructuring charges.

In the first quarter of 2003, we continued to implement profit
improvement and cost reduction measures, and recorded restructuring costs of
$1.4 million. These charges consisted of severance and benefits of $1.3 million
related to worldwide involuntary terminations and estimated lease costs of
$56,300 pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. We terminated 127 employees worldwide, across
a wide range of functions including marketing, technical support, finance,
operations and sales, and expect annual savings of approximately $8 million.
Expected savings related to vacated facilities is not material. Future savings
expected from restructuring related cost reductions will be reflected as a
decrease in 'Selling, General and Administrative expenses' on the Statement of
Operations. We also recorded an inventory charge of approximately $1.5 million
related to significant changes to certain vendor relationships and the
discontinuance of other non-strategic product lines.

Outstanding liabilities related to these charges are summarized as
follows (in thousands):

Management expects to extinguish the restructuring and special charges
liabilities of $709,000 by November 2007.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Net sales were $2,230.3 million for the year ended December 31, 2003,
which represented an increase of $125.4 million, or 6% over 2002. Solutions
sales increased by $145.3 million, primarily due to increased demand across all
geographies, particularly in the European market. Sales of components and
peripherals decreased by $19.9 million primarily due to pricing pressures in the
industry and our decision to discontinue certain non-strategic product lines, as
discussed below.

23

Our gross profit for 2003 was $168.1 million, a decrease of $10.5
million, or 6% from 2002. In 2003, both gross margins and gross profit dollars
were negatively impacted by worldwide competitive pricing pressures and a shift
in product mix resulting from rapid growth of certain products that carry lower
than average gross margins. We also recorded an inventory charge of $1.5 million
taken in the first quarter of 2003 related to the impact of unfavorable market
conditions and our decision to reposition our product offerings and discontinue
certain non-strategic product lines, as discussed below. Gross margin was 7.5%
in 2003, compared to 8.5% in 2002.

Selling, general and administrative expenses decreased to $155.7
million in 2003 from $165.6 million in 2002, a decrease of $9.9 million, or 6%.
As a percentage of sales, selling, general and administrative expenses decreased
to 7.0% compared to 7.9% in 2002. The decrease in expenses was attributable to
the profit improvement actions undertaken by us in the second half of 2002.

Interest expense and other income decreased in 2003 to $16.1 million
from $16.9 million in 2002, a decrease of $800,000, or 5%. The decrease in
interest expense and other income was primarily due to overall decreased bank
borrowings during 2003 for worldwide working capital purposes and decreased
interest rates. The average interest rate in 2003 was 6.8% versus 7.0% in 2002.

In 2003, we recorded a tax benefit at a rate of 13% on the loss before
taxes compared to the 2002 tax benefit rate of 27% on losses before taxes. The
lower tax benefit rate for 2003 was primarily related to deferred tax valuation
allowances established related to losses incurred in certain foreign
jurisdictions.

Restructuring Plan

In the second quarter of 2004, we were released from certain
contractual obligations related to excess facilities in the U.S. for which
restructuring charges had been recorded in 2002. Accordingly, we released
approximately $300,000 of our restructuring reserve related to that facility.
Additionally, we revised our estimates for future lease obligations for
non-cancelable lease payments for excess facilities in Europe and recorded an
additional $300,000 of restructuring charges.

In the first quarter of 2003, we continued to implement profit
improvement and cost reduction measures, and recorded restructuring costs of
$1.4 million. These charges consisted of severance and benefits of $1.3 million
related to worldwide involuntary terminations and estimated lease costs of
$56,300 pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. We terminated 127 employees worldwide, across
a wide range of functions including marketing, technical support, finance,
operations and sales, and expect annual savings of approximately $8 million.
Expected savings related to vacated facilities is not material. Future savings
expected from restructuring related cost reductions will be reflected as a
decrease in 'Selling, General and Administrative expenses' on the Statement of
Operations. We also recorded an inventory charge of approximately $1.5 million
related to significant changes to certain vendor relationships and the
discontinuance of other non-strategic product lines.

In the second and third quarters of 2002, as part of our plan to reduce
costs and improve operating efficiencies, we recorded special charges of $5.7
million. These costs consisted primarily of estimated lease costs of $2.3
million pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. and costs of $583,000 related to the closure
of the Rorke Data Europe facilities, whose operations were consolidated into our
TTP division in Almere, Netherlands. These special charges also included
provisions for certain Latin American receivables of $1.7 million, and severance
and benefits of $1.1 million related to worldwide involuntary terminations. We
terminated 78 employees, predominately in sales and marketing functions and
eliminated two executive management positions in the U.S. Future expected costs
reductions will be reflected in the Statement of Operations line item 'Selling,
General and Administrative expenses.'

24

Outstanding liabilities related to these charges are summarized as
follows (in thousands):

Management expects to extinguish the restructuring and special charges
liabilities of $709,000 by November 2007.

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have funded our working capital requirements
principally through borrowings under subordinated term loans and bank lines of
credit, as well as proceeds from warrant and stock option exercises. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth, and the financing of certain
acquisitions. In March 2004, we completed a private offering of $110 million
convertible subordinated notes with proceeds of $106 million, net of expenses.
In August 2003, we completed a registered public offering of approximately 5.75
million shares of our common stock, with proceeds net of commissions, discounts
and expenses of $34.9 million. In addition, in March 2002, we received $16.5
million from a private equity financing.

To date, we have paid no cash dividends to its shareholders. We have no
plans to pay cash dividends in the near future. Our line of credit agreements
prohibit the payment of dividends or other distributions on any of our shares
except dividends payable with our capital stock.

Our future cash requirements will depend on numerous factors, including
potential acquisitions and the rate of growth of our sales and our effectiveness
at controlling and reducing costs.

The net amount of cash used in investing activities was $38.9 million
in 2004, which was primarily related to the acquisitions of OpenPSL Limited and
other property and equipment. The net amount of cash provided by financing
activities was $26.5 million which was primarily related to the issuance of
convertible notes and net repayments under our short and long-term borrowing
facilities. The net amount of cash provided by operating activities in 2004 was
$19.4 million.

Our accounts receivable increased to $376.0 million at December 31,
2004, from $309.9 million at December 31, 2003. Increases to accounts receivable
resulting from increased sales were offset by our reduction in days sales
outstanding to 42 at December 31, 2004, from 44 days at December 31, 2003. Our
inventories increased to $271.8 million at December 31, 2004, from $257.0
million at December 31, 2003. This increase was primarily

25

due to our need to support sales growth. However, due to management of
inventory, there was a decrease in average days in inventory to 33 days at
December 31, 2004 as compared to 39 days at December 31, 2003. Our accounts
payable increased to $307.4 million in 2004 from $250.5 million in 2003 as a
result of a change in the timing of inventory purchases and receipts and our
efforts to manage working capital.

The net amount of cash provided by financing activities was $57.5
million in 2003, which was primarily the result of proceeds from the issuance of
common stock and net borrowings on the Company's short and long term borrowing
facilities. The net amount of cash used in operating activities in 2003 was
$55.5 million. Net cash used in investing activities in 2003 was $9.3 million,
which was primarily related to the acquisitions of EBM Mayorista and other
property and equipment.

Our accounts receivable increased to $309.9 million at December 31,
2003, from $277.3 million at December 31, 2002. Increases to accounts receivable
resulting from increased sales were offset by our reduction in days sales
outstanding to 44 at December 31, 2003, from 47 days at December 31, 2002. Our
inventories increased to $257.0 million at December 31, 2003, from $182.8
million at December 31, 2002. This increase was primarily due to our need to
support anticipated sales growth. Our accounts payable increased to $250.5
million in 2003 from $211.9 million in 2002 as a result of a change in the
timing of inventory purchases and receipts.

On March 5, 2004, we completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024
(the "Old Notes"). On December 20, 2004, we completed our offer to exchange
newly issued 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New
Notes") for an equal amount of its outstanding Old Notes. Approximately
$109,600,000 aggregate principal amount of the Old Notes, representing
approximately 99.6 percent of the total principal amount of Old Notes
outstanding, were tendered in exchange for an equal principal amount of New
Notes. The New Notes mature on March 5, 2024 and bear interest at the rate of 3
3/4% per year on the principal amount, payable semi-annually on March 5 and
September 5, beginning on March 5, 2005. Holders of the New Notes may convert
the New Notes any time on or before the maturity date if certain conversion
conditions are satisfied. Upon conversion of the New Notes, we will be required
to deliver, in respect of each $1,000 principal of New Notes, cash in an amount
equal to the lesser of (i) the principal amount of each New Note to be converted
and (ii) the conversion value, which is equal to (a) the applicable conversion
rate, multiplied by (b) the applicable stock price. The initial conversion rate
is 91.2596 shares of common stock per New Note with a principal amount of $1,000
and is equivalent to an initial conversion price of approximately $10.958 per
share. The conversion rate is subject to adjustment upon the occurrence of
certain events. The applicable stock price is the average of the closing sales
prices of our common stock over the five trading day period starting the third
trading day following the date the New Notes are tendered for conversion. If the
conversion value is greater than the principal amount of each New Note, we will
be required to deliver to holders upon conversion, at its option, (i) a number
of shares of our common stock, (ii) cash, or (iii) a combination of cash and
shares of our common stock in an amount calculated as described in the
prospectus filed by us in connection with the exchange offer. In lieu of paying
cash and shares of our common stock upon conversion, we may direct its
conversion agent to surrender any New Notes tendered for conversion to a
financial institution designated by us for exchange in lieu of conversion. The
designated financial institution must agree to deliver, in exchange for the New
Notes, (i) a number of shares of our common stock equal to the applicable
conversion rate, plus cash for any fractional shares, or (ii) cash or (iii) a
combination of cash and shares of our common stock. Any New Notes exchanged by
the designated institution will remain outstanding. We may redeem some or all of
the New Notes for cash on or after March 5, 2009 and before March 5, 2011 at a
redemption price of 100% of the principal amount of the New Notes, plus accrued
and unpaid interest up to, but excluding, the redemption date, but only if the
closing price of our common stock has exceeded 130% of the conversion price then
in effect for at least 20 trading days within a 30 consecutive trading day
period ending on the trading day before the date the redemption notice is
mailed. We may redeem some or all of the New Notes for cash at any time on or
after March 5, 2011 at a redemption price equal to 100% of the principal amount
of the New Notes, plus accrued and unpaid interest up to, but excluding, the
redemption date. We may be required to purchase for cash all or a potion of the
New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a

26

change of control, at a purchase price equal to 100% of the principal amount of
the new notes being purchased, plus accrued and unpaid interest up to, but
excluding, the purchase date.

On September 13, 2004, we entered into an amendment to our syndicated
Loan and Security Agreement with Congress Financial Corporation (Western)
("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At our option, all or any portion of the
outstanding borrowings may be converted to a Eurodollar rate loan, which bears
interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%, based
on unused availability levels. We also pay an unused line fee equal to 0.375%
per annum of the unused portion of the facility, subject to certain adjustments.
The average interest rate on outstanding borrowings under the Congress Facility
during the quarter ended December 31, 2004 was 4.83%, and the balance
outstanding at December 31, 2004 was $686,000. Our obligations under the
Congress Facility are secured by certain assets of our North and South American
subsidiaries. The Congress Facility requires us to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments.

On September 20, 2004, Bell Microproducts (the parent company only)
("Bell"), entered into a securitization program with Wachovia Bank, National
Association ("Wachovia") and Blue Ridge Asset Funding Corporation ("Blue
Ridge"), an affiliate of Wachovia, which expires on September 20, 2007
("Wachovia Facility"). Under the program, Bell will sell or contribute all of
its receivables to a newly created special purpose bankruptcy remote entity
named Bell Microproducts Funding Corporation ("Funding"), a wholly-owned
subsidiary of Bell. Funding will obtain financing from Blue Ridge or Wachovia
and other liquidity banks secured by the receivables to pay a portion of the
purchase price for the receivables. The balance of the purchase price will be
paid by advances made by Bell to Funding under a subordinated note of Funding
payable to Bell and by capital contributions from Bell to Funding. The maximum
principal amount available for Funding's credit facility is $75 million. The
interest rate on advances made by Blue Ridge shall be the cost of Blue Ridge's
commercial paper. In addition, Funding pays a program fee in the amount of 95
basis points per annum on the portion of the advances funded by Blue Ridge's
commercial paper. The interest rate on advances made by Wachovia and other
liquidity banks shall be either an alternate base rate (which is the higher of
the "prime rate" as announced by Wachovia, or 0.50% above the federal funds
effective rate), or a rate based on an adjusted LIBO rate plus 1.50%. Funding
also pays an unused line fee ranging from 0.20% to 0.25% per annum of the unused
portion of the facility. Bell acts as a servicer for Funding and will collect
all amounts due under, and take all action with respect to, the receivables for
the benefit of Funding and its lenders. In exchange for these services, Bell
receives a servicing fee determined on an arms-length basis. The cash flow from
the collections of the receivables will be used to purchase newly generated
receivables, to pay amounts to Funding's lenders, to pay down on the
subordinated note issued to Bell and to make dividend distributions to Bell
(subject at all times to the required capital amount being left in Funding).
Including the program fee, the average interest rate on outstanding borrowings
under the securitization program for the quarter ended December 31, 2004 was
2.98%, and the balance outstanding at December 31, 2004 was $42 million.
Obligations of Funding under the Wachovia Facility are secured by all of
Funding's assets. The Wachovia Facility requires Funding (and in certain
circumstances, Bell) to meet certain financial tests and to comply with certain
other covenants including restrictions on changes in structure, incurrence of
debt and liens, payment of dividends and distributions, and material
modifications to contracts and credit and collections policy. In January 2005,
the agreement was amended to increase the maximum principal amount available
from $75 million to $90 million.

On December 2, 2002, as further amended in December 2004, we entered
into a Syndicated Credit Agreement arranged by Bank of America, National
Association ("Bank of America facility"), as principal agent, to

27

provide a L75 million revolving line of credit facility, or the U.S. dollar
equivalent of approximately $144 million at December 31, 2004. The Bank of
America facility matures on July 15, 2006. The syndicate includes Bank of
America as agent and security trustee and other banks and financial
institutions, as lenders. Borrowings under the line of credit bear interest at
Bank of America's base rate plus a margin of 2.25% to 2.50%, based on certain
financial measurements. At our option, all or any portion of the outstanding
borrowings may be converted to a LIBOR Revolving Loan, which bears interest at
the adjusted LIBOR rate plus a margin of 2.25% to 2.50%, based on certain
financial measurements. The average interest rate on the outstanding borrowings
under the revolving line of credit during the quarter ended December 31, 2004
was 6.4%, and the balance outstanding at December 31, 2004 was $17.6 million.
Our obligations under the revolving line of credit are secured by certain assets
of our European subsidiaries. The revolving line of credit requires us to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock, repatriation of cash and investments.

On July 6, 2000, and as amended on May 3, 2004, we entered into a
Securities Purchase Agreement with The Retirement Systems of Alabama and certain
of its affiliated funds (the "RSA facility"), under which we borrowed $180
million of subordinated debt financing. This subordinated debt financing was
comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of $3.5 million plus interest and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, we entered into an interest rate swap
agreement with Wachovia Bank effectively securing a new interest rate on $40
million of the outstanding debt. The new rate is based on the six month U.S.
Libor rate plus a fixed margin of 4.99% and continues until termination of the
agreement on June 30, 2010. The notional amount is amortized ratably as the
underlying debt is repaid. The notional amount at December 31, 2004 was $36.5
million. We initially recorded the interest rate swap at fair value, and
subsequently recorded changes in fair value as an offset to the related
liability. At December 31, 2004, the fair value of the interest rate swap was
($490,000). The RSA facility is secured by a second lien on certain of our North
American and South American assets. We must meet certain financial tests on a
quarterly basis, and comply with certain other covenants, including restrictions
of incurrence of debt and liens, restrictions on asset dispositions, payment of
dividends, and repurchase of stock. We are also required to be in compliance
with the covenants of certain other borrowing agreements. The balance
outstanding at December 31, 2004 on this long-term debt was $52.0 million, $10.5
million is payable in 2005, $7.0 million is payable in 2006, $7.9 million is
payable in 2007 and $26.6 million thereafter. Net of the fair value of the
interest rate swap, the balance outstanding on the RSA facility at December 31,
2004 was $51.5 million.

On May 9, 2003, we entered into a mortgage agreement with Bank of
Scotland for L6 million, or the U.S. dollar equivalent of approximately $11.5
million, as converted at December 31, 2004. The new mortgage agreement fully
repaid the borrowings outstanding under the previous mortgage agreement with
Lombard NatWest Limited, has a term of 10 years, bears interest at Bank of
Scotland's rate plus 1.35%, and is payable in quarterly installments of
approximately L150,000, or $288,000 USD, plus interest. The principal amount due
each year is approximately $1.2 million. The balance of the mortgage as
converted to USD at December 31, 2004 was $10.2 million. Terms of the mortgage
require us to meet certain financial ratios and to comply with certain other
covenants on a quarterly basis.

On June 22, 2004, in connection with the acquisition of OpenPSL, we
assumed a short-term financing agreement with GE Commercial Distribution Finance
("GE Facility") for up to L17.5 million or the U.S. dollar equivalent of $31.7
million. The loan was secured by certain OpenPSL accounts receivable and bore
interest at Euribor plus 2.25%. This agreement was terminated on September 22,
2004 and the balance outstanding at that date was repaid in full.

Our agreement with IFN Finance BV was amended in December 2004 to
reduce our $7.5 million in short-term financing to $4.7 million. The loan is
secured by certain European accounts receivable and

28

inventories, bears interest at 5.5%, and continues indefinitely until terminated
by either party upon 90 days notice. There were no outstanding borrowings at
December 31, 2004.

On June 22, 2004, in connection with the acquisition of OpenPSL, we
assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of
L670,000, or the U.S. dollar equivalent of approximately $1.3 million. The
mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and
is payable in monthly installments of approximately L7,600, or $14,600 U.S.
dollars. The balance on the mortgage was $897,000 at December 31, 2004.

The following table describes our commitments to settle contractual
obligations in cash as of December 31, 2004 (in thousands):

(1) Notes payable primarily consist of the 3 3/4% convertible
subordinated notes, the RSA facility and the mortgages with Bank of
Scotland and HSBC Bank.

Other contractual obligations of ours include a $125 million revolving
line of credit with Wachovia Bank, N.A., scheduled to mature July 31, 2007, a
$144 million borrowing facility with Bank of America, scheduled to mature July
15, 2006, a $75 million securitization program with Wachovia Bank, N.A.
scheduled to mature September 20, 2007 and a $4.7 million borrowing facility
with IFN Finance BV, which continues until terminated by either party. Amounts
outstanding at December 31, 2004 under these facilities were $686,000, $17.6
million and $42.0 million, respectively with no balance outstanding under the
IFN facility.

We incurred net losses in 2003 and 2002. The 2003 loss is related to
declining product gross margins, certain restructuring initiatives including the
reduction of headcount and the discontinuation of certain product lines. The
2002 loss is related to certain restructuring initiatives including the
reduction of headcount and the abandonment of facilities and the increase in
"Selling, General, and Administrative Expenses."

We anticipate that our existing cash and our ability to borrow under
our lines of credit will be sufficient to meet our anticipated cash needs for
operations and capital requirements through December 31, 2005.

Our expectations as to cash flows, and as to future cash balances, are
subject to a number of assumptions, including assumptions regarding anticipated
revenues, customer purchasing and payment patterns, and improvements in general
economic conditions, many of which are beyond our control. If revenues do not
match projections and if losses exceed our expectations, we will implement cost
saving initiatives. If we are unable to sustain our profitability, in order to
continue operations, we may need to obtain additional debt financing or sell
additional shares of our equity securities. There can be no assurance that we
will be able to obtain additional debt or equity financing on terms acceptable
to us or at all. Our failure to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on our ability to achieve our
intended business objectives.

29

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2004, the Emerging Issues Task Force issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-06 did not have a material effect on our earnings
per share for the three month and twelve month periods ended December 31, 2004,
as we do not have participating securities.

In September 2004, the Emerging Issues Task Force issued Statement No.
04-10, "Applying Paragraph 19 of FAS 131 in Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds," ("EITF
04-10"). The EITF gives guidance to companies on what to consider in determining
the aggregation criteria and guidance from paragraphs 17 and 19 of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
Specifically, whether operating segments must always have similar economic
characteristics and meet a majority of the remaining five aggregation criteria,
items (a)-(e), listed in paragraph 17 of SFAS 131, or whether operating segments
must meet a majority of all six aggregation criteria (that is, the five
aggregation criteria, items (a)-(e), listed in paragraph 17 and similar economic
characteristics), in determining the appropriate segment reporting disclosures.
We are in the process of assessing the impact of EITF 04-10 on our financial
statement disclosures.

On October 13, 2004 the Financial Accounting Standards Board (FASB)
ratified the consensus the EITF reached on EITF 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share." This EITF
changes the way shares of common stock that are issuable upon conversion of
certain instruments are treated in the calculation of diluted earnings per
share. In addition to prospective application, this EITF requires retroactive
restatement of prior period earnings per share for all periods in which
securities outstanding at December 31, 2004 (the effective date of this
guidance) were outstanding. As of December 31, 2004, we had two series of
contingently convertible notes outstanding, including approximately $0.4 million
in aggregate principal amount of its 3 3/4% Convertible Subordinated Notes due
2024 (the "Old Notes") and approximately $109.6 million in aggregate principal
amount of its 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New
Notes"). Because the terms of the Old Notes require settlement in shares of
common stock of the full value of the notes upon conversion, all shares
potentially issuable at the end of each reporting period would be included in
diluted weighted average shares outstanding. In addition, for purposes of
calculating diluted earnings per share,we would be required to add back to net
income the after-tax interest expense on the notes for each reporting period, as
if the notes had been converted to common stock at the beginning of the period.
We have concluded that the restatement would have no material effect on
previously reported diluted earnings per share. The New Notes would only be
included in the diluted earnings per share calculation at such time in the
future when our stock price rises above the conversion price. The dilutive
impact would be equal to the number of shares needed to satisfy the
"in-the-money" value of the New Notes, assuming conversion (see Note 6 for a
discussion of the New Notes). The adoption of this consensus did not have a
material impact on diluted earnings per share for the period ended December 31,
2004.

In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". This Statement amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires those items to be
excluded from the cost of inventory and expensed when incurred. In

30

addition, this Statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for companies at the beginning of the
first interim or annual period beginning after June 15, 2005. We do not believe
that the adoption of SFAS 151 will have a material effect on the results of
operations or consolidated financial position.

In December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"),
"Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS 123(R) supersedes APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", and its related implementation
guidance. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. We currently account for our employee stock options
in accordance with APB 25 while disclosing the pro forma effect of the options
and restricted stock grants had they been recorded under the fair value method.
As required by the Statement, we plan to adopt the revised Statement in our
quarter ending June 30, 2005. We are in the process of evaluating the impact of
the adoption of this standard on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on our variable rate credit
facilities and could be subjected to increased interest payments if market
interest rates fluctuate. For the year ended December 31, 2004, average
borrowings outstanding on the variable rate credit facility with Congress
Financial Corporation (Western) were $47 million, average borrowings with
Wachovia Bank, National Association and Blue Ridge Asset Funding Corporation
were $38 million and average borrowings with Bank of America, N.A. were $52
million. These facilities have interest rates that are based on associated rates
such as Eurodollar and base or prime rates that may fluctuate over time based on
changes in the economic environment. Based on actual borrowings throughout the
year under these borrowing facilities, an increase of 1% in such interest rate
percentages would increase the annual interest expense by approximately $1.4
million.

A substantial part of our revenue and capital expenditures are
transacted in U.S. dollars, but the functional currency for foreign subsidiaries
is not the U.S. dollar. We enter into foreign forward exchange contracts to
hedge certain balance sheet exposures against future movements in foreign
exchange rates. The gains and losses on the forward exchange contracts are
largely offset by gains or losses on the underlying transactions and,
consequently, a sudden or significant change in foreign exchange rates should
not have a material impact on future net income or cash flows. As a result of
Bell or its subsidiaries entering into transactions denominated in currencies
other than their functional currency, Bell recognized a foreign currency gain of
$733,000 during the year ended December 31, 2004. To the extent we are unable to
manage these risks, our results, financial position and cash flows could be
materially adversely affected.

In August 2003, we entered into an interest rate swap agreement in
order to gain access to the lower borrowing rates normally available on
floating-rate debt, while avoiding prepayment and other costs that would be
associated with refinancing long-term fixed-rate debt. The swap purchased has a
notional amount of $40 million, expiring in June 2010, with a six-month
settlement period and provides for variable interest at LIBOR plus a set rate
spread. The notional amount is amortized ratably as the underlying debt is
repaid. The notional amount at December 31, 2004 was $36.5 million. The notional
amount does not quantify risk or represent assets or liabilities, but rather, is
used in the determination of cash settlement under the swap agreement. As a
result of purchasing this swap, we will be exposed to credit losses from
counter-party non-performance; however, we do not anticipate any such losses
from this agreement, which is with a major financial institution. The agreement
will also expose us to interest rate risk should LIBOR rise during the term of
the agreement. This swap agreement is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). Under the provisions of SFAS 133, we initially
recorded the interest rate swap at fair value, and subsequently recorded any
changes in fair value as an offset to the related liability. Fair value is
determined based on quoted market prices, which reflect the difference between
estimated future variable-rate payments and future fixed-rate receipts. The fair
value of the interest rate swap was ($490,000) at December 31, 2004.

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Bell Microproducts Inc. and Subsidiaries:

We have completed an integrated audit of Bell Microproducts Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Bell
Microproducts Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements 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 our opinion.

As discussed in Note 2 and Note 3 to the consolidated financial statements, as
of January 1, 2002, the Company ceased amortization of goodwill to conform with
the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets."

Internal control over financial reporting

Also, in our opinion, management's assessment, included in "Management's Report
on Internal Control Over Financial Reporting appearing," under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of

33

internal control, and performing such other procedures as we consider necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate

As described in "Management's Report on Internal Control Over Financial
Reporting," management has excluded OpenPSL, Ltd from its assessment of internal
control over financial reporting as of December 31, 2004 because it was acquired
by the Company in a purchase business combination during 2004. We have also
excluded OpenPSL from our audit of internal control over financial reporting.
OpenPSL is a wholly-owned subsidiary whose total assets and total revenues
represent 7% and 5%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2004.

PricewaterhouseCoopers LLP
San Jose, CA
March 16, 2005

34

BELL MICROPRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

35

BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

36

BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

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

37

BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH, IN THOUSANDS)

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

38

BELL MICROPRODUCTS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY:

The Company operates in one business segment as a distributor of
storage products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America. The
Company is one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. The Company's concentration
on data storage systems and products allows it to provide greater technical
expertise to its customers, form strategic relationships with key manufacturers
and provide complete storage solutions to its customers at many levels of
integration. The Company offers a wide range of storage products as well as
semiconductors, computer platforms and software and peripherals. The Company's
storage products include:

o high-end computer and storage subsystems;

o Fibre Channel connectivity products;

o complete storage systems such as storage area networks (SAN), network
attached storage (NAS) and direct attached storage (DAS);

o storage management software;

o disk, tape and optical drives; and

o a broad selection of value-added services.

In addition, the Company has developed a proprietary LDI software
licensing system, which facilitates the sale and administration of software
licenses.

The Company incurred net losses in 2003 and 2002. The 2003 loss is
related to declining product gross margins and certain restructuring initiatives
including the reduction of headcount and the discontinuation of certain product
lines. The 2002 loss is related to certain restructuring initiatives including
the reduction of headcount, the abandonment of facilities, and the increase in
"Selling, General, and Administrative Expenses."

As is more fully discussed in Note 6, the Company has a $75 million
securitization program and a $125 million line of credit facility with a group
of lenders for operations in North and South America. The Company had
approximately $104 million in unused borrowing capacity at December 31, 2004
related to these facilities. These facilities are limited to use for certain
operations within the Americas and the funds can be used outside the Americas if
permission is received by the Company from the lenders. The Company also has a
total of $149 million available in line of credit facilities with lenders in
Europe. At December 31, 2004, the Company had approximately $106 million
available in unused borrowing capacity under these arrangements. These
facilities are limited to use for operations within Europe and the United
Kingdom. In March 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024.

The Company anticipates that its existing cash and its ability to
borrow under its lines of credit will be sufficient to meet the Company's
anticipated cash needs for operations and capital requirements through December
31, 2005.

The Company's expectations as to its cash flows, and as to future cash
balances, are subject to a number of assumptions, including assumptions
regarding anticipated revenues, customer purchasing and payment patterns, and
improvements in general economic conditions, many of which are beyond the
Company's control. If revenues do not match projections and if losses exceed the
Company's expectations, the Company will implement cost saving initiatives. If
the

39

Company is unable to return to profitability, in order to continue operations,
it may need to obtain additional debt financing or sell additional shares of its
equity securities. There can be no assurance that the Company will be able to
obtain additional debt or equity financing on terms acceptable to the Company or
at all. The failure of the Company to obtain sufficient funds on acceptable
terms when needed could have a material adverse effect on the Company's ability
to achieve its intended business objectives.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION AND BASIS OF PREPARATION

The consolidated financial statements include the accounts of the
parent company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.

The preparation of financial statements in accordance with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the Company's consolidated
financial statements and accompanying notes. Management bases its estimates on
historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management's best knowledge of current
events and actions that may impact the Company in the future, actual results may
be different from the estimates. The Company's critical accounting policies are
those that affect its financial statements materially and involve difficult,
subjective or complex judgments by management.

REVENUE RECOGNITION

Revenue is recognized when title transfers to the customer and when the
rights and risks of ownership have passed to the customer, when persuasive
evidence of an arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. Transactions with
sale terms of FOB shipping point are recognized when the products are shipped
and transactions with sale terms of FOB destination are recognized upon arrival.
Shipping and handling costs charged to customers are included in net revenue and
the associated expense is recorded in total costs for all periods presented.
Provisions for estimated returns and expected warranty costs are recorded at the
time of sale and are adjusted periodically to reflect changes in experience and
expected obligations. The Company's warranty reserve relates primarily to its
storage solutions and value added businesses. Reserves for warranty items are
included in other current liabilities. A reconciliation of the changes in the
product warranty liability during 2004 is as follows (in thousands):

CONCENTRATION OF CREDIT AND OTHER RISKS

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for estimated collection
losses. No customer accounts for more than 10% of sales in any of the three
years ended December 31, 2004, 2003 and 2002, or accounts receivable at December
31, 2004 and 2003.

Four vendors accounted for 50%, 45% and 43% of the Company's inventory
purchases during 2004, 2003 and 2002, respectively.

INVENTORIES

Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out (FIFO) method. Market is based on
estimated net realizable value. The Company assesses the valuation of its
inventory on a quarterly basis and periodically writes down the value for
estimated excess and obsolete inventory based on estimates about future demand,
actual usage and current market value.

40

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of computer
and other equipment, furniture and fixtures and warehouse equipment that range
from three to five years. Depreciation of buildings is based upon the estimated
useful lives of 50 years. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated life of the
asset or the lease term.

GOODWILL

In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," the Company is required to perform an annual impairment test for
goodwill. SFAS No. 142 requires the Company to compare the fair value of the
Company to its carrying amount on an annual basis to determine if there is
potential impairment. If the fair value of the Company is less than its carrying
value, an impairment loss is recorded to the extent that the fair value of the
goodwill is less than the carrying value. The fair value for goodwill is
determined based on discounted cash flows. The Company performs this impairment
test annually and whenever facts and circumstances indicate that there is a
possible impairment of goodwill. The Company completed the required annual
impairment test, which resulted in no impairment for fiscal year 2004.

LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of any impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based
on the fair value of the asset. Other intangible assets are recorded at cost and
amortized over periods ranging from 2 to 40 years.

INCOME TAXES

The Company accounts for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability method, deferred
assets and liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. The provision
for income taxes is comprised of the current tax liability and the change in
deferred tax assets and liabilities. The Company establishes a valuation
allowance to the extent that it is more likely than not that deferred tax assets
will not be recoverable against future taxable income.

EARNINGS PER SHARE

Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method.

Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):

41

At December 31, 2004, 888,430 restricted stock grants and options to
purchase common stock were excluded from the calculation of diluted EPS because
they were anti-dilutive. At December 31, 2003 and 2002, all outstanding
restricted stock grants, options and warrants to purchase 4,772,575 and
6,117,246 shares of common stock respectively were excluded from the computation
of diluted net loss per share because they were anti-dilutive.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange at the
balance sheet date. Income and expense items are translated at average monthly
rates of exchange prevailing during the year. The resulting translation
adjustments are included in accumulated other comprehensive income as a separate
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in the Statements of Operations.

COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income consists of its
reported net income or loss and the change in the foreign currency translation
adjustment.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's Statements of Operations. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."

The following table illustrates the effect on income from continuing
operations and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation. The
estimated fair value of each the Company option is calculated using the
Black-Scholes option-pricing model.

Weighted average basic and diluted shares outstanding are the same for
the periods in which net losses were incurred, in the accompanying consolidated
statement of operations.

42

Because additional stock options and stock purchase rights are expected
to be granted each year, the above pro forma disclosures are not considered by
management to be representative of pro forma effects on reported financial
results for future years.

SEGMENT REPORTING

Financial Accounting Standards Board Statement No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS 131") requires
that companies report separately in the financial statements certain financial
and descriptive information about operating segments' profit or loss, certain
specific revenue and expense items and segment assets. Additionally, companies
are required to report information about the revenues derived from their
products and service groups, about geographic areas in which the Company earns
revenues and holds assets, and about major customers (see Note 14).

DERIVATIVE FINANCIAL INSTRUMENTS

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities, and requires that all derivatives, including foreign
currency exchange contracts, be recognized on the balance sheet at fair value.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be recognized
currently in earnings. All of the Company's derivative financial instruments are
recorded at their fair value in other current assets or accounts payable and
accrued expenses. The transition adjustment upon adoption of SFAS 133 was not
material.

The Company generates a substantial portion of its revenues in
international markets, which subjects its operations and cash flows to the
exposure of currency exchange fluctuations. The Company seeks to minimize the
risk associated with currency exchange fluctuations by entering into forward
exchange contracts to hedge certain foreign currency denominated assets or
liabilities. These derivatives do not qualify for SFAS 133 hedge accounting
treatment. Accordingly, changes in the fair value of these hedges are recorded
immediately in earnings on line item 'Interest Expense and Other Income' to
offset the changes in the fair value of the assets or liabilities being hedged.

RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2004, the Emerging Issues Task Force issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-06 did not have a material effect on the Company's
earnings per share for the three month and twelve month periods ended December
31, 2004, as the Company does not have participating securities.

In September 2004, the Emerging Issues Task Force issued Statement No.
04-10, "Applying Paragraph 19 of FAS 131 in Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds," ("EITF
04-10"). The EITF gives guidance to companies on what to consider in determining
the aggregation criteria and guidance from paragraphs 17 and 19 of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
Specifically, whether operating segments must always have similar economic
characteristics and meet a majority of the remaining five aggregation criteria,
items (a)-(e), listed in paragraph 17 of SFAS 131, or whether operating segments
must meet a majority of all six aggregation criteria (that is, the five
aggregation criteria, items (a)-(e), listed in paragraph 17 and similar economic
characteristics), in determining the appropriate segment reporting disclosures.
The Company is in the process of assessing the impact of EITF 04-10 on its
financial statement disclosures.

43

On October 13, 2004 the Financial Accounting Standards Board (FASB)
ratified the consensus the EITF reached on EITF 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share." This EITF
changes the way shares of common stock that are issuable upon conversion of
certain instruments are treated in the calculation of diluted earnings per
share. In addition to prospective application, this EITF requires retroactive
restatement of prior period earnings per share for all periods in which
securities outstanding at December 31, 2004 (the effective date of this
guidance) were outstanding. As of December 31, 2004, the Company had two series
of contingently convertible notes outstanding, including approximately $0.4
million in aggregate principal amount of its 3 3/4% Convertible Subordinated
Notes due 2024 (the "Old Notes") and approximately $109.6 million in aggregate
principal amount of its 3 3/4% Convertible Subordinated Notes, Series B due 2024
(the "New Notes"). Because the terms of the Old Notes require settlement in
shares of common stock of the full value of the notes upon conversion, all
shares potentially issuable at the end of each reporting period would be
included in diluted weighted average shares outstanding. In addition, for
purposes of calculating diluted earnings per share, the Company would be
required to add back to net income the after-tax interest expense on the notes
for each reporting period, as if the notes had been converted to common stock at
the beginning of the period. The Company has concluded that this restatement
would have no material effect on previously reported diluted earnings per share.
The New Notes would only be included in the diluted earnings per share
calculation at such time in the future when the Company's stock price rises
above the conversion price. The dilutive impact would be equal to the number of
shares needed to satisfy the "in-the-money" value of the New Notes, assuming
conversion (see Note 6 for a discussion of the New Notes). The adoption of this
consensus did not have a material impact on diluted earnings per share for the
period ended December 31, 2004.

In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 151 ("SFAS 151"),
"Inventory Costs, an amendment of ARB No. 43, Chapter 4". This Statement amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires those items to be
excluded from the cost of inventory and expensed when incurred. In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for companies at the beginning of the
first interim or annual period beginning after June 15, 2005. The Company does
not believe that the adoption of SFAS 151 will have a material effect on the
results of operations or consolidated financial position.

In December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"),
"Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS 123(R) supersedes APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", and its related implementation
guidance. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The Company currently accounts for its employee
stock options in accordance with APB 25 while disclosing the pro forma effect of
the options and restricted stock grants had they been recorded under the fair
value method. As required by the Statement, the Company plans to adopt the
revised Statement in its quarter ending June 30, 2005. The Company is in the
process of evaluating the impact of the adoption of this standard on their
financial statements.

NOTE 3 - ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES:

In accordance with SFAS No. 142, goodwill amortization was discontinued
as of January 1, 2002. SFAS No. 142 prescribes a two-phase process for
impairment testing of goodwill. The first phase screens for impairment; while
the second phase (if necessary), measures the impairment. The Company performs
this impairment test annually and whenever facts and circumstances indicate that
there is a possible impairment of goodwill. The Company completed the required
annual impairment test, which resulted in no impairment for fiscal year 2004.

The Company has acquired certain intangible assets through acquisitions
which include non-compete agreements, trademarks, trade names and customer and
supplier relationships. The carrying values and accumulated amortization of
these assets at December 31, 2004 and 2003 are as follows (in thousands):

44

The expected amortization of these balances over the next five fiscal
years are as follows (in thousands):

Aggregate Amortization Expense
- ------------------------------------------------------
For year ended December 31, 2004 $ 1,142
Estimated Amortization Expense
- ------------------------------------------------------
For year ending December 31, 2005 $ 1,151
For year ending December 31, 2006 $ 1,084
For year ending December 31, 2007 $ 1,008
For year ending December 31, 2008 $ 821
For year ending December 31, 2009 $ 638
Thereafter $ 4,705

NOTE 4 - ACQUISITIONS:

All acquisitions below have been accounted for using the purchase
method. Accordingly, the results of operations of the acquired businesses are
included in the consolidated financial statements from the dates of acquisition.

OpenPSL Holdings Limited Acquisition

On June 22, 2004, the Company acquired all of the outstanding capital
stock of OpenPSL Holdings Limited ("OpenPSL"), a privately held Company
headquartered in Manchester, United Kingdom, with branch offices in Dublin,
Ireland and Leeds, Bracknell and Nottingham, United Kingdom. The acquisition of
OpenPSL allows the Company to broaden its product offerings in a strategic
geography. OpenPSL is a leading value added distributor of enterprise, storage
and security products and related professional services to VARs, system
integrators and software companies in the UK and Ireland. Their line card of
franchised suppliers includes Hewlett Packard, IBM, Oracle, Veritas, Allied
Telesyn, Microsoft and others.

OpenPSL was acquired for a total purchase price of approximately $37.9
million which included cash of approximately $33.7 million, the issuance of
664,970 shares of the Company's Common Stock including Common Stock issued as
consideration for the first of two contingent incentive payments and acquisition
costs. The Company is obligated to pay up to an additional $4.3 million within
one year of the closing date as an additional contingent incentive payment to be
based upon earnings achieved during the first twelve months after acquisition.
The final allocation of the purchase price to acquired assets and assumed
liabilities based upon management estimates are as follows (in thousands):

45

Accounts receivable $ 30,721
Inventories 4,743
Equipment and other assets 2,419
Goodwill 31,094
Intangibles 3,671
Accounts payable (18,785)
Other accrued liabilities (9,289)
Notes payable (6,723)
------------
Total consideration $ 37,851
============

Other intangibles include customer and supplier relationships and
non-compete agreements with estimated useful lives of 4 years, 7 years and 2
years, respectively.

Pro forma disclosure (in thousands, except per share data):

The following pro forma combined amounts give effect to the acquisition
of OpenPSL as if the acquisition had occurred on January 1, 2003. The pro forma
amounts do not purport to be indicative of what would have occurred had the
acquisition been made as of the beginning of the period or of results which may
occur in the future.

EBM Mayorista, S.A. de C.V. Acquisition

On October 15, 2003, the Company acquired certain assets and assumed
certain liabilities of EBM Mayorista, S.A. de C.V. ("EBM"), a privately held
company headquartered in Merida, Mexico, with branch locations in Cancun,
Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz, Tuxtla, Torreon, Puebla and
Aguascaliente. EBM distributes a diverse product line of computer hardware and
software to Mexican resellers, retail locations and system integrators including
the Intel, Samsung, Epson and U.S Robotics lines.

EBM was acquired for a total purchase price of approximately $6.0
million which included cash of approximately $5.1 million and acquisition costs.
The Company is obligated to pay 35% of EBM's earnings before taxes as a
contingent incentive payment based upon meeting minimum earnings targets during
each of the subsequent four anniversary years. EBM met its earnings target for
the first anniversary year and accordingly, the Company has accrued $419,000 as
additional consideration at December 31, 2004. The purchase price was allocated
to the acquired assets and liabilities assumed, based upon management's estimate
of their fair market values as of the acquisition date, as follows (in
thousands):

Inventories $ 5,177
Equipment and other assets 304
Goodwill 3,833
Other intangibles 850
Accounts payable (3,778)
----------
Total consideration $ 6,386
==========

Other intangibles include customer and supplier relationships, trade
name, and non-compete agreements, with estimated useful lives for amortization
of 7 years, 20 years and 6 years, respectively.

As EBM does not constitute a significant subsidiary of the Company, pro
forma disclosure is not required herein.

46

NOTE 5 - BALANCE SHEET COMPONENTS:

Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is our best estimate of
the amount of probable credit losses in our existing accounts receivable. We
determine the allowance based on historical write-off experience by industry and
regional economic data. We review our allowance for doubtful accounts monthly.
Past due balances over 90 days and over a specified amount are reviewed
individually for collectibility. All other balances are reviewed on a pooled
basis by type of receivable. Account balances are charged off against the
allowance when we feel it is probable the receivable will not be recovered. We
do not have any off-balance-sheet credit exposure related to our customers.

Total depreciation expense on the Company's property and equipment was
$11.1 million in 2004, $10.3 million in 2003 and $10.4 million in 2002.

47

NOTE 6 - LINES OF CREDIT AND TERM LOANS:

LINES OF CREDIT

On September 13, 2004, the Company entered into an amendment to its
syndicated Loan and Security Agreement with Congress Financial Corporation
(Western) ("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At the Company's option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
bears interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%,
based on unused availability levels. The Company also pays an unused line fee
equal to 0.375% per annum of the unused portion of the facility, subject to
certain adjustments. The average interest rate on outstanding borrowings under
the Congress Facility during the quarter ended December 31, 2004 was 4.83%, and
the balance outstanding at December 31, 2004 was $686,000. Obligations of the
Company under the Congress Facility are secured by certain assets of the Company
and its North and South American subsidiaries. The Congress Facility requires
the Company to meet certain financial tests and to comply with certain other
covenants, including restrictions on incurrence of debt and liens, restrictions
on mergers, acquisitions, asset dispositions, capital contributions, payment of
dividends, repurchases of stock and investments.

On September 20, 2004, Bell Microproducts, (the parent company only)
("Bell") entered into a securitization program with Wachovia Bank, National
Association ("Wachovia") and Blue Ridge Asset Funding Corporation ("Blue
Ridge"), an affiliate of Wachovia, which expires on September 20, 2007
("Wachovia Facility"). Under the program, Bell will sell or contribute all of
its receivables to a newly created special purpose bankruptcy remote entity
named Bell Microproducts Funding Corporation ("Funding"), a wholly-owned
subsidiary of Bell. Funding will obtain financing from Blue Ridge or Wachovia
and other liquidity banks secured by the receivables to pay a portion of the
purchase price for the receivables. The balance of the purchase price will be
paid by advances made by Bell to Funding under a subordinated note of Funding
payable to Bell and by capital contributions from Bell to Funding. The maximum
principal amount available for Funding's credit facility is $75 million. The
interest rate on advances made by Blue Ridge shall be the cost of Blue Ridge's
commercial paper. In addition, Funding pays a program fee in the amount of 95
basis points per annum on the portion of the advances funded by Blue Ridge's
commercial paper. The interest rate on advances made by Wachovia and other
liquidity banks shall be either an alternate base rate (which is the higher of
the "prime rate" as announced by Wachovia, or 0.50% above the federal funds
effective rate), or a rate based on an adjusted LIBO rate plus 1.50%. Funding
also pays an unused line fee ranging from 0.20% to 0.25% per annum of the unused
portion of the facility. Bell acts as a servicer for Funding and will collect
all amounts due under, and take all action with respect to, the receivables for
the benefit of Funding and its lenders. In exchange for these services, Bell
receives a servicing fee determined on an arms-length basis. The cash flow from
the collections of the receivables will be used to purchase newly generated
receivables, to pay amounts to Funding's lenders, to pay down on the
subordinated note issued to Bell and to make dividend distributions to Bell
(subject at all times to the required capital amount being left in Funding).
Including the program fee, the average interest rate on outstanding borrowings
under the securitization program for the quarter ended December 31, 2004 was
2.98%, and the balance outstanding at December 31, 2004 was $42 million.
Obligations of Funding under the Wachovia Facility are secured by all of
Funding's assets. The Wachovia Facility requires Funding (and in certain
circumstances, Bell) to meet certain financial tests and to comply with certain
other covenants including restrictions on changes in structure, incurrence of
debt and liens, payment of dividends and distributions, and material
modifications to contracts and credit and collections policy. In January 2005,
the agreement was amended to increase the maximum principal amount available
from $75 million to $90 million.

On December 2, 2002, as further amended in December 2004, the Company
entered into a Syndicated Credit Agreement arranged by Bank of America, National
Association ("Bank of America facility"), as principal agent, to provide a L75
million revolving line of credit facility, or the U.S. dollar equivalent of
approximately $144 million at December 31, 2004. The Bank of America facility
matures on July 15, 2006. The syndicate includes Bank of America as agent and
security trustee

48

and other banks and financial institutions, as lenders. Borrowings under the
line of credit bear interest at Bank of America's base rate plus a margin of
2.25% to 2.50%, based on certain financial measurements. At the Company's
option, all or any portion of the outstanding borrowings may be converted to a
LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a
margin of 2.25% to 2.50%, based on certain financial measurements. The average
interest rate on the outstanding borrowings under the revolving line of credit
during the quarter ended December 31, 2004 was 6.4%, and the balance outstanding
at December 31, 2004 was $17.6 million. Obligations of the Company under the
revolving line of credit are secured by certain assets of the Company's European
subsidiaries. The revolving line of credit requires the Company to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock, repatriation of cash and investments.

The Company's agreement with IFN Finance BV was amended in December
2004 to reduce its $7.5 million in short-term financing to $4.7 million. The
loan is secured by certain European accounts receivable and inventories, bears
interest at 5.5%, and continues indefinitely until terminated by either party
upon 90 days notice. There were no outstanding borrowings at December 31, 2004.

TERM LOANS

On March 5, 2004, the Company completed a private offering of $110
million aggregate principal amount of 3 3/4% convertible subordinated notes due
2024 (the "Old Notes"). On December 20, 2004, the Company completed its offer to
exchange its newly issued 3 3/4% Convertible Subordinated Notes, Series B due
2024 (the "New Notes") for an equal amount of its outstanding Old Notes.
Approximately $109,600,000 aggregate principal amount of the Old Notes,
representing approximately 99.6 percent of the total principal amount of Old
Notes outstanding, were tendered in exchange for an equal principal amount of
New Notes. The New Notes mature on March 5, 2024 and bear interest at the rate
of 3 3/4% per year on the principal amount, payable semi-annually on March 5 and
September 5, beginning on March 5, 2005. Holders of the New Notes may convert
the New Notes any time on or before the maturity date if certain conversion
conditions are satisfied. Upon conversion of the New Notes, the Company will be
required to deliver, in respect of each $1,000 principal of New Notes, cash in
an amount equal to the lesser of (i) the principal amount of each New Note to be
converted and (ii) the conversion value, which is equal to (a) the applicable
conversion rate, multiplied by (b) the applicable stock price. The initial
conversion rate is 91.2596 shares of common stock per New Note with a principal
amount of $1,000 and is equivalent to an initial conversion price of
approximately $10.958 per share. The conversion rate is subject to adjustment
upon the occurrence of certain events. The applicable stock price is the average
of the closing sales prices of the Company's common stock over the five trading
day period starting the third trading day following the date the New Notes are
tendered for conversion. If the conversion value is greater than the principal
amount of each New Note, the Company will be required to deliver to holders upon
conversion, at its option, (i) a number of shares of the Company's common stock,
(ii) cash, or (iii) a combination of cash and shares of the Company's common
stock in an amount calculated as described in the prospectus filed by the
Company in connection with the exchange offer. In lieu of paying cash and shares
of the Company's common stock upon conversion, the Company may direct its
conversion agent to surrender any New Notes tendered for conversion to a
financial institution designated by the Company for exchange in lieu of
conversion. The designated financial institution must agree to deliver, in
exchange for the New Notes, (i) a number of shares of the Company's common stock
equal to the applicable conversion rate, plus cash for any fractional shares, or
(ii) cash or (iii) a combination of cash and shares of the Company's common
stock. Any New Notes exchanged by the designated institution will remain
outstanding. The Company may redeem some or all of the New Notes for cash on or
after March 5, 2009 and

49

before March 5, 2011 at a redemption price of 100% of the principal amount of
the New Notes, plus accrued and unpaid interest up to, but excluding, the
redemption date, but only if the closing price of the Company's common stock has
exceeded 130% of the conversion price then in effect for at least 20 trading
days within a 30 consecutive trading day period ending on the trading day before
the date the redemption notice is mailed. The Company may redeem some or all of
the New Notes for cash at any time on or after March 5, 2011 at a redemption
price equal to 100% of the principal amount of the New Notes, plus accrued and
unpaid interest up to, but excluding, the redemption date. The Company may be
required to purchase for cash all or a potion of the New Notes on March 5, 2011,
March 5, 2014 or March 5, 2019, or upon a change of control, at a purchase price
equal to 100% of the principal amount of the new notes being purchased, plus
accrued and unpaid interest up to, but excluding, the purchase date.

On July 6, 2000, and as amended on May 3, 2004, the Company entered
into a Securities Purchase Agreement with The Retirement Systems of Alabama and
certain of its affiliated funds (the "RSA facility"), under which the Company
borrowed $180 million of subordinated debt financing. This subordinated debt
financing was comprised of $80 million bearing interest at 9.125%, repaid in May
2001; and $100 million bearing interest at 9.0%, payable in semi-annual
principal installments of $3.5 million plus interest and in semi-annual
principal installments of $8.5 million commencing December 31, 2007, with a
final maturity date of June 30, 2010. On August 1, 2003, the Company entered
into an interest rate swap agreement with Wachovia Bank effectively securing a
new interest rate on $40 million of the outstanding debt. The new rate is based
on the six month U.S. Libor rate plus a fixed margin of 4.99% and continues
until termination of the agreement on June 30, 2010. The notional amount is
amortized ratably as the underlying debt is repaid. The notional amount at
December 31, 2004 was $36.5 million. The Company initially recorded the interest
rate swap at fair value, and subsequently recorded changes in fair value as an
offset to the related liability. At December 31, 2004, the fair value of the
interest rate swap was ($490,000). The RSA facility is secured by a second lien
on certain of the Company's and its subsidiaries' North American and South
American assets. The Company must meet certain financial tests on a quarterly
basis, and comply with certain other covenants, including restrictions of
incurrence of debt and liens, restrictions on asset dispositions, payment of
dividends, and repurchase of stock. The Company is also required to be in
compliance with the covenants of certain other borrowing agreements. The balance
outstanding at December 31, 2004 on this long-term debt was $52.0 million, $10.5
million is payable in 2005, $7.0 million is payable in 2006, $7.9 million is
payable in 2007 and $26.6 million thereafter. Net of the fair value of the
interest rate swap, the balance outstanding on the RSA facility at December 31,
2004 was $51.5 million.

On May 9, 2003, the Company entered into a mortgage agreement with Bank
of Scotland for L6 million, or the U.S. dollar equivalent of approximately $11.5
million, as converted at December 31, 2004. The new mortgage agreement fully
repaid the borrowings outstanding under the previous mortgage agreement with
Lombard NatWest Limited, has a term of 10 years, bears interest at Bank of
Scotland's rate plus 1.35%, and is payable in quarterly installments of
approximately L150,000, or $288,000 USD, plus interest. The principal amount due
each year is approximately $1.2 million. The balance of the mortgage as
converted to USD at December 31, 2004 was $10.2 million. Terms of the mortgage
require the Company to meet certain financial ratios and to comply with certain
other covenants on a quarterly basis.

On June 22, 2004, in connection with the acquisition of OpenPSL, the
Company assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of
L670,000, or the U.S. dollar equivalent of approximately $1.3 million. The
mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and
is payable in monthly installments of approximately L7,600, or $14,600 U.S.
dollars. The balance on the mortgage was $897,000 at December 31, 2004.

NOTE 7 - COMMON STOCK:

On August 27, 2003, the Company completed a secondary registered public
offering of 5,000,000 shares of Common Stock, at an offering price to the public
of $6.50 per share. In connection with the offering, the Company granted to the
underwriters an option to purchase up to 750,000 shares to cover over
allotments, and the option was exercised in full on September 18, 2003. The
Company received proceeds of $34.9 million, net of commissions, discounts and
expenses.

In March 2002, the Company received proceeds of approximately $16.5
million from a private placement of 1,500,000 shares of Common Stock. The
Company also issued to the purchasers warrants to purchase an additional 750,000
shares of Common Stock at an exercise price of $11.00 per share. The Company
valued the warrants at $3,858,000 using the Black-Scholes option pricing model
applying an expected life of 18 months, a risk free interest rate of 6.59% and a
volatility of 69%. The warrants were recorded as a component of equity.

50

NOTE 8 - RESTRUCTURING COSTS, SPECIAL CHARGES AND OTHER PROVISIONS:

In the second quarter of 2004, the Company was released from certain
contractual obligations related to excess facilities in the U.S. for which
restructuring charges had been recorded in 2002. Accordingly, the Company
released approximately $300,000 of its restructuring reserve related to that
facility. Additionally, the Company revised its estimates for future lease
obligations for non-cancelable lease payments for excess facilities in Europe
and recorded an additional $300,000 of restructuring charges.

In the first quarter of 2003, the Company continued to implement profit
improvement and cost reduction measures, and recorded restructuring costs of
$1.4 million. These charges consisted of severance and benefits of $1.3 million
related to worldwide involuntary terminations and estimated lease costs of
$56,300 pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. The Company terminated 127 employees
worldwide, across a wide range of functions including marketing, technical
support, finance, operations and sales. Future savings expected from
restructuring related cost reductions will be reflected as a decrease in
'Selling, General and Administrative expenses' on the Statement of Operations.
The Company also recorded an inventory charge of approximately $1.5 million
related to significant changes to certain vendor relationships and the
discontinuance of other non-strategic product lines, recorded in 'Cost of
Sales'.

In the second and third quarters of 2002, as part of the Company's plan
to reduce costs and improve operating efficiencies, the Company recorded special
charges of $5.7 million. These costs consisted primarily of estimated lease
costs of $2.3 million pertaining to future lease obligations for non-cancelable
lease payments for excess facilities in the U.S. and costs of $583,000 related
to the closure of the Rorke Data Europe facilities, whose operations were
consolidated into the Company's TTP division in Almere, Netherlands. These
special charges also included provisions for certain Latin American receivables
of $1.7 million, and severance and benefits of $1.1 million related to worldwide
involuntary terminations. The Company terminated 78 employees, predominately in
sales and marketing functions and eliminated two executive management positions
in the U.S. Future expected costs reductions will be reflected in the Statement
of Operations line item 'Selling, General and Administrative expenses.'

Outstanding liabilities related to these charges are summarized as
follows (in thousands):

Management expects to extinguish the restructuring and special charges
liabilities of $709,000 by November 2007.

51

NOTE 9 - STOCK-BASED COMPENSATION PLANS:

STOCK OPTION PLANS

In May of 1998, the Company adopted the 1998 Stock Plan (the "Plan")
which replaced the 1988 Amended and Restated Incentive Stock Plan (the "1988
Plan") and the 1993 Director Stock Option Plan (the "Director Plan").

The Plan provides for the grant of stock options and stock purchase
rights to employees, directors and consultants of the Company at prices not less
than the fair value of the Company's Common Stock at the date of grant for
incentive stock options and prices not less than 85% of the fair value of the
Company's Common Stock for nonstatutory stock options and stock purchase rights.
Under the Plan, the Company has reserved for issuance a total of 5,439,327
shares of Common Stock plus 272,508 shares of Common Stock which were reserved
but unissued under the 1988 Plan and 52,500 shares of Common Stock which were
reserved but unissued under the Director Plan. The maximum aggregate number of
shares of Common Stock which may be optioned and sold under the Plan is
3,988,984 shares, plus an annual increase to be added on January 1 of each year,
equal to the lesser of (i) 600,000 shares, (ii) 4% of the outstanding shares on
such date, or (iii) a lesser amount determined by the Board of Directors,
subject to adjustment upon changes in capitalization of the Company. Since
inception, the Company has reserved 9,117,975 shares of Common Stock for
issuance under the aggregate of all stock option plans.

All stock options become exercisable over a vesting period as
determined by the Board of Directors and expire over terms not exceeding ten
years from the date of grant. If an optionee ceases to be employed by the
Company, the optionee may, within one month (or such other period of time, as
determined by the Board of Directors, but not exceeding three months) exercise
options to the extent vested.

As part of the Plan, the Board of Directors adopted a Management
Incentive Program (the "Program") for key employees. Under this Program, options
for 193,500 shares of Common Stock were granted in 2000 and no options were
granted in years 2002, 2003 or 2004. The Program provides for ten-year option
terms with vesting at the rate of one tenth per year, with potential for
accelerated vesting based upon attainment of certain performance objectives. The
options lapse ten years after the date of grant or such shorter period as may be
provided for in the stock option agreement.

Options granted under the Director Plan prior to May 1998 and
outstanding at December 31, 2004 total 60,000. Under the Director Plan, 112,500
options were granted in 1993 at an exercise price of $5.33 per share, and 30,000
options were granted in 1996 at an exercise price of $4.67 per share. In 1997,
30,000 options were granted at an exercise price of $8.42 per share. In 1998,
22,500 options were granted at an exercise price of $5.00 per share. On August
5, 1999, the Board of Directors approved the vesting in full of all options
currently held by the Directors and modified the Plan to immediately vest all
future Board of Directors options at the time they are granted.

In 2003 and prior years beginning in 2000, the number of shares of
Common Stock reserved under the Plan were not sufficient to accommodate the
Company's growth through acquisitions and key employee retention efforts. To
induce certain key employees to accept employment with the Company, the Company
issued a total of 450,000, 898,000 and 520,000 nonqualified stock options
outside the provisions of the Plan in 2003, 2002 and 2001 respectively, and
621,500 of these options were outstanding at December 31, 2004, net of
cancellations, and are included in the table below.

The following table presents all stock option activity:

52

Increase in options available for grant 600,000 -- --
Options tendered in exchange for restricted stock units 1,346,500 (2,234,250) $ 15.43
Restricted stock rights granted in option exchange (744,802) 744,802 $ 0.00
Options canceled 295,191 (297,191) $ 7.78
Canceled options not available for grant (88,764) -- $ 5.29
Options granted (1,389,200) 1,839,200 $ 6.33
Options exercised -- (604,310) $ 5.88
--------------- ---------------
Balance at December 31, 2003 513,335 4,815,497 $ 10.31

Increase in options available for grant 600,000 -- --
Options canceled 614,137 (614,137) $ 5.42
Canceled options not available for grant (303,749) -- $ 6.49
Options granted (1,146,348) 1,146,348 $ 6.05
Options exercised -- (737,224) $ 3.96
--------------- ---------------
Balance at December 31, 2004 277,375 4,610,484 $ 5.92
=============== ===============

At December 31, 2004, 1,641,743 options were exercisable under these
Plans. Upon the adoption of the 1998 Stock Plan, canceled options under the 1988
Plan are not available for future grants.

The following table summarizes information about stock options and
restricted stock outstanding for all plans at December 31, 2004:

EMPLOYEE STOCK PURCHASE PLAN

The Employee Stock Purchase Plan ("ESPP"), as amended in 2004, provides
for automatic annual increases in the number of shares reserved for issuance on
January 1 of each year by a number of shares equal to the lesser of (i) 400,000
shares, (ii) 2.0% of the outstanding shares on such date, or (iii) a lesser
amount determined by the Board of Directors, subject to adjustment upon changes
in capitalization of the Company. The automatic annual increase feature
terminates on January 1, 2007.

The Company has reserved 2,628,498 shares of Common Stock for issuance
to all eligible employees under its ESPP. Sales made through this plan will be
at the lower of 85% of market price at the date of purchase or on the first day
of each six-month offering period in the prior two years. A total of 2,592,715
shares have been issued under this plan as of December 31, 2004.

53

FAIR VALUE DISCLOSURES

The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its plans, all of which are fixed plans. To determine the additional pro
forma disclosures required by SFAS 123 for the stock option plans, the fair
value of each option grant used for calculating pro forma net income is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following weighted average assumptions were used for grants in 2004, 2003 and
2002 respectively, expected volatility of 74%, 76% and 76%; risk free interest
rate of 3.0%, 2.0% and 3.4% and expected lives of 3.60, 3.45 and 3.55 years. The
Company has not paid dividends and assumed no dividend yield. The weighted
average fair value of those stock options granted in 2004, 2003 and 2002 was
$4.09, $3.46 and $4.81 per option, respectively. The fair value of each ESPP
purchase right is estimated on the beginning of the offering period using the
Black-Scholes option-pricing model with substantially the same assumptions as
the option plans but expected lives of 2 years. The weighted average fair value
of those purchase rights granted in 2004, 2003 and 2002 was $2.86, $3.62 and
$3.69 per right, respectively. Had compensation cost for the Company's two
stock-based compensation plans been determined based on the fair value at the
grant dates for awards in 2004, 2003 and 2002 under those plans consistent with
the provisions of SFAS 123, the Company's net income and earnings per share
would have been reduced as presented in the disclosure in Note 2 Stock-Based
Compensation.

SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair value of
employee stock options.

OPTION EXCHANGE

On November 25, 2002, the Company made an exchange offer (the
"Exchange") to current officers and employees of the Company to exchange stock
options held by these employees for rights to receive shares of the Company's
Common Stock ("Restricted Units"). The offer period ended December 31, 2002 and
the Restricted Units were issued on January 3, 2003 (the "Exchange Date").
Employee stock options eligible for the Exchange had a per share exercise price
of $11.75 or greater, whether or not vested ("Eligible Options"). The offer
provided for an exchange ratio of three option shares surrendered for each
Restricted Unit to be received subject to vesting terms.

In order to be eligible to participate in the Exchange ("Eligible
Participant"), the employee may not receive stock options or other equity awards
in the six months following the Exchange Date. In order to participate in the
Exchange, an Eligible Participant could tender all Eligible Options held, or any
selected Eligible Options granted by different stock option agreements. If an
Eligible Participant chose to participate, all options granted on or after May
26, 2002 were tendered regardless of the exercise price of such options. The
Units of restricted stock will vest in one-fourth increments on each of the
first, second, third and fourth annual anniversary dates of the Exchange Date.
If the employment of an employee who participated in the Exchange terminates
prior to the vesting, the employee will forfeit the unvested shares of
Restricted Units. As a result of the Exchange, the Company issued 744,802 rights
to receive Restricted Units in return for 2,234,250 stock options. The total
non-cash deferred compensation charge over the vesting period of four years is
approximately $4 million computed based on the share price at the date of
approval of $5.42 per share. The deferred compensation charge is unaffected by
future changes in the price of the common stock.

NOTE 10 - INCOME TAXES:

The provision for (benefit from) income taxes consists of the following
(in thousands):

54

Deferred tax assets (liabilities) comprise the following (in
thousands):

Valuation allowances reduce the deferred tax assets to the amount that,
based upon all available evidence, is more likely than not to be realized. The
deferred tax assets valuation allowance at December 31, 2004 and 2003 is
attributed to certain foreign net operating loss carryovers that do not meet the
more likely than not standard of realizability.

As of December 31, 2004, the Company had state net operating loss
carryforwards of approximately $20,577,656 available to offset future state
taxable income. The state net operating loss carryforwards will expire in
varying amounts beginning 2006 through 2023.

The tax benefit associated with dispositions from employee stock plans
for 2004 is approximately $615,050, which was recorded as an addition to paid-in
capital and a reduction to taxes payable.

A reconciliation of the Federal statutory tax rate to the effective tax
(benefit) follows:

NOTE 11 - COMMITMENTS AND CONTINGENCIES:

The Company leases its facilities under cancelable and non-cancelable
operating lease agreements. The leases expire at various times through 2019 and
contain renewal options. Certain of the leases require the Company to pay
property taxes, insurance, and maintenance costs.

The Company leases certain equipment under capital leases with such
equipment amounting to $2,214,000 less accumulated depreciation of $617,000 at
December 31, 2004. Depreciation expense on assets subject to capital leases was
$222,000 for the year ended December 31, 2004. The capital lease terms range
from 24 months to 60 months.

The following is a summary of commitments under non-cancelable leases:

55

Total operating lease expense was $9,068,000, $8,343,000 and $8,671,000
for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company is subject to legal proceedings and claims that arise in
the normal course of business. Management believes that the ultimate resolution
of such matters will not have a material adverse effect on the Company's
financial position or results of operations or cash flows.

NOTE 12 - TRANSACTIONS WITH RELATED PARTIES:

Two directors of the Company are directors of one of the Company's
customers, Company A. Another director of the Company is a director of two of
the Company's customers/vendors, Companies B and C. A third director of the
Company is a director of one of the Company's customers, Company C. A fourth
director of the Company is the President of one of the Company's consulting
providers, Company D. A fifth director of the Company is the President of one of
the Company's customers/vendors, Company E. A sixth director of the Company is a
director of one of the Company's customers, Company F. A former president of one
of the Company's subsidiaries was a co-owner of one of the Company's customers
in 2003 and 2002, Company G. The Company also leased a facility from Company G.
Sales to these parties and purchases of inventory and other services from these
parties for the three years ended December 31, 2004 and accounts receivable at
December 31, 2004 and 2003 are summarized below:

56

The Company has concluded that terms of these transactions were no less
favorable than reasonably could be expected to be obtained from unaffiliated
parties.

NOTE 13 - SALARY SAVINGS PLAN:

The Company has a Section 401(k) Plan (the "Plan") which provides
participating employees an opportunity to accumulate funds for retirement and
hardship. Participants may contribute up to 15% of their eligible earnings to
the Plan. The Company may elect to make matching contributions equal to a
discretionary percentage of participants' contributions up to the statutory
maximum of participants' eligible earnings. The Company has not made any
contributions to the Plan.

NOTE 14 - GEOGRAPHIC INFORMATION:

The Company operates in one industry segment and markets its products
worldwide through its own direct sales force. The Company attributes revenues
from customers in different geographic areas based on the location of the
customer. Sales in the U.S. were 38%, 38% and 41% of total sales for the years
ended December 31, 2004, 2003 and 2002, respectively.

Geographic information consists of the following:

The following table presents long-lived assets located in the Company's
country of domicile and located in all foreign countries.

NOTE 15 - SUBSEQUENT EVENT:

On January 31, 2005, the Company entered into an amendment to the
securitization program with Wachovia Bank, National Association ("Wachovia") and
Blue Ridge Asset Funding Corporation ("Blue Ridge") to increase the maximum
amount available under this credit facility from $75 million to $90 million,

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

(in thousands, except per share amounts)

57

Operating income (loss) ......... 14,293 9,442 5,877 6,556 7,696 5,095 1,240 (3,031)
Interest expense and other income 4,693 4,493 3,830 3,838 3,731 4,208 4,185 4,019
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations
before income taxes ........... 9,600 4,949 2,047 2,718 3,965 887 (2,945) (7,050)
Provision for (benefit from)
income taxes .................. 3,800 2,175 996 1,006 1,517 513 (584) (2,115)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) .............. $ 5,800 $ 2,774 $ 1,051 $ 1,712 $ 2,448 $ 374 $ (2,361) $ (4,935)
========= ========= ========= ========= ========= ========= ========= =========

Earnings (loss) per share
Basic ......................... $ 0.20 $ 0.10 $ 0.04 $ 0.06 $ 0.09 $ 0.02 $ (0.12) $ (0.25)
Diluted ....................... $ 0.20 $ 0.10 $ 0.04 $ 0.06 $ 0.09 $ 0.02 $ (0.12) $ (0.25)
========= ========= ========= ========= ========= ========= ========= =========

Shares used in per share
calculation
Basic ......................... 28,407 27,990 27,194 27,068 26,558 22,471 20,137 20,131
========= ========= ========= ========= ========= ========= ========= =========
Diluted........................ 29,344 28,553 27,659 28,079 27,692 23,098 20,137 20,131
========= ========= ========= ========= ========= ========= ========= =========

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

After evaluating the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934
("the Exchange Act") as of the end of the period covered by this annual report,
our Chief Executive Officer and Chief Financial Officer, with the participation
of our management, have concluded that our disclosure controls and procedures
are effective to ensure that information that is required to be disclosed by us
in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules of the
Securities Exchange Commission.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Our internal control system was designed to ensure that
material information regarding our consolidated operations is made available to
management and the board of directors to provide them reasonable assurance that
the published financial statements are fairly presented. There are limitations
inherent in any internal control, such as the possibility of human error and the
circumvention of overriding of controls. As a result, even effective internal
controls can provide only reasonable assurance with respect to financial
statement preparation but may not prevent or detect misstatements. And, as
conditions change over time so to may the effectiveness of internal controls.

Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control--Integrated Framework
issued by the Committee of the Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal
Control--Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2004.
Management has excluded OpenPSL, Ltd from its assessment of internal control
over financial reporting as of December 31, 2004 because it was acquired by Bell
in a purchase business combination during 2004. OpenPSL is a wholly-owned
subsidiary whose total assets and total

58

revenues represent 7% and 5%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2004.

Our management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.

Changes in Internal Controls

There were no changes in our internal control over financial reporting
that occurred during the period covered by this annual report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

59

PART III

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2005 Annual Meeting of Shareholders (the "Proxy
Statement").

ITEM 10. DIRECTORS AND EXECTUTIVE OFFICERS OF THE REGISTRANT

(a) Information concerning directors of Bell Microproducts Inc.
appears in our Proxy Statement, under the captions "Corporate
Governance" and "Election of Directors." This portion of the
Proxy Statement is incorporated herein by reference.

(b) EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and descriptions identify and set forth
information regarding the Company's six executive officers:

W. Donald Bell has been President, Chief Executive
Officer and Chairman of the Board of Bell Microproducts since
its inception in 1987. Mr. Bell has over thirty years of
experience in the electronics industry. Mr. Bell was formerly
the President of Ducommun Inc. and its subsidiary, Kierulff
Electronics Inc., as well as Electronic Arrays Inc. He has
also held senior management positions at Texas Instruments
Incorporated, American Microsystems and other electronics
companies.

James E. Illson has been our Chief Financial Officer
and Executive Vice President of Finance and Operations since
September 2002. From March 2000 to April 2002, Mr. Illson was
Chief Executive officer and President of Wareforce Inc. a
value added reseller. Mr. Illson was with Merisel Inc. from
August 1996 to January 2000, serving in the position of Chief
Financial Officer until March 1998, when he became
President/Chief Operating Officer. Mr. Illson holds a
Bachelors degree in Business Administration and a Masters
degree in Industrial Administration. Mr. Illson has over 20
years experience in financial and operational fields.

Richard J. Jacquet has been our Vice President of
Human Resources since May 2000. From 1988 to May 2000, Mr.
Jacquet served as Vice President of Administration of Ampex
Corporation, an electronics manufacturing company. Prior to
1988, Mr. Jacquet served in various senior human resource
positions with Harris Corporation and FMC Corporation.

60

Philip M. Roussey has been our Executive Vice
President of our Enterprise Marketing since February 2002,
prior to which he served as our Executive Vice President of
Computer Products Marketing from April 2000 until February
2002 and as our Senior Vice President of Marketing for
Computer Products and Vice President of Marketing from the
inception of our Company in 1987 until April 2000. Prior to
joining Bell Microproducts in 1987, Mr. Roussey served in
management positions with Kierulff Electronics, most recently
as Corporate Vice President of Marketing.

Robert J. Sturgeon has been our Vice President of
Information Technology since July 2000, prior to which, he
served as our Vice President of Operations since joining the
Company in 1992. From January 1991 to February 1992, Mr.
Sturgeon was Director of Information Services for Disney Home
Video. Prior to that time, Mr. Sturgeon served as Management
Information Services ("MIS") Director for Paramount Pictures'
Home Video Division from June 1989 to January 1991 and as a
Marketing Manager for MTI Systems, a division of Arrow
Electronics Inc., from January 1988 to June 1989. Other
positions Mr. Sturgeon has held include Executive Director of
MIS for Ducommun where he was responsible for ten divisions,
including Kierulff Electronics.

Graeme Watt has been our President of Bell
Microproducts, Europe since April 2004. From 1988 through 2003
he held a number of positions in IT distribution with
Frontline Distribution, Computer 2000 and Tech Data as the
companies were acquired. His most recent roles were Managing
Director, United Kingdom for Computer 2000, Northern Region
Managing Director for Tech Data Europe, and European President
for Tech Data from 2000 to 2003. Mr Watt holds a Bachelor of
Sciences Degree in Biological Science from Edinburgh
University and is a qualified Chartered Accountant.

(c) Information concerning Compliance with Section 16(a) of the
Securities Exchange Act of 1934 appears in our Proxy
Statement, under the heading "Compliance with Section 16(a) of
the Securities Exchange Act of 1934," and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation appears in our Proxy
Statement, under the caption "Executive Compensation," and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning the security ownership of certain beneficial
owners and management appears in the our Proxy Statement, under the caption
"Election of Directors," and is incorporated herein by reference.

The following table provides information concerning our equity
compensation plans as of December 31, 2004:

61

(1) Weighted-average exercise price excludes 815,675 shares for restricted
stock units with zero exercise price.

(2) Includes (a) shares under our (2) 1998 Stock Plan, which plan provides
for the automatic increase of shares on January 1 of each year of a
number of shares equal to the lesser of (i) 600,000 shares, (ii) 4% of
the outstanding shares on such date, or (iii) a lesser amount
determined by the Board, subject to adjustment upon changes in our
capitalization and (b) 36,850 shares remaining available under our
Employee Stock Purchase Plan, which plan provides for the automatic
increase on January 1 of each year of a number of shares equal to the
lesser of (i) 400,000 shares, (ii) 2.0% of the outstanding shares on
such date, or (iii) a lesser amount determined by the Board, subject
to adjustment upon changes in our capitalization.

(3) Represents stock options that have been granted to employees outside
of the Company's 1998 Stock Plan, which options are represented by
agreements substantially the same as agreements with respect to
options under the 1998 Stock Plan and generally provide for a vesting
period as determined by the Board of Directors and expire over terms
not exceeding ten years from the date of grant.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions
appears in our Proxy Statement, under the caption "Election of Directors," and
is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services appears
in our Proxy Statement under the caption "Ratification of Appointment of
Independent Accountants" and is incorporated herein by reference.

62

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

(1) Consolidated Financial Statements

The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statements (set forth in Item 8 of this Form
10-K) are filed as part of this Annual Report on Form 10-K.

(2) Consolidated Financial Statement Schedule
II - Valuation and Qualifying Accounts and Reserves page 65

Schedules not listed above have been omitted because they are not
required or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements.

(3) Exhibits - See Exhibit Index following signature page

(b) Exhibits. See Item 15(a) above.

(c) Financial Statements and Schedule. See Item 15(a) above.

63

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 on March 16, 2005.

BELL MICROPRODUCTS INC.

By: /s/ James E. Illson
----------------------------------
James E. Illson
Chief Financial Officer and
Executive Vice President of
Finance and Operations

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints W. Donald Bell and James E. Illson and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:

64

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

(1) Balance consists of allowance for doubtful accounts and inventory provisions
related to the acquisitions of subsidiaries and the effects of cumulative
translation adjustments.

65

INDEX TO EXHIBITS

66

10.8* Employment Agreement dated as of July 1, 1999 between the Registrant
and W. Donald Bell, the Registrant's Chief Executive Officer -
incorporated by reference to exhibit filed with the Registrant's
Report on Form 8-K filed on January 13, 2000.

10.9 Office and warehouse lease, dated March 21, 1991, as amended by
Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4
and Amendment No. 5 relating to Rorke Data facilities in Eden
Prairie, Minnesota - incorporated by reference to Exhibit 10.1 to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2000.

10.10 Lease, dated June 16, 2000, relating to Bell Microproducts - Future
Tech facilities in Miami, Florida - incorporated by reference to
Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 2000.

10.11 Securities Purchase Agreement dated July 6, 2000 between the
Registrant and The Retirement Systems of Alabama - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-Q
for the quarter ended September 30, 2000.

10.12* Management Retention Agreements between the Registrant and the
following executive officers of the Registrant: Philip M. Roussey and
Robert J. Sturgeon - incorporated by reference to Exhibit 10.32 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.

10.13* 1998 Stock Plan, as amended and restated through April 30, 2002, and
form of option agreement.

10.14* Form of restricted stock unit agreement currently used under the 1998
Stock Plan - incorporated by reference to Exhibit 99(D)(3) to
Schedule TO (File No. 005-44304) filed November 26, 2002.

10.15* Amendment to Employment Agreement dated as of July 1, 1999 between
the Registrant and W. Donald Bell date as of April 30, 2002 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.

10.16* Executive Employment and Non-Compete Agreement dated as of August 13,
2002 between the Registrant and James E. Illson - incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.

10.17 Syndicated Credit Agreement effective as of December 2, 2002, as
amended and restated on September 14, 2004 by and among Ideal
Hardware Limited, Bell Microproducts Europe Export Limited, BM Europe
Partners C.V., Bell Microproducts Europe BV, Bank of America, N.A.
and certain banks and financial institutions.

10.18 Syndicated Composite Guarantee and Debenture effective as of December
2, 2002 by and among Ideal Hardware Limited, certain other companies
listed and Bank of America, N.A. - incorporated by reference to
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002.

10.19 Priority Agreement effective as of December 2, 2002 by and among Bell
Microproducts Limited, National Westminster Bank PLC and Bank of
America, N.A. - incorporated by reference to Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.

10.20 First Union National Bank Loan and Security Agreement dated May 14,
2001 - incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 -
incorporated by reference to Exhibit 10.42 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.

10.21 First Amendment to Loan and Security Agreement dated as of December
31, 2002 by and among the Registrant, certain subsidiaries of the
Registrant, certain financial institutions and Congress Financial
Corporation - incorporated by reference to Exhibit 10.43 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.

67

10.22 Supplemental Agreement Re Syndicated Credit Agreement dated November
6, 2003 by and among Ideal Hardware Limited, Bell Microproducts
Europe Export Limited, BM Europe Partners C.V., Bell Microproducts
Europe BV, Bank of America, N.A. and certain banks and financial
institutions - incorporated by reference to Exhibit 10.44 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003.

10.23 Second Amendment to Loan and Security Agreement and Waiver dated
October 9, 2003 with Congress Financial Corporation - incorporated by
reference to Exhibit 10.45 to the Registrant's Annual Report on Form
10K for the year ended December 31, 2003.

10.24* Amendment to Employment Agreement dated October 19, 2000 between the
Company and W. Donald Bell - incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001.

10.25 First Amendment to Securities Purchase Agreement dated May 3, 2004
between the Registrant and the Retirement Systems of Alabama -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004.

10.26 Third Amendment to Loan and Security Agreement dated September 13,
2004 between the Registrant and Congress Financial Corporation -
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004.

10.27 Credit and Security Agreement dated September 20, 2004 by and among
Bell Microproducts Funding Corporation, the Registrant, Blue Ridge
Asset Funding Corporation, certain Liquidity Banks and Wachovia Bank
- incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2004.

10.28 Receivables Sales Agreement dated September 20, 2004 between the
Registrant and Bell Microproducts Funding Corporation - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.

10.29 Supplemental Agreement to Syndicated Credit Agreement dated September
22, 2004 by and among Ideal Hardware Limited, Bell Microproducts
Europe Export Limited, BM Europe Partners C.V., Bell Microproducts
Europe B.V., Bank of America, N.A. and certain banks and financial
institutions - incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004.

10.30 Amendment No. 1 to Credit and Security Agreement dated January 31,
2005 by and among the Registrants Blue Ridge Asset Funding
Corporation, certain liquidity Banks and Wachovia Bank.

21.1 Subsidiaries of the Registrant

23.1 Consent of PricewaterhouseCoopers LLP, independent accountants

24.1 Power of Attorney (Contained on Signature page of this Form 10-K).

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.

- ----------

* Management contract or compensatory plan, contract or
arrangement required to be filed as an exhibit to this Form
10-K.

68