once a rising young manufacturer of IBM-compatible personal computers -- was forced to restate its second-quarter earnings to reflect a $2.5 million loss rather than a previously reported multimillion-dollar profit.

Things looked bleak.

But the company's new chief financial officer, who had just come on board, was optimistic.

"I didn't come on board to rearrange deck chairs on the Titanic," growled Robert Cross, who soon became Columbia's president. "This is a sleek, jazzy boat that's just a little overloaded now."

That "sleek, jazzy boat" has effectively capsized in a sea of red ink and hostile litigation. Barely a year after going public, Columbia's stock was delisted by the National Association of Securities Dealers. The company's underwriter, Dean Witter Reynolds Inc., has been sued both by shareholders and Columbia's banks. Columbia's founder and chairman was forced to resign as the company ran up an estimated $40 million loss last year. Layoffs and defections have left the Columbia, Md., company a husk of its original self.

The thing now keeping Columbia afloat is the Chapter 11 bankruptcy protection it received last month. Otherwise, Columbia's story is something out of a Silicon Valley nightmare, a messy tale of mismanagement, lawsuits and a failed attempt to turn around a company that once soared with profitability.

Columbia's banks are out $22 million and have sued each other to recover their losses. The company owes other creditors roughly $16 million. National Bank of Washington Chairman Luther Hodges Jr. confirms that the Columbia loans -- which reportedly total near $10 million -- could represent the largest single loss in the bank's history.

Tired of dickering with its banks, Columbia's board of directors and top officers resigned en masse on June 7. Most of them plan to set up a new computer company called Chesapeake Data Products. They left the company in the hands of a bank-recommended, court-appointed bankruptcy trustee.

Almost immediately, Columbia obtained a temporary restraining order from the federal bankruptcy court in Rockville forbidding Chesapeake and its officers from soliciting business from Columbia's customers.

The next day, the court found Robert Cross in contempt of that order. Cross said he would not comment on the court's ruling.

Further bankruptcy court hearings are scheduled this Friday in Rockville. Neither side will talk about the pending litigation that may determine both Columbia's and Chesapeake's fate.

This road to bankruptcy court was paved with great expectations.

Founded in 1975 by William Diaz with a $50,000 SBA minority loan, Columbia grew from a tiny electronic components firm to one of the top IBM PC-compatible companies in the business. In 1982, when Columbia was just entering the "PC clone" business, sales approached $9 million. The next year, sales skyrocketed to $56 million. In 1984, Diaz and other executives predicted revenue would top $130 million as the personal computer market continued to burn hot.

"Every projection imaginable pointed to an ever-growing market," said Diaz.

Reality then intervened. The PC market started to shrivel. Columbia was left with swollen inventories, increasing debt, no new products and an outmoded marketing strategy.

Last July, the company's independent auditors forced a $10 million swing in Columbia's second-quarter earnings because the company had claimed that products it shipped on consignment were actually sales. In the competitive personal computer market, shipping on consignment enabled a PC manufacturer to gain valuable shelf space in computer stores because the retailer didn't have to pay for the machines until they were sold. When Columbia's distributors found they couldn't sell the product, it was the computer company -- not the distributors -- that had to eat the loss.

Those problems were exacerbated by the speed at which the PC market dissolved.

"The company had stated earnings that were really, in effect, extraordinary earnings," said Samuel Irwin, who was brought onto the company's board by Diaz last fall and was instrumental in forcing Diaz to resign. "The company had operated at a point in time when its market was disoriented. It was a fad market. The company accumulated too much inventory and too much debt. It no longer had a focus on engineering activity to bring new product on line. It was also a company that had outgrown its management."

Cross, who had a reputation as a corporate trouble-shooter, was brought in by Columbia's venture capitalists, Citicorp Venture Capital and Allstate Venture Capital, to run its finances in the wake of the restatement. He began slicing employment and negotiating new terms with creditors.

"Bob took the attitude to bring the company down to an operating size that was more stable," said Irwin. "That was around a $30 million-a-year level -- the company when he came in was geared at a $125 million rate."

Diaz took a near-instant dislike to Cross and fired him. Diaz's board of directors revolted and forced him to take Cross back. From that point on, Diaz became less and less involved in the day-to-day efforts to turn the company around, despite his reputation as a hands-on manager.

"When Columbia went public in 1984," said Irwin, "it was for $10 million -- which isn't really a lot of money. The reason is that Diaz wanted to keep 85 percent control of the company."

However, Irwin added, "the real control of a company is based on the leadership of the person in control , not the percentage of the company he owns."

Diaz dismisses Irwin's perception as "asinine," saying that the "window" for taking Columbia public was shrinking and that the company was lucky to raise even the $10 million.

Cross and Irwin continued to assume a greater role in Columbia. Irwin, as a member of the board, helped force out Diaz's hand-picked president. Cross became the company's new president and chief operating officer. Irwin became its chairman when Diaz resigned earlier this year.

"The worst mistake I made was to bring Irwin in to help us," said Diaz, who added that he wanted Irwin to focus on Columbia's long-term strategy. He said he was "betrayed" by Irwin and Cross.

Though Columbia's operations gradually began moving toward a break-even point, the company still suffered the burden of debt from previous excess inventory. Irwin conceded that he and Cross had made little effort to develop new products to succeed the company's existing line of personal computers. A move to sell Columbia's manufacturing arm at the end of last year failed.

Moreover, determining the value of Columbia's bloated inventory of personal computers was extremely difficult because of the depressed state of the market. Columbia was forced to ask the federal Securities and Exchange Commission for special permission to delay filing its annual report.

The company's two main lenders -- First Pennsylvania Corp. and National Bank of Washington -- feared they would never get all of their money back. As the subordinate lender, National Bank of Washington fought with First Pennsylvania to get treatment equal to First Pennsylvania's should Columbia fail. The Washington bank foreclosed on Columbia's Puerto Rican manufacturing operations earlier this year.

"The banks were fighting with themselves," Irwin said. "They were caring little or nothing about the company."

Asserting that the bank squabble was affecting its day-to-day operations, Columbia filed for bankruptcy protection early last month. Since then, negotiations between Columbia representatives and bank officials to restructure the company repeatedly have failed.

Spokesmen for the banks declined to comment on that assessment of their actions.

Irwin also asserted that the banks had refused to release money to the company. "Instructions were given that no salary was going to be made available to certain people in the company by name -- including me. First Penn took unilateral control and made management decisions without consulting the board."

In a statement, a First Pennsylvania spokesman said the bank "supports the continuing operation of Columbia, and that product is being produced and shipped."

Unhappy with the banks' role, Cross and several other Columbia employes resigned on June 7 and simultaneously announced a new company, "Chesapeake Data," that would be a "continuation of Columbia-type products and will have a comparable engineering personality." One of the issues in the litigation over the new company is whether the founders of Chesapeake were Columbia employes at the time they moved to start a new firm.

The bankruptcy trustee, backed by the banks, sought and obtained a temporary restraining order against the new company. Cross, who has been seeking both financing and customers, was cited for contempt the day after the order was issued. Irwin, now in Michigan, has not been served with a contempt order.

The continuing saga of Columbia and Chesapeake is likely to be played out in the courts before it reaches the marketplace. While it is unlikely that Chesapeake, if it gets off the ground, will repeat Columbia's mistakes, it is equally unlikely that it will experience the rapid rise to success that Columbia too briefly enjoyed. Until the court rules on Friday, however, neither Cross nor Irwin will comment on their new corporate future.