================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

COMMISSION FILE NUMBER: 0-20732

COMPUTER INTEGRATION CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 65-0506623
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2425 CROWN POINT EXECUTIVE DRIVE 28277
CHARLOTTE, NORTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (704) 847-7800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ]

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

AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT

Common Stock, par value $.001 per share ("Common Stock"), was the only
class of voting stock of the Registrant outstanding on September 23, 1997. At
such date, the aggregate market value of the 5,126,303 shares of Common Stock
held by persons other than officers, directors and persons known to the
Registrant to be the beneficial owner (as that term is defined under the rules
of the Securities and Exchange Commission, the "Commission") of more than five
percent of the Common Stock, was approximately $7,369,061.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distributions of securities under a plan
confirmed by a court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 14,034,810 shares of
Common Stock were outstanding as of September 23, 1997.

DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement of Computer Integration Corp.
for the 1997 Annual Meeting of Stockholders
Incorporated in Part III

================================================================================
2

PART I

ITEM 1. BUSINESS

GENERAL

The Company (which term includes Computer Integration Corp. and its
wholly-owned operating subsidiary, CIC Systems, Inc., hereafter "CICS") is one
of the largest volume resellers of microcomputers, workstations and related
products, services and solutions to large and medium-sized corporations,
federal, state and local government entities and colleges and universities in
the United States. The Company distributes a broad range of
microcomputer-related products, services, and solutions from major hardware
manufacturers and software developers such as Hewlett-Packard Company ("HP"),
Compaq Computer Corporation ("Compaq"), Sun Microsystems Computer Corporation
("Sun"), Toshiba America Information Systems, Inc. ("Toshiba"), International
Business Machines ("IBM"), Lexmark International ("Lexmark"), NEC Technologies,
Inc. ("NEC"), 3COM, Inc. ("3COM"), Oracle Corporation ("Oracle"), Netscape
Communications Corporation ("Netscape"), Sterling Commerce, Inc. ("Sterling"),
Novell, Inc. ("Novell") and Microsoft Corporation ("Microsoft"). The Company is
one of the largest resellers of computer products manufactured by HP in the
United States and during the year ended June 30, 1997 ("Fiscal 1997"), sales of
HP products accounted for approximately 67% of the Company's net sales.

The Company has experienced rapid growth. On March 30, 1993, the Company
acquired Copley Systems Corporation ("Copley") of Westwood, Massachusetts.
Effective July 1, 1994, the Company acquired Dataprint, Inc. ("Dataprint") of
Charlotte, North Carolina, and effective July 1, 1995, the Company acquired
substantially all of the assets of Cedar Computer Center, Inc. ("Cedar") of Des
Moines, Iowa (the "Cedar Acquisition"). At the time of their acquisitions,
Copley and Dataprint were two of the largest dealers of HP computer products in
the northeastern and southeastern United States, respectively. Cedar was one of
the largest dealers of HP computer products in the midwestern and western United
States. Cedar's products complemented the Company's existing product lines and
increased the Company's market share of Compaq products. Net sales of the
Company increased from $103.9 million for the fiscal year ended June 30, 1993 to
$417.5 million in Fiscal 1997.

The microcomputer industry has grown dramatically over the past several
years as a result of equipment price reductions, significant improvements in
hardware performance and software applications, increased use of microcomputers
by governments and businesses and increased product familiarity by end users.
The microcomputer distribution industry has experienced related growth in the
use of wholesale distribution channels by manufacturers for the distribution of
their products. The Company has distinguished itself from its competitors by
focusing primarily on the direct delivery of personal computer ("PC") hardware,
peripherals and software, from selected manufacturers, to a broad range of
customers through a low-cost, efficient method of distribution. The Company
configures PCs and printers with memory, operating systems and software at its
distribution centers in Westwood, MA and Charlotte, NC. Management believes that
the Company's focus on a limited number of manufacturers, its expertise with
their product lines, commitment to servicing its customers, and efficient
distribution and delivery of products provide the Company a competitive
advantage and enable it to operate with relatively low operating costs.

The Company's operating strategy is to (i) increase customer loyalty
through the offering of a full array of services and excellent product delivery,
(ii) increase its market share of products of selected manufacturers such as HP,
Compaq, and Sun, (iii) grow its nationwide sales and distribution network and
its tele-sales operations, (iv) expand its systems integration and support
services, and (v) strengthen its professional and solution services. The Company
may acquire other companies whose products and services complement the Company's
existing products and services, including both resellers and providers of
systems integration and other support services.

In September, 1997 the Company announced a new logistics strategy and
consolidation of headquarters functions into a new office in Charlotte, NC. The
Company expects that these actions will allow it to be more responsive to its
customers and improve the quality, efficiency, and timeliness of the products
and services it provides. The new logistics strategy will have two elements: i)
outsourcing of its distribution, warehousing and
3

configuration for all non-HP products which have been handled by the Company and
ii) consolidating its warehouse and configuration operations from its existing
facilities in Westwood, MA and Charlotte, NC to a new facility in Charlotte, NC.
The strategy will be implemented in stages with all elements expected to be
completed by December 31, 1997. The Company's headquarters functions, which are
currently performed in both Westwood and Charlotte, will be consolidated into a
new headquarters facility in Charlotte. The personnel headquartered in Charlotte
will include its Executive Officers, and its Finance and Accounting, Purchasing,
Marketing, and Information Systems departments. The Company will maintain its
Northeast Regional Headquarters and its professional services, customer support,
human resources departments, and certain other departments in an office in a
Boston suburb. Most of this consolidation is expected to be completed by
December 31, 1997.

INDUSTRY

Significant technological advances have transformed the microcomputer
industry during the past ten years. Once dominated by several large
manufacturers, the market now consists of several hundred manufacturers offering
products ranging from hand-held computers to sophisticated UNIX-based
workstations. During the same period, demand for microcomputers and related
products has increased substantially, as a result of several factors, including:
(i) decreases in the prices of microcomputers, peripherals and software,
primarily as a result of intense competition among manufacturers, retailers and
resellers; (ii) improvements in microcomputer hardware performance and
development of new software applications; (iii) increased use of microcomputers
by business, government and education institutions; and (iv) the development of
industry standards and component compatibility. While the technology and level
of product sophistication continue to improve, the cost of products has
continued to decline. Over the last several years, the industry has experienced
aggressive price reductions by personal computer manufacturers which have
exerted additional pressure on the profit margins of all manufacturers and
distributors. However, the lower prices have also stimulated demand, resulting
in increased sales to both existing and first-time buyers. In addition, as user
familiarity with microcomputers has increased, demand for more sophisticated
hardware, software and related products has increased the average total purchase
price for personal computer systems.

As the microcomputer products industry has grown, parallel growth has
occurred in the microcomputer products distribution industry in response to
increased demand for products and the increased use of wholesale distribution
channels by manufacturers. Microcomputer products are delivered to the ultimate
consumer through a combination of distribution channels including manufacturers,
wholesale distributors, aggregators and resellers. Wholesale distributors and
aggregators sell directly to resellers. Resellers, such as the Company, sell
directly to consumers, including corporations, government entities, education
institutions, small and medium-sized businesses and individuals; integrate
computer systems; and provide technical support services.

There are various categories of resellers, including retailers such as
computer superstores and office supply chains; mail-order firms; and systems
integrators. The larger computer manufacturers such as HP, Compaq and IBM,
historically, have required resellers to purchase their products from an
affiliated aggregator or designated distributors or directly from such
manufacturers. The Company purchases the majority of the products it sells,
including HP products, directly from manufacturers and purchases the balance of
such products, including Compaq, Sun and IBM, from aggregators and distributors.

Another product distribution model which competes with the Company is the
"manufacturer direct" model. Dell and Gateway have been the leaders in this area
offering products via a single toll free 800 telephone number. Traditionally,
this distribution model has fulfilled a small business and individual consumer
niche. Over the past year, both companies have made great strides into the
larger business community. With commercial sales well into the billions, this
type of product fulfillment will increasingly be a competitive threat. The
Company believes, however, that many customers will continue to prefer the
face-to-face sales approach.

Due to significant changes in technology, the industry has experienced
rapid product obsolescence. The average life cycle of personal computers and
peripherals before enhanced models are available is approxi-

2
4

mately six months. As technology advances, customers generally desire to
purchase the newest and fastest products to gain a competitive advantage.
Therefore, inventory management is critical to profitability.

Technological advances in the microcomputer industry typically result in
increased demand for the products sold by the Company. For example, Windows
95(TM), an operating system software introduced by Microsoft, has generated
increased sales of memory chips, hard drives, new computers and 32-bit software,
to make existing hardware systems compatible with the new operating system and
to upgrade existing hardware systems to take advantage of all of the features of
the new operating system.

The networking segment of the microcomputer industry is also currently
experiencing rapid growth. In addition to increased purchases of local and wide
area networks by the Company's target customers, new, previously undeveloped
markets may also be created by developments such as the Internet, an informal
world-wide network of proprietary computer networks and individuals
interconnected by various telecommunications systems.

In recent years, companies such as Oracle Corporation, Sybase, Inc., and
Informix Software Corp. have generated several billion dollars in annual
revenues by selling and developing tools which have enabled companies to reduce
their technical staff, upgrade their computer equipment and commensurately
reduce operating expenses by increasing the efficiency of their management
information systems. In addition, hardware manufacturers have developed products
to interface with other hardware systems. These trends in the microcomputer
industry have created additional demand and markets for the products sold by the
Company.

STRATEGY

The Company's long-term objective is to become one of the leading resellers
and systems integrators in the United States in terms of sales volume of
microcomputers, work stations and related products and services. The Company's
business strategy is to:
-- Build customer loyalty and satisfaction by offering a full array of
services and excellent product delivery;
-- Increase its market share of products of selected manufacturers such as
HP, Compaq, IBM and Sun;
-- Expand its nationwide sales and distribution network and its tele-sales
operations;
-- Expand its systems integration and support services; and
-- Expand its professional and solutions offerings.

Building Customer Loyalty and Satisfaction. The Company believes that the
development of long-term relationships with its customers will encourage repeat
purchases and foster overall customer satisfaction. Management believes that the
key to building customer loyalty is providing products and services, in a timely
fashion, which meet customers' technological and organizational needs. The
Company has assembled a dedicated sales team which is knowledgeable,
continuously trained and kept current on the products and services offered by
the Company and their application to specific customer needs. The Company's
sales force is supported by a strong technical staff whose expertise in the
Company's product lines enables the Company to efficiently and timely process
customers' orders, configure computer systems, deliver products, and provide
consultation and technical support services. The Company has approximately
16,000 active customers. During the past year, the Company has committed
increased resources and emphasis on services such as toll-free ordering and
technical support, direct Internet communications with customers and enhanced
product warranty programs, all of which are designed to further enhance customer
loyalty and satisfaction.

Increase in Market Share of Products from Selected Manufacturers. The
Company primarily sells products from a limited number of manufacturers. The
Company's success has been attributable, in large part, to the success of its
low cost distribution system for HP products and its expertise in selling
products manufactured by Sun. The Company will continue to concentrate on sales
of those products, but will also evaluate its product line in order to emphasize
sales of those products that make the greatest contribution to the Company's
gross profit margins. The Company is an authorized reseller of IBM and Compaq
computer products. The Company believes that increased emphasis on these product
lines may also generate additional

3
5

systems integration business by introducing potential customers to the Company's
expertise in integrating IBM and Compaq systems into its network connectivity
solutions.

National Sales and Distribution Network. The acquisitions of Copley,
Dataprint and Cedar, respectively, have increased sales of the Company and its
predecessor from $103.9 million for the fiscal year ended June 30, 1993 to
$417.5 million for Fiscal 1997. Those acquisitions have positioned the Company
to achieve its long-term objective by providing a nationwide network of 25
offices in 22 states for the sale and distribution of products and services. In
addition to these recent acquisitions, the Company intends to continue to review
potential acquisitions of companies whose products and services complement the
Company's existing products and services including both resellers and providers
of systems integration and other support services. Although the Company
continuously reviews potential acquisition candidates, it has not entered into
any agreement, understanding or commitment with respect to any additional
acquisitions at this time. The Company also plans to expand its tele-sales
marketing and sales activities and expects this to generate additional revenue.

Expansion of Systems Integration and Support Services. Management believes
that two factors will contribute to the growth of the Company's systems
integration and support services business: (i) government, education and
commercial needs for local and wide area networks are expanding as such
end-users continue to upgrade their technology and right-size their information
processing systems; and (ii) the trend toward retaining third parties for
network design, configuration and integration is accelerating, particularly as a
result of the reduction of in-house technical staffs. The Company intends to
focus on developing computer networks that maximize the productivity of its
clients' technology. The Company's expertise in networking technology permits it
to integrate existing hardware and software efficiently and effectively. The
Company's system integration services include physical installation, customized
configuration, testing, software loading, applications training, continuing
education, telephone and on-site consulting and complete maintenance and repair
services. Over the past several years, the Company has redirected certain of its
marketing activities in an effort to offer technical services to entities that
have not purchased equipment from the Company. Over the past year, the Company
increased its technical services support capabilities by entering into
partnerships with third party service providers. Through strategic partnerships,
the Company is able to augment its technical and professional services staff
with leading service providers offering all services from four hour response
time repair through complete wide area network management.

Expand its professional and solutions offerings. The Company believes that
the expansion of professional services and solutions requirements in government,
education and corporate sectors has created a market need which the Company can
capitalize on by formulating strategic relationships with industry-leading
technology companies. These relationships have enabled the Company to provide a
focused set of service and solution offerings in the areas of database
integration and management, network and internet security, collaborative
computing and interoperability in Unix and Windows NT environments. These
offerings specifically include infrastructure and network encryption and network
management and monitoring. The Company will continue to leverage its
relationships with third party services and technical personnel to increase its
professional services and solutions business and further the opportunities
throughout the Company's national branches. The Company has formed an Enterprise
Technology Group to focus on its professional and solutions offerings.

SALES AND MARKETING

The Company has historically conducted its sales operations, for both
products and services, from sales offices located throughout the United States.
The Company is organized into five national regions: the Northeast, with
headquarters in metropolitan Boston (Westwood), Massachusetts; the Southeast,
with headquarters in Charlotte, North Carolina; the Central East, with its
headquarters in metropolitan Washington, DC; the Midwest, with headquarters in
metropolitan Minneapolis, Minnesota; and the West, with headquarters in Denver,
Colorado. The Company will continue to conduct decentralized sales activities
throughout the United States, but will centralize marketing activities at the
five regional headquarters. In each sales office, the Company will maintain
specific sales groups that specialize in serving some or all of the corporate,
government and education markets. The Company intends to hire additional sales
and technical

4
6

service personnel for its sales offices, relocate employees as necessary to meet
the Company's personnel requirements and increase the productivity of its
existing sales and technical staff.

The Company markets its products and services directly to large and
medium-sized end-user customers in the corporate, government and education
markets. The Company believes that this large account sales approach is a highly
effective method for distributing, serving and supporting large end-user
customers by providing name brand product assortment and low-cost distribution
and technical service capabilities, while delivering a high level of local
customer service and support. In addition, the Company has established a
marketing program directed at currently inactive customers and educates
salespeople on features of new product lines which are currently offered by the
Company but have not yet generated significant sales.

Certain of the Company's major suppliers provide marketing and advertising
credits or allowances, the amount of which is based on a percentage of purchases
made by the Company. Such arrangements typically allow the Company, at its
discretion, to participate in various advertising campaigns and marketing
strategies and subsequently seek reimbursement for all or a portion of the
related costs. However, the Company must expend advertising or marketing funds
before suppliers will allow the utilization of advertising or marketing credits.
The total amount of such credits funded by the suppliers by means of credits in
Fiscal 1997 was less than 1.0% of the Company's net sales.

CUSTOMERS

The Company has two major target customer groups: (i) large and
medium-sized corporations and (ii) federal, state and local governments and
their various divisions (the "government market") and colleges and universities.
The Company maintains specialty marketing groups to focus specifically on the
corporate, government and education markets. The Company believes that such
specialty groups have made the Company more knowledgeable about specific
industry needs, thereby allowing it to become more responsive in providing
desired products and services. During Fiscal 1997, no single customer accounted
for more than 10.0% of the Company's net sales.

PRODUCTS AND MANUFACTURERS

Product Selection. The Company distributes a broad range of
microcomputer-related products including printers, desk top computers,
workstations, lap-top computers, peripherals and software. Peripherals include
printers, plotters, modems, storage devices and memory. Substantially all of the
Company's products are purchased from suppliers located in the United States.
The Company's main products are printers made by HP; Intel-based desk top
computers made by HP and Compaq; UNIX-based workstations made by Sun and HP;
lap-top computers made by HP, Compaq and Toshiba; microcomputing peripherals,
other than printers, made by HP; software developed by Microsoft, Sun, Netscape,
Oracle, and Sterling; and networking products developed by Sun.

The Company evaluates its product assortment based on technological
advances and market demand for information technology products. The Company also
continuously evaluates its existing product lines to determine whether such
products are achieving their market potential. If sales volume declines with
respect to a particular product, or a product is determined to be obsolete, of
poor quality or is subject to delays in delivery, the product is discontinued.

The Company obtains the majority of the products its sells from its major
supplier, HP. During Fiscal 1997 and Fiscal 1996, 67.0% and 65.0%, respectively,
of the Company's net sales were derived from products manufactured by HP. The
Company purchases its other products from a number of distributors. During
Fiscal 1997 products from one distributor accounted for 13% of the Company's net
sales (the "Primary Distributor").

Supplier Agreements. The Company has resale agreements with most of its
suppliers, which, in the opinion of management, reflect terms and conditions
customarily used by each manufacturer. With the exception of its agreement with
HP, the Company's distribution agreements generally allow distribution of
products on a non-exclusive basis with no geographic restrictions. Such
agreements usually contain provisions

5
7

that allow either party to terminate the agreement, without cause, upon 30 to 60
days notice and do not restrict the Company from selling competing products from
different manufacturers. In addition, such agreements typically provide the
Company the right to terminate or curtail sales of one product line in favor of
another product line as a result of technological change, pricing
considerations, customer demand or supplier distribution policy.

The Company's current resale agreement with HP has a one-year term and
expires on February 28, 1998. The agreement allows either party to terminate the
agreement without cause upon 30 days written notice, or with cause upon 15 days
written notice. The agreement authorizes the Company, on a non-exclusive basis,
to sell HP personal computers, peripherals and other computer-related products
in those metropolitan areas in the United States in which the Company has office
locations. Some specific HP products have no geographical resale restrictions
and may be sold anywhere in the United States. The Company may resell HP
products to any education institution in the United States and to any state
government if the Company has an office in such state.

The Company's current agreement with its Primary Distributor has a one-year
term expiring April 4, 1998. The agreement allows either party to terminate with
or without cause on 30 days notice.

Since August 1994, the total combined purchases of HP products by the
Company have qualified it for the Level II Discount. The Level II Discount is
currently available to HP distributors who have attained gross purchases of HP
products of at least $135 million during a contract year. Qualification for the
Level II Discount enables the Company to purchase HP products at the lowest
available cost. The Company's total purchases of HP products for the contract
year ending February 28, 1998 are expected to substantially exceed $135 million.

Copley became an authorized, non-exclusive, reseller of Sun hardware and
software products in February 1990. In January 1994, the Company entered into an
exclusive sales agent agreement with Sun for the sale and marketing of Sun
products in the education marketplace in New England, including Vermont, New
Hampshire, Maine, Rhode Island and Eastern Massachusetts. Such agreement covers
grades K through 12 and universities, with the exception of certain designated
universities to which Sun sells directly.

Most of the Company's U.S. suppliers, including HP and Sun, provide price
protection, by way of credits, against price reductions by the supplier between
the time of the initial sale to the Company and the Company's subsequent sale to
its customers. Historically, credits, refunds or other payments to which the
Company has been entitled by reason of price protection have offset most of any
inventory write-downs the Company has made as a result of such price reductions.

The Company believes that its relationships with its suppliers are
excellent. Through its participation in supplier-dealer councils, committees and
conferences, the Company enhances relationships with its suppliers by advising
them on products and customer preferences. The Company also assists its
suppliers in developing marketing programs and offers suppliers the opportunity
to provide customer seminars.

CUSTOMER SERVICES

The Company offers a wide range of technical and customer support services,
including hardware configuration, software installation, CPU burn-in (product
testing), project management and training. Before any project begins, the
Company assembles a project team which consists of several client
representatives. All project details are agreed upon in advance and referenced
in a project contract. In addition, control and project reporting procedures are
established. Prior to the shipment of any equipment from one of the Company's
distribution centers or one of its distribution or aggregation partners,
technical personnel perform as much of the necessary configurations, software
installation and CPU burn-in as is possible to minimize installation and service
expenses charged to its customers or incurred by the Company.

In addition to providing initial technical and support services, the
Company also offers on-going technical and support services on all products,
including training, telephone support, including toll-free 800 numbers, hardware
and software support contracts which require the Company to dispatch technical
personnel to the customers' offices, and consulting. The Company provides
warranty repair work at customers' offices for all

6
8

hardware it sells and also offers extended warranties for many of the products
it sells. The Company anticipates that depot warranty work (returns of defective
equipment directly to the Company, which is then repaired by the Company at the
expense of the equipment manufacturer) is likely to increase due to the
equipment configuration of its customers' network environments, the convenience
of the Company's repair facilities and the Company's ability to repair equipment
in an efficient and timely manner. The Company has entered into strategic
relationships with third parties who provide some of these services on behalf of
the Company.

The microcomputer industry is characterized by the existence of numerous
hardware and software systems utilizing different, and often incompatible,
operating components. The Company provides systems integration services which
focus on developing computer environments that maximize the efficient
utilization of its clients' equipment, platforms, applications, protocols, user
preferences and ultimate project output. A systems integrator offers extensive
technical background and expertise in the development of computer environments
that coordinate a client's existing hardware and software to maximize efficient
equipment utilization in a user-friendly manner. The Company's engineers and
consultants provide advice and technical assistance with respect to office
automation, internets and intranets, electronic publishing, image processing,
relational databases, database publishing, network integration, wide-area
networking, right-sizing and application integration. The Company's staff
provides five primary areas of support to its systems integration clients:
connectivity, networking, consulting, project management, and configuration and
installation services. Such support is provided in the form of hardware
maintenance and warranty repair, technical inquiry assistance via telephone and
software/systems training.

DISTRIBUTION

The Company typically fills its orders within 48 hours of receipt. In
addition, the Company has the ability to ship products that require testing,
customization or configuration within five days of receipt. The Company also
coordinates product "rollouts" for customers which involve shipping to a
customer's determined schedule over a period of weeks or months. Upon request,
the Company provides expedited delivery via an overnight or courier service for
an additional cost. The Company performs the majority of its testing,
customization and configuration at its locations in Westwood, Massachusetts, and
Charlotte, North Carolina. As described above, the Company has announced that it
will be consolidating these functions into a new facility in Charlotte, North
Carolina. (See Business -- General.)

The Company's order processing and inventory controls allow the Company to
forecast and order products only when needed. The Company communicates
electronically and by fax with its suppliers to further reduce overhead.
Additionally, the Company manages its inventory levels by providing for the
"drop shipment" of products directly from certain manufacturers or distributors
to customers. Drop shipments reduce the Company's physical handling, inventory,
storage, and shipping costs and allow the Company to expedite delivery of
products to customers. This inventory management technique enables the Company
to offer a greater range of products without increasing inventory requirements.

The Company has historically attempted to maximize product availability and
delivery response times while minimizing inventory levels to reduce the risk of
product obsolescence and price fluctuations. Most products are stocked to
provide only a 10 to 30 day supply. During Fiscal 1997, the Company turned its
inventory an average of 19 times per year compared to 17 times in Fiscal 1996.
The Company's management information system provides perpetual inventory
management and real-time transaction processing for all product receipts and
shipments. The Company conducts frequent physical inventory cycle counts and
reconciles such inventory to the Company's perpetual inventory records.
Historically, the Company's inventory shrinkage has been less than 0.5% of net
sales.

MANAGEMENT INFORMATION SYSTEMS

The Company's operations are computerized with respect to inventory,
accounts receivable, accounts payable, order entry, payroll and general ledger
software systems, and such information is continuously updated. Each of the
Company's locations operate on an interactive basis. The Company utilizes its

7
9

management information systems ("MIS") to monitor inventory levels and sales
trends, assist in purchase decisions, monitor customer credit status and provide
product availability, order status and pricing information to customers.

The Company has allocated approximately $2.0 million to be expended in the
year ended June 30, 1998 ("Fiscal 1998") to significantly upgrade its MIS,
including installation of a new integrated software system for order entry,
purchasing, inventory, distribution and accounting, equipping virtually all
sales executives and systems engineers with HP laptop computers, upgrading
desktop personal computer hardware and software, and enhancing its company-wide
electronic mail system. Management believes that these upgrades are necessary
for the Company to take advantage of technological MIS improvements, reduce
ongoing operating costs, and enhance its competitive position.

The Company uses the Internet to enhance customer support and interbusiness
correspondence. Internet access provides a convenient communication device
enabling customers to contact their sales, customer service and technical
support representatives via text-based messages.

EMPLOYEES

As of June 30, 1997, the Company employed 400 full-time employees,
consisting of 54 in management (including executive officers), 83 in
administration, 130 in sales and marketing, 46 in technical support and
engineering, 65 in customer service, and 22 in warehouse operations. The Company
considers its relations with its employees to be excellent. The Company has no
employees who are represented by unions.

PATENTS AND TRADEMARKS

The Company does not have any patents or material trademarks and does not
consider patents or trademarks to be significant to its operations.

ITEM 2. PROPERTIES

The Company currently maintains its executive and main administrative
offices in Charlotte, North Carolina and Westwood, Massachusetts. These also
serve as the primary sales offices and distribution centers for the Company's
five regions. The Company distributes most of the products that it sells from
these two distribution centers. The Company also has 25 sales offices in 22
states, leasing approximately 185,000 total square feet at an annual base rent
of approximately $1.9 million. The Company believes that its current facilities
are adequate for its current level of operations and foreseeable needs and has
the physical capacity at most locations to substantially increase its sales
staff. As described above, the Company has announced plans to consolidate its
headquarters and distribution functions in Charlotte. (See Business -- General.)

ITEM 3. LEGAL PROCEEDINGS

On May 22, 1997, MCI Systemhouse, Inc. filed a complaint against the
Company in the Circuit Court for Palm Beach County, Florida seeking contractual
damages in the amount of $2,036,882, plus accrued interest. The litigation
concerns consulting services rendered to the Company by MCI's predecessor, SHL
Systemhouse Corp., in connection with the Company's Management Information
Systems. See "Business -- Management Information Systems". The Company has filed
an answer and counter-claim seeking return of monies previously paid under the
consulting agreement and damages.

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

None.

8
10

PART II

ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been traded on the Nasdaq SmallCap Market
since June 1996 under the symbol "CICC." During the year ended June 30, 1997,
the high and low prices for the Common Stock were $4.75 and $.6875,
respectively.

On September 23, 1997, the closing price of the Common Stock as reported by
Nasdaq was $1.4375 per share. The number of record holders of the Common Stock
as of September 23, 1997 was 14,034,810.

The Company has never paid any dividends on its Common Stock. Pursuant to
the revolving credit agreement between CICS and its principal lender, the
ability of CICS to transfer funds to the Company, and the resulting availability
of funds to the Company for the payment of dividends, is restricted and,
therefore, the Company's ability to pay dividends on its Common Stock is
effectively prohibited. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

9
11

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below for each of the
fiscal years ended June 30, 1995, 1996 and 1997 have been derived from the
audited consolidated financial statements of the Company appearing elsewhere
herein. This data should be read in conjunction with such consolidated financial
statements and other financial information, including the notes thereto,
included elsewhere herein (in thousands except share-related data).

COPLEY SYSTEMS
CORPORATION
(PREDECESSOR) COMPUTER INTEGRATION CORP. AND SUBSIDIARY
-------------- -------------------------------------------------
PERIOD PERIOD
FROM FROM INCEPTION
JULY 1, JULY 29,
1992 1992
THROUGH THROUGH YEAR ENDED JUNE 30,
MARCH 30, JUNE 30, -------------------------------------------------
1993 1993(1) 1994 1995 1996 1997
-------------- -------------- ---------- ---------- ---------- ----------

STATEMENTS OF INCOME DATA:
Net sales................................... $76,770 $ 27,134 $ 103,786 $ 209,226 $ 449,954 $ 417,532
Cost of goods sold.......................... 69,563 24,290 93,068 188,685 407,313 378,109
------- ---------- ---------- ---------- ---------- ----------
Gross profit................................ 7,207 2,844 10,718 20,541 42,641 39,423
Selling, general and administrative
expenses.................................. 5,484 2,351 8,755 15,975 37,563 43,656
------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operation................ 1,723 493 1,963 4,566 5,078 (4,233)
Interest and other expenses(2).............. 224 218 1,611 2,565 5,324 4,480
Income (loss) before income taxes and
extraordinary item........................ 1,499 275 352 2,001 (246) (8,713)
Provision (benefit) for income taxes(3)..... 569 125 265 868 157 (2,749)
------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item..... 930 150 87 1,133 (403) (5,964)
Extraordinary item, net of taxes............ -- -- 165 -- -- --
------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........................... 930 150 252 1,133 (403) (5,964)
Required dividends on preferred stock....... -- 93 171 202 218 218
------- ---------- ---------- ---------- ---------- ----------
Income (loss) applicable to common stock.... $ 930 $ 57 $ 81 $ 931 $ (621) $ (6,182)
======= ========== ========== ========== ========== ==========
SHARE-RELATED DATA(4):
Income (loss) before extraordinary item..... $ .01 $ (.02) $ .15 $ (.09) $ (.89)
Extraordinary item.......................... -- .03 -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) applicable to common stock.... $ .01 $ .01 $ .15 $ (.09) $ (.89)
========== ========== ========== ========== ==========
Common shares and equivalents
outstanding(4)............................ 5,034,181 5,900,000 6,409,000 6,916,383 6,976,661
========== ========== ========== ========== ==========
JUNE 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
BALANCE SHEET DATA:
Working capital............................. $ 6,566 $ 4,614 $ 9,222 $ 22,475 $ 19,559
Total assets................................ 24,457 29,785 54,755 114,991 102,661
Total short-term debt....................... 2,378 8,936 9,955 19,315 9,277
Term note, less current portion............. 5,101 5,037 12,508 27,500 27,500
Subordinated note, less current portion..... 2,481 11 -- 1,611 1,343
Total long-term debt........................ 7,582 5,048 12,508 29,619 29,059
Shareholders' equity........................ 2,583 2,780 6,591 10,246 4,216

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

(1) The Company acquired all of the outstanding capital stock of Copley
effective as of March 30, 1993. Includes the operating results of Copley
from March 31, 1993 through June 30, 1993.

(2) For the years ended June 30, 1994 and 1996, respectively, includes $509,000
and $486,000, respectively, of costs associated with public offerings.

(3) For all periods presented prior to March 31, 1993, Copley was taxed as an S
Corporation pursuant to Subchapter S of the Internal Revenue Code of 1986,
as amended. Net income reflects a provision for income taxes as if Copley
were subject to regular corporate income taxes based on the tax laws in
effect during such periods.

(4) Prior to its acquisition by the Company, Copley had 1,088 shares of Common
Stock outstanding. Earnings per share data has not been presented for Copley
for all periods presented prior to March 31, 1993, as such historical
information would not be meaningful.

10
12

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

GENERAL

The Company began operations in 1992 with the organization of CICS, and
acquired Copley on March 30, 1993 and Dataprint effective July 1, 1994.
Effective July 1, 1995, the Company acquired substantially all the assets and
operations of Cedar, which acquisition increased the Company's net sales, on a
pro forma basis, for the year ended June 30, 1995 by 121.1%. All historical
financial information relates to the Company.

RESULTS OF OPERATIONS

All financial results related to operations of the Company include
historical results for the years ended June 30, 1997, June 30, 1996, and June
30, 1995 ("Fiscal 1997", "Fiscal 1996," and "Fiscal 1995", respectively). The
pro forma information for Fiscal 1995 ("Pro Forma Fiscal 1995") relates to the
Company's and Cedar's operations, combined on a pro forma basis, as if the
acquisition of Cedar had occurred on July 1, 1994. The following summary tables
have been presented to set forth certain income statement data, in dollars and
as a percentage of net sales, to assist in the understanding of the explanation
of operations for the periods ended June 30, 1997, 1996 and 1995. The pro forma
consolidated financial information does not purport to represent what the
Company's financial position or results of operations would have been if the
acquisition had in fact occurred on such date or as of the beginning of such
period.

YEAR ENDED JUNE 30,
------------------------------------------------------
1995 1995 1996 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(IN THOUSANDS)

Net Sales............................... $ 209,226 $ 462,543 $ 449,954 $ 417,532
Gross Profit............................ 20,541 40,641 42,641 39,423
Selling, General & Administrative
Expense............................... 15,975 28,396 37,563 43,656
Income (loss) from Operations........... 4,566 12,245 5,078 (4,233)
Interest Expense........................ 2,565 5,092 4,838 4,480
Net Income (loss)....................... 1,133 4,255 (403) (5,964)

YEAR ENDED JUNE 30,
------------------------------------------------------
1995 1995 1996 1997
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- ----------
(AS A PERCENT OF NET SALES)

Net Sales................................. 100.0% 100.0% 100.0% 100.0%
Gross Profit.............................. 9.8 8.8 9.5 9.4
Selling, General & Administrative
Expense................................. 7.6 6.1 8.3 10.5
Income (loss) from Operations............. 2.2 2.6 1.1 (1.0)
Interest Expense.......................... 1.2 1.1 1.1 1.1
Net Income (loss)......................... 0.5 0.9 (0.1) (1.4)

FISCAL 1997 COMPARED TO FISCAL 1996

Net sales for Fiscal 1997 were $417.5 million compared to $450.0 million
for Fiscal 1996, a decrease of $32.5 million or 7.2%. This decrease was
primarily due to a loss in customer base resulting from the distraction and lack
of focus of the Company's organization associated with changes in the Company's
executive management and the planned relocation to Atlanta which was announced
in June 1996 and canceled in October 1996. The Company has taken various actions
to refocus its employees, which has recently resulted in increased sales levels.

Gross profits decreased to $39.4 million in Fiscal 1997 from $42.6 million
in Fiscal 1996, a decrease of $3.2 million or 7.5%. Gross profit margins
decreased to 9.4% in Fiscal 1997 compared to 9.5% in Fiscal 1996. The decrease
in gross profits primarily resulted from the 7.2% decrease in sales discussed
above.

11
13

Selling, general and administrative ("SG&A") costs were $43.7 million in
Fiscal 1997 compared to $37.6 million in Fiscal 1996. SG&A expenses, as a
percentage of net sales, increased to 10.5% in Fiscal 1997 compared to 8.3% in
Fiscal 1996 as explained below.

During the fourth quarter of Fiscal 1996, the Company recorded a charge of
$2.3 million for restructuring costs associated with a planned consolidation of
the Company's headquarters and certain sales and distribution facilities and
relocation to Atlanta. These costs included approximately $1.7 million for
severance benefits for approximately 125 affected employees, $400,000 for the
write-off of property and equipment, and approximately $200,000 for lease
extension and termination costs and other activities to close existing
facilities. On October 30, 1996 the Company decided not to proceed with the
consolidation of the Company's headquarters, sales and distribution facilities
and relocation to Atlanta. It decided instead to maintain these functions in its
existing facilities in Westwood, MA and Charlotte, NC. This decision primarily
reflected the Company's desire to retain certain key personnel for whom
relocation was not a viable option, as well as other cost considerations.
Accordingly, during the second quarter of Fiscal 1997, the Company reversed
approximately $1.8 million of the original $2.3 million charge for restructuring
costs. The remaining restructuring accrual balance of $128,000 as of June 30,
1997 primarily represents obligations for future severance payments related to
the canceled Atlanta consolidation.

During Fiscal 1996 and the first half of Fiscal 1997, the Company invested
approximately $4.2 million in a management information system ("MIS System")
which was intended to replace the multiple systems then in use. The Company
concluded that the MIS system did not provide minimum required functionality and
that the costs required to achieve such functionality did not justify further
investment and therefore decided to abandon this MIS System and implement an
alternative solution. As a result the Company recorded a charge of approximately
$4.2 million in Fiscal 1997 associated with the write-off of its investment in
this MIS System ("MIS Charge"). The Company believes that a portion of this
write-off was caused by the failure of consultants, previously engaged by the
Company to assist with the implementation of the MIS System, to perform as
required under their contracts with the Company. The Company is currently in
litigation with such consultants concerning remaining amounts allegedly due
under the consulting contracts. (See Item 3 Legal Proceedings.) There can be no
assurance that the Company will be successful in such litigation and the
consolidated financial statements include these remaining amounts as
liabilities.

Exclusive of the above mentioned restructuring charge reversal and MIS
charge, SG&A expenses were $41.3 million for Fiscal 1997, compared to $35.3
million for Fiscal 1996, an increase of $6.0 million or 17.0%. Fiscal 1997 SG&A
included a charge of approximately $895,000 associated with the termination of a
lease which had been executed in connection with the Company's plans to relocate
to Atlanta. Excluding this and the other charges discussed previously, SG&A
increased $5.1 million or 14.4% from Fiscal 1996 primarily due to higher salary,
severance, and temporary help caused by high employee turnover associated with
the announced, then canceled, relocation to Atlanta and changes in executive
management; an enhanced telecommunications system; and additional travel
expenses.

Interest expense decreased to $4.5 million for Fiscal 1997 from $4.8
million during Fiscal 1996, as a result of decreased outstanding indebtedness
due to lower levels of inventory associated with improved inventory turnover and
the 7.2% decrease in net sales.

As a result of the foregoing, the Company's net loss increased by
approximately $5.6 million to $6.0 million in Fiscal 1997 from a loss of
approximately $403,000 in Fiscal 1996.

FISCAL 1996 COMPARED TO PRO FORMA FISCAL 1995

Net sales for Fiscal 1996 were $450.0 million compared to $462.5 million
for Pro Forma Fiscal 1995, a decrease of $12.5 million or 2.7%. This decrease
was primarily due to reduced sales volume at existing locations in the Midwest
acquired as a result of the Cedar Acquisition.

Gross profits increased to $42.6 million in Fiscal 1996 from $40.6 million
in Pro Forma Fiscal 1995, an increase of $2.0 million or 4.9%. Gross profit
margins increased to 9.5% in Fiscal 1996 compared to 8.8% in Pro Forma Fiscal
1995 as a result of increased emphasis by the Company's sales organization on
transactions

12
14

involving products with relatively higher profit margins, such as PCs, and
decreased reliance on high volume, marginally profitable transactions.

SG&A expenses increased by $9.2 million or 32.4% to $37.6 million in Fiscal
1996 compared to $28.4 million in Pro Forma Fiscal 1995. The primary components
of the Company's SG&A expense (66.9%) are salaries and benefits. Salaries and
benefits were $25.1 million in Fiscal 1996, an increase of 19.5% or $4.1 million
from Pro Forma Fiscal 1995. The majority of the increase was attributable to a
9.9% increase in employee headcount during the year to approximately 500 at June
30, 1996. This increase was a direct result of putting in place a new executive
management team and increased sales representatives during the year, along with
redundant positions required as a result of relocating distribution and
administration functions from the Midwest to Massachusetts during the fourth
quarter of 1996. In January 1996, the Company began offering health and other
benefits to employees acquired in connection with the Cedar Acquisition,
resulting in additional salaries and benefit costs of approximately $200,000
during Fiscal 1996.

Occupancy cost, which consists of rent and related utility costs, increased
23.5% to $2.1 million in Fiscal 1996 compared to $1.7 million in Pro Forma
Fiscal 1995. This increase is primarily attributable to relocating the Company's
distribution facility in the Los Angeles area to a new free standing facility,
and more than doubling the size of the Company's warehouse in Westwood, MA. The
balance of the increase was a result of increased rents for existing locations.

Depreciation and amortization increased to $1.5 million in Fiscal 1996 from
$1.2 million in Pro Forma Fiscal 1995, primarily as a result of increased
depreciation expense related to current year additions of fixed assets.

Other SG&A expenses increased $2.1 million to $6.6 million in Fiscal Year
1996 compared to $4.5 million in Pro Forma Fiscal 1995. The increase was
attributable to increased legal, professional and recruiting fees, higher than
expected travel costs associated with the consolidation of distribution and
administrative functions in Westwood, MA and overall higher other selling and
administrative costs.

During the fourth quarter of 1996, the Company recorded a special charge of
$2.3 million for restructuring costs associated with the planned (and
subsequently canceled) relocation and consolidation of the Company's
headquarters, sales and distribution facilities to Atlanta, Georgia.

During Fiscal 1996, the Company incurred costs of approximately $486,000
related to expenses incurred in connection with the registration of the
Company's securities for a public offering which was not completed. There were
no such costs in Pro Forma Fiscal 1995.

As a result of the foregoing, the Company incurred a net loss of
approximately $403,000 compared to net income of $4.3 million in Pro Forma
Fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through the private
sale of equity securities and borrowings under its credit facility. As of June
30, 1997, the Company had cash of $1.4 million, accounts receivable of $63.9
million, working capital of $19.6 million and available funds under its credit
facility of approximately $13.0 million.

Net cash provided by operating activities during Fiscal 1997 was $6.3
million primarily as a result of the $6.4 million reduction in inventories and
the $6.1 million increase in accounts payable, partially offset by an increase
of $2.9 million in accounts receivable and $2.1 million in prepaid expenses and
other assets.

Net cash used in investing activities during Fiscal 1997 was approximately
$1.7 million primarily as a result of purchases of office and computer
equipment. Financing activities used approximately $10.9 million primarily as a
result of a pay down in the outstanding balance on the Company's line of credit.

On September 30, 1996, the Company amended its financing agreement with its
primary lender, Congress Financial Corporation ("Congress"), effective June 30,
1996, which included an increase in the maximum available credit from $70
million to $77 million (subject to a borrowing limit based on eligible

13
15

inventory and accounts receivable) and modifications of certain financial
covenants ("Credit Facility"). The Credit Facility is collateralized by
substantially all of the Company's accounts receivable and inventory and
consists of a $27.5 million, 3-year term loan and a $49.5 million revolving line
of credit. Interest on the Credit Facility accrues at 1.0% over the prime rate
of CoreStates Bank, N.A. (effective rate of 9.5% at June 30, 1997). The Credit
Facility, which is used for working capital, will expire in July 1998 and will
be automatically renewable for one year at the option of Congress, upon certain
terms and conditions. The Credit facility requires that the Company maintain, at
all times, certain net worth and working capital levels and restricts the
payment of dividends.

During Fiscal 1996, the Company made net repayments of $10.0 million under
the Credit Facility. At September 19, 1997, the Company had an outstanding
balance under the Credit Facility of $34.2 million.

During Fiscal 1997 the Company entered into an agreement with a company to
finance product purchases. The amount outstanding under this agreement is
included in accounts payable in the consolidated balance sheets. In connection
with this facility, the lender has a lien on the inventory financed. The Company
has a $1.5 million letter of credit issued under its Credit Facility with
Congress in favor of the lender.

The Company's future capital requirements for operations include financing
the growth of working capital items associated with sales growth including
accounts receivable and inventory, upgrading management information systems,
enhancing and increasing its professional services capabilities, consolidating
its operations, and funding acquisitions. The Company believes that cash flow
from operations, funds from the equity investment in July, 1997 as previously
discussed, and borrowings under the Credit Facility will provide sufficient cash
to fund its operations and meet current obligations for the fiscal year ending
June 30, 1998. In the event the Company expands its operations or makes
acquisitions that would require funds in excess of its existing resources, it
would have to seek additional debt or equity financing. There can be no
assurance that the Company could obtain such financing or that such financing
would be available on terms acceptable to the Company.

During the fiscal years ended June 30, 1997, 1996 and 1995, the Company's
capital expenditures were approximately $2.2 million, $3.4 million and $917,000,
respectively. The Company has allocated approximately $2.0 million to be
expected in Fiscal 1998 to significantly upgrade its MIS, including installation
of a new integrated software system for order entry, purchasing, inventory,
distribution and accounting, equipping virtually all sales executives and
systems engineers with HP laptop computers, upgrading desktop personal computer
hardware and software, and enhancing its company-wide electronic mail system.
Management believes that these upgrades are necessary for the Company to take
advantage of technological MIS improvements, reduce ongoing operating costs, and
enhance its competitive position.

In connection with the acquisition of Cedar, the Company has agreed to pay
the seller, on July 2, 1998, an amount equal to the difference between the
market price per share on that date for the 515,000 shares of Common Stock owned
by the Seller, and $10 per share. On September 23, 1997, the closing price of
the Common Stock as reported by Nasdaq was $1.4375 per share. The Company
believes that such guarantee can be satisfied from cash flow from operations or
borrowings under the Credit Facility.

As previously discussed in Item I, in September 1997, the Company announced
a new logistics strategy and consolidation of headquarters and distribution
functions into new facilities in Charlotte, NC. The consolidation is expected to
be completed by December 31, 1997. The Company's preliminary estimate of
non-recurring costs associated with the consolidation is approximately $2
million. These costs include employee severance benefits, reimbursed employee
relocation expenses, recruiting, facility relocation expenses, and the write-off
of certain property and equipment. This estimate also includes the costs
associated with the duplication of certain employee positions and redundant
facilities during the transition period.

14
16

The Company has historically attempted to maximize product availability and
delivery response times while minimizing inventory levels to reduce the risk of
product obsolescence and price fluctuations. Most products are stocked to
provide only a 10 to 30 day supply. During Fiscal 1997, the Company turned its
inventory an average of 19 times per year compared to 17 times in Fiscal 1996.
The Company's management information system provides perpetual inventory
management and real-time transaction processing for all product receipts and
shipments. The Company conducts physical inventory cycle counts and reconciles
such inventory to the Company's perpetual inventory records. Historically, the
Company's inventory shrinkage has been less than 0.5% of net sales.

Most of the Company's major suppliers, including HP and Sun, provide price
protection, in the form of credits, against price reductions by the supplier
between the initial sale to the Company and the subsequent sale by the Company
to the ultimate consumer. Credits, refunds or other payments to which the
Company has been entitled to historically by reason of price protection have
offset most of any inventory write-downs the Company has incurred as a result of
such price reductions. Net inventory write-downs after credits or refunds by
suppliers amounted to less than 0.1% of net sales for each of Fiscal 1997 and
Fiscal 1996, respectively. Such suppliers accept defective merchandise returned
within three to six months after shipment to the Company and its major suppliers
permit the Company to return slow-moving current inventory in exchange for other
inventory, subject to certain volume limitations.

The Company attempts to control losses on credit sales by closely
monitoring customers' creditworthiness through its credit department, which
maintains detailed, computerized, current information on each customer's payment
history and other relevant credit information. The Company also subscribes to a
national credit reporting service that provides credit rating information
regarding customers on an on-line basis. Bad debt expense as a percentage of net
sales was less than 0.5% for each of Fiscal 1997 and 1996.

This Form 10-K contains forward-looking statements that are subject to
risks and uncertainties. Statements indicating that the Company "expects,"
"estimates," or "believes" are forward-looking as are all other statements
concerning future financial results, product offerings or other events that have
not yet occurred. There are several important factors that could cause actual
results or events to differ materially from those anticipated by the
forward-looking statements contained herein. Such factors include, but are not
limited to: the growth rates of the Company's market segments; the position of
the Company's products in those segments; the Company's ability to effectively
manage business, and the growth of its business, in a rapidly changing
environment; the timing of new product introductions; inventory risks due to
changes in market conditions; the competitive environment in the computer
industry; the Company's ability to establish successful strategic relationships;
and general economic conditions. Subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by cautionary statements in this paragraph
and elsewhere in this report, and in other reports filed by the Company with the
Securities and Exchange Commission, and in the Company's Registration Statements
on Form S-3 (File Nos. 333-33417 and 333-84472), filed with the Securities and
Exchange Commission on August 12, 1997, including the risk factors sections
thereof.

SEASONAL FACTORS

Because of the broad range of markets served by the Company, the Company's
sales have not historically been subject to seasonal fluctuations.

INFLATION

Inflation has not had a significant impact on the Company's operations as
technological advances and industry competition have generally caused
microcomputer equipment prices to decline. The Company has experienced few price
increases and, historically, has passed them on to its customers, since prices
charged by the Company are generally not fixed by long-term contracts.

15
17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

I. AUDITED FINANCIAL STATEMENTS

PAGE
----

COMPUTER INTEGRATION CORP.
Report of Independent Certified Public Accountants.................................... 17

Audited Consolidated Financial Statements

Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996..................... 18
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and
1995................................................................................ 19
Consolidated Statements of Shareholders' Equity for Years Ended June 30, 1997, 1996
and 1995............................................................................ 20
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and
1995................................................................................ 21
Notes to Consolidated Financial Statements............................................ 22

Schedule I -- Condensed Financial Information of Registrant........................... 34
Schedule II -- Valuation and Qualifying Accounts...................................... 37

16
18

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors
Computer Integration Corp.

We have audited the accompanying consolidated balance sheets of Computer
Integration Corp. and Subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Computer
Integration Corp. and Subsidiary at June 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth herein.

West Palm Beach, Florida
August 13, 1997, except for the second
paragraph of Note 13 as to
which the date is September 18, 1997

17
19

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)

JUNE 30,
---------------------
1997 1996
-------- --------

ASSETS
Current assets:
Cash...................................................................................... $ 1,360 $ 7,599
Accounts receivable, less allowance of $1,362 in 1997 and $1,351 in 1996 for doubtful
accounts................................................................................ 63,905 62,743
Inventories............................................................................... 17,350 23,706
Deferred income taxes..................................................................... 2,952 2,169
Prepaid expenses and other current assets................................................. 2,881 658
-------- --------
Total current assets............................................................... 88,448 96,875
Furniture and office equipment, net of accumulated depreciation of $2,157 in 1997 and $1,635
in 1996................................................................................... 2,145 3,177
Management information system............................................................... -- 1,834
Other assets:
Goodwill, net of accumulated amortization of $1,814 in 1997 and $1,137 in 1996............ 11,770 12,447
Other....................................................................................... 298 658
-------- --------
12,068 13,105
-------- --------
Total assets....................................................................... $102,661 $114,991
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable under line of credit........................................................ $ 8,717 $ 18,747
Accounts payable.......................................................................... 52,276 46,171
Accrued expenses.......................................................................... 6,348 5,862
Restructuring accrual..................................................................... 128 2,300
Income taxes payable...................................................................... -- 132
Current portion of subordinated notes payable............................................. 268 302
Current portion of capital lease obligations.............................................. 292 266
Other current liabilities................................................................. 860 620
-------- --------
Total current liabilities.......................................................... 68,889 74,400
Noncurrent liabilities:
Term note payable......................................................................... 27,500 27,500
Subordinated notes payable, less current portion.......................................... 1,343 1,611
Capital lease obligations, less current portion........................................... 216 508
Deferred income taxes..................................................................... 497 326
Other..................................................................................... - 400
-------- --------
Total noncurrent liabilities....................................................... 29,556 30,345
Commitments
Shareholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized; issued and outstanding as
follows:
Series A, 9% cumulative, convertible, redeemable preferred stock, stated value $100 per
share; 40,000 shares authorized, -0- shares issued and outstanding at June 30, 1997 and
1996................................................................................... -- --
Series B, 9% cumulative, convertible preferred stock, $.001 par value; 250 shares
authorized, -0-shares issued and outstanding at June 30, 1997 and 1996................. -- --
Series C, 9% cumulative, convertible, redeemable preferred stock, stated value $4,000
per share; 250 shares authorized, -0- shares issued and outstanding at June 30, 1997
and 1996............................................................................... -- --
Series D, 9% cumulative, convertible, redeemable preferred stock, stated value $100 per
share; 40,000 shares authorized, 19,036 and 19,250 shares issued and outstanding at
June 30, 1997 and 1996, respectively................................................... -- --
Series E, 9% cumulative, convertible, redeemable preferred stock, stated value $4,000
per share; 250 shares authorized, 125 shares issued and outstanding at June 30, 1997
and 1996............................................................................... -- --
Common stock, $.001 par value, 20,000,000 shares authorized, 7,084,810 and 6,944,700
shares issued and outstanding at June 30, 1997 and 1996, respectively................... 7 7
Additional paid-in capital................................................................ 9,854 9,810
(Accumulated deficit) retained earnings................................................... (5,645) 429
-------- --------
Total shareholders' equity......................................................... 4,216 10,246
-------- --------
Total liabilities and shareholders' equity......................................... $102,661 $114,991
======== ========

See accompanying notes.

18
20

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)

YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
--------- --------- ---------

Net sales................................................. $ 417,532 $ 449,954 $ 209,226
Cost of goods sold........................................ 378,109 407,313 188,685
--------- --------- ---------
Gross profit.............................................. 39,423 42,641 20,541
Operating expenses:
Selling, general and administrative..................... 41,338 35,263 15,975
Restructuring charge (reversal)......................... (1,843) 2,300 --
Loss on abandonment of management information system.... 4,161 -- --
--------- --------- ---------
43,656 37,563 15,975
--------- --------- ---------
(Loss) income from operations............................. (4,233) 5,078 4,566
Interest expense.......................................... 4,480 4,838 2,565
Other -- costs associated with terminated public
offering................................................ -- 486 --
--------- --------- ---------
(Loss) income before income taxes......................... (8,713) (246) 2,001
(Benefit) provision for income taxes...................... (2,749) 157 868
--------- --------- ---------
Net (loss) income......................................... (5,964) (403) 1,133
Less required dividends on preferred stock................ (218) (218) (202)
--------- --------- ---------
(Loss) income applicable to common stock.................. $ (6,182) $ (621) $ 931
========= ========= =========
(Loss) income per common share............................ $ (.89) $ (.09) $ .15
========= ========= =========

Common shares and common share equivalents outstanding.... 6,976,661 6,916,383 6,409,000
========= ========= =========

See accompanying notes.

19
21

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)

(ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFICIT)
--------------- ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ --------- ------ ---------- ------------

Balance at June 30, 1994................... -- $-- 5,900,000 $ 6 $2,636 $ 138
Proceeds from sale of Series A preferred
stock, less offering costs of $26..... 19,250 -- -- -- 1,898 --
Issuance of Series B and Series C
preferred stock in connection with the
acquisition of Dataprint, Inc. ....... 250 -- -- -- 1,000 --
Conversion of Series B preferred stock
into common stock..................... (125) -- 500,000 -- -- --
Net income............................... -- -- -- -- -- 1,133
Dividends declared on preferred stock
($8.94 and $390.57 per share for
Series A and Series C,
respectively)......................... -- -- -- -- -- (221)
------ --- --------- --- ------ --------
Balance at June 30, 1995................... 19,375 -- 6,400,000 6 5,534 1,050
Issuance of common stock in connection
with the acquisition of substantially
all of the assets of Cedar Computer
Center, Inc., less present value
assigned to guarantee of $904......... -- -- 515,000 1 4,246 --
Exchange of Series A and Series C
preferred stock for Series D and
Series E preferred stock,
respectively.......................... -- -- -- -- -- --
Exercise of stock options................ -- -- 25,250 -- 25 --
Common stock grants to employees......... -- -- 4,450 -- 5 --
Net loss................................. -- -- -- -- -- (403)
Dividends declared on preferred stock
($9.00 and $360.00 per share for
Series D and Series E,
respectively)......................... -- -- -- -- -- (218)
------ --- --------- --- ------ --------
Balance at June 30, 1996................... 19,375 -- 6,944,700 7 9,810 429
Conversion of Series D preferred stock
into common stock..................... (214) -- 8,572 -- -- --
Exercise of stock options................ -- -- 131,528 -- 151 --
Common stock grant to employee........... -- -- 10 -- -- --
Net loss................................. -- -- -- -- -- (5,964)
Dividends declared on preferred stock
($9.00 and $360.00 per share for
Series D and Series E,
respectively)......................... -- -- -- -- (107) (110)
------ --- --------- --- ------ --------
Balance at June 30, 1997................... 19,161 $-- 7,084,810 $ 7 $9,854 $ (5,645)
====== === ========= === ====== ========

See accompanying notes.

20
22

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED JUNE 30,
-----------------------------
1997 1996 1995
-------- -------- -------

OPERATING ACTIVITIES
Net (loss) income.................................................................... $ (5,964) $ (403) $ 1,133
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation expense............................................................. 895 864 502
Goodwill amortization............................................................ 677 629 364
Deferred loan cost amortization.................................................. 245 282 206
Provision for bad debts.......................................................... 1,707 1,639 375
Restructuring charge (reversal).................................................. (1,843) 2,300 --
Common stock grants to employees................................................. -- 5 --
Deferred income taxes............................................................ (612) (1,279) (105)
Loss on abandonment of management information system............................. 4,161 -- --

Changes in operating assets and liabilities, exclusive of effects of purchase
business combinations:
Accounts receivable............................................................ (2,869) 6,296 (8,822)
Inventories.................................................................... 6,356 3,895 977
Prepaid expenses and other assets.............................................. (2,108) (427) (552)
Accounts payable............................................................... 6,105 (19,138) 4,765
Accrued expenses and other current liabilities................................. (44) 630 (844)
Other noncurrent liabilities................................................... (400) 90 (95)
-------- -------- -------
Net cash provided by (used in) operating activities.................................. 6,306 (4,617) (2,096)
INVESTING ACTIVITIES
Purchase of substantially all of the assets of Cedar Computer Center, Inc. .......... (500) (9,892) (274)
Purchase of Dataprint, Inc., net of cash acquired.................................... (38) (462) 260
Acquisition of property and equipment................................................ (1,142) (1,583) (917)
-------- -------- -------
Net cash used in investing activities................................................ (1,680) (11,937) (931)
FINANCING ACTIVITIES
Proceeds from sale of capital stock, net of offering costs........................... -- -- 1,831
Payments of deferred loan costs...................................................... (200) -- --
Proceeds from exercise of stock options.............................................. 151 25 --
Net (decrease) increase in notes payable under line of credit........................ (10,030) 8,826 (484)
Proceeds received on term note payable............................................... -- 15,000 2,500
Repayments on subordinated notes payable............................................. (303) (164) (780)
Payment of capital lease obligations................................................. (265) (114) (39)
Preferred stock dividends paid....................................................... (218) (218) (113)
-------- -------- -------
Net cash (used in) provided by financing activities.................................. (10,865) 23,355 2,915
-------- -------- -------
Net (decrease) increase in cash...................................................... (6,239) 6,801 (112)
Cash at beginning of period.......................................................... 7,599 798 910
-------- -------- -------
Cash at end of period................................................................ $ 1,360 $ 7,599 $ 798
======== ======== =======
SUPPLEMENTAL INFORMATION
Interest paid........................................................................ $ 4,502 $ 4,416 $ 2,355
======== ======== =======
Income taxes paid.................................................................... $ 398 $ 1,513 $ 1,202
======== ======== =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Preferred stock dividends accrued included in other current liabilities.............. $ 107 $ 108 $ 108
======== ======== =======
Costs associated with management information system included in accrued expenses..... $ 1,048 $ 989 $ --
======== ======== =======
Costs associated with management information system under capital leases............. $ -- $ 845 $ --
======== ======== =======

See Note 2 for disclosure of noncash transactions associated with the
acquisition of substantially all of the assets of Cedar Computer Center, Inc.
and the acquisition of Dataprint, Inc.

See accompanying notes.

21
23

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of Computer
Integration Corp. (CIC), and its wholly-owned operating subsidiary, CIC Systems,
Inc. (CICS)(collectively the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.

The Company is a reseller of microcomputers, workstations and related
products, services and solutions to large and medium-sized corporations,
federal, state and local governmental entities and colleges and universities
throughout the United States. The Company distributes a broad range of
microcomputer related products from major hardware manufacturers and software
developers which include Hewlett-Packard Company (see Note 3); Compaq Computer
Corporation; Sun Microsystems Computer Corporation; Toshiba America Information
Systems, Inc.; International Business Machines; Lexmark International; NEC
Technologies, Inc.; 3COM, Inc.; Oracle Corporation; Netscape Communications
Corporation; Sterling Commerce, Inc.; Novell, Inc.; and Microsoft Corporation.

Concentration of Credit Risk

Accounts receivable are primarily from business, governmental, and
educational customers located throughout the United States. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains an allowance for doubtful accounts at a level
which management believes is sufficient to cover probable credit losses.

Inventories

Inventories, which consist of finished goods available for sale, are valued
at the lower of average cost or market value.

Revenue Recognition

The Company recognizes revenue upon the shipment of ordered merchandise and
as services are rendered.

Furniture and Office Equipment

Furniture and office equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from three to seven years.

Goodwill

Goodwill related to acquired businesses is being amortized on the
straight-line method over a 20-year period.

The Company, at each balance sheet date, evaluates the recovery of the
carrying amount of goodwill by determining if any impairment indicators are
present. These indicators include duplication of resources resulting from
acquisitions, income derived from businesses acquired and other factors. If this
review indicates that goodwill will not be recoverable, as principally
determined based on the estimated undiscounted cash flows of the entity over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of future cash flows.

22
24

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair Values of Financial Instruments

The carrying amount of cash approximates its fair value. The fair value of
the Company's notes payable and capital lease obligations are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying value
of these instruments approximates fair value at June 30, 1997 and 1996.

Earnings Per Common Share

Earnings per common share are calculated by dividing net earnings
applicable to common stock by the weighted average of common shares and, if
dilutive, common share equivalents outstanding during the periods. Common share
equivalents represent the potentially dilutive effect of the assumed exercise of
certain outstanding stock options and warrants. The effect of convertible
preferred stock is not included in the calculation since it does not have a
dilutive effect on the earnings per common share.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its employee stock options because, as discussed in Note 6, the
alternative fair value accounting provided for under Financial Accounting
Standards Board (FASB) Statement No. 123, Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

Accounting Pronouncement to be Adopted in Future Periods

In March 1997, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 requires companies with complex
capital structures that have publicly held common stock or common stock
equivalents to present both basic and diluted earnings per share (EPS) on the
face of the income statement. The presentation of basic EPS replaces the
presentation of primary EPS currently required by APB Opinion No. 15, Earnings
Per Share. Basic EPS is calculated as income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period. Diluted EPS (previously referred to as fully diluted EPS) is calculated
using the "if converted" method for convertible securities and the treasury
stock method for options and warrants as prescribed by APB Opinion No. 15. This
statement is effective for financial statements issued for interim and annual
periods ending after December 15, 1997. The Company does not believe the
adoption of SFAS No. 128 in fiscal 1998 will have a significant impact on the
Company's reported EPS.

Reclassifications

Certain reclassifications have been made to the 1996 consolidated financial
statements to conform with the 1997 presentation. These reclassifications did
not have a material impact on the Company's consolidated financial position or
results of operations.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

23
25

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACQUISITIONS

Effective July 1, 1995, the Company acquired substantially all of the
assets and assumed all of the trade payables and certain other liabilities of
Cedar Computer Center, Inc. (Cedar), an Iowa corporation, for a combination of
cash, notes, and securities of the Company. The purchase price for the net
assets of Cedar and related acquisition costs consisted of approximately
$9,865,579 in cash, $3,760,000 of subordinated promissory notes, $515,000
representing the fair value at the date of acquisition of 515,000 shares of the
Company's common stock and $3,731,427 representing the fair value of the
Company's guarantee that the common stock will have a market value of $10 per
share at the end of three years following the sale. The fair value of the
Company's guarantee is included in additional paid-in capital in the
consolidated balance sheets. Any payments required to be made by the Company
under the guarantee will first be applied against the amount recorded and any
excess will be charged against earnings in the period paid. The cash portion of
the purchase price was obtained from the Company's revolving credit facility
from Congress Financial Corporation (New England).

The total purchase price of $17,872,006 was allocated to assets acquired
and liabilities assumed, based on their respective estimated fair values. The
excess of the purchase price over the aggregate amount assigned to the
identifiable net assets acquired was recorded as an intangible asset (goodwill)
which is being amortized using the straight-line method over 20 years. The
initial allocation of the purchase price is summarized as follows (in
thousands):

Accounts receivable........................................ $ 40,773
Inventories................................................ 16,052
Furniture and office equipment............................. 765
Prepaid expenses........................................... 156
Accounts payable and accrued expenses...................... (44,063)
--------
Fair value of assets acquired, net of liabilities assumed.. 13,683
Goodwill................................................... 4,189
--------
$ 17,872
========

The asset purchase agreement related to the acquisition of Cedar provided
for adjustment of the purchase price based on the ultimate realization of
certain assets and the assumption of certain liabilities. During fiscal 1996, as
a result of such adjustments, the asset purchase agreement was amended to
reflect a reduction of $2,025,016 in the net assets acquired and a corresponding
reduction in the purchase price of $1,682,780 through a reduction of
subordinated seller notes. Goodwill increased by $342,236 as a result of this
purchase price adjustment.

At the time Cedar was acquired, management, with the approval of the Board
of Directors, was assessing the activities conducted at Cedar to determine which
functions, if any, were duplicative and should be eliminated. This assessment,
which was completed in the second quarter of fiscal 1996, resulted in a plan to
exit certain activities conducted by Cedar and resulted in the accrual of
employee termination benefits of $311,000, write-off of assets no longer
required of $200,000, lease termination payments of $52,000 and other costs
associated with the facility closing of $237,000. A corresponding increase in
goodwill of $800,000 was recorded. While these actions were substantially
completed at June 30, 1996, approximately $500,000 remained to be paid and was
included in accrued expenses in the consolidated balance sheet at June 30, 1996.

24
26

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The results of operations of Cedar have been included in the Company's
consolidated statements of operations since the effective date of acquisition,
July 1, 1995. The following summarizes unaudited pro forma results of operations
for the year ended June 30, 1995 assuming the acquisition occurred at July 1,
1994 (in thousands except per share data).

Sales............................................. $462,543
Net income........................................ 4,255
Net income per common share....................... .57

The pro forma results have been prepared for analysis only and do not
purport to be indicative of the results of operations which would have resulted
had the combination been in effect on the date indicated or which may result in
the future.

Effective July 1, 1994, the Company acquired all of the capital stock of
Dataprint, Inc. (Dataprint), a value added reseller of microcomputers and
related equipment and products, in a transaction that was accounted for as a
purchase business combination. The purchase price of $9,650,000 and acquisition
costs of $260,439 were paid with cash of $1,371,089, issuance of notes payable
of $250,000 and $1,000,000 in convertible preferred stock of CIC, direct
proceeds from CICS's revolving line of credit of $7,100,000 and other
liabilities incurred of $189,350. The total purchase price of $9,910,439 was
allocated to assets acquired and liabilities assumed, based on their respective
estimated fair values. The excess of the purchase price over the aggregate
amount assigned to the net tangible assets acquired was recorded as an
intangible asset (goodwill) that is being amortized using the straight-line
method over 20 years. The allocation of the purchase price is summarized as
follows (in thousands):

Cash....................................................... $ 1,631
Accounts receivable........................................ 6,304
Inventories................................................ 4,472
Furniture and office equipment............................. 178
Prepaid expenses........................................... 18
Accounts payable and accrued expenses...................... (8,095)
-------
Fair value of assets acquired, net of liabilities assumed.. 4,508
Goodwill................................................... 5,402
-------
$ 9,910
=======

Based on operating results of Dataprint for the years ended June 30, 1996
and 1995, the Company incurred additional purchase price of $38,000 and
$462,000, respectively, related to performance against a maximum contingent earn
out of $500,000. Such amounts are included in goodwill in the consolidated
balance sheets.

In connection with the Company's acquisition of Dataprint, the Company paid
an acquisition fee of $125,000 to R.G. Farrell, Inc., a company owned and
controlled by the then president of the Company.

3. INVENTORIES

The Company purchases a substantial portion of its inventory from one
supplier, with which the Company has a signed U.S. reseller agreement that
expires on February 28, 1998. The Company purchased approximately $252,900,000
and $264,800,000 in 1997 and 1996, respectively, from this single supplier. At
June 30, 1997 and 1996, amounts due to this supplier included in accounts
payable were approximately $40,400,000 and $33,000,000, respectively.

25
27

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. BORROWINGS

The Company's borrowings consist of the following:

Notes Payable

During 1995, the Company entered into a $31.5 million bank-credit agreement
that provided a $19.0 million revolving line of credit and a $12.5 million term
loan through August 5, 1998. In 1996, the amount available under such agreement
was increased to $77 million and the due date was extended to July 1, 1998. The
allocation between the revolving line and the term loan was $49.5 million and
$27.5 million, respectively. Amounts outstanding under the revolving line of
credit totaled $8,716,575 and $18,746,703 at June 30, 1997 and 1996,
respectively. These amounts outstanding under the revolving line of credit are
due on demand and bear interest payable at 1% over the prime rate of Corestates
Bank, N.A. (9.5% effective rate at June 30, 1997). This credit agreement is
collateralized by substantially all of the Company's trade accounts receivable
and inventory, which have a combined carrying value of approximately $81,255,000
at June 30, 1997.

Under the revolving portion of the line of credit, the Company may borrow
up to a maximum of $49.5 million, including a total of $15 million in the form
of irrevocable letters of credit. Letters of credit issued on behalf of the
Company consist of a $10 million irrevocable letter of credit issued in 1996 to
a major supplier of the Company which partially secures an account payable of
approximately $40.4 million at June 30, 1997 and a $1.5 million irrevocable
letter of credit issued in 1997 to a finance company which partially secures
amounts owed under an inventory financing facility (see inventory financing
facility discussed below). The $27.5 million term note payable is discussed
below. At June 30, 1997, the Company has approximately $13 million available
under this credit agreement. The credit agreement prohibits the Company from
paying any dividends on its common stock and requires that the Company maintain
minimum levels of working capital and adjusted net worth, both as defined in the
agreement.

Term Note Payable

As discussed above, at June 30, 1997 and 1996, the Company has a $27.5
million term note payable to its principal lender. This note requires monthly
interest payments of 1% over the prime rate of the Corestates Bank, N.A. (9.5%
effective rate at June 30, 1997) and matures on July 1, 1998.

Subordinated Notes Payable

In connection with the acquisition of substantially all of the assets of
Cedar (see Note 2), subordinated promissory notes in the aggregate principal
amount of $3,510,000 and a short-term promissory note in the principal amount of
$250,000 were issued to the seller. The subordinated promissory notes are
payable in four annual installments of principal and interest at an interest
rate of 7.25% per annum, commencing on July 2, 1996 through July 2, 1999. The
short-term promissory note was payable in six equal monthly installments of
principal and interest at an interest rate of 10% per annum, and was fully
satisfied at June 30, 1996.

As a result of the purchase price adjustments, described in Note 2, the
aggregate principal amount of the subordinated promissory notes was reduced to
$1,913,000 under the same terms and conditions. Future annual principal
maturities of the subordinated promissory notes for the year ended June 30 are
as follows: 1998 -- $267,440; 1999 -- $671,560; 2000 -- $671,560.

The notes are subordinate and junior in right of payment to the prior
payment of all indebtedness of CICS to its senior lenders, secured by a pledge
of 15% of the issued and outstanding shares of common stock of CICS subject to
the prior security interest of CICS' senior lenders and are guaranteed by the
Company.

26
28

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventory Financing Facility

In 1997, the Company entered into an agreement with a company to finance
inventory purchases from selected suppliers, with a maximum credit availability
of $4.5 million. The amount outstanding under this agreement, which totaled
approximately $3 million at June 30, 1997, is included in accounts payable in
the consolidated balance sheet at June 30, 1997. The financing company has a
lien on the inventory financed under this facility, and a $1.5 million
irrevocable letter of credit has been issued on behalf of the Company in favor
of the financing company. In addition, the agreement requires that the Company
maintain a minimum level of working capital and annually profitability, both as
defined in the agreement.

For the year ended June 30, 1997, the Company did not satisfy the minimum
level of profitability required by its inventory financing facility agreement
and has been declared in default of its obligations under such agreement.
However, on the condition that the Company maintain full compliance with all
terms of the agreement, the financing company has agreed to forbear from
exercising its right to accelerate the indebtedness and has agreed to continue
to provide financing pursuant to the agreement, with a maximum credit limit of
$3 million, through November 17, 1997, at which time the agreement will
terminate and all amounts then outstanding will become due and payable by
December 17, 1997. Management of the Company is currently involved in
discussions with the finance company to replace the current facility with a new
facility under mutually acceptable terms.

5. INCOME TAXES

Significant components of the Company's deferred income tax assets and
liabilities at June 30 are as follows (in thousands):

1997 1996
------ ------

Deferred income tax assets:
Allowance for doubtful accounts.......................... $ 537 $ 725
Inventory................................................ 788 421
Restructuring charge..................................... 51 922
Accrued liability........................................ 803 --
Accrued expenses......................................... 384 --
Net operating loss carryforwards......................... 307 46
Other, net............................................... 82 55
------ ------
Total deferred income tax assets................. $2,952 $2,169
====== ======
Deferred income tax liabilities:
Goodwill................................................. $ (344) $ (144)
Depreciation............................................. (153) (182)
------ ------
Total deferred income tax liabilities............ $ (497) $ (326)
====== ======

At June 30, 1997, the Company had available net operating loss
carryforwards of approximately $778,000 which expire in various amounts from
2003 to 2011. As a result of the sale of the Company's common stock (see Note
13), utilization of approximately $671,000 of net operating loss carryforwards
will be limited as defined in Section 382 of the Internal Revenue Code (IRC).
The utilization of approximately $107,000 of net operating loss carryforwards
has already been limited to approximately $9,000 per year.

27
29

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The (benefit) provision for income taxes as of June 30 consists of the
following (in thousands):

1997 1996 1995
------- ------- -----

Current:
Federal................................... $(1,692) $ 1,146 $ 743
State..................................... (445) 290 230
------- ------- -----
(2,137) 1,436 973
Deferred:
Federal................................... (504) (1,014) (82)
State..................................... (108) (265) (23)
------- ------- -----
(612) (1,279) (105)
------- ------- -----
$(2,749) $ 157 $ 868
======= ======= =====

At June 30, 1997, the Company had an income tax receivable of approximately
$2.3 million included in prepaid expenses and other current assets in the
consolidated balance sheet. This amount represents a refund due upon carryback
of net operating losses.

The reconciliation of income taxes attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax (benefit) expense
as of June 30 is as follows (in thousands):

1997 1996 1995
------- ---- ----

Tax (benefit) expense at statutory rates.... $(2,962) $(84) $680
Increase resulting from:
Effect of state income taxes.............. (265) 76 154
Amortization of goodwill.................. 144 139 120
Other..................................... 334 26 (86)
------- ---- ----
Total............................. $(2,749) $157 $868
======= ==== ====

6. CAPITAL STOCK

On April 3, 1996, the Company's Board of Directors authorized the issuance
of two new Series of cumulative, convertible, redeemable preferred stock,
designated Series D and Series E. The Series D preferred stock is identical to
the Company's Series A preferred stock, and Series E preferred stock is
identical to the Company's Series C preferred stock, with the single exception
that the mandatory conversion feature of the Series A and Series C preferred
stock was modified to extend the effective date of that conversion from five to
ten days after the completion of a public offering of common stock and the
trading of such stock at a price equal to or greater than $4.00 per share.

On May 5, 1996, the Company completed a private exchange offer with the
holders of its outstanding shares of Series A and Series C preferred stock. As a
result of the exchange offer, the Company issued 19,250 shares of Series D
preferred stock in exchange for 19,250 outstanding shares of Series A preferred
stock and 125 shares of Series E preferred stock in exchange for 125 outstanding
shares of Series C preferred stock.

Holders of the Series D and Series E cumulative, convertible, redeemable
preferred stock are entitled to receive, when, as and if declared by the Board,
cumulative annual dividends of 9% of their respective stated values per share of
$100 and $4,000, payable in cash or in kind. Such dividends are payable on
January 31 and July 31. Accrued but unpaid dividends shall be cumulative, but
shall not bear interest. Dividends paid during each year ended June 30, 1997 and
1996 totaled $218,250. So long as any shares of Series D and Series E preferred
stock are outstanding, no dividends may be paid on the common stock or any
Series of preferred

28
30

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock ranking junior to the Series D and Series E preferred stock, until all
dividends accrued on the Series D and Series E preferred stock have been paid
for the current and all prior periods. Except as, and if required by law, and as
herein described, the Series D and Series E preferred stock are nonvoting. In
the event the Company fails to declare and pay dividends for two consecutive
Dividend Payment Dates, as defined, and for so long as such failure is
continuing, the holders of a majority of each of the Series D and Series E
preferred stock are entitled to vote separately as a class to elect one
additional director per Series to the Board of Directors of the Company.

The shares of Series D preferred stock will be convertible at any time and
from time to time at the option of the holder thereof into shares of common
stock of the Company at a conversion rate (the Series D Conversion Rate) of 40
shares of common stock for each share of Series D preferred stock. The shares of
Series E preferred stock are convertible at any time and from time to time at
the option of the holder thereof into shares of common stock of the Company at a
conversion rate (the Series E Conversion Rate) of 4,000 shares of common stock
for each share of Series E preferred stock. The shares of Series D or Series E
preferred stock will automatically and mandatorily convert at the same Series D
and Series E Conversion Rate, as applicable, into common stock at such time as
the Company has completed a public offering of common stock and, thereafter, the
common stock has traded for ten consecutive days at a bid and ask price equal to
or greater than $4.00 per share.

The shares of Series D and Series E preferred stock are subject to
redemption by the Company, at its option, at any time and from time to time,
after one year from the date of issue at a redemption price of 110% of their
respective stated values of $100 and $4,000 per share of the Series D and Series
E preferred stock, respectively, plus all accrued and unpaid dividends as of the
date of redemption.

On July 23, 1997, the Company completed the sale of 6,950,000 shares of its
common stock for an aggregate price of approximately $7.4 million (see Note 13).

Stock Options: The Company's 1994 Stock Option Plan, as amended, permits
the granting of incentive and nonqualified stock options as provided in the
relevant sections of the IRC. Under the plan, incentive options may be granted
at prices not less than the fair market value on the date of the grant. The term
of each option and the manner in which it may be exercised is determined by the
Board of Directors at the date of

29
31

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

each grant, and options are for a period of no more than ten years. A summary of
stock option activity related to the 1994 Stock Option Plan, as amended, is as
follows:

WEIGHTED-
NUMBER OF NUMBER WEIGHTED- AVERAGE
SHARES OF AVERAGE EXERCISE
RESERVED SHARES EXERCISE NUMBER PRICE PER
FOR UNDER PRICE PER OF OPTIONS OPTION
OPTIONS OPTIONS OPTION EXERCISABLE EXERCISABLE
---------- -------- --------- ----------- -----------

Balance at June 30, 1994........... 500,000 40,000 $ .66
Granted.......................... -- 460,000 1.02
Expired.......................... -- (5,000) .10
---------- --------
Balance at June 30, 1995........... 500,000 495,000 1.00 180,000 $1.02
Additional shares reserved for
grant......................... 550,000 --
Granted.......................... -- 462,750 4.00
Exercised........................ (25,250) (25,250) 1.00
Expired.......................... -- (3,850) 1.00
---------- --------
Balance at June 30, 1996........... 2.49 470,900 1.04
1,024,750 928,650
Additional shares reserved for
grant......................... 750,000 --
Granted.......................... -- 599,000 1.45
Exercised........................ (131,528) (131,528) 1.15
Expired.......................... -- (493,750) 3.27
---------- --------
Balance at June 30, 1997........... 1,643,222 902,372 1.46 639,437 1.40
========== ========

The exercise price for 91,000 options outstanding at June 30, 1997 is $4.00
per share and have a weighted average remaining contractual life of 4.7 years.
Of these options, 67,565 are currently exercisable. The remaining 811,372
options outstanding at June 30, 1997 have exercise prices ranging from $.10 to
$1.56 and have a weighted average remaining contractual life of 5 years. Of
these options, 571,872 are currently exercisable at a weighted average exercise
price of $1.12.

Pro forma information regarding net income and EPS is required by Statement
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1997 and 1996:
risk-free interest rate of 6.5%; dividend yield of -0-%; volatility factor of
the expected market price of the Company's common stock of .775; and a weighted
average expected life of the option of 3 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. 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
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As a result,
these pro forma disclosures are not likely to be representative of the effects
of applying the provisions of FASB No. 123 on reported net income for future
periods since 1997 and

30
32

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 reflect expense for only two and one year's vesting, respectively. The
Company's pro forma information for the year ended June 30, 1997 and 1996
follows (in thousands except share related data):

1997 1996
------- -----

Pro forma net loss........................ $(6,835) $(694)
Pro forma loss per common share........... (1.02) (.15)

The weighted average fair value of options granted during 1997 and 1996 is
$.79 and $2.38 per share, respectively.

Stock Purchase Warrants: At June 30, 1997, the Company has outstanding
55,000 warrants to purchase shares of the Company's common stock. These
warrants, all of which are currently exercisable, have an exercise price of
approximately $4.11 per share and expire in 2001.

7. COMMITMENTS

Operating Leases

The Company is committed through 2000 under various leases relating to
facilities and equipment. Some leases have renewal clauses which may be
extended, at the option of the Company, beyond their respective terms. These
leases require fixed rental payments and require payments of property taxes and
insurance. Rent expense for the Company relating to all of the above
noncancelable lease agreements was approximately $1,927,000, $1,788,000 and
$636,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
Included in rent expense for the year ended June 30, 1997 and 1996 is
approximately $306,000 and $264,000, respectively, paid to a shareholder of the
Company. At June 30, 1997, the approximate future minimum annual rentals due
under the noncancelable leases are as follows (in thousands):

1998.............................................. $1,324
1999.............................................. 515
2000.............................................. 216
2001.............................................. 55
------
$2,110
======

Capital Leases

The Company has entered into capital equipment leases for approximately
$973,000 which expire at varying dates through March 1998. The carrying value of
the property under these leases was charged against earnings in fiscal 1997 as a
result of the Company's abandonment of a management information system project
(see Note 12).

At June 30, 1997, future minimum lease payments pursuant to these leases
are as follows (in thousands):

1998............................................... $ 339
1999............................................... 225
-----
Total minimum lease payments....................... 564
Less amounts representing interest of approximately
12%.............................................. (56)
-----
Present value of minimum lease payments............ 508
Less current portion............................... (292)
-----
$ 216
=====

31
33

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other

The Company is a guarantor of a mortgage note payable, with an outstanding
balance of approximately $1.3 million, which encumbers a building that is owned
by the former owner of Copley Systems Corporation (Copley).

At the time of its acquisition by the Company, Copley leased office and
warehouse space from an affiliate of the principal stockholder of Copley (the
Seller), which lease expires on June 25, 2007. The lease provides for monthly
payments of $26,000. In exchange for a payment made at closing, the Seller
assumed the lease, agreed to make all required payments thereunder, and
indemnified the Company against any amounts which may become due under the lease
for the balance of its term.

8. 401(k) PLAN

The Company has a 401(k) plan under which full-time employees shall be
eligible to become participants upon attaining age 21 and completing 3 months of
service. Employer contributions are at the sole discretion of the Board of
Directors. Contributions for the years ended June 30, 1997, 1996 and 1995 were
approximately $149,000, $112,000 and $128,000, respectively.

9. COSTS ASSOCIATED WITH PUBLIC OFFERING

In the first quarter of 1996, the Company incurred approximately $486,000
in connection with the preparation of a Registration Statement on Form S-1. This
public offering was terminated and the related costs were charged against
earnings during the year ended June 30, 1996.

10. MAJOR CUSTOMER

A major customer accounted for approximately 10% of sales for the year
ended June 30, 1995. No individual customer accounted for greater than 10% of
sales for the years ended June 30, 1997 and 1996.

11. RESTRUCTURING CHARGE

During the fourth quarter of fiscal 1996, the Company recorded a charge of
$2.3 million for restructuring costs associated with the planned relocation and
consolidation of the Company's headquarters, and certain sales and distribution
facilities. These costs included approximately $1.7 million for severance
benefits for approximately 125 affected employees, $400,000 for the write-off of
property and equipment, and approximately $200,000 for lease extension and
termination costs and other activities to close existing facilities. However, on
October 30, 1996, the Company decided not to proceed with many of the planned
restructuring activities, primarily as a result of the Company's desire to
retain certain key personnel for whom relocation was not a viable option, as
well as other cost considerations. Accordingly, during the second quarter of
fiscal 1997, the Company reversed approximately $1.8 million of the original
accrual for restructuring costs. During 1997, the Company paid approximately
$328,000 associated with these activities and has approximately $128,000 accrued
as of June 30, 1997 which represents future severance payments for four
employees affected by the implementation of certain of the planned restructuring
activities.

In connection with the plans, discussed above, the Company had previously
signed a ten-year lease commencing January 1997. During 1997, the Company
negotiated a termination agreement with the landlord to be released of its
obligations under the lease agreement for a charge of approximately $895,000,
which is included in selling, general and administrative expenses in the
consolidated statement of operations for the year ended June 30,1997. As of June
30, 1997, such obligation has been fully satisfied.

32
34

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. LOSS ON ABANDONMENT OF MANAGEMENT INFORMATION SYSTEM

During 1997 and 1996, the Company invested a total of $4,161,370 in a
management information system (MIS System) which was intended to replace the
multiple systems then in use. During 1997, the Company concluded that the system
did not provide the minimum required functionality and that the costs required
to achieve such functionality did not justify further investment. Therefore, the
Company decided to abandon the MIS System and implement an alternative solution.
As a result, the Company recorded a charge of $4,161,370 in the third quarter of
1997 associated with the write-off of the carrying value of its investment in
the MIS System, consisting primarily of software and capitalized consulting
fees. The fees allegedly due to the consultants who were engaged in connection
with the implementation of the MIS System are being disputed by the Company and,
at June 30, 1997, such fees totaling approximately $2,037,000 are included in
accrued expenses in the consolidated balance sheet.

13. SUBSEQUENT EVENTS

On July 23, 1997, the Company completed the sale of 6,950,000 shares of its
common stock for an aggregate price of $7,436,500 to various unaffiliated third
parties. As a result of the sale, the buyers now hold 49.86% of the shares of
the Company's common stock outstanding. In connection with the sale, the Company
issued warrants to purchase 300,000 shares of the Company's common stock to the
individuals who facilitated the transaction. The warrants are immediately
exercisable at a price of $1.13 per share and expire in 2004. The proceeds
received by the Company, net of associated expenses, of approximately $7.2
million were used to repay borrowings under the Company's revolving line of
credit. Assuming this repayment had occurred on July 1, 1996, the loss per
common share for the year ended June 30, 1997 would have been $(.41) as a result
of a reduction of interest costs of approximately $670,000 and an increase in
the common shares outstanding of 6,950,000.

On September 18, 1997, the Company announced a new logistics strategy and
plan to consolidate its headquarters functions into a new facility in Charlotte,
NC. The Company expects that these actions will allow it to be more responsive
to its customers and improve the quality, efficiency, and timeliness of the
products and services it provides. The strategy will be implemented in stages
with all elements expected to be completed by December 31, 1997. The Company's
preliminary estimate of the costs associated with the consolidation is
approximately $2 million. These costs include employee severance and relocation
benefits, recruiting costs, facility relocation costs and the write-off of
certain property and equipment. This estimate also includes the estimated costs
associated with the duplication of certain employee responsibilities and
redundant facilities during the transition period.

33
35

COMPUTER INTEGRATION CORP.

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS
(IN THOUSANDS)

JUNE 30,
-------------------
1997 1996
------- -------

ASSETS
Current assets:
Cash............................................................................... $ 30 $ 101
Other.............................................................................. 4,441 1,713
------- -------
Total current assets................................................................. 4,471 1,814
Other assets (principally investment in CIC Systems, Inc.)........................... 31,886 37,688
------- -------
$36,357 $39,502
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.................................................................. $ 513 $ 936
Long-term debt....................................................................... 1,343 1,610
Other noncurrent liabilities (principally amount due to CIC Systems, Inc.)........... 30,285 26,710
------- -------
Total liabilities.................................................................... 32,141 29,256
Shareholders' equity:
Preferred stock.................................................................... -- --
Common stock....................................................................... 7 7
Other shareholders' equity......................................................... 4,209 10,239
------- -------
Total shareholders' equity........................................................... 4,216 10,246
------- -------
$36,357 $39,502
======= =======

See accompanying notes.

34
36

COMPUTER INTEGRATION CORP.

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED JUNE 30,
-------------------------------
1997 1996 1995
------- ------- -------

Operating expenses:
Selling, general and administrative......................... $ 2,943 $ 3,587 $ 1,653
Restructuring charge (reversal)............................. (1,843) 2,300 --
------- ------- -------
Total operating expenses............................ 1,100 5,887 1,653
------- ------- -------
Loss from operations.......................................... (1,100) (5,887) (1,653)
Interest expense.............................................. 283 880 13
Other -- costs associated with terminated public offerings.... -- 486 --
------- ------- -------
Loss before income taxes and equity in net income of
subsidiary.................................................. (1,383) (7,253) (1,666)
Income tax benefit............................................ 306 2,944 490
------- ------- -------
Loss before equity in net (loss) income of subsidiary......... (1,077) (4,309) (1,176)
Equity in net (loss) income of subsidiary..................... (4,887) 3,906 2,309
------- ------- -------
Net loss...................................................... $(5,964) $ (403) $ 1,133
======= ======= =======

See accompanying notes.

35
37

COMPUTER INTEGRATION CORP.

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED JUNE 30,
-------------------------------
1997 1996 1995
------- ------- -------

CASH USED IN OPERATING ACTIVITIES............................. $(3,020) $(7,285) $(1,996)
INVESTING ACTIVITIES:
Purchase of substantially all of the assets of Cedar Computer
Center, Inc. ............................................... (500) (9,892) (274)
Purchase of Dataprint, Inc., net of cash acquired............. (38) (462) 260
Acquisition of equipment...................................... -- (22) (57)
------- ------- -------
Net cash used in investing activities......................... (538) (10,376) (71)

FINANCING ACTIVITIES:
Proceeds of sale of capital stock, net of offering costs...... -- -- 1,831
Net (repayments) proceeds of note payable..................... -- (25) 25
Proceeds from exercise of stock options....................... 151 25 --
Repayment of long-term debt................................... (303) (164) (780)
Dividends paid................................................ (218) (218) (113)
Advances from CIC Systems, Inc. .............................. 3,857 17,997 637
------- ------- -------
Net cash provided by financing activities..................... 3,487 17,615 1,600
------- ------- -------
Net decrease in cash.......................................... (71) (46) (467)
Cash at beginning of period................................... 101 147 614
------- ------- -------
Cash at end of period......................................... $ 30 $ 101 $ 147
======= ======= =======

See accompanying notes.

36
38

COMPUTER INTEGRATION CORP.

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997

1. BASIS OF PRESENTATION

In the parent-company-only financial statements, Computer Integration
Corp.'s (CIC) investment in the subsidiary is stated at cost plus equity in
undistributed earnings of its wholly-owned subsidiary CIC Systems, Inc. (CICS)
since the date of acquisition. The parent-company-only financial statements
should be read in conjunction with the Company's consolidated financial
statements.

2. GUARANTEE

CICS has a $77 million bank credit agreement that provides a $49.5 million
revolving line of credit and a $27.5 million term loan through July 1, 1998.
Under the terms of the agreement, CIC has guaranteed the payment of all
principal and interest.

3. DIVIDENDS FROM SUBSIDIARY

No cash dividends were paid to CIC from CICS for the years ended June 30,
1997, 1996 and 1995.

COMPUTER INTEGRATION CORP.
AND SUBSIDIARY

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------------------------------------------- ---------- ---------- ---------- ----------

YEAR ENDED JUNE 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts................ $1,351 $1,707 $1,696(1) $1,362
====== ====== ====== ======
YEAR ENDED JUNE 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts................ $ 495 $1,639 $ 783(1) $1,351
====== ====== ====== ======
YEAR ENDED JUNE 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts................ $ 322 $ 375 $ 201(1) $ 495
====== ====== ====== ======

- ---------------
(1) Uncollectible accounts written off, net of recoveries.

37
39

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

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY

Incorporated herein by reference to the Company's Definitive Proxy
Statement.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference to the Company's Definitive Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference to the Company's Definitive Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Incorporated herein by reference to the Company's Definitive Proxy
Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements.

COMPUTER INTEGRATION CORP.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996
Consolidated Statements of Operations for the Years Ended June 30, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997,
1996 and 1995
Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules.

(1) Computer Integration Corp.:

Schedule I -- Condensed Financial Information of Registrant

Schedule II -- Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and have, therefore,
been omitted.

EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------

38
40

EXHIBIT NO. DESCRIPTION
- ----------- -----------

(10)(b) -- *Employment Agreement between John Paget and CIC Systems, Inc., dated July 24, 1997(4)
(10)(c) -- *Employment Agreement between Steven Wright and CIC Systems, Inc., dated July 15, 1997(4)
(10)(d) -- *Employment Agreement between Samuel C. McElhaney and CIC Systems, Inc., dated July 15, 1997(4)
(10)(e) -- *Employment Agreement between Edward Meltzer and CIC Systems, Inc., dated July 15, 1997(4)
(10)(f) -- Amended and Restated Loan and Security Agreement between CIC Systems, Inc. and
Congress Financial Corporation (New England), dated December 10, 1996(4)
(10)(g) -- Amended and Restated Loan and Security Agreement between CIC Systems, Inc. and
Congress Financial Corporation (New England), dated May 12, 1997(4)
(10)(h) -- $27.5 million Term Promissory Note between CIC Systems, Inc. and Congress
Financial Corporation (New England), dated July 1, 1995(5)
(10)(i) -- Guarantee of Registrant in favor of Congress Financial Corporation (New England),
dated July 1, 1995(3)
(10)(j) -- Stock Purchase Agreement, dated as of May 15, 1997, between the Company and
Chartwell Group, Inc.(6)
(10)(k) -- Form of Common Stock Purchase Warrant(6)
(21) -- Subsidiary of Registrant(2)
(23) -- Consent of Ernst & Young LLP(4)
(27) -- Financial Data Schedule (for SEC use only).

- ---------------
(1) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K, as filed with the Commission on October 2, 1996, Commission
File No. 0-20732.

(2) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-84472) as filed with the
Commission on September 28, 1994, and as amended by Amendments No. 1 through
8 thereto.

(3) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-84472) as filed with the
Commission on September 28, 1994, and as amended by Amendments No. 1 through
8 thereto; and the Registrant's Definitive Proxy Statement, dated
October 17, 1996.

(4) Filed herewith.

(5) Incorporated by reference to the Exhibits to the Registrant's Current Report
on Form 8-K, dated July 1, 1995 as filed with the Commission on July 11,
1995, Commission File No. 0-20732.

(6) Incorporated by reference to the Exhibits to the Registrant's Current Report
on Form 8-K, dated July 24, 1997 as filed with the Commission on August 5,
1997 Commission File No. 0-20732.

* Compensatory plan or arrangement.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

39
41

SIGNATURES

Pursuant to the requirements of Section 13 and 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, in the City of
Charlotte, State of North Carolina on the 29th day of September, 1997.

COMPUTER INTEGRATION CORP.

By: /s/ JOHN E. PAGET
------------------------------------
John E. Paget
Chief Executive Officer

Dated: September 29, 1997

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

SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------

/s/ JOHN E. PAGET Chief Executive Officer September 29, 1997
- ------------------------------------------ and Director (Principal
John E. Paget Executive Officer)

/s/ EDWARD A. MELTZER Chief Financial Officer September 29, 1997
- ------------------------------------------ (Principal Financial and
Edward A. Meltzer Principal Account Officer)

/s/ SAMUEL C. MCELHANEY Chairman of the Board of September 29, 1997
- ------------------------------------------ Directors
Samuel C. McElhaney

/s/ ARALDO COSSUTTA Director September 29, 1997
- ------------------------------------------
Araldo Cossutta

/s/ FRANK J. ZAPPALA Director September 29, 1997
- ------------------------------------------
Frank J. Zappala

/s/ MICHAEL G. SANTRY Director September 29, 1997
- ------------------------------------------
Michael G. Santry

/s/ MATTHEW S. WALLER Director September 29, 1997
- ------------------------------------------
Matthew S. Waller

40
42

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------

(a)(3) -- Exhibits.
(3)(a) -- Certificate of Incorporation of Computer Integration Corp., as amended(1)
(3)(b) -- By-laws of Computer Integration Corp.(2)
(4) -- Form of Subscription Agreement between NEG, Inc. and Purchasers of Series A, 9%
Cumulative Convertible Redeemable Preferred Stock(2)
(10)(a) -- *1994 Stock Option Plan, as amended(3)
(10)(b) -- *Employment Agreement between John Paget and CIC Systems, Inc., dated July 24,
1997(4)
(10)(c) -- *Employment Agreement between Steven Wright and CIC Systems, Inc., dated July 15,
1997(4)
(10)(d) -- *Employment Agreement between Samuel C. McElhaney and CIC Systems, Inc., dated
July 15, 1997(4)
(10)(e) -- *Employment Agreement between Edward Meltzer and CIC Systems, Inc., dated July
15, 1997(4)
(10)(f) -- Amended and Restated Loan and Security Agreement between CIC Systems, Inc. and
Congress Financial Corporation (New England), dated December 10, 1996(4)
(10)(g) -- Amended and Restated Loan and Security Agreement between CIC Systems, Inc. and
Congress Financial Corporation (New England), dated May 12, 1997(4)
(10)(h) -- $27.5 million Term Promissory Note between CIC Systems, Inc. and Congress
Financial Corporation (New England), dated July 1, 1995(5)
(10)(i) -- Guarantee of Registrant in favor of Congress Financial Corporation (New England),
dated July 1, 1995(3)
(10)(j) -- Stock Purchase Agreement, dated as of May 15, 1997, between the Company and
Chartwell Group, Inc.(6)
(10)(k) -- Form of Common Stock Purchase Warrant(6)
(21) -- Subsidiary of Registrant(2)
(23) -- Consent of Ernst & Young LLP(4)
(27) -- Financial Data Schedule (for SEC use only).

- ---------------
(1) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K, as filed with the Commission on October 2, 1996, Commission
File No. 0-20732.

(4) Filed herewith.

(5) Incorporated by reference to the Exhibits to the Registrant's Current Report
on Form 8-K, dated July 1, 1995 as filed with the Commission on July 11,
1995, Commission File No. 0-20732.

(6) Incorporated by reference to the Exhibits to the Registrant's Current Report
on Form 8-K, dated July 24, 1997 as filed with the Commission on August 5,
1997 Commission File No. 0-20732.

* Compensatory plan or arrangement.