SECURITIES AND EXCHANGE COMMISSION
                                 Washington, D.C. 20549

                                        FORM 10-K

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

For the fiscal year ended                    Commission file
    December 31, 1996                        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.)

           372 Danbury Road
           Wilton, Connecticut                  06897  
----------------------------------------     -----------
(Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code: 203-761-7900
                                                    ------------
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       
                                -------           -------
                 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 stock held
by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the stock was
sold, as of a specified date within 60 days prior to the date of
filing.

<PAGE>

Aggregate market value as of March 15, 1997.....$41,315,305


                 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, 1997 . . . . . . . . . . .21,068,206 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 1997 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 Company is the leading provider
in the United States of ESL systems, based on management's
estimates of installed ESL 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.

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.

<PAGE>
           As of December 31, 1996, the ERS ShelfNet System was installed
in 64 U.S. retail stores, including stores owned by such leading
supermarket chains as The Vons Companies, Inc. ("Vons"), Stop &
Shop Supermarket Company ("Stop & Shop"), H.E. Butt Grocery Co.
("HEB"), Big Y Foods, Inc. ("Big Y"), Shaw's Supermarkets, Inc.
("Shaw's"), Lucky Stores, Inc. ("Lucky"), The Great Atlantic &
Pacific Tea Company, Inc. and K Mart Corporation, and one
supermarket owned by the Overwaitea Food Group Division of Great
Pacific Industries, Ltd. (the "Overwaitea Food Group"). The
Company's customers include five of the 15 largest supermarket
chains in the United States. The Company estimates that, as of
December 31, 1996, of the approximately 29,800 supermarkets in the
United States, approximately 120 stores were operating ESL systems.

           The Company was incorporated in February 1993 to serve as a
holding company for the business and assets of Electronic Retailing
Systems International, Inc. (the "Principal Subsidiary"), which was
incorporated in Connecticut in 1990, and ERS Associates Limited
Partnership (the "Partnership"), which was organized in Connecticut
in 1992 in order to continue the business and hold the principal
assets of the Principal Subsidiary. The combination of the Company,
the Principal Subsidiary and the Partnership effected immediately
prior to the closing of the Company's initial public offering (the
"Initial Public Offering") of common stock, $.01 par value ("Common
Stock"), in May 1993, is herein referred to as the "Combination".
Unless the context otherwise requires, references herein to the
"Company" refer to Electronic Retailing Systems International,
Inc., a Delaware corporation, and its subsidiaries and, with
respect to operations prior to the Combination, its predecessors.
References to historical financial information of the Company prior
to the date of the Combination refer to the historical financial
information of the Principal Subsidiary. 

           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 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.

Recent Developments

           In December 1996, ERS announced that (i) it will launch a new
marketing and pricing program designed to facilitate rapid market
acceptance and installation of the ERS ShelfNet System and (ii) it
planned in the first quarter of 1997 to introduce a new generation

<PAGE>
ERS ShelfNet System that provides spread spectrum microwave
transmission of data directly to wireless ESLs. The Company expects
that implementation of these initiatives will reduce the cost of
installing and maintaining the ERS ShelfNet System. In addition, in
December 1996 ERS signed its first non-binding letter of intent
(the "Letter of Intent") providing for installation of the ERS
ShelfNet System in approximately 60 supermarkets beginning in 1997,
and is continuing its efforts to procure additional letters of
intent. The Letter of Intent is, and all such additional
arrangements will be, subject to numerous conditions, including the
negotiation and execution of definitive contract terms.

New Marketing and Pricing Program

           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 retailers. The
Company now intends also to offer the ERS ShelfNet System on a fee
based arrangement called "Save-As-You-Go" (the "SayGo Plan")
whereby the Company will own the system and, with no upfront cash
cost to the retailer, furnish the system to retailers (generally
for a period of up to five years), who will pay monthly fees to the
Company based primarily on their actual usage of the system. The
Company believes that the SayGo Plan will accelerate market
acceptance of the ERS ShelfNet System.

           Management estimates that, under the SayGo Plan, the annual
cost savings and benefits realized by its anticipated supermarket
customers using the ERS ShelfNet System could substantially exceed
the anticipated annual cost to the customer for the new generation
system proposed by ERS. For example, management estimates, based on
studies conducted in collaboration with the Company's current
customers, that cost savings and benefits to a supermarket with
15,000 ESLs that changes 2,500 to 4,500 prices per week could,
under the Company's proposed SayGo Plan, provide an annual net
contribution per store ranging from approximately $40,000 to
approximately $240,000 through the anticipated level of usage of
the applications afforded by the ERS ShelfNet System. However,
there can be no assurance that any such cost savings or benefits
will be realized by any customer. 

           Enhancement of the ERS ShelfNet System

           In December 1996, the Company announced its plan to introduce
the new generation ERS ShelfNet System, providing 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 current ESL system,
which requires the wiring of store aisles.

<PAGE>
<PAGE>
           Letters of Intent

           In December 1996, ERS signed its first non-binding Letter of
Intent providing for installation of the ERS ShelfNet System in
approximately 60 supermarkets beginning in 1997, and is continuing
its efforts to procure additional letters of intent. The Letter of
Intent is, and all such additional arrangements will be, subject to
numerous conditions, including negotiation and execution of
definitive contract terms. See "Marketing and Sales" below for a
description of the terms to be proposed initially by the Company.

           Securities Offerings

           In July 1996, the Company raised approximately $12 million in
net proceeds pursuant to an offshore public offering of shares of
Common Stock in accordance with Regulation S under the Securities
Act of 1933 (the "Securities Act") and the contemporaneous private
placement of Common Stock to subscribers, including members of the
Board of Directors and their affiliates. In January 1997, the
Company raised approximately $95 million in net proceeds as a
result of the private sale (the "Private Placement") of 147,312
units (the "Units"), each consisting of 13-1/4% Senior Discount
Notes due 2004 with a principal amount at maturity of $1,000 (the
"Senior Discount Notes") and one warrant (collectively, the "1997
Warrants") to purchase 17.23 shares of Common Stock.

Business Strategy

           The Company's strategy is to achieve increasing recurring
revenue through greater market penetration of the ERS ShelfNet
System. The Company intends: (i) to focus its initial marketing
efforts under the SayGo Plan on the supermarket sector of the
retail industry; (ii) to continue to reduce the manufacturing costs
of the system to increase the Company's profitability; and (iii) to
continue to enhance, develop and support value-added applications
of the ERS ShelfNet System.

           .     SayGo Plan.  The Company believes that its SayGo Plan
                 will facilitate more rapid market acceptance of the ERS
                 ShelfNet System because it does not require an initial
                 cash investment by the customer. The Company intends to
                 use the proceeds from the Private Placement to install
                 the ERS ShelfNet System in supermarkets under the SayGo
                 Plan.

           .     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, 1996, of the approximately 29,800 supermarkets in the

<PAGE>
                 United States, approximately 120 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 the SayGo Plan.

           .     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.

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.
<TABLE>
<CAPTION>
                 Type of Store                 Number of Stores
           <S>                                       <C>
           Supermarkets. . . . . . . . .              29,800
           Discount mass merchandisers .               9,455
           Chain drug stores . . . . . .              20,366
           Convenience stores. . . . . .              56,000
                                                     -------
              Total . . . . . . . . . . .            115,621
                                                     =======
</TABLE>            
Source:  Progressive Grocer Annual Report, April 1996; MMR Annual
         Report, April 29, 1996. 

      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,

<PAGE>
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 and increase 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. <PAGE>
<PAGE>
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 also is more susceptible to
pricing inaccuracy. Stores with inaccurate prices risk customer
dissatisfaction as well as fines and penalties levied by
governmental agencies. According to Supermarket News, February 5,
1996, over 90% of supermarket executives surveyed rate the issue of
pricing verification as extremely or highly important. 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 walking
the aisle and checking promotional items against a printed list
arranged according to the shelfset schematics (called
"planograms"). The Company believes using such a printed list is an
unnecessarily time-consuming, inaccurate and costly process.

      Replenishment/Inventory Management

      Supermarkets lose sales (and their corresponding margins) when
products are inadvertently missing from designated planogrammed
shelves, 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, 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.

<PAGE>
<PAGE>
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 Instant Response Pricing to eliminate manual
price changes, Integrated Electronic Pricing to ensure pricing
integrity, Quick Point of Purchase (QuickPop(R)) Merchandising to
reduce the cost of changing merchandising materials, AccuStock(TM))
to facilitate inventory replenishment and ShelfSet Audit to provide
for efficient shelf set management.
<TABLE>
<CAPTION>
Retail Challenge           ERS Solution
<S>                        <C>
Manual Price 
 Changes.                  Instant Response Pricing. 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.

Pricing Integrity.         Integrated Electronic Pricing. 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.


<PAGE>
<PAGE>
Merchandising
 Management.               QuickP.O.P. The ERS ShelfNet System's
                           QuickP.O.P. application 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 arranged
                           according to the planogram.

Replenishment/
 Inventory
 Management.               AccuStock. The ERS ShelfNet System's
                           AccuStock application 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. AccuStock 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.

Shelfset Management.       ShelfSet Audit. 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.

</TABLE>

Management estimates that, under the SayGo Plan, the cost savings
and benefits to its anticipated supermarket customers using the ERS
ShelfNet System (including the full suite of its applications at
the anticipated level of usage) could provide an annual net

<PAGE>
contribution per store ranging from approximately $40,000 to
approximately $240,000. See "Recent Developments-New Marketing and
Pricing Program" above. 

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 system permits the transmission of data directly to
wireless ESLs.

      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 four different sizes and types of ESLs for use in
different applications, such as SKUs for coolers and freezers. The
Company's currently installed ESLs are powered through 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.
<PAGE>
      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 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 which 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

      General

      The Company historically has marketed its ERS ShelfNet System
for sale, at prices generally in excess of $100,000 per store, a
significant capital expenditure for retailers. The Company now
intends also to market the ERS ShelfNet System under its SayGo
Plan, whereby the Company will own the system and, with no upfront
cash cost to the retailer, furnish the system to retailers who will
pay monthly fees to the Company based largely on their actual usage
of the system.

      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

<PAGE>
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.

      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.

      SayGo Agreements

      In December 1996, the Company signed its first non-binding
Letter of Intent providing for installation of the ERS ShelfNet
System under the SayGo Plan, and is continuing its efforts to
procure additional letters of intent. The Letter of Intent is, and
all such additional arrangements will be, subject to numerous
conditions, including negotiation and execution of definitive
contract terms.

      Under the terms proposed by the Company, the Company will own
the ERS ShelfNet System and furnish 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 will provide for: (i) a fixed rate charge per ESL per
month and (ii) a base rate charge per ESL price change, less volume
discounts. Charges will be billed to the customer on a monthly
basis. In addition to such amounts, the Company will collect
transaction fees for usage of each value added application.

      The Company's proposals will allow the customer to terminate
the program and return the Company's system at any time after the
first twelve months. The customer's fees will cease upon
termination, except for agreed upon amounts in certain
circumstances.

<PAGE>
<PAGE>
      Organization

      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 systems and to
coordinate their implementation of the ERS ShelfNet System. The
Company exhibits its system at major trade shows worldwide 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.

      Collaborative Development

      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 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, 1996, the ERS ShelfNet System was installed
in 64 U.S. retail stores, including those owned by such leading
supermarket chains as Vons, Stop & Shop, HEB, Big Y, Shaw's, Lucky,
The Great Atlantic & Pacific Tea Company, Inc., and K Mart
Corporation, and one supermarket owned by the Overwaitea Food Group
in Canada. The Company's customers include five of the 15 largest
supermarket chains in the United States.

      In June 1996, the Company obtained a sub-contract from NCR
under NCR's prime contract to upgrade POS systems at U.S. military
commissaries, subject to receipt of purchase orders by the Company
from NCR. Pursuant to such arrangements, NCR has delivered an order
for a software license covering the installation of the ERS
ShelfNet System.

      During the year ended December 31, 1994, HEB and Vons
accounted for 14% and 67%, respectively, of the Company's
consolidated revenues; during the year ended December 31, 1995,
HEB, Vons and Shaw's accounted for 30%, 27% and 26%, 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.

<PAGE>
<PAGE>
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 will commit 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. However, the Company believes that other suppliers
could produce equivalent microprocessors within approximately four
months. 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. 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.

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

<PAGE>
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.

      During the years ended December 31, 1994, 1995 and 1996, the
Company incurred expenses for research and development activities
of, respectively, $2,571,000, $2,491,000 and $1,117,000. During the
years ended December 31, 1995 and December 31, 1996, the Company
capitalized an aggregate of $475,000 and $592,000, respectively, in
costs of internal labor and outside services associated with
product development. No such amounts were capitalized during the
year ended December 31, 1994.

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 twelve United States patents and has eight
additional United States patent applications pending, and eleven
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.

      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

<PAGE>
adequate scope to protect the Company's technology or that issued
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, in consideration of a
$700,000 payment made by the Company to Telepanel. During 1994, the
United States patent underlying Telepanel's patent rights
applicable to such license 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.
Telepanel has publicly reported the existence of an arrangement
with IBM whereby IBM may market the Telepanel system. See
"Intellectual Property" above for a description of the settlement
in 1993 of certain patent litigation between the Company and
Telepanel. The Company believes NCR also has developed and is
testing an ESL system 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. 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, 1996, the Company had 62 full-time
employees, consisting of 26 engaged in engineering and development
and manufacturing support, 12 in marketing and sales activities, 18
in customer services and six in general administrative and
executive functions. At such date, the Company had an additional 27
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 18 states
currently have laws or regulations requiring some form of "unit
pricing" (which require prices and price per measure to be
displayed at the shelf), and at least nine 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 some of
the states that have item pricing laws, such 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 Department of Consumer Protection to exempt from item
pricing requirements stores employing an approved ESL system.

      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>
<TABLE>
<CAPTION>
      Name                                Age            Position
      ----                                ---            --------
<S>                                       <C>      <C>
Norton Garfinkle                          66       Chairman of the Board
Bruce F. Failing, Jr.                     48       Vice Chairman of the
                                                     Board and Chief
                                                     Executive Officer
George B. Weathersby                      52       President
William W. Erdman                         55       Executive Vice President
Michael R. Valiton                        35       Senior Vice President,
                                                     Technology and
                                                     Operations
William B. Ames                           53       Vice President,
                                                    Manufacturing
William B. Fischer                        45       Vice President,
                                                    Finance
James M. Nolan, Jr.                       42       Vice President, New
                                                    Product Development
Paul M. Patrick                           44       Vice President

</TABLE>

      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. Weathersby has been President of the Company since
February 1997, and serves as Chairman of the Executive Committee of
the Company's Board of Directors. Mr. Weathersby has been Vice
Chairman of Cambridge Management Corporation and its affiliates
including Oxford Management Corporation since 1993. From 1991 to
1993, Mr. Weathersby was a general partner of Founder's Court, an
investment management firm. Mr. Weathersby is a director of Holnam,
Inc. and USA Group, Inc.
<PAGE>
<PAGE>
      Mr. Erdman has been Executive Vice President since March 1997.
From 1992 until prior to joining the Company, Mr. Erdman was
President and Chief Executive Officer of InterDigital
Communications Corporation (formerly, International Mobile Machine
Corporation).

      Mr. Valiton has been Senior Vice President, Technology and
Operations of the Company since March 1996, having joined the
Company in July 1994 and become Vice President, Delivery in January
1995. From prior to 1992 until joining the Company, Mr. Valiton
held various positions with Ungermann-Bass, Inc., the last of which
was as Director of Customer Administration.

      Mr. Ames has been Vice President, Manufacturing of the Company
since April 1995. From prior to 1992 until joining the Company, Mr.
Ames was employed in various positions by the Hewlett-Packard
Company, the last of which were as Strategic Planning Manager and
Manufacturing Development Engineering Manager.

      Mr. Fischer has been Vice President, Finance of the Company
since April 1995, having served as Controller of the Company from
May 1994 until April 1995. From September 1990 until joining the
Company, Mr. Fischer was Director of Financial Accounting Policies
at GTE Corporation. From 1978 until 1990, Mr. Fischer was employed
by Price Waterhouse LLP, having last held the position of Senior
Manager.

      Mr. Nolan has been Vice President, New Product Development of
the Company since November 1993. From 1981 until 1993, Mr. Nolan
held various positions with Sequoia Systems, Inc., a developer of
fault tolerant computer systems, the last of which was as Vice-
President of Engineering.

      Mr. Patrick has been a Vice President of the Company since
1992. From 1989 to 1992, Mr. Patrick was Vice President, Canadian
Operations, of Stores Automated Systems, Inc., a manufacturer of
retail point of sale products and services. 

ITEM 2. PROPERTIES

      The Company's executive offices are located at 372 Danbury
Road, Wilton, Connecticut, where the Company leases approximately
14,700 square feet of space (exclusive of space subleased to an
affiliate). The Company's lease expires in July 1997 and requires
payment of annual rent (net of sublease payments) in the amount of
approximately $241,000 (in addition to increases in operating
expenses and real estate taxes). Of the Company's space in Wilton,
approximately 1,900 square feet is devoted to office and
administrative uses, approximately 6,600 square feet to engineering
and development activities, and approximately 6,200 square feet to
marketing, sales and customer service functions.

<PAGE>
<PAGE>
      The Company leases an additional space of approximately 10,000 
square feet for engineering and development activities in Westford,
Massachusetts, and at other smaller locations where required to
support its 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 and the
Principal Subsidiary.

ITEM 3. LEGAL PROCEEDINGS

      In 1992, in proceedings commenced by the Company in the High
Court of Justice, Chancery Division, England against defendants
John Baxter and Epsi'lanne (UK) Limited, the defendants served
counterclaims seeking, among other things, to enjoin the Company
from selling its system in the United Kingdom. The Company does not
believe that these counterclaims have any merit.


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

      (a)  On December 5, 1996, the Company convened its Annual
Meeting of Stockholders, which was continued, by adjournment, and
completed on January 13, 1997 (collectively, the "Annual Meeting").

      (b)  Not applicable because (i) proxies for the Annual Meeting
were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934 together with the Company's Proxy Statement
dated November 5, 1996; (ii) there was no solicitation in
opposition to management's nominees as listed in such Proxy
Statement; and (iii) all of such nominees were elected.

      (c)   At the Annual Meeting, the Company's stockholders voted
in favor of the election of management's nominees for election as
directors of the Corporation. The holders of 15,902,846 shares
voted in favor of, and the holders of 38,300 shares withheld their
vote for, the election of Paul A. Biddelman; the holders of
15,902,846 shares voted in favor of, and the holders of 38,300
shares withheld their vote for, the election of David Diamond; the
holders of 15,902,846 shares voted in favor of, and the holders of
38,300 shares withheld their vote for, the election of Bruce F.
Failing, Jr.; the holders of 15,902,846 shares voted in favor of,
and the holders of 38,300 shares withheld their vote for, the
election of Norton Garfinkle; the holders of 15,902,846 shares
voted in favor of, and the holders of 38,300 shares withheld their
vote for, the election of George Weathersby; and the holders of
15,902,846 shares voted in favor of, and the holders of 38,300
shares withheld their vote for, the election of Donald E. Zilkha.

<PAGE>
<PAGE>
      At the Annual Meeting, the stockholders voted in favor of a
proposal to approve an amendment of the Certificate of
Incorporation of the Company to increase the number of authorized
shares of the Company's Common Stock from 25,000,000 shares to
35,000,000 shares. The holders of 15,145,154 voted in favor of, the
holders of 1,102,780 shares voted against, and the holders of 6,575
shares abstained with respect to approval of such proposal.

      At the Annual Meeting, the stockholders voted in favor of a
proposal to approve an amendment to the Company's 1993 Employee
Stock Option Plan in order to increase the number of shares
issuable pursuant to the exercise of options under such plan from
1,225,000 to 1,775,000 shares of Common Stock of the Company.  The
holders of 15,896,046 shares voted in favor of, the holders of
36,825 shares voted against, and the holders of 8,275 shares
abstained with respect to approval of such proposal.

      At the Annual Meeting, the Company's stockholders voted in
favor of a proposal to approve an amendment to the Company's 1993
Director Stock Option Plan in order to increase the number of
shares issuable pursuant to the exercise of options under such plan
from 50,000 to 150,000 shares of Common Stock of the Company.  The
holders of 11,843,866 shares voted in favor of and the holders of
550 shares voted against approval of such proposal.

      (d)  Not applicable.
                                    PART II

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

      The Company's Common Stock is currently traded on the over-
the-counter market, with price quotations reported on the Nasdaq
Stock Market under the symbol "ERSI."  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 System.  Quotations represent prices between
dealers and do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
      1995                          High           Low
      ----                          ----           ---
      <S>                           <C>            <C>
      First Quarter                 $6.50          $4.63
      Second Quarter                 5.75           3.00
      Third Quarter                  5.25           3.50
      Fourth Quarter                 4.75           2.38
      
      1996                          High           Low
      ----                          ----           ---
      First Quarter                 $3.25          $1.63
      Second Quarter                 2.38           1.63
      Third Quarter                  4.13           1.63
      Fourth Quarter                 4.25           2.63
</TABLE>
<PAGE>
     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, 1997, the number of record holders of the
Company's Common Stock was 567.

     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 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"
and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity", which information
is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

     The following tables reflect summary historical consolidated
financial and certain other 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".

     The following summary historical consolidated statement of
operations and balance sheet data, insofar as it relates to each of
the years 1992-1996, has been derived from audited annual
consolidated financial statements, including the consolidated
statement of operations for the three years ended December 31,
1996.

<PAGE>
<PAGE>
<TABLE>
<CAPTION>
                                         Year Ended December 31,           
                              ---------------------------------------------
                              1996      1995      1994       1993(1)   1992
                              ----      ----      ----       ----      ----
                               (Amounts in thousands, except per share data)
<S>                           <C>      <C>       <C>        <C>       <C>
Consolidated Statement
 of Operations Data:

Revenues....................  $ 5,002  $  2,973  $  2,376   $  1,122  $    941
Cost of goods sold..........    6,204     4,113     3,822      1,718     2,373
                              -------- --------- ---------  --------- ---------
 Gross profit (loss)........   (1,202)  ( 1,140)  ( 1,446)   (   596)   (1,432)
                              -------- --------- ---------  --------- ---------
Operating expenses:
 Selling, general and
  administrative............    6,807     6,952     6,039      5,966     4,628
 Research and development...    1,117     2,491     2,571      2,325     2,503
Depreciation and amorti-
  zation....................      162       107       149        177       157
 Stock option compensation(2)      44        27     1,119      7,454       --
 Patent license fee.........      --        --        --         --        700
                              -------- --------- ---------  --------- ---------
  Total operating expenses..    8,130     9,577     9,878     15,922     7,988
                              -------- --------- ---------  --------- ---------
  Loss from operations......   (9,332)  (10,717)  (11,324)   (16,518)   (9,420)
                              -------- --------- ---------  --------- ---------
Other income (expenses):
 Interest income............      302       134       288        438        44
 Interest expense...........     (382)     (291)      (65)      (340)     (922)
 Gain (loss) on short-term
  investments...............      --          6      (177)       --        --
 Other......................      --        --        --         --        (66)
                              -------- --------- ---------  --------- ---------
  Total other income
   (expense)................      (80)     (151)       46         98      (944)
                              -------- --------- ---------  --------- ---------
Loss before minority
 interest in consolidated
 affiliate..................  ( 9,412)  (10,868)  (11,278)   (16,420)  (10,364)
Minority interest in loss
 of consolidated affiliate..      --        --        --         423       831 
                              -------- --------- ---------  --------- ---------
Net loss(3).................  $(9,412) $(10,868) $(11,278)  $(15,997) $ (9,533)
                              ======== ========= =========  ========= =========

Earnings per share:
 Weighted average number
  of common shares out-
  standing(4)...............   16,169    11,743    11,682     11,461  
                              ======== ========= =========  =========
Net loss per common share(5)  $  (.60)  $ (0.95) $  (0.97)  $  (1.40) 
                              ======== ========= =========  =========
/TABLE
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
                                               December 31,                
                                -------------------------------------------
                                1996     1995      1994      1993      1992
                                ----     ----      ----      ----      ----
                                            (Dollars in thousands)
<S>                           <C>      <C>       <C>        <C>       <C>
Consolidated Balance
 Sheet Data:

Net working capital.......    $  8,764 $ 5,283   $ 3,452    $11,642   $ 2,800
Total assets..............      12,260   8,316     5,195     13,241     5,445
Long-term debt............       4,989   3,335     1,981       --      14,199
Minority interest in con-
 solidated affiliate......         --      --       --         --       8,531
Stockholders' equity
 (deficiency).............       5,723   3,215     2,268     12,405   (19,374)
</TABLE>
-------------------------

(1)  Reflects the consummation of the Combination immediately prior to
     the closing of the Initial Public Offering.

(2)  Compensation expense recognized in 1996, 1995 and 1994 related to
     services provided by employees during those periods. The non-cash
     compensation expense recognized for 1993 included compensation
     earned for services prior to the Combination and compensation
     earned for the period subsequent to the Combination through
     December 31, 1993. 

(3)  Prior to the closing of the Initial Public Offering, the Company
     was treated as an "S Corporation" for U.S. federal income tax
     purposes.

(4)  In 1993, prior to the closing of the Initial Public Offering, the
     calculation of weighted average number of common shares outstanding
     included as common share equivalents 725,104 shares subject to
     options outstanding. Subsequent to such closing, the calculation
     does not reflect common share equivalents that are anti-dilutive.

(5)  Net loss per common share data for periods prior to December 31,
     1993 has not been presented as it is not meaningful due to the
     Combination consummated immediately prior to the closing of the
     Initial Public Offering.


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, 1996, approximately
120 stores in the United States were operating such systems, out of
a potential market in excess of 100,000 supermarkets and other
stores. Large supermarket chains have tested the productivity
benefits as well as the technical functionality of ESL systems in
pilot stores, as a result of which the Company believes they are in

<PAGE>
a position to consider rolling out the systems. The Company's
objective is to be the worldwide leader in the emerging ESL system
market as product adoption and penetration increases.

     Because the market for ESL systems is in the development
stage, 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.

     Since its inception in April 1990, the Company has been
engaged primarily in the development, design, market testing and,
more recently, sale of the ERS ShelfNet System. The Company
subcontracts to third parties the manufacture and assembly of the
components comprising the ERS 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. Since inception and through December
31, 1996, the Company has generated cumulative revenues of $12.6
million, and has incurred a cumulative net loss of approximately
$57.1 million, which includes non-cash charges in the amount of
$8.6 million for stock option compensation expense.

     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 now intends also to market its
ERS ShelfNet System on a fee based arrangement whereby the Company
will own the system and, with no upfront cash cost to the retailer,
furnish the system to retailers (generally for a period of up to
five years), who will pay monthly fees to the Company based largely
on their actual usage of the system. The Company believes the SayGo
Plan will increase market acceptance of the ERS ShelfNet System.
However, there can be no assurance that the pricing strategy will
be accepted by customers or will be successful in helping the
Company to attain profitability.

     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. Such assets will be subject to periodic impairment
testing as prescribed by Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of.

<PAGE>
<PAGE>
Results of Operations

   Year ended December 31, 1996 compared to year ended December 31,
    1995

     Revenues.  The Company's revenues were $5,002,000 in 1996,
compared to $2,973,000 in 1995. The increase of $2,029,000 in 1996
is primarily attributable to greater product sales in 1996,
including software license fees in the amount of $243,000 recorded
in the second quarter. The increase in revenue also reflects a
$586,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues are attributable to sales to
customers in the supermarket industry. In 1996, a single customer
was responsible for 46% of revenues and 79% of revenues was
attributable to three customers. Approximately 30% of revenues in
1995 were attributable to a single customer, with three customers
accounting for 83% of total revenues.

     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 software costs, warranty and
maintenance costs, freight and inventory obsolescence.

     Cost of goods sold was $6,204,000 in 1996 compared to
$4,113,000 in 1995, reflecting increased product sales in 1996. The
Company realized lower hardware component costs on installations
during 1996 as compared to 1995, reflecting an increase in the use
of high volume low cost suppliers. Cost of goods sold in 1996
includes warranty and maintenance expenses of $966,000, compared to
$561,000 for such expenses in 1995. The increase in warranty and
maintenance costs reflects the growing installation base for the
ERS ShelfNet System. The Company anticipates that system
enhancements implemented in 1996 and 1995 will further decrease
future warranty and maintenance expenses per installation and, in
the future, that the cost of goods sold will decrease as a
percentage of revenues as a result of higher manufacturing volumes
of its components and as the installation process is improved.

     Cost of goods sold in 1996 also includes 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
electronic shelf labeling system.

     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 decreased $145,000, to $6,807,000 in 1996, compared to
$6,952,000 in 1995, reflecting reduced discretionary spending in
1996. 

<PAGE>
<PAGE>
     Research and Development.  Research and development expenses
were $1,117,000 in 1996 compared to $2,491,000 in 1995, reflecting
the winding down or completion in 1996 of several hardware and
software development projects commenced in prior years. During the
years ended December 31, 1996 and 1995, the Company also
capitalized product development costs of $592,000 and $475,000,
respectively, that will be 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 $302,000 in
1996 compared to $134,000 in 1995, due to increased cash and cash
equivalents available for investment.

     Interest Expense.  Interest expense increased to $382,000 in
1996 compared to $291,000 in 1995. Interest expense represents
interest on amounts borrowed from the CDA and, through July 24,
1995, a revolving credit facility with the principal stockholders
of the Company and members of the Board of Directors and their
affiliates.

     Income Taxes.  The Company has incurred net losses since
inception which have generated net operating loss carry forwards
for federal income tax purposes of approximately $44 million, which
are available to offset future taxable income and expire through
the year 2011 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, the
impact of this potential tax benefit has been eliminated in the
Company's consolidated financial statements as of December 31, 1996
and 1995 (see Note 11 of the Notes to Consolidated Financial
Statements included in response to "Item 14. Exhibits, Financial
Statements Schedules and Reports on Form 8-K").

   Year Ended December 31, 1995 Compared to Year Ended December 31,
    1994

     Revenues.  The Company's revenues were $2,973,000 in 1995,
compared to $2,376,000 in 1994. The increase of $597,000 in 1995
was attributable to an increase of $436,000 in product sales. The
total increase in revenue also reflected a $161,000 increase in
maintenance revenue associated with a larger installed customer
base. All revenues were attributable to sales to customers in the
supermarket industry. Approximately 30% of revenues in 1995 was
attributable to a single customer, with three customers accounting
for 83% of total revenues. In 1994, a single customer was
responsible for 67% of revenues and 81% of revenues was
attributable to two customers.

     Cost of Goods Sold.  Cost of goods sold was $4,113,000 in
1995, compared to $3,822,000 in 1994, reflecting increased product
sales in 1995. The Company realized lower hardware component costs
on installations during 1995 as compared to 1994, reflecting an
increase in the use of high volume, low cost suppliers. In
addition, included in cost of goods sold in 1994 is $300,000 of
product performance-related costs expected to be non-recurring.

<PAGE>
Such product performance-related costs included a $125,000
provision for the upgrade of certain prior customer installations
with an enhanced version of a component of the ERS ShelfNet System
and the costs of a special quality and performance audit of
customer installations. Cost of goods sold in 1995 included
warranty and maintenance expenses of $561,000. The comparable costs
in 1994 were $206,000, excluding such special product performance-
related costs. The increase in warranty and maintenance costs
reflected the growing installation base for the ERS ShelfNet
System.

     Selling, General and Administrative.  Selling, general and
administrative costs increased $913,000, to $6,952,000 in 1995
compared to $6,039,000 in 1994. The increase in selling, general
and administrative costs was primarily attributable to efforts to
expand the Company's organization in anticipation of sales growth.

     Research and Development.  Research and development expenses
were $2,491,000 in 1995, compared to $2,571,000 in 1994. Expenses
incurred in the development of the hardware components of the ERS
ShelfNet System were $1,523,000 in 1995, compared to $989,000 in
1994, due to an increased use of third parties to augment the
Company's internal activities in the area of long-term product
development. Expenses incurred in the development of the Company's
software system were $968,000 in 1995, compared to $1,582,000 in
1994. During the year ended December 31, 1995, the Company also
capitalized $475,000 of product development costs that will be
amortized over the shorter of the economic life of the related
software product or process or three years.

     Stock Option Compensation.  The Company recorded non-cash
compensation expense of $27,000 in 1995 and $1,119,000 in 1994.
Non-cash compensation expense results from the Company's issuance
of stock options to employees at exercise prices below the fair
market value at the date of grant and is recognized as expense over
the employees' respective service periods.

     Interest Income.  Interest income decreased to $134,000 in
1995, compared to $288,000 in 1994, due to the decrease in the
level of short-term investments. Short-term investments were sold
during 1995 and 1994 to fund the Company's operating cash
requirements.

     Interest Expense.  Interest expense increased $226,000 to
$291,000 in 1995, compared to interest expense of $65,000 in 1994.
Interest expense represented interest on amounts borrowed from the
CDA and, through July 24, 1995, a revolving credit facility between
the Company and members of the Board of Directors and their
affiliates.

     Gain (Loss) on Short-Term Investments.  The Company recognized
$6,000 in gains in 1995 and $177,000 in losses in 1994 on the
market value of short-term investments. There were no unrealized
gains or losses on short-term investments at December 31, 1995. At
December 31, 1994, short-term investments of $1,027,000 were
recorded net of a valuation allowance of $77,000 for unrealized

<PAGE>
losses. The remaining $100,000 of such losses had been realized in
1994.

     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, 1995 and 1994. See Note 11
of the Notes to 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, 1996, the Company had net working capital
of $8,764,000, reflecting cash and cash equivalents of $8,198,000,
compared to net working capital of $5,283,000, reflecting cash and
cash equivalents of $3,210,000 at December 31, 1995. The increase
in net working capital cash and cash equivalents primarily resulted
from the offshore public offering and contemporaneous private
placement (the "1996 Transactions") of Common Stock in July 1996
($12 million), and additional borrowings during the first quarter
of 1996 under the Company's facility with the CDA ($1.65 million).
On January 24, 1997, the Company raised approximately $95 million
in net proceeds as a result of the Private Placement.

     Net cash used in operations was $7,549,000 in 1996, compared
to net cash of $11,160,000 used for operating activities in 1995,
resulting primarily from the net losses of $9,412,000 and
$10,868,000, respectively, for such periods. Such net losses
reflect non cash provisions for doubtful accounts receivable of
$168,000 in 1996 and $82,000 in 1995, and for inventory
obsolescence of $843,000 in 1996 and $94,000 in 1995. The
improvement in net cash used in operations also reflected decreases
in trade accounts receivable (net of allowance for doubtful
accounts) of $294,000 and inventory (net of reserves) of
$1,052,000, compared to increases of $853,000 and $497,000,
respectively, for such items during the prior year. During 1996,
current liabilities decreased $217,000 reflecting a reduction in
outstanding trade payables, compared to an increase of $820,000 in
the prior year. 

     Cash used in investing activities totaled $989,000 in 1996
compared to $100,000 of cash provided by investing activities in
1995. Investing activities included capital expenditures of
$397,000 and $452,000 in 1996 and 1995, respectively. The Company
also incurred $592,000 and $475,000 in 1996 and 1995, respectively,
in product development costs. In 1995, cash provided by investing
activities also included $1,027,000 from the sale of short-term
investments.

     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 proposed SayGo Plan the Company will offer the system on
a fee based arrangement whereby the Company retains ownership of
the system. See "Item 1. Business-Marketing and Sales-SayGo

<PAGE>
Agreements" above, for a description of fixed and variable charges
proposed by the Company under the SayGo Plan. As a result, the
Company will have substantial manufacturing and carrying costs
attendant to introduction of the SayGo Plan, which will not
initially be covered by revenues calculated on the basis of usage
fees paid by customers. Accordingly, the Company will use
substantial funds in order to support the introduction of the SayGo
Plan.

     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, the Initial Public Offering consummated in
May 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 its Board of
Directors and their affiliates, the 1996 Transactions and the
Private Placement.

     In July 1996, the Company completed: (i) 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, and (ii)
the contemporaneous private placement of an aggregate of 911,657
shares of Common Stock to subscribers, including certain members of
the Board of Directors and their affiliates. In connection with
completion of such transactions, holders of all 125,556 outstanding
shares of Series A Preferred Stock converted their shares, in
accordance with their terms, into an aggregate of 3,138,900 shares
of Common Stock, in exchange for payments aggregating $235,000. The
aggregate net proceeds to the Company in such transactions were
approximately $12 million (exclusive of non-cash expenses
represented by the issuance of 218,957 shares of Common Stock as
commissions).

     The Company borrowed the remaining $1,650,000 under its
facility with the CDA during the first quarter of 1996. The
aggregate of $5,000,000 principal amount of such indebtedness (the
"CDA Note") is repayable five years after the August 1994 closing
and is convertible to shares of Common Stock, through August 12,
1997 at an adjusted conversion price calculated at $3.00 plus the
average price of the Common Stock during the eighteen months prior
to conversion and thereafter at $3.00 plus the average market price
of the Common Stock during the twelve months prior to conversion.
At closing, the CDA acquired five-year warrants to purchase 699,724
shares (as adjusted through December 31, 1996) of Common Stock,
exercisable at an adjusted price through August 12, 1997 calculated
at $2.58 plus the average market price of the Common Stock during
the 18 months prior to exercise, and thereafter as $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 for up to ten years from closing), 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

<PAGE>
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.

     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 Note, at specified prices. 

   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, subsequent to 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 will utilize the net proceeds from the Private
Placement in connection with the anticipated expansion of its
operations, including for manufacturing and carrying costs
attendant to the SayGo Plan, and for general corporate purposes,
including the funding of the Company's ongoing engineering and
development 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 for the
foreseeable future.

     The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and
related arrangements, and the Company may consider additional
transactions, consistent with the provisions of the Indenture, that
will further enhance its liquidity. The Company has not reached any
determination with respect to the size or nature of any such
transaction, or whether any such transaction will be undertaken,
and there can be no assurance that any such transaction will be
effected.<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.

                                   PART III

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 1997 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.

                                    PART IV

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, 1996,  the Company
filed a Current Report on Form 8-K dated December 18, 1996
reporting, under "Item 5. Other Events" thereunder, the Company's
proposed private offering of debt securities; and filed a Current
Report on Form 8-K dated December 20, 1996 addressing, under "Item
5. Other Events" thereunder, the Company's adjournment of its 1996
annual meeting of stockholders. No financial statements were
included with such reports.  

         During the first quarter of 1997, the Company filed a
Current Report on Form 8-K dated January 24, 1997 addressing, under
"Item 5. Other Events" thereunder, the completion of the private
offering of Senior Discount Notes; and filed a Current Report on
Form 8-K dated February 7, 1997 addressing, under "Item 5.  Other
Events" thereunder, certain changes in management. No financial
statements were included with such reports.

         

<PAGE>
<PAGE>
                               POWER OF ATTORNEY

     The issuer and each person whose signature appears below
hereby appoint Norton Garfinkle, Bruce F. Failing, Jr. and William
B. Fischer 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 27, 1997                  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              March 27, 1997
-----------------------    Board and Principal 
Bruce F. Failing, Jr.      Executive Officer 


s/William B. Fischer      Vice President,                   March 27, 1997
----------------------     Finance and 
William B. Fischer         Principal 
                           Financial and
                           Accounting 
                           Officer

s/Paul A. Biddelman       Director                          March 27, 1997
----------------------
Paul A. Biddelman



<PAGE>

s/David Diamond           Director                          March 27, 1997
----------------------
David Diamond



s/Norton Garfinkle        Director                          March 27, 1997
----------------------        
Norton Garfinkle



s/George Weathersby       Director                          March 27, 1997
----------------------
George Weathersby


s/Donald E. Zilkha        Director                          March 27, 1997
----------------------
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,
  1996 and 1995..................................                 F-3

Consolidated Statement of Operations for
  the years ended December 31, 1996, 1995
  and 1994.......................................                 F-4 

Consolidated Statement of Cash Flows
  for the years ended December 31, 1996, 1995
  and 1994.......................................                 F-5 

Consolidated Statement of Changes in
  Stockholders' Equity for the years ended 
  December 31, 1996, 1995 and 1994...............                 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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 upon 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.



PRICE WATERHOUSE LLP



Stamford, Connecticut
March 20, 1997









                                      F-2<PAGE>
<PAGE>
                 Electronic Retailing Systems International, Inc.
                            Consolidated Balance Sheet
                (in thousands, except per share and share amounts)
<TABLE>
<CAPTION
                                                          December 31,
                                                        ----------------
                                                        1996        1995
                                                        ----        ----
<S>                                                     <C>         <C>
Assets
Current assets
 Cash and cash equivalents (Note 2)                     $  8,198    $ 3,210
 Accounts receivable - net of allowance 
   for doubtful accounts of $90 in 1996 
   and $88 in 1995                                         1,061      1,356
 Receivables from affiliates (Note 3)                         20          8
 Installations in progress                                    87        522
 Inventories - net of reserves of $838 in 1996
   and $195 in 1995 (Note 2)                                 821      1,874
 Prepayments and other current assets                        125         79
                                                        ---------   --------
   Total current assets                                   10,312      7,049
                                                        ---------   --------
Equipment (Note 2)                                         2,444      2,047
 Accumulated depreciation                                 (1,798)    (1,365)
                                                        ---------   --------
   Net equipment                                             646        682
                                                        ---------   --------
Other non-current assets                                   1,302        585
                                                        ---------   --------
Total assets                                            $ 12,260    $ 8,316
                                                        =========   ========
Liabilities and Stockholders' Equity
Current liabilities
  Accounts payable and accrued expenses                 $  1,286    $ 1,549
  Accrued salaries and benefits                              262        217
                                                        ---------   --------
    Total current liabilities                              1,548      1,766
                                                        ---------   --------
 Long-term debt (Note 6)                                   4,989      3,335
                                                        ---------   --------
 Commitments  (Note 8)                                      -          -
                                                        ---------   --------
Stockholders' equity
 Preferred stock, undesignated (par 
  value $1.00 per share; 2,000,000 
  and 1,860,000 shares authorized, 
  none outstanding)
 Series A Cumulative, Convertible 
  Preferred Stock (no shares and 
  140,000 shares authorized; no shares 
  and 123,246 shares issued and out-
  standing in 1996 and 1995, including 
  2,049 shares issued January 1, 1996 
  as a stock dividend to holders of 
  record on December 31, 1995)                              -           123
 Common stock (par value $0.01 per share; 
  25,000,000 shares authorized; 21,047,106 
  and 11,748,232 shares issued and out-
  standing in 1996 and 1995, respectively)                   210        117
 Additional paid-in capital                               50,655     38,474
 Accumulated deficit                                     (45,142)   (35,499)
                                                        ---------   --------
   Total stockholders' equity                              5,723      3,215
                                                        ---------   --------
Total liabilities and stockholders' equity              $ 12,260    $ 8,316
                                                        =========   ========
</TABLE>
      See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
                   Electronic Retailing Systems International, Inc.
                         Consolidated Statement of Operations
                       (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                    ----------------------------
                                                    1996        1995        1994
                                                    ----        ----        ----
<S>                                                 <C>         <C>         <C>
Revenues
 Product sales                                      $ 4,106     $ 2,663     $  2,227
 Maintenance                                            896         310          149
                                                    --------    --------    ---------
   Total revenues                                     5,002       2,973        2,376
                                                    --------    --------    ---------
Cost of goods sold
 Product sales                                        4,488       3,552        3,316
 Maintenance                                            966         561          506
 Special inventory provision (Note 2)                   750         -            -
                                                    --------    --------    ---------
  Total cost of goods sold                            6,204       4,113        3,822
                                                    --------    --------    ---------
 Gross profit (loss)                                 (1,202)     (1,140)      (1,446)
                                                    --------    --------    ---------
Operating expenses
 Selling, general and administrative 
  (including amounts to related parties 
   of $34 in 1996, $91 in 1995 and $76 
   in 1994)  (Note 3)                                 6,807       6,952        6,039
 Research and development (Note 9)                    1,117       2,491        2,571
 Depreciation and amortization                          162         107          149
 Stock option compensation (Note 10)                     44          27        1,119
                                                    --------    --------    ---------
  Total operating expenses                            8,130       9,577        9,878
                                                    --------    --------    ---------
 Loss from operations                                (9,332)    (10,717)     (11,324)
                                                    --------    --------    ---------
Other income (expenses)
 Interest income                                        302         134          288
 Interest expense (including amounts 
   to related parties of $52 in 1995)
   (Note 3)                                            (382)       (291)         (65)
 Gain (loss) on short-term investments
   (Note 2)                                            -              6         (177)
                                                    --------    --------    ---------
  Total other income (expenses)                         (80)       (151)          46
                                                    --------    --------    ---------
  Net loss                                          $(9,412)   $(10,868)    $(11,278)
                                                    ========    ========    =========
Earnings per Share
 Weighted average common shares 
  outstanding                                        16,169      11,743       11,682
                                                    ========    ========    =========
 Net loss per common share                          $ (0.60)    $ (0.95)    $  (0.97)
                                                    ========    ========    =========
   </TABLE>
                See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
                    Electronic Retailing Systems International, Inc.
                          Consolidated Statement of Cash Flows
                                     (in thousands)
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                     ----------------------------
                                                     1996        1995        1994
                                                     ----        ----        ----
<S>                                                  <C>         <C>         <C>
Net Cash Flows from Operating Activities:
Net loss                                             $  (9,412)  $(10,868)   $ (11,278)
Adjustments to reconcile net loss 
 to net cash used in operating activities:
  Depreciation and amortization                            660        463          374
  Provision for inventory obsolescence                     843         94           93
  Provision for doubtful accounts                          168         82           38
  Stock option compensation                                 44         27        1,119
  Accounts receivable                                      126       (935)         179
  Inventories                                              209       (591)        (534)
  Other current and non-current assets                      30       (252)        (127)
  Current liabilities                                    (217)        820          110
                                                     ---------   ---------   ----------
    Net cash used in operating activities              (7,549)    (11,160)     (10,026)
                                                     ---------   ---------   ----------
Cash Flows from Investing Activities:
 Capital expenditures                                    (397)       (452)        (303)
 Capitalized product development costs                   (592)       (475)         -
 Proceeds from sales or maturities of
  short-term investments                                 -          1,027        7,040
                                                     ---------   ---------   ----------
     Cash provided by (used in) investing
      activities                                         (989)        100        6,737
                                                     ---------   ---------   ----------
Cash Flows from Financing Activities:
 Net proceeds from the issuance of common stock        12,111          -             2
 Net proceeds from the issuance of long-term
   note and warrant                                     1,650       1,350        1,899
 Conversion of preferred stock                           (235)         -           -
 Net proceeds from the issuance of preferred
  stock                                                  -          8,789          -
 Borrowings under line of credit                         -          3,000          -
                                                     ---------   ---------   ----------
   Cash provided by financing activities               13,526      13,139        1,901
                                                     ---------   ---------   ----------
Net increase (decrease) in cash and cash
 equivalents                                            4,988       2,079       (1,388)
                                                     ---------   ---------   ----------
Cash and cash equivalents at beginning of period        3,210       1,131        2,519
                                                     ---------   ---------   ----------
Cash and cash equivalents at end of period           $  8,198    $  3,210    $   1,131
                                                     =========   =========   ==========
   </TABLE>

There were no cash payments for income taxes in the years 1996, 1995 and
1994.  Cash payments for interest expense were $380, $262 and $45 in 1996,
1995 and 1994, respectively,  including payments of $52 made to related
parties in 1995.   In 1995, preferred stock was issued in a non cash
exchange for surrender of $3 million of debt held by preferred stock
subscribers.  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

<PAGE>
<PAGE>
                    Electronic Retailing Systems International, Inc.
                Consolidated Statement of Changes in Stockholders' Equity
                          (in thousands, except share amounts)
<TABLE>
<CAPTION>
                                                           Additional
                                   Preferred   Common      Paid-in     Accumulated
                                     Stock     Stock       Capital     Deficit
                                   ---------   ------      ---------   -----------
<S>                                <C>         <C>         <C>         <C>
Balances at December 31, 1993      $   -       $    115    $ 25,318    $ (13,028)
                                   ---------   ---------   ---------   ----------
 Vesting of previously issued
  stock options                                               1,119
 Issuance of stock warrants                                      20
 Issuance of 193,500 shares with
  exercise of stock options                           2
 Net loss for year                                                       (11,278)
                                   ---------   ---------   ---------   ----------
Balances at December 31, 1994      $   -       $    117    $ 26,457    $ (24,306)
                                   ---------   ---------   ---------   ----------
 Vesting of previously issued
 stock options                                                   27
 Proceeds from issuance and 
  sale of 120,000 shares of 
  preferred stock                       120                  11,668
 Issuance of 3,246 shares of 
  preferred stock as dividends            3                     322         (325)
 Net loss for year                                                       (10,868)
                                   ---------   ---------   ---------   ----------
Balances at December 31, 1995      $    123    $    117    $ 38,474    $ (35,499)
                                   ---------   ---------   ---------   ----------
 Vesting of previously issued 
  stock options                                                  44
 Issuance of 65,860 shares
  with exercise of stock options                      1
 Issuance of 2,310 shares of 
  preferred stock as dividends            2                     229         (231)
 Proceeds from issuance and sale 
  of 4,963,500 shares in offshore 
  offering, and issuance of 
  218,957 shares to placement 
  agent                                              52      10,087
 Proceeds from issuance and sale 
  of 911,657 shares in private 
  placement                                           9       1,982
 Conversion of Series A preferred 
  stock and issuance of 3,138,900 
  common shares                        (125)         31        (161)
 Net loss for year                                                        (9,412)
                                   ---------   ---------   ---------   ----------
Balances at December 31, 1996      $    -      $    210    $ 50,655    $ (45,142)
                                   =========   =========   =========   ==========
</TABLE>

       See accompanying notes to consolidated financial statements<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 in North America.

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
it is highly unlikely that any one event would have a material
effect on the Company's future operating results.

      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, 1995 included
deposits of $440,000 held as interest bearing collateral for
irrevocable letters of credit of the same amount relating to future
inventory purchases in 1996.  There were no letters of credit
outstanding at December 31, 1996.  

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

      Investments in Debt Securities

      The Company's short-term investments have consisted primarily
of corporate debt obligations.  Such investments have had
maturities of less than one year and have yielded interest at
prevailing interest rates at the time of acquisition. 

      There were no short-term investments at December 31, 1996 and
1995.  During 1994, realized and unrealized losses totaling
$177,000 were recognized on short-term investments.  Realized gains
and realized losses in 1994 totaled $6,000 and $106,000,
respectively.

      Financial Instruments

      Financial instruments include cash, short-term investments
consisting of fixed rate overnight deposits and short-term
corporate debt obligations, letters of credit fully collateralized
by cash and cash equivalents, accrued salaries and expenses, and a
convertible long-term note.  Financial instruments are carried at
cost 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, 1996 consist of approximately $188,000 of materials
and supplies and $633,000 of finished goods.  Inventories at
December 31, 1995 consisted of approximately $674,000 of materials
and supplies and $1,200,000 of finished goods.  Inventories in
excess of expected requirements due to new product introductions
are expensed currently.

      In December 1996, the Company announced its new generation
wireless electronic shelf labeling system.  In that connection, the
Company assessed the expected market demand for the new product and
the inventory on hand needed to support its forecasted
installations and the maintenance requirements of its existing
installed base and recorded a special provision for excess
inventory of $750,000 in the fourth quarter of 1996.  Charges for
excess, slow moving and obsolete inventory for the years 1996, 1995
and 1994 were $843,000, $94,000 and $93,000, respectively.

      Equipment
            
      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.

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

      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.  Amortization commences
when the product is available for general release to customers.  As
of December 31, 1996 and 1995, unamortized capitalized costs of
$857,000 and $468,000, respectively, are included as non-current
assets.  Amortization expense totaled $203,000 and $7,000 for 1996
and 1995, respectively.  There were no amounts capitalized or
amortized in 1994.

      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.  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.
      
      Earnings Per Share

      Net loss per common share is computed using the weighted
average number of common shares and common share equivalents
assumed to be outstanding during the period.  Common share
equivalents consist of the Company's common shares issuable upon
exercise of stock options and stock purchase warrants.  The
computation of net loss per common share does not reflect common
share equivalents that are anti-dilutive.

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

      Adoption of New Accounting Standards

      In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("FAS 123"),  effective for
fiscal years beginning after December 15, 1995.  FAS 123 indicates
a preference for a fair value based method of accounting for
employee stock options, but allows for continuation of the
intrinsic value based method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB
Opinion 25").  The Company adopted FAS 123 effective January 1,
1996 and has chosen to continue its use of the intrinsic value
based method of accounting.  (See Note 10).

Note 3 -Related Party Transactions:

      The Company incurs certain common costs on behalf of
affiliates, which are reimbursed by the affiliates.  The Company
subleases a portion of its headquarters facility to an affiliate. 
Such common costs, including sublease payments, amounted to
$63,000, $112,000 and $184,000 in 1996, 1995 and 1994, respectively
(see Note 8).  Unpaid amounts are included in receivables from
affiliates at December 31, 1996 and 1995.

      The Company has received consulting services and paid a former
member of its Board of Directors fees of $34,000, $34,000 and
$38,000 in 1996, 1995 and 1994, respectively.  The Company also
received consulting services and paid fees to another former member
of the Board of Directors of  $20,000 and $38,000 in 1995 and 1994,
respectively.

      On March 30, 1995, the Company entered into a revolving credit
facility with its principal stockholders and certain members of its
Board of Directors and their affiliates.  On July 24, 1995, in
connection with the sale of preferred stock (see Note 4), $3
million in debt borrowed under such revolving credit facility was
surrendered, and the unused portion of the facility in the amount
of $2 million was terminated.  Interest expense in 1995 on amounts
borrowed under the line of credit totaled $52,000, at an average
rate of prime plus 1%.  Additionally, a facility fee of $100,000
was paid to the lenders pursuant to the terms of the credit
facility.

Note 4 - Preferred Stock:

      On July 24, 1995, the Company completed a private sale of
85,000 shares of its newly-created 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

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


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.

      On July 11, 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, in either 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:

      On July 11, 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 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).

Note 6 - Long-Term Liabilities:

      On August 12, 1994, the Company completed a financing
arrangement with the Connecticut Development Authority ("CDA"),
under which the CDA loaned $2 million to the Company at closing and
agreed to loan the Company up to an additional $3 million through
August 12, 1997.  At December 31, 1995, $3.35 million was
outstanding under such facility, with the remainder of the $5
million credit limit advanced in February 1996.  Such indebtedness
is repayable five years after closing, accrues interest, payable


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


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.  Such indebtedness
is secured by the Company's assets.  The Company also issued to the
CDA warrants to purchase 600,000 shares of Common Stock.

      During 1995, the Company also entered into agreements with the
CDA, which became effective upon consummation of the initial sale
of the Company's Series A Preferred Stock (see Note 4), whereby,
through August 12, 1997, the conversion price of the debt held by
the CDA and the exercise price of its warrants were reduced so as
to be calculated as $3.00 plus the average market price of the
Common Stock during the 18 months prior to conversion, and
thereafter as $3.00 plus the average market price of Common Stock
during the twelve months prior to conversion.  Pursuant to such
agreements, and as a result of additional provisions contained in
the CDA's warrants, effective upon consummation of the sale of the
Preferred Stock, and issuance of the initial dividend thereon:  (i)
through August 12, 1997, the exercise price of the CDA's warrants
was reduced so as to be calculated as $2.58 plus the average market
price of the Common Stock during the 18 months prior to exercise,
and thereafter as $2.58 plus the average market price of the Common
Stock during the twelve months prior to exercise, and (ii) the
number of shares subject to purchase upon exercise of the CDA's
warrants was adjusted to 699,724.

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, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
                     
      Customer                                  1996        1995        1994
      --------                                  ----        ----        ----
      <S>                                       <C>         <C>         <C>
      The Stop & Shop Supermarket Company       46%          --          --
      Big Y Foods, Inc.                         20%          --          --
      Shaw's Supermarkets, Inc.                 13%         26%          --
      H.E. Butt Grocery Co.                      --         30%         14%
      The Vons Companies, Inc.                   --         27%         67%

</TABLE>
      
Note 8 - Commitments:

      The Company leases its facilities under operating lease
agreements.  During 1996, 1995 and 1994 rental expense amounted to
approximately $278,000, $295,000 and $258,000, respectively.

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

      Future minimum lease payments on a calendar year basis under
non-cancelable leases, as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                      Total     
                                    Commitments
                                    -----------
                  <S>               <C>
                  1997              $218,000
                  1998                23,000
                                    --------
                                    $241,000
                                    ========
</TABLE>

The Company subleases a portion of its headquarters facility to an
affiliate for which sublease payments were $63,000 in 1996.  Future
sublease amounts from its affiliate are $83,000 in 1997.

Note 9 - Research and Development:

      Research and development activities were a major component of
the Company's expenditures and efforts during 1996, 1995 and 1994. 
The Company's research and development expenses (including the
allocation of salaries) during 1996, 1995 and 1994 were $1,117,000,
$2,491,000 and $2,571,000, respectively.

      During 1995 and 1994, the Company had research and development
contracts with unaffiliated parties for both hardware and software
elements of its electronic shelf labeling system.  The Company
reimbursed these contractors generally based on milestone
achievements or satisfactory performance.

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.  In June 1994 and December 1996, the stockholders
approved an increase in the number of authorized shares of Common
Stock available for issuance under the plan from 850,005 to
1,225,000 and from 1,225,000 to 1,775,000, respectively.  Options
granted under the plan typically become exercisable over a period
of four years.  The consolidated statement of operations for the
years ended December 31, 1996, 1995 and 1994 includes noncash
compensation expense of $44,000, $27,000, and $1,119,000,
respectively, representing compensation earned for service through
the periods then ended related to option grants.

<PAGE>
<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, 1993     $ .01-$6.00        697,978
                                                                  ---------
         Option grants                          $ .01-$8.50        239,823
         Options exercised                      $ .01             (193,500)
         Options canceled                       $ .01-$6.00        (13,931)
                                                                  ---------
      Options outstanding December 31, 1994     $ .01-$8.50        730,370
                                                                  ---------
         Option grants                          $ .01-$5.63        480,205
         Options exercised                      $ .01              (27,766)
         Options canceled                       $ .01-$8.50       (265,080)
                                                                  ---------
      Options outstanding December 31, 1995     $ .01-$6.00        917,729
                                                                  ---------
         Option grants                          $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
                                                                  =========
</TABLE>


      The Company applies APB Opinion 25 and related interpretations
in accounting for its employee stock option plan.  Stock option
compensation expense recognized by the Company was $44,000,
$27,000, and $1,119,000 for 1996, 1995, and 1994, respectively. 
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 net loss per common share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
                                          1996              1995
                                          ----              ----
            <S>                           <C>               <C>
            Net loss:
             As reported                  ($9,412,000)      ($10,868,000)
             Pro forma                    ($9,412,000)      ($11,221,000)

            Net loss per common
             share:
              As reported                 ($0.60)           ($0.95)
              Pro forma                   ($0.60)           ($0.98)
</TABLE>
      
<PAGE>
<PAGE>
               ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The fair value of each option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for employee stock
option grants in 1996 and 1995: dividend yield of 0%; expected
volatility of 53%; risk-free interest rate of 7%; and expected life
of 5 years. The weighted average fair value of options granted
during the years ended December 31, 1996 and 1995 was $1.30 and
$2.98, respectively.

      The following table summarizes information about employee
stock options outstanding and exercisable at December 31, 1996:
<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           389,676     5 years     $ .01       70,125      $ .01
  $1.88-$3.63     371,784     9           $2.25       10,000      $1.88
  $5.00-$5.875    117,032     8           $5.05       64,917      $5.09
                  ---------                           ---------
                  878,492                             145,042
                  =========                           =========
</TABLE>

      Additionally, the Company has a director stock option plan
under which options covering shares of Common Stock may be granted
to directors of the Company. In January 1997, the stockholders
approved an increase in the number of authorized shares of Common
Stock available under the plan from 50,000 to 150,000.  During
1996, 122,500 options were granted to directors of the Company to
purchase an equal number of common shares pursuant to this plan at
option prices ranging from $1.875 to $3.38.  All such options
remain outstanding as of December 31, 1996.

      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 30% of their gross wages, not to
exceed in any given year a limitation set by Internal Revenue
Service regulations (such limitation was $9,500 in 1996).  The plan
provides for discretionary matching contributions, as determined by
the Board of Directors, to be made by the Company.  There have been
no discretionary amounts contributed to the plan as of December 31,
1996.

<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 $43.9 million for
federal income tax purposes.  These carryforwards are available to
offset future taxable income and begin to expire in the years 2008
and 1998 for federal and state income tax purposes, respectively. 
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, 1996 and 1995 of $21.1 million
and $17.5 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, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                1996              1995  
                                                ----              ----
      <S>                                       <C>               <C>
      Net operating loss carryforwards          $18,256,000       $14,568,000
      Stock option compensation                   2,566,000         2,904,000
      Other                                         293,000            54,000
                                                -----------       -----------
      Total deferred tax benefit                 21,115,000        17,526,000
      Valuation allowance                       (21,115,000)      (17,526,000)
                                                ------------      ------------
            Net noncurrent deferred tax asset   $   --            $   --      
                                                ============      ============
</TABLE>


      In 1996, 1995 and 1994 a statutory Federal income tax rate of
34% and a state income tax rate of 7.6%, net of the Federal tax
benefit, was applicable to the Company.  Due to the Company's
taxable losses the effective tax rate was nil in each year.

      The financial statement income tax provision 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, 1996, 1995 and 1994 as a result of the following:

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

<TABLE>
<CAPTION>
                                          1996        1995        1994
                                          ----        ----        ----
<S>                                       <C>         <C>         <C>

Tax benefit at Federal statutory rate     $3,200,000  $3,695,000  $3,835,000  
State income tax benefit, net of
 Federal tax charge                          714,000     825,000     856,000
Net loss not providing current
 year tax benefit                         (3,608,000) (4,428,000) (4,358,000)
Other                                       (306,000)    (92,000)   (333,000)
                                          ----------- ----------- -----------
 Provision for income taxes               $    --     $    --     $    --    
                                          =========== =========== ===========
</TABLE>    

Note 12 - Subsequent Events: 

      Sale of Senior Discount Notes and Warrants

      On January 24, 1997, the Company completed the sale, in a
private offering, of 147,312 Units ("Units") consisting of
$147,312,000 principal amount at maturity of 13-1/4% Senior
Discount Notes due February 1, 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 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.            

      Increase in Authorized Shares of Common Stock

      On January 13, 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.
<PAGE>
<PAGE>
                               INDEX TO EXHIBITS                              

Exhibit                                                           
Number                    Document Description
-------                   --------------------
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).
 
3.2      -    By-laws of the Company (Incorporated
               by reference to Exhibit 3.2 to the
               Registration Statement on Form S-4
               No. 333-21893).
                        
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' Agree-
               ment 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).

10.4     -    Form of Reorganization Agreement
               dated March 12, 1993 among the
               Company, the Partnership, the 
               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).

<PAGE>
<PAGE>
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     -    Subscription Agreements, each dated 
               as of July 24, 1995, between the
               Company and, respectively, Donald E.
               Zilkha, Bruce F. Failing, Jr., Hanseatic
               Corporation and Garfinkle Limited Partner-
               ship II (Incorporated by reference to
               Exhibit 5(c) of the Current Report on
               Form 8-K dated July 24, 1995).

10.7     -    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).

10.8     -    Lease dated as of June 8, 1992 be-
               tween the Company (as assignee) and 
               Wilton Office Associates Limited
               Partnership (Incorporated by reference
               to Exhibit 10.9 to the Registration
               Statement on Form S-1 No. 33-59486).
  
10.9     -    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).

10.10    -    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).

10.11    -    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).<PAGE>
<PAGE>
10.12    -    7.4% Convertible Note dated August
               12, 1994 executed by 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).

10.13    -    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).

10.14    -    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).

10.15    -    Revolving Credit Loan Agreement dated
               as of March 30, 1995 between the Company
               and the lenders named in Annex 1 (Incor-
               porated by reference to Exhibit 10.15 
               to the Annual Report on Form 10-K for 
               the year ended December 31, 1994).

10.16    -    Placing Agreement dated July 5, 1996
               between the Company and Henderson 
               Crosthwaite Institutional Brokers
               Limited (Incorporated by reference
               to Exhibit 5(c) to the Company's
               Current Report on Form 8-K dated
               July 11, 1996).

10.17    -    Agreement with respect to U.S. Sec-
               urities 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).

<PAGE>
<PAGE>
10.18    -    Forms of Subscription Agreement accep-
               ted July 5, 1996 by the Company (Incor-
               porated by reference to Exhibit 5(f) 
               to the Company's Current Report on 
               Form 8-K dated July 11, 1996.

10.19    -    Registration Rights Agreement dated 
               July 11, 1996 between the Company and
               the subscribers parties thereto (Inc-
               orporated by reference to Exhibit 5(g) 
               to the Company's Current Report on 
               Form 8-K dated July 11, 1996.

10.20    -    Purchase Agreement dated as of January
               20, 1997 between the Company and 
               Credit Suisse First Boston Corporation
               and UBS Securities LLC (Incorporated by
               reference to Exhibit 1.1 to the  Regis-
               tration Statement on Form S-4 No. 
               333-21893).

10.21    -    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).

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

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

10.24    -    Promissory Note dated October 7, 1992 
               of Paul M. Patrick in the principal 
               amount of $35,000 in favor of the Company
               (Incorporated by reference to Exhibit 
               10.12 to the Registration Statement 
               on Form S-1 No. 33-59486).

<PAGE>
<PAGE>
10.25    -   Form of the Company's 1993 Employee
               Stock Option Plan (Incorporated by
               reference to Exhibit 10.22 to the
               Registration Statement on Form S-4 
               No. 333-21893). 
   
10.26    -    Form of the Company's 1993 Director
               Stock Option Plan (Incorporated by
               reference to Exhibit 10.23 to the
               Registration Statement on Form S-4
               No. 333-21893).

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       -    Consent of Price Waterhouse LLP.

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

27       -    Financial Data Schedule.