SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ___________

                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended                December 31, 1997
                               --------------------------------------------

                                       OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to ______________________



                         Commission file number     0-11877
                                               ----------------


                                ELXSI CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


              Delaware                                 77-0151523
--------------------------------------------------------------------------------
(State or other jurisdiction of            (I.R.S. employer identification no.)
incorporation or organization)



3600 Rio Vista Avenue, Suite A. Orlando, FL               32805
--------------------------------------------------------------------------------
(Address of principal executive offices)               (Zip code)


Registrant's telephone number, including area code:       (407) 849-1090
                                                    --------------------------
Securities registered pursuant to Section 12(b) of the Act:

      Title of each class             Name of each exchange on which registered
      -------------------             -----------------------------------------
             None                                   Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, par value $0.001
--------------------------------------------------------------------------------
                                (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.[ X] 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. [ ]

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates  of the  Registrant,  based upon the closing  price of the Common
Stock on March 20, 1997, as reported by NASDAQ,  was  $44,387,000.  On March 20,
1997, the Registrant had outstanding 4,660,980 shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held in May 1998 are incorporated by reference into Part III.

                                       1
<PAGE>

This  Annual  Report  on  form  10-K  (this  "10-K")  includes   forward-looking
statements,  particularly  in  the  "Management's  Discussion  and  Analysis  of
Financial  Condition  and  Results  of  Operations"  section  (Item  7  herein).
Additional  written  or  oral  forward-looking  statements  may be made by or on
behalf of the Company  from time to time,  in filings  with the  Securities  and
Exchange  Commission,  in press  releases  and  other  public  announcements  or
otherwise.  All such  forward-looking  statements are within the meaning of that
term in Section 27A of the Securities  Act of 1933, as amended,  and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements may include,
but not be limited to  projections  of revenue,  income,  losses and cash flows,
plans for future capital and other  expenditures,  plans for future  operations,
financing  needs or plans,  plans  relating to products or  services,  estimates
concerning the effects of litigation or other disputes,  as well as expectations
and  assumptions  relating  to any or all  of  the  foregoing,  relating  to the
Company, its subsidiaries and/or divisions.

Although the Company believes that its  forward-looking  statements are based on
expectations and assumptions that are reasonable,  forward-looking statement are
inherently  subject  to  risks  and  uncertainties,  some  of  which  can not be
predicted.  Accordingly,  no assurance  can be given that such  expectations  or
assumptions  will  prove to have been  correct,  and  future  events  and actual
results  could  differ  materially  from those  described in or  underlying  the
forward-looking statements. Among the factors that could cause future events and
actual results to differ  materially are: the demand for the Company's  products
and services and other market  acceptance  risks;  the presence in the Company's
markets of  competitors  with  greater  financial  resources,  and the impact of
competitive  products  and services  and  pricing;  the loss of any  significant
customers  or  group  of  customers;  general  economic  and  market  conditions
nationally and (in the case of  Bickford's) in New England;  the ability of Cues
to develop new products;  capacity and supply  constraints or difficulties;  the
results  of  the   company's   financing   efforts;   the  emergence  of  future
opportunities; and the effect of the Company's accounting policies.

More detail regarding these and other important  factors that could cause actual
results  to  differ   materially   from  such   expectations,   assumptions  and
forward-looking  statements  ("Cautionary  Statements") may be disclosed in this
10-K, other Securities and Exchange  Commissions filing and public announcements
of the  Company.  All  subsequent  written and oral  forward-looking  statements
attributable to the Company,  its subsidiaries or divisions or persons acting on
their  behalf  are  expressly  qualified  in their  entirety  by the  Cautionary
Statements.

The Company  assumes no obligation to update its  forward-looking  statements or
advise of changes in the expectations, assumptions and factors on which they are
based.
                                       2
<PAGE>


                                     PART I


ITEM 1. BUSINESS

GENERAL

ELXSI  Corporation (the "Company") is a Delaware  corporation that was formed in
September 1980 as Trilogy Limited,  a Bermuda  corporation.  The Company changed
its name to ELXSI Ltd.  in January  1987,  and changed  its  incorporation  from
Bermuda to Delaware  and became  known as ELXSI  Corporation  in August  1987. A
public  company since November 1983,  the Company  acquired ELXSI  ("ELXSI"),  a
California  corporation,  in October 1985. In December 1987, the Company's other
California subsidiary, Trilogy Systems Corporation was merged into ELXSI.

On July 1, 1991, ELXSI acquired 30 restaurants operating under the Bickford's or
Bickford's  Family  Fare  names and 12  restaurants  operating  under the Howard
Johnson's name, located in Massachusetts,  Vermont, New Hampshire,  Rhode Island
and  Connecticut,  from Marriott Family  Restaurants,  Inc.  ("Marriott")  for a
purchase price of  approximately  $23,867,000  (including  transaction  fees and
costs).

Between 1991 and 1996,  ELXSI sold six of its Howard  Johnson's  restaurants and
converted  five of the remaining six Howard  Johnson's  into  Bickford's  Family
Restaurants.  During the same period,  ELXSI opened eight new Bickford's  Family
Restaurants  and  acquired  16 Abdow's  Family  Restaurants  ("Abdow's").  ELXSI
subsequently converted nine Abdow's into Bickford's Family Restaurants, sold one
Abdow's and closed another  Abdow's.  During 1997, ELXSI opened three additional
Bickford's.  At December 31, 1997 ELXSI owned and operated 55 Bickford's  Family
Restaurants ("Bickford's"), five Abdow's and one Howard Johnson's Restaurant, in
its  Bickford's  Family  Restaurant  division  (the  "Bickford's   Division"  or
"Restaurant  Division").  As used  herein the term  "Restaurants"  refers to the
Bickford's,  Abdow's and Howard Johnson's  restaurants owned and operated in the
Restaurant Division.

On October 30, 1992, ELXSI acquired Cues, Inc., of Orlando,  Florida and its two
wholly-owned subsidiaries, Knopafex, Ltd., of Toronto, Canada, and Cues B.V., of
Maastricht, The Netherlands. The Cues business in the United States is owned and
operated  as a  division  of  ELXSI.  Cues,  Knopafex  Ltd.  and Cues  B.V.  are
hereinafter  collectively referred to as "Cues" or the "Cues Division".  Cues is
principally  engaged in the  manufacturing and servicing of video inspection and
rehabilitation  equipment  for  wastewater  and drainage  systems  primarily for
governmental municipalities, service contractors and industrial users.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Reference is made to the information set forth in Note 12 (Segment Reporting) to
the Consolidated  Financial  Statements  included herein,  which  information is
hereby incorporated by reference herein.

                                       3
<PAGE>

RESTAURANT DIVISION

Restaurant Division sales were $65,198,000, $61,283,000 and $54,270,000 in 1997,
1996 and 1995, respectively.  Restaurant Division sales represented 75.0%, 74.1%
and  72.7% of the  total  sales  of the  Company  during  1997,  1996 and  1995,
respectively.

The  Restaurants  are  family-oriented  and offer full  service  and  relatively
inexpensive meals.  Featuring a breakfast menu available throughout the day, the
Restaurants  appeal  to  customers  who  are  interested  in  a  casual,  low-to
moderately-priced  meal.  The  Company  has been  successful  in  marketing  the
breakfast  menu  concept to  customers  regardless  of the time of day,  and has
expanded lunch and dinner patronage by also offering improved  traditional lunch
and dinner items.  Most menu items are priced between $2.89 and $7.59,  with the
average customer check being approximately  $5.52, $5.24 and $5.12 in 1997, 1996
and 1995, respectively. Major categories of menu items are pancakes, waffles and
french toast,  eggs and  omelettes,  "country"  dinners,  soups and side orders,
salads,  hamburgers and  sandwiches,  and desserts.  Breakfast  items and coffee
accounted for  approximately  70% of food sales in each of the past three fiscal
years.

Each  Restaurant is open seven days a week,  with most  generally open from 7:00
a.m. to 11:00 p.m.  during the week and later on weekends  and with some open 24
hours  on  the  weekends.   Some  Restaurants  are  open  24  hours  every  day.
Approximately  60% of weekly  sales  volume has been  generated  Friday  through
Sunday in each of the past three fiscal years.

While the Company  believes  that the  Restaurants  appeal to a wide  variety of
customers,  they  primarily  cater to  families  and to a lesser  extent  senior
citizens  which are  attracted  to the  high-quality,  low-to  moderately-priced
meals.  Each  Restaurant  generally  draws its customers from within a five-mile
radius  and,  consequently,  repeat  business  is  extremely  important  to  the
Restaurant  Division's  success.  The Company  believes that repeat business has
accounts for a majority of the Restaurant sales.

Each of the original 30  Bickford's  consists of a free  standing  building that
covers  approximately  2,700 to 7,000 square  feet,  and are  typically  located
adjacent to major roads and highways and/or  shopping malls.  Nearly all contain
two dining  areas,  smoking and  non-smoking.  At December 31,  1997,  13 of the
Restaurant  buildings were owned, while the remaining 48 Restaurants were either
leased or owned buildings on leased land.

Each Restaurant has a kitchen equipped with grill space and ovens for service of
baked  foods.  Seating  capacity  ranges  from 100 to 240  people.  Eight of the
Bickford's Restaurants provide counter service.

                                       4
<PAGE>

Restaurant Expansion and Renovation

ELXSI's  acquisition of Bickford's and Howard Johnson's  provided an opportunity
to  renovate  the  existing  Restaurants  and to acquire  additional  locations.
Capital  expenditures  during the years ended  December 31, 1997,  1996 and 1995
were as follows:

<TABLE>
<CAPTION>

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

<S>                           <C>            <C>             <C>
Expansion                     $     725,000  $     483,000   $     221,000
Conversions                              --        747,000         243,000
Purchase leased property            635,000             --              --
Renovation                          255,000        384,000         415,000
Replacement due to fire loss        517,000        249,000              --
Refurbishment & Equipment         1,695,000      1,028,000       1,088,000
                              -------------  -------------    ------------
                              $   3,827,000 $    2,891,000    $  1,967,000
                              ============= ==============    ============

Acquisition of Abdow's        $          -- $          --     $  2,575,000
                              ============= ==============    ============
</TABLE>


All of the  above  capital  expenditures,  except  for the 1995  acquisition  of
Abdow's and the 1997 purchase of leased  property,  were funded by earnings from
operations.  The  acquisition  of Abdow's in 1995,  was funded by an increase in
ELXSI's then  existing  line of credit with Bank of America  Illinois (now named
Bank of America National Trust and Savings Association, hereinafter, "BAI"). The
purchase  of the leased  property  was  primarily  made with the  proceeds  of a
mortgage.

The Company currently plans to spend $2,100,000 for renovations,  refurbishments
and equipment  replacements and $1,050,000 for Restaurant expansion during 1998.
Management  believes that earnings  from  operations  will be sufficient to fund
this planned program in addition to other funding requirements.

The Company  believes that increased  profitability of the Restaurants will come
mainly from  gaining  market  share by  continuing  its programs to improve food
products and service,  and through its programs of refurbishing  existing units,
opening new units,  and, to a lesser extent,  from price increases.  The Company
believes that these factors at least partially resulted in sales at the original
30 Bickford's having increased.

Sales at the original comparable Bickford's Restaurants (28 restaurants in 1997)
increased  4.3% in 1997,  1.6% in 1996 and 1.3% in 1995  over the  prior  year's
sales; customer counts at original comparable  Bickford's  Restaurants decreased
 .8% in 1997,  were flat in 1996 and increased 1.8% in 1995 over the prior year's
counts;  sales at same  Restaurants  (41  restaurants in 1997) increased 4.2% in
1997,  0.7% in 1996 and 0.4% in 1995,  and customer  counts at same  Restaurants
decreased  1.0% in 1997,  decreased 0.8% in 1996 and increased 3.4% in 1995 over
the prior year's counts.

The Company takes an opportunistic  approach to Restaurant  Division  expansion.
Management  evaluates  both  purchase  and  lease  opportunities,  and,  in most
instances,   the  Company  favors

                                       5
<PAGE>

opening new Restaurants utilizing leased properties.  The Company will generally
open a new  Restaurant  only  if it can  reasonably  be  expected  to  meet  the
Company's return on investment criteria,  which is generally an annual return on
the investment of approximately 25% to 30%.

Restaurant Management and Supervision

Each Restaurant has a manager and one to three assistant managers,  at least one
of whom must be on duty at all times during  Restaurant  hours. The managers are
responsible  for hiring all  personnel  at the  Restaurant  level,  managing the
payroll  and  employee  hours and  ordering  necessary  food and  supplies.  The
Bickford's  Division has nine district managers who, between them, cover all the
Restaurants. The district managers are responsible for the complete operation of
the Restaurants located in assigned geographical areas, including responsibility
for sales,  profits and compliance with all operational policies and procedures.
The  district  managers,  managers  and  assistant  managers  are  all  salaried
personnel,  but are also  compensated  with  performance  incentives  which  can
provide a significant  portion of their total  compensation.  Bonuses paid under
the program are based  principally  upon monthly  sales  volume,  attainment  of
certain cost targets and store profitability.

Sources and Availability of Materials

Food  supplies  are  distributed  by various  Company-approved  wholesalers  and
purveyors, which deliver directly to each Restaurant based on the quoted cost of
individual food items.  Essential  supplies and raw materials are available from
several sources,  and the Company is not dependent upon any one supplier for its
food  supplies.   These  purchases  from  suppliers  are  generally  done  on  a
verbal-purchase-order  basis and without any long-term commitments or contracts.
The  Company  does not  maintain  or engage  in any  warehousing  or  commissary
operations.

Seasonality

The Restaurants experience slightly higher revenues in the summer months.

Customers

The  Restaurants are not dependent upon a single customer or group of customers,
although a large portion of each Restaurant's  customers live within a five mile
radius  thereof  and,  accordingly,   repeat  customers  are  important  to  the
Bickford's  Division's  success.  See the fourth  paragraph of this  "Restaurant
Division" section above.

Competition

The Restaurants are in direct competition with many local restaurants  providing
family-oriented  meals,  some of which are owned,  operated and/or franchised by
national and regional chains, many of whom are larger and have greater financial
resources than the Company.  The restaurant  business is highly competitive with
respect to price, service,  location and food quality. The Company believes that
its  attention to quality and service,  along with its low-to  moderately-priced

                                       6
<PAGE>

menu items, will continue to attract customers.  In 1995, the Company noticed an
increase  in the  number  of  restaurants  offering  buffet-style  dining in New
England.  The Company believes that the freshness of its food and its reasonable
pricing compare favorably to these buffet concepts.

Employees

At December 31, 1997,  the  Restaurant  Division  employed  approximately  2,750
persons,   of  whom   approximately   2,259  were  part-time  hourly  employees,
approximately  270 were full-time  hourly employees and  approximately  221 were
salaried  personnel.  This  represents  an increase  since  December 31, 1996 of
approximately 100 persons, consisting mainly of part-time employees. None of the
Restaurant Division's employees is represented by a union.

Environmental Matters

The  Restaurant  Division is subject to various  federal,  state and local laws,
rules and  regulations  relating to the protection of the  environment  that are
typical for  companies in its  industry.  Management  believes  that  compliance
therewith will have no material effect on its capital expenditures,  earnings or
competitive position.

CUES DIVISION

The Cues Division sales were  $21,747,000,  $21,460,000 and $20,404,000 in 1997,
1996 and 1995,  respectively.  Cues Division sales represented  25.0%, 25.9% and
27.3%  of  the  total  sales  of  the  Company  during  1997,   1996  and  1995,
respectively.

Cues  manufactures  systems which utilize closed  circuit  television and highly
specialized  rehabilitation  equipment to inspect and repair  underground  sewer
lines.  The  infiltration of groundwater  into sewer  pipelines  through leaking
joints and pipe fractures unnecessarily burdens the capacity of sewage treatment
plants by  increasing  the  volume of fluids  being  treated.  Without a tightly
maintained pipe network the treatment plant may become overwhelmed  resulting in
raw sewage  flowing into rivers,  harbors,  lakes or other bodies of water.  The
Environmental Protection Agency through the Clean Water Act imposes severe fines
and penalties for such  pollution.  Leaking  joints and pipe  fractures can also
contribute to sewer line damage that can be repaired,  in severe cases,  only by
costly  excavation.  Cues mounts its systems in  specially  designed  trucks and
vans, which are sold as mobile units. In addition to truck mounted systems, Cues
sells a range of  portable  systems  that may be hand  carried  or  mounted on a
wheeled  dolly for ease of transport to difficult  access  locations.  Cues also
provides  product  servicing  and  replacement  parts  for  its  customers.  The
principal  customers of Cues are municipalities and contractors engaged in sewer
inspection  and  repair.  Cues  is  not  engaged  in  the  service  business  of
maintaining and repairing sewer lines but strictly manufactures equipment.

Inspection and Rehabilitation Equipment

Cues's  inspection and sealing  equipment  constitutes an integrated system that
provides the capability of inspecting underground sewer lines via remote control
television cameras. The

                                       7
<PAGE>

system has the  capability  of creating a permanent  record on video tape of the
pipe  conditions  such as distance,  slope,  defect  severity and location using
various sensing instrumentation. In addition, the Company manufactures a line of
grout  application  equipment for i.) detecting  leaking  joints  through an air
pressure  testing device and ii.) properly  applying  chemical sealant to repair
small pipe fractures and leaking joints.

Cues also  manufactures  and sells a line of remotely  operated  robotic cutting
devices.  These cutting devices reinstate or open lateral sewer lines, which are
smaller-diameter pipes leading from residences or businesses into the main sewer
pipes, after the laterals have been blocked by the material used in relining the
main sewer pipe's interior surface.

Cues's inspection, cutting and sealing systems are placed in sewer lines through
manholes. The television camera, positioned using either a motorized transporter
or pulled on a skid  assembly,  relays a  television  picture of the interior of
that sewer line via cable to a monitoring station in a mobile unit above ground.
The television inspection system employs a three-inch-diameter color camera that
can be remotely adjusted for close-up viewing of problem areas. By recording the
position of the camera as it moves through the sewer lines,  the Cues inspection
and sealing equipment gives the customers a permanent record of the condition of
their  sewer  lines.  If the  television  camera  inspection  of the sewer lines
discloses a leaking joint or pipe fracture,  sealing equipment can be introduced
and  positioned  through use of the camera to make the repair.  Once the sealing
module is positioned,  inflatable packers seal off the line at either end of the
damaged  area and a  chemical  sealant is applied  that  penetrates  the leak or
fracture as well as the earth surrounding the pipe,  hardening to seal the line.
The sealing module may also be used to determine the structural integrity of the
joint by applying  air or water  pressure  against the walls of the joint.  This
pressure  test enables the  customers to detect  leaking  joints that may not be
easily detected visually.

The  sealing  module  manufactured  by Cues is used to repair  sewer lines where
infiltration  or  inflow  of  water  occurs  through  leaking  joints  and  pipe
fractures.  Repairs  can last 20 years or more,  depending  upon the  structural
soundness of the sewer line or repaired joints.  Cues's sealing equipment is not
designed to repair a severely damaged or collapsed pipe, which must be excavated
and  replaced  in the  traditional  manner or repaired by the use of other sewer
line repair  technologies  such as relining.  However,  Cues's Kangaroo  cutting
system is used  integrally  in the  structural,  in-line  methods  of  repairing
collapsed  sewer lines.  Cues has also  developed a line of equipment for use in
the inspection, but not the repair, of underground water wells, dams, industrial
pipe, potable water lines and large-pipe storm drains.

Product Servicing, Replacement Parts and Chemicals

Cues  provides  product  servicing  and  repairs at its  facilities  in Orlando,
Florida; Milpitas, California; Toronto, Canada; and Maastricht, The Netherlands.
In  Orlando,   Cues  also  maintains  an  inventory  of  replacement  parts  for
distribution  and sale to  customers.  Cues  generally  warrants that all parts,
components  and  equipment  that it  manufactures  will be free from  defects in
material  and  workmanship  under normal and intended use for a period of twelve
months from the date of shipment to the customer.  Major items of equipment such
as vehicles,  generators, etc., furnished

                                       8
<PAGE>

to, but not  manufactured  by,  Cues,  are  covered  under the  warranty  of the
third-party  manufacturer of such equipment.  Cues recorded  warranty expense of
approximately $146,000,  $287,000 and $255,000,  during the years 1997, 1996 and
1995, respectively.

Product Development

Cues has an ongoing program to improve its existing  products and to develop new
products.  During  the 12  months  ended  December  31,  1997,  1996  and  1995,
approximately  $217,000,  $248,000 and $311,000,  respectively,  was expended by
Cues for product  development,  (excluding,  in each case, the  compensation and
benefits  expense  of  engineering  department  personnel,   which  comprises  a
significant  portion of research and development  efforts).  Although Cues holds
United States  patents for components of its products,  management  believes the
expiration  or invalidity of any or all of such patents will not have a material
adverse  effect  on its  business.  For  1998,  Cues  currently  plans  to spend
approximately  $250,000  (exclusive  of such  personnel  expenses)  for  product
development activities.

Source and Availability of Raw Materials

Cues  manufactures  certain  components  of its  system  and  purchases  others,
including television camera modules, monitors, video recorders, vehicles, all of
which are available from a number of sources. These purchases from suppliers are
done on a  purchase  order  basis  and  without  any  long-term  commitments  or
contracts.

Cues has agreements with Orlando,  Florida truck dealers to deliver truck bodies
that are used in the manufacture of Cues's mobile units. Under these agreements,
Cues  reimburses the dealers' floor plan financing costs for those vehicles held
by the  dealer  until  delivery.  Cues  does not have any other  commitments  or
contracts with its truck dealers.  Management  believes that alternative sources
for truck chassis are  available  and that the loss of any current  dealer would
not have a material adverse effect on Cues.

Marketing

Cues markets its products and services in the United  States  though nine direct
salesmen.  In certain geographic areas of the country,  Cues markets it products
and services through  independent  representatives  which are  non-exclusive (to
Cues),  none of whom accounted for more than 5% of the Cues Division's  revenues
in any of the last three  years.  The Company  believes  that the loss of any of
these salesman or  representatives  would not have a material  adverse effect on
the Cues Division. Cues also employees technical service representatives located
in Orlando, Toronto and Maastricht.  Cues's customers include municipalities and
contractors   engaged   in  sewer  line   inspection   and  repair  as  well  as
privately-owned  sewer systems.  No customer accounted for more the 5% of Cues's
1997,  1996 or 1995  sales.  Cues  participates  in trade  shows and uses  trade
magazine  advertising  in the marketing of its products and  services.  The Cues
name is well-established,  affording it and its products wide recognition within
its industry.

                                       9
<PAGE>

Outside  North  America,  Cues markets its products in five  continents,  either
directly or through non-exclusive (to Cues) independent distributors,  agents or
dealers,  none of whom accounted for more than 5% of the Cues Division's revenue
in any of the last three  years.  During  1997,  1996 and 1995,  export sales to
foreign  countries  represented  approximately  12%,  16% and 14% of total  Cues
sales,  respectively.  The vast  majority of  equipment  sales to  customers  in
foreign  countries are arranged under U.S.  dollar-denominated  letter of credit
arrangements and, therefore, the currency and payment risk are minimized.

The Cues Division  historically  has not  experienced  any material  problems or
risks in distributing and selling products outside the United States, other than
those normally  associated  with such efforts  (e.g.,  language  barriers,  time
differences, customs regulations and complications relative to the conforming of
equipment to local electronic, video, vehicle and other standards).

Competition

Competition  for the type of  products  sold by Cues is based  mostly  on price,
features,  service  and  reliability.   Management  believes  that  it  competes
effectively in each of these  respects.  Management also believes that there are
six companies which produce and sell products which are  competitive  with those
produced by Cues. A significant portion of sales are generated through a bidding
process initiated by municipalities.  This process is extremely price sensitive,
requiring Cues to meet or beat competitors' bids in order to secure sales.

Employees

At December 31, 1997 Cues had 134 full and  part-time  employees.  This includes
three  employees of Knopafex,  Ltd. and four  employees of Cues B.V. None of the
Cues Division employees are represented by a union.

Environmental

The Cues Division is subject to various federal, state and local laws, rules and
regulations  relating to the protection of the environment  that are typical for
companies in its industry. Management believes that compliance therewith has had
no  material  effect  on  its  capital  expenditures,  earnings  or  competitive
position.

ITEM 2. PROPERTIES

ELXSI  leases land and/or  buildings  at 48 of its 61  restaurants,  under lease
agreements expiring (including extension options) on various dates through 2032.
The majority of these leases require ELXSI to pay taxes, maintenance,  insurance
and other occupancy expenses related to the leased premises. The rental payments
for a majority of the Restaurant  locations are based upon minimum annual rental
payments and a percentage of their respective sales.

                                       10
<PAGE>

Below is a summary of the Restaurant properties as of December 31, 1997.

<TABLE>

                                             Howard
                              Bickford's     Johnson's      Abdow's        Total
                              ----------     ---------      -------        -----
<CAPTION>
<S>                <C>        <C>            <C>            <C>            <C>

Massachusetts:    Owned            9             --            --              9
                  Leased          26              1             3             30

Connecticut:      Owned            2             --            --              2
                  Leased           5             --             2              7

Rhode Island:     Owned           --             --            --             --
                  Leased           5             --            --              5

New Hampshire:    Owned            2             --            --              2
                  Leased           5             --            --              5

Vermont:          Owned           --             --            --             --
                  Leased           1             --            --              1

Total:            Owned           13             --            --             13
                  Leased          42              1             5             48
</TABLE>


ELXSI also owns a 4,000 square foot building in Boston, Massachusetts,  which is
used for its Restaurant Division management and administrative headquarters, and
a 26,000 square foot office and manufacturing  facility in Orlando,  Florida for
its Cues  Division.  In  addition,  Cues B.V.  owns an office and  manufacturing
facility in Maastricht,  The  Netherlands,  and Knopafex,  Ltd. rents office and
manufacturing  space in Toronto,  Canada.  During 1997, ELXSI purchased a 32,000
square foot facility, which after renovation and expansion,  will be utilized by
Cues as its new manufacturing and  administrative  facility.  During 1998, ELXSI
anticipates  spending  approximately  $1.1  million to  renovate  and expand the
facility.

ITEM 3. LEGAL PROCEEDINGS

There are no material  pending legal  proceedings  (other than ordinary  routine
litigation  incidental  to the  business)  to which  the  Company  or any of its
subsidiaries  is a party or of which any of their  respective  properties is the
subject,  nor are there any proceedings  known by the Company to be contemplated
by governmental authorities against the Company or any of its Subsidiaries.

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

There  were no  matters  submitted  to vote of  stockholders  during  the fourth
quarter of 1997.

                                       11
<PAGE>

                                     PART II

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

Market Information

The Company's  Common Stock is traded in the National  Association of Securities
Dealers,  Inc.-  National  Market System of the Nasdaq Stock Market  ("NASDAQ"),
under the symbol ELXS. The following table sets forth high and low closing sales
prices for the fiscal  quarters  indicated,  as  reported  by NASDAQ.

                        1997                                   1996
          -------------------------------        -------------------------------
<TABLE>
<CAPTION>
<S>            <C>            <C>                     <C>            <C>

                 High           Low                     High           Low
               --------       -------                 --------       -------

First Quarter  $ 7.375        $ 5.875                 $ 6.875        $ 5.50
Second Quarter   7.375          5.75                    7.625          5.25
Third Quarter    12.00          7.00                    6.625          4.875
Fourth Quarter   15.00          8.75                    6.625          4.875
</TABLE>


On March 20, 1998,  the reported last sale price for the Company's  Common Stock
in NASDAQ  was  $13.75  per share.  The above  quotations  reflect  inter-dealer
prices, without retail mark-up,  mark-down or commission and may not necessarily
represent actual transactions.

Holders

As of March 20, 1998 there were 5,635 holders of record of the Company's  Common
Stock.

Dividend History

The Company has never paid a cash  dividend,  however  management  will consider
paying dividends  depending on future earnings and cash flows of the Company and
other relevant considerations.  On June 4, 1997, the Board of Directors declared
a common stock purchase right dividend for  shareholders of the Company's Common
Stock outstanding as of June 16, 1997.

Stock Transfer Agent

The Company's stock transfer agent is Continental  Stock Transfer & Trust Co., 2
Broadway, New York, New York 10004, (212) 509-4000.

                                       12
                                     <PAGE>

ITEM 6. SELECTED  FINANCIAL  DATA
(Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>

                                                            Year Ended  December  31,
                                             1997           1996           1995           1994          1993
                                        -------------  -------------  -------------  -------------  -------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Net Sales                               $      86,945  $      82,743  $      74,674  $      62,423  $     55,682

Costs and Expenses:
   Cost of sales                              (68,406)       (66,603)       (58,347)       (47,440)       (41,338)
   General and administrative                  (7,924)        (7,362)        (7,484)        (6,630)        (6,406)
   Depreciation and amortization               (3,176)        (2,775)        (2,206)        (1,794)        (1,589)
   Interest income                              1,287            111            125              8             --
   Interest  expense                           (1,420)        (1,495)        (1,767)        (1,426)        (1,653)
   Other (expense) income                        (239)           432             65            (41)           (80)
   Benefit (provision) for income taxes         7,312          2,332           (514)          (366)          (348)
                                        -------------   ------------  -------------  -------------  -------------

Net income                              $      14,379   $      7,383   $      4,546   $      4,734  $       4,268
                                        =============   ============   ============   ============  =============

Net income per common share
   Basic                                $        3.08   $       1.55   $       0.95   $       0.88  $        0.79
                                        =============   ============   ============   ============  =============
   Diluted                              $        2.88   $       1.51   $       0.89   $       0.79 $         0.72

Weighted average number of common and
 common equivalent shares
  Basic                                         4,661          4,763          4,811          5,353          5,369
  Assumed conversion of options and warrants      328            139            282            654            576
                                        -------------  -------------  -------------  -------------  -------------

  Diluted                                       4,989          4,902          5,093          6,007          5,945
                                        =============  =============  =============  =============  =============

Other Data:

Working capital                         $      12,095  $       8,649  $       2,438  $        (423) $         471
Total assets                                   66,453         59,478         47,699         40,516         38,520
Capitalized leases and long term debt          12,354         20,704         14,924         12,304         12,016
Stockholders' equity                           43,172         28,913         22,714         19,398         18,126
</TABLE>

                                       13
                                     <PAGE>

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


RESULTS OF OPERATIONS

See  Note 1 to the  Consolidated  Financial  Statements  for  background  on the
Company.

Both the  Company's  corporate  functions  and Cues  Division  have fiscal years
consisting  of four  calendar  quarters  ending on December  31. The  Restaurant
Division's fiscal years consist of four 13-week quarters (and, accordingly,  one
52-week  period)  ending on the last  Saturday in December;  this  requires that
every six or seven years the Restaurant Division add an extra week at the end of
the fourth  quarter and fiscal year.  This was the case in the fourth quarter of
1994.

The  Company's  revenues  and  expenses  result  from the  operation  of ELXSI's
Restaurant   and  Cues   Divisions   and  the   Company's   corporate   expenses
("Corporate").

Year Ended December 31, 1997

Restaurant Division. The Restaurants had sales of $65,198,000,  cost of sales of
$53,378,000,  selling,  general and  administrative  expenses of $1,880,000  and
depreciation and  amortization  expense of $2,694,000,  which yielded  operating
income of  $7,246,000.  In addition,  the  Restaurants  had $152,000 of interest
expense  related to the  amortization  of  deferred  financing  fees and capital
leases,  and  other  expense  of  $152,000  related  mainly to the write off and
reserve for  disposals  of fixed  assets,  resulting  in income  before taxes of
$6,942,000.

Cues  Division.  Cues had sales of  $21,747,000,  cost of sales of  $15,028,000,
selling,  general and administrative expenses of $4,245,000 and depreciation and
amortization expense of $482,000,  which yielded operating income of $1,992,000.
In addition,  Cues had $84,000 of interest  expense,  $24,000 of interest income
and $87,000 of other expense, resulting in income before taxes of $1,845,000.

Corporate.  Corporate general and administrative  expenses were $1,799,000.  The
major components of these expenses were the compensation  accrual related to the
Bickford's  Phantom  Stock Option Plan (see the  Company's  proxy  statement for
further  information),  management  fees paid to Cadmus  Corporation  ("Cadmus")
under  a  management  agreement  (see  Note  7  to  the  Consolidated  Financial
Statements),  legal  expenses,  Corporate and  Bickford's  audit  expenses,  and
stockholder services and financial reporting expenses.

The terms of the Cadmus management agreement provide for Cadmus to provide ELXSI
with advice and services with respect to it's business and financial  management
and long-range planning.  Specific examples of services historically rendered to
the Company under this management agreement include: (a) furnishing the services
of  certain  executive  officers  and other  employees  of Cadmus;  (b)  ongoing
evaluation  of  division  management;   (c)  preparing  and  reviewing  division
operating  budgets and plans;  (d) evaluating new restaurant  locations and menu

                                       14
<PAGE>

changes; (e) identifying,  and assisting in the divestiture of, under-performing
assets;  (f) evaluating  financing  options and  negotiating  with lenders;  (g)
assisting in the  compliance  with  securities  laws and other public  reporting
requirements; (h) communicating with stockholders; (i) negotiating and arranging
insurance programs; (j) monitoring tax compliance;  (k) evaluating and approving
capital spending;  (l) cash management services;  (m) preparing market research;
(n) developing and improving  management  reporting systems; and (o) identifying
and  evaluating  acquisition  candidates  and  investment  opportunities.  It is
through  the  Cadmus  management  agreement  that the  Company is  provided  the
non-director  services  of: Mr.  Milley  (except in his capacity as President of
Cues, for which he is directly  compensated by ELXSI), the Company's Chairman of
the Board,  President and Chief  Executive  Officer;  Thomas R.,  Druggish,  the
Company's Vice  President,  Treasurer and Secretary;  and Kevin P. Lynch, a Vice
President and Director of the Company.

Corporate  interest  expense  was  $1,184,000,  consisting  of senior  bank debt
interest.  The Company's  senior bank debt lender is BAI; Note 8 to Consolidated
Financial Statements of the Company includes information  regarding the terms of
the senior bank debt.

During  1997,  the Company  recorded a current  consolidated  tax  provision  of
$850,000 and a deferred tax benefit of $8,162,000, resulting in a net income tax
benefit of $7,312,000.  The deferred tax benefit was recorded in accordance with
Statement of  Accounting  Standards  Number 109  "Accounting  For Income  Taxes"
("SFAS  109").  SFAS 109  requires  the  recognition  of deferred tax assets and
liabilities  for the expected future tax  consequences of temporary  differences
between the carrying  amounts and the tax basis of other assets and liabilities.
Management evaluated the likelihood of future earnings during the remaining life
of its net  operating  loss and tax  credit  carryforwards  and the  anticipated
realization of these tax loss  carryforwards  in  determining  the amount of the
deferred tax asset to record.  The  utilization  of the  Company's net operating
loss and tax credit  carryforwards  may be  impaired  or reduced  under  certain
circumstances.  Events which may affect these carryforwards include, but are not
limited to,  cumulative stock ownership changes of 50% or more over a three-year
period,  as  defined,  the  ability of the  company to realize  budgeted  future
taxable  income,   and  the  timing  of  the  utilization  of  the  tax  benefit
carryforwards.  Such  changes in  ownership  would  significantly  restrict  the
Company's  ability to utilize loss and credit  carryforwards  in accordance with
sections 382 and 383 of the Internal Revenue Code ("IRC"). Management recognizes
that it is  limited  in its  ability  to  prevent  such  cumulative  changes  in
ownership  from  occurring.  If a  change  of  ownership  were to occur - and no
assurance  can be given  that one will not occur  factors  such as the number of
common shares  issued and  outstanding,  the market price of such shares,  short
term treasury rates, etc., would be used under the current tax laws to determine
the amount of the tax loss and credit  carryforwards  that can be utilized  each
year.  At December 31, 1996,  management  believed that the Company would have a
cumulative  stock  ownership  change of 50% or more during 1997. At December 31,
1997,  management believed the possibility of a change of ownership occurring in
1998 was less likely due to Bylaw provisions approved by the stockholders in May
1997 to help limit such changes as well as the passage of time in the three-year
window of ownership change calculation.

                                       15
<PAGE>

As a result,  in 1997,  the Company  reduced the  valuation  allowance  by a net
$8,162,000,  which increased in the deferred tax asset of $2,881,000 at December
31, 1996 to  $11,043,000  at  December  31,  1997.  The net  deferred  tax asset
represents the amount of net operating loss and tax credit  carryforwards  which
management believes are more likely than not to be realized in the future.

Recording the deferred tax benefit in 1997 resulted in an increase in net income
and basic earnings per share of $8,162,000 and $1.75 ($1.64 diluted earnings per
share), respectively .

Earnings Per Share. The 1997 basic and diluted earnings per share were $3.08 and
$2.88, respectively.  The 1997 weighted average number of shares outstanding for
the  basic  and  diluted  earnings  per  share  were  4,661,000  and  4,989,000,
respectively.  This  compares  to 1996 basic and diluted  earnings  per share of
$1.55 and  $1.51,  respectively,  when there  were  basic and  diluted  weighted
average shares outstanding of 4,763,000 and 4,902,000, respectively. The average
stock price during 1997 and 1996 was $8.23 and $5.83,  respectively.  The market
price at December 31, 1997 and 1996 was $11.50 and $6.625, respectively.

Year Ended December 31, 1996

Restaurant Division. The Restaurants had sales of $61,283,000,  cost of sales of
$50,990,000,  selling,  general and  administrative  expenses of $1,956,000  and
depreciation and  amortization  expense of $2,318,000,  which yielded  operating
income of  $6,019,000.  In addition,  the  Restaurants  had $246,000 of interest
expense  related to the  amortization  of  deferred  financing  fees and capital
leases, and other income of $227,000 related mainly to a gain on the replacement
of  assets  lost in a  Restaurant  fire,  resulting  in income  before  taxes of
$6,000,000.

Cues  Division.  Cues had sales of  $21,460,000,  cost of sales of  $15,613,000,
selling,  general and administrative expenses of $4,056,000 and depreciation and
amortization expense of $457,000,  which yielded operating income of $1,334,000.
In addition,  Cues had $42,000 of interest  expense,  $5,000 of other income and
$45,000 of tax expense, resulting in income before taxes of $1,252,000.

Corporate.  Corporate general and administrative  expenses were $1,350,000.  The
major components of these expenses were the compensation  accrual related to the
Bickford's  Phantom  Stock Option Plan (see the  Company's  proxy  statement for
further information),  management fees paid to Cadmus, legal expenses, Corporate
and Bickford's audit expenses,  and stockholder services and financial reporting
expenses.

Corporate  interest  expense  was  $1,207,000,  consisting  of senior  bank debt
interest of $1,045,000 and senior subordinated note interest of $162,000.

During  1996,  the Company  recorded a current  consolidated  tax  provision  of
$549,000 and a deferred tax benefit of $2,881,000, resulting in a net income tax
benefit of $2,332,000 at the Corporate level.

                                       16
<PAGE>

During 1996, a portion of the valuation  allowance  was released  based upon the
success of Restaurant  conversions and  manufacturing  consolidations  which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset.  The net deferred tax asset  represents  the amount of net operating loss
and tax credit  carryforwards which management believed was more likely than not
to be realized in the future.  At the end of 1996 and 1995, the Company believed
that  it  would  have  a  change  of  ownership  of  50% or  more,  which  would
significantly  restrict usage of net operating  losses in future years under IRC
sections 382 and 383.

Recording the deferred tax benefit in 1996 resulted in an increase in net income
and earnings per share of $2,881,000 and $0.59, respectively.

Earnings Per Share. Basic and diluted earnings per share for 1996 were $1.55 and
$1.51, respectively,  with basic and diluted weighted average shares outstanding
of 4,763,000 and  4,902,000,  respectively.  The average stock price during 1996
was $5.83 and the market price at December 31, 1996 was $6.625.

Year Ended December 31, 1995

Restaurant Division. The Restaurants had sales of $54,270,000,  cost of sales of
$43,729,000,  selling,  general and  administrative  expenses of $1,620,000  and
depreciation and  amortization  expense of $1,833,000,  which yielded  operating
income of  $7,088,000.  In addition,  the  Restaurants  had $297,000 of interest
expense  related to the  amortization  of  deferred  financing  fees and capital
leases, resulting in income before taxes of $6,791,000.

Cues  Division.  Cues had sales of  $20,404,000,  cost of sales of  $14,618,000,
selling,  general and administrative expenses of $4,425,000 and depreciation and
amortization expense of $373,000, which yielded operating income of $988,000. In
addition,  Cues had $22,000 of  interest  expense,  $2,000 of  interest  income,
$68,000 of other  income and $4,000 of tax  expense  adjustments,  resulting  in
income before taxes of $1,032,000.

Corporate.  Corporate general and administrative  expenses were $1,439,000.  The
major components of general and administrative expenses include the compensation
accrual  related to the Bickford's  Phantom Stock Option Plan,  management  fees
paid to Cadmus,  legal expenses,  Corporate and Bickford's  audit expenses,  and
stockholder  services and financial  reporting  expenses.  Interest  expense was
$1,448,000,  consisting of senior bank debt  interest of  $1,275,000  and senior
subordinated  note  interest of  $173,000.  In  addition,  the Company  recorded
interest  income of $123,000,  other  expense of $3,000 and a  consolidated  tax
provision of $514,000 at the Corporate level.

At December  31, 1995,  the Company  maintained  a 100%  valuation  allowance to
account for the  potential  limitations  imposed by IRC sections 382 and 383, as
well as to give  effect to  uncertainties  surrounding  the  future  success  of
restaurant  acquisitions  and  manufacturing  consolidations  undertaken at Cues
during the year.

                                       17
<PAGE>

Earnings Per Share. Basic and diluted earnings per share for 1995 were $0.95 and
$0.89, respectively,  with basic and diluted weighted average shares outstanding
of 4,811,000 and  5,093,000,  respectively.  The average stock price during 1995
was $6.12 and the market price at December 31, 1995 was $6.125.

Comparison of 1997 Results to 1996 Results

Sales during 1997 increased by $4,202,000,  or 5.1%,  gross profit  increased by
$2,399,000,  or 14.9%, selling,  general and administrative expense increased by
$562,000,  or 7.6%, and depreciation and amortization  increased by $401,000, or
14.5%,  resulting in an operating  income  increase of $1,436,000,  or 23.9%, in
each case as compared to 1996.  Interest expense decreased by $75,000,  or 5.0%,
interest  income  increased  by  $1,176,000,  or  1,059.5%,  and  other  expense
increased by $671,000  from other income of $432,000 in 1996 to other expense of
$239,000  in 1997.  In 1997,  the  Company  recorded  an income  tax  benefit of
$7,312,000.  The  above  changes  resulted  in an  increase  in  net  income  of
$6,996,000, or 94.8% in 1997 compared to 1996.

Restaurant Division. Restaurant sales increased by $3,915,000, or 6.4%, in 1997.
The sales  increase is primarily  attributable  to an increase in the same store
sales of $1,528,000  and an increase in sales at new  restaurants of $2,285,000.
Same store restaurant sales increased by $1,528,000, or 3.5%, mainly as a result
of a $1,232,000,  or 4.3%, sales increase in the original comparable  Bickford's
acquired in 1991 (28 locations). In addition, the 11 other comparable Bickford's
increased $478,000, or 4.3%.

The original  comparable 28  Bickford's  had negative  customer  counts of 0.8%,
while  the 12 other  comparable  Bickford's  and the one  Howard  Johnson's  had
negative  customer  counts of 1.5% and 2.3%,  respectively.  Overall  comparable
customer  counts  decreased  by 1.8% in 1997  compared  to 1996.  The one Howard
Johnson's  Restaurant  is  located  near one of the  three  Bickford's  that are
licensed  to  an  unrelated  third  party  and,  under  the  applicable  license
agreement,  may not be converted into a Bickford's.  Management is continuing to
focus on  improving  sales at all  Restaurants  through  attention  to  customer
service, food quality, new menu items and Restaurant refurbishments.

Restaurant gross profit increased by $1,527,000,  or 14.8%, and the gross profit
as a percentage of sales increased from 16.8% in 1996 to 18.1% in 1997. The main
factors in the 1.3%  increase in the gross profit  percentage  was a decrease in
food and labor costs as a percentage  of sales.  Food costs as a  percentage  of
sales decreased by 0.7%, from 26.0% to 25.3%, mainly due to discounts related to
the  increased  volume of food  purchases  associated  with the  addition of new
Restaurants,  including  the  Abdow's.  Labor  costs  as a  percentage  of sales
decreased by 0.5%,  from 35.8% in 1996 to 35.3% in 1997, due to the inclusion of
$355,000 of start-up  training costs in 1996 related primarily to the conversion
of nine  Abdow's  into  Bickford's  restaurants.  Variable  and fixed costs were
approximately  flat as a  percentage  of sales in 1997  compared  to 1996.  Upon
conversion  of  the  Abdow's  into  Bickford's  Restaurants,  food  costs  as  a
percentage  of  sales  declined  to the  average  Bickford's  level.  Management
currently  intends  to keep  the  present  four  remaining  Abdow's  Restaurants
operating under that concept, which has generally lower margins than Bickford's,
and therefore the overall margins will continue to be negatively affected.

                                       18
<PAGE>

Restaurant selling,  general and administrative expense decreased by $76,000, or
3.9%, during 1997 compared to 1996.

Restaurant depreciation and amortization increased by $376,000, or 16.2%, during
1997 as compared to 1996. Restaurant depreciation and amortization will continue
to increase each year with the addition of new  Restaurants,  or until such time
as assets valued and recorded at the date of the Bickford's  acquisition in July
1991 become fully depreciated.  The equipment acquired in that acquisition has a
seven-year useful life, and will become fully depreciated in 1998.

As a result of the above,  Restaurant  Division  operating  income  increased by
$1,227,000, or 20.4%, in 1997 compared to 1996.

Cues Division.  Cues's sales increased by $287,000, or 1.3%, in 1997 compared to
1996.  As a result of this  increase and a 3.7%  increase in Cues's gross profit
percentage  in 1997  compared to 1996,  gross profit  increased by $872,000,  or
14.9%.  Selling,  general and administrative  expenses increased by $189,000, or
4.7%, and depreciation and amortization  expense increased by $25,000,  or 5.5%.
The increase in selling,  general and administrative expenses resulted primarily
from  the  increase  in west  coast  sales  effort.  As a result  of the  above,
operating  income  increased by $658,000,  or 49.3%,  in 1997  compared to 1996.
Management  anticipates that gross margins will continue to experience  pressure
in 1998 due to the fact that Cues's customers continue to stress pricing factors
in awarding contracts through the competitive bidding process.

Corporate.   Corporate's  general  and  administrative   expenses  increased  by
$449,000,  or 33.3%, during 1997 compared to 1996,  partially due to an increase
in the Bickford's  management  compensation accrual related to its Phantom Stock
Option  Plan,  an  increase in  management  fee expense and an increase in other
taxes. Interest expense decreased by $23,000, or 1.9%, in 1997 compared to 1996.
The bank interest rate applicable to Company borrowings at December 31, 1997 was
either prime (8.5%) or 2% over the Eurodollar  rate, then  approximately  8.00%.
The Company has the option of  designating  a portion of its bank line of credit
borrowings as Eurodollar rate financing for 30, 60 or 90-day periods.

On December 30, 1996, ELXSI purchased three revolving notes (the "Notes") with a
face value of $6,650,000 from BAI, its lending bank, for $5,850,000. The Company
recorded this  $800,000  discount as a reduction in the face amount of the Notes
on the December 31, 1996 balance sheet. The face value of the Notes,  payable by
three  wholly-owned  subsidiaries  of Azimuth  Corporation;  (collectively,  the
"Azimuth  Subsidiaries"),  bore  interest at 15% per annum payable in arrears on
the 1st and 16th of each month and had a  maturity  date of June 30,  1998.  The
Notes were fully  collateralized by all of the assets of Azimuth Corporation and
the Azimuth  Subsidiaries,  including accounts receivable and inventory.  Two of
the Azimuth  Subsidiaries design and manufacture trade show booth displays;  the
other is a  distributor  of  electrical  fuses  and  fasteners.  Certain  of the
officers,  directors  and/or  stockholders of Azimuth  Corporation are officers,
directors  and/or  stockholders  of the Company and/or officers and directors of
ELXSI.

                                       19
<PAGE>

The purpose of the  transaction  described  above and in this  paragraph  was to
prudently  utilize the  Company's  debt  capacity to earn a return not generally
available in the  marketplace  for the  commensurate  risk. The knowledge of the
Azimuth  Corporation  credit and the short time frame required to respond to BAI
made ELXSI unique in its ability to capture such an attractive opportunity. As a
result of the  transactions,  ELXSI became the senior revolving credit lender to
the Azimuth Subsidiaries. Funding for ELXSI's purchase of the Notes was provided
by BAI under an amendment and  restatement  of its credit  agreement with ELXSI.
The Company's  return on investment from the foregoing  transactions  was in the
form of net interest (i.e., the difference  between the Azimuth's  Subsidiaries'
15% interest  rate and the Company's  cost of borrowing)  and the portion of the
discount earned by the Company described above.

On June 16, 1997, the Azimuth  Subsidiaries  prepaid all of the outstanding face
amount of the  Notes due to ELXSI by  utilizing  the  proceeds  of a new line of
credit negotiated with a third party lender.  The working capital line of credit
extended  by  ELXSI  to  the  Azimuth  Subsidiaries  was  terminated  upon  such
prepayment.

During 1997, in connection with the Azimuth Subsidiaries  financing  transaction
described above, the Company recorded interest income (including amortization of
the discount),  net of the applicable interest expense paid to BAI, of $709,000,
or $0.15 per share ($0.14  diluted).  Over the period the Notes were outstanding
and held by ELXSI,  it earned  approximately  $938,000  of net income from these
transactions.

Comparison of 1996 Results to 1995 Results

Sales during 1996 increased by $8,069,000,  or 10.8%,  gross profit decreased by
$187,000,  or 1.1%,  selling,  general and  administrative  expense decreased by
$122,000,  or 1.6%, and depreciation and amortization  increased by $569,000, or
25.8%,  resulting in an operating income decrease of $634,000,  or 9.6%, in each
case as compared to 1995.  Interest  expense  decreased by  $272,000,  or 15.4%,
interest income decreased by $14,000 and other income increased by $367,000.  In
1996,  the Company  recorded an income tax benefit of $2,332,000  compared to an
income  tax  expense of  $514,000  in 1995.  The above  changes  resulted  in an
increase in net income of $2,837,000, or 62.4%, in 1996 compared to 1995.

Restaurant  Division.  Restaurant  sales  increased by $7,013,000,  or 12.9%, in
1996. The sales increase is  attributable to an increase in the same store sales
of $309,000 and an increase in sales at new  restaurants  of  $7,807,000,  which
were  partially  offset by a decrease in sales of $1,103,000  at a  fire-damaged
Bickford's,  and the sale of one and the closing of another Abdow's Restaurants.
The 1996 sales increase due to new restaurants  consisted of $3,372,000 from the
five purchased Abdow's,  $3,563,000 from the nine converted Abdow's and $872,000
from other new Bickford's. Same store restaurant sales increased by $309,000, or
0.7%, mainly as a result of a $483,000,  or 1.6%, sales increase in the original
Bickford's  acquired in 1991 (29  locations;  excluding the fire damaged  site).
This increase was partially offset by a sales decrease of $107,000, or 0.9%, and
$67,000,  or 4.5%, at the 11 other  comparable  Bickford's and the one remaining
Howard Johnson's unit, respectively.

                                       20
<PAGE>

The original 29 Bickford's  (excluding  the fire damaged site) had flat customer
counts while the 11 other comparable Bickford's and the one Howard Johnson's had
negative  customer  counts of 2.6% and 3.0%,  respectively.  Overall  comparable
customer counts decreased by 0.8% in 1996 compared to 1995, primarily due to the
severe winter weather in the first quarter of 1996.

Restaurant  gross profit  decreased by $248,000 and gross profit as a percentage
of sales  decreased  from 19.4% in 1995 to 16.8% in 1996. The main factor in the
2.6%  decline in the gross  profit  percentage  was an increase in labor  costs.
Labor costs as a percentage  of sales  increased by 2.0%,  from 34.4% in 1995 to
36.4% in 1996,  due to higher labor costs as a  percentage  of sales at the nine
converted and five remaining  Abdow's and $355,000 of start-up training costs in
1996 related  primarily to the  conversion  of the nine Abdow's into  Bickford's
Restaurants.  The 14 Abdow's  Restaurants  (including  the nine  converted  into
Bickford's)  had labor costs as a percentage of sales of 40.8%.  Management does
not intend to reduce the labor costs  immediately at the converted Abdow's as it
does not wish to  compromise  their  excellent  service  reputation.  Food costs
decreased by 0.3% in 1996 as compared to 1995, while variable costs increased by
0.4%  during  the same  period.  The food  costs  decrease  was mainly due to an
increase  in cash  rebates  related to the  increased  volume of food  purchases
associated  with the  addition  of new  Restaurants,  mainly the  Abdow's.  Upon
conversion of an Abdow's into a Bickford's Restaurant, food cost as a percentage
of sales tend to decline to the average  Bickford's  level.  The Bickford's food
costs  increased as a percentage of sales as a result of the sale of higher-cost
dinner  items and an increase in the cost of  individual  food items,  including
eggs,  bacon and  sausage,  partially  offset by a decline in coffee  costs.  In
addition, fixed costs as a percentage of sales increased by 0.6% in 1996, due to
higher rents related to the inclusion of the Abdow's  Restaurants  for 12 months
in 1996 as compared to six months in 1995.

Restaurant  selling,  general and  administrative  expense increased by $336,000
during 1996 over 1995, mainly as a result of adding additional support personnel
as a result of the acquisition of Abdow's.

Restaurant  depreciation and  amortization  increased by $485,000 during 1996 as
compared to 1995.  Restaurant  depreciation  and  amortization  will continue to
increase each year with the addition of new  Restaurants,  or until such time as
assets  valued and recorded at the date of the  Bickford's  acquisition  in July
1991 become fully depreciated.  The equipment acquired in that acquisition has a
seven-year useful life, and will become fully depreciated in 1998.

As a result of the above,  Restaurant  Division  operating  income  decreased by
$1,069,000 in 1996 compared to 1995.

Cues Division.  Cues's sales increased by $1,056,000,  or 5.2%, in 1996 compared
to 1995. As a result of this increase and a 1.1% decrease in Cues's gross profit
percentage  in 1996  compared  to  1995,  gross  profit  increased  by  $61,000.
Operating income was positively  impacted by a decrease in selling,  general and
administrative   expenses  of  $369,000  partially  offset  by  an  increase  in
depreciation  and  amortization  expense of  $84,000.  The  decrease in selling,
general and administrative expenses resulted primarily from the consolidation of
Canadian  operations into

                                       21
<PAGE>

Orlando  and the  restructuring  of the west coast  sales  effort to become more
efficient.  As a result of the above,  operating income increased by $346,000 in
1996 as compared to 1995.

Corporate.  Corporate's general and administrative expenses decreased by $89,000
during 1996  compared  to 1995,  partially  due to a decrease in the  Bickford's
management  compensation  accrual  related to its  Phantom  Stock  Option  Plan.
Interest  expense  decreased  by  $241,000  in 1996  compared  to 1995  due to a
decrease in interest  rates and a lower  average debt balance in 1996.  The bank
interest rate  applicable to Company  borrowings at December 31, 1996 was either
prime (8.25%) or 2% over the  Eurodollar  rate,  then  approximately  7.68%.  In
addition,   the  Company   prepaid  the  remaining   $1,199,000  of  its  senior
subordinated notes during 1996. These notes had interest rates of 15% and 14.5%.

ACQUISITIONS

On September  24, 1997,  ELXSI  completed the purchase of a building and land in
Orlando,  Florida,  adjacent to Cues's existing facilities for $1,240,000.  Upon
completion of the renovation  and expansion of the existing  building it will be
utilized by Cues for all manufacturing and administrative  functions.  Financing
for the  purchase  was  provided  by the Orange  County  Industrial  Development
Authority  (the  "IDA").  The  IDA  issued  a 15  year  bond  in the  amount  of
$2,500,000,  which was  purchased  by BAI.  ELXSI  will  make 180 equal  monthly
principal payments of approximately $14,000. Interest is paid monthly in arrears
initially at a taxable rate of either the BAI's reference rate or the Eurodollar
rate plus 1.5%.  During January 1998, the bonds  converted to tax-exempt  status
and ELXSI began paying interest at approximately 64% of the taxable rate.

On July 3,  1995,  ELXSI  acquired  16  Abdow's  Family  Restaurants  from Abdow
Corporation,  of  Springfield,  MA,  for a  price  of  approximately  $3,800,000
(including  transaction  fees  and  expenses  of  approximately  $300,000).  The
transaction  included the leasing of the 16 restaurant sites and the purchase of
associated assets located in western Massachusetts and central Connecticut.  The
acquisition was financed by an increase in ELXSI's  existing line of credit with
BAI. On February 1, 1996,  ELXSI  completed its sale of the Vernon,  Connecticut
Abdow's Restaurant for net proceeds of $1,225,000. During 1996, ELXSI closed one
under-performing  Abdow's  Restaurant.   In  February  1998,  ELXSI  closed  one
additional under-performing Abdow's Restaurant.

INCOME TAXES AND INFLATION

In 1997,  the Company  recorded a  provision  for  current  federal  alternative
minimum  taxes of  $149,000  (after the benefit of federal  net  operating  loss
carryforwards  of  $1,616,000),  a state income tax  provision of $701,000 and a
deferred  tax  benefit of  $8,162,000,  resulting  in an income  tax  benefit of
$7,312,000 (see "Year Ended December 31, 1997 - Corporate" above).

In 1996,  the Company  recorded a  provision  for  current  federal  alternative
minimum  taxes of  $105,000  (after the benefit of federal  net  operating  loss
carryforwards  of  $1,616,000),  a state income tax  provision of $444,000 and a
deferred  tax  benefit of  $2,881,000,  resulting  in an income  tax  benefit of
$2,332,000 (see "Year Ended December 31, 1996 - Corporate" above).

                                       22
<PAGE>

In 1995, the Company recorded a provision for federal  alternative minimum taxes
of $118,000  (after the benefit of federal net operating loss  carryforwards  of
$1,619,000), and a state income tax provision of $396,000.

At December 31, 1997, the Company had approximately  $208,000,000 in federal net
operating loss carryforwards,  which begin to expire in 1998 and fully expire in
2005 if not used. In addition,  the Company had  $1,700,000  in  investment  tax
credit and research and development tax credit carryforwards available to reduce
future  federal  income taxes.  (see "Year Ended  December 31, 1997 - Corporate"
above).

Inflation  and changing  prices have not had a material  impact on the Company's
results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Available Resources.  The Company's consolidated  unrestricted cash positions at
December  31, 1997 and 1996 were $0. The Company  has a cash  management  system
whereby cash  generated by operations is  immediately  used to reduce debt.  The
immediate reduction of outstanding debt provides the Company with a reduction in
interest  expense  greater than the  interest  income that the cash could safely
earn from alternative  investments.  Working capital needs, when they arise, are
met by daily borrowings.

During 1997,  the Company had cash flow from  operations of  $10,784,000  which,
along with the net  collection of related  party notes  receivable of $3,850,000
and net  borrowings  of  long-term  debt of  $3,020,000,  funded the purchase of
property,  plant and equipment totalling $5,435,000 (including the $1,407,000 of
land and building  construction-in-progress and the three new Restaurants opened
in 1997), net payments of the line of credit of $10,765,000,  principal payments
of other  long-term debt totalling  $74,000;  the repurchase of Common Stock and
Warrants to purchase Common Stock for $22,000;  payment of deferred bank fees of
$153,000;  and principal  payments on capital  leases of $137,000.  During 1997,
current  assets  increased  by  $3,697,000,  primarily  due to the  increase  in
restricted cash and cash  equivalents and an increase in the Company's  deferred
tax asset.  Current  liabilities  increased in 1997 by $316,000  (excluding  the
current portion of the long-term debt and current  portion of long-term  capital
leases).

During 1996,  the Company had cash flow from  operations  of  $4,200,000  which,
along with the  $1,075,000  proceeds  from the sale of the  Vernon,  Connecticut
Abdow's  Restaurant  and net  borrowings  of  $7,112,000  under the bank line of
credit,  funded  the  purchase  of  property,   plant  and  equipment  totalling
$3,108,000  (including  the one new  Restaurant  opened in 1996),  a loan to ELX
Limited Partnership  ("ELX") totalling  $909,000,  the purchase of related party
debt with a face amount of $6,650,000 from BAI for $5,850,000  (see  "Comparison
of 1997 Results to 1996 Results and  Corporate"  above);  principal  payments of
long-term  14.5% and 15% senior  subordinated  notes totalling  $1,199,000;  the
repurchase of Common Stock and Warrants to purchase Common Stock for $1,146,000;
and  principal  payments on capital  leases of $139,000.  During  1996,  current
assets  increased  by  $4,249,000,  primarily  due  to  an  increase  in  Cues's

                                       23
<PAGE>

inventory,  the recording of a deferred tax asset, an increase in Bickford's and
Corporate's  accounts  receivable  due to an insurance  settlement  related to a
Restaurant  fire in 1996,  partially  offset by a decrease in the asset held for
sale due to the sale of the Vernon,  Connecticut Abdow's  restaurant.  Inventory
increased due to Cues's introduction and development of new products,  a general
increase  in  component  parts used in  production  and an  increase in finished
assemblies.  Current  liabilities  decreased in 1996 by $750,000  (excluding the
current portion of the long-term debt and current  portion of long-term  capital
leases).

During 1995,  the Company had cash flow from  operations  of  $5,078,000,  which
along with net borrowings of $2,334,000 in long-term debt funded the purchase of
property,  plant  and  equipment  totalling  $2,357,000  (including  the one new
Restaurant  opened in  1995);  the net cost of  acquiring  the  fifteen  Abdow's
totalling $2,575,000;  the recording of assets held for sale of $1,075,000;  the
repurchase of Common Stock of $1,224,000;  the payment of bank fees of $125,000;
and the principal  payments on capital leases of $56,000.  During 1995,  current
assets increased by $4,034,000, primarily due to an increase in Cues's inventory
and the  recording of an asset held for sale at December 31, 1995 related to the
Vernon,  Connecticut  Abdow's  Restaurant.  Inventory  increased  due to  Cues's
introduction  and  development of new products and an increase in equipment used
for  demonstrations.  The increase in current assets was partially  offset by an
increase in current  liabilities of $647,000  (excluding the current  portion of
the long-term debt and current portion of long-term capital leases).

Future Needs for and Sources of Capital. Management believes that cash generated
by operations is sufficient to fund current  operations,  including the interest
payments on bank debt. With bank approval,  excess funds are available under the
Company's loan agreement to finance additional acquisitions.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  Consolidated  Financial  Statements  of the  Company for each of the fiscal
years in the three-year period ended December 31, 1997, together with the report
thereon of Price  Waterhouse  LLP dated  March 12,  1998,  are  included in this
report  commencing  on page F-1 and are listed  under  Part IV,  Item 14 in this
Report.

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

Since the beginning of 1996: (i) Price Waterhouse LLP, the Company's independent
accountants engaged as the principal accountant to audit the Company's financial
statements,  has neither  resigned  (or  indicated  it has declined to stand for
re-election after the completion of a current audit) or been dismissed, and (ii)
no new  independent  accountant  has been  engaged by the  Company as either the
principal accountant to audit a significant subsidiary.

                                       24
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information  required under this item is incorporated herein by reference to
the ELXSI Corporation Proxy Statement to be filed within 120 days after December
31, 1997 for the annual Meeting of Stockholders to be held in May 1998.

ITEM 11. EXECUTIVE COMPENSATION

The information  required under this item is incorporated herein by reference to
the ELXSI Corporation Proxy Statement to be filed within 120 days after December
31, 1997 for the annual Meeting of Stockholders to be held in May 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  required under this item is incorporated herein by reference to
the ELXSI Corporation Proxy Statement to be filed within 120 days after December
31, 1997 for the annual Meeting of Stockholders to be held in May 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  required under this item is incorporated herein by reference to
the ELXSI Corporation Proxy Statement to be filed within 120 days after December
31, 1997 for the annual Meeting of Stockholders to be held in May 1998.

                                       25
<PAGE>

                                     PART IV

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

(a) Documents  filed  as  part of  this  report:

Index  to  Consolidated  Financial Statements
---------------------------------------------
<TABLE>
<CAPTION>

1.  Financial   Statements                                         Page
                                                                  Number(s)
                                                                  ---------

<S>                                                               <C>
  Report of Independent Certified Public Accountants                 F-1
  Consolidated Balance Sheets at December 31, 1997 and 1996          F-2 to F-3
  Consolidated  Income  Statements  for the three years
     ended December 31, 1997                                         F-4
  Consolidated  Statements of  Stockholders'  Equity for the
     three years ended December 31, 1997                             F-5
  Consolidated Statements of Cash Flows for the three years
     the  three  years  ended  December  31,  1997                   F-6 to  F-7
  Notes to Consolidated Financial  Statements                        F-8 to F-27
</TABLE>

2.  Financial  Statement  Schedules

<TABLE>
<CAPTION>
               Schedule
               Number         Description                                       Page
               ------         -----------                                       ----
<S>                                                                             <C>
                 II           Valuation and Qualifying  Accounts and Reserves   S-1
</TABLE>

All other schedules are omitted because they are not applicable or not required,
or because the required  information is included in the  Consolidated  Financial
Statements or Notes thereto.

3. Exhibits

Exhibit
Number   Description
------   -----------

2.1      Agreement  and Plan of Merger by and among  ELXSI  Corporation,  ELXSI,
         Cadmus Corporation and Holdingcues,  Inc. dated as of October 16, 1992,
         including form of Series C Warrant.  (Incorporated  herein by reference
         to  Exhibit  2.7 of the  Company's  Current  Report  on Form 8-K  filed
         November 13, 1992 (File No 0-11877)).

2.2      Family Restaurant Sale and Purchase Agreement,  between Marriott Family
         Restaurants, Inc. ("Marriott") and the Company dated February 28, 1991.
         (Incorporated  herein by  reference  to  Exhibit  2.1 of the  Company's
         Current  Report on Form 8-K,  dated July 16, 1991 (File No.  0-11877)).

                                       26
<PAGE>

2.3      Side  Letter  to the  Family  Restaurant  Sale and  Purchase  Agreement
         between Marriott and the Company dated February 28, 1991. (Incorporated
         herein by reference to Exhibit 2.2 of the Company's  Current  Report on
         Form 8-K, dated July 16, 1991 (File No.  0-11877)).

2.4      Assignment  and  Guaranty  of  Family  Restaurants  Sale  and  Purchase
         Agreement  and Side  Letter,  between the  Company,  Marriott and ELXSI
         dated June 29, 1991.  (Incorporated  herein by reference to Exhibit 2.3
         of the Company's  Current Report on Form 8-K, dated July 16, 1991 (File
         No.  0-11877)).

2.5      Closing Side Letter  Agreement  Regarding  Family  Restaurants Sale and
         Purchase  Agreement  between  ELXSI and  Marriott  dated  July 1, 1991.
         (Incorporated  herein by  reference  to  Exhibit  2.4 of the  Company's
         Current  Report on Form 8-K,  dated July 16, 1991 (File No.  0-11877)).

2.6      Real Estate Closing Side Letter Agreement  Regarding Family Restaurants
         Sale and Purchase  Agreement  between ELXSI and Marriott  dated July 1,
         1991. (Incorporated herein by reference to Exhibit 2.5 of the Company's
         Current  Report on Form 8-K,  dated July 16, 1991 (File No.  0-11877)).

2.7      Agreement  Concerning  Massachusetts  and  Connecticut  Liquor Licenses
         between ELXSI and Marriott dated July 1, 1991.  (Incorporated herein by
         reference to Exhibit 2.6 of the Company's  Current  Report on Form 8-K,
         dated July 16, 1991 (File No.  0-11877)).

3.1      Restated  Certificate  of  Incorporation  of the  Company,  as amended.
         (Incorporated  herein by  reference  to  Exhibit  3.1 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1989
         (File  No.   0-11877)).

3.2      Certificate of Amendment of Restated  Certificate of  Incorporation  of
         the Company  dated May 27, 1992.  (Incorporated  herein by reference to
         Exhibit 3.2 of the Company's  Annual Report on Form 10-K for the fiscal
         year ended  December  31, 1994 (File No.  0-11877)).

3.3      Bylaws of the Company  (Incorporated herein by reference to Exhibit 3.3
         to the  Company's  Current  Report on Form 8-K dated June 24,  1997 and
         filed on June 26,  1997 (File No.  0-11877)).

4.1      Series A Warrant  No. A-7 to  purchase  50,000  shares of Common  Stock
         issued to Eliot  Kirkland  L.L.C.  ("EKLLC").  (Incorporated  herein by
         reference to Exhibit 4.1 of the  Company's  Annual  Report on Form 10-K
         for the fiscal year ended  December 31, 1996 (File No.  0-11877)).

4.2      Form  of  Allonge  and   Amendment   to  Series  A  Warrants  of  ELXSI
         Corporation,  with  respect  to the  foregoing  Warrant.  (Incorporated
         herein by reference to Exhibit 4.2 of the  Company's  Annual  Report on
         Form  10-K for the  fiscal  year  ended  December  31,  1996  (File No.
         0-11877)).

4.3      Series A Warrant No. A-6 to  purchase  150,500  shares of Common  Stock
         issued to the Alexander M. Milley  Irrevocable Trust I U/A dated May 9,
         1994. (Incorporated herein by reference to Exhibit 4.2 of the Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No.  0-11877)).

4.4      Form  of  Allonge  and   Amendment   to  Series  A  Warrants  of  ELXSI
         Corporation,  with  respect  to the  foregoing  Warrant.  (Incorporated
         herein by reference to Exhibit 4.4 of the  Company's  Annual  Report on
         Form  10-K for the  fiscal  year  ended  December  31,  1996  (File No.
         0-11877)).

4.5      Series B  Warrant  No.  B-1 to  purchase  604,656  shares  of  Series A
         Non-Voting  Convertible  Preferred Stock issued to Continental Illinois
         Equity Corporation  ("CIEC") (now named BankAmerica Capital Corporation
         ("BACC")).  (Incorporated  herein by  reference  to Exhibit  4.6 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1989 (File No.

                                       27
<PAGE>

       0-11877)).

4.6      Series C Warrant  No. C-3 to  purchase  68,762  shares of Common  Stock
         issued to EKLLC.  (Incorporated  herein by  reference to Exhibit 4.6 of
         the  Company's  Annual  Report on Form 10-K for the  fiscal  year ended
         December  31,  1996  (File  No.  0-11877)).

4.7      Form  of  Allonge  and   Amendment   to  Series  C  Warrants  of  ELXSI
         Corporation,  with  respect  to the  foregoing  Warrant.  (Incorporated
         herein by reference to Exhibit 4.7 of the  Company's  Annual  Report on
         Form  10-K for the  fiscal  year  ended  December  31,  1996  (File No.
         0-11877)).

4.8      Amended and Restated  Registration Rights Agreement dated as of January
         23,  1990  among  the  Company,  Milley &  Company  ("M&C")  and  CIEC.
         (Incorporated  herein by  reference  to  Exhibit  4.7 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1989
         (File No. 0-11877)).

4.9      Exercise of Option and Assignment of  Registration  Rights  executed by
         ELX Limited  partnership  ("ELX") and The Airlie Group, L.P. ("Airlie")
         dated November 30, 1994.  (Incorporated  herein by reference to Exhibit
         4.6 of the  Company's  Annual  Report on Form 10-K for the fiscal  year
         ended  December  31,  1994  (File  No.   0-11877)).

4.10     15%  Senior  Subordinated  Note  issued by the  Company  to CIEC in the
         amount of  $401,765.00.  (Incorporated  herein by  reference to Exhibit
         10.18 of the  Company's  Annual Report on Form 10-K for the fiscal year
         ended  December  31,  1989  (File  No.  0-11877)).

4.11     14.5%  Senior  Subordinated  Note  issued by the Company to CIEC in the
         amount of  $502,206.25  dated June 27,  1991.  (Incorporated  herein by
         reference to Exhibit 4.8 of the  Company's  Annual  Report on Form 10-K
         for the fiscal year ended December 31, 1994 (File No. 0-11877)).

4.12     Amended and Restated Loan and Security Agreement,  dated as of December
         30,  1996,   between  ELXSI  and  Bank  of  America  Illinois  ("BAI").
         (Incorporated  herein by  reference  to Exhibit  4.12 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1996
         (File No. 0-11877)).

4.13     Warrant Purchase and Senior  Subordinated  Note termination  Agreement,
         dated  as  of  December  30,  1996,   between  BACC  and  the  Company.
         (Incorporated  herein by  reference  to Exhibit  4.13 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1996
         (File No. 0-11877)).

4.14     14.5%  Senior  Subordinated  Note  issued by the  Company  to Pan Fixed
         Income  Fund,  Ltd.,  dated as of  November  16,  1993 in the amount of
         $250,000.  (Incorporated  herein by  reference  to Exhibit  4.12 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31,  1994 (File No.  0-11877)).

4.15     14.5%  Senior  Subordinated  Note  issued by the Company to Rona Jaffe,
         dated as of November 16, 1993 in the amount of $100,000.  (Incorporated
         herein by reference to Exhibit 4.13 of the  Company's  Annual Report on
         Form  10-K for the  fiscal  year  ended  December  31,  1994  (File No.
         0-11877)).

4.16     14.5% Senior  Subordinated Note issued by the Company to Anne Strassler
         A.C.S.W.  P.C., dated as of November 16, 1993 in the amount of $25,000.
         (Incorporated  herein by  reference  to Exhibit  4.14 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

                                       28
<PAGE>

4.17     Rights  Agreement,  dated as of June 4, 1997,  between  the Company and
         Continental   Stock   Transfer  &  Trust   Company,   as  Rights  Agent
         (Incorporated herein by reference to Exhibit 4.17 to the Company's Form
         8-A  Registration  Statement  filed and dated  June 10,  1997 (File no.
         0-11877)).

4.18     Second  Amendment to Amended and Restated Loan and Security  Agreement,
         dated as of  September  24,  1997,  between  ELXSI and Bank of  America
         National  Trust  and  Savings  Association.   (Incorporated  herein  by
         reference to Exhibit  4.18 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1997 (File No. 0-11877)).

4.19     Trust  Indenture,  dated as of September  24, 1997,  between the Orange
         County  Industrial  Development  Authority and Sun Trust Bank,  Central
         Florida,  National  Association,  as Trustee.  (Incorporated  herein by
         reference to Exhibit  4.19 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1997 (File No. 0-11877)).

4.20     Loan Agreement,  dated as of September 24, 1997,  between ELXSI and the
         Orange County Industrial Development Authority. (Incorporated herein by
         reference to Exhibit  4.20 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1997 (File No. 0-11877)).

4.21     Mortgage and Security Agreement, dated as of September 24, 1997 between
         ELXSI  and  the  Orange  County   Industrial   Development   Authority.
         (Incorporated  herein by  reference  to Exhibit  4.21 of the  Company's
         Quarterly  Report on Form 10-Q for  quarter  ended  September  30, 1997
         (File No. 0-11877)).

4.22     Bond Purchase  Agreement,  dated as of September 24, 1997, by and among
         the Orange County Industrial Development  Authority,  ELXSI and Bank of
         America National Trust and Savings Association. (Incorporated herein by
         reference to Exhibit  4.22 of the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1997 (File No. 0-11877)).

4.23     Guaranty  Agreement,  dated as of September  24,  1997,  by and between
         ELXSI  Corporation  and Bank of  America  National  Trust  and  Savings
         Association.  (Incorporated  herein by reference to Exhibit 4.23 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1997 (File No. 0-11877)).

4.24     Security  Agreement,  dated as of September 24, 1997, between ELXSI and
         the  Orange  County  Industrial  Development  Authority.  (Incorporated
         herein by reference to Exhibit 4.24 of the Company's  Quarterly  Report
         on Form  10-Q for the  quarter  ended  September  30,  1997  (File  No.
         0-11877)).

10.1     The   Company's   1987   Incentive   Stock   Option  Plan  as  amended.
         (Incorporated  by  reference to Exhibit  10.1 of the  Company's  Annual
         Report on Form 10-K for the fiscal year ended  December  31, 1987 (File
         No. 0-11877)).

10.2     The  Company's  1987   Supplemental   Stock  Option  Plan  as  amended.
         (Incorporated  by  reference to Exhibit  10.2 of the  Company's  Annual
         Report on Form 10-K for the fiscal year ended  December  31, 1987 (File
         No.  0-11877)).

10.3     The Company's 1993 Incentive Stock Option Plan. (Incorporated herein by
         reference to Exhibit 10.3 of the  Company's  Annual Report on Form 10-K
         for the fiscal year ended December 31, 1994 (File No.  0-11877)).

10.4     The Company's 1995 Incentive Stock Option Plan (Incorporated  herein by
         reference  to  Exhibit  4.1  to the  Company's  Form  S-8  Registration
         Statement filed November 14, 1995 (Registration No.  033-

                                       29
<PAGE>

         64205)).

10.5     The Company's 1996 Incentive Stock Option Plan (Incorporated  herein by
         reference  to  Exhibit  4.1  to the  Company's  Form  S-8  Registration
         Statement filed December 2, 1996  (Registration No.  333-17131)).

10.6     The Company's 1997 Incentive Stock Option Plan (Incorporated  herein by
         reference  to  Exhibit  4.1  to the  Company's  Form  S-8  Registration
         Statements filed January 30, 1998 (Registration No. 333-4538))

10.7     The ELXSI 1991  Phantom  Stock  Option Plan for the  management  of the
         Bickford's Division.  (Incorporated herein by reference to Exhibit 10.4
         of the  Company's  Annual Report on Form 10-K for the fiscal year ended
         December 31, 1994 (File No. 0-11877)).

10.8     Amendment  No. 1 to the ELXSI 1991  Phantom  Stock  Option Plan for the
         management  of  the  Bickford's   Division.   (Incorporated  herein  by
         reference to Exhibit 10.5 of the  Company's  Annual Report on Form 10-K
         for the fiscal year ended December 31, 1994 (File No.  0-11877)).

10.9     Non-Qualified  Stock Option  Agreement issued to Robert C. Shaw for the
         purchase of 12,500  shares of Common  Stock,  dated  October 30,  1992.
         (Incorporated  herein by  reference  to Exhibit  10.7 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.10    Non-Qualified  Stock Option  Agreement issued to John C. Savage for the
         purchase of 10,000  shares of Common  Stock,  dated  October 30,  1992.
         (Incorporated  herein by  reference  to Exhibit  10.8 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.11    Non-Qualified  Stock Option Agreement issued to Farrokh K. Kavarana for
         the purchase of 10,000 shares of Common Stock,  dated October 30, 1992.
         (Incorporated  herein by  reference  to Exhibit  10.9 of the  Company's
         Annual Report on Form 10-K for the Fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.12    Non-Qualified  Stock Option  Agreement issued to Kevin P. Lynch for the
         purchase of 20,000  shares of Common  Stock,  dated  October 30,  1992.
         (Incorporated  herein by  reference to Exhibit  10.10 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.13    Non-Qualified  Stock Option Agreement issued to Alexander M. Milley for
         the purchase of 30,000 shares of Common Stock,  dated October 30, 1992.
         (Incorporated  herein by  reference to Exhibit  10.11 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.14    Non-Qualified  Stock Option  Agreement issued to Thomas R. Druggish for
         the purchase of 12,500 shares of Common Stock,  dated October 30, 1992.
         (Incorporated  herein by  reference to Exhibit  10.12 of the  Company's
         Annual Report on Form 10-K for the fiscal year ended  December 31, 1994
         (File No. 0-11877)).

10.15    Stock and Note  Purchase  Agreement  dated as of August 31, 1989 by and
         among the Company, Airlie and M&C. (Incorporated herein by reference to
         Exhibit 2.1 of the Company's  Current  Report on Form 8-K filed October
         3, 1989 (File No 0-11877)).

                                       30
<PAGE>

10.16    Stock and Note  Purchase  Agreement  dated as of January 23, 1990 among
         Airlie,  CIEC and M&C.  (Incorporated  herein by  reference  to Exhibit
         10.14 of the  Company's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1994 (File No. 0-11877)).

10.17    Management Agreement between Winchester National,  Inc. (d/b/a M&C) and
         the Company dated September 25, 1989. (Incorporated herein by reference
         to Exhibit  10.21 of the  Company's  Annual Report on Form 10-K for the
         fiscal year ended December 31, 1991 (File No. 0-11877)).

10.18    Assignment  of  Management  Agreement  dated  June 28,  1991  among the
         Company,   Winchester  National,  Inc.,  ELXSI  and  Milley  Management
         Incorporated  ("MMI").  (Incorporated  herein by  reference  to Exhibit
         10.16 of the  Company's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1994 (File No. 0-11877)).

10.19    Management  Agreement  Extension dated September 25, 1992 between ELXSI
         and MMI.  (Incorporated  herein by  reference  to Exhibit  10.17 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1994 (File No. 0-11877)).

10.20    Form of Extension No. 2 to Management  Agreement,  dated as of June 30,
         1997,  between  ELXSI and Cadmus  (incorporated  herein by reference to
         Exhibit  10.33 to the  Company's  Current  Report on Form 8-K dated and
         filed July 9, 1997 (File No. 0-11877)).

10.21    Assignment to Cadmus Corporation ("Cadmus"),  dated January 1, 1994, of
         MMI's rights under the extended  Management  Agreement  dated September
         25, 1992, as amended,  between ELXSI and MMI.  (Incorporated  herein by
         reference to Exhibit 10.18 of the Company's  Annual Report on Form 10-K
         for the fiscal year ended December 31, 1994 (File No. 0-11877)).

10.22    Promissory Note of ELX payable to the Company dated December 8, 1994 in
         the amount of $1,155,625.00 due December 8, 1997.  (Incorporated herein
         by  reference to Exhibit 10.6 of the  Company's  Annual  Report on Form
         10-K for the fiscal year ended December 31, 1994 (File No. 0-11877)).

10.23    Letter  Agreement  dated  December  8,  1997,  from the  Company to ELX
         extending the term of the foregoing.

10.24    Form of Stock  Purchase  and  Option  Exercise  Agreement,  dated as of
         December  30,  1996,  between  BACC  and ELX  (Incorporated  herein  by
         reference to Exhibit D to the  Amendment  No. 10 to the Schedule 13D of
         Alexander M. Milley, MMI, ELX, Cadmus and EKLLC, dated January 7, 1997,
         filed in respect of the Company's Common Stock).

10.25    Form of Promissory  Note of ELX payable to the Company,  dated December
         30,  1996,  in  the  amount  of  $909,150  due  on  December  30,  1999
         (Incorporated  herein by reference to Exhibit E to the Amendment No. 10
         to the Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
         dated January 7, 1997, filed in respect of the Company's Common Stock).

10.26    Form of  Recapitalization  Agreement,  dated as of December  30,  1996,
         among Azimuth  Corporation  ("Azimuth"),  Delaware Electro  Industries,
         Inc. ("DEI"), Contempo Design, Inc. ("CDI"), Contempo Design West, Inc.
         ("CDW"),  ELXSI and BAI (Incorporated  herein by reference to Exhibit F
         to the  Amendment  No. 10 to the  Schedule  13D of Alexander M. Milley,
         MMI, ELX, Cadmus and EKLLC,  dated January 7, 1997, filed in respect of
         the Company's Common Stock).

10.27    Second  Amended and Restated Loan and Security  Agreement,  dated as of
         October 9,  1995,  between  Azimuth  and BAI.  (Incorporated  herein by
         reference to Exhibit 10.24 of the Company's  Annual Report on Form 10-K
         for the fiscal year ended December 31, 1996 (File No. 0-11877)).

                                       31
<PAGE>

10.28    Loan and Security  Agreement,  dated as of October 9, 1995, between DEI
         and BAI.  (Incorporated  herein by  reference  to Exhibit  10.25 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1996 (File No. 0-11877)).

10.29    Loan and Security  Agreement,  dated as of October 9, 1995, between CDI
         and BAI.  (Incorporated  herein by  reference  to Exhibit  10.26 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1996 (File No. 0-11877)).

10.30    Loan and Security  Agreement,  dated as of October 9, 1995, between CDW
         and BAI.  (Incorporated  herein by  reference  to Exhibit  10.27 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1996 (File No. 0-11877)).

10.31    First Omnibus  Amendment,  dated as of August 9, 1996,  among  Azimuth,
         DEI,  CDI,  CDW and BAI.  (Incorporated  herein by reference to Exhibit
         10.28 of the  Company's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996 (File No. 0-11877)).

10.32    Second  Omnibus  Amendment,  dated  as of  September  23,  1996,  among
         Azimuth,  DEI, CDI, CDW and BAI.  (Incorporated  herein by reference to
         Exhibit  10.29 of the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended December 31, 1996 (File No. 0-11877)).

10.33    Third Omnibus Amendment,  dated as of November 27, 1996, among Azimuth,
         DEI,  CDI,  CDW and BAI.  (Incorporated  herein by reference to Exhibit
         10.30 of the  Company's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996 (File No. 0-11877)).

10.34    Second Amended and Restated Guaranty, dated as of October 9, 1995, made
         by DEI, CDI and CDW in favor of BAI.  (Incorporated herein by reference
         to Exhibit  10.31 of the  Company's  Annual Report on Form 10-K for the
         fiscal year ended December 31, 1996 (File No. 0-11877)).

10.35    Second Amended and Restated  Pledge  Agreement,  dated as of October 9,
         1995,  among Azimuth,  DEI, CDI, CDW and BAI.  (Incorporated  herein by
         reference to Exhibit 10.32 of the Company's  Annual Report on Form 10-K
         for the fiscal year ended December 31, 1996 (File No. 0-11877)).

10.36    Form of letter,  dated June 1997 from ELXSI to Azimuth,  DEI,  CDI, and
         CDW (Incorporated herein by reference to Exhibit C to the Amendment No.
         10 to the Schedule 13D of Alexander  M. Milley,  MMI,  ELX,  Cadmus and
         EKLLC,  dated January 7, 1997 filed in respect of the Company's  Common
         Stock)

10.37    Form of Employment Agreement,  dated as of June 30, 1997, between ELXSI
         and  Alexander M. Milley  (Incorporated  herein by reference to Exhibit
         10.34 to the Company's Form 8-K Current Report dated July 9, 1997 filed
         on July 9, 1997 (File No. 0-11877)).

21.1     Subsidiaries of the Company. (Incorporated by reference to Exhibit 22.1
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         December 31, 1990 (File No. 0-11877)).

23.1     Consent of Price Waterhouse LLP

27       Financial Data Schedule

(b) Reports on Form 8-K

            None

                                       32
<PAGE>

                                   SIGNATURES

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

                                        ELXSI CORPORATION

                                        BY:/s/ Alexander M. Milley
                                           --------------------------------
                                           Alexander M. Milley
                                           Chairman of the Board, President and
                                           Chief Executive Officer

Dated: March 20, 1998

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.

<TABLE>
<CAPTION>
<S>                           <C>                                       <C>

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

/s/ Alexander M. Milley       Chairman of the Board,                    March 20, 1998
--------------------------
      Alexander M. Milley     President andChief Executive
                              Officer (Principal Executive Officer)

/s/ Robert C. Shaw
--------------------------    Director and Vice President               March 20, 1998
      Robert C. Shaw

/s/ Thomas R. Druggish        Vice President, Treasurer                 March 20, 1998
--------------------------
     Thomas R. Druggish       and Secretary (Chief
                              Accounting Officer and
                              Principal Financial Officer)

/s/ Kevin P. Lynch            Director and Vice President               March 20, 1998
--------------------------
     Kevin P. Lynch

/s/ Farrokh K. Kavarana       Director                                  March 20, 1998
--------------------------
     Farrokh K. Kavarana

/s/ Denis M. O'Donnell        Director                                  March 20, 1998
--------------------------
     Denis M. O'Donnell
</TABLE>

                                       33
                                     <PAGE>

               Report of Independent Certified Public Accountants


To the Board of Directors and Shareholders of
ELXSI Corporation

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item  14(a)(1)  and (2) on page  26,  present  fairly,  in all
material  respects,   the  financial  position  of  ELXSI  Corporation  and  its
subsidiaries at December 31, 1997 and 1996, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997, in conformity with generally  accepted  accounting  principles.  These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.





/s/ Price Waterhouse LLP
-----------------------------
Price Waterhouse LLP


Orlando, Florida
March 12, 1998

                                      F-1
<PAGE>

                                ELXSI CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

                                   A S S E T S


<TABLE>
<CAPTION>

                                             December 31,           December 31,
                                                1997                   1996
                                             -----------            -----------

Current assets:

<S>                                          <C>                    <C>
  Restricted cash and cash equivalents       $     1,079            $        --

  Accounts receivable, less allowance for
   doubtful accounts of $117 and $54 in 1997
   and 1996, respectively                          3,987                  3,425

  Inventories                                     10,378                 11,017

  Prepaid expenses and other current assets          203                    234

  Notes receivable - related party                    --                  1,156

  Deferred tax asset                               5,024                  1,142

     Total current assets                         20,671                 16,974

Property, buildings and equipment, net            29,681                 27,677

Intangible assets, net                             5,344                   5,525

Deferred debt costs, net                             155                      76

Notes receivable - related party                   4,065                   6,759

Deferred tax asset - noncurrent                    6,019                   1,739

Other                                                518                     728
                                          --------------           -------------

     Total assets                         $       66,453           $      59,478
                                          ==============           =============
</TABLE>





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

                                      F-2
                                     <PAGE>

                                ELXSI CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                             December 31,           December 31,
                                                1997                    1996
                                             -----------            -----------
<S>                                          <C>                    <C>

Current liabilities:
   Accounts payable                          $     3,226            $     3,266
   Accrued expenses                                5,005                  4,649
   Capital lease obligations - current               125                    142
   Current portion of long-term debt                 220                    268
                                             -----------            -----------

     Total current liabilities                     8,576                  8,325

Capital lease obligations - non current            1,074                  1,588
Long-term debt, net of discount                   10,935                 18,706
Other non current liabilities                      2,696                  1,946
                                             -----------            -----------

     Total liabilities                            23,281                 30,565
                                             -----------            -----------

Commitments and contingencies (Note 9)                --                     --
-------------- -------------

Stockholders' equity:
  Preferred Stock, Series A Non-voting
    Convertible, par value $0.002 per share
    Authorized--5,000,000 shares
    Issued and outstanding--none                      --                     --
  Common Stock, par value $0.001 per share
    Authorized--160,000,000 shares
    Issued and outstanding--4,660,980
    at December 31, 1997 and 4,660,869
    at December 31, 1996                               5                      5
  Additional paid-in-capital                     228,509                228,520
  Accumulated deficit                           (185,133)              (199,512)
  Cumulative foreign currency translation
    adjustment                                      (209)                  (100)
                                            ------------           ------------

Total stockholders' equity                        43,172                 28,913
                                            ------------           ------------

Total liabilities and stockholders' equity  $     66,453           $     59,478
                                            ============           ============
</TABLE>




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

                                      F-3
                                     <PAGE>

                                ELXSI CORPORATION
                         CONSOLIDATED INCOME STATEMENTS
                  (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>

                                                      Year Ended December 31,
                                             ------------------------------------------
                                                  1997          1996          1995
                                             -------------- ------------- -------------

<S>                                          <C>            <C>           <C>
Net sales                                    $       86,945 $      82,743 $      74,674

Costs and expenses:
   Cost of sales                                     68,406        66,603        58,347
   Selling, general and administrative                7,924         7,362         7,484
   Depreciation and amortization                      3,176         2,775         2,206
                                             -------------- ------------- -------------

Operating income                                      7,439         6,003         6,637

Other income (expense):
     Interest income                                  1,287           111           125
     Interest expense                                (1,420)       (1,495)       (1,767)
     Other (expense) income                            (239)          432            65
                                             -------------- ------------- -------------

Income before income taxes                            7,067         5,051         5,060

Benefit (provision) for income taxes                  7,312         2,332          (514)
                                             -------------- ------------- -------------

Net income                                   $       14,379 $       7,383 $       4,546
                                             ============== ============= =============


Net income per common share:
   Basic                                     $         3.08 $        1.55 $        0.95
                                             ============== ============= =============
   Diluted                                   $         2.88 $        1.51 $        0.89
                                             ============== ============= =============

Weighted average number of common
 and common equivalent shares:
  Basic                                               4,661         4,763         4,811
                                             ============== ============= =============
  Diluted (see Note 11)                               4,989         4,902         5,093
                                             ============== ============= =============
</TABLE>






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

                                      F-4
                                     <PAGE>

                                ELXSI CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                                                              Cumulative
                                                                                               Foreign
                                                                     Additional   Accum-       Currency
                                              Common Stock             Paid-In    ulated      Translation
                                           Shares     Dollars          Capital    Deficit     Adjustment
                                          --------   ---------       ----------  ---------    -----------

<S>                                       <C>        <C>             <C>         <C>          <C>
Balance at December 31, 1994              5,032,333  $       5       $  230,890  $(211,441)   $       (56)

Foreign currency translation
   adjustment                                    --         --               --         --             (6)
Purchase and retirement of
   Common Stock                            (240,000)        --           (1,224)        --             --
Issuance of fractional shares                    20
Net income                                                  --         --            4,546             --
                                          ---------  ---------       ----------  ---------     ----------

Balance at December 31, 1995              4,792,353          5          229,666   (206,895)           (62)

Foreign currency translation
   adjustment                                    --         --               --         --            (38)
Purchase and retirement of Common
     Stock and warrants to purchase
     convertible preferred stock           (131,500)        --           (1,146)        --             --
Issuance of fractional shares                    16         --               --         --             --
Net income                                                  --               --      7,383             --
                                         ----------  ---------       ----------  ---------     ----------

Balance at December 31, 1996              4,660,869          5          228,520   (199,512)          (100)

Foreign currency translation
     adjustment                                  --         --               --         --           (109)
Purchase and retirement of
     Common Stock                            (2,000)        --              (22)        --             --
Exercise of Common Stock options
     to purchase Common Stock                 2,100         --               11         --             --
Issuance of fractional shares                    11         --               --         --             --
Net income                                       --         --               --     14,379             --
                                         ----------  ---------       ----------  ---------     ----------

Balance at December 31, 1997              4,660,980  $       5       $  228,509  $(185,133)    $     (209)
                                         ==========  =========       ==========  =========     ==========
</TABLE>







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

                                      F-5
                                     <PAGE>


                                ELXSI CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                          --------------------------------
                                                            1997        1996       1995
                                                          --------     -------    -------
<S>                                                       <C>          <C>        <C>

Cash flows provided by operating activities:

Net income                                                $ 14,379     $ 7,383    $ 4,546
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization                            3,176       2,775      2,206
    Amortization of deferred debt costs                         74         166        213
    Amortization of debt discount                               --          12         19
    Loss on disposal of equipment                               42         292         54
    Other                                                       --         (38)        (6)

(Increase) decrease in assets:
    Accounts receivable                                       (562)       (649)      (498)
    Inventories                                                639      (2,540)    (2,269)
    Prepaid expenses and other current assets                   31         163       (192)
    Deferred tax asset                                      (8,162)     (2,881)        --
    Other                                                      101        (283)      (242)
(Decrease) increase in liabilities:
    Accounts payable                                           (40)     (1,003)       253
    Accrued expenses                                           356         253        394
    Other non current liabilities                              750         550        600
                                                          --------     -------    -------
    Net cash provided by operating activities               10,784       4,200      5,078
                                                          --------     -------    -------

Cash flows used in investing activities:

    Proceeds from sale of Abdow's Restaurant                    --       1,075         --
    Acquisition of asset held for sale                          --          --     (1,075)
    Acquisition of Abdow's Restaurants                          --          --     (2,575)
    Purchase of property, buildings and equipment           (5,435)     (3,108)    (2,357)
    Collection of notes receivable - related party           5,850          --         --
    Investment in notes receivable - related party          (2,000)     (6,759)        --
                                                          --------     -------    -------
    Net cash used in investing activities                   (1,585)     (8,792)    (6,007)
                                                          --------     -------    -------
</TABLE>







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

                                      F-6
<PAGE>

                                ELXSI CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                             (Dollars in Thousands)


<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                          --------------------------------
                                                            1997        1996       1995
                                                          --------     -------    -------
<S>                                                       <C>          <C>        <C>

Cash flows (used in) provided by financing activities:

   Net (payments) borrowings on line of credit            $(10,765)    $ 7,112    $ 2,429
   Borrowings of long-term debt                              3,020
   Payments of long-term senior subordinated debt               --      (1,199)       (83)
   Payments of long-term debt                                  (74)         (6)       (12)
   Purchase of Common Stock and warrants to
    purchase Common Stock                                      (22)     (1,146)    (1,224)
   Proceeds from exercise of Common Stock
    options                                                     11          --         --
   Payment of deferred bank fee                               (153)        (30)      (125)
   Principal payments on capital lease obligations            (137)       (139)       (56)
                                                          --------     -------    -------
   Net cash (used in) provided by financing activities      (8,120)      4,592        929

Increase in cash and cash equivalents                        1,079          --         --

Cash and cash equivalents, beginning of period                  --          --         --
                                                          --------     -------    -------

Cash and cash equivalents, end of period                  $  1,079     $    --    $    --
                                                          ========     =======    =======


Supplemental Disclosure of Cash Flow Information:

Cash paid during the year for:
     Interest                                             $  1,237     $ 1,411    $ 1,544
     Taxes                                                     856         747        563
</TABLE>


Non Cash Investing Activities:

In October 1997, the Company  purchased a restaurant  facility it was previously
leasing, which was classified as a capital lease, in Marlboro, Massachusetts for
approximately $635,000, $520,000 of which was financed with a mortgage note (see
Note 8).





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

                                      F-7
                                     <PAGE>

                                ELXSI CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1997


Note 1. The Company

General.  ELXSI  Corporation  (together with its subsidiary,  the "Company") has
historically   operated   principally   through  its   wholly-owned   California
subsidiary,  ELXSI.  Prior to 1990,  the  principal  business  of ELXSI  was the
design, manufacture,  sale and support of minisupercomputers.  In July 1989, the
Company announced a major restructuring of its computer operations. In September
1989, the Company discontinued all computer operations.

On  July 1,  1991,  ELXSI  acquired  30  Bickford's  Restaurants  and 12  Howard
Johnson's  Restaurants from Marriott Family Restaurants,  Inc. These Restaurants
are  located  in  Massachusetts,   Vermont,  New  Hampshire,  Rhode  Island  and
Connecticut.

Between  1992 and 1996,  ELXSI  sold six of its  Howard  Johnson's  Restaurants,
converted five others into Bickford's  Restaurants,  opened eight new Bickford's
Restaurants,  acquired 16 Abdow's Family  Restaurants  ("Abdow's"),  sold one of
these  Abdow's,  closed  another  of these  Abdow's  and  converted  nine of the
remaining Abdow's into Bickford's  Restaurants.  During 1997, ELXSI opened three
new Bickford's  Restaurants.  At December 31, 1997, ELXSI operated 55 Bickford's
Restaurants, five Abdow's and one Howard Johnson's Restaurant (the "Restaurants"
or "Restaurant Division").

On October 30, 1992,  ELXSI acquired Cues, Inc. of Orlando,  Florida and its two
wholly-owned  subsidiaries Knopafex,  Ltd., a Canadian company, and Cues B.V., a
Dutch company, collectively referred to as "Cues".

Cues is engaged in the manufacture and servicing of video  inspection and repair
equipment  for  wastewater  and  drainage  systems  primarily  for  governmental
municipalities, service contractors and industrial users.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation.  The consolidated  financial statements include the
accounts of ELXSI  Corporation  and its  wholly-owned  subsidiary.  All material
intercompany accounts and transactions have been eliminated.

Both the  Company's  corporate  functions  and Cues  Division  have fiscal years
consisting  of four  calendar  quarters  ending on December  31. The  Restaurant
Division's  fiscal year consists of four 13-week  quarters (one 52-week  period)
ending on the last  Saturday in December;  this requires that every six or seven
years the Restaurant Division add an extra week at the end of the fourth quarter
and fiscal year. This was the case for the fourth quarter of 1994.

Cash and Cash Equivalents. The Company has a cash management system whereby cash
generated by operations is  immediately  used to reduce debt.  Accordingly,  the
Company generally maintains no cash or cash equivalents.

                                      F-8
<PAGE>

Fair Value of Financial Instruments.  The carrying amount of restricted cash and
cash  equivalents,  accounts and notes  receivable,  accounts  payable,  accrued
expenses  and  long-term  debt  approximates  fair  value  because  of the short
maturity of those  instruments  and the variable  nature of the  interest  rates
associated with the debt.

Inventories. Inventories are stated at the lower of cost or market determined by
the first-in, first-out method.

Property, Buildings and Equipment.  Property, buildings and equipment, including
buildings   under  capital   leases,   are  stated  at  cost  less   accumulated
depreciation. Depreciation is provided using the straight-line method. Buildings
held pursuant to capital  leases are  amortized  over the shorter of the term of
the applicable lease (including extension options) or the estimated useful life.
The estimated lives used are:

     Buildings and improvements                   30 years
     Equipment, furniture and fixtures             7 years

Depreciation  expense for 1997,  1996 and 1995 was  $2,995,000,  $2,597,000  and
$2,018,000, respectively.

Impairment  of  Long-Lived  Assets.  In the event that  facts and  circumstances
indicate that the carrying  value of a long-lived  asset,  including  associated
intangibles,  may be impaired,  an evaluation of  recoverability is performed by
comparing the estimated  future  un-discounted  cash flows  associated  with the
asset's  carrying  amount  to  determine  if a  write-down  to  market  value or
discounted cash flow is required. Statement of Financial Accounting Standard No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed Of" ("SFAS 121"), was adopted by the Financial  Accounting
Standards  Board  ("FASB") in March 1995 and was  implemented  by the Company in
1996.  However,  since the Company's  previous  accounting policy was consistent
with the provisions of SFAS 121, there was no impact as a result of adopting the
new standard.

Intangible  Assets. The excess of cost over fair value of net assets acquired is
amortized over 35 years using the straight-line method. Amortization expense for
1997,  1996  and  1995  was  $150,000,  $150,000  and  $153,000,   respectively.
Management periodically reviews the potential impairment of intangible assets in
order to determine the proper  carrying values as of each  consolidated  balance
sheet date.

Trademarks are amortized over 35 years using the straight-line method. Trademark
amortization  expense for 1997, 1996 and 1995 was $31,000,  $28,000 and $35,000,
respectively.

Deferred Debt Costs. Deferred debt costs are amortized over the term of the loan
to interest expense using the effective interest method. As of December 31, 1997
and 1996,  $155,000 and  $76,000,  respectively,  remained to be amortized  over
future  periods.  Amortization  expense  in 1997,  1996  and  1995 was  $74,000,
$166,000 and $213,000, respectively.

Use of  Estimates.  The  preparation  of  consolidated  financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and the disclosure of contingent  assets and liabilities at the date
of the consolidated financial statements and of the reported amounts of

                                      F-9
<PAGE>

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

Concentration of Credit Risk. The Company's Cues division designs,  manufactures
and markets a line of video inspection and repair equipment used by governmental
municipalities,  service  contractors and industrial users for underground sewer
lines.   Financial   instruments  which  potentially   subject  the  Company  to
concentrations  of  credit  risk are  primarily  accounts  receivable  and notes
receivable.  The Company performs  ongoing credit  evaluations of its customers'
financial condition and,  generally,  requires no collateral from its customers.
The  allowance  for  non-collection  of  accounts  receivable  is based upon the
expected collectibility of all accounts receivable.

The Company  does not rely on any one vendor or supplier  for its raw  materials
within each of its  operating  divisions,  and  management  believes  that other
suppliers could provide for the Company's needs on comparable terms.

Foreign  Currency  Translation.  The assets and  liabilities of the Canadian and
Dutch subsidiaries of Cues are translated into U.S. dollars at year-end exchange
rates, and revenue and expense items are translated at average rates of exchange
prevailing during the year. Resulting translation adjustments are accumulated in
a separate component of stockholders' equity.

Income  Taxes.  The  Company  has  adopted  Statement  of  Financial  Accounting
Standards Number 109 "Accounting For Income Taxes" ("SFAS 109").  This Statement
provides for  accounting for taxes under an asset and liability  approach.  This
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary  differences  between the carrying
amounts and the tax basis of other assets and liabilities. Temporary differences
giving rise to  deferred  tax assets and  liabilities  include  certain  accrued
liabilities and net operating loss carryforwards. The provision for income taxes
includes  the  amount of income  taxes  payable  for the year as  determined  by
applying  the  provisions  of the current tax law to the taxable  income for the
year and the net change during the year in the Company's deferred tax assets and
liabilities.  In determining the amount of any valuation  allowance  required to
offset  deferred tax assets,  an assessment  is made that includes  anticipating
future income,  in determining  the likelihood of realizing  deferred tax assets
(see Note 6).

Advertising.  Advertising costs, included in selling, general and administrative
expense, are expensed as incurred and totalled $1,028,000, $975,000 and $862,000
in 1997, 1996 and 1995, respectively.

Reclassification.  The Company has recorded certain  reclassifications  in prior
years to be consistent with the current years presentation.

Accounting  for  Stock-Based  Compensation.  In October  1995,  the FASB adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS  123"),  which  governs  the  accounting  for  stock-based
compensation  plans,  including  employee  stock options.  The statement  allows
companies the choice of adopting a new fair value-based method of accounting for
such plans  that  includes  expensing  related  compensation  cost in the income
statement,  or  continuing  to apply  the  method  specified  under  preexisting
guidelines  under  which  generally  no  compensation  expense is  recorded.  If
companies elect to follow  preexisting  guidelines,  the new statement  requires
that the notes to the financial  statements include pro forma

                                      F-10
<PAGE>

information  on net income  and  earnings  per share as if the fair value  based
method  were  being  used.  The  Company  has  elected  to  continue  to measure
compensation  expense under the preexisting  guidelines.  Pro forma  information
relating to stock-based compensation is presented in Note 11.

Adoption  of New  Accounting  Standards.  In  February  1997,  the FASB  adopted
Statement of Financial  Accounting  Standards (SFAS 128),  "Earnings Per Share",
which  requires  companies to change in fiscal 1997 the way that they  calculate
and present  earnings per share.  In  accordance  with those  requirements,  the
Company now presents "basic" earnings per share,  which is net income divided by
weighted average shares  outstanding  during the period,  and "diluted" earnings
per share, which considers the impact of common stock equivalents. The Company's
common stock  equivalents  consist of employee and  director  stock  options and
warrants  to purchase  common  stock.  Earnings  per share  presented  for prior
periods have been restated in accordance with SFAS 128.

In June 1997, the FASB adopted two standards:  SFAS Nos. 130 and 131, "Reporting
Comprehensive  Income" and  "Disclosures  about  Segments of an  Enterprise  and
Related  Information." Both of these new standards relate to the presentation of
financial  information  and do not  impact  the  computation  of net  income  or
earnings per share.  Both will be effective for the Company  beginning  with its
1998 annual  financial  statements.  SFAS 130 requires  that  companies  display
"comprehensive  income",  which in  addition to the  current  definition  of net
income includes certain amounts currently  recorded directly in equity.  For the
Company,  the only such item is foreign currency translation  adjustments.  This
new standard will be adopted by adding a column,  which will show  comprehensive
income, to the statement of changes in stockholder' equity.

SFAS 131 mandates the  management  approach to  identifying  business  segments.
Under the management approach,  segments are defined as the organizational units
that have been established for internal performance evaluation purposes. For the
Company, the new standard will not impact its current presentation of segments.

Year 2000 Compliance.  The Company has studied the issue of Year 2000 compliance
and its potential effects on the Company's operations.  Based on its assessment,
the Company expects to upgrade its critical  computer  systems to make them Year
2000  compliant by the end of fiscal 1998 without  material  expenditures.  Year
2000  compliance  is not  expected  to have a  material  adverse  effect  on the
Company's consolidated financial position or results of operations.

Note 3. Acquisitions

On September  24, 1997,  ELXSI  completed the purchase of a building and land in
Orlando, Florida,  adjacent to Cues existing facilities,  for $1,240,000, . Upon
completion of the renovation  and expansion of the existing  building it will be
utilized by Cues for all manufacturing and administrative  functions.  Financing
for the  purchase  was  provided  by the Orange  County  Industrial  Development
Authority  (the  "IDA").  The  IDA  issued  a 15  year  bond  in the  amount  of
$2,500,000,  which was purchased by Bank of America  National  Trust and Savings
Association,  (formerly named Bank of America Illinois) ("BAI"). ELXSI will make
180 equal monthly principal payments of approximately $14,000.  Interest is paid
monthly in arrears initially at a taxable rate of either BAI's reference rate or
the  Eurodollar  rate plus 1.5%.  During  January 1998,

                                      F-11
<PAGE>

the bonds  converted  to  tax-exempt  status  and ELXSI is  paying  interest  at
approximately 64% of the taxable rate.

On July 3,  1995,  ELXSI  acquired  16  Abdow's  Family  Restaurants  from Abdow
Corporation,  of  Springfield,   MA,  for  approximately  $3,800,000  (including
expenses of approximately $300,000). The acquisition was financed by an increase
in ELXSI's  existing line of credit with the BAI. The  transaction  involved the
leasing of the 16 restaurant sites and the purchase of associated assets located
in western  Massachusetts and central  Connecticut.  ELXSI converted nine of the
Abdow's  locations into  Bickford's  Restaurants  during 1995 and 1996.  Shortly
after the  acquisition,  ELXSI  negotiated  the sale of the Vernon,  Connecticut
Abdow's  Restaurant  for a net sales price of  approximately  $1,225,000,  which
approximated  the  fair  market  value  of the  Restaurant  on the  date  of its
acquisition by ELXSI.  The balance of the receivable  from the sale is reflected
as an asset held for sale at December  31,  1995.  The  balance of the  purchase
price of $2,575,000 was allocated to the equipment,  leasehold  improvements and
leasehold  interests of the  remaining 15 Abdow's  restaurants.  The sale of the
Vernon  Connecticut,  Abdow's  Restaurant  was  consummated on February 1, 1996.
During  1996,  ELXSI  closed  one  under-performing  Abdow's  Restaurant.  As of
December  31,  1997,  ELXSI  continued  to operate five Abdow's and nine Abdow's
converted facilities as Bickford's Restaurants.

Note 4. Restricted Cash

Industrial  development  bond proceeds used to finance the Orlando  building and
land acquisition noted above in excess of the purchase price of the building and
land and the portion of the transaction costs allowed to be paid at closing from
the bond  proceeds  are being held by a trustee  pursuant  to a trust  indenture
between the IDA and a commercial bank, as trustee.  As of December 31, 1997, the
trustee held cash in the amount of  $1,079,000,  which is restricted  for use by
Cues to fund  building  improvements  and equipment  expenditures  to modify the
building for its intended use. The funds are  reflected as  restricted  cash and
cash equivalents in the accompanying  balance sheet at fair market value and are
invested in a money market mutual fund pursuant to the trust indenture.

Note 5. Composition of Certain Financial Statement Components

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                                     ----------------------------
                                                         1997            1996
                                                     ------------    ------------
<S>                                                  <C>             <C>

Inventories:
   Raw materials and finished goods                  $  6,884,000    $  7,734,000
   Work in process                                      3,494,000       3,283,000
                                                     ------------    ------------
                                                     $ 10,378,000    $ 11,017,000
                                                     ============    ============

Property, buildings and equipment:
     Land                                            $  7,599,000    $  7,298,000
     Buildings and improvements                        15,307,000      14,817,000
     Buildings held pursuant to capital leases           ,234,000        ,671,000
     Equipment, furniture and fixtures                 15,593,000      12,544,000
     Construction in progress                           1,407,000              --
                                                     ------------    ------------
                                                       41,140,000      36,330,000
     Accumulated depreciation and amortization        (11,459,000)     (8,653,000)
                                                     ------------    ------------
                                                     $ 29,681,000    $ 27,677,000
                                                     ============    ============
</TABLE>


                                      F-12
<PAGE>

Costs to complete the Cues facility are estimated to be $1,100,000 at December
31, 1997.


<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                                     ----------------------------
                                                         1997            1996
                                                     ------------    ------------
<S>                                                  <C>             <C>

Intangible assets:
     Excess of cost over fair value of
      net assets acquired                            $  5,249,000    $  5,249,000
     Trademarks                                         1,030,000       1,030,000
     Liquor licenses                                       85,000          85,000
                                                     ------------    ------------
                                                        6,364,000       6,364,000
     Accumulated amortization                          (1,020,000)       (839,000)
                                                     ------------    ------------
                                                     $  5,344,000    $  5,525,000
                                                     ============    ============
</TABLE>

The excess of cost over fair value of net assets acquired, trademarks and liquor
licenses  represent  the value  assigned  to these  intangible  assets  upon the
acquisition of Restaurants and Cues by ELXSI.


<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                                     ----------------------------
                                                         1997            1996
                                                     ------------    ------------
<S>                                                  <C>             <C>

Accrued expenses:
     Salaries, benefits and vacation                 $  1,768,000    $  1,513,000
     Other taxes                                           42,000         587,000
     Insurance                                            633,000         461,000
     Utilities                                            258,000         293,000
     Professional  fees                                   212,000         301,000
     Royalty                                              202,000         128,000
     Warranty                                             200,000         180,000
     Other reserves                                       171,000         175,000
     Rents                                                170,000         214,000
     Interest and bank fees                               140,000          31,000
     Acquisition  costs                                    50,000          26,000
     Management fees - related party                           --         119,000
     State and federal  income taxes                        9,000          54,000
     Other expenses                                       550,000         567,000
                                                     ------------    ------------
                                                     $  5,005,000    $  4,649,000
                                                     ============    ============
</TABLE>

Note 6. Income Taxes

Pre-tax income for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>

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

<S>                                <C>            <C>            <C>
     Domestic                      $   6,938,000  $   5,000,000  $    4,941,000
     Foreign                             129,000         51,000         119,000
                                   -------------  -------------  --------------
     Total                         $   7,067,000  $   5,051,000  $    5,060,000
                                   =============  =============  ==============

The components of income tax benefit (expense) related to earnings for the years
ended December 31, 1997, 1996 and 1995 is as follows:
</TABLE>

                                      F-13
<PAGE>

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                   --------------------------------------------

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

<S>                                <C>            <C>            <C>
     Current:
      Federal                      $    (149,000) $    (105,000) $     (118,000)
      State and local                   (701,000)      (444,000)       (396,000)
                                   -------------  -------------  --------------
                                        (850,000)      (549,000)       (514,000)
                                   -------------  -------------  --------------
     Deferred:
      Federal                          8,162,000      2,881,000              --
      State and local                         --             --              --
                                   -------------  -------------  --------------
                                       8,162,000      2,881,000              --
                                   -------------  -------------  --------------

     Total                         $   7,312,000  $   2,332,000  $     (514,000)
                                   =============  =============  ==============
</TABLE>

Deferred income taxes are provided for temporary  differences between income tax
and  financial  statement  recognition  of revenues  and  expenses.  Significant
components  of the  deferred  tax  (liabilities)  assets  are  comprised  of the
following at December 31, 1997 and 1996:


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

     Fixed asset and other                         $ (1,147,000)   $ (1,245,000)
                                                   ------------    ------------
      Gross deferred tax liabilities                 (1,147,000)     (1,245,000)
                                                   ------------    ------------

     Accrued expenses and other                       1,989,000         814,000
     Loss carryforwards                              70,618,000      73,440,000
     Credit carryforwards                             2,342,000       6,851,000
                                                   ------------    ------------
      Gross deferred tax assets                      74,949,000      81,105,000
                                                   ------------    ------------

     Deferred tax asset valuation allowance         (62,759,000)    (76,979,000)
                                                   ------------    ------------
      Net deferred taxes                           $ 11,043,000    $  2,881,000
                                                   ============    ============

At December 31, 1997 and 1996, the Company had net operating loss  carryforwards
for federal income tax purposes of approximately  $208 million and $216 million,
respectively. The decrease in the net deferred tax asset primarily resulted from
the use of net operating loss  carryforwards  to offset 1997  estimated  federal
taxable income and a reduction in credits available to the Company.  The Company
also has investment tax credit  carryforwards  and research and  development tax
credit  carryforwards  of approximately  $1.7 million.  These net operating loss
carryforwards  and  investment  tax  credit   carryforward  expire  as  follows:


                                                                 Investment
                                        Net Operating Loss       Tax Credit
                                          Carryforwards         Carryforwards
                                          -------------         -------------

          1998                            $   7,837,000         $   1,021,000
          1999                               72,325,000               425,000
          2000                               54,316,000               269,000
          2001                               33,916,000                 7,000
          2002                                5,836,000                    --
          2003                               14,118,000                    --
          2004                               18,941,000                    --
          2005 through 2009                     409,000
                                          -------------         -------------
                                          $ 207,698,000         $   1,722,000
                                          =============         =============

                                      F-14
<PAGE>

The Company also has minimum tax credit carryforwards of approximately  $620,000
which have an unlimited carryforward period.

The Company establishes  valuation  allowances in accordance with the provisions
of  FASB  Statement  No.  109,   "Accounting  For  Income  Taxes".  The  Company
continually  reviews the adequacy of the valuation  allowance and is recognizing
deferred  tax asset  benefits  only as  reassessment  indicates  that it is more
likely than not that the benefits will be realized.

During 1996, a portion of the valuation  allowance  was released  based upon the
success of restaurant  conversions and  manufacturing  consolidations  which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset.  At the end of 1996,  the  Company  believed  it would  have a change  of
ownership of 50% or more.

During 1997, facts and circumstances  surrounding the Company's belief that they
would have a change in ownership of 50% or more materially changed. Accordingly,
the Company reduced the valuation  allowance  applied against net operating loss
carryforwards  by  $8,162,000  based upon  reasonable  and prudent tax  planning
strategies and future income  projections.  Accordingly,  this increased the net
deferred tax asset to  $11,043,000,  which  represents an amount that management
believes  more  likely  than not will be  realized.  The total  amount of future
taxable income necessary to realize the asset is approximately $32,000,000.  The
Company  expects to generate  this  income  principally  through  the  continued
adherence to reasonable tax planning  strategies and future income  projections.
The remaining  valuation  allowance is necessary due to the magnitude of the net
operating loss carryforwards and the uncertainty of future income estimates.

The  Company's  net  deferred  tax  assets  include  substantial  amounts of net
operating loss and credit  carryforwards.  Failure to achieve forecasted taxable
income would affect the ultimate realization of the net deferred tax assets.

The utilization of the Company's net operating loss and tax credit carryforwards
may be impaired or reduced under certain circumstances.  Events which may affect
the  Company's  ability  to utilize  these  carryforwards  include,  but are not
limited to,  cumulative stock ownership changes of 50% or more over a three-year
period, as defined by Section 382 of the Internal Revenue Code ("IRC"),  and the
timing of the  utilization  of the tax benefit  carryforwards.  Such  changes in
ownership would significantly restrict the Company's ability to utilize loss and
credit carryforwards in accordance with sections 382 and 383 of the IRC.

A reconciliation of the statutory  federal tax rate and the Company's  effective
income  tax rate for the years  ended  December  31,  1997,  1996 and 1995 is as
follows:

                        <TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                          --------------------------------
                                                            1997        1996       1995
                                                          --------     -------    -------
<S>                                                       <C>          <C>        <C>

   Federal income tax rate                                    34.0%       34.0%      34.0%
   State income taxes, net of federal benefit                  6.5         8.6        7.7
   Changes in valuation allowance for deferred
     tax assets                                             (113.9)      (57.1)        --
   Other                                                       1.9         0.3        0.5
   Recognition of net operating loss carryforward            (32.0)      (32.0)     (32.0)
                                                          --------     -------    -------
     Effective income tax rate                              (103.5)%     (46.2)%     10.2%
                                                          ========     =======    =======
</TABLE>


                                      F-15
<PAGE>

Note 7. Related Party Transactions

Transactions  with ELX Limited  Partnership.  On  December 8, 1994,  the Company
loaned ELX Limited Partnership ("ELX"), of which the President of the Company is
the sole general partner and other officers of the Company are limited partners,
approximately  $1,156,000  under an  unsecured  note.  ELX used the  proceeds to
exercise its option to purchase  369,800  shares of the  Company's  Common Stock
held by The Airlie Group L.P. ("Airlie") under an existing option granted to ELX
at $3.125 per share on September  25, 1989.  On December 8, 1997,  the principal
due date of the loan was extended for an additional  three years. The loan bears
interest at 1/2% above the Company's  senior debt  borrowing  rate (see Note 8).
Interest  from December 8, 1994 to December 8, 1997 was paid current in December
1997. Principal and interest from December 8, 1997 are due on December 8, 2000.

On December 30, 1996,  the Company  loaned ELX  approximately  $909,000 under an
unsecured  note.  The  proceeds of this loan were used to exercise its option to
purchase  110,200  shares of the  Company's  Common  Stock held by Bank  America
Capital  Corporation  ("BACC")  under an  existing  option and to  purchase  the
remaining  110,200 shares of the Company's  Common Stock held by BACC for $5.125
per share. This note also bears interest at 1/2% above the Company's senior debt
borrowing  rate.  Principal and interest are due on December 30, 1999. The above
transactions  occurring on December 30, 1996 represent a complete divestiture of
the Company's  securities held by BACC. The source of the loan funds was ELXSI's
then existing line of credit.

Transactions with Cadmus Corporation.  On June 30, 1997, ELXSI loaned $2,000,000
to Cadmus  Corporation  ("Cadmus").  The loan matures on June 30, 1999 and bears
interest  at 15%,  payable  quarterly  in arrears  and is  collateralized  by an
investment owned by Cadmus.  ELXSI earned a 5%, or $100,000,  closing fee, which
will be amortized to interest  income  utilizing the effective  interest  method
over the life of the loan.  Cadmus  reimbursed  ELXSI for the costs  incurred by
ELXSI in making the loan.  Certain  officers,  directors and/or  shareholders of
Cadmus are officers and/or directors of the Company and/or ELXSI.

ELXSI (as assignee of ELXSI Corporation)  entered into a management agreement on
September  25,  1989  with  Cadmus.  Effective  June 30,  1997,  the  management
agreement  was extended to at least June 30, 2005.  Effective  April 1, 1997 the
management  fee  was  increased  from  $500,000  to  $600,000  annually,  with a
provision that the fee shall increase 5% on each anniversary  date thereof.  The
management  fee may be  discontinued  following  a year in which  the  Company's
operating income is less than $4,000,000,  but will be reinstated  following the
first fiscal  quarter in which the Company  again  attains  quarterly  operating
income of at least  $1,250,000.  During  1997,  1996 and 1995,  the  Company was
charged management fees of $575,000, $500,000 and $500,000, respectively. Cadmus
also  provides  the Company with certain  general and  administrative  services.
During  1997,  1996 and 1995,  the  Company  was  charged  $27,000,  $36,000 and
$36,000,  respectively,  for such items. At December 31, 1997 and 1996,  accrued
expenses  include $0 and  $119,000,  respectively,  payable to Cadmus under such
management agreement.

Transactions with Azimuth  Corporation and  Subsidiaries.  On December 30, 1996,
ELXSI  entered  into  a   Recapitalization   Agreement  (the   "Recapitalization
Agreement")  with Azimuth  Corporation  ("Azimuth")  and its three  wholly-owned
subsidiaries:  Contempo Design,  Inc.,  Contempo Design West, Inc., and Delaware
Electro   Industries,   Inc.   (collectively   referred   to  as  the

                                      F-16
<PAGE>

"Azimuth Subsidiaries").  Certain of the officers, directors and stockholders of
Azimuth and certain of the  officers and  directors of the Azimuth  Subsidiaries
are officers and directors of the Company. Under the Recapitalization Agreement,
ELXSI purchased from BAI, its lending bank, three Azimuth  Subsidiary  revolving
notes (the  "Notes")  which were  scheduled to mature on December 31, 1996.  The
Notes had a combined face value of $6,650,000  and were purchased by ELXSI at an
$800,000  discount.  Under the  Recapitalization  Agreement,  ELXSI received all
contract rights and  obligations  held by BAI in relation to the Notes and, as a
result,  became the provider of a working capital line of credit for the Azimuth
Subsidiaries,  which ELXSI increased to $9,650,000 and extended through June 30,
1998.  The line of credit was secured by an Azimuth  guaranty and  substantially
all of the assets of Azimuth and the Azimuth Subsidiaries.

On June 16, 1997, the Azimuth  Subsidiaries  prepaid all of the outstanding face
amount of the  Notes due to ELXSI by  utilizing  the  proceeds  of a new line of
credit  obtained from a third party lender.  The working  capital line of credit
extended  by  ELXSI  to  the  Azimuth  Subsidiaries  was  terminated  upon  such
prepayment.  During  the  period  the  Notes  were  outstanding,   ELXSI  earned
approximately $938,000 of net income from this transaction.

Note 8. Long-Term Debt

Long-term debt consists of the  following:

                                                       December 31, 1997
                                                --------------------------------
                                                     1997              1996
                                                --------------    --------------

1.   ELXSI
     Bank Line of Credit with BAI, $9,000,000
     available, interest due monthly at prime
     (8.5% at December  31, 1997) or 2% above
     Eurodollar  rate (8.00% at December  31,
     1997),  maturing on June 30,  1999.  The
     line of credit does not require  minimum
     reductions in available credit. The line
     is secured by assets of ELXSI, including
     real estate,  and the outstanding  stock
     of ELXSI.  The  agreement  provides  for
     commitment  fees of  0.3% on the  unused
     portion  of  the  line  of  credit.   In
     addition,  the  agreement  restricts the
     payment of cash dividends by ELXSI to an
     amount  not to exceed  50% of the excess
     cash flow (as  defined).                     $  2,956,000     $  9,784,000

     2.  ELXSI
     Supplemental  Bank Line of  Credit  with
     BAI, $7,100,000 available,  interest due
     monthly at prime (8.5% at  December  31,
     1997) or 2% above Eurodollar rate (7.75%
     at December 31, 1997),  maturing on June
     30,  1999.  The line may be  utilized to
     repurchase  securities  of the  Company,
     including stock,  warrants and notes and
     is secured by assets of ELXSI, including
     real estate,  and the outstanding  stock
     of ELXSI.  The  agreement  provides  for
     commitment  fees of  0.3% on the  unused
     portion of the line of credit.                  5,100,000        3,187,000

                     F-17
<PAGE>

     3. ELXSI
     Additional Bank Line of Credit with BAI,
     interest was due monthly at prime (8.25%
     at  December   31,  1996)  or  2%  above
     Eurodollar  rate (7.68% at December  31,
     1996). The line was utilized to purchase
     the  notes   payable   by  the   Azimuth
     Subsidiaries  (see Note 7). During 1997,
     the  Company  prepaid  the  balance  and
     terminated  the line with the  bank.                  --         5,850,000

     4. Bickford's
     5 year  mortgage  payable  on  land  and
     building     located    in     Marlboro,
     Massachusetts with monthly  installments
     of approximately $3,000 plus interest at
     8.01% per annum. The balance of $347,000
     is due on October 1, 2002.                       514,000                --

     5. Cues
     15   year   Orange   County   Industrial
     Development Authority bonds with monthly
     principal   payments  of   approximately
     $14,000 plus  interest at the tax exempt
     equivalent of the  Eurodollar  rate plus
     1.5%   payable   monthly   in   arrears.       2,472,000                --

     6. Cues
     Mortgage  payable  at  8.25% on the land
     and building owned by Cues B.V.                  111,000           122,000

     Other                                              2,000            31,000
                                                  -----------       -----------
                                                   11,155,000        18,974,000
     Less current portion                            (220,000)         (268,000)
                                                  -----------       -----------
     Long-Term Debt                               $10,935,000       $18,706,000
                                                  ===========       ===========

The  above  bank debt  agreements  with BAI  contain,  among  other  provisions,
financial  covenants  related to the  maintenance of ELXSI's  minimum net worth,
restrictions  on its capital  expenditures  and compliance  with certain ratios,
including interest coverage and funded debt to earnings before interest,  taxes,
depreciation and amortization.

Aggregate  maturities of long-term  debt for the five years ending  December 31,
2002 and thereafter are as follows:

                    1998                     $ 220,000
                    1999                     8,275,000
                    2000                       219,000
                    2001                       219,000
                    2002                       219,000
                    Thereafter               2,003,000
                                          ------------
                                          $ 11,155,000
                                          ============

                                      F-18
<PAGE>

Note 9. Commitments and Contingencies

ELXSI  conducts  a  substantial  portion  of  its  operations  utilizing  leased
facilities. ELXSI leases land and/or buildings at 48 of its 61 Restaurants under
lease  agreements  with terms  expiring on various  dates  (including  extension
options)  through 2032. The majority of the leases require that ELXSI pay taxes,
maintenance, insurance, and other occupancy expenses related to leased premises.
The rental  payments for a majority of the  Restaurant  locations are based on a
minimum  annual  rental plus a percentage  of sales,  as defined in the relevant
agreements.  Generally,  the leases  provide  for renewal  options,  and in most
cases,  management  expects  that  in  the  normal  course  of  business,  lease
agreements will be renewed or replaced by other leases.

Cues has several non-cancelable  operating leases,  primarily for certain office
and  transportation  equipment,  that  expire  over the  next  three  years  and
generally provide for purchases or renewal options.

The following is a schedule of future minimum lease  commitments for each of the
years in the five-year periods ending December 31, 2002, and thereafter:

                                        Capital Leases      Operating Leases
                                        --------------      ----------------

     1998                               $      220,000      $      2,766,000
     1999                                      126,000             2,683,000
     2000                                      126,000             2,636,000
     2001                                      126,000             2,482,000
     2002                                      126,000             2,405,000
     Thereafter                              1,555,000            16,501,000
                                        --------------          ------------
     Total minimum lease payments            2,279,000          $ 29,473,000
                                                                ============
     Less - Amount representing interest    (1,080,000)
                                        --------------
     Present value of net minimum
      capital lease payments                 1,199,000
     Less - current portion                   (125,000)
                                        --------------
     Capital lease
      obligation-noncurrent             $    1,074,000
                                        ==============

Rent  expense  charged to  operations  amounted to  $3,294,000,  $2,852,000  and
$2,235,000 during 1997, 1996, and 1995, respectively.

Cues has arrangements  with truck dealers to deliver truck bodies which are used
in the  manufacture of certain Cues  products.  Under these  arrangements,  Cues
reimburses the dealers'  floor-plan  financing  costs for those vehicles held by
the dealers until delivery to Cues. The amount of this  reimbursement  for 1997,
1996 and 1995 was $63,000,  $61,000 and $56,000,  respectively.  At December 31,
1997 and 1996,  truck bodies held by the dealers under these  arrangements  were
valued at $447,000 and $643,000, respectively.

The  Company is  involved  in  various  claims and  lawsuits  incidental  to its
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's  consolidated financial position
or results of operations.

                                      F-19
<PAGE>

Note 10. Thrift and Profit Sharing Plan

In 1986, Cues established a contributory trusteed thrift and profit sharing plan
covering all of its employees who have  completed one year of eligible  service.
The plan's  enrollment  dates are  January 1, April 1, July 1, and  October 1 of
each year.  Participants  have the option of making  after-tax or deferred  cash
contributions,  not  to  exceed  6% of  their  annual  compensation,  which  are
supplemented  by  employer  matching  contributions  in the amount of 50% of the
participant's  contribution.  The  participants  may make  additional  voluntary
contributions to the plan which are not supplemented by employer  contributions.
Participants  partially  vest in the employer's  contributions  after the second
year of service and are fully vested after the sixth year of service. Thrift and
profit sharing expense for 1997, 1996 and 1995 was $44,000, $44,000 and $48,000,
respectively.

During 1995, the Restaurant  Division  established a  non-contributory  trusteed
thrift and profit  sharing plan  covering all of its  employees who are over the
age of 21 and have completed one year of eligible service.

Note 11. Stockholders' Equity

Common Stock Options.  At December 31, 1997 and 1996, the Company had a total of
897,487 and 769,587  common shares  reserved for issuance under its stock option
plans,  respectively.  Options under the  Company's  plans are granted at prices
determined  by the  Board of  Directors,  generally  are not less  than the fair
market value of the Common Stock on the date of grant.  Options  generally  vest
and become  exercisable  six  months  after the date of the grant and expire ten
years after the date of the grant.

During 1997,  stockholders  approved the ELXSI  Corporation 1997 Incentive Stock
Option Plan (the "1997 Plan"),  under which up to 130,000  shares may be issued.
Under  the 1997 Plan  options  to  purchase  130,000  shares  were  granted  and
outstanding  at an  exercise  price of $6.00 per  share.  These  options  became
exercisable on November 22, 1997.

During 1996,  stockholders  approved the ELXSI  Corporation 1996 Incentive Stock
Option Plan (the "1996 Plan"),  under which up to 125,000  shares may be issued.
Under  the 1996 Plan  options  to  purchase  114,950  shares  were  granted  and
outstanding at an exercise price of $6.50 and $9.00 per share. The $6.50 options
became exercisable on November 23, 1996 and the $9.00 options become exercisable
on April 8, 1998.

During 1995,  stockholders  approved the ELXSI  Corporation 1995 Incentive Stock
Option Plan (the "1995 Plan"),  under which up to 125,000  shares may be issued.
Under  the 1995 Plan  options  to  purchase  123,300  shares  were  granted  and
outstanding at an exercise price of $5.75 and $9.00 per share. The $5.75 options
became exercisable on November 18, 1995 and the $9.00 options become exercisable
on April 8, 1998.

                                      F-20
<PAGE>





                                                                 Weighted-
                                                  Number          Average
                                                 of Shares     Exercise Price
                                                -----------    --------------

   Outstanding at December 31, 1994               317,200           5.47
   Exercisable at December 31, 1994               282,050           5.41
   Available for grant at December 31, 1994       202,987

   Granted during 1995                            124,800           5.69
   Exercised during 1995                             (600)          3.13
   Canceled during 1995                            (4,190)          5.56
   Outstanding at December 31, 1995               437,210           5.53
   Exercisable at December 31, 1995               374,478           5.46
   Available for grant at December 31, 1995       207,377

   Granted during 1996                            130,450           6.21
   Exercised during 1996                             --
   Canceled during 1996                           (15,900)          5.40
   Outstanding at December 31, 1996               551,760           5.70
   Exercisable at December 31, 1996               480,305           5.68
   Available for grant at December 31, 1996       217,827

   Granted during 1997                            217,500           7.21
   Exercised during 1997                           (2,100)          5.38
   Canceled during 1997                               --
   Outstanding at December 31, 1997               767,160           6.13
   Exercisable at December 31, 1997               580,394           5.74
   Available for grant at December 31, 1997       130,327

The following table summarizes the stock options  outstanding and exercisable at
December 31, 1997:

                               Outstanding                     Exercisable
                    --------------------------------     -----------------------
                               Weighted-
                               Average     Weighted-                   Weighted
                               Remaining   Average                     Average
  Range of          Number of  Contractual Exercise      Number of     Exercise
Exercise Prices      Options      Life      Price         Options       Price
---------------     ---------  ----------- ---------     ---------     --------

 5.00 - 6.50          678,460            7      5.72       579,194         5.70
    9.00               87,500           10      9.00             0            0
   26.50                1,200            2     26.50         1,200        26.50

The  Company  has  adopted  the   "disclosure-only"   provisions  of  SFAS  123.
Accordingly,  no  compensation  expense has been recognized for the stock option
plans. Had  compensation  costs for the stock option plans been determined based
on the  fair  value  at the  date of grant  for  awards  in 1997,  1996 and 1995
consistent  with the  provisions  of SFAS 123,  the  Company's  net  income  and
earnings per share would approximate the following pro forma amounts:

                                      F-21
<PAGE>

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

Net income - as reported              14,379,000     7,383,000     4,546,000
Net income - pro forma                14,098,000     7,148,000     4,357,000

Basic EPS - as reported                     3.08          1.55          0.95
Basic EPS - pro forma                       2.96          1.50          0.91

Diluted EPS - as reported                   2.88          1.51          0.89
Diluted EPS - pro forma                     2.83          1.46          0.86

The fair  value of each  option  is  estimated  on the date of grant  using  the
Black-Scholes  option  pricing model.  The fair value of options  granted during
1997 were calculated utilizing the following  weighted-average  assumptions:  No
dividend yield;  expected volatility of 11.7%; risk free interest rate of 5.89%;
and  expected  lives of 7 years.  The  weighted-average  fair  value of  options
granted during fiscal 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
                                                                Weighted     Weighted
                                                                 Average      Average
                                                     Number     Exercise       Fair
                                                   of Options    Prices       Values
                                                   ----------    ------       ------

<S>                                                  <C>          <C>           <C>
Fiscal 1997:
Exercise price = market price at date of grant       217,500      7.36          2.66

Fiscal 1996:
Exercise price = market price at date of grant       130,450      6.21          2.24

Fiscal 1995:
Exercise price = market price at date of grant       104,800      5.75          2.07
Exercise price > market price at date of grant        20,000      5.38          1.81
</TABLE>

Warrants.  At  December  31,  1997 and 1996,  the Company had a total of 269,262
common shares reserved for issuance pursuant to warrants as follows:

In  connection  with the  acquisition  of Cues,  the  Company  issued a Series C
warrant to purchase  68,762 shares of the Company's  Common Stock.  This warrant
remained  unexercised at December 31, 1996, and originally had an exercise price
and  expiration  date of $4.36 per share and  January  31,  1997,  respectively.
During 1997, this warrant's  expiration date was extended until January 31, 1999
and the exercise price was increased to $5.23 per share.

In September  1989, the Company issued warrants to acquire up to an aggregate of
1,204,000 shares of the Company's Common Stock. On December 8, 1994, the Company
repurchased 761,638 of these warrants from Airlie for $1,635,000,  or $2.125 per
warrant.  On December 30, 1996,  the Company  repurchased  all of these warrants
that were for convertible  preferred stock  (convertible  into 241,862 shares of
Common Stock) from BACC for $478,000, or $1.975 per underlying common share. The
remaining  200,500  warrants  remain  unexercised  at  December  31,  1997,  and
originally had an exercise price and expiration date of $3.125 and September 25,
1996,  respectively.  During 1996, these warrants'  expiration date was extended
until  September  30, 1998 and the  exercise  price was  increased  to $3.75 per
share.

                                      F-22
<PAGE>

Phantom Stock Option Plan. The phantom stock option plan was implemented in 1992
as a long-term incentive plan for four key executives of Bickford's  Restaurants
(the  "Group").  At the  inception  of the  plan,  the  Group  paid  an  initial
investment  totalling  approximately  $116,000.  In October  1997,  the  Company
returned the Group's initial  investment and  simultaneously  received notes for
the same amount from each Group member. These notes bear interest at 9% annually
and are due June 30,  2001.  Each Group  member is  entitled  to  receive,  upon
exercise,  a cash  payment  equal to his  individual  vested  percentage  of the
appraised value of Bickford's  Restaurants,  as defined, less the balance of his
exercise price payable upon exercise.  Full vesting occurred on July 1, 1996, at
which time the Group,  as a whole,  was entitled to 13.9% of the appraised value
of Bickford's Restaurants, as defined. Each Group member's phantom stock options
may be exercised at the earliest of July 1, 2001, the termination of employment,
death or the sale of the Restaurants.

The  assumptions  used in calculating  the annual  expense  include the use of a
multiple  of  the  Bickford's   Restaurants   operating  income,   less  certain
Bickford's-related   liabilities,  a  non-liquidity  discount,  estimated  taxes
related to a gain on divestiture of the Restaurants,  sale transaction costs and
the  exercise  price.   During  1997,  1996  and  1995,  the  Company   recorded
compensation  expense  related to the phantom  stock  option  plan of  $750,000,
$550,000  and  $600,000,  respectively.  As  of  December  31,  1997  and  1996,
$2,696,000  and  $1,946,000,  respectively,  is  recorded  in other  non-current
liabilities,  which  represents  13.9%  of  the  estimated  appraised  value  of
Bickford's Restaurants , as defined, on those dates.

Stock  Purchase  Rights.  On June 4,  1997,  the Board of  Directors  declared a
dividend  distribution  of one Common Stock  purchase right (a "Right") for each
share of the Company's Common Stock  outstanding on June 16, 1997 issued under a
rights  agreement (the "Rights  Agreement")  with  Continental  Stock Transfer &
Trust Company.  Each right would entitle  stockholders to purchase the Company's
Common Stock at an exercise  price of $25.00 per full common  share,  subject to
adjustment.  The  Rights  are  not  currently  exercisable,   but  would  become
exercisable if an Acquiring Person (as defined in the Rights Agreement)  becomes
a holder of 15% or more of the  outstanding  shares of Common Stock (35% or more
for The Milley group Members (as defined in the Rights Agreement)).

In the  event  that  the  Company  is  acquired  in a merger  or other  business
combination,  under  various  circumstances,  the  holders of the Rights will be
entitled to receive,  upon exercise,  Common Stock of the Company,  or acquiring
company and/or cash and other property, equal to two times the exercise price of
the Rights.

The Rights,  which do not have any voting rights, may be redeemed by the Company
at a price of $0.001 per Right, subject to certain limitations.  The Rights will
expire at the close of  business  on June 15,  2007,  unless  exercised  through
provisions  in the Rights  Agreement  or early  redemption  or  exchange  by the
Company.

                                      F-23

<PAGE>


Reconciliation  of Earnings Per Share. The following is a reconciliation  of the
numerators  and  denominators  of the  basic  and  diluted  earnings  per  share
computations for the indicated years:

                                                 Year Ended December 31,
                                        --------------------------------------
                                            1997         1996         1995
                                        ------------  -----------  -----------
Basic earnings per share
   Numerator                            $ 14,379,000  $ 7,383,000  $ 4,546,000
                                        ------------  -----------  -----------
   Denominator:
     Common shares outstanding             4,661,000    4,763,000    4,811,000
                                        ------------  -----------  -----------
     Basic earnings per share           $       3.08  $      1.55  $       .95
                                        ============  ===========  ===========

Diluted earnings per share
   Numerator                            $ 14,379,000  $ 7,383,000  $ 4,546,000
                                        ------------  -----------  -----------
   Denominator:
     Common shares outstanding             4,661,000    4,763,000    4,811,000
     Assumed conversion of options and
       warrants                              328,000      139,000      282,000
                                        ------------  -----------  -----------
       Total shares                        4,989,000    4,902,000    5,093,000
                                        ------------  -----------  -----------
       Diluted earnings per share       $       2.88  $      1.51  $       .89
                                        ============  ===========  ===========

Options to  purchase  87,500  shares of Common  Stock at $9.00 per  share,  were
outstanding  during  the last  quarter  of 1997 but  were  not  included  in the
computation  of diluted  earnings per share because the options'  exercise price
was greater than the average market price of the common  shares.  These options,
which expire on October 8, 2007, were still outstanding at the end of 1997.

Options to  purchase  105,450  shares of Common  Stock at $6.50 per share,  were
outstanding  during  the  last  half  of  1996  but  were  not  included  in the
computation  of diluted  earnings per share because the options'  exercise price
was greater than the average market price of the common  shares.  These options,
which expire on May 23, 2006, were still outstanding at the end of 1997.

In  addition,  options to purchase  1,200  shares of Common  Stock at $26.50 per
share,  were outstanding  during all periods  presented but were not included in
the  computation  of diluted  earnings per share  because the options'  exercise
price was greater  than the average  market  price of the common  shares.  These
options,  which expire on May 23,  2000,  were still  outstanding  at the end of
1997.

Note 12. Segment Reporting

The Company  operates  in two  segments,  restaurant  operations  and  equipment
manufacturing.  Summarized  financial  information  by business  segment for the
years ended December 31, 1997, 1996 and 1995 is as follows:


                                            1997         1996         1995
                                        ------------ ------------ ------------
Net Sales:
  Restaurants                           $ 65,198,000 $ 61,283,000 $ 54,270,000
  Equipment                               21,747,000   21,460,000   20,404,000
                                        ------------ ------------ ------------

                                        $ 86,945,000 $ 82,743,000 $ 74,674,000
                                        ============ ============ ============

                                      F-24

<PAGE>

                                            1997         1996          1995
                                        ------------  -----------  ------------
Operating Income:
  Restaurants                           $ 7,246,000  $ 6,019,000   $  7,088,000
  Equipment                               1,992,000    1,334,000        988,000
  Corporate                              (1,799,000)  (1,350,000)    (1,439,000)
                                        -----------  -----------   ------------
                                        $ 7,439,000  $ 6,003,000   $  6,637,000
                                        ===========  ===========   ============

Total Assets:
  Restaurants                           $30,240,000  $ 29,780,000  $ 30,008,000
  Equipment                              20,868,000    18,328,000    16,321,000
  Corporate                               5,345,000    11,370,000     1,370,000
                                        -----------  ------------  ------------
                                        $66,453,000  $ 59,478,000  $ 47,699,000
                                        ===========  ============  ============

Depreciation and Amortization:
  Restaurants                           $ 2,694,000  $  2,318,000  $  1,833,000
  Equipment                                 482,000       457,000       373,000
                                        -----------  ------------  ------------
                                        $ 3,176,000   $ 2,775,000  $  2,206,000
                                        ===========  ============  ============

Capital Expenditures:
  Restaurants                           $ 3,827,000   $ 2,891,000  $  1,967,000
  Equipment                               1,608,000       217,000       390,000
                                        -----------   -----------  ------------
                                        $ 5,435,000   $ 3,108,000  $  2,357,000
                                        ===========  ============  ============

Capital   expenditures  exclude  amounts  in  connection  with  acquisition  and
divestitures.

There were no  inter-segment  sales or transfers  during 1997,  1996,  and 1995.
Operating income by business segment excludes interest income, interest expense,
and other income and  expenses.  Corporate  assets  consist  principally  of the
related  party notes and  interest  receivable,  the  deferred tax asset and the
closing fee receivable due from the Azimuth Subsidiaries.

Foreign assets,  revenues,  and export sales each represent less than 10% of the
Company's totals. No material amount of the Company's sales are dependent upon a
single customer.

Note  13.  Quarterly  Financial  Data -  (Unaudited)  The  following  summarizes
quarterly  financial  data for 1997 and 1996 (in  thousands,  except  per  share
data):

                                                       1997
                                      --------------------------------------
                                      Mar. 31,  June 30,  Sep. 30,  Dec. 31,
                                      --------  --------  --------  --------

Net sales                             $ 20,079  $ 21,564  $ 23,076  $ 22,226
Gross profit                             3,938     4,729     5,059     4,813
Income before income taxes               1,189     2,258     2,052     1,568
Net income                            $    940  $  1,783  $  3,300  $  8,356
Earnings per common share:
  Basic                               $    .20  $    .38  $    .71  $   1.79
  Diluted                             $    .19  $    .37  $    .66  $   1.61


                                      F-25
<PAGE>

<TABLE>
<CAPTION>

                                                            1997
                                      ------------------------------------------------
                                       Mar. 31,     June 30,     Sep. 30,     Dec. 31,
                                      ---------    ---------    ---------    ---------

Reconciliation of earnings per share:
 Basic earnings per share:
<S>                                   <C>          <C>          <C>          <C>
  Numerator                           $     940    $   1,783    $   3,300    $   8,356
                                      ---------    ---------    ---------    ---------
  Denominator:
    Common shares outstanding             4,661        4,661        4,661        4,661
                                      ---------    ---------    ---------    ---------
    Basic earnings per share          $     .20    $     .38    $     .71    $    1.79
                                      =========    =========    =========    =========

 Diluted earnings per share:
  Numerator                           $     940    $   1,783    $   3,300    $   8,356
                                      ---------    ---------    ---------    ---------
  Denominator:
    Common shares outstanding             4,661        4,661        4,661        4,661
    Assumed conversion of options
      and warrants                          166          177          377          521
                                      ---------    ---------    ---------    ---------
    Total shares                          4,827        4,832        5,038        5,182
                                      ---------    ---------    ---------    ---------
    Diluted earnings per share        $     .19    $     .37    $     .66    $    1.61
                                      =========    =========    =========    =========


                                                            1996
                                      ------------------------------------------------
                                       Mar. 31,     June 30,     Sep. 30,     Dec. 31,
                                      ---------    ---------    ---------    ---------

Net sales                             $  19,820    $  21,665    $  21,242    $  20,016
Gross profit                              3,356        4,202        4,249        4,333
Income before income taxes                  519        1,264        1,482        1,786
Net income                            $     430    $   1,124    $   1,315    $   4,514
Earnings per common share:
    Basic                             $     .09    $     .23    $     .28    $     .96
    Diluted                           $     .08    $     .22    $     .26    $     .94

Reconciliation of earnings per share:
 Basic earnings per share:
  Numerator                           $     430    $   1,123    $   1,315    $   4,515
                                      ---------    ---------    ---------    ---------
  Denominator:
    Common shares outstanding             4,792        4,792        4,779        4,690
                                      ---------    ---------    ---------    ---------
    Basic earnings per share          $     .09    $     .23    $     .28    $     .96
                                      =========    =========    =========    =========

 Diluted earnings per share:
  Numerator                           $     430    $   1,123    $   1,315    $   4,515
                                      ---------    ---------    ---------    ---------
  Denominator:
    Common shares outstanding             4,792        4,792        4,779        4,690
    Assumed conversion of options
      and warrants                          291          313          215           97
                                      ---------    ---------    ---------    ---------
    Total shares                          5,083        5,105        4,994        4,787
                                      ---------    ---------    ---------    ---------
    Diluted earnings per share        $     .08    $     .22    $     .26    $     .94
                                      =========    =========    =========    =========
</TABLE>

                                      F-26
<PAGE>


In the fourth quarter of 1997 and 1996, the Company recorded a credit to benefit
for income taxes of $7,070,000 and $2,881,000,  respectively, as a result of the
release of a portion of the valuation allowance discussed in Note 6.

Note 14.  Subsequent Event. On March 24, 1998, the Company purchased and retired
90,000  shares of its Common  Stock for  $1,215,000.  The purchase was funded by
borrowing on the  Company's  line of credit with BAI. In  addition,  the Company
loaned  $135,000  to Azimuth  Corporation,  the  proceeds  of which were used by
Azimuth to purchase  10,000  shares of the  Company's  Common Stock from a third
party.




                                      F-27
<PAGE>


                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                              ELXSI CORPORATION AND SUBSIDIARIES
                                    (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                          Additions
                                                                -----------------------------
                                             Balance at         Charged        Charged to                              Balance
                                             Beginning         Costs and         Other            Deductions           at End
                                             of Period          Expenses    Accounts-describe      Describe           of Period
                                            ----------         ---------    -----------------      --------           ---------

Year ended December 31, 1997 Account
  deducted from assets:
      Reserve for doubtful accounts
<S>                                         <C>                <C>               <C>                                   <C>
         receivable                         $       54         $      55         $       8   (C)          --   (A)     $     117
                                            ==========         =========         =========         =========           =========
      Inventory reserve                     $      550         $     715         $      --                38   (B)     $   1,227
                                            ==========         =========         =========         =========           =========
      Deferred tax asset valuation
        allowance                           $   76,979         $                 $   --               14,220   (D)     $  62,759
                                            ==========         =========         =========         =========           =========

Year ended December 31, 1996 Account
  deducted from assets:
      Reserve for doubtful accounts
         receivable                         $       58         $      28         $       3   (C)          35   (A)     $      54
                                            ==========         =========         =========         =========           =========
      Inventory reserve                     $      150         $     400         $      --                --   (B)     $     550
                                            ==========         =========         =========         =========           =========
      Deferred tax asset valuation
        allowance                           $   83,988         $                 $      --             7,009   (D)     $  76,979
                                            ==========         =========         =========         =========           =========

Year ended December 31, 1995 Account
  deducted from assets:
      Reserve for doubtful accounts
         receivable                         $       35         $      23         $      19   (C)          19   (A)     $      58
                                            ==========         =========         =========         =========           =========
      Inventory reserve                     $      100         $      54         $      --                 4   (B)     $     150
                                            ==========         =========         =========         =========           =========
      Deferred tax asset valuation
        allowance                           $   85,224         $                 $      --             1,236   (D)     $  83,988
                                            ==========         =========         =========         =========           =========

(A)  Uncollectible  accounts written off during 1997, 1996 and 1995.
(B)  Obsolete inventory written off during 1997, 1996 and 1995.
(C)  Bad debt recoveries.
(D)  Change in estimate related to future net operating loss and tax credit usage and various changes in timing differences
     associated with tax to book benefits.
</TABLE>

                                             S-1

<PAGE>