UNITED STATES
                                           SECURITIES AND EXCHANGE COMMISSION
                                                     Washington, D.C. 20549

                                                            FORM 10-K
(Mark One)
[  X  ]       ANNUAL REPORT PURSUANT TO SECTION 13
        OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

         For the fiscal year ended December 31, 1998

                                 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 0-21456

         ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
         ------------------------------------------------
      (Exact name of registrant as specified in its charter)

         Delaware                                06-1361276               
----------------------                        -----------------
(State or other jurisdiction of               (I.R.S. Employer
incorporation or organization)                Identification No.)

         488 Main Avenue
         Norwalk, Connecticut                       06851                       
----------------------------                   ------------------
(Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code: 203-849-2500
                                                    -------------
Securities registered pursuant to Section 12(b) of the Act: None
                                                            ----
Securities registered pursuant to Section 12(g) of the Act:

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

         Indicate by a 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 as the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
                                   Yes  X                  No          
                                       -----                   -----
<PAGE>
<PAGE>
                     Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [     ]

         State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant. The aggregate
market value shall be computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such
common equity, as of a specified date within 60 days prior to the date
of filing.

Aggregate market value as of March 15, 1999    $15,944,740

         Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.

                     Common Stock, $.01 par value,
                       as of March 15, 1999         21,249,447 shares

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the documents, all or portions of which are
incorporated by reference herein, and the part of the Form 10-K into
which the document is incorporated: Proxy Statement to be filed with
respect to the 1999 Annual Meeting of Stockholders-Part III.
<PAGE>
<PAGE>
PART I
ITEM 1.  BUSINESS

General

Electronic Retailing Systems International, Inc. (the "Company" or
"ERS") develops and provides electronic shelf label ("ESL") systems
designed to allow supermarket chains and other retailers to increase
productivity, reduce labor costs and improve management information
systems. The ERS ShelfNet(R) system (the "ERS ShelfNet System") has
been designed as a productivity enhancing center store automation
system, which replaces paper price tags on retail shelves with
electronic liquid crystal display units and provides a suite of
applications to enhance a retailer's pricing, inventory, shelf
management, merchandising and promotional activities. The ERS ShelfNet
System is comprised of proprietary hardware and software that
electronically link a store's shelves to its point-of-sale ("POS")
systems and central computer.

The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software
and communications hardware, which are designed to interface with
other store and vendor applications. Each ESL is a miniature data
transceiver that is capable of storing, receiving and returning
alphanumeric messages. An ERS store-based local area network has up
to 20,000 individual ESLs connected to a central server. The ERS
ShelfNet System is designed to allow retailers to:

         Implement price changes almost instantaneously from the store's
               central computer or directly from corporate or regional
               headquarters;
         
         Ensure pricing integrity by accurately displaying and monitoring
               product prices;
         
         Streamline stock monitoring activities to reduce lost sales
               resulting from the failure to properly stock items;

         Increase the speed and accuracy of placing product displays and
               promotional material by reducing and simplifying the tasks
               required of store employees; and

         Audit inventory more efficiently and improve computerized
               inventory ordering systems.
         <PAGE>
<PAGE>
ERS believes these features enable retailers to reduce labor costs,
increase productivity and pricing accuracy, and improve inventory
management, thereby raising such retailers' gross margins and lowering
their operating costs in the highly competitive U.S. retailing market.

         For the foreseeable future, the Company's revenues will be derived
primarily from the ERS ShelfNet System. The market for ESL systems,
such as the ERS ShelfNet System, is in the development stage, and
market acceptance of, and demand for, these systems are subject to a
high level of uncertainty. The Company's success will be dependent
upon, among other things, the extent to which retailers choose to
install ESL systems. The demand for such systems may be affected by
numerous factors, many of which are beyond the Company's control,
including the actual savings and benefits experienced by the
individual stores using the ESL systems, and there can be no assurance
that supermarket chains will choose to install ESL systems in a
significant number of their stores.

         As of December 31, 1998, the Company's ESL systems were installed
in 70 U.S. retail stores, including stores owned by such leading
supermarket chains as Stop & Shop Supermarket Company ("Stop & Shop"),
H.E. Butt Grocery Co. ("HEB"), Big Y Foods, Inc. ("Big Y"), Shaw's
Supermarkets, Inc. ("Shaw's"), The J.H. Harvey Company ("Harvey's")
and K Mart Corporation ("K Mart"), and in chain drug stores owned by
Rite-Aid Corporation ("Rite-Aid"), in addition to two stores outside
of the U.S. The Company estimates that, as of December 31, 1998, of
the approximately 30,300 supermarkets in the United States,
approximately 170 stores were operating ESL systems.

         As more fully described under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources," the Company is highly leveraged, and at
December 31, 1998 recorded total outstanding indebtedness of $129.1
million and a stockholders' deficit of $54.7 million. The Company
expects its net losses and negative cash flows from operations to
continue into the current fiscal year. Although management believes
the Company's resources will enable the Company to fund operations
through the year ending December 31, 2000, thereafter the Company's
ability to meet its continuing debt service and other obligations will
depend largely on the extent to which the Company can implement
successfully its business strategy of achieving large scale
commercialization of the ERS ShelfNet System. If the Company is unable
to place the system as a result of lack of market acceptance or
otherwise, the Company will be unable to implement fully, or realize
the anticipated results, of its strategy and may need to raise
additional long-term financing to support operations and service debt.
The Company has no current arrangement with respect to, or sources of,
any additional financing, and there can be no assurance that any such
additional financing would be available on terms reasonable to the
Company.
<PAGE>
<PAGE>
         This Annual Report on Form 10-K contains various forward-looking
statements and information that are based on information currently
available to management and management's beliefs and assumptions. When
used in this document, the words "anticipate", "designed to",
"estimate", "believes", "plans", and similar expressions are intended
to identify forward-looking statements, but are not the exclusive
means of identifying such statements. Such statements are subject to
risks and uncertainties, and the Company's actual results may vary
materially from those anticipated, estimated or projected due to a
number of factors, including, without limitation, the timely
availability and acceptance of new products, the rate of development
of the emerging market for ESL systems, the impact of competitive
products and pricing, the ability to obtain system components from
suppliers, the management of growth, and other factors set forth in
reports and other documents filed by the Company with the Securities
and Exchange Commission from time to time.

Business Strategy

         The Company's objective is to achieve increasing revenue through
greater market penetration of the ERS ShelfNet System.  To achieve
this objective, the Company is pursuing a strategy that includes the
following key elements:

              .          Initial Focus on Supermarket Sector.  The Company
                intends initially to focus its marketing efforts on the
                supermarket sector because of the Company's established
                relationships with supermarket chains and because of the
                Company's belief that supermarket operators generally are
                more receptive than other retailers to utilizing technology
                to reduce operating costs and improve productivity. The
                Company estimates that, as of December 31, 1998, of the
                approximately 30,300 supermarkets in the United States,
                approximately 170 stores were operating ESL systems.

               .        Reduce Manufacturing Costs.  The Company intends to
                continue its efforts to reduce the cost of manufacturing its
                wireless ESLs through the application of established chip
                manufacturing techniques to the ESL's integrated circuit, the
                integration of various components in the ESL and the
                achievement of significant economies of scale expected as a
                result of the higher manufacturing volumes the Company
                believes will arise from the implementation of its marketing
                plans.

               .        Value-Added Applications.  In order to increase the
                appeal of the Company's system to prospective customers (by
                increasing the level of potential cost savings) and to
                encourage existing customers to adopt the new generation
                system and to install additional systems, the Company intends
                to develop additional productivity enhancing applications for
                the ERS ShelfNet System.


<PAGE>
         Contemporaneously with the introduction of its new generation
system, the Company launched a marketing and pricing program providing
for a fee-based arrangement called "Save-As-You-Go" (the "SayGo
Plan"), in order to address the capital expenditure for retailers
represented by the sale price of the ERS ShelfNet System, generally
in excess of $100,000 per store. Under the SayGo Plan, the Company
owns the system and, with no upfront cash cost to the retailer,
furnishes the system to retailers who pay monthly fees to the Company
based on their actual usage of the system.

         The Company believes that the SayGo Plan has, to a limited extent,
facilitated market acceptance of the ERS ShelfNet System, principally
as a result of its diminution of the risk perceived by new customers
in an investment in new technology. The Company also believes that
retailers to whom the benefits of the ERS ShelfNet System have been
established may prefer to purchase the system rather than participate
in the SayGo Plan. During the year ended December 31, 1998, of the 23
systems installed by the Company, six were acquired by customers under
the SayGo Plan and the remainder were purchased. Accordingly, the
Company will continue to offer the ERS ShelfNet System under the SayGo
Plan in addition to pursuing maximum sales of the system.

         The Company also intends, during its current fiscal year, to
develop additional strategies to accelerate market recognition and
acceptance of the system and its benefits. There can be no assurance
that any such approaches will be material to the determination of
additional retailers to install the Company's systems in the emerging
market for ESLs.

Retail Industry Overview

         The Company's target market consists of retailers that stock a
large number of stockkeeping units ("SKUs"), operate in highly
competitive environments, have relatively low margins and change
prices frequently. Such retailers include supermarkets, discount mass
merchandisers, chain drug stores and convenience stores. The Company
believes that such retailers generally seek automated solutions to
reduce labor costs and improve efficiencies in operations. The
approximate number of supermarkets, discount mass merchandisers, chain
drug stores and convenience stores in the United States is set forth
in the table below. The table does not include the European market,
where the aggregate number of comparable stores is greater than in the
United States.
<PAGE>
<PAGE>
                     Type of Store                      Number of Stores
                     -------------                      ----------------
         Supermarkets                                       30,300
         Discount mass merchandisers                         9,900
         Chain drug stores                                  19,500
         Convenience stores                                 56,000
                                                          --------
                                            Total          115,700
                                                          ========

Source:  Progressive Grocer Annual Report, April 1998; Chain Store
Guide 1998. 

         The Company believes that many of its target retailers are
capital constrained and have compared potential investments in the
ERS ShelfNet System to alternative capital expenditures. Such
alternative uses of capital include purchasing additional stores,
remodeling and refurbishing existing stores, making acquisitions
and investing in technology, including ESL systems. The Company's
SayGo Plan is designed to eliminate a retailer's upfront cash cost
to install the ERS ShelfNet System, instead assessing charges
largely for services the retailer actually uses. Thus, the ERS
ShelfNet System will constitute an operating expense (that the
Company estimates to be more than offset by cost savings and
benefits) rather than a capital expenditure for retailers,
allowing retailers to conserve capital for other projects while
also choosing to install the ERS ShelfNet System.

Supermarket Sector

          The supermarket sector is mature, intensely competitive and
tends to have margins that are among the lowest in the retailing
industry. The Company estimates that an average supermarket stocks
approximately 19,500 SKUs, most of which are available at
competitive stores, and runs frequent promotions with respect to
many of these items. As a result, a supermarket's success depends
in large part on the efficiency of its operations, which in turn
affects its ability to offer competitive prices and maintain
acceptable operating margins. Supermarkets are under constant
pressure to reduce costs, manage inventory more effectively and
offer competitive prices.

          Historically, supermarkets have been among the first
retailers to adopt technologies designed to reduce labor and other
costs, improve operations and enhance customer service. For
example, POS scanners were first introduced in the supermarket
sector and have achieved the greatest level of market penetration
there. While fewer than 15 supermarkets in the United States had
POS scanners in 1974, by 1995 approximately 95% of all chain
supermarket stores and approximately 80% of independent
supermarket stores had installed POS scanners. POS systems have
enabled retailers to reduce labor costs, improve pricing integrity<PAGE>
<PAGE>
crease efficiency while also providing additional applications
such as electronic funds transfer and computerized inventory
management. The Company believes that supermarkets and other
retailers will more quickly adopt other technological innovations
as a result of their experience with POS scanners. As a result,
and because of the Company's established relationships with
supermarket chains and its installed base of ERS ShelfNet Systems
in supermarkets, the Company intends to continue to focus its
marketing efforts in the supermarket sector.

Challenges Facing Retailers That Affect the Company

          The Company has designed the ERS ShelfNet System to address
retailer productivity, labor costs, merchandising and competitive
market share issues, as summarized below:

     Manual Price Changes

          Although POS systems have enabled supermarkets to achieve
efficiencies at the "front end" of the store, the center of the
typical store has not been automated and remains labor intensive.
The Company estimates that an average supermarket carries
approximately 19,500 SKUs and changes approximately 2,500 prices
per week at the shelf with newly printed paper labels. These price
changes require numerous manual steps resulting in (i) significant
labor costs and (ii) delays in implementing price changes
following special promotions or increases in wholesale costs, both
of which adversely affect supermarket profitability.

          Pricing Integrity 

          In addition to being labor intensive and time-consuming,
manual implementation of price changes is also more susceptible to
pricing inaccuracy. Stores with inaccurate prices risk customer
dissatisfaction as well as fines and penalties levied by
governmental agencies. As a result, supermarket operators incur
significant expense in auditing pricing integrity and correcting
pricing inaccuracies.

          Merchandising Management 

          Supermarkets actively promote products at the shelf with a
variety of merchandising materials such as "hangers" or "bibs",
which are affixed to the shelf or a product's price label and
alert consumers to pricing or promotional activities. Supermarkets
install and remove bibs manually, with employees generally
spending time in the aisle hanging and removing bibs from sale
items. Store managers walk the aisle auditing promotional items
against a printed list. The Company believes that current in-aisle
promotional maintenance and promotional compliance procedures are
an unnecessarily time-consuming, inaccurate and costly process.

<PAGE>
<PAGE>
          Replenishment/Inventory Management

          Supermarkets can lose sales (and their corresponding
margins) when products are inadvertently missing from designated
shelves arranged according to shelf set schematics (called
"planograms"), often due to lost or damaged paper labels. In
addition, damaged and handwritten paper labels result in increased
order entry errors, which increases both out-of-stocks (resulting
in lost sales) and labor costs associated with the product
ordering process.

          Shelfset Management 

          Typically, supermarkets carefully develop planograms for
the management of products and product categories in the stores,
on the belief that products perform best in the aggregate when
arranged on shelves in the quantities and with the facings
prescribed by the planogram. When paper labels are lost, damaged
or moved, deviations from the planogram occur, possibly resulting
in a higher incidence of out-of-stock items, loss of sales of
potentially high margin items, continued stocking of discontinued
or unauthorized products, and increased time and labor associated
with new cut-ins to a shelfset that differ from the planogram.

ERS ShelfNet Applications

          The ERS ShelfNet System has been designed (i) to replace
paper price tags on retail shelves with electronic liquid crystal
display units, and (ii) to provide a suite of applications to
address the challenges to retailers of manual price changes,
pricing integrity, merchandising management, replenishment/
inventory management and shelfset management. The ERS ShelfNet
System's applications are designed to include the following
features to address the needs of retailers:

Retail Challenge                                    ERS Solution

Manual Price
    Changes . . . . . . . . .  . . The ERS ShelfNet System allows retailers to
                                   implement price changes almost
                                   instantaneously from the store's central
                                   computer or directly from corporate or
                                   regional headquarters, which the Company
                                   believes facilitates significant labor
                                   savings from manual implementation of price
                                   changes. In addition, electronic price
                                   changes are significantly faster to
                                   implement, which the Company believes leads
                                   to increased margins as prices may be
                                   increased promptly following special
                                   promotions or increases in wholesale
                                   prices. 
<PAGE>
<PAGE>
Pricing Integrity . . .  . . . . . The ERS ShelfNet System electronically
                                   links a store's POS systems and its ESLs,
                                   virtually eliminating discrepancies between
                                   prices displayed on the store shelves and
                                   prices charged at checkout. This assurance
                                   of pricing integrity permits retailers to
                                   reduce or eliminate manual pricing audits
                                   and fines paid to governmental entities for
                                   pricing inaccuracies. In addition, such
                                   pricing accuracy can result in fewer price
                                   checks and errors at checkout, can result
                                   in faster checkout times, improved cashier
                                   productivity and increased customer
                                   satisfaction.

Merchandising
 Management . . . .. . . . . . . . The ERS ShelfNet System is designed to
                                   increase the speed and accuracy of placing
                                   product displays and promotional material
                                   by displaying a signal on the ESLs of
                                   products that require the addition or
                                   removal of merchandising bibs or hangers.
                                   This is intended to eliminate the time-
                                   consuming and potentially inaccurate manual
                                   process of checking promotional items
                                   against a printed list. The ERS system is
                                   designed to enable conduct of audits of
                                   promotional programs quickly and accurately
                                   in the store aisle.

Replenishment/
Inventory  
 Management . . . .. . . . . . . . The ERS ShelfNet System is designed to
                                   allow authorized store personnel to change
                                   ESLs from a price display to an out-of-
                                   stock message. This procedure replaces the
                                   current system of noting out-of-stocks
                                   manually, with the use of a label scanner,
                                   which requires follow-up by the store
                                   employee. The ERS ShelfNet System
                                   facilitates simple notation of out-of-
                                   stocks during normal stocking procedures,
                                   with the system automatically generating an
                                   out-of-stock report that can be resolved
                                   quickly by store management. In addition,
                                   the display of an out-of-stock message,
                                   rather than removal of a paper label, holds
                                   the shelf placement for the missing
                                   product, increasing planogram integrity.
<PAGE>
<PAGE>
Shelfset Management .. . . . . . . The ERS ShelfNet System is designed to
                                   maintain shelfsets more easily, because the
                                   ESLs stay locked in place and cannot be
                                   moved back and forth as can paper tags. In
                                   addition, the ESL is designed to display
                                   product facing information and section,
                                   shelf, and bay locations for simple, more
                                   accurate and less paper-intensive planogram
                                   implementations or changes. These features
                                   are intended to reduce labor associated
                                   with shelfset management and stocking and
                                   increase planogram compliance and
                                   monitoring. 

The ERS ShelfNet System

          The Company's ESL system replaces paper price tags on retail 
shelves with liquid crystal display labels and transmits pricing and other
information to and from the shelf edge. The Company's new generation ERS
ShelfNet System provides spread spectrum microwave transmission of data 
directly to wireless ESLs. The enhanced ERS ShelfNet System is designed 
to provide additional flexibility and convenience to customers by 
expanding potential coverage by the Company's ESLs to the entire store 
and allowing the retailer to change store placement of the ESLs more
easily. The Company believes that the cost of installing and maintaining 
its wireless ESLs will be lower than that of its prior ESL system, which 
required the wiring of store aisles.

          Each ERS ShelfNet System generally consists of 10,000 to
20,000 ESLs and the necessary communication and support
infrastructure to link the ESLs with the store's central computer
and POS systems. The Company's new generation system consists of
the following components:

          Electronic Shelf Label

          Each ESL is a mini data transceiver contained in a plastic
case, which displays price and other information by means of a
wide-angle view liquid crystal display window. The ESL is also
able to display pricing and other promotional information for the
consumer and inventory and reorder information for store
employees, and is equipped with two buttons designed to allow
store staff to interact with the store computers from the ESL on
the shelf. The Company offers five different sizes and types of
ESLs for use in different applications, such as SKUs for coolers
and freezers. The Company's prior generation ESLs are powered<PAGE>
<PAGE>
by the rails to which they are connected, whereas the wireless
ESLs are powered by long-life batteries.

          Spread Spectrum Wireless Network

          Communication to the ESLs is managed by a high frequency,
real-time communication system that uses spread spectrum
technology. Active cell antennae in the store ceiling send and
receive signals to and from wireless ESLs in their respective
coverage areas. The cells form a radio frequency infrastructure in
which multiple, non-overlapping cells may be active
simultaneously, while overlapping cells synchronize their
transmissions, permitting spectrum re-use. The redundancy of
transmission provided by ERS' spread spectrum network helps to
eliminate interference problems and to ensure that complete
information is clearly communicated.

            Communication Hub

            The local area network's communication hub, located in the
store's back office area, has two functions: (i) the hub
distributes signals to the ESLs through computerized information
processors which relay information to active cell antennae in the
store ceiling and from the antennae to the individual product ESLs
located on the shelf and (ii) the hub receives information from
the information processors which has been relayed by the antennae
in the ceiling after receipt from the ESLs located on the shelf.

            System Controller

            The system controller is a personal computer or the existing
in-store processor, also located in the store's back office area,
which is linked directly to the store's electronic POS system. The
system software resides in the system controller, and allows the
same pricing data that is incorporated into the POS system to be
used with the ERS ShelfNet System simultaneously. The system
controller communicates the pricing or other data directly to and
from the communication hub. The system controller is designed to
receive information from the store's corporate or regional
headquarters (such as product price or promotional information)
and to communicate data to such headquarters (such as product
order information).

            Software System

            The Company's ESL system is designed to be compatible with
electronic POS scanning systems and is compatible with systems
provided by the three major worldwide suppliers of POS systems,
IBM, NCR, and Fujitsu-ICL. The Company's system may also be
interfaced with major store operating systems, such as OS/2,
Windows NT and Unix. Because the "intelligence" of the ERS
ShelfNet System is located in the system controller and not the
individual ESLs, the Company is able to incorporate new functions<PAGE>
<PAGE>
into its system by upgrading software without replacing any
hardware.

            The Company's system can be linked to an in-store laser
printer capable of printing paper overlays for ESLs, paper labels
for non-electronic shelves and other promotional items. The
Company furnishes its customers with specific procedures and
guidelines for each application that show store managers how to
utilize the ERS system and software tools, and a data collection
and analysis format to document productivity increases and to
monitor ongoing improvements in store operations.

Marketing and Sales

            The Company will continue to focus its marketing efforts on
major national and regional supermarket chains. The Company
believes that each supermarket chain will typically choose a
single supplier of ESL systems to maximize chainwide efficiency.
Therefore, the Company's marketing strategy is to make
installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such
installations by installing systems through the rest of the
chain's stores. In response to retailing trends, the Company has
also increased its marketing efforts to mass merchandisers and,
during the year ended December 31, 1998, entered into arrangements
with Rite-Aid, a chain drug store.

            Based upon its experience to date, the Company expects that
the adoption process for the ERS ShelfNet System will occur in
four successive phases, as follows:

                 Detailed review of store procedures and systems and
                      documentation of expected cost savings and benefits;

                 Agreement for multi-store adoption of the ERS ShelfNet
                      System subject to design, installation and
                      implementation of a single store evaluation system and
                      concurrent design of integration plans, operating
                      procedures and training programs for broader use by the
                      retailer;

                 Installation of the first group of stores within a chain,
                      defined by a geographic or merchandising region, to
                      establish final chain-wide operating procedures; and

                 Chain-wide commercial rollout.
                      
                 The Company currently markets its products directly to
major retail chains through a marketing and sales force. The
Company's marketing and sales personnel have significant retail
experience, including experience in the POS system and local area
network industries. The Company's marketing staff works with
existing and potential customers to define their needs for ESL<PAGE>
<PAGE>
systems and to coordinate their implementation of the ERS ShelfNet
System. The Company exhibits its system at major trade shows  and
produces and distributes promotional materials to increase market
awareness of the Company's system. 

                 In addition, the Company will continue to investigate the
feasibility of marketing its system through indirect channels such
as value added resellers and distributors. The Company has
obtained letters of intent, subject to definitive contract terms,
to enter into reseller arrangements from Stores Automated Systems,
Inc., with respect to the United States, and from Seal Electronica
Ltda., with respect to Brazil. In 1997, the Company entered into
a five-year agreement with Symbol Technologies, Inc. ("Symbol"),
granting Symbol the right, subject to specified exceptions and
exclusion of certain markets in the United States, to resell the
Company's products worldwide and, subject to achievement of
specified market penetration objectives, the exclusive right to
resell the Company's products in Europe. Pursuant to such
arrangements and subject to meeting certain minimum sales
criteria, Symbol would also have the right to manufacture the
Company's ESL system. The Company has not yet generated revenues
under its arrangements with Symbol.

                 The Company historically has marketed its ERS ShelfNet
System for sale, at prices generally in excess of $100,000 per
store. The Company also markets the ERS ShelfNet System under its
SayGo Plan, which the Company believes has, to a limited extent,
facilitated market acceptance of its system, principally as a
result of diminution of the risk perceived by new customers in an
investment in new technology. Under the terms of the SayGo Plan,
the Company owns the system and, with no upfront cash cost to the
retailer, furnishes the system to retailers who pay monthly fees
to the Company based largely on their actual usage of the system.
Under the SayGo Plan, the Company furnishes the system to
qualified customers, identified by the Company as those retailers
who meet minimum requirements with respect to price change
potential per store and number of ESLs ordered. The Company's
contract with such customers typically provides for charges to be
billed to the customer monthly based on usage of the system. The
SayGo Plan allows the customer to terminate the program and return
the Company's system at any time after the first twelve months.
The customer's fees cease upon termination, except for agreed upon
amounts in certain circumstances.

                 The Company also intends, during its current fiscal year,
to develop additional strategies to accelerate market recognition
and acceptance of the system and its benefits. There can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
systems in the emerging market for ESLs.

<PAGE>
<PAGE>
                 System sales revenue from the Company's hardware and
software products is recognized at the time of shipment to
customers, or upon completion of an installation of a trial
system, while revenue from providing installation services to
customers is recognized upon the completion of an installation.
Under the SayGo Plan, the Company recognizes revenues as monthly
usage and other fees are billed to customers, and depreciates the
cost of hardware components of its systems over the shorter of
their estimated useful lives or five years. 

                 Maintenance revenue for services provided under maintenance
contracts is recognized over the service contract period, and
other revenue for parts and services is recognized when provided.
In connection with implementing the SayGo Plan, the Company incurs
substantial cash requirements for manufacturing and carrying costs
which are not initially covered by revenues.

                 The Company has collaborated with supermarket retailers and
suppliers of in-store wireless networks, printing services,
merchandise planning systems and other retail systems providers in
order to develop a better understanding of customer needs and to
offer comprehensive customer solutions. The Company will continue
to pursue such efforts and will seek additional strategic partners
to assist the Company in the broad market adoption and roll-out of
the Company's new generation system.

Customers

                 As of December 31, 1998, the Company's ESL systems were
installed in 70 U.S. retail stores, including those owned by such
leading supermarket chains as Stop & Shop, HEB, Big Y, Shaw's,
Harvey's and K Mart, and in chain drug stores owned by Rite-Aid,
in addition to two stores outside of the U.S. 

                 As of December 31, 1998, the Company had installed its new
generation system in ten Shaw's stores, five Stop & Shop stores,
one Harvey's store, one supermarket in Brazil and five Rite-Aid
stores. As of such date, the Company had also installed its new
generation ShelfServer software in seven Shaw's stores in order to
upgrade previously installed ERS systems. As of December 31, 1998,
the Company had received purchase orders covering two new
generation systems from Stop & Shop, one system from Shaw's and
five systems from Rite-Aid, which the Company expects to install
in 1999, and had entered into agreements with each of Waremart
Inc. ("Waremart") and E.W. James & Sons Supermarkets, Inc. ("E.W.
James") for the installation of a new generation system. Under the
terms of the agreements, Waremart and E.W. James have undertaken
to install the ShelfNet System in three and 28 additional stores,
respectively, subject to satisfaction with the performance of the
system.

<PAGE>
<PAGE>
                 During the year ended December 31, 1998, Stop & Shop and
Shaw's accounted for 59% and 29%, respectively, of the Company's
consolidated revenues; during the year ended December 31, 1997,
Stop & Shop, Shaw's, and HEB accounted for 41%, 22% and 11%,
respectively, of the Company's consolidated revenues; and during
the year ended December 31, 1996, Stop & Shop, Big Y and Shaw's
accounted for 46%, 20% and 13%, respectively, of the Company's
consolidated revenues.  The failure of such customers to continue
to utilize systems from the Company could have a material adverse
effect on the business of the Company. Additionally, customers who
account for significant portions of the Company's revenues may
have the ability to negotiate prices for the Company's products
and services that are more favorable to such customers and that
result in lower profit margins for the Company.

                 The Company is actively engaged in pursuing its efforts to
procure additional orders for its systems, and may also in the
ordinary course of its business enter into letters of intent
contemplating the installation of its system. Such letters of
intent are not binding obligations, will be subject to conditions
such as the negotiation and execution of definitive contract
terms, and there can be no assurance that any such arrangements
will be consummated.

Installation and Customer Service

                 The ERS ShelfNet System is designed to be installed in a
store without disrupting normal store operations. In connection
with the introduction of its new generation system, the Company
intends to use a team comprised of one Company employee and two
sub-contracted installers to install communications infrastructure
and software and, if rail strips are also ordered by the customer,
up to an additional five sub-contracted installers to install such
hardware. The ESLs generally will be programmed by the customer or
at the Company's facilities and shipped to the site where they
will be installed by the customer.

                 The Company's customer service group is staffed with
employees experienced in POS and other retail systems. The
Company's SayGo Plan  commits the Company to a standard
maintenance contract, at no additional charge, with extended
maintenance services available at additional charges to the
customer.

Manufacturing

                 The Company utilizes third parties to manufacture and
assemble the components comprising the ERS ShelfNet System. The
Company's ESLs currently incorporate a microprocessor which is
supplied solely by Sanyo Semiconductor Corporation ("Sanyo"). <PAGE>
<PAGE>
While the Company, on the basis of its familiarity with the design
of such microprocessor and the capabilities of other sources,
believes that other suppliers could produce equivalent
microprocessors within approximately four months of notification
by the Company, any inability to obtain microprocessors from its
current supplier in sufficient quantities could result in a
temporary interruption of the Company's production of ESLs and any
such replacement supplier could charge more for such production or
produce a lower-quality unit, thus diminishing the Company's
revenues and income from operations.  The Company's policy is to
maintain an inventory of microprocessors sufficient to meet
substantially all of its requirements during any such period. The
Company intends to evaluate, from time to time, establishing
relationships with other manufacturers of microprocessors to
provide a second source of supply for its ESLs.

                 The Company intends to maintain its practice of utilizing
manufacturing subcontractors, and has a supply arrangement with
Surface Mount Technology Ltd., of Hong Kong, for the assembly of
ESLs. The Company also continues to utilize Modulus, Inc. as a
domestic source for the assembly of its ESLs. Although the Company
has not experienced interruptions or delays in the manufacture or
assembly of its systems, and believes that alternative sources of
system components are readily available, the termination of the
Company's relationship with one or more of its contract
manufacturers or legal or regulatory changes in any country in
which such manufacturer resides may result in a temporary
interruption in the manufacture and assembly of the Company's
system and, thus, in the delay or loss of placements of the ERS
ShelfNet System, with a corresponding loss of revenues.

Engineering and Development

                 The Company's principal engineering and development efforts
have been conducted through software and hardware development
groups located at its facilities in Connecticut and Massachusetts.
These groups focus on improvements to current technology and also
on new applications of existing technology. The Company's
engineering staff also generates the functional specifications and
development schedules for each of the Company's customers. The
Company has also from time to time engaged third parties to design
hardware components based upon requirements or specifications
developed by the Company, and entered into arrangements with
hardware and software developers to augment the Company's internal
activities in the area of long-term product development. The
Company's arrangements with such developers are typically subject
to termination by the Company without penalty, and continuation of
such arrangements will in each case depend upon the satisfactory
achievement by such developers of specified milestones or other
satisfactory performance by them.

<PAGE>
<PAGE>
                 During the years ended December 31, 1998, 1997 and 1996,
the Company incurred expenses for research and development
activities of, respectively, $3,928,000, $3,409,000 and
$1,614,000. During the years ended December 31, 1998, 1997 and
1996, the Company capitalized an aggregate of $373,000, $375,000
and $592,000, respectively, in costs of internal labor and outside
services associated with product development. 

Intellectual Property

                 The Company has aggressively pursued an intellectual
property rights strategy to protect its product developments. The
Company's policy is to file patent applications to protect its
technology, inventions and improvements that are important to the
development of its business, and to seek copyright protection with
respect to its software. The Company also relies upon trade
secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain its competitive
position.

                 The Company holds 16 United States patents and has 12
additional United States patent applications pending, and 20
foreign patent applications pending. The Company also has other
applications under preparation and intends to continue to file
patent applications on its novel products and systems. Certain of
these patents and patent applications are directed to salient
features of the Company's ESL system, in particular relating to
the ESL and associated hardware, and the communications network
linking the components of the system.

                 The Company's wholly-owned subsidiary, Amacrine
International, Inc. ("Amacrine"), is entitled to use, and to grant
sublicenses with respect to, certain patents directed to an
alphanumeric display module and radio frequency communications
system, which Amacrine designed and developed for Telepanel
Systems Inc. ("Telepanel") under a technical services agreement
which existed between such companies. The Company has become aware
of certain statements made by Telepanel, which the Company
believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents or will
otherwise protect its rights.

                 The Company attempts to protect certain computer software
and service applications through the use of copyright and trade
secret law. The Company relies on non-disclosure agreements with
its employees, customers, consultants, and strategic partners.

                 Although the Company believes that patents and other
intellectual property rights are important to its business, there
can be no assurance that patents will issue from any applications
therefor, or if patents issue, that the claims allowed will be of
adequate scope to protect the Company's technology or that issued<PAGE>
<PAGE>
patents or other technology rights will not be challenged or
invalidated. The Company's business could be adversely affected by
increased competition in the event that any patent granted to it
is adjudicated to be invalid or is inadequate in scope to protect
the Company's operations, or if any of the Company's other
arrangements related to technology are breached or violated.

                 In 1993 in connection with the settlement of certain
litigation, the Company was granted a limited non-exclusive
license in the United States, Canada, the United Kingdom,
Australia, Japan and Germany covering certain United States and
foreign patents, of which Telepanel is the exclusive licensee. The
United States and other patents underlying Telepanel's patent
rights applicable to such license have now expired.

                 Although the Company believes that its products and
technology do not infringe intellectual property rights of others,
there can be no assurance that third parties will not assert
infringement claims in the future or that such claims will not be
successful. Furthermore, the Company could incur substantial costs
in defending itself in patent infringement suits brought by others
and in prosecuting suits against patent infringers.

Competition

                 The Company believes that the only ESL system suppliers
offering a product currently competing with the Company's system
in the United States are Telepanel, Pricer and, recently, NCR and
Hobart Corporation ("Hobart"). Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the
Telepanel system. NCR and Hobart also have developed and have
introduced ESL systems in the United States. Outside of the United
States, in addition to Pricer, the Company expects to compete with
a number of companies with ESL systems under development.

                 The emerging ESL system market is characterized by rapid
technological advances and evolving industry standards, and the
Company may be subject to a high degree of potential competition
with additional companies which may attempt to develop or market
competing ESL systems. These companies may be larger than the
Company and have greater financial and other resources than the
Company. In the future, the Company may face competition from
vendors of POS systems, or scanner manufacturers which offer
products related to POS systems, who may elect to enter the market
for ESL systems. The ERS ShelfNet System is also subject to
competition from vendors selling traditional paper labeling
methods, as well as providers of hand-held portable data
terminals.

                 The principal competitive factors in the Company's business
are product functionality, price/performance and reliability. The
Company believes that it competes favorably on each of these
factors.<PAGE>
<PAGE>
Employees

                 As of December 31, 1998, the Company had 96 full-time
employees, consisting of 38 engaged in engineering, development
and manufacturing support, 19 in marketing and sales activities,
28 in customer services and 11 in general administrative and
executive functions. At such date, the Company had an additional
13 part-time employees, engaged primarily in customer service
functions. The Company does not have a collective bargaining
agreement with any of its employees and considers its relationship
with its employees to be excellent.

Government Regulation

                 Accuracy in pricing on the part of supermarkets has been an
objective of state and local regulation. At least 22 states
currently have laws or regulations requiring some form of "unit
pricing" (which require prices and price per measure to be
displayed either on the package or the shelf), and at least seven
states (and other local jurisdictions) have laws requiring "item
pricing" (which require the marking of prices on individual
consumer packages for some or all products in the retail store).
The existence of item pricing laws applicable to any of the
Company's intended customers increases such customers' costs of
providing price information to consumers and may decrease or
eliminate some of the potential benefits of implementation of the
ERS ShelfNet System. In the State of Minnesota, item pricing is
not required if the price is clearly presented on the shelf and
consumers are offered the means by which to mark individual items.
In the State of Connecticut, the item pricing law allows the
State's Commissioner of Consumer Protection to exempt from item
pricing requirements stores employing an approved ESL system. The
Commonwealth of Massachusetts has authorized and is conducting
trials of ESL systems in support of its consideration of
regulation which may encourage the installation of such systems.

                 The United States Federal Communications Commission has
established standards for radio frequency emissions from computer
products, and certain components utilized in the Company's ESL
system must comply with such criteria. All components currently
incorporated into the ERS ShelfNet System comply with such
standards, and the Company does not anticipate any material delays
in securing any required certification for components under
development by the Company. Certain foreign countries also
regulate radio frequency emissions.

Executive Officers 

                 The executive officers of the Company, and their respective
ages and positions with the Company, are as follows:

<PAGE>
<PAGE>
     Name                           Age                Position
     ----                           ---                --------

Norton Garfinkle                     68                Chairman of the Board
Bruce F. Failing, Jr                 50                 Vice Chairman of the 
                                                        Board and Chief 
                                                        Executive Officer
Michael Persky                       35                President
Jerry McAuliffe                      35                Vice President, Chief 
                                                        Financial Officer
Morty Bachar                         42                 Vice President, 
                                                        Engineering
Paul Lavoie                          38                Vice President, Retail 
                                                        Marketing
Norman Tsang                         34                Vice President, Marketing


                 Mr. Garfinkle, the Company's Chairman of the Board, is a
founder of the Company. Since 1970, Mr. Garfinkle has also been
the Chairman of Cambridge Management Corporation, which
manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as
Chairman of its affiliates, including Oxford Management
Corporation, which specialize in the research and development of
new technologies. From 1985 to 1988, Mr. Garfinkle was Chairman of
Oral Research Laboratories, Inc., a manufacturer of dental hygiene
products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to
1988. In December 1995, pursuant to an agreement with New York
State authorities, Mr. Garfinkle admitted to a misdemeanor
relating to his 1989 New York State return and paid all taxes
required by the agreement.

             Mr. Failing, the Company's Vice Chairman of the Board and
Chief Executive Officer, is a founder of the Company, and served
as President through February 1997. In 1973, Mr. Failing co-
founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive
Officer of Actmedia, Inc. until its sale in 1989. 

             Mr. Persky has been President and Chief Operating Officer of
the Company since April 1998, having joined the Company and become
Vice President-Marketing in 1997. Prior to joining the Company,
Mr. Persky was Vice President-Marketing for Executone, Inc., a
manufacturer of telephone systems, since 1996. From prior to 1994
to 1996, Mr. Persky held various marketing positions with Octel
Communications (formerly VMX, Inc.), a voice mail supplier, the
last of which was as Marketing Director, Europe, Middle East and
Africa.

<PAGE>
<PAGE>
             Mr. McAuliffe has been Vice President, Chief Financial
Officer of the Company since January 1999. From 1997 until joining
the Company, Mr. McAuliffe was Chief Financial Officer of Ubiq
Communications, Inc., a specialty wireless messaging and
information company, and from prior to 1994 to 1997 served as
Chief Financial Officer of Ovid Technologies, Inc.,  a software
and internet based information technology company.
             
             Mr. Bachar has been Vice President, Engineering of the
Company since January 1999, having joined the Company as Director,
Project Management in August 1998. During 1998, Mr. Bachar served
as Vice President of Engineering of Voyetra Turtle Bech, a
developer of multimedia software and hardware products, and from
1996 to 1997 was Director of Development and Project Management
for Executone, Inc.  From 1994 to 1995, Mr. Bachar was Director of
Special Projects of IPC Information Systems, Inc., a
telecommunications company.
             
             Mr. Lavoie has been Vice President, Retail Marketing of the
Company since January 1999, having joined the Company as Vice
President, Marketing in 1998. From 1994 to 1998, Mr. Lavoie held
various marketing positions with News America Marketing, Inc.
(formerly, Actmedia, Inc.), the last of which was as Senior Vice
President, Retail Marketing. 
             
             Mr. Tsang has been Vice President, Marketing of the Company
since January 1999.  Prior to joining the Company, Mr. Tsang was
Vice President, Marketing of Star Markets Company, a regional
supermarket and natural foods chain from March 1995 to December
1998.  From prior to 1994 to March 1995, Mr. Tsang was a
consultant with McKinsey & Company, a strategic consulting
company.

ITEM 2. PROPERTIES

             The Company's executive offices are located at 488 Main
Avenue, Norwalk, Connecticut, where the Company leases
approximately 29,400 square feet of space under a lease requiring
payment of annual rent (in addition to utility charges and
increases in operating expenses and real estate taxes) in an
amount, currently, at approximately $480,000 increasing to
approximately $684,000 in the  final year of the lease (which
expires August 2007),  subject to the Company's right to terminate
the lease in July 2002 or July 2004 upon payment of specified
sums. Of the Company's currently leased space in Norwalk,
approximately 6,100 square feet is devoted to office and
administrative uses, approximately 11,000 square feet to
engineering and development activities, approximately 6,100 square
feet to marketing, sales and customer service functions, and
approximately 6,200 square feet, which the Company began leasing
on January 1, 1998, is currently not being used and is currently
the subject of sublease negotiations by the Company with a third
party.<PAGE>
<PAGE>
             The Company holds an option to lease the remaining portion
of all space (up to approximately 35,000 square feet in aggregate)
as it becomes available in the building that houses its executive
offices. The lease term and cost per square foot for all
additional space would be on terms comparable to those of the
original lease. The Company has no present plans to exercise this
option.

             The Company has entered into a lease arrangement in
Boxborough, Massachusetts, with respect to approximately 22,500
square feet, which expires in September 2002 and requires annual
rent (in addition to increases in operating expenses and real
estate taxes) in an amount currently of approximately $268,000,
increasing to approximately $290,000 in the final year of the
lease. The space is used for engineering and development
activities. The Company leases additional space at other smaller
locations where required to support operations. The foregoing
facilities are regarded by management as adequate in all material
respects for the current requirements of the Company's business.

             As described under Note 6 of the Notes to the Company's
Consolidated Financial Statements included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K", the Company's indebtedness to the Connecticut Development
Authority (the "CDA") is secured by the assets of the Company.

ITEM 3. LEGAL PROCEEDINGS

             The Company is involved in certain litigation incidental to
the conduct of its business and affairs. Management does not
believe that the outcome of any such litigation will have a
material adverse effect on the financial condition or results of
operations of the Company.

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

             Not applicable.

PART II

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

             (a) The Company's Common Stock is currently traded on the
over-the-counter market, with price quotations reported on the
Nasdaq SmallCap Market under the symbol "ERSI." Prior to November
6, 1998, the Company's Common Stock was quoted on the Nasdaq
National Market.  The following table sets forth, for the calendar
periods indicated, the range of quarterly high and low sales
prices for the Common Stock, as reported on the Nasdaq National
Market prior to November 6, 1998 and on the Nasdaq SmallCap Market
from and after such date. Quotations represent prices between<PAGE>
<PAGE>
dealers and do not include retail mark-ups, mark-downs or
commissions.

                 1997                      High           Low

                 First Quarter             $7.38          $3.38
                 Second Quarter             7.50           4.63
                 Third Quarter              7.44           5.13
                 Fourth Quarter             7.13           3.31

                 1998                      High           Low

                 First Quarter             $5.00          $3.00
                 Second Quarter             4.50           2.50
                 Third Quarter              4.50           2.56
                 Fourth Quarter             3.94           1.00

                 Since July 11, 1996, the Common Stock has also been
admitted to trading on the Alternative Investment Market of the
London Stock Exchange.

                 As of March 15, 1999, the number of record holders of the
Company's Common Stock was 566.

                 The Company has never paid or declared any cash dividends
on its Common Stock and does not intend to pay cash dividends on
its Common Stock in the foreseeable future. The Company intends to
retain its earnings, if any, for the future operation and
expansion of its business. The payment of dividends in the future
will depend upon the restrictions imposed by the indenture
pursuant to which the Senior Discount Notes were issued, the
Company's available earnings, the capital requirements of the
Company, its general financial condition and other factors deemed
pertinent by the Board of Directors. See Note 6 of the Notes to
the Company's Consolidated Financial Statements included in
response to "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-
Liquidity", which information is incorporated herein by reference.

                 (b)                     Not applicable.

ITEM 6. SELECTED FINANCIAL DATA

                 The following tables reflect summary historical
consolidated financial data with respect to the Company for the
periods indicated and should be read in conjunction with the
Company's Consolidated Financial Statements included in response
to "Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<PAGE>
<PAGE>
                 The following selected consolidated statement of operations
and balance sheet data, insofar as it relates to each of the five
years in the period ended December 31, 1998, has been derived from
audited consolidated financial statements, including the
consolidated balance sheet as of December 31, 1998 and 1997 and
the related consolidated statement of operations for each of the
three years in the period ended December 31, 1998 and the notes
thereto.
<TABLE>
<CAPTION>
                                              Year Ended December 31,  
  
                              1998       1997     1996      1995       1994 
                              ----       ----     ----      ----       ----
                                (Amounts in thousands, except per share data)
<S>                          <C>        <C>      <C>       <C>       <C>
Consolidated Statement
 of Operations Data:

Revenues....................  $ 3,764    $ 1,972  $  5,002  $  2,973   $  2,376
Cost of goods sold..........    8,095      3,699     6,204     4,113      3,822
                               ------    -------   -------  --------    --------
  Gross loss................   (4,331)    (1,727)   (1,202)   (1,140)    (1,446)
                               ------    -------   -------  --------    -------
Operating expenses:
 Selling, general and
  administrative............   12,671     12,394     6,310     6,896      6,425
 Research and development...    3,928      3,409     1,614     2,547      2,185
Depreciation and amorti-
  zation....................      375        301       162       107        149
  Stock option compensation      --           --        44        27      1,119
                               ------    -------   -------  --------      -------
  Total operating expenses..   16,974     16,104     8,130     9,577      9,878
                               ------    -------   -------  --------    -------
  Loss from operations......  (21,305)   (17,831)   (9,332)  (10,717)   (11,324)
                               ------    -------   -------- ---------   -------
Other income (expenses):
 Interest income............    3,982      4,982       302       134        288
 Interest expense...........  (16,886)   (14,024)     (382)     (291)       (65)
Loss on disposals ..             (104)      --          --        --        --
Gain (loss) on short-term
  investments...............     --         --          --         6       (177)
                               ------    -------   --------  --------      ------- 
Total other (expense)
      income .............    (13,008)    (9,042)      (80)     (151)        46
                               ------     -------  --------  --------      -------
Net loss..................   $(34,313)  $(26,873) $ (9,412) $(10,868)  $(11,278)
                             ========   ========  ========  ========   ========<PAGE>
Earnings per share:
 Weighted average number
  of common shares out-
  standing.................   21,233     21,096    16,169     11,743     11,682
                             ========   ========  ========   ========  ========
Basic loss per common
  share(1)................. $  (1.62)   $ (1.27)  $ (0.60)  $  (0.95)  $  (0.97)
                             ========   ========  ========   ========   ========

                                            December 31,
                               1998     1997     1996      1995      1994
                               ----     ----    ----       ----      ----
                                           (Dollars in thousands)
Consolidated Balance
 Sheet Data:

Net working capital.......  $ 65,697  $ 88,372  $ 8,764   $ 5,283    $ 3,452
Total assets..............    81,626   100,208   12,260     8,316      5,195
Long-term debt............   124,057   113,102    4,989     3,335      1,981
Common stock purchase
 warrants.................     5,100     5,100     --        --         --
Stockholders' (deficit)
 equity...................   (54,742)  (20,476)   5,723     3,215      2,268

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

 (1) In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
     "Earnings Per Share". Due to the Company's loss position, the Company has
     reported "basic" loss per common share. The presentation of "dilutive" loss
     per common share is not required as common stock equivalents are anti-
     dilutive.

</TABLE>
  
  
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Overview

               The market for ESL systems is in the development stage, and
the Company estimates that, as of December 31, 1998, approximately
170 stores in the United States were operating such systems, out
of a potential market in excess of 100,000 supermarkets and other
stores. As a result, market acceptance of and demand for these
systems are subject to a high level of uncertainty. The Company's
success will depend upon the rate at and extent to which retailers
choose to install ESL systems throughout their stores. The initial
acceptance and rate of installation by retailers may be affected
by numerous factors beyond the Company's control, including the
customer's assessment of the benefits of and the need for ESL
systems and the customer's available capital resources, and  there
can be no assurance that supermarket chains will choose to install
ESL systems in a significant number of their stores.
 
               Since its inception in 1990, the Company has been engaged
primarily in the development, design, market testing and sale of
the ERS ShelfNet System. The Company subcontracts to third parties
the manufacture and assembly of the components comprising the ERS<PAGE>
<PAGE>
ShelfNet System. In addition, the Company engages unaffiliated
parties to augment its internal development resources and to
assist it in the continued development of the ERS ShelfNet System.
The Company has never been profitable and has incurred significant
net operating losses and negative cash flow from operations to
date. Since inception and through December 31, 1998, the Company
has generated cumulative revenues of $18.3 million, and has
incurred a cumulative net loss of approximately $126.9 million.
The Company expects losses and negative cash flow from operations
to continue into the current fiscal year, and the accumulated
deficit will increase, while the Company concentrates on the
foregoing activities and unless and until it has established a
sufficient revenue-generating customer base. 

               The Company historically has marketed the ERS ShelfNet
System for sale at prices generally in excess of $100,000 per
store. The purchase of an ESL system from the Company has
therefore represented a significant capital expenditure for
capital-constrained retailers. The Company also markets its ERS
ShelfNet System on a fee based arrangement under its SayGo Plan.
Under the SayGo Plan, the Company will recognize revenues as
monthly usage and other fees are billed to customers. Also, under
the SayGo Plan the Company will retain ownership of the systems,
which will be reflected as long-term assets on the Company's
consolidated balance sheet and which will be depreciated on a
straight-line basis over the shorter of their economic lives or
five years. The Company intends, during its current fiscal year,
to develop additional strategies to accelerate market recognition
and acceptance of the system and its benefits, but there can be no
assurance that any such approaches will be material to the
determination of additional retailers to install the Company's
system in the emerging market for ESLs.

               In order to pursue its strategy of greater market
penetration while its operations grow, the Company has incurred
indebtedness that is substantial in relation to its stockholders'
deficit. As of December 31, 1998, the Company had recorded total
outstanding indebtedness of approximately $129.1 million and a
total stockholders' deficit of $54.7 million. As a result of its
high degree of leverage (and as more fully-described below under
"Liquidity and Capital Resources"): (i) a substantial portion of
the Company's cash flow from operations, if any, after February 1,
2000, will be required to be dedicated to the Company's interest
expense obligations and may not be available to the Company for
its operations, working capital, capital expenditures or other
purposes, (ii) the Company's ability to obtain financing that may
be needed may be limited, (iii) the Company's flexibility to
adjust to changing market conditions and ability to withstand
competitive pressures as compared to less highly-leveraged
competitors could be limited (including by reason of the covenants
contained in the Company's debt instruments), and (iv) the Company
may be more vulnerable to downturns in general economic conditions<PAGE>
<PAGE>
or in its business or be unable to undertake capital expenditures
that are important for its growth strategy, any of which could
have a material adverse effect on the Company and its ability to
make payments of principal of, and interest on, its indebtedness. 

               Commencing August 1, 2000, cash interest on the Company's 
Senior Discount Notes (the "Senior Discount Notes") will be
payable semi-annually at the rate of 13-1/4% per annum
(approximately $19.5 million per year). The full accreted
principal amount at maturity of the Senior Discount Notes of
$147,312,000 will become due on February 1, 2004. The Company's
ability to meet its continuing debt service and other obligations
will depend largely on the extent to which the Company can
implement successfully its business strategy of achieving large-
scale commercialization of the ERS ShelfNet System, and  there can
be no assurance that the Company will be able to implement fully
its strategy, that the anticipated results of its strategy will be
realized, or that the Company will be able to generate sufficient
cash flow or otherwise obtain funds in the future to cover
interest and principal payments associated with the Senior
Discount Notes and any other debt of the Company. See "Liquidity
and Capital Resources" below.

Results of Operations

               Year ended December 31, 1998 compared to 
                   year ended December 31, 1997

               Revenues.  The Company's revenues were $3,764,000 in 1998,
compared to $1,972,000 in 1997, reflecting the increased demand
for ERS' new generation product. In 1998, revenues were
concentrated among two significant customers within the
supermarket industry comprising 88% of total revenues, with one
customer accounting for 59% thereof. Approximately 41% of revenues
in 1997 was attributable to a single customer, with three
customers accounting for 74% of total revenues. For each of the
years ended December 31, 1998 and 1997 software license fees were
$122,000, or 4% and 11% of product sales, respectively. For the
year ended December 31, 1998, maintenance revenues increased to
$864,000 from $825,000 in the prior year, due primarily to an
increase in the number of installed locations. 

               Cost of Goods Sold.  Cost of goods sold consists of the cost
of hardware components of the ERS ShelfNet System, system
installation costs, depreciation of tools and dies owned by the
Company and utilized in the manufacturing of hardware components,
amortization of capitalized product development costs, warranty
and maintenance costs, freight and inventory obsolescence.

               Under the SayGo Plan, the Company will depreciate the cost
of hardware components of its system over the shorter of their
estimated useful lives or five years.
<PAGE>
<PAGE>
               Cost of goods sold increased to $8,095,000 in 1998 from
$3,699,000 in 1997, resulting in a gross loss (cost of goods sold
in excess of revenues) in 1998  of 115% of total revenues compared
to 88% in 1997. The increase in gross loss as a percent of
revenues is primarily the net effect of an increase in the
inventory reserve, offset by reduced material cost and by a
decrease in depreciation related to manufacturing equipment and
amortization of product development costs, as a share of cost of
goods sold, resulting from increased installation volumes. During
1998, the Company recorded a charge of $2,970,000 representing an
increase in its reserve for inventory valuation.

               Warranty and maintenance expenses included in the cost of
goods sold decreased to $654,000 in 1998 from $758,000 in 1997,
attributable to maturity of the product.  ERS anticipates that
future warranty and maintenance expenses per installation will
decrease as a greater percentage of the installed base consists of 
wireless installations, and that the cost of goods sold as a
percentage of revenues will decrease as a result of higher
manufacturing volumes of its components and as the installation
process is improved.

               Selling, General and Administrative.  Selling, general and
administrative costs consist of costs associated with selling and
administrative staff, overhead, market research and development,
and customer service personnel. Selling, general and
administrative costs increased $277,000, to $12,671,000 in 1998,
compared to $12,394,000 in 1997. The 1998 results reflect an
increase in compensation related expense from 1997 consisting of
an increase in severance related costs and slightly higher
salaries offset by an overall decrease in employee headcount. The
1997 results include the effect of a special non-cash charge of
$510,000 for the issuance of common stock purchase warrants.

               As more fully described in Note 12 of the Notes to the
Company's Consolidated  Financial Statements included in response
to "Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K," in October 1997 the Company and Telepanel executed
an agreement to combine, as a result of which the Company would
have become the sole beneficial owner of the outstanding Telepanel
common shares. In April 1998, such arrangements were terminated.
Results for the years ended December 31, 1998 and 1997 include
direct transaction costs associated with the proposed combination
of $381,000 and $585,000, respectively. 

               Research and Development.  Research and development expenses
increased $519,000 to $3,928,000 in 1998 from $3,409,000 in 1997.
Such increases reflect expanded hardware and software engineering
activities, primarily greater functionality of the Company's new
system, creation of improved POS data integration tools and the
development of training programs. During the years ended December
31, 1998 and 1997, the Company also capitalized product
development costs of $373,000 and $375,000, respectively. <PAGE>
<PAGE>
               Interest Income.  Interest income decreased to $3,982,000
in 1998 compared to $4,982,000 in 1997, due to decreased cash and
cash equivalents available for investment.

               Interest Expense.  Interest expense increased to $16,886,000
in 1998 compared to $14,024,000 in 1997. Interest expense
represents interest on amounts borrowed from the CDA and,
additionally, non-cash interest on the Senior Discount Notes. With
the consummation in January 1997 of the private sale (the "Private
Placement") of 147,312 units (the "Units"), each consisting of
Senior Discount Notes with a principal amount at maturity of
$1,000 and one warrant (collectively, the "1997 Warrants") to
purchase 17.23 shares of Common Stock, the Company commenced
recording interest on an amount equal to the gross proceeds from
the Private Placement plus prior recorded and unpaid interest at
an annual rate of 13.25%. Additional expense is being recorded as
a result of the amortization of the discount recorded on the
Senior Discount Notes (for value attributed to the 1997 Warrants)
and the amortization of costs of issuance.

               Income Taxes.  The Company has incurred net losses since
inception which have generated net operating loss carryforwards
for federal income tax purposes of approximately $73.7 million,
which are available to offset future taxable income and expire
through the year 2013 for federal income tax purposes. In
consideration of the Company's accumulated losses and the
uncertainty of its ability to utilize any future tax benefits
resulting from these losses, a full valuation allowance has been
provided against the impact of this potential tax benefit in the
Company's consolidated financial statements as of December 31,
1998 and 1997 (see Note 11 of the Notes to the Company's
Consolidated Financial Statements included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K").

               Year ended December 31, 1997 compared to 
                     year ended December 31, 1996

               Revenues.  The Company's revenues were $1,972,000 in 1997,
compared to $5,002,000 in 1996. The Company believes that the
decrease of $3,030,000 in revenues in 1997 compared to 1996
reflected the decreased demand for ERS' previous generation
product attendant to plans to introduce a new generation product. 

               In 1997, revenues were concentrated among three significant
customers within the supermarket industry comprising 74% of total
revenues, with one customer accounting for 41% thereof.
Approximately 46% of revenues in 1996 was attributable to a single
customer, with three customers accounting for 79% of total
revenues. For the years ended December 31, 1997 and 1996 software
license fees were $122,000 and $243,000, respectively, or 11% and
6% of product sales. For the year ended December 31, 1997,
maintenance revenues decreased to $825,000 from $896,000 in the<PAGE>
<PAGE>
prior year, due primarily to a reduced customer base of the
previous generation product. 

               Cost of Goods Sold. Cost of goods sold decreased to
$3,699,000 in 1997, from $6,204,000 in 1996. Warranty and
maintenance expenses included in the cost of goods sold decreased
to $758,000 in 1997 from $966,000 in 1996, attributable to
maturity of the product. The gross loss (cost of goods sold in
excess of revenues) in 1997 increased to 88% of total revenues
from 24% in the 1996 corresponding period, reflecting reduced
installation volumes.
   
               The increase in gross loss as a percent of revenues was
primarily the result of ERS' transition to a new generation of
wireless products. During this transition, ERS experienced high
initial material costs and installation inefficiencies.
Additionally, because of a reduction in product sales in 1997,
depreciation of manufacturing equipment and amortization of
product development costs comprised a significant share of costs
of goods sold.

               Cost of goods sold in 1996 also included a special provision
for excess inventory of $750,000 recorded in the fourth quarter of
1996, in connection with the introduction of the new generation
ESL system.

               Selling, General and Administrative. Selling, general and
administrative costs increased $6,084,000, to $12,394,000 in 1997,
compared to $6,310,000 in 1996. This reflects increased salary,
recruiting and rental expense related to efforts to expand ERS'
organization in anticipation of sales growth. In addition, results
include direct transaction costs associated with the proposed
Telepanel arrangement of approximately $585,000 and the effect of
a special non-cash charge of $510,000 for the issuance of common
stock purchase warrants.

               Research and Development.  Research and development expenses
were $3,409,000 in 1997 compared to $1,614,000 in 1996. The
increase in research and development expenses reflects expanded
hardware and software engineering activities and the development
of training programs. During the years ended December 31, 1997 and
1996, the Company also capitalized product development costs of
$375,000 and $592,000, respectively. These product development
costs are amortized over the shorter of the estimated useful life
of the related software product or process or three years.

               Interest Income.  Interest income increased to $4,982,000
in 1997 compared to $302,000 in 1996, due to increased cash and
cash equivalents available for investment, including the proceeds
of the Private Placement of 147,312 Units consisting of
$147,312,000 principal amount at maturity of Senior Discount Notes
together with the 1997 Warrants to purchase an aggregate of
2,538,258 shares of Common Stock consummated on January 24, 1997.<PAGE>
<PAGE>
               Interest Expense.  Interest expense increased to $14,024,000
in 1997 compared to $382,000 in 1996. Interest expense represents
interest on amounts borrowed from the CDA and additionally, in
1997, non-cash interest on the Senior Discount Notes. 

               Income Taxes. In consideration of the Company's accumulated
losses and the uncertainty of its ability to utilize any future
tax benefits resulting from these losses, the impact of this
potential tax benefit has been eliminated in the Company's
consolidated financial statements as of December 31, 1997 and 1996
(see Note 11 of the Notes to the Company's Consolidated Financial
Statements included in response to "Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 8-K").

Liquidity and Capital Resources

               As of December 31, 1998, the Company had net working capital
of $65,697,000 reflecting cash and cash equivalents of $63,877,000
compared to net working capital of $88,372,000, reflecting cash
and cash equivalents of $82,400,000 at December 31, 1997. The
decrease in net working capital and in cash and cash equivalents
resulted primarily from funding the Company's operations during
1998.

               Net cash used in operations was $16,606,000 in 1998,
compared to net cash of $16,831,000 used for operating activities
in 1997, resulting primarily from the net losses of $34,313,000
and $26,873,000, respectively, for such periods. In 1998, the net
loss of $34,313,000 included $15,441,000 of non-cash interest
expense, compared to $12,798,000 of such expense in the prior
year. The 1998 net cash used in operations also reflected an
increase in trade accounts receivable (net of allowance for
doubtful accounts) of $1,057,000 and a decrease in inventory (net
of reserves) of $660,000, compared to a decrease in accounts
receivable (net of allowance for doubtful accounts) of $842,000
and an increase of inventory (net of reserves) of $6,452,000
during the prior year. The Company recorded a charge during 1998
of $2,970,000 representing an increase in its reserve for
inventory valuation. During 1998, current liabilities decreased by
$268,000 reflecting a decrease in outstanding trade payables,
compared to an increase of $934,000 in the prior year. 

               Cash used in investing activities totaled $1,964,000 in 1998
compared to $3,709,000 in 1997. Investing activities included
capital expenditures of $1,730,000 and $3,334,000 in 1998 and
1997, respectively. The Company also incurred $373,000 and
$375,000 in 1998 and 1997, respectively, in product development
costs. 

<PAGE>
<PAGE>
               In addition to selling the ERS ShelfNet System to customers
at a price generally in excess of $100,000 per store, under the
Company's SayGo Plan the Company offers the system on a fee-based
arrangement whereby the Company retains ownership of the system.
As a result, the Company will have substantial cash requirements,
and will require substantial funds, for manufacturing and carrying
costs attendant to the SayGo Plan, which will not initially be
covered by revenues calculated on the basis of usage fees paid by
customers.

               Although the Company believes that the SayGo Plan has, to
a limited extent, facilitated market acceptance of the ERS
ShelfNet System, principally as a result of its diminution of the
risk perceived by new customers in an investment in new
technology, the Company believes that retailers to whom benefits
of the system have been established may prefer to purchase the
system rather than participate in the SayGo Plan. Accordingly, the
Company will continue to offer its system under the SayGo Plan in
addition to pursuing maximum sales of the system. The Company also
intends, during its current fiscal year, to develop additional
strategies to accelerate market recognition and acceptance of the
system and its benefits, which may draw on the Company's liquid
assets.

               To date, the Company has not generated positive cash flow
from operations, and has historically funded its operations
primarily through loans from its stockholders, the sale of
interests in an affiliated partnership, its initial public
offering of Common Stock consummated in 1993, its arrangements
with the CDA, the sale of Series A Preferred Stock, $1.00 par
value ("Series A Preferred Stock"), to the Company's principal
stockholders and members of the Company's Board of Directors and
their affiliates, an offshore public offering and contemporaneous
private placement of Common Stock in 1996 and the Private
Placement.

               Cash from financing activities provided $47,000 in 1998 from
the exercise of stock options, compared to $94,742,000 in 1997 as
a result of the Private Placement. In January 1997, the Company
completed the private sale of 147,312 Units, consisting of
$147,312,000 principal amount at maturity of its Senior Discount
Notes and the 1997 Warrants, which were sold to investors at a
price aggregating $100 million ($95 million net proceeds to the
Company). The Senior Discount Notes mature on February 1, 2004,
with accrual of cash interest at the rate of 13-1/4% per annum
commencing February 1, 2000, such interest payable thereafter on
February 1 and August 1 of each year commencing August 1, 2000.
The Senior Discount Notes may be called, at the Company's option,
in whole or in part, at any time after February 1, 2001, and, upon
specified change in control events, each holder has the right to
require the Company to purchase its Senior Discount Notes at
specified prices. 
<PAGE>
<PAGE>
               The indenture under which the Senior Discount Notes were
issued places limitations on operations and sales of assets by the
Company or its subsidiaries, requires maintenance of certain
financial ratios in order for the Company to incur additional
indebtedness (subject to specified exceptions), requires the
delivery by the Company's subsidiaries of guaranties if specified
debt is subsequently incurred by such subsidiaries, and limits the
Company's ability to pay cash dividends or make other
distributions to the holders of its capital stock or to redeem
such stock. The 1997 Warrants are, since January 24, 1998,
exercisable through February 1, 2004 with respect to an aggregate
of 2,538,258 shares of Common Stock, at a per share price of
$5.23.

               The Company remains obligated to the CDA for an aggregate
of $5,000,000 principal amount of indebtedness (the "CDA Note"),
repayable in August 1999 and convertible to shares of Common Stock
at an adjusted conversion price calculated at $3.00 plus the
average market price of the Common Stock during the twelve months
prior to conversion. The CDA also acquired warrants expiring in
August 1999 to purchase 699,724 shares (as adjusted through
December 31, 1998) of Common Stock, exercisable at an adjusted
price calculated at $2.58 plus the average market price of the
Common Stock during the twelve months prior to exercise. Under its
arrangements with the CDA, the Company will be obligated to comply
with certain covenants (some of which remain in effect until
August 2004), whether or not the CDA Note has been paid in full,
or be subject to certain penalties including immediate repayment
of the CDA Note in full. In the event of specified changes in
control of the Company coupled with prepayment of its note, the
Company has rights to repurchase such warrants and shares at the
fair market value thereof (calculated pursuant to such
arrangements), and thereby, subject to the foregoing, extinguish
such covenants. In all events (and notwithstanding any such
repurchase), if the Company relocates outside of Connecticut
before August 2004, all advances made by the CDA are subject to
acceleration, together with a penalty of $250,000.

               The Company expects net losses and negative cash flows from
operations to continue into the current fiscal year. The Company
has been utilizing and will continue to utilize the net proceeds
from the Private Placement in connection with the anticipated
expansion of its operations and for general corporate purposes,
including the funding of the Company's ongoing engineering,
development and marketing efforts. The Company believes the
proceeds of the Private Placement, together with its other cash
and cash equivalents, will be sufficient to meet the Company's
currently anticipated operating and capital expenditure
requirements as it implements its business strategy and as
required debt service under the Senior Discount Notes commences,
and fund operations through the year ending December 31, 2000. As
more fully described above, the Company's ability to meet its
continuing debt service and other obligations will depend, among<PAGE>
<PAGE>
other factors, on the acceptance of the Company's system in its
intended market and the Company's success in implementing its
business strategy and achieving large scale commercialization of
the ERS ShelfNet System. In the event commercialization does not
result in sufficient liquidity to the Company, the Company may
need to raise additional long-term financing to support operations
and service debt. The Company has no current arrangement with
respect to, or sources of, any additional financing, and there can
be no assurance that any such additional financing would be
available on terms reasonable to the Company.

Year 2000

               The "year 2000" problem relates to computer systems that
have time and date-sensitive programs that were designed to read
years beginning with "19", but may not properly recognize the year
2000.  If the ERS ShelfNet System or a computer system or software
application used by the Company or a third party dealing with the
Company fails because of the inability of the system or
application to properly read the year "2000", the results may
adversely affect the Company.

               Accordingly, the Company has been reviewing the ERS ShelfNet
System and its internal computer programs and systems to ensure
year 2000 compliance.  During 1998, the Company established a
project team designed to address year 2000 risks in a methodical
manner, concentrating in four separate areas of activity: (i)
internal systems, (ii) products, (iii) customers and (iv)
suppliers. The Company's project team provides consulting services
where needed in the areas of project planning and estimating,
testing and technical issues, and runs remedial projects where
needed.  The Company does not contemplate an independent review of
its year 2000 risks or estimates, but has engaged and will engage
experts on specific projects where required.

               The project team has been reviewing the year 2000 compliance
status of the software and systems used in the Company's internal
business processes and is making necessary upgrades and
modifications.  The project team intends to obtain appropriate
assurances of compliance from manufacturers of hardware and
software products used by the Company internally, and their
agreement to modify or replace any non-compliant products. If the
Company is unable to obtain such assurances, the project team will
undertake to test such components and, if necessary, replace them.
The Company anticipates that the software or systems that the
Company deems significant to its business will be year 2000
compliant by the end of the second quarter of 1999,  but there can
be no assurance that the Company will not experience delays in
implementing compliant products.  

<PAGE>
<PAGE>
               The project team has completed preliminary testing of the
new generation software of the ERS ShelfNet System and has found
it to be year 2000 compliant in all material respects.  The
project team has also determined that the new generation software
may be utilized to upgrade non-compliant prior generation
software. The project team anticipates completing its testing of
the new generation software by the end of the first quarter of
1999 and will undertake any necessary corrective measures during
the second and third quarters of 1999. Although the Company's
agreements with customers generally limit liability of the
Company, there can be no assurance that customers with installed
prior generation systems may not assert claims against the Company
if they experience year 2000 problems with their systems. Given
the terms of the Company's arrangements with these customers, the
Company does not believe that any such development will result in
any material financial exposure to the Company.
               
               As part of the Company's effort, it will recreate customer
environments to the extent possible, and test data interfaces and
other applications to assist customers in year 2000 compliance. 
Many customers and potential customers are expending significant
resources to correct their current operations for year 2000
compliance, which may affect purchasing patterns and result in
reduced time and funds available to investigate the purchase of
the ERS ShelfNet System.

               The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and others
with whom the Company transacts business on a worldwide basis do
not comply with year 2000 requirements. The project team is
implementing a program to obtain appropriate assurances of year
2000 compliance from the Company's principal suppliers, and is
endeavoring to determine the extent to which the Company is
vulnerable to their failure to remediate year 2000 issues.  The
Company has obtained certain written certifications from such
vendors as to year 2000 compliance and plans to obtain the
remainder by the end of the second quarter of 1999. To the extent
that a supplier or vendor poses unacceptable year 2000 risks to
the Company, the Company will seek to identify alternative supply
sources.  As more fully described under "Item 1. Business-
Manufacturing", the Company believes alternative sources of system
components are available and maintains an inventory of its
products, which the Company believes is sufficient to account for
temporary supply disruptions. 
               
               The Company presently believes that the ERS ShelfNet System
and the Company's internal computer systems will be year 2000
compliant in a timely manner.  However, while the Company
estimates the cost of these efforts to be less than approximately
$300,000, there can be no assurance that such costs will not
exceed such amount.  Notwithstanding management's current
assessment that no material exposure to significant business
interruption exists, the Company plans by the end of the second<PAGE>
<PAGE>
quarter of 1999 to complete contingency plans in the event its
year 2000 project is not completed in a timely manner, or in the
event unforeseen difficulties arise.  The Company will
appropriately modify its strategy as additional circumstances come
to its attention, but there can be no assurance that the Company
will timely identify and remediate all significant year 2000
problems, that remedial efforts will not involve significant
additional time and expense, or that such problems will not have
an effect on the Company's business, results of operations or
financial position more substantial than currently anticipated.

Market Risk

               The Company is subject to market risks related to changes
in interest rates and, accordingly, the Company's objective is to
minimize any impact on its financial position from these risks.
The Company's cash and cash equivalents predominantly consist of
short-term, highly-liquid U.S. treasury bills and certificates of
deposit, in order to minimize interest rate risk. The Company does
not enter into transactions involving derivative financial
instruments for speculative trading purposes. 

               The Company utilizes sensitivity analysis, along with other
techniques, as a basis for measuring the impacts that market risk
exposure may have on the fair value of the Company's debt and
financial instruments. If market interest rates were to increase
immediately and uniformly by ten percent from levels at December
31, 1998,the decline in fair value of the portfolio would not be
material. The Company's long-term term debt bears interest, for
the most part, at a fixed rate and, therefore, relative to its
long-term debt, an immediate ten percent change in the market
interest rates would not materially impact the Company's financial
statements. 

               These effects of hypothetical changes in interest rates,
however, ignore other effects the same movement may have arising
from other variables, and actual results could differ from the
sensitivity calculations of the Company.  The Company regularly
assesses additional relevant variables, establishes policies and
business practices to protect against the adverse effects of using
any given financial instruments and does not anticipate any
material losses generated by these risks.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
         RISK 

               For information concerning this item, see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations-Market Risk," which information is
incorporated herein by reference.

<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               For information concerning this item, see "Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K",
which information is incorporated herein by reference. 

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

                 Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

              For information concerning this item, see "Item 1. Business-
Executive Officers" and the Proxy Statement to be filed with
respect to the 1999 Annual Meeting of Stockholders (the "Proxy
Statement"), which information is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

             For information concerning this item, see the Proxy
Statement, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

             For information concerning this item, see the Proxy
Statement, which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

             For information concerning this item, see the Proxy
Statement which information is incorporated herein by reference.

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

                 (a)        1. Financial Statements:

                            The consolidated financial statements filed in this
Annual Report on Form 10-K are listed in the attached Index to
Consolidated Financial Statements and Schedules. 

                            2. Financial Statement Schedules:

                            No consolidated financial statement schedules are
filed in this Annual Report on Form 10-K because they are not
required or are inapplicable or the required information is
otherwise shown in the consolidated financial statements or notes
thereto.

<PAGE>
<PAGE>
                            3. Exhibits:

                            The exhibits required to be filed as part of this
Annual Report on Form 10-K are listed in the attached Index to
Exhibits.

                 (b)        Current Reports on Form 8-K:

                            During the quarter ended December 31, 1998, the
Company filed a Current Report on Form 8-K dated November 6, 1998
reporting, under "Item 5. Other Events" thereunder, the movement
of the Company's Common Stock to the Nasdaq SmallCap Market. No
financial statements were included with such report.
<PAGE>
<PAGE>
                                            POWER OF ATTORNEY

         The issuer and each person whose signature appears below hereby
appoint Norton Garfinkle, Bruce F. Failing, Jr. and Jerry
McAuliffe as attorneys-in-fact with full power of substitution,
severally, to execute in the name and on behalf of the registrant
and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which
amendments may make such changes in the report as the attorney-in-
fact acting deems appropriate and to file any such amendment to
the report with the Securities and Exchange Commission.

                                    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.

Dated: March 31, 1999                               ELECTRONIC RETAILING SYSTEMS
                                                     INTERNATIONAL, INC.

                                                    By s/Bruce F. Failing, Jr.
                                                      ------------------------
                                                      Bruce F. Failing, Jr.
                                                      Vice Chairman of the Board
                                                      and Principal Executive 
                                                      Officer

                 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>
Signature                         Title                           Date
---------                         -----                           -----
<S>                               <C>                             <C>
s/Bruce F. Failing, Jr.           Vice Chairman of the Board      March 31, 1999
-----------------------            and Principal Executive
Bruce F. Failing, Jr.              Officer

s/Jerry McAuliffe                 Vice President and              March 31, 1999
-----------------------            Principal  Financial and
Jerry McAuliffe                    Accounting Officer 

S/Paul A. Biddelman               Director                        March 31, 1999
-----------------------
Paul A. Biddelman


s/David Diamond                   Director                        March 31, 1999
----------------------
David Diamond


s/Norton Garfinkle                Director                        March 31, 1999
----------------------


s/Sheldon Weinig                  Director                       March  31, 1999
-----------------------
Sheldon Weinig


s/Donald E. Zilkha                Director                       March  31, 1999
-----------------------
Donald E. Zilkha
/TABLE
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Financial Statements:

Report of Independent AccountantS. . . . .       F-2

Consolidated Balance Sheet, December 31,
  1998 and 1997. . . . . . . . . . . . . .       F-3

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

Consolidated Statement of Cash Flows
  for the years ended December 31, 1998,
  1997 and 1996. . . . . . . . . . . . . .       F-5

Consolidated Statement of Changes in
  Stockholders' (Deficit) Equity for the
  years ended December 31, 1998, 1997 
  and 1996 . . . . . . . . . . . . . . . .       F-6

Notes to Consolidated Financial Statements.      F-7

Financial Statement Schedules:

No Financial Statement Schedules are included herein because they
are not required, are inapplicable, or the information is otherwise
shown in the consolidated financial statements or the notes
thereto.













                                                                    F-1<PAGE>
<PAGE>
                                          REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of
  Electronic Retailing Systems International, Inc.

In our opinion, the consolidated financial statements listed in the
index on page F-1 present fairly, in all material respects, the
financial position of Electronic Retailing Systems International,
Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



PRICEWATERHOUSECOOPERS LLP



Stamford, Connecticut
March 29, 1999








                                                                         F-2

<PAGE>
<TABLE>
                  Electronic Retailing Systems International, Inc.
                            Consolidated Balance Sheet
                (in thousands, except per share and share amounts)
<CAPTION>
                                                      December 31,
                                                    ----------------
                                                    1998        1997
                                                    ----        ----
<S>                                             <C>         <C>
Assets
Current assets
 Cash and cash equivalents (Note 2)              $ 63,877    $82,400
 Accounts receivable - net of allowance 
   for doubtful accounts of $352 in 1998 
   and $229 in 1997                                 1,260        203
 Receivables from affiliates (Note 3)                  --         36
 Installations in progress                            398        202
 Inventories - net of reserves of $3,991 in
   1998 and $1,021 in 1997 (Note 2)                 6,612      7,273
 Prepayments and other current assets                 761        740
                                                 ---------   --------
   Total current assets                            72,908     90,854
                                                 ---------   --------
Furniture and equipment (Note 2)                    5,113      5,055
 Accumulated depreciation                          (1,462)    (1,753)
                                                 ---------   --------
Furniture and equipment, net                        3,651      3,302
                                                 ---------   --------
Debt issuance costs (Note 2)                        4,475      5,038
Other non-current assets                              592      1,014
                                                 ---------   --------
Total assets                                    $  81,626   $100,208
                                                =========   ========
Liabilities and Stockholders' Deficit
Current liabilities
  Accounts payable and accrued expenses          $  1,877    $ 2,128
  Accrued salaries and benefits                       337        354
  Notes payable                                     4,997        -
                                                 --------    -------
    Total current liabilities                       7,211      2,482
                                                 --------    -------
 Long-term debt (Note 6)                          124,057    113,102
                                                 --------    -------
 Common stock purchase warrants (Note 6)            5,100      5,100
 Commitments and contingencies (Note 8)                 -          -

Stockholders' deficit
 Preferred stock, undesignated (par value
  $1.00 per share; 2,000,000 shares
     authorized,none issued and outstanding)           -          -
 Common stock (par value $0.01 per share; 
  35,000,000 authorized; 21,249,447 and
  21,187,035 shares issued and outstanding
  in 1998 and 1997, respectively)                     212        211
 Additional paid-in capital                        51,374     51,328

 Accumulated deficit                             (106,328)   (72,015)
                                                   -------    -------
   Total stockholders' deficit                    (54,742)   (20,476)
                                                   -------   -------
Total liabilities and stockholders'
  deficit                                        $ 81,626   $100,208

                                                 ========    =======
                  See accompanying notes to consolidated financial statements
</TABLE>
                                                                  F-3<PAGE>
<PAGE>
<TABLE> 
                     Electronic Retailing Systems International, Inc.
                         Consolidated Statement of Operations
                       (in thousands, except per share amounts)
  <CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                 1998        1997        1996
                                                 ----        ----        ----
<S>                                          <C>         <C>         <C>
Revenues
 Product sales                                $ 2,900     $ 1,147     $  4,106
 Maintenance                                      864         825          896
                                             --------    --------    ---------
 Total revenues                                 3,764       1,972        5,002
                                             --------    --------    ---------
Cost of goods sold
 Product sales                                  7,441       2,941        5,238
 Maintenance                                      654         758          966
                                              --------    --------    ---------
  Total cost of goods sold                      8,095       3,699        6,204
                                             --------    --------    ---------
 Gross loss                                    (4,331)     (1,727)      (1,202)
                                             --------    --------    ---------
Operating expenses
 Selling, general and administrative 
  (including amounts to related parties 
   of $192 in 1998, $125 in 1997 and $34 
   in 1996)  (Note 3)                          12,671      12,394        6,310
 Research and development (Note 9)              3,928       3,409        1,614
 Depreciation and amortization                    375         301          162
 Stock option compensation (Note 10)               -           -            44
                                             --------    --------    ---------
  Total operating expenses                     16,974      16,104        8,130
                                             --------    --------    ---------
 Loss from operations                         (21,305)    (17,831)      (9,332)
                                             --------    --------    ---------
Other income (expenses)
 Interest income                                3,982       4,982          302
 Interest expense                             (16,886)    (14,024)        (382)
 loss on disposals                               (104)         -            -
                                              --------    --------    ---------
  Total other income (expenses)               (13,008)     (9,042)         (80)
                                              --------    --------    ---------
  Net loss                                   $(34,313)   $(26,873)    $ (9,412)
                                              ========    ========    =========
Earnings per Share
 Weighted average common shares 
  outstanding                                  21,233      21,096       16,169
                                              ========    ========    =========
Basic loss per common share (Note 2)          $ (1.62)    $ (1.27)    $  (0.60)
                                              ========    ========    =========


                  See accompanying notes to consolidated financial statements
</TABLE>                                                     F-4<PAGE>
<PAGE>
<TABLE>
                   Electronic Retailing Systems International, Inc.
                          Consolidated Statement of Cash Flows
                                     (in thousands)
<CAPTION>
                                                   Year Ended December 31,
                                                ----------------------------
                                                1998        1997      1996
                                                ----        ----      ----
<S>                                         <C>          <C>        <C>
Net Cash Flows from Operating Activities:
Net loss                                     $  (34,313)  $(26,873)  $ (9,412)
Adjustments to reconcile net loss 
 to net cash used in operating activities:
  Depreciation and amortization                   2,994      1,799        660
  Loss on disposal of fixed assets                                        104
   Common stock purchase warrants                     -        510         -
  Provision for inventory obsolescence            3,099        392        843
  Provision for doubtful accounts                   165        252        168
    Stock option compensation                         -          -         44 
    Accrued interest                             15,441     12,798         - 
  Accounts receivable                            (1,222)       606        126
  Inventories                                    (2,438)    (6,844)       209 
  Other current and non-current assets             (168)      (405)        30 
  Current liabilities                              (268)       934       (217)
                                              ---------   ---------  ----------
    Net cash used in operating activities       (16,606)   (16,831)    (7,549)
                                              ---------   ---------  ----------
Cash Flows from Investing Activities:
 Capital expenditures                            (1,730)    (3,334)      (397)
 Capitalized product development costs             (373)      (375)      (592)
 Disposal of fixed assets                           139          -          -
                                               ---------   ---------   ---------
    Net cash used in investing
      activities                                 (1,964)    (3,709)      (989) 
                                               ---------   ---------   ---------
Cash Flows from Financing Activities:
 Net proceeds from the issuance of long-
   term debt                                         -      89,478         -
 Net proceeds from the issuance of common stock      47        164     12,111
 Net proceeds from the issuance of long-term
   note                                              -          -       1,650
 Net proceeds from the issuance of common stock
   purchase warrants                                 -       5,100          -
 Cash payments to preferred stockholders
  upon conversion                                    -          -        (235)
                                                ---------   ---------  --------
   Cash provided by financing activities             47     94,742     13,526
                                                ---------   ---------  --------
Net (decrease) increase in cash and cash
 equivalents                                    (18,523)    74,202      4,988 
                                                ---------   ---------  --------
Cash and cash equivalents at beginning of
 period                                          82,400      8,198      3,210
                                                ---------  ---------   ---------
Cash and cash equivalents at end of period     $ 63,877    $82,400     $8,198
                                                =========  =========   =========

There were no cash payments for income taxes in the years 1998, 1997 and
1996. Cash payments for interest expense were $401, $339 and $380 in 1998,
1997 and 1996, respectively. In 1996, preferred stock was converted to 3,138,900
shares of common stock in a non cash transaction.
        See accompanying notes to consolidated financial statements
</TABLE>
                                                             F-5
<PAGE>
<TABLE>
                     Electronic Retailing Systems International, Inc.
           Consolidated Statement of Changes in Stockholders' (Deficit) Equity
                          (in thousands, except share amounts)
<CAPTION>
                                                        Additional
                                  Preferred   Common      Paid-in    Accumulated
                                    Stock     Stock       Capital    Deficit        Total
                                  ---------   --------   ---------   -----------   ---------
<S>                             <C>         <C>        <C>        <C>            <C>
Balances at December 31, 1995       $   123    $    117   $ 38,474   $ (35,499)    $  3,215
                                  ---------   ---------  ---------   ----------     -------
Vesting of previously issued
  stock options                                                 44                       44
 Issuance of 65,860 common shares
  with exercise of stock options                      1                                   1
 Issuance of 2,310 shares of
  preferred stock as dividends            2                    229        (231)       -
 Issuance and sale of 4,963,500
   common shares in offshore 
   offering, and issuance of
   218,957 common shares to
   placement agent                                  52      10,087                    10,139
 Issuance and sale of 911,657
   common shares in private
   placement                                         9       1,982                     1,991
 Conversion of Series A preferred
  stock and issuance of 3,138,900
  common shares                       (125)         31        (161)                    (255)
 Net loss for year                                                      (9,412)      (9,412)
                                   ---------   ---------  ---------  ----------    ---------
Balances at December 31, 1996      $   -       $    210   $ 50,655   $ (45,142)    $  5,723
 
 Issuance of common stock
  purchase warrants                                            510                      510
 Issuance of 139,929 common 
  shares with exercise of stock
   options                                           1        163                       164
 Net loss for year                                                     (26,873)     (26,873)
                                  ---------   ---------  ---------  ----------    ---------
Balances at December 31, 1997      $    -      $    211   $ 51,328   $ (72,015)    $(20,476)

Issuance of 52,412 common 
  shares with exercise of stock
   options                                           1         46                        47
 Net loss for year                                                     (34,313)     (34,313)
                                  ---------   ---------  ---------  ----------    ---------
Balances at December 31, 1998      $    -      $    212   $ 51,374   $(106,328)    $(54,742)
                                  =========   =========  =========  ==========    =========
See accompanying notes to consolidated financial statements

</TABLE>
                                                                 F-6
<PAGE>
<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -Organization:

            Electronic Retailing Systems International, Inc. ("ERS" or
            the "Company"), was incorporated in 1993 under the laws of
            the State of Delaware as a holding company for the business
            and assets of Electronic Retailing Systems International,
            Inc., incorporated in 1990 under the laws of Connecticut, and
            an affiliated partnership. The Company develops and supplies
            electronic shelf labeling systems. Electronic shelf labeling
            systems replace paper price tags on retail shelves with
            liquid crystal display labels and transmit pricing and other
            information to and from the aisle. The Company's system is
            designed to address retailers' needs for improved pricing
            accuracy and labor efficiencies by electronically linking a
            store's shelves to its POS scanners and central computer. The
            Company currently operates primarily in North America.

            The Company has sustained net losses and negative cash flows
            from operations since its inception and management expects
            these conditions to continue into the year ending December
            31, 1999. Management believes that existing resources will
            enable the Company to fund operations through the year ending
            December 31, 2000; thereafter, the Company may need to raise
            additional long-term financing to support operations and
            service debt. There can be no assurance that additional
            financing would be available on terms reasonable to the
            Company. 

Note 2 -Summary of Significant Accounting Policies:

            Basis of Consolidation

            The consolidated financial statements include the accounts of
            the Company and all of its subsidiaries. All significant
            intercompany balances and transactions have been eliminated.

            Use of Estimates

            The preparation of financial statements in conformity with
            generally accepted accounting principles requires management
            to make estimates and assumptions covering a broad spectrum
            of the Company's financial activities, and while the Company
            believes these estimates to be prudent, there exists a
            possibility that unexpected events might affect these
            estimates. While actual results could differ from those
            estimates, management believes that any one event would not
            have a material effect on the Company's future operating 

                                                           F-7<PAGE>
<PAGE>
                             ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            results. The Company's future results and inventory valuation
            could be adversely affected by a number of factors, including 
            (a) the timely availability and acceptance of ESL systems, 
            (b) the impact of competitive products and pricing, and (c) 
            the Company's ability to obtain system components from suppliers.

            Cash Equivalents

            Cash equivalents consist of short-term, highly-liquid U.S.
            Treasury Bills and certificates of deposit with original
            maturities of less than three months and are stated at cost,
            which approximates market. Interest income is accrued as
            earned. 

            Cash and cash equivalents at December 31, 1997 included
            deposits of $2,969,000 held as interest bearing collateral for
            irrevocable letters of credit of the same amount relating to
            future inventory purchases in 1998. 

            Financial Instruments

            Financial instruments include cash, cash equivalents, letters
            of credit fully collateralized by cash and cash equivalents,
            notes payable, long-term debt and common stock purchase
            warrants. Financial instruments are carried at cost or accrued
            carrying value which approximates fair market value.

            Inventories

            Inventories are stated at the lower of cost (determined on a
            first in, first out basis) or market value. Inventories at
            December 31, 1998 consist of approximately $2,167,000 of
            materials and supplies and $4,445,000 of finished goods.
            Inventories at December 31, 1997 consisted of approximately
            $3,286,000 of materials and supplies and $3,987,000 of
            finished goods. 

            Charges for excess, slow moving and obsolete inventory for the
            years 1998, 1997 and 1996 were $3,099,000, $392,000, and
            $843,000.

            Furniture and Equipment

            Furniture and equipment is stated at cost. Depreciation is
            provided on the straight-line method over the estimated useful
            lives of the respective assets, none of which exceeds five
            years.

                                                             F-8<PAGE>
<PAGE>
                           ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Furniture and equipment as of December 31, 1998 and 1997, was
comprised of the following (in (000s)):

                                      1998         1997
                                      ----         ----

Furniture                             $1,350       $1,723
Equipment                              3,763        3,332
                                      ------       ------
Furniture and equipment,
  at cost                              5,113        5,055
Accumulated depreciation              (1,462)      (1,753)
                                      ------       ------
Furniture and equipment, net          $3,651       $3,302
                                      ======       ======

Fully depreciated furniture and equipment no longer in use of
$1,429 was written-off during 1998. In addition, during 1998
equipment with a cost of $243 was written off resulting in a loss
of $104.

Product Development Costs

The Company capitalizes product development costs, principally
wages and contractor fees, after establishing commercial and
technical viability. Product development costs are stated at the
lower of cost or net realizable value. These costs are amortized
using the straight-line method over the shorter of the estimated
useful life of the product or three years. The Company's policy is
to make regular evaluations of the remaining product development
costs for potential impairments of value through analysis of
operating results and related cash flows, trends and prospects as
well as competitive and economic factors. Amortization commences
when the product is available for general release to customers. As
of December 31, 1998 and 1997, unamortized capitalized costs of
$559,000 and $969,000, respectively, are included as other non-
current assets in the accompanying consolidated balance sheet.
Amortization expense totaled $783,000, $262,000 and $203,000 for
1998, 1997 and 1996, respectively.









                                                                    F-9


<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            Debt Issuance Costs

            The Company has capitalized costs incurred in connection with
            the issuance of debt. Such costs are principally investment
            banking, legal, accounting, financial printing, and other
            related fees and costs. These costs are amortized using the
            effective interest method over the lives of the respective
            debt arrangements. As of December 31, 1998 and 1997,
            unamortized debt issuance costs of $4,475,000 and $5,038,000,
            respectively, are included as other non-current assets in the
            accompanying consolidated balance sheet. Amortization expense
            totaled $563,000, $440,000 and $19,000 for 1998, 1997 and
            1996, respectively.

            Revenue Recognition

            Revenue is recognized when the product is shipped or upon
            completion of installation of a trial electronic shelf label
            system, provided that no significant obligations remain and
            collection of the resulting receivable is deemed probable.
            Revenue from providing installation services to customers is
            recognized upon the completion of an installation. Under the
            SayGo plan, the Company recognizes revenues as monthly usage,
            and other fees are billed to customers, and depreciates the
            cost of hardware components of its systems over the start of
            their estimated useful lives or five years. Maintenance
            revenue for services provided under maintenance contracts is
            recognized over the service contract period. Other revenue for
            parts and services is recognized when provided.

            Income Taxes

            The Company accounts for income taxes in accordance with
            Statement of Financial Accounting Standards No. 109,
            "Accounting for Income Taxes" which requires an asset and
            liability approach to the recognition of deferred tax assets
            and liabilities for the expected future tax consequences of
            events that have been recognized in the Company's financial
            statements or tax returns. Deferred income taxes relate to
            timing differences between financial and income tax reporting
            for stock option compensation, product development costs,
            depreciation and other items.




                                                             F-10<PAGE>
<PAGE>
                             ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            Stock Based Compensation

            The Company accounts for incentive plans and stock options
            using the provisions of Accounting Principle Board Opinion No.
            25, "Accounting for Stock Issued to Employees." Pro forma
            information required by Financial Accounting Standards No.
            123, "Accounting for Stock Based Compensation," is included in
            Note 10.

            Earnings Per Share

            Basic earnings per share ("EPS") is calculated by dividing the
            net loss available to common stockholders by the weighted
            average number of common shares outstanding for the period,
            without consideration for common stock equivalents.  Diluted
            EPS is computed by dividing net loss for the period by the
            weighted average number of common shares outstanding and
            dilutive common stock equivalents.

            Due to the Company's loss position, the Company has reported
            only "basic" EPS. The presentation of "dilutive" EPS is not
            required as common stock equivalents are anti-dilutive. The
            number of securities at December 31, 1998, 1997, and 1996 that
            could potentially dilute basic EPS in the future are
            5,745,496, 5,969,004, and 1,528,492, respectively. Such
            securities, which have been excluded from the calculation of
            basic EPS as they are anti-dilutive, include employee and
            director stock options, convertible debt, and common stock
            purchase warrants.

            Segment Information

            The Company is in one business segment, the electronic shelf
            labeling business, and follows the requirements of FAS 131,
            "Disclosures about Segments of an enterprise and Related
            Information;" however, the requirements do not have a material
            impact on the financial statements.

            Adoption of New Accounting Standard

            In 1998, the Company adopted Statement of Financial Accounting
            Standards No. 130 "Reporting Comprehensive Income" ("FAS
            130"), which is effective for fiscal years beginning after
            December 15, 1997. FAS 130 establishes new rules for the
            reporting and display of comprehensive income and its
            components. Comprehensive income is defined as "the change in
            equity of a business enterprise during a period 


                                                             F-11<PAGE>
<PAGE>
                             ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            from transactions and other events and circumstances from non-
            owner sources." The adoption of this standard had no impact on
            the Company's financial statements.

            In June 1998, the Financial Accounting Standards Board issued
            SFAS No. 133, "Accounting for Derivative Instruments and
            Hedging Activities," which the Company is required to adopt
            effective beginning January 1, 2000. The Company is currently
            evaluating the impact on its financial statements of adopting
            the standard and will comply as required; however, the impact
            is not expected to be material on the Company's financial
            statements.

            In April 1998, the American Institute of Certified Public
            Accountants issued Statement of Position (SOP) 98-5,
            "Reporting on the Costs of Start-Up Activities". This SOP is
            effective January 1, 1999 and generally requires that all
            start-up costs, as defined, be expensed as incurred. The
            Company is in the process of identifying any previously
            capitalized costs which have to be expensed under this
            guidance. Any required adjustment, which is not estimated to
            be material, will be recorded as a cumulative effect
            adjustment in the first quarter of 1999.

            Reclassifications

            Certain prior year amounts have been reclassified to conform
            to current year presentation.

            Note 3 -Related Party Transactions:

            The Company has incurred certain common costs on behalf of
            affiliates, which were reimbursed by the affiliates, in
            connection with the sublease by the Company of a portion of
            its prior headquarters facility to such affiliates. Such
            common costs, including sublease payments, amounted to $0,
            $55,000 and $63,000 in 1998, 1997 and 1996, respectively (see
            Note 8). Unpaid amounts were included in receivables from
            affiliates at December 31, 1997, and 1996.

            The Company has received consulting services and paid a
            current and a former member of its Board of Directors, through
            an affiliate of the Company, fees of $192,000 and $125,000 in
            1998 and 1997, respectively. The Company also has received
            consulting services and paid a former member of its Board of
            Directors fees of $34,000 in 1996. 


                                                                 F-12<PAGE>
<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Preferred Stock:

            In July 1995, the Company completed a private sale of 85,000
            shares of its  Series A Cumulative, Convertible Preferred
            Stock, $1.00 par value ("Series A Preferred Stock"), for an
            aggregate purchase price of $8.5 million. The purchase price
            was delivered by surrender of $3 million of the Company's debt
            held by the subscribers, which consisted of certain members of
            the Company's Board of Directors and their affiliates, and
            cash in the amount of $5.5 million. Subsequently in 1995, an
            affiliate of the Company's Chairman of the Board, and one of
            the subscribers, acquired 35,000 additional shares of Series
            A Preferred Stock at a purchase price per share of $100.

            In July 1996 in connection with the Company's offshore public
            offering (see Note 5) and contemporaneous private placement,
            holders of the Company's Series A Preferred Stock converted
            their shares, in accordance with their terms, into an
            aggregate of 3,138,900 shares of Common Stock, $.01 par value
            ("Common Stock"). In connection with the conversion, payments
            aggregating $235,000 were made to the Series A Preferred Stock
            holders.

            Each share of Series A Preferred Stock entitled the holder to
            a dividend of $7.50 per annum, payable quarterly, which would
            cumulate if not paid. Dividends were payable by the Company,
            at its election, either in cash or in the form of additional
            shares of Series A Preferred Stock valued at $100 per share.
            Dividends paid to holders of record of such stock in 1996 and
            1995 were paid in the form of additional shares of Series A
            Preferred Stock (aggregating 5,556 shares).

            Each share of Series A Preferred Stock, valued at $100, was
            convertible into shares of the Company's Common Stock at a
            conversion price of $4.00 (subject to certain adjustments),
            and was subject to redemption, at the option of the Company,
            at a price of $100 under certain conditions. Holders of Series
            A Preferred Stock voted together with holders of Common Stock,
            each share carrying one vote, and were entitled to a
            liquidation preference of $100 per share.

Note 5 - Common Stock Offering:

            In July 1996, the Company completed the offshore public
            offering of an aggregate of 4,963,500 shares of its Common
            Stock, in accordance with Regulation S under the Securities
            Act of 1933, and the contemporaneous private placement to 

                                                            F-13<PAGE>
<PAGE>
                          ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            subscribers, including certain members of the Company's Board
            of Directors and their affiliates, of an aggregate of 911,657
            shares of Common Stock. Net proceeds from these transactions
            were approximately $12 million (exclusive of non-cash expenses
            represented by the issuance of 218,957 shares of Common Stock
            as commissions).

            In January 1997, the Company's stockholders voted to approve
            an increase in the number of authorized shares of Common Stock
            from 25,000,000 to 35,000,000 shares.

Note 6 - Debt and Common Stock Purchase Warrants:

            In August 1994, the Company completed a financing arrangement
            with the Connecticut Development Authority ("CDA"), under
            which the CDA loaned $5 million to the Company through
            February 1996. Such indebtedness is repayable in August 1999,
            accrues interest, payable monthly, at a rate of 7.4% per
            annum, is subject to prepayment without premium at the option
            of the Company, and is convertible into shares of the Common
            Stock of the Company. This note has been classified as short
            term on the Company's balance sheet at December 31, 1998. Such
            indebtedness is collateralized by the Company's assets. 

            The Company also issued to the CDA warrants to purchase
            600,000 shares of Common Stock. At issuance, the original
            conversion price of the debt and exercise price of the
            warrants was in excess of the then market price of the
            Company's Common Stock and, accordingly, nominal value was
            assigned to the warrants. The agreements entered into with the
            CDA were amended effective upon consummation of the initial
            sale of the Company's Series A Preferred Stock (see Note 4),
            and as a result of additional provisions contained in the
            CDA's warrants to provide as follows: (i) the conversion price
            of the debt held by the CDA is $3.00 plus the average market
            price of the Common Stock during the twelve months prior to
            conversion, (ii) the exercise price of the CDA's warrants is
            calculated as $2.58 plus the average market price of the
            Common Stock during the twelve months prior to exercise, and
            (iii) the number of shares subject to purchase upon exercise
            of the CDA's warrants is 699,724.

            In January 1997, the Company completed the sale, in a private
            offering (the "Private Placement"), of 147,312 Units ("Units")
            consisting of $147,312,000 principal amount at maturity of 13-
            1/4% Senior Discount Notes due February 1, 

                                                             F-14<PAGE>
<PAGE>
                        ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            2004 (the "Notes") together with warrants to purchase an
            aggregate of 2,538,258 shares of Common Stock, at an exercise
            price of $5.23 per share, exercisable from the period
            commencing on the first anniversary of closing through
            February 1, 2004.

            The Units were sold to investors at a price aggregating $100
            million, representing a yield to maturity on the Notes of 13-
            1/4%. No cash interest will accrue on the Notes prior to
            February 1, 2000. Interest will be payable thereafter on
            February 1 and August 1 of each year commencing August 1,
            2000. The Notes are non-callable prior to February 1, 2001.
            Upon specified change in control events, each holder has the
            right to require the Company to purchase its Note at a
            specified price. The net proceeds to the Company from the
            Private Placement approximated $95 million.
            
            The indenture under which the Notes were issued places
            limitations on operations and sales of assets by the Company
            or its subsidiaries, requires maintenance of certain financial
            ratios in order for the Company to incur additional
            indebtedness (subject to specified exceptions), requires the
            delivery by the Company's subsidiaries of guaranties if
            specified debt is subsequently incurred by such subsidiaries,
            and limits the Company's ability to pay cash dividends or make
            other distributions to the holders of its capital stock or to
            redeem such stock.

            With the consummation of the Private Placement in January
            1997, the Company commenced recording interest on an amount
            equal to the gross proceeds from the Private Placement plus
            prior recorded and unpaid interest at the annual rate of
            13.25%. Additional interest expense is being recorded as a
            result of the amortization of the discount recorded on the
            Notes (for value attributed to the warrants) and the
            amortization of the costs of issuance.

            Long-term debt as of December 31, 1998 and 1997 was comprised
            of the following (in 000s):





                                                            F-15<PAGE>
<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                        1998           1997
                                                        ----           ----
            <S>                                         <C>            <C>
            7.4% CDA Note due August 12, 1999           $    -         $ 4,993
            13.25% Senior Discount Notes
              due February 1, 2004 (in-
              cluding interest accrued
              of $15,441 and $12,798)                124,057           108,109
                                                    --------           ------- 
           Total long-term debt                     $124,057          $113,102
                                                    ========           =======
</TABLE>

            The Company engaged Patricof & Co. in connection with certain
            corporate finance services and, in addition to fees paid,
            issued three-year warrants in the second quarter of 1997
            exercisable with respect to 250,000 shares of Common Stock at
            a price of $5.24 per share. The estimated fair value of
            warrants issued to Patricof & Co. approximated $510,000, and
            has been recorded as an increase to Additional Paid-in
            Capital.

Note 7 - Customer Information:

            All of the Company's sales are to customers in the retail food
            market industry. Significant customer sales for the years
            ended December 31, 1998, 1997 and 1996 were as follows:

            Customer                                  1998     1997     1996
                                                      ----     ----     ----
            
            The Stop & Shop Supermarket Company        59%      41%      46%
            Big Y Foods, Inc.                          --       --       20%
            Shaw's Supermarkets, Inc.                  29%      22%      13%
            H.E. Butt Grocery Co.                      --       11%      -- 
             

            Accounts receivable at December 31, 1998 and 1997 are
            unsecured and concentrated among major supermarket chains in
            the United States. If the customers within this concentration
            failed to pay according to the terms of their agreements these
            receivables would be reduced to nominal value.






                                                                       F-16
<PAGE>
                  ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8  Commitments and Contingencies:

            The Company leases its facilities under operating lease
            agreements. During 1998, 1997 and 1996 rental expense amounted
            to approximately $946,000, $424,000 and $278,000,
            respectively.

            Future minimum lease payments on a calendar year basis under
            non-cancelable leases, as of December 31, 1998, are as
            follows:

                                                       Total                 
                                                     Commitments           
                                                     ----------
                        1999                            768,000
                        2000                            788,000
                        2001                            816,000
                        2002                            777,000
                        2003       and thereafter     2,989,000
                                                     ----------
                                                     $6,138,000           
                                                     ==========

            The Company is involved in certain litigation incidental to
            the conduct of its business and affairs. Management does not
            believe that the outcome of any such litigation will have a
            material adverse effect on the financial condition or results
            of operations of the Company.

Note 9 - Research and Development:

            Research and development activities were a major component of
            the Company's expenditures and efforts during 1998, 1997 and
            1996. The Company's research and development expenses
            (including the allocation of applicable salaries) during 1998,
            1997 and 1996 were $3,928,000, $3,409,000 and $1,614,000,
            respectively.

Note 10 - Stock Option and Defined Contribution Plan:

            The Company has an employee stock option plan whereby options
            to purchase shares of Common Stock may be granted to key
            employees of the Company. The stockholders have approved
            successive increases in the number of shares of Common Stock
            available for issuance under the plan, which currently
            authorizes the grant of options covering 3,500,000 shares.
            Options granted under the plan typically become exercisable
            over a period of four years and have a term of  10  years.

                                                                       F-17
<PAGE>
                        ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


            A summary of all option activity pursuant to the employee
            stock option plan is as follows:
            <TABLE>
            <CAPTION>
                                                    Price Range     Options
                                                    -----------     -------
            <S>                                     <C>             <C>
            Options outstanding December 31, 1995    $ .01-$6.00     917,729
                                                                   ---------
               Options granted                       $1.88-$2.25     380,784
               Options exercised                     $ .01           (65,860)
               Options canceled                      $2.25-$6.00    (354,161)
                                                                   ---------
            Options outstanding December 31, 1996    $ .01-$5.875    878,492
                                                                   ---------
               Options granted                       $4.88-$6.19   1,117,117
               Options exercised                     $ .01-$5.00    (139,929)
               Options canceled                      $ .01-$6.13    (120,552)
                                                                   ---------
            Options outstanding December 31, 1997    $ .01-$6.19   1,735,128
                                                                   ---------
               Options granted                       $2.25-$4.00     918,099
               Options exercised                     $ .01-$2.25     (52,412)
               Options canceled                      $ .01-$6.13  (1,181,853)
                                                                   ----------
            Options outstanding December 31, 1998    $ .01-$6.19   1,418,962
                                                                   ==========
</TABLE>
            Options exercisable at:

                        December 31, 1998          280,165
                        December 31, 1997          271,450
                        December 31, 1996          145,042

            The following table summarizes information about employee
stock options outstanding and exercisable at December 31, 1998: 




                                                            F-18<PAGE>
<PAGE> 
                           ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                               Weighted       Weighted                                   Weighted
Range of                                       Average        Average                                    Average
Exercise          Number          Remaining    Exercise       Number           Exercise
 Prices           Outstanding     Life          Price         Exercisable      Price
---------         -----------     ---------     ---------     -----------      ---------
<S>               <C>             <C>          <C>            <C>              <C>
$ .01                 251,862     3 years      $ .01          106,359          $ .01
$2.25-$4.00         1,070,881     9            $3.16          117,274          $2.28
$4.88-$6.13            96,219     8            $5.14           56,532          $5.12
                    ---------                                 -------
                    1,418,962                                 280,165
                   ==========                                 =======
</TABLE>

            Additionally, the Company has a director stock option plan
            under which options covering 750,000 shares of Common Stock
            may be granted to directors of the Company. During 1998,
            47,500 options were granted to directors of the Company to
            purchase an equal number of common shares pursuant to this
            plan at option prices of $2.75 and $4.00. As of December 31,
            1998 options covering an aggregate of 100,000 shares of Common
            Stock were outstanding under the plan.
            
            In June 1998, the Company's Board of Directors approved a plan
            to issue new options with a lower exercise price and a
            different vesting period upon surrender by the employee of
            existing options. Employee options with exercise prices
            ranging from $4.875 to $6.1875 to purchase 508,863 shares of
            common stock were exchanged for 508,863 shares at the price of
            $3.50, which was the fair market value at the time of
            exchange. The tables above have been adjusted to reflect these
            reduced exercise prices, and the extension of the option's
            life.
            
            The Company applies APB Opinion 25 and related interpretations
            in accounting for its employee and director stock option
            plans. The consolidated statement of operations for the year
            ended December 31, 1996 includes noncash stock option
            compensation expense of $44,000 representing compensation
            earned for employee service through the periods then ended
            related to option grants. Had compensation expense for the
            Company's employee stock option plan been determined based on
            the fair value at the grant dates of awards under the plan,
            consistent with FAS 123, the Company's net loss and basic loss
            per common share would have been the pro forma amounts
            indicated below:





                                                                    F-19
<PAGE>
                          ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                  1998            1997            1996
                                  ----            ----            ----
<S>                               <C>             <C>            <C>
Net loss:
  As reported                     ($34,313,000)   ($26,873,000)  ($9,412,000)
  Pro forma                       ($35,781,000)   ($28,052,000)  ($9,412,000)   

Basic loss per common share:
  As reported                           ($1.62)         ($1.27)      ($0.60)
  Pro forma                             ($1.64)         ($1.33)      ($0.60)

</TABLE>

            The fair value of each stock option grant was estimated on the
            date of grant using the Black-Scholes option-pricing model
            with the following weighted-average assumptions used in 1998,
            1997 and 1996: 
<TABLE>
<CAPTION>
                                        1998       1997      1996
                                        ----       ----      ----
<S>                                     <C>        <C>       <C>
            Dividend yield                 0%         0%        0%
            Expected volatility          112%       114%       53%
            Risk-free interest rate        5%         6%        7%
            Expected life                  6 years    6 years   5 years
</TABLE>

            The weighted average fair value of stock options granted
            during the years ended December 31, 1998, 1997 and 1996 was
            $2.89, $4.82 and $1.31, respectively.
            
            The Company has a defined contribution profit sharing and
            savings plan which qualifies under Section 401(k) of the
            Internal Revenue Code for employees meeting certain service
            requirements. Participants may contribute up to 15% of their
            gross wages, not to exceed in any given year a limitation set
            by Internal Revenue Service regulations (such limitation was
            $10,000 in 1998). The plan provides for discretionary matching
            contributions, as determined by the Board of Directors, to be
            made by the Company. There was $34,000 contributed to the
            plan, by the Company, as of December 31, 1998. There were no
            discretionary amounts contributed to the plan as of December
            31, 1997.





                                                          F-20<PAGE>
<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Income Taxes:

            The Company has incurred net losses since inception which have
            generated net operating loss carryforwards of $73.7  million
            for federal income tax purposes. These carryforwards are
            available to offset future taxable income and begin to expire
            in the year 2008. These losses are subject to limitation on
            future years utilization should certain ownership changes
            occur.

            The net operating loss carryforwards and temporary differences
            between the carrying amounts of assets and liabilities for
            financial reporting and income tax purposes result in a
            noncurrent deferred tax benefit at December 31, 1998 and 1997
            of $44.5 million and $32.5 million, respectively. In
            consideration of the Company's accumulated losses and the
            uncertainty of its ability to utilize this deferred tax
            benefit in the future, the Company has recorded a valuation
            allowance of an equal amount on such dates to fully offset the
            deferred tax benefit amount. 

            Significant components of the noncurrent deferred tax asset at
            December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                        1998              1997
                                        ----              ----
<S>                                    <C>               <C>
Net operating loss carryforwards       $30,662,000       $29,127,000
Deferred interest expense               10,113,000            --    
Stock option compensation                2,726,000         2,642,000
Other                                      977,000           762,000
                                        ----------       -----------
Total deferred tax benefit              44,478,000        32,531,000
Valuation allowance                    (44,478,000)      (32,531,000)
                                       -----------       -----------
Net noncurrent deferred tax asset      $     --          $     --
                                       ===========       ===========
</TABLE>


In 1998, 1997 and 1996 a statutory Federal income tax rate of 34%
and a state income tax rate of 7.6%, net of the Federal tax
benefit, were applicable to the Company. Due to the Company's
taxable losses the effective tax rate was nil in each year.
                                                            F-21<PAGE>
<PAGE>
                             ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The income tax provision calculated for financial reporting
purposes differs from income taxes determined by applying the
statutory Federal income tax rate to the financial statement net
loss for the years ended December 31, 1998, 1997 and 1996 as a
result of the following:
<TABLE>
<CAPTION>
                                            1998       1997       1996
                                            ----       ----       ----
  <S>                                    <C>           <C>        <C>
  Tax benefit at Federal statutory
    rate                                 $11,156,000   $9,083,000 $3,200,000
  State income tax benefit, net of
   Federal tax charge                      2,494,000    2,031,000    714,000
  Net loss not providing current
   year tax benefit                      (12,641,000) (11,063,000)(3,608,000)
  Non-deductible interest                   (987,000)      --          -- 
  Other                                     ( 22,000)    (51,000)   (306,000)
                                          ----------  ----------    --------
    Provision for income taxes            $    -      $    -        $   -
                                          =========== ==========    ========== 
</TABLE>
    
Note 12 - Proposed ERS/Telepanel Combination:
            
            In October 1997, the Company and Telepanel Systems Inc.
            ("Telepanel") executed an agreement providing for the
            combination of the Company and Telepanel, as a result of
            which ERS would have become the sole beneficial owner of
            the outstanding Telepanel Common Shares. In February
            1998, as an interim arrangement pursuant to the
            combination agreement, the Company and Telepanel entered
            into a joint distribution agreement providing for the
            creation of a joint venture (the "Joint Venture") that
            would hold specified distribution rights.  Pursuant to
            such arrangements, in February 1998 the Company advanced
            the amount of $2,000,000 to the Joint Venture, which
            accrued interest payable monthly, at the prime rate plus
            2.5% per annum, was guaranteed by Telepanel and its
            subsidiaries, and was collateralized by all of the assets
            of Telepanel and its subsidiaries (such collateral
            subordinated in right to specified bank indebtedness but
            prior in right to any other interest).

                                                                  F-22<PAGE>
<PAGE>
                            ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    In March 1998, the Company announced that the condition to
    closing contained in the combination agreement requiring
    confirmation that the transaction would qualify for pooling-of-
    interests accounting treatment failed to be satisfied, and the
    Company's Board of Directors determined that it did not intend
    to waive the condition to combine regarding qualification for
    pooling-of-interests accounting treatment. In April 1998, the Company 
    and Telepanel executed a formal agreement to terminate their combination 
    agreement and executed reciprocal releases thereunder.  In addition, 
    the parties agreed: (i) to terminate their joint distribution agreement; 
    (ii) that the Company would withdraw its demand for acceleration of 
    payment of the outstanding working capital advances to the Joint Venture
    (as a result of the failure of the Joint Venture to pay interest
    when due); and (iii) that such balances would be due in October
    1998, subject to earlier repayment from equity or debt offerings
    of Telepanel.  The outstanding advances to the Joint Venture were
    repaid in full in October 1998. 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                                                    F-23
<PAGE>
<PAGE>
                                INDEX TO EXHIBITS
<TABLE>
Exhibit Number                  Document Description
--------------                  --------------------
<S>                             <C>
3.1                    -        Certificate of Incorporation of the Company
                                (Incorporated by reference to Exhibit 3.1
                                of the Registration Statement on Form S-4
                                No. 333-21893).
 
3                      -        By-laws of the Company (Incorporated by
                                reference to Exhibit 3.2 to the Annual
                                Report on Form 10-K for the year ended
                                December 31, 1997). 

10.1                   -        Form of Reorganization Agreement dated March
                                12, 1993 among the Company, the Principal
                                Subsidiary, Norton Garfinkle, The G/N 
                                Garfinkle Trust, Bruce F. Failing, Jr.,
                                The Failing Trust,  Elizabeth Z. Failing,
                                Robert D. Power and John Stevens
                                (Incorporated by reference to Exhibit
                                10.1 to  the Registration Statement on
                                Form S-1 No. 33-59486).

10.2                    -       Form of Registration Rights Agreement dated
                                March 12, 1993 among the Company, Norton
                                Garfinkle, The G/N Garfinkle Trust, Bruce
                                F. Failing, Jr., The Failing Trust,
                                Elizabeth Z. Failing, Robert D. Power and
                                John Stevens (Incorporated by reference
                                to Exhibit 10.2 to the Registration
                                Statement on Form S-1 No. 33-59486).

10.3                    -       Form of Restated Stockholders' Agreement dated
                                March 12, 1993 among Norton Garfinkle,
                                The G/N Garfinkle Trust, Bruce F.
                                Failing, Jr., The Failing Trust and
                                Elizabeth Z. Failing (Incorporated by
                                reference to Exhibit 10.3 to the
                                Registration Statement on Form S-1 No.
                                33-59486), together with Amendment No. 1
                                to Restated Stockholders Agreement dated
                                October 29, 1997 (Incorporated by
                                reference to Exhibit 10.4 to the Annual
                                Report on Form 10-K for the year ended
                                December 31, 1997) and Amendment No. 2 to
                                Restated Stockholders Agreement dated 
                                      E-1<PAGE>
                                April 25, 1998 (Incorporated by reference
                                to Exhibit 10.1 to the Quarterly Report
                                on Form 10-Q for the period ended March
                                31, 1998).

10.4                  -         Form of Reorganization Agreement dated March
                                12, 1993 among the Company, the
                                Partnership, the Principal Subsidiary,
                                and the limited partners of the
                                Partnership (Incorporated by reference to
                                Exhibit 10.4 to the Registration
                                Statement on Form S-1 No. 33-59486).

10.5                   -        Form of Registration Rights Agreement dated
                                March 12, 1993 among the Company and the
                                limited partners of the Partnership
                                (Incorporated by reference to Exhibit
                                10.5 to the Registration Statement on
                                Form S-1 No. 33-59486).

10.6                   -        Registration Rights Agreement dated as of July
                                24, 1995 among the Company, Donald E.
                                Zilkha, Bruce F. Failing, Jr., Hanseatic
                                Corporation and Garfinkle Limited
                                Partnership II (Incorporated by reference
                                to Exhibit 5(d) of the Current report on
                                Form 8-K dated July 24, 1995).

10.7                   -        Technical Services Agreement dated October 1,
                                1985 between Telepanel, Inc. and Amacrine
                                International, Inc. (Incorporated by
                                reference to Exhibit 10.10 to the
                                Registration Statement on Form S-1 No.
                                33-59486).

10.8                    -       License Agreement dated January 27, 1993
                                between the Company and Telepanel Systems
                                Inc. (Incorporated by reference to
                                Exhibit 10.11 to the Registration
                                Statement on Form S-1 No. 33-59486).

10.9                    -       Note and Warrant Purchase Agreement dated as
                                of August 12, 1994 among the Company, the
                                Principal Subsidiary, and the Connecticut
                                Development Authority (Incorporated by
                                reference to Exhibit 10(a) to the
                                Quarterly Report on Form 10-Q for the
                                period ended June 30, 1994), together
                                with 7.4% Convertible Note dated August
                                12, 1994 executed by 
                                              E-2<PAGE>
                                the Company and the Principal Subsidiary
                                to the Connecticut Development  Authority
                                (Incorporated by reference to Exhibit
                                10(b) to the Quarterly Report on Form 10-
                                Q for the period ended June 30, 1994),
                                and Stock Subscription Warrant dated
                                August 12, 1994 issued by the Company to
                                the Connecticut  Development Authority
                                (Incorporated by reference to Exhibit
                                10(c) to the Quarterly Report on Form 10-
                                Q for the period ended June 30, 1994),
                                and Conditional Assignment and Security
                                Agreement dated August 12, 1994 among the
                                Company, the Principal Subsidiary and the
                                Connecticut Development Authority
                                (Incorporated by reference to Exhibit
                                10(d) to the Quarterly Report on Form 
                                10-Q for the period ended June 30, 1994).

10.10                  -        Placing Agreement dated July 5, 1996
                                between the Company and Henderson 
                                Crosthwaite Institutional Brokers Limited
                                (Incorporated by reference to Exhibit 5
                                to the Company's Current Report on Form
                                8-K dated July 11, 1996), together with
                                Agreement with respect to U.S. Securities
                                Laws dated July 2, 1996 between the
                                Company and Henderson Crosthwaite
                                Institutional Brokers Limited
                                (Incorporated by reference to Exhibit
                                5(d) to the Company's Current Report on
                                Form 8-K dated July 11, 1996).

10.11                  -        Forms of Subscription Agreement accepted
                                July 5, 1996 by the Company (Incorporated
                                by reference to Exhibit 5(f) to the
                                Company's Current Report on Form 8-K
                                dated July 11, 1996, together with
                                Registration Rights Agreement dated July
                                11, 1996 between the Company and the
                                subscribers parties thereto (Incorporated
                                by reference to Exhibit 5(g) to the
                                Company's Current Report on Form 8-K
                                dated July 11, 1996).


                                           E-3<PAGE>
10.12               -          Warrant Agreement dated as of January 24, 1997
                               between the Company and American Stock
                               Transfer & Trust Company (Incorporated by
                               reference to Exhibit 10.20 to the 
                               Registration Statement on Form S-4 No. 333-
                               21893).

10.13               -          Indenture dated as of January 24, 1997 between 
                               the Company and United States Trust Company
                               of New York (Incorporated by reference to
                               Exhibit 4.1 to the Registration Statement
                               on Form S-4 No. 333-21893).

10.14               -          Registration Rights Agreement dated January
                               20, 1997 between the Company and Credit
                               Suisse First Boston Corporation and UBS
                               Securities LLC (Incorporated by reference
                               to Exhibit 4.3 to the Registration
                               Statement on Form S-4 No. 333-21893).

10.15               -          Lease Agreement dated May 30, 1997 between 488
                               Main Avenue Associates, LLC and the
                               Company, together with Amendment No. 1
                               thereto (Incorporated by reference to
                               Exhibit 10.17 to the Annual Report on
                               Form 10-K for the year ended December 31,
                               1997).

10.16               -          Lease Agreement dated October 1, 1997 between
                               Kurian Limited Partnership and the Company
                               (Incorporated by reference to Exhibit 10.18 to
                               the Annual Report on Form 10-K for the year
                               ended December 31, 1997).

10.17               -          Combination Agreement dated October 29, 1997
                               between the Company and Telepanel Systems Inc.
                               (Incorporated by reference to Exhibit 5(a) of
                               the Current Report on Form 8-K dated October
                               29, 1997), together with Joint Distribution
                               Agreement dated February 3, 1998 between the
                               Company and Telepanel Systems Inc.
                               (Incorporated by reference to Exhibit 10.20 to
                               the Annual Report on Form 10-K 

                                              E-4<PAGE>
                                 for the year ended December 31, 1997) and
                                 Termination Agreement dated April 22, 1998
                                 among the Company, Telepanel Systems Inc. and
                                 Telepanel/ERS Joint Venture Inc. (Incorporated
                                 by reference to Exhibit 5(a) to the Current
                                 Report on Form 8-K dated April 22, 1998).

10.18                -          Form of the Company's 1993 Employee Stock Option
                                Plan (Incorporated by reference to Exhibit
                                10.21 of the Annual Report on Form 10-K for
                                the year ended December 31, 1997). 

10.19                -          Form of the Company's 1993 Director Stock Option
                                Plan (Incorporated by reference to Exhibit
                                10.22 of the Annual Report on Form 10-K for
                                the year ended December 31, 1997).

10.20                -          Release and Settlement Agreement dated March 2,
                                1998 between the Company and William W. Erdman

10.21                -          Release and Settlement Agreement dated May 18, 
                                1998 between the Company and Michael L.
                                Luetkemeyer.

11.1                 -         Statement of Computation of Per Share Earnings.

12.1                 -         Statement of Computation of Ratio of Earnings
                               to Fixed Charges.

21                   -          Subsidiaries of the Company.

23.1                 -          Consent of PricewaterhouseCoopers LLP.

24                   -          Power of Attorney (See "Power of Attorney" in
                                this Annual Report on Form 10-K).

27                   -          Financial Data Schedule.


</TABLE>






                                              E-5