SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
For the fiscal year ended December 31, 1999
                                       OR
| | TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d) OF  THE  SECURITIES
    EXCHANGE ACT OF 1934
For the transition period from            to
                               ----------    ----------

                         Commission file number 0-21600

                                   ECCS, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

          New Jersey                                     22-2288911
---------------------------------         --------------------------------------
(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
Incorporation or Organization)

One Sheila Drive, Tinton Falls, New Jersey                          07724
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(Address of Principal Executive Offices)                          (Zip Code)

                                 (732) 747-6995
                             ----------------------
                             (Registrant's telephone
                          number, including area code)

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

    Title of each class             Name of Each Exchange on Which Registered
    -------------------             -----------------------------------------

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

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

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

                          Common Stock, $0.01 par value
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)



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     Indicate by check mark  whether the  Registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                   Yes: X                              No:
                       ---                                ---


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


     State the aggregate market value of the voting stock held by non-affiliates
of the  Registrant:  $166,349,750  at February  29, 2000 based on the last sales
price on that date.


         Indicate the number of shares  outstanding of each of the  Registrant's
classes of common stock, as of February 29, 2000:

Class                                                           Number of Shares
-----                                                           ----------------

Common Stock, $.01 par value                                       11,349,868


     The  following  documents  are  incorporated  by reference  into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.



<PAGE>

                                TABLE OF CONTENTS
                                -----------------
          Item                                                              Page
          ----                                                              ----

PART I    1.   Business...................................................     2

          2.   Properties.................................................    20

          3.   Legal Proceedings..........................................    20

          4.   Submission of Matters to a Vote of Security Holders........    21

PART II   5.   Market For the Company's Common Equity and Related
               Shareholder Matters........................................    22

          6.   Selected Consolidated Financial Data.......................    23

          7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations........................    24

          7A.  Quantitative and Qualitative Disclosures About Market Risk.    32

          8.   Financial Statements and Supplementary Data................    32

          9.   Changes in and Disagreements With Accountants on
               Accounting and Financial Disclosure........................    32

PART III  10.  Directors and Executive Officers of the Company............    33

          11.  Executive Compensation.....................................    33

          12.  Security Ownership of Certain Beneficial Owners
               and Management.............................................    33

          13.  Certain Relationships and Related Transactions.............    33

PART IV   14.  Exhibits, Financial Statement Schedules,
               and Reports on Form 8-K....................................    33

SIGNATURES................................................................    35

EXHIBIT INDEX.............................................................    37

FINANCIAL STATEMENTS......................................................   F-1


<PAGE>

                           FORWARD LOOKING STATEMENTS

     The  statements  contained in this Annual  Report on Form 10-K that are not
historical facts are forward-looking  statements (as such term is defined in the
Private  Securities   Litigation  Reform  Act  of  1995).  Such  forward-looking
statements may be identified by, among other things,  the use of forward-looking
terminology   such  as  "believes,"   "expects,"   "may,"  "will,"  "should"  or
"anticipates" or the negative thereof or other variations  thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These  forward-looking  statements,  such as  statements  regarding  anticipated
future revenues, capital expenditures, research and development expenditures and
other  statements  regarding  matters  that are not  historical  facts,  involve
predictions.  ECCS,  Inc.'s  ("ECCS," the  "Company"  or "We")  actual  results,
performance or achievements  could differ  materially from the results expressed
in, or implied by,  these  forward-looking  statements  contained in this Annual
Report on Form 10-K.  Factors that could cause actual  results,  performance  or
achievements  to vary  materially  include,  but are not limited  to:  component
quality and availability,  changes in business conditions,  Year 2000 compliance
of the  Company's  and other  vendors'  products and related  issues,  including
impact of the Year 2000 problem on customer  buying  patterns,  changes in ECCS'
sales  strategy and product  development  plans,  changes in the data storage or
network  marketplace,  competition  between ECCS and other companies that may be
entering the data storage  host/network  attached markets,  competitive  pricing
pressures, continued market acceptance of ECCS' open systems products, delays in
the development of new technology and changes in customer buying patterns.


                                     PART I

ITEM 1.   BUSINESS.

GENERAL

     We design, manufacture,  sell and support fault tolerant enterprise storage
solutions that protect and ensure access to an organization's critical data. Our
products include high performance  storage  subsystems that meet a wide range of
customer  applications  for Open  Systems-based  networks,  such as NT, UNIX and
Linux operating  systems.  Our enterprise  storage  solutions  address all three
storage  markets:  DAS, in which the storage  device is connected  directly to a
server; NAS, in which the storage device is installed on a network;  and SAN, in
which the storage device is used in a specialized  network.  These  connectivity
options  provide storage users the flexibility to choose and deploy a particular
storage  solution to meet their needs. As data  requirements  change,  we enable
customers  to  migrate  their   existing   storage   investments   to  different
connectivity options. We provide our customers fault tolerant, modular, scalable
and  reconfigurable  products  to manage and meet their  changing  business  and
computing  needs.  We believe our products reduce the total cost of ownership of
data storage by allowing end users to use the products across various  operating
systems.

     In 1996, as a result of an extensive  product  development  initiative,  we
repositioned ourselves from a reseller of third party products to a developer of
fault tolerant enterprise storage solutions.  A number of products resulted from
these product development efforts, including our

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<PAGE>

Synchronix and Synchronection  product lines.  During 1998, we shifted our sales
and  marketing  focus to the  development  of our direct sales  channel from our
previous use of alternate channel partners.  Our direct sales force concentrates
on sales to e-commerce and other  commercial  end users.  Our direct sales force
also recruits VARs and assists them in their sales to commercial end users.

     In January  2000,  we  introduced  Synchronix  SAN, an  enterprise  storage
solution  for the SAN  architecture.  This new product  combines  Fibre  Channel
switched fabric and SAN management with the fault tolerant features found in our
Synchronix  storage engine.  We believe that companies'  growing storage demands
will lead them  increasingly to consider SAN products.  At present,  a number of
our existing customers have taken or are taking delivery of Synchronix SAN on an
evaluation  basis  since  its  introduction.  In  addition  to  providing  fault
tolerance and  increased  performance,  Synchronix  SAN allows our customers the
ability to migrate to our software-based solution as it becomes available.

     We are presently undertaking a software development effort to create a file
aware storage architecture for our future products.  File aware storage products
possess  embedded  intelligence  that obviates the need for a server  which,  in
turn,  provides for increased  performance and lower costs.  Our  software-based
implementation  of a file aware storage  architecture  will also incorporate our
fault tolerance expertise, allow users to integrate our products with those from
other  vendors and provide for the  migration of our storage to DAS, NAS and SAN
architectures  as a customer  requires.  We believe our  planned  software-based
offering provides many features and capabilities not currently  available in the
storage  marketplace.  We are  currently  in the  process of  preparing  several
separate  patent  applications  relating  to this  software-based  offering.  We
believe  our  software-based  offering  will appeal to both large data users and
alternative  channel  partners,  including  OEMs,  as the  significant  software
component of our future  products will allow them to be easily  integrated  into
other storage solutions.

INDUSTRY BACKGROUND

     In recent years there has been a significant increase in the volume of data
created,  processed,  stored and accessed throughout an enterprise. As a result,
the  demand  for  sophisticated  storage  systems  to house  this data has grown
dramatically.  International  Data  Corporation  estimates  that  the  worldwide
storage system marketplace will exceed $46 billion in 2003. This growth has been
fueled by the rapid  expansion of the  Internet,  measured both by the number of
users as well as the number of web-based  e-commerce  and corporate  initiatives
which require continuous access to critical business information 24 hours a day,
seven days a week.  Also  contributing  to this growth has been the emergence of
data-intensive  applications,   such  as  online  transaction  processing,  data
warehousing,  data  mining  and  enterprise  resource  planning,  and the use of
multimedia-based  information.  This  demand is  compounded  when  organizations
create redundant sources of data to enable continuous error-free access to data.
As a result,  the need for high-capacity,  high-performance  storage devices and
systems  is  dramatically  increasing.  The  growth  in  stored  data  has  been
facilitated by the continued decline in the cost per unit of storage capacity.

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<PAGE>

     Data has also become  increasingly  important as a critical business asset.
In addition to being relied upon by an organization's employees,  corporate data
is also being directly accessed by customers and suppliers. As a result, storage
systems  and  servers   must  handle   greater   volumes  of  input  and  output
transactions, or I/Os, and provide continuous availability of data. Data must be
continuously available as the cost of down-time or sub-optimal performance could
adversely affect a business'  competitive  advantage.  These  requirements  have
placed significant stress on currently installed storage products, many of which
were not designed to handle large volumes of dispersed data.

     In addition, the increased use of Open Systems computing environments, such
as NT, UNIX and Linux,  creates the need for  flexible  and  comprehensive  data
storage solutions capable of serving multiple computer  platforms.  Open Systems
architecture  permits  organizations to utilize  hardware and software  products
from various  suppliers in order to process,  share,  manage and protect mission
critical   information   throughout   an   enterprise.   Whereas   organizations
historically  purchased  their storage from the same vendor that provided  their
server technology,  storage purchases are increasingly being made independent of
server purchase decisions.

     As the number, importance and complexity of storage systems have increased,
the  management  of the  data-intensive  network  environment  has  become  more
difficult.  While data  administration  is a key requirement for  organizations,
their budgetary constraints often require that this increasingly complex task be
accomplished cost-effectively, without increased staffing.

     To address  the  evolving  storage  requirements  of  organizations,  three
storage  architectures  have  emerged.  DAS has  been the  storage  architecture
traditionally  employed and has  historically  represented  the vast majority of
storage  purchases.  NAS and SAN are  more  recent  innovations  in the  storage
marketplace and are expected to represent over 37% of worldwide  storage systems
sales by 2003, representing a compound annual growth rate in excess of 66%.

     o    DAS -  Storage  devices  that  are  directly  attached  to  the   host
          computer.  These storage devices are dedicated to and accessed through
          the host computer;

     o    NAS - Storage devices  that  are  connected to  a local or  wide  area
          network.  NAS devices  incorporate their own processing power in order
          to store and retrieve  data.  NAS storage  devices allow more than one
          host server and users of different  operating  systems to access data;
          and

     o    SAN -  Storage  devices   that  are   connected  to   an   additional,
          specialized,  high speed network,  dedicated to providing I/O. The use
          of a SAN  offloads a  significant  amount of data traffic and overhead
          from the local or wide area  network,  resulting  in improved  overall
          network performance. SAN storage devices enable users on one operating
          system to access data stored on a different type of operating  system.
          We  believe   that  Fibre   Channel   technology   is  the   preferred
          implementation technology for SAN storage.


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<PAGE>

THE ECCS APPROACH

     We believe that our enterprise  storage  solutions  appeal to the market by
providing an enhanced  combination of performance and features,  which we expect
to deliver increasingly through software-based product offerings.  The following
are the key attributes of our approach:

     o    RANGE  OF  MIGRATABLE  SOLUTIONS.  We  offer a range  of  products  to
          operate in DAS, NAS and SAN environments which allows our customers to
          utilize the storage  architecture that best suits their  requirements.
          As the data  storage  needs of our  customers  expand and evolve,  our
          comprehensive  solutions can be  redeployed  from one  environment  to
          another, thereby protecting a customer's storage investment.

     o    SCALABILITY.   Our  products   provide   maximum  scalability   as   a
          customer's  needs change by using a modular  approach in designing and
          configuring  our storage  solutions.  Customers  can purchase from 100
          gigabytes to multiple terabytes,  adding storage capacity as required.
          This scalability  allows us to provide  solutions for a broad range of
          storage  requirements,  from low  capacity  users  to  enterprise-wide
          environments.

     o    COMPETITIVE PRICING.  Our  products generally  provide end  users with
          the same  features  as  similar  solutions,  but at a lower  cost.  In
          addition,   our  modular  product   approach  offers   customers  more
          attractive initial entry costs.

     o    ENHANCED DATA AVAILABILITY. Our  products  enhance  data  availability
          by offering  array-based  failover,  fault  tolerance,  multiple  host
          connectivity  across various Open Systems platforms,  on-line firmware
          upgrades,  on-line  systems  maintenance and  hot-swappable  component
          replacement.

     o    HIGH LEVEL OF I/O  PERFORMANCE.  Our  products provide  a  high  level
          of I/O  performance  by using (i) multiple  RAID  (redundant  array of
          independent   disks   levels)   that   possess   varying   performance
          characteristics,  (ii) larger  cache sizes to improve  speed and (iii)
          solid  state  disks  for  dedicated  memory  for  frequently  accessed
          information.

     o    ENHANCED  DATA ADMINISTRATION CAPABILITIES. Our  products  utilize  an
          intuitive,  customizable  GUI (graphical user interface)  which allows
          for the remote  monitoring  and management of virtually all functions,
          including system  configuration,  cache policies and data rebuild upon
          system  failure.  These  features  allow for the management of data by
          both  sophisticated  and  unsophisticated  users.  Our  products  also
          provide  automatic  notification  of system  errors via a "call  home"
          feature that automatically  notifies our customer service personnel by
          e-mail and paging.

STRATEGY

     Our  objective  is to further  establish  and  solidify our position in the
rapidly growing Open Systems storage market.  Our strategic focus centers around
serving users whose

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<PAGE>

mission  critical  applications  require high  performance and high  reliability
storage  products.  We intend to establish ECCS as the data storage  solution of
choice for  companies  with growing and  increasingly  complex  data needs.  Our
strategy incorporates the following key elements:

     o    EXPAND  OUR  DIRECT  SALES  CHANNEL.  To better address e-commerce and
          other commercial  customers and Federal  markets,  we intend to expand
          our direct sales channel.  Our direct sales force also assists VARs in
          their sales  efforts  with  commercial  customers.  We believe  that a
          larger  direct  sales  force will  enable us to better  penetrate  and
          retain customer  accounts,  identify current and future end user needs
          and enhance opportunities for follow-on sales.

     o    TARGET  COMMERCIAL CUSTOMERS  WITH GROWING  STORAGE  REQUIREMENTS.  We
          intend to concentrate  our sales efforts on commercial  customers with
          data  intensive  applications  and data rich  computing  environments.
          Within  the  commercial  end user  market,  we will  target  companies
          conducting e-commerce.

     o    DEVELOP   SOFTWARE-BASED   ENTERPRISE   STORAGE  SOLUTIONS.   We   are
          continuing our efforts to develop software-based  products. We believe
          our  software-based  solutions  will be attractive to large data users
          because these  solutions  will occupy a smaller  physical  space while
          providing  greater  performance  and new  features  to the  end  user.
          Software-based products enable users to migrate more easily among DAS,
          NAS and SAN storage  architectures.  We further believe these products
          will be attractive to large  alternate  channel  partners  because the
          significant  software  component of these  products  makes them easily
          integrated into other storage solutions.

     o    EXPAND   OUR   TECHNOLOGICAL   EDGE.   We  believe   that  we  possess
          substantial  technical  expertise  gained  through  years of  internal
          research and  development,  particularly in the area of fault tolerant
          enterprise  storage  solutions.  We hold  several  patents on our RAID
          controller  and  intend to file  patent  applications  related  to new
          software-based,  fault  tolerant SAN  products.  We further  intend to
          improve  upon our  current  product  offerings  as well as  develop or
          obtain new products for data storage.

     o    REDUCE  TOTAL COST OF  OWNERSHIP.  We  believe  we  deliver  solutions
          that reduce the total cost of  ownership  of data  storage.  Such cost
          includes the purchase price and maintenance and management  costs over
          one  year.  Our  competitively  priced,  high  performance  enterprise
          storage solutions are scalable and migratable across various operating
          systems.  A customer  can further  protect its storage  investment  by
          redeploying our solutions to and from NAS, DAS and SAN environments.

PRODUCTS AND TECHNOLOGY

     Our core technology  provides  data-intensive  environments with protection
against the loss of critical data and provides the  performance  and reliability
characteristics  of more expensive  solutions at a more  competitive  price. Our
products offer users:

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<PAGE>

     o    the  ability to deploy in major  Open Systems-based networks,  such as
          NT, UNIX and Linux;

     o    scalable storage capacity;

     o    fault tolerance;

     o    fast data transfer rates; and

     o    ease of storage system management.

     Our families of products include the following:

SYNCHRONIX  is our DAS  product  offering.  The  major  features  of  Synchronix
include:

     o    support for multiple levels of RAID;

     o    scalable to multiple terabytes;

     o    array-based  failover which allows failover  without disruption of the
          host server;

     o    fault  tolerance  due  to  fully redundant  and hot  swappable  active
          components;

     o    active/active   controllers  processing   data  simultaneously   which
          enhances performance and protects against system failure;

     o    graphical  user interface  that provides  access to  all  operational,
          maintenance and monitoring functions; and

     o    "call home"  feature that automatically notifies  our customer service
          personnel of any system failure or problem.

SYNCHRONIX SAN  is our new fault  tolerant SAN solution.  This product  combines
Fibre  Channel  switched  fabric  and SAN  management  with the  fault  tolerant
features found in our Synchronix  storage engine. In addition to providing fault
tolerance and  increased  performance,  Synchronix  SAN allows our customers the
ability to migrate to our software-based solution as it becomes available.  This
turnkey product includes the following features:

     o    fibre  heterogeneous  file  sharing   which   allows  a  user  on  one
          operating  system  to  access  data  stored  on  a  different  type of
          operating system;

     o    support for industry standards, including switched fabric support; and

     o    fully   integrated  switches,  hubs,  host  bus  adapters,    storage,
          management tools and software provided by us and third parties.

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<PAGE>

SYNCHRONECTION  is our NAS product  offering.  Synchronection  incorporates  the
features of  Synchronix  with over six times the storage  capacity and redundant
file  servers.  Rather than  limiting  access to a user of a specific  operating
system, Synchronection allows access by users of multiple operating systems.

RAVEN  UX 410 is a  powerful,  flexible,  all-in-one  server  for  departmental,
Internet and Intranet  requirements.  The Raven product is sold primarily to the
U.S. Air Force.  The Raven UX 410 offers high  performance and a scalable server
which provides for continuous availability with integrated RAID protection.

FIBREPACC (Performance,  Availability, Capacity and Connectivity) is a scalable,
high-performance,  continuously  available Fibre Channel storage solution.  Each
FibrePACC  houses up to ten Fibre  Channel  disk  drives in varying  capacities.
FibrePACC  is  available  with online disk and  storage  management  software to
configure storage.

PRODUCTS UNDER DEVELOPMENT.  We are presently undertaking a software development
effort to create a file aware storage architecture for our future products. File
aware storage products possess embedded  intelligence that obviates the need for
a server which, in turn, provides for increased performance and lower costs. Our
software-based  implementation  of a file aware storage  architecture  will also
incorporate our fault tolerance expertise, allow users to integrate our products
with those from other  vendors and provide for the  migration  of our storage to
DAS, NAS and SAN  architectures as a customer  requires.  We believe our planned
software-based  offering  provides many features and  capabilities not currently
available in the storage marketplace.

SALES AND MARKETING

     We market our products directly to e-commerce, other commercial and Federal
end users and indirectly through our alternate channel partners,  including OEMs
and national resellers.

     DIRECT  SALES.  Our  direct  sales  efforts  focus  on  e-commerce,   other
commercial  and Federal end user  accounts,  as well as assisting  VARs in their
sales to these end  users.  Our  direct  sales team  consists  of 24 people.  We
conduct sales and marketing  from our corporate  headquarters  in New Jersey and
from  our  offices  in  Alpharetta,   Georgia;  Herndon,   Virginia;  San  Jose,
California;  and Los  Angeles,  California.  We believe  that direct sales has a
number of advantages, including:

     o    better customer account penetration, loyalty and diversity;

     o    opportunities for follow-on sales to our existing customer base;

     o    opportunities for increased customer referrals; and

     o    more   accurate  identification  of   current  and  future  end   user
          customer  requirements  with which to guide product  specification and
          development efforts.

     We plan to  concentrate  our sales efforts on customers with data intensive
computing environments such as companies conducting e-commerce.

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<PAGE>

     INDIRECT SALES THROUGH ALTERNATE  CHANNEL  PARTNERS.  Our alternate channel
effort is divided  into two broad  groups  through  which we market our products
and/or services:

     o    National  Resellers  -  We   are  in   the  process   of   identifying
          resellers that will be able to take  advantage of our products  and/or
          offer additional services to end users. National resellers allow us to
          market our products on a broader basis.

     o    OEMs - OEMs  are  companies  that  integrate our  products into  their
          solutions under their label with typically large volume commitments.

We believe that  several of our products  under  development  could  attract the
interest of OEMs because the  significant  software  component of these products
makes them easily integrated into other storage solutions.  We believe that OEMs
can provide us with high visibility, significant marketing opportunities and the
ability to leverage a large sales force.

CUSTOMER SUPPORT AND SERVICE

     We provide 24 x 7 technical  support  services  to end users and  alternate
channel  partners.  Our technical support  specialists  provide three "tiers" or
"levels"  of  support,  and are able not only to  diagnose  and solve  technical
problems,  but  also to  assist  customers  with  systems  integration  and use.
Customers  have  toll-free  telephone  access   (1-800-2-GET-HLP)  to  technical
specialists who respond to hardware,  software and  applications  questions.  We
track service reports through a customer database which maintains current status
reports as well as  historical  logs of  customer  interaction.  The "call home"
feature of our Synchronix family of products automatically notifies our customer
service personnel of any system failure or problem. We provide technical support
under annual  maintenance  contracts  which are offered to all of our customers.
Technical  support includes problem  identification,  work-around  solutions and
engineering services.

     We further  differentiate  our company by maintaining ISO 9001 registration
for our  principal  facility.  We  utilize  ISO 9001  standards  throughout  our
organization  to  consistently   maintain  high  quality  design,   development,
integration and manufacturing,  installation and service processes. Our emphasis
on providing  high quality  customer  services  enhances our sales and marketing
efforts and supplier relationships.

COMPETITION

     We are  engaged in fields  within  the data  processing  industry  that are
characterized by a high level of competition. Competitive factors include:

     o    relative price/performance;

     o    product features, quality and reliability;

     o    speed to market;

     o    adherence to industry standards;

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<PAGE>

     o    financial strength; and

     o    service, support and reputation.

     Many of our competitors have financial,  technical,  manufacturing,  sales,
marketing and other resources which are  substantially  greater than our own. We
cannot be certain that we will be able to continue to compete  successfully with
existing or new competitors.  Recent  acquisitions of several of our competitors
by large  companies,  consolidation  of smaller  market  participants  and other
market activities have increased the competition in our marketplace.

     In  addition,  we compete  with a broad range of  businesses  with  varying
degrees of experience, resources and development, including established computer
manufacturers,  systems  integrators  and  manufacturers  of enterprise  storage
products and networking products.  We compete with different companies depending
on the specific  application or market. With respect to DAS products,  EMC Corp.
and LSI Logic are significant  competitors,  as are large server vendors such as
Compaq and Sun  Microsystems.  In the NAS  market,  our  primary  competitor  is
Network  Appliance  Inc. As we introduce  our fault  tolerant SAN  products,  we
expect to compete  with a number of  existing  and new  competitors  introducing
products in this emerging market.

     Competitive  pricing  pressures exist in the data storage market and may in
the  future  have an  adverse  effect  on our  revenues  and  earnings.  Certain
competitors  have reduced  prices in order to preserve or gain market share.  If
our  competitors  continue  to make price  cuts,  our  financial  results may be
adversely affected. We believe that pricing pressures are likely to continue.

CUSTOMERS

     We sell to a broad range of  customers in various  industries.  In the last
year, our sales to e-commerce companies have increased  significantly.  In 1999,
we had net sales of approximately $4,444 to e-commerce customers, accounting for
approximately  11.2% of  total  net  sales.  In 1998,  we had  minimal  sales to
e-commerce  customers.  We anticipate  that sales to e-commerce  customers  will
continue to grow rapidly as the data storage needs of these companies expand and
we develop our direct sales channel to target this market.

MANUFACTURING AND SUPPLIERS

     We rely on outside  manufacturers to produce some of our products.  We also
rely on outside suppliers to supply subassemblies,  component parts and computer
systems for resale.  Our  in-house  manufacturing  consists  primarily  of light
assembly, systems integration, testing and quality assurance.

     Unisys,  formerly  our  primary  outside  manufacturer  for our  Synchronix
system, closed its Winnipeg computer storage systems manufacturing plant in July
1999 and terminated its manufacturing service agreement with us. We manufactured
such  systems  in-house  from August to December  1999.  In September  1999,  we
entered into a Master Sale Agreement with Hitachi Computer  Products  (America),
Inc.  Pursuant to such  agreement,  Hitachi began  manufacturing  certain of our
products  in  January  2000 for use in our  fault  tolerant  enterprise  storage
solutions.

                                       10
<PAGE>

The agreement does not contain specific  quantity  commitments and purchases are
made on a purchase  order basis.  The  agreement  does not include any long-term
commitment by either party.

     Certain  components  used in our products are available only from a limited
number of sources.  Any delays in  obtaining  such  components  could  adversely
affect our results of  operations.  We cannot be certain that material  problems
will not arise in the future  with our  outside  manufacturers  or vendors  that
could significantly impede or interrupt our business.  We cannot be certain that
our relationships with our outside  manufacturers and suppliers will continue or
that we would be able to obtain alternative sources of supply without a material
disruption  in  our  ability  to  provide  products  to  our  customers  if  our
relationships   with  our  existing  outside   manufacturers  or  suppliers  are
terminated.

     We rely on certain  distributors to supply us with component  products from
Sun  Microsystems  and Seagate  Technologies.  Although  we believe  alternative
distributors  of these products are available,  we cannot be certain that we can
obtain them on a timely and  cost-effective  basis. Our primary vendor for these
third party  products is Bell  Microproducts.  During 1999,  purchases from Bell
totaled  $10,776,  or 43.5%, of our total purchases.  We purchase  products from
Bell on a purchase order basis. There are no minimum purchase requirements. This
arrangement is terminable by either party at any time.

     In February 1999, we received ISO 9001  certification.  This  certification
reflects uniform,  industry-wide  standards of quality control for manufacturing
data-storage  products.  We cannot be certain that we will  continue to meet the
industry-accepted standards necessary to maintain ISO 9001 certification.

RESEARCH AND DEVELOPMENT

     We  participate  in an  industry  that is  subject  to rapid  technological
change,  and our ability to remain  competitive  depends on, among other things,
our ability to  maintain a  technological  edge.  As a result,  we have  devoted
substantial  resources to product  development.  Our  research  and  development
expenditures  were $2,662 in 1999, of which $723 were  capitalized in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.

     Our  research and  development  expenditures  are related to the  following
projects:

     o    improvements   to  the  Synchronix  and   Synchronection  families  of
          products;

     o    the  development of  a software-based fault  tolerant distributed file
          system storage architecture; and

     o    new interface connectivities.

                                       11
<PAGE>

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     Proprietary protection for our technological know-how, products and product
candidates is important to our business.  We rely upon patents,  trade  secrets,
know-how and  continuing  technological  innovation  to develop and maintain our
competitive  position.  We also rely on a  combination  of  copyright  and trade
secret  protection  and  non-disclosure  agreements to establish and protect our
proprietary rights. We have filed numerous patent applications  covering various
aspects  of  our  Synchronix  product  family  and  intend  to  file  additional
applications for products under  development.  We cannot be certain that patents
will  issue  from any  applications  or, if  patents  do issue,  that any claims
allowed will be  sufficiently  broad to prohibit  others from marketing  similar
products.  In addition, we cannot be certain that any patents that may be issued
to us, or which we may  license  from  third  parties,  will not be  challenged,
invalidated or circumvented,  or that any rights granted thereunder will provide
proprietary  protection.  Although we continue to implement  protective measures
and intend to defend our proprietary  rights,  policing  unauthorized use of our
technology or products is difficult and we cannot be certain that these measures
will be successful.

     Although  management  believes  that patents will provide some  competitive
advantage,  our  success  is  dependent  to a great  extent  on our  proprietary
knowledge, innovative skills, technical expertise and marketing ability. Because
of rapidly changing  technology,  our present intention is not to rely primarily
on patents or other  intellectual  property  rights to protect or establish  our
market position.

     We have  registered  trademarks  for  ECCS,  RAID 10  PERFORMANCE  MANAGER,
INTELLIGENT REBUILD,  SPLIT MIRROR,  EXAMODULE,  SYNCHRONIX,  INVERSE MIRRORING,
SYNCHRONECTION and SPLIT VOLUME. We have applied for trademark  registration for
SYNCHRONISM,  EASY BACKUP, SANSTAR, NAS-STAR, NAS-CIFS and NAS-WEB. We cannot be
certain that trademarks will be issued for such applications.

     We  require  all  employees,   consultants   and   contractors  to  execute
non-disclosure  agreements  as a condition of employment or engagement by us. We
cannot  be  certain,  however,  that  we  can  limit  unauthorized  or  wrongful
disclosures of unpatented trade secret information.

EMPLOYEES

     As of March 15, 2000,  we employed 115 persons,  of whom 29 were engaged in
marketing  and sales;  34 in  engineering  and research and  development;  24 in
operations,   including  customer  and  technical  support,   manufacturing  and
fulfillment; 10 in Professional Services; and 18 in finance,  administration and
management.   None  of  our  employees  is  covered  by  collective   bargaining
agreements.  We believe that we have been  successful in attracting  skilled and
experienced personnel;  however,  competition for such personnel is intense. Our
future success will depend in part on our ability to continue to attract, retain
and motivate highly qualified technical, manufacturing, marketing and management
personnel. We consider relations with our employees to be good.

                                       12
<PAGE>

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

WE RELY SUBSTANTIALLY ON KEY CUSTOMERS.

     Our  customer  base is highly  concentrated.  Our top 10 customers in 1997,
1998 and 1999 accounted for, in the aggregate,  approximately  84.7%,  85.6% and
82.6%, respectively, of net sales in those periods. Sales to the U.S. Air Force,
through Federal  integrators,  accounted for 44.0%, 33.7% and 58.4% of net sales
in  1997,  1998 and  1999,  respectively.  Federal  integrators  are  government
contractors  who sell directly to U.S.  government  entities.  We believe that a
substantial  portion  of our net sales and gross  profits  will  continue  to be
derived from sales to a concentrated group of customers.  However, the volume of
sales to a specific  customer  is likely to vary from  period to  period,  and a
significant customer in one period may not purchase our products in a subsequent
period.  In general,  there are no ongoing  written  commitments by customers to
purchase our products. All our product sales are made on a purchase order basis.
Our net sales in any period  generally  have been and likely will continue to be
in the near term, derived from a relatively small number of sales  transactions.
Therefore,  the loss of one or more major customers could  materially  adversely
affect our results of operations.

THE FEDERAL GOVERNMENT'S INVESTIGATION  INTO FEDERAL GOVERNMENT PURCHASING COULD
AFFECT OUR SALES TO THE U.S. AIR FORCE.

     In late  January  2000,  we  received  a subpoena  from the  United  States
Attorney's  Office in Boston,  Massachusetts  for the production of documents in
connection with an investigation  into Federal  government  purchasing.  We have
been and intend to continue cooperating with the investigation and are complying
fully,  and intend to  continue  to comply  fully,  with the  subpoena.  We sell
computer  products  to  companies  which are used by the Federal  government  to
supply computer products to the U.S. Air Force. In addition, a subpoena has been
received by an officer of ours who is expected to testify before the grand jury.
Such testimony has not yet been provided. Although the investigation is still in
its  early  stages,   it  appears  that  one  avenue  of  inquiry  involves  the
relationships and transactions of various  suppliers,  manufacturers  (including
us),  and  other   companies,   with   companies   that   provide   product  and
product-related  services  to  the  U.S.  Air  Force.  We  understand  that  the
government's  inquiry  includes a review of the  conduct of such  companies  and
their officers and  employees.  We believe that we have not violated any federal
laws in connection with our sale of computer products ultimately received by the
U.S.  Air  Force.In  1999,  net  sales to the U.S.  Air  Force  through  Federal
integrators  accounted for 58.4% of our net sales. We cannot be certain that our
sales to the U.S. Air Force through  Federal  integrators  will not be adversely
affected by such investigation.

WE HAVE EXPERIENCED  SUBSTANTIAL  VARIABILITY OF OUR QUARTERLY OPERATING RESULTS
WHICH WE EXPECT WILL CONTINUE.

     Our  quarterly  operating  results have  fluctuated,  and will  continue to
fluctuate,  significantly  from period to period  depending upon factors such as
the  success  of our  efforts to expand our  customer  base,  changes in and the
timing of  expenditures  relating  to the  continued  development  of  products,
changes in pricing  policies  by us and by our  competitors  and  certain  other
factors.  As a result, it is possible that in some future quarters our operating
results may be below the expectations of investors and securities  analysts.  If
this happens,  the trading price of our common stock could  decline.  Due to the
relatively fixed nature of certain of our costs, a

                                       13
<PAGE>

decline  in  net  sales  in  any  fiscal  quarter  typically  results  in  lower
profitability in that quarter.  Quarterly  fluctuations in sales to the U.S. Air
Force are the result of several factors over which we have no control, including
funding appropriations and departmental approvals. Although we do not anticipate
that the U.S. Air Force will continue to purchase from us at historical  levels,
either in absolute  dollars or as a  percentage  of net sales,  we believe  that
sales to the U.S. Air Force will continue to comprise a  significant  portion of
our net sales. In addition,  our direct sales cycle  (including sales to Federal
end users) is less  predictable  than our indirect  sales  through our alternate
channel partners.

     Because we generally ship products within 30 days of receiving an order, we
do not  customarily  have a  significant  backlog.  Based on the  timing of such
product  shipments,  we do not believe that  projects in process at any one time
are a reliable  indicator  or measure of expected  future  revenue.  None of our
customers have minimum purchase requirements.

WE MAY NOT BE ABLE TO KEEP PACE WITH ANTICIPATED RAPID TECHNOLOGICAL CHANGE.

     The  market  for  our  fault  tolerant   enterprise  storage  solutions  is
characterized by:

     o    rapid technological change;

     o    evolving industry standards;

     o    changing customer preferences; and

     o    new product and service introductions.

     Both the needs of potential  customers and the  technologies  available for
meeting those needs can change  significantly within a short period of time. Our
future  success will depend on our ability to develop  solutions  that keep pace
with  changes in the  markets in which we  compete.  Any  failure on our part to
respond quickly, cost-effectively and sufficiently to these changes could render
our existing  products,  services or technologies  non-competitive  or obsolete.
Even  if we  develop  new  products,  services  or  technologies,  we may not be
successful in the marketplace.

     Demand  for  our  fault  tolerant   enterprise  storage  solutions  depends
principally upon the demand for Open  Systems-based  networks,  such as NT, UNIX
and Linux  operating  systems.  Although  we expect the  industry to continue to
expand,  our business may be adversely affected by a decline in the sales growth
of Open Systems-based networks targeted by us.

THERE MAY BE A LACK OF MARKET ACCEPTANCE FOR OUR NEW PRODUCTS.

     We believe that our success depends, in part, on our ability to:

     o    enhance existing products;

     o    develop new products that maintain technological leadership;

     o    meet a wide range of changing customer needs; and

     o    achieve market acceptance.

                                       14
<PAGE>

     Our business  will be  adversely  affected if we fail to maintain or expand
our direct sales  force,  introduce  new products in a timely or  cost-effective
manner,  increase the  functionality of our existing products to meet customers'
needs  or  remain  price  competitive.  We  cannot  be  certain  that we will be
successful in our product  development  efforts or, even if successful,  whether
our products will achieve market acceptance.

WE MAY NOT BE ABLE TO EXPAND OUR SALES AND DISTRIBUTION CHANNELS.

     During 1998, we shifted our sales and marketing focus to the development of
our direct sales  channel from our previous use of alternate  channel  partners.
During the prior three  years,  we had focused our sales and  marketing  efforts
through our primary alternate  channel partners,  Unisys and Tandem. As a result
of industry  consolidation and competitive  factors,  sales to Unisys and Tandem
declined  significantly in 1999. Our direct sales force concentrates on sales to
e-commerce  (electronic  commerce) and other  commercial end users, and the U.S.
Air Force and other Federal  government  end users.  Our direct sales force also
recruits  VARs  (value  added  resellers)  and  assists  them in their  sales to
commercial end users. We believe that several of our products under  development
could attract the interest of large data users and alternate  channel  partners,
including OEMs (original  equipment  manufacturers) as the significant  software
component of these products will allow them to be easily  integrated  into other
storage  solutions.  Whether we can successfully sell our products and enter new
markets will depend on our ability to:

     o    hire additional direct sales personnel;

     o    develop  and enhance relationships with new and existing customers and
          resellers; and

     o    develop  software-based  products attractive to  large data users  and
          alternate channel partners.

     We cannot be certain that new relationships with alternate channel partners
will be  established.  Furthermore,  we cannot  be  certain  that our  alternate
channel  partners will not develop or market products in the future that compete
with our products.

THE MARKETS WE SERVE ARE HIGHLY COMPETITIVE.

     We are  engaged in fields  within  the data  processing  industry  that are
characterized by a high level of competition. Competitive factors include:

     o    relative price/performance;

     o    product features, quality and reliability;

     o    speed to market;

     o    adherence to industry standards;

     o    financial strength; and

     o    service, support and reputation.

                                       15
<PAGE>

     Many of our competitors have financial,  technical,  manufacturing,  sales,
marketing and other resources which are  substantially  greater than our own. We
cannot be certain that we will be able to continue to compete  successfully with
existing or new competitors.  Recent  acquisitions of several of our competitors
by large  companies,  mergers of smaller  market  participants  and other market
activities have increased the competition in our marketplace.

     In  addition,  we compete  with a broad range of  businesses  with  varying
degrees of experience, resources and development, including established computer
manufacturers,  systems  integrators  and  manufacturers  of enterprise  storage
products and networking products.  We compete with different companies depending
on the specific  application or market. With respect to DAS products,  EMC Corp.
and LSI Logic are significant  competitors as are large server vendors,  such as
Compaq and Sun  Microsystems.  In the NAS  market,  our  primary  competitor  is
Network  Appliance  Inc. As we introduce  our fault  tolerant SAN  products,  we
expect to compete  with a number of  existing  and new  competitors  introducing
products in this emerging market.

     Competitive  pricing  pressures exist in the data storage market and may in
the  future  have an  adverse  effect  on our  revenues  and  earnings.  Certain
competitors  have reduced  prices in order to preserve or gain market share.  If
our  competitors  continue  to make price  cuts,  our  financial  results may be
adversely affected. We believe that pricing pressures are likely to continue.

WE DEPEND ON OUTSIDE MANUFACTURERS AND VENDORS TO SUPPLY OUR PRODUCTS.

     We rely on outside  manufacturers to produce some of our products.  We also
rely on outside suppliers to supply subassemblies,  component parts and computer
systems for resale.  Our  in-house  manufacturing  consists  primarily  of light
assembly, systems integration, testing and quality assurance.

     Unisys,  formerly  our  primary  outside  manufacturer  for our  Synchronix
system, closed its Winnipeg computer storage systems manufacturing plant in July
1999 and terminated its manufacturing service agreement with us. We manufactured
such  systems  in-house  from August to December  1999.  In September  1999,  we
entered into a Master Sale Agreement with Hitachi Computer  Products  (America),
Inc.  Pursuant to such  agreement,  Hitachi began  manufacturing  certain of our
products  in  January  2000 for use in our  fault  tolerant  enterprise  storage
solutions.  The agreement does not contain  specific  quantity  commitments  and
purchases are made on a purchase order basis. The agreement does not include any
long-term commitment by either party.

     Certain  components  used in our products are available only from a limited
number of sources.  Any delays in  obtaining  such  components  could  adversely
affect our results of  operations.  We cannot be certain that material  problems
will not arise in the future  with our  outside  manufacturers  or vendors  that
could significantly impede or interrupt our business.  We cannot be certain that
our relationships with our outside  manufacturers and suppliers will continue or
that we would be able to obtain alternative sources of supply without a material
disruption  in  our  ability  to  provide  products  to  our  customers  if  our
relationships   with  our  existing  outside   manufacturers  or  suppliers  are
terminated.

                                       16
<PAGE>

     We rely on certain  distributors to supply us with component  products from
Sun  Microsystems  and Seagate  Technologies.  Although  we believe  alternative
distributors  of these products are available,  we cannot be certain that we can
obtain them on a timely and cost-effective basis.

WE HAVE BEEN OPERATING AS A PROPRIETARY  SELLER FOR A LIMITED PERIOD OF TIME AND
HAVE A HISTORY OF LOSSES.

     From our inception  until 1994, our principal  business was the sale of NCR
products to AT&T  business  units as a value added  reseller.  During 1994, as a
result of AT&T's acquisition of NCR, AT&T discontinued  purchasing our products.
We then undertook a product development  initiative to reposition ourselves as a
provider  of fault  tolerant  enterprise  storage  solutions.  During  1996,  we
completed  our  repositioning  and began selling our fault  tolerant  enterprise
storage solutions.  Accordingly,  we have a limited operating history within our
current line of business.

     We  incurred  net  losses  of  $769,000  and  $2,657,000  in 1996 and 1998.
Although we had net income of  $1,102,000  in 1997 and  $1,952,000  in 1999,  we
cannot  be  certain  that  we will be able  to  maintain  profitable  levels  of
operations in the future.

OUR SUCCESS IS DEPENDENT UPON OUR KEY MANAGEMENT, MARKETING, SALES AND TECHNICAL
PERSONNEL.

     Our future depends,  in large part,  upon the continued  service of the key
members  of our  management  team,  as well as  marketing,  sales and  technical
personnel.  None of our  executive  officers  has  entered  into  an  employment
agreement. Equally important is our ability to attract and retain new management
and other personnel. Competition for such personnel is intense, and there can be
no assurance that we will be able to retain our key employees or that we will be
successful in attracting and retaining new personnel in the future.  The loss of
any one or more of our key  personnel  or the  failure to attract and retain key
personnel could have a material adverse effect on our business.

OUR FAILURE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS COULD ADVERSELY AFFECT
OUR BUSINESS.

     We may acquire complementary product lines,  technologies and businesses as
part or our growth strategy. Although we may make such acquisitions,  we may not
be able to successfully integrate them with our business in a timely manner. Our
failure to successfully address the risks associated with such acquisitions,  if
consummated,  could  have a  material  adverse  effect on our  business  and our
ability to develop  and market  products.  The success of any  acquisition  will
depend on our ability to:

     o    successfully integrate and manage the acquired operations;

     o    retain the key employees of the acquisition targets;

     o    develop,  integrate and market products and product enhancements based
          on the acquired products and technologies; and

                                       17
<PAGE>

     o    control  costs  and  expenses,  as well as  demands on our management,
          associated with the potential acquisitions.

     If we are not  able to  successfully  integrate  acquired  products  lines,
technologies or businesses with our business, we may incur substantial costs and
delays or other operational,  technical or financial problems. In addition,  our
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with key clients and
employees.  To finance future acquisitions,  we may issue equity securities that
could be dilutive  to our  shareholders.  We may also incur debt and  additional
amortization  expenses  related to  goodwill  and other  intangible  assets as a
result of future  acquisitions.  The interest  expense  related to this debt and
additional  amortization  expense may significantly reduce our profitability and
could have a material  adverse effect on our business,  financial  condition and
operating results.

WE HAVE ONLY LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS.

     Our  future  success  depends  in  part  upon  our  intellectual  property,
including  patents,  trade  secrets,   know-how  and  continuing   technological
innovation.  We cannot be  certain  that the steps  taken by us to  protect  our
intellectual  property  will be  adequate  to prevent  misappropriation  or that
others will not develop  competitive  technologies  or  products.  We have filed
numerous patent applications  covering various aspects of our Synchronix product
family  and  intend  to  file   additional   applications   for  products  under
development.  However,  we cannot be certain  that  patents  will issue from any
application filed by us or that, if patents do issue, the claims allowed will be
sufficiently  broad to  prohibit  others from  marketing  similar  products.  In
addition,  we  cannot  be  certain  that any  patents  issued  to us will not be
challenged,  invalidated or circumvented, or that issued patents will provide us
with a  competitive  advantage.  Although  we  believe  that  our  products  and
technology  do not  infringe  upon  proprietary  rights of others,  we cannot be
certain that third parties will not assert  infringement claims in the future or
that such claims  will not be  successful.  Although  we  continue to  implement
protective  measures  and  intend to defend  our  proprietary  rights,  policing
unauthorized  use of our  technology  or products is difficult  and we cannot be
certain that these measures will be successful.

WE MAY NOT BE ABLE TO COMPLY WITH INDUSTRY STANDARDS.

     We design our products to comply with  standards  adopted by our  industry,
the Storage Network Industry  Association  (SNIA) and the Fibre Channel Alliance
(FCA).  We work  closely  with  SNIA and FCA to  ensure  that our  products  are
compatible  with industry  standards.  We cannot be certain that  standards from
other standards-setting  bodies will not become  industry-accepted  standards. A
shift  in  industry  standards  could  have a  material  adverse  effect  on our
operations.

     In February 1999, we received ISO 9001  certification.  This  certification
reflects uniform,  industry-wide  standards of quality control for manufacturing
data-storage  products.  There can be no assurance that we will continue to meet
the industry-accepted standards necessary to maintain ISO 9001 certification.  A
loss of ISO  certification  may  adversely  impact net sales to  customers  that
require or prefer ISO certification.

                                       18
<PAGE>

POTENTIAL VOLATILITY OF OUR STOCK PRICE.

     The market  price of the shares of our  common  stock has been,  and in the
future may be,  highly  volatile.  Some factors that may affect the market price
include:

     o    actual or anticipated quarterly fluctuations in our operating results;

     o    changes  in  recommendations  or  earnings  estimates  by   securities
          analysts;

     o    announcements  of technological innovations or new commercial products
          or services by us or our competitors; and

     o    general market or economic conditions.

     This risk may be heightened  because our industry is characterized by rapid
technological  change  and  susceptible  to the  introduction  of new  competing
technologies or competitors.  In addition,  equity securities of many technology
companies have  experienced  significant  price and volume  fluctuations.  These
price and  volume  fluctuations  often  have  been  unrelated  to the  operating
performance  of the affected  companies.  Volatility  in the market price of our
common stock could result in securities  class action  litigation.  This type of
litigation,  regardless of the outcome,  could result in substantial  cost and a
diversion of management's attention and resources.

WE  HAVE  CERTAIN  ANTI-TAKEOVER   DEFENSES  THAT  COULD  DELAY  OR  PREVENT  AN
ACQUISITION.

     Our certificate of incorporation and New Jersey law contain provisions that
could  make it more  difficult  for a third  party  to  acquire  control  of our
company, even if such change of control would be beneficial to our shareholders.
For example,  our certificate of  incorporation  authorizes  3,000,000 shares of
undesignated  preferred  stock which may be issued by our board of  directors on
such terms and with such rights,  preferences and  designations as our board may
determine  without  further  action by our  shareholders.  In addition,  certain
"anti-takeover"  provisions of the New Jersey Business  Corporation Act restrict
the ability of certain  shareholders to affect a merger or business  combination
or obtain control of us. These  provisions  could  discourage bids for shares of
our  common  stock at a  premium  as well as create a  depressive  effect on the
market price of the shares of our common stock.

WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.

     We have never paid, and do not anticipate paying, any cash dividends on our
common stock for the  foreseeable  future.  Our factoring  facility with Bank of
America restricts our ability to pay certain dividends without its prior written
consent.  Our line of credit  facility with Finova Capital Corp.  also prohibits
the payment of dividends.  Unless we pay dividends, our shareholders will not be
able to receive a return on their shares unless they sell them.


                                       19
<PAGE>

ITEM 2.   PROPERTIES.

     Our  executive  and business  development  office is in Tinton  Falls,  New
Jersey.  We believe  that our  current  facilities  are  adequate to support our
existing  operations.  We also believe  that we will be able to obtain  suitable
additional facilities on commercially reasonable terms on an "as needed" basis.

     We occupy the following properties, which are all leased:

<TABLE>
<CAPTION>
         Location            Approximate Area              Use                         Nature of Occupancy
                              (in sq. feet)
--------------------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>                           <C>
Tinton Falls, New Jersey         22,000            Executive Office, R&D,        Lease expires 12/31/00 with a four
                                                   Manufacturing Business        year renewal option
                                                   Development

Tinton Falls, New Jersey         10,000            R&D Manufacturing Business    Lease expires on 12/31/01
                                                   Development

Alpharetta, Georgia               1,200            Sales Office                  Lease expires on 1/31/01

Herndon, Virginia                   640            Sales Office                  Lease expires on 3/31/01

San Jose, California              1,403            Sales Office                  Lease expires on 4/5/01

Los Angeles, California             300            Sales Office                  Month-to-month lease agreement
</TABLE>

ITEM 3.   LEGAL PROCEEDINGS.

     In November 1999, Mark Ish and David Boyle,  former  executive  officers of
our company,  filed a complaint against us and Gregg M. Azcuy, our President and
Chief  Executive  Officer,  in the Superior  Court of New Jersey,  Law Division,
Monmouth County. By the action,  Messrs. Ish and Boyle are seeking  compensatory
damages,  punitive  damages,  attorneys'  fees,  interest  and costs for alleged
breach of multiple contracts,  fraud and defamation.  We believe such claims are
without merit and we intend to vigorously defend such actions. We do not believe
that the outcome of such litigation will adversely affect our business.

     In late  January  2000,  we  received  a subpoena  from the  United  States
Attorney's  Office in Boston,  Massachusetts  for the production of documents in
connection with an investigation  into Federal  government  purchasing.  We have
been and intend to continue cooperating with the investigation and are complying
fully,  and intend to  continue  to comply  fully,  with the  subpoena.  We sell
computer  products  to  companies  which are used by the Federal  government  to
supply computer products to the U.S. Air Force. In addition, a subpoena has been
received by an officer of ours who is expected to testify before the grand jury.
Such testimony has not yet been provided. Although the investigation is still in
its  early  stages,   it  appears  that  one  avenue  of  inquiry  involves  the
relationships and transactions of various  suppliers,  manufacturers  (including
us),  and  other   companies,   with   companies   that   provide   product  and
product-related  services  to  the  U.S.  Air  Force.  We  understand  that  the
government's  inquiry  includes a review of the  conduct of such  companies  and
their officers and  employees.  We believe that we have not violated any federal
laws in connection with our sale of computer products ultimately received by the
U.S. Air Force.

                                       20
<PAGE>

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

     Not applicable.


                                       21
<PAGE>

                                     PART II

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

     Our common stock is quoted on the Nasdaq  National  Market under the symbol
"ECCS."  Prior to February 22,  2000,  our common stock was quoted on the Nasdaq
Small Market under the symbol  "ECCS." The  following  table sets forth the high
and low sales price for the common  stock for each of the  quarters  since 1998.
Such quotations reflect inter-dealer prices,  without retail mark-up,  mark-down
or commission and may not represent actual transactions.

                                                          HIGH            LOW
                                                       -----------     ---------
 Fiscal Year Ended December 31, 1998

        First Quarter............................       $7.000           $3.750

        Second Quarter...........................        4.063            2.375

        Third Quarter............................        3.250            1.000

        Fourth Quarter...........................        3.125            0.906

 Fiscal Year Ended December 31, 1999

        First Quarter............................        2.094            1.125

        Second Quarter...........................        4.000            1.531

        Third Quarter............................        5.250            2.125

        Fourth Quarter...........................       13.250            3.063

     On March 24,  2000,  the last  reported  sale price of our common  stock as
reported  by the Nasdaq  National  Market was $16.00 per share.  As of March 24,
2000, the approximate number of holders of record of our common stock was 136.

                                       22
<PAGE>

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA.

The following selected consolidated  financial data as of and for the five years
ended  December  31, 1999 are derived  from our audited  consolidated  financial
statements.  Historical results are not necessarily  indicative of results to be
expected for any future  period.  The selected  consolidated  financial data set
forth  below  should  be read in  conjunction  with the  Consolidated  Financial
Statements and Notes thereto and with  "Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations"  appearing  elsewhere  in this
Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                               -------------------------------------------------------------
                                               1995          1996           1997         1998         1999
                                               ----          ----           ----         ----         ----
                                                         (in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S>                                          <C>           <C>           <C>             <C>        <C>
Net sales..............................      $ 31,174      $ 22,604      $ 34,001        $ 28,466   $ 39,761
  Cost of sales........................        23,256        15,165        24,226          20,452     26,777
                                             --------      --------      --------        --------   --------
Gross profit...........................         7,918         7,439         9,775           8,014     12,984
  Selling, general and
     administrative expenses...........         9,967         6,907         6,838           8,378      9,693
  Research and development
     expenses..........................         1,123         1,027         1,687           2,683      1,939
                                             --------      --------      --------        --------   --------
Operating (loss) income................        (3,172)         (495)        1,250          (3,047)     1,352
  Net interest expense (income) .......           487           274            28            (390)      (162)
                                             --------      --------      --------        --------   --------
(Loss) income before income tax benefit
  and extraordinary item...............        (3,659)         (769)        1,222          (2,657)     1,514
Income tax benefit.....................            --            --            --              --       (438)
                                             --------      --------      --------        --------   --------
(Loss) income before extraordinary item        (3,659)         (769)        1,222          (2,657)     1,952
     Extraordinary item................            --            --           120              --         --
                                             --------      --------      --------        --------   --------

Net (loss) income......................        (3,659)         (769)        1,102          (2,657)     1,952
  Preferred dividends..................            79           248           192              --         --
                                             --------      --------      --------        --------   --------
Net (loss) income applicable
  to common shares.....................      $ (3,738)     $ (1,017)     $    910        $ (2,657)  $  1,952
                                             ========      ========      ========        ========   ========
Net (loss) income per share before
  extraordinary item -  basic..........      $  (0.88)     $  (0.23)     $   0.16        $  (0.24)  $   0.18
Net (loss) income per share - basic....      $  (0.88)     $  (0.23)     $   0.14        $  (0.24)  $   0.18
Net (loss) income per share before
  extraordinary item - diluted.........      $  (0.88)     $  (0.23)     $   0.12        $  (0.24)  $   0.16
Net (loss) income per share - diluted..      $  (0.88)     $  (0.23)     $   0.11        $  (0.24)  $   0.16
Weighted average common shares
outstanding -  basic...................         4,232         4,346         6,702          10,969     11,093
Weighted average common shares
outstanding -  diluted.................         4,232         4,346        10,035          10,969     11,978

                                                                      AS OF DECEMBER 31,
                                               -------------------------------------------------------------
                                                1995          1996           1997           1998        1999
                                                ----          ----           ----           ----        ----
                                                                      (in thousands)
Balance Sheet Data:
Cash...................................      $  1,514      $  4,393      $ 11,625        $  5,374   $  7,993
Working capital........................         1,134         4,280        15,260          11,969     14,200

Total assets...........................        12,435        14,552        24,992          21,374     23,231
Loans payable and payable to Finova
  Capital..............................         1,849         1,762         1,031           1,231        968
Series B redeemable
  convertible preferred stock..........         1,794            --            --            --           --
Shareholders' equity...................         2,122         6,177        17,643          15,232     17,701
</TABLE>

                                       23
<PAGE>

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

OVERVIEW

     We design, manufacture,  sell and support fault tolerant enterprise storage
solutions that protect and ensure access to an organization's critical data. Our
products include high performance, fault tolerant storage subsystems that meet a
wide range of customer applications for Open Systems-based networks, such as NT,
UNIX  and  Linux  operating  systems.  Our  fault  tolerant  enterprise  storage
solutions address all three storage markets: DAS, in which the storage device is
connected directly to a server; NAS, in which the storage device is installed on
a  network;  and SAN,  in which  the  storage  device  is used in a  specialized
network.  These  connectivity  options  provide our customers the flexibility to
choose and deploy a particular  storage  solution to meet their  needs.  As data
requirements change, customers can migrate their existing storage investments to
different connectivity options.

     During 1998, we shifted our sales and marketing focus to the development of
our direct sales  channel from our previous use of alternate  channel  partners.
Our direct sales force  concentrates on sales to e-commerce and other commercial
end users,  and the U.S. Air Force and other Federal  government end users.  Our
direct  sales  force  also  recruits  VARs and  assists  them in their  sales to
commercial  end users.  During the three years prior to 1998, we had focused our
sales and marketing  efforts  through our primary  alternate  channel  partners,
Unisys  and  Tandem.  As a result  of  industry  consolidation  and  competitive
factors,  sales to Unisys and Tandem declined  significantly  in 1999. We do not
expect sales to these  alternate  channel  partners to  constitute a significant
part of our net sales in 2000.  Although  our  product  development  efforts are
focused on commercial  end users,  we believe that several of our products under
development could attract the interest of large data users and alternate channel
partners,  including  OEMs,  as the  significant  software  component  of  these
products will allow them to be easily  integrated into other storage  solutions.
We are  presently  undertaking  a software  development  effort to create a file
aware storage architecture for our future products.  File aware storage products
possess  embedded  intelligence  that obviates the need for a server  which,  in
turn,  provides for increased  performance and lower costs.  Our  software-based
implementation  of a file aware storage  architecture  will also incorporate our
fault tolerance expertise, allow users to integrate our products with those from
other  vendors and provide for the  migration of our storage to DAS, NAS and SAN
architectures  as a customer  requires.  We believe our  planned  software-based
offering provides many features and capabilities not currently  available in the
storage marketplace.

     We anticipate  that the  commercial  sector will continue to be our fastest
growing sales  channel.  Sales to commercial  customers  grew from $1,800 in the
first quarter of 1999 to $4,600 in the fourth quarter of 1999. In the last year,
our sales to  e-commerce  companies  have  increased  by  approximately  218% as
compared  to 1998.  Such  sales  constituted  35.1% of all  sales to  commercial
customers  in 1999.  We  anticipate  that  sales to  e-commerce  customers  will
continue to grow rapidly as the data storage needs of these companies expand and
we develop our direct sales channel to target this market.

                                       24
<PAGE>

     On April 7, 2000,  we  announced  that our net sales for the quarter  ended
March 31, 2000 are expected to range from $4,400 to $4,700, which is expected to
result in a net loss of $1,000 to $1,500 for the quarter.  These results are due
primarily  to lower sales to the U.S.  Air Force  through  Federal  integrators.
Commercial sales,  while up from the first quarter 1999, are also expected to be
lower than the fourth quarter 1999 level.

     Sales to the U.S. Air Force accounted for approximately  58.4% of net sales
in 1999.  Although we do not anticipate that the U.S. Air Force will continue to
purchase  from us at  historical  levels,  either in  absolute  dollars  or as a
percentage  of net  sales,  we  believe  that  sales to the U.S.  Air Force will
continue  to  comprise  a  significant  portion  of  our  net  sales.  Quarterly
fluctuations  in sales to the U.S.  Air Force are the result of several  factors
over which we have no control, including funding appropriations and departmental
approvals.  We cannot be certain  that our sales to the U.S.  Air Force  through
Federal  integrators  will  not  be  adversely  affected  by  the  investigation
discussed in Item 3. Legal Proceedings.

     The following table sets forth,  for the periods  indicated,  the net sales
derived from each of our sales channels:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                      ----------------------------
                                                                       1997        1998      1999
                                                                      ------      -----     ------
<S>                                                                  <C>         <C>        <C>
     Direct:
       Commercial and other Federal customers..............          $ 6,461     $ 7,960    $12,638
       U.S. Air Force......................................           14,960       9,579     23,216
     Indirect:
       Alternate channel partners..........................           12,580      10,927      3,907
                                                                      ------      ------     ------
                                                                     $34,001     $28,466    $39,761
                                                                     =======     =======    =======
</TABLE>

     Direct sales include sales through regional and local resellers.  All sales
to the U.S. Air Force are through Federal  integrators.  Federal integrators are
government  contractors who sell directly to U.S. government entities.  Indirect
sales include sales through OEMs and national resellers.

REVENUE

     Product  sales  revenue is  generally  recognized  upon  product  shipment.
Periodically,  revenue  is  recognized  for  product  which is being held at the
customer's request. Revenue is only recognized on such product when all risks of
ownership  have  passed  to  the  customer  and  the  Company  has  no  specific
performance  obligations  remaining.  Service revenue is generally recognized as
services are provided.  Revenue  related to maintenance  contracts is recognized
over the respective terms of the maintenance contracts.

COST OF REVENUE

     Our cost of revenue relating to product sales consists primarily of:

     o    the costs of purchased material;

     o    direct labor and related overhead expenses; and

     o    amortization of capitalized software.

                                       25
<PAGE>

     Capitalized   software  amounts  are  amortized   commencing  with  product
introduction  on a  straight-line  basis  utilizing the estimated  economic life
ranging from one to three years.

     The  profitability of any particular  quarter is significantly  affected by
the  relative  sales levels of each of our primary  sales  channels and types of
customers in such  quarter.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily of:

     o    salaries,  commissions  and  travel  costs  for  sales  and  marketing
          personnel, including trade shows; and

     o    expenses  associated  with our  management, accounting,  contract  and
          administrative functions.

     We expect selling,  general and  administrative  expenses to  significantly
increase in  connection  with the  expansion  of our  marketing  efforts and our
direct sales force.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses consist primarily of salaries and related
overhead  expenses  paid  to  software  and  hardware  engineers.  Research  and
development  expenses are anticipated to significantly  increase to enable us to
update and expand upon our product offerings. Research and development costs are
expensed  as  incurred,   except  for  software   development  costs  which  are
capitalized after technological feasibility has been demonstrated.

                                       26
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth for the periods  indicated certain financial
data expressed as a percentage of total revenue:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                 ------------------------------------------
                                                                    1997            1998             1999
                                                                 ---------        --------         --------
<S>                                                                 <C>             <C>              <C>
Direct net sales:
    Commercial and other Federal customers..................        19.0%           28.0%            31.8%
    U.S. Air Force..........................................        44.0            33.7             58.4
Indirect net sales:
    Alternate channel partners..............................        37.0            38.3              9.8
                                                                --------       ---------        ---------
Total net sales.............................................       100.0           100.0            100.0
  Cost of sales.............................................        71.3            71.9             67.3
                                                               ---------       ---------        ---------
Gross profit................................................        28.7            28.1             32.7
  Selling, general & administrative expenses................        20.1            29.4             24.4
  Research & development expenses...........................         5.0             9.4              4.9
                                                               ---------       ---------        ---------
Operating income (loss).....................................         3.6           (10.7)             3.4
  Net interest expense (income).............................         0.1            (1.4)            (0.4)
                                                               ---------       ----------       ----------
Income (loss) before extraordinary item and tax benefit.....         3.5            (9.3)             3.8
  Extraordinary item........................................         0.3              --               --
  Benefit for income taxes..................................          --              --             (1.1)
                                                               ---------       ----------       ----------
Net (loss) income...........................................         3.2%           (9.3)%            4.9%
                                                               =========       ==========       ==========
</TABLE>

     Our operating  results are affected by several  factors,  particularly  the
spending  fluctuations of our largest  customers,  including the U.S. Air Force.
Due to the  relatively  fixed  nature of certain of our costs,  a decline in net
sales  in any  fiscal  quarter  will  have a  material  adverse  effect  on that
quarter's results of operations.  We do not expect such spending fluctuations to
be altered in the foreseeable future.

     Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
     ---------------------------------------------------------------------

     NET SALES

     Net sales increased by approximately  $11,295, or 39.7%, to $39,761 in 1999
from $28,466 in 1998. Sales of our fault tolerant  enterprise  storage solutions
accounted for 95.0% and 96.0% of net sales in 1999 and 1998, respectively. Other
revenues   accounted  for  5.0%  and  4.0%  of  net  sales  in  1999  and  1998,
respectively. The increase in 1999 net sales resulted primarily from an increase
in sales of our  enterprise  storage  solutions  to the U.S.  Air Force  through
Federal  integrators and to commercial end users, offset in part by decreases in
sales to our alternate channel partners.

     Sales to our commercial  customers  increased by approximately  $4,678,  or
58.7%, to $12,638 in 1999 from $7,960 in 1998. Such increase  reflects the shift
in our sales and marketing  focus to direct sales and the  resulting  success of
sales into the e-commerce market.  Such sales accounted for approximately  31.8%
and 28.0% of net sales in 1999 and 1998, respectively.

                                       27
<PAGE>

     Sales to the U.S.  Air  Force  through  Federal  integrators  increased  by
approximately  $13,637,  or 142.4%, to $23,216 in 1999 from $9,579 in 1998. Such
sales accounted for approximately 58.4% and 33.7% of net sales in 1999 and 1998,
respectively.

     Sales to alternate channel partners  decreased by approximately  $7,020, or
64.2%,  to  $3,907  in 1999 from  $10,927  in 1998.  Such  sales  accounted  for
approximately 9.8% and 38.3% of net sales in 1999 and 1998,  respectively.  Such
decrease  represents  a  decrease  in sales to  Unisys of  approximately  $4,762
combined with a $2,258  decrease in sales to Tandem.  Sales to Unisys  accounted
for  approximately   8.0%  and  28.0%  of  our  net  sales  in  1999  and  1998,
respectively.  Sales to Tandem accounted for approximately 2.0% and 10.0% of our
net sales in 1999 and 1998, respectively.

     GROSS PROFIT

     Our  gross  profit  increased  by  approximately   $4,970,   or  62.0%,  to
approximately $12,984 in 1999 from $8,014 in 1998. Such increase in gross profit
is due  primarily to the higher level of sales in 1999,  coupled with  favorable
gross  margin  percentages.  Our gross profit  percentage  increased to 32.7% in
1999, as compared to 28.2% in the prior year. The 4.5% increase is  attributable
to the higher proprietary content of product sales, favorable costs attributable
to quantity  discounts  received for third party component products and the lack
of one-time  charges  incurred  in 1998  related to the  discontinuation  of our
efforts to develop a fibre controller and a controller  design that incorporated
Tandem's ServerNet Technology.

     OPERATING EXPENSES

     Selling, general and administrative (SG&A) expenses increased by $1,315, or
15.7%, to $9,693 in 1999 from $8,378 in 1998. Such increase was due primarily to
higher commissions associated with higher sales levels. To a lesser extent, such
increase  was due to the hiring of  additional  sales and  marketing  personnel,
coupled with enhanced  efforts to market our current and new product  offerings.
SG&A expenses as a percentage of net sales  represented 24.4% and 29.4% for 1999
and 1998,  respectively.  Such  percentage  decrease is attributable to a higher
level of revenue in 1999. Salaries, commissions,  bonuses, employee benefits and
payroll taxes were the largest components of SG&A expenses, accounting for 70.0%
and 66.0% of such expenses in 1999 and 1998, respectively.

     Research and development  expenses  decreased in 1999 by $744, or 27.7%, to
$1,939 in 1999 from  $2,683 in 1998.  This  decrease  was due  primarily  to our
decision to discontinue our efforts to develop a fibre controller. Such expenses
represented  approximately  4.9% and 9.4% of our net  sales  for 1999 and  1998,
respectively,  and, including the amount capitalized in accordance with SFAS No.
86, represented approximately 6.7% and 16.0% of our net sales for 1999 and 1998,
respectively.

     NET INTEREST INCOME

     Net interest income was $162 and $390 for 1999 and 1998, respectively.  The
reduction in interest  income was  primarily  due to lower cash balances in 1999
compared to 1998.

                                       28
<PAGE>

     Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
     ---------------------------------------------------------------------

     NET SALES

     Net sales decreased by approximately  $5,535,  or 16.3%, to $28,466 in 1998
from $34,001 in 1997. Sales of our fault tolerant  enterprise storage solutions,
including sales of certain third party component  products,  accounted for 96.0%
and  93.0% of net  sales in 1998 and  1997,  respectively.  Services  and  other
revenues   accounted  for  4.0%  and  6.0%  of  net  sales  in  1998  and  1997,
respectively.  The decrease in 1998 net sales resulted primarily from a decrease
in sales of our enterprise  storage  solutions,  including sales to the U.S. Air
Force through Federal  integrators and sales to our alternate  channel partners,
offset partially by an increase in sales to commercial customers.

     Sales to our commercial  customers  increased by approximately  $1,795,  or
27.8%,  to  $7,960  in 1998  from  $6,461  in 1997.  Such  sales  accounted  for
approximately 28.0% and 19.0% of net sales in 1998 and 1997, respectively.  Such
increase was  primarily due to our  continued  focus on commercial  sales of our
Synchronix product line offering.

     Sales to the U.S.  Air  Force  through  Federal  integrators  decreased  by
approximately  $5,381,  or 36.0%,  to $9,579 in 1998 from $14,960 in 1997.  Such
sales accounted for approximately 33.7% and 44.0% of net sales in 1998 and 1997,
respectively.

     Sales to alternate channel partners  decreased by approximately  $1,653, or
13.1%,  to  $10,927  in 1998 from  $12,580 in 1997.  Such  sales  accounted  for
approximately 38.3% and 37.0% of net sales in 1998 and 1997, respectively. Sales
to Unisys accounted for  approximately  28.0% and 18.0% of our net sales in 1998
and 1997,  respectively.  Sales to Tandem accounted for approximately  10.0% and
13.0% of our net sales in 1998 and 1997, respectively.

     GROSS PROFIT

     Our  gross  profit  decreased  by  approximately   $1,761,   or  18.0%,  to
approximately  $8,014 in 1998 from $9,775 in 1997. Such decrease in gross profit
was due  primarily to the lower  volume of sales to the U.S.  Air Force  through
Federal integrators during 1998 as compared to 1997 and one-time charges in 1998
related to the  discontinuation of our efforts to develop a fibre controller and
a controller design that incorporated Tandem's ServerNet  Technology.  Our gross
profit percentage  decreased  slightly to 28.2% in 1998, as compared to 29.0% in
the prior year.

     OPERATING EXPENSES

     SG&A expenses  increased by $1,540, or 22.5%, to $8,378 in 1998 from $6,838
in 1997.  Such increase was due primarily to the hiring of additional  sales and
marketing personnel, coupled with enhanced efforts to market our current and new
product  offerings.  SG&A  expenses  increased  as a  percentage  of  net  sales
representing  29.0% and 20.0% for 1998 and  1997,  respectively.  SG&A  expenses
increased as a percentage of revenue as a result of a combination of higher SG&A
expenses  and lower  sales  volume.  Salaries,  commissions,  bonuses,  employee
benefits  and  payroll  taxes  were the  largest  components  of SG&A  expenses,
accounting for 66.0% and 70.0% of such expenses in 1998 and 1997, respectively.

                                       29
<PAGE>

     Research and development  expenses  increased in 1998 by $996, or 59.0%, to
$2,683 from $1,687 in 1997.  This  increase  was due  primarily to the hiring of
additional engineers to continue the product development  initiative  associated
with the enhancements to our fault tolerant  enterprise storage solutions and to
the  development  of  a  new  technology  center.   Such  expenses   represented
approximately  9.4% and 5.0% of our net  sales in 1998 and  1997,  respectively,
and,   including  the  amount  capitalized  in  accordance  with  SFAS  No.  86,
represented  approximately  16.0%  and 6.6% of our net  sales for 1998 and 1997,
respectively.

     NET INTEREST (INCOME) EXPENSE

     Net interest income for 1998 was $390,  while net interest  expense was $28
in 1997. Such fluctuation was due principally to higher cash balances  resulting
from cash generated by our follow-on  public offering in 1997 and a reduction in
the borrowings against our accounts receivable line of credit.

LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)

     Our cash balance was approximately $7,993 at December 31, 1999.

     Net cash used in operating activities in 1998 was $4,431. Net cash provided
by  operating  activities  was $4,269 in 1999.  Net cash  provided by  operating
activities  in 1999 resulted  primarily  from net income from  operations  after
adding back  depreciation and  amortization  coupled with a decrease in accounts
receivable  and  prepaid  expenses  offset by a  decrease in  payables to Finova
Capital Corp. and decreases in accounts payable and accrued  expenses.  Net cash
provided  by  financing   activities  was  $435  and  $234  in  1998  and  1999,
respectively.  Such net proceeds in 1999 primarily represents cash received from
the  exercise of stock  options  partially  offset by payments of capital  lease
obligations.

     We used $1,208 and $812 for the acquisition of equipment by direct purchase
during  1998  and  1999,  respectively.  Such  expenditures  in  1999  primarily
consisted of computer  equipment  associated  with our research and  development
efforts.  Such expenditures in 1998 primarily  consisted of a capital investment
associated  with our  enterprise-wide  ERP software  system,  as well as capital
equipment relating to our research and development  efforts.  There are no other
material commitments for capital expenditures currently outstanding.

     We had working  capital of $11,969  and  $14,200 at  December  31, 1998 and
1999, respectively.

     As of December  31,  1999,  we had no  outstanding  balance  under our full
recourse factoring facility with Bank of America.

     We use our  line of  credit  with  Finova  Capital  Corp.  to  augment  our
purchasing  ability with various vendors.  The maximum  borrowings  allowed were
$3,000  through  January 31, 2000 after  which the  maximum  borrowings  allowed
decreased to $2,000.  During the third  quarter  1999, we were allowed to exceed
the maximum amount by $295. The maximum amount,  during 1999, that we have drawn
under such general line of credit was  approximately  $3,295. As of December 31,
1998 and 1999,  we had  $1,231 and $968  outstanding  under  this  credit  line,
respectively.  As of December 31, 1999, available credit under such line towards
future inventory purchases was $2,032.


                                       30
<PAGE>

     We have net  operating  loss  ("NOL")  carryovers  for  Federal  income tax
purposes of  approximately  $9,134,  which will begin to expire in 2009. We also
have  research and  development  tax credit  carryovers  for Federal  income tax
purposes of approximately $490, which will begin to expire in 2009. In addition,
we have alternative  minimum tax credits of approximately $83. These credits can
be carried forward indefinitely. We experienced a change in ownership in 1996 as
defined by Section 382 of the Internal Revenue Code. Accordingly,  future use of
some of these NOLs and income tax credits may be limited.

     During the fourth  quarter of 1999, we sold  approximately  $7,100 of state
NOL carryforwards and $149 of research and development tax credit  carryforwards
to an unrelated third party for approximately $438. We have approximately $4,820
of  remaining  state NOL  carryforwards  which  will begin to expire in 2001 and
state research and development tax credit  carryforwards  of $272 as of December
31, 1999.

     Under SFAS No. 109, a valuation  allowance is established,  if based on the
weight of available  evidence,  it is more likely than not that a portion of the
deferred tax asset will not be realized. Accordingly, a full valuation allowance
has been  provided  to off-set  our net  deferred  tax assets  since we are in a
cumulative loss position. We will periodically reassess the valuation allowance.

     We believe that our existing available cash, credit facilities and the cash
flow expected to be generated  from  operations  will be adequate to satisfy our
current and planned operations for at least the next 12 months.

IMPACT OF YEAR 2000

     In prior years, the Company  discussed the nature and progress of its plans
to become Year 2000 ready.  In late 1999, the Company  completed its remediation
and  testing  of  systems.  As a result  of those  planning  and  implementation
efforts, the Company experienced no significant  disruptions in mission critical
information technology and non-information technology systems and believes those
systems  successfully  responded to the Year 2000 date change.  Through December
31,  1999,  the Company  capitalized  approximately  $1,275 in  connection  with
software  and  hardware  acquired to address  the Year 2000.  The Company is not
aware of any material problems resulting from Year 2000 issues,  either with its
products,  its internal systems,  or the products and services of third parties.
The Company will continue to monitor its mission critical computer  applications
and those of its suppliers and vendors  throughout  the Year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

     RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statements of
Financial  Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities."  SFAS No. 133  establishes  accounting and reporting  standards for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is now effective for the year beginning  January 1, 2001. As we do not currently
engage in derivatives or hedging transactions,  we believe that there will be no
impact to our results of operations,  financial  position or cash flows upon the
adoption of SFAS No. 133.


                                       31
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     We have limited  exposure to financial market risks,  including  changes in
interest rates.  At December 31, 1999, all our available  excess funds were cash
or cash equivalents  whose value is not subject to changes in interest rates. We
currently hold no derivative  instruments and do not earn foreign-source income.
We  expect  to  invest  our cash  only in debt  obligations  issued  by the U.S.
government or its agencies with maturities of less than one year.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The financial  statements  required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial  statements
filed herewith is found at "Item 14. Exhibits,  Financial  Statement  Schedules,
and Reports on Form 8-K."

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

     Not applicable.

                                       32
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
2000 Annual Meeting of Shareholders is incorporated  herein by reference to such
proxy statement.

ITEM 11.  EXECUTIVE COMPENSATION.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 2000  Annual  Meeting of  Shareholders  is
incorporated herein by reference to such proxy statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 2000
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 2000 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.

                                     PART IV

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

     (a)  (1)  Financial Statements.

               Financial   Statements   are  included  in  Item  8,   "Financial
               Statements and Supplementary Data" as follows:

          o    Report of Independent Auditors

          o    Consolidated Balance Sheets - December 31, 1998 and 1999

          o    Consolidated Statements of Operations - Years  ended December 31,
               1997, 1998, and 1999

          o    Consolidated  Statements of  Shareholders'  Equity - Years  ended
               December 31, 1997, 1998, and 1999

          o    Consolidated  Statements of Cash Flows - Years ended December 31,
               1997, 1998, and 1999

          o    Notes to Consolidated Financial Statements - December 31, 1999

                                       33
<PAGE>

     (a)  (2)  Financial Statement Schedule.

               Schedule II - Valuation and Qualifying Accounts
               All other schedules for which provision is made in the applicable
               accounting  regulation of the Securities and Exchange  Commission
               are  not  required   under  the  related   instructions   or  are
               inapplicable and therefore have been omitted.

     (a)  (3)  Exhibits.

               Reference is made to the Exhibit Index on Page 38.

     (b)  Reports on Form 8-K.

               None.

                                       34
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 14th day of April,
2000.


                                                ECCS, INC.



                                                By: /s/Gregg M. Azcuy
                                                   -----------------------------
                                                   Gregg M. Azcuy, President and
                                                   Chief Executive Officer


                                       35
<PAGE>

     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/ Gregg M. Azcuy                        President, Chief Executive Officer and           April 14, 2000
-------------------------------           Director (Principal Executive Officer)
Gregg M. Azcuy

/s/ Louis Altieri                         Vice President, Finance and                      April 14, 2000
-------------------------------           Administration (Principal Financial and
Louis Altieri                             Accounting Officer)

/s/ Michael E. Faherty                    Chairman of the Board and Director               April 14, 2000
-------------------------------
Michael E. Faherty

/s/ Gale R. Aguilar                       Director                                         April 14, 2000
-------------------------------
Gale R. Aguilar

/s/ James K. Dutton                       Director                                         April 14, 2000
-------------------------------
James K. Dutton

/s/ Donald E. Fowler                      Director                                         April 14, 2000
-------------------------------
Donald E. Fowler

/s/ Frank R. Triolo                       Director                                         April 14, 2000
-------------------------------
Frank R. Triolo

/s/ Thomas I. Unterberg                   Director                                         April 14, 2000
-------------------------------
Thomas I. Unterberg
</TABLE>

                                       36
<PAGE>

                                  EXHIBIT INDEX

   Exhibit
   No.                                  Description of Exhibit
   -------                              ----------------------

   3.1              Certificate  of  Amendment   to  the  Restated  and  Amended
                    Certificate of Incorporation,  as amended.  (Incorporated by
                    reference to the  Company's  Annual  Report on Form 10-K for
                    the annual  period ended  December 31, 1995 filed on May 17,
                    1996.)

   3.2              By-Laws  of  the  Company,  as  amended.   (Incorporated  by
                    reference to the Company's Quarterly Report on Form 10-Q for
                    the  quarterly  period  ended  September  30,  1997 filed on
                    November 3, 1997.)

   4.1*             1989 Stock  Option  Plan of the  Company.  (Incorporated  by
                    reference to the  Company's  Registration  Statement on Form
                    S-1 (File Number  33-60986)  which became  effective on June
                    14, 1993.)

   4.2*             Warrant  issued to Michael E.  Faherty to  purchase  266,601
                    shares  of Common  Stock of the  Company.  (Incorporated  by
                    reference to the Company's Quarterly Report on Form 10-Q for
                    the  quarterly  period ended March 31, 1995 filed on May 15,
                    1995.)

   4.3*             Form of Option  Agreement,  pursuant  to which  the  Company
                    granted  non-qualified  stock options  outside the Company's
                    Stock  Option  Plan.   (Incorporated  by  reference  to  the
                    Company's  Quarterly  Report on Form 10-Q for the  quarterly
                    period ended March 31, 1995 filed on May 15, 1995.)

   4.4*             Option issued to Gregg M. Azcuy to purchase 80,000 shares of
                    Common Stock of the Company.  (Incorporated  by reference to
                    the  Company's   Quarterly  Report  on  Form  10-Q  for  the
                    quarterly  period  ended  March  31,  1995  filed on May 15,
                    1995.)

   4.5*             1996 Stock Plan of the Company.  (Incorporated  by reference
                    to the Company's Form S-8, Registration  Statement under the
                    Securities  Act of 1933 (File No.  333-15529)  which  became
                    effective on November 5, 1996.)

   4.6*             1996  Non-Employee  Directors  Stock  Option  Plan   of  the
                    Company.  (Incorporated  by reference to the Company's  Form
                    S-8, Registration Statement under the Securities Act of 1933
                    (File No.  333-15529)  which became effective on November 5,
                    1996.)


                                       37
<PAGE>

   Exhibit
   No.                                  Description of Exhibit
   -------                              ----------------------

   10.1             Form   of  Non-Competition  and  Non-Disclosure    Agreement
                    executed by substantially all option holders.  (Incorporated
                    by reference to the Company's Registration Statement on Form
                    S-1 (File Number  33-60986)  which became  effective on June
                    14, 1993.)

   10.2             Form of  Employee's Invention  Assignment  and  Confidential
                    Information  Agreement.  (Incorporated  by  reference to the
                    Company's  Registration  Statement  on Form S-1 (File Number
                    33-60986) which became effective on June 14, 1993.)

   10.3             Lease  Agreements  between  the Company and Philip J. Bowers
                    & Company  dated  September  20,  1988 and May 13,  1991 and
                    modified June 10, 1992 for the Company's  Tinton Falls,  New
                    Jersey   Facilities.   (Incorporated  by  reference  to  the
                    Company's  Registration  Statement  on Form S-1 (File Number
                    33-60986) which became effective on June 14, 1993.)

   10.4*            Indemnification  Agreement  as  of  August 22, 1994  by  and
                    between the Company and James K.  Dutton.  (Incorporated  by
                    reference to the Company's Quarterly Report on Form 10-Q for
                    the quarterly period ended October 1, 1994 filed on November
                    8, 1994.)

   10.5             Lease Agreement, dated May 15, 1994  between the Company and
                    John Donato,  Jr., d/b/a Mid Atlantic  Industrial  Co., with
                    Security  Amendment and  Subordination,  Attornment  and Non
                    Disturbance  Agreement  dated May 25,  1994  executed by the
                    Company,  as lessee,  John Donato,  Jr., as  mortgagor,  and
                    Starbase II Partners,  L.P., as mortgagee.  (Incorporated by
                    reference to the  Company's  Annual  Report on Form 10-K for
                    the year ended December 31, 1994 filed on April 13, 1995.)

   10.6*            Indemnification Agreement as of March 1, 1995 by and between
                    the Company and Gale R. Aguilar.  (Incorporated by reference
                    to the  Company's  Annual  Report  on Form 10-K for the year
                    ended December 31, 1994 filed on April 13, 1995.)

   10.7*            Indemnification Agreement as of April 5, 1994 by and between
                    the Company and Gregg M. Azcuy.  (Incorporated  by reference
                    to the  Company's  Annual  Report  on Form 10-K for the year
                    ended December 31, 1994 filed on April 13, 1995.)

   10.8*            Indemnification  Agreement as  of September  12, 1994 by and
                    between the Company and Louis J. Altieri.  (Incorporated  by
                    reference to the  Company's  Annual  Report on Form 10-K for
                    the year ended December 31, 1994 filed on April 13, 1995.)


                                       38
<PAGE>

   Exhibit
   No.                             Description of Exhibit
   -------                         ----------------------

   10.9*            Indemnification  Agreement  as  of  December  6, 1994 by and
                    between the Company and Michael E. Faherty. (Incorporated by
                    reference to the  Company's  Annual  Report on Form 10-K for
                    the year ended December 31, 1994 filed on April 13, 1995.)

   10.10*+          Senior  Staff  Change  In  Control Severance  And  Incentive
                    Compensation  Pay  Agreement  by and between the Company and
                    Gregg M. Azcuy.

   10.11*+          Senior  Staff  Change  In  Control  Severance And  Incentive
                    Compensation  Pay  Agreement  by and between the Company and
                    Louis J. Altieri.

   10.12*+          Senior  Staff  Change In  Control  Severance  And  Incentive
                    Compensation  Pay  Agreement  by and between the Company and
                    Priyan Guneratne.

   10.13*           Indemnification Agreement as of June 20, 1996 by and between
                    the  Company  and  Thomas  I.  Unterberg.  (Incorporated  by
                    reference to the Company's Quarterly Report on Form 10-Q for
                    the  quarterly  period ended June 30, 1996,  filed on August
                    14, 1996.)

   10.14*           Indemnification Agreement as of June 20, 1996 by and between
                    the Company and Frank R. Triolo.  (Incorporated by reference
                    to the  Company's  Quarterly  Report  on Form  10-Q  for the
                    quarterly  period ended June 30,  1996,  filed on August 14,
                    1996.)

   10.15*           Indemnification Agreement as of June 20, 1996 by and between
                    the Company and Donald E. Fowler. (Incorporated by reference
                    to the  Company's  Quarterly  Report  on Form  10-Q  for the
                    quarterly  period ended June 30,  1996,  filed on August 14,
                    1996.)

   10.16*           Indemnification  Agreement  as of  August  22,  1996  by and
                    between the Company and Priyan  Guneratne.  (Incorporated by
                    reference to the Company's  Annual Report on Form 10-K/A for
                    the annual period ended December 31, 1996 filed on March 28,
                    1997).

   10.17*           1995   Employee   Stock   Purchase  Plan  of   the  Company.
                    (Incorporated  by  reference  to  the  Company's  Form  S-8,
                    Registration  Statement  under  the  Securities  Act of 1933
                    (File  No.  33-93480)  which  became  effective  on June 14,
                    1995.)

   10.18+           Master Sales Agreement  dated  September  23,  1999,  by and
                    between the Company and Hitachi Computer Products  (America)
                    Inc., as amended.

   10.19            Agreement  dated August 13, 1996 by and between  the Company
                    and AT&T Capital Corporation.  (Incorporated by reference to
                    the  Company's  Annual  Report on Form 10-K/A for the annual
                    period ended December 31, 1996 filed on March 28, 1997).

                                       39
<PAGE>

   Exhibit
   No.                             Description of Exhibit
   -------                         ----------------------

   10.20            Factoring Agreement  dated July 9, 1997 between  the Company
                    and NationsBanc  Commercial  Corporation.  (Incorporated  by
                    reference to the Company's Quarterly Report on Form 10-Q for
                    the quarterly period ended June 30, 1997, filed on August 6,
                    1997).

   20               Listing of Subsidiaries.  (Incorporated  by reference to the
                    Company's Annual Report on Form 10-K/A for the annual period
                    ended December 31, 1996 filed on March 28, 1997).

   23+              Consent of Ernst & Young LLP.

   27+              Financial Data Schedule.

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

   *                A management  contract or  compensatory  plan or arrangement
                    required to be filed as an exhibit pursuant to Item 14(c) of
                    Form 10-K.

   +                Filed herewith.  All other exhibits previously filed.


                                       40
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE


                                                                           Page
                                                                           ----

Report of Independent Auditors.............................................F-2

Consolidated Balance Sheets as of
   December 31, 1998 and 1999..............................................F-3

Consolidated Statements of Operations for
   each of the three years in the period ended
   December 31, 1999.......................................................F-4

Consolidated Statements of Shareholders'
   Equity for each of the three years in
   the period ended December 31, 1999......................................F-5

Consolidated Statements of Cash Flows
   for each of the three years in the period
   ended December 31, 1999.................................................F-6

Notes to Consolidated Financial Statements.................................F-7

Schedule II - Valuation and Qualifying Accounts............................S-1


Schedules other than those listed are omitted as they are not applicable, or the
required or equivalent information has been included in the financial statements
or notes thereto.



                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ECCS, Inc.

     We have audited the accompanying  consolidated balance sheets of ECCS, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended  December 31, 1999. Our audits also included the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
ECCS, Inc. and  subsidiaries at December 31, 1998 and 1999, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 1999, in conformity  with  accounting  principles
generally  accepted in the United  States.  Also,  in our  opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

                                                /s/ ERNST & YOUNG LLP

MetroPark,  New Jersey
February 8, 2000, except for Note 15, as to which the date is April 14, 2000



                                      F-2
<PAGE>

                                   ECCS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                               --------------------------------
                                                                                  1998                   1999
                                                                               ------------           ---------
<S>                                                                            <C>                   <C>
Assets
Current Assets:
   Cash and cash equivalents...........................................        $   5,374             $   7,993
   Accounts receivable, less allowance for doubtful accounts of $334
    in 1998 and $0 in 1999.............................................            6,644                 5,829
   Inventories.........................................................            5,563                 5,570
   Prepaid expenses and other receivables..............................              314                   254
                                                                               ---------             ---------
                                                                                  17,895                19,646
Property, plant and equipment (net)....................................            1,916                 1,733
Capitalized software (net).............................................            1,302                 1,790
Other assets...........................................................              261                    62
                                                                               ---------             ---------
          Total assets.................................................        $  21,374             $  23,231
                                                                               =========             =========

Liabilities and Shareholders' Equity
Current Liabilities:
   Payable to Finova Capital...........................................        $   1,231             $     968
   Current portion of capital lease....................................              110                   158
   Accounts payable....................................................            2,800                 1,631
   Accrued expenses and other..........................................            1,140                 1,874
   Warranty............................................................              523                   746
   Customer deposits, advances and other credits.......................              122                    69
                                                                               ---------             ---------
                                                                                   5,926                 5,446
Capital lease obligations, net of current portion......................              135                    67
Deferred rent..........................................................               81                    17
                                                                               ---------             ---------
                                                                                   6,142                 5,530
                                                                               ---------             ---------
Shareholders' Equity:
   Preferred stock, $.01 par value per share, Authorized, 3,000,000
    shares;
    None issued and outstanding at December 31, 1998 and
    December 31, 1999..................................................               --                    --
   Common stock, $.01 par value per share, Authorized, 20,000,000 shares;
    Issued and outstanding, 11,027,084 shares and 11,341,318
    shares at December 31, 1998 and December 31, 1999, respectively....              110                   113
   Capital in excess of par value - common.............................           25,860                26,374
   Accumulated deficit.................................................          (10,738)               (8,786)
                                                                               ---------             ---------
                                                                                  15,232                17,701
                                                                               ---------             ---------
       Total Liabilities and Shareholders' Equity......................        $  21,374             $  23,231
                                                                               =========             =========
</TABLE>

                                      F-3
<PAGE>

                                   ECCS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                       1997                 1998                 1999
                                                  --------------      ---------------      ---------------

<S>                                                <C>                 <C>                  <C>
Net sales.................................         $    34,001         $    28,466          $    39,761

Cost of sales.............................              24,226              20,452               26,777
                                                   -------------       --------------       --------------
  Gross profit............................               9,775               8,014               12,984

Operating expenses:
  Selling, general & administrative.......               6,838               8,378                9,693
  Research & development..................               1,687               2,683                1,939
                                                   -------------       --------------       --------------
                                                         8,525              11,061               11,632
                                                   -------------       --------------       --------------

Operating income (loss)...................               1,250              (3,047)               1,352

  Net interest expense (income)...........                  28                (390)                (162)
                                                   -------------       --------------       --------------
Income (loss) before income tax benefit
  and extraordinary item..................               1,222              (2,657)               1,514
  Income tax benefit......................                  --                  --                 (438)
                                                   -------------       --------------       --------------
Income (loss) before extraordinary item...               1,222              (2,657)               1,952
  Extraordinary item......................                 120                  --                   --
                                                   -------------       --------------       --------------
Net income (loss) ........................               1,102              (2,657)               1,952

  Preferred dividends.....................                 192                  --                   --

Net income (loss) applicable to
  common shares...........................         $       910         $    (2,657)         $     1,952
                                                   =============       ==============       ==============
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss)  per common share before
  extraordinary item - basic .............         $      0.16         $     (0.24)         $      0.18
                                                   =============       ==============       ==============
Extraordinary charge......................         $     (0.02)        $        --          $        --
                                                   =============       ==============       ==============

Net income (loss)  per common
  share - basic...........................         $      0.14         $     (0.24)         $      0.18
                                                   =============       ==============       ============
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Income (loss)  per common  share before
  extraordinary item - diluted............         $      0.12         $     (0.24)         $      0.16

Extraordinary charge......................         $     (0.01)        $        --          $        --
                                                   =============       ==============       ============
Net income (loss)  per common
  share - diluted.........................         $      0.11         $     (0.24)         $      0.16
                                                   =============       ==============       ============
Weighted average number of common and
  dilutive shares - basic.................               6,702              10,969               11,093
                                                   =============       ==============       ============
Weighted average number of common and
  dilutive shares - diluted...............              10,035              10,969               11,978
                                                   =============       ==============       ============
</TABLE>

                                      F-4
<PAGE>

                                   ECCS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                       Common Stock                        Preferred Stock
                          -------------------------------------------------------------------------

                                                   Capital in                           Capital in                       Total
                                                   Excess of                            Excess of     Accumulated     Shareholders'
                             Shares      Amount    Par Value      Shares     Amount     Par Value       Deficit          Equity
                          ---------------------------------------------------------------------------------------------------------
<S>                         <C>          <C>       <C>           <C>         <C>         <C>           <C>            <C>
Balance at December 31,
  1996.................     4,432,216    $   44    $  10,254     2,100,000   $  21       $ 4,522       $ (8,664)      $ 6,177

Conversion of Series B and
  Series C Convertible
  Preferred Stock to
  Common...............     3,770,590        38        4,505    (2,100,000)    (21)       (4,522)            --            --

Issuance of stock......     2,629,018        26       10,569            --      --            --             --        10,595

Stock option exercises.        86,364         1          287            --      --            --             --           288

Dividends paid.........            --        --           --            --      --            --           (519)         (519)

Net income.............            --        --           --            --      --            --          1,102         1,102
                           ----------    ------    ---------    ----------   -----       -------       --------       -------
Balance at December 31,
  1997.................    10,918,188       109       25,615            --      --            --         (8,081)       17,643

Issuance of stock and stock
  option exercises.....       108,896         1          245            --      --            --            --            246

Net loss...............            --        --           --            --      --            --        (2,657)        (2,657)
                           ----------    ------    ---------    ----------  ------       -------       -------        -------
Balance at December 31,
  1998.................    11,027,084       110       25,860            --      --            --       (10,738)        15,232

Issuance of stock and stock
  option exercises......      314,234         3          514            --      --            --            --            517

Net income..............           --        --           --            --      --            --         1,952          1,952
                           ----------    ------     --------    ----------   -----      --------      --------        -------

Balance at December 31,
  1999..................   11,341,318    $  113     $ 26,374    $       --   $  --      $     --      $ (8,786)       $17,701
                           ==========    ======     ========    ==========   =====      ========      ========        =======
</TABLE>


                                      F-5
<PAGE>

                                   ECCS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                  ---------------------------------------------------
                                                                        1997              1998               1999
                                                                  --------------     -------------       ------------
<S>                                                                 <C>               <C>                 <C>
Cash flows from operating activities:
Net income (loss)...........................................        $   1,102         $  (2,657)          $   1,952
   Adjustments  to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
    Extraordinary item......................................              120                --                  --
    Depreciation and amortization...........................            1,168             1,035               1,515
    Write off of capitalized software                                                       366                  --
Change in operating assets and liabilities:
    (Increase) decrease in accounts receivable..............           (2,575)             (907)                815
    Decrease (increase) in inventories......................               84              (967)                 (7)
    (Increase) decrease in prepaid expenses and other.......             (538)              276                 259
    Increase (decrease) in accounts payable, accrued
      liabilities and other.................................              345            (1,289)               (212)
    Decrease in customer deposits...........................             (424)             (288)                (53)
                                                                    ---------         ---------           ---------
Net cash (used in) provided by operating activities.........             (718)           (4,431)              4,269
                                                                    ---------         ---------           ---------
Cash flows from investing activities:
   Additions to property, plant and equipment...............             (809)           (1,208)               (812)
   Additions to capitalized software........................             (602)           (1,047)             (1,072)
                                                                    ---------         ---------           ---------
Net cash used in investing activities.......................           (1,411)           (2,255)             (1,884)
                                                                    ---------         ---------           ---------
Cash flows from financing activities:
   Borrowings under revolving credit agreement..............           18,198            11,381              16,624
   Repayments under revolving credit agreement..............          (18,929)          (12,412)            (16,624)
   (Decrease) increase in payable to Finova Capital.........              (64)            1,231                (263)
   Repayment of capital lease obligations...................              (88)              (11)                (20)
   Proceeds from exercise of employee stock options and
     issuance of common stock...............................           10,883               246                 517
   Payment of dividends.....................................             (519)               --                  --
   Cash used for extinguishment of debt.....................             (120)               --                  --
                                                                    ---------         ---------           ---------
Net cash provided by financing activities...................            9,361               435                 234
                                                                    ---------         ---------           ---------
Net increase (decrease) in cash and cash equivalents........            7,232            (6,251)              2,619
Cash and cash equivalents at beginning of period............            4,393            11,625               5,374
                                                                    ---------         ---------           ---------
Cash and cash equivalents at end of period..................        $  11,625         $   5,374           $   7,993
                                                                    =========         =========           =========
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
     Interest...............................................        $     148         $      88           $     135
                                                                    =========         =========           =========
     Non cash capital lease obligations.....................               --         $     245                  --
                                                                    =========         =========           =========
</TABLE>

                                      F-6
<PAGE>

                                   ECCS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1999

               (DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)


NOTE 1 -- THE COMPANY

     ECCS,  Inc.  ("ECCS" or the  "Company")  designs,  manufactures,  sells and
supports fault  tolerant  enterprise  storage  solutions that protect and ensure
access to an organization's  critical data. The Company's  products include high
performance  storage subsystems that meet a wide range of customer  applications
for Open Systems-based  networks,  such as NT, UNIX and Linux operating systems.
The Company's  enterprise  storage  solutions address all three storage markets:
DAS,  in which the storage  device is  connected  directly to a server;  NAS, in
which the  storage  device is  installed  on a  network;  and SAN,  in which the
storage  device is used in a specialized  network.  These  connectivity  options
provide storage users the flexibility to choose and deploy a particular  storage
solution to meet their needs.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
and its  subsidiaries.  None of the  subsidiaries  are active.  All  significant
intercompany balances and transactions have been eliminated.

     CASH AND CASH EQUIVALENTS

     The  Company  considers  short-term  investments  with a maturity  of three
months or less when purchased to be cash equivalents.

     INVENTORIES

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

     PROPERTY, PLANT AND EQUIPMENT

     Property,  plant  and  equipment  are  carried  at cost.  Depreciation  and
amortization  are provided on a  straight-line  basis over the estimated  useful
lives ranging from 3 to 5 years.

     Equipment  under  capital  leases is recorded at the lower of fair value or
present  value  of  minimum  lease  payments  at the  inception  of  the  lease.
Amortization of the leased property is computed using the  straight-line  method
over the term of the lease.

                                      F-7
<PAGE>

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value amounts for cash,  accounts  receivable  and short term debt
approximate carrying amounts due to the short maturity of these instruments.

     SOFTWARE DEVELOPMENT COSTS

     The Company  capitalizes  software  development  costs in  accordance  with
Statement  of  Financial  Accounting  Standards  ("SFAS") No. 86. Such costs are
capitalized  after  technological   feasibility  has  been  demonstrated.   Such
capitalized  amounts are amortized  commencing  with product  introduction  on a
straight-line  basis  utilizing the estimated  economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of  sales  and  aggregated,  $605,  $190  and $586  for  1997,  1998  and  1999,
respectively.  At December  31,  1999,  the Company  has  capitalized  $4,736 of
software  development  costs,  of which $366 has been written off and $2,580 has
been amortized. In 1998, the Company discontinued its efforts to develop a fibre
controller  and a  controller  design  that  incorporates  Tandem's  Server  Net
Technology. As a result, the Company incurred a one-time charge in 1998 of $366.

     IMPAIRMENT OF LONG-LIVED ASSETS

     In  accordance  with  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of",  the Company
records impairment losses on long-lived assets used in operations or expected to
be disposed of when  indicators of impairment  exist and the cash flows expected
to be derived  from those  assets  are less than the  carrying  amounts of those
assets. No such events and circumstances have occurred.

     REVENUE RECOGNITION

     In general, revenue is recognized upon shipment of the product or system or
as services are provided. Periodically,  revenue is recognized for product which
is being held at the  customer's  request.  Revenue is only  recognized  on such
product when all risks of ownership  have passed to the customer and the Company
has  no  specific  performance   obligations  remaining.   Revenues  related  to
maintenance   contracts  are  recognized  over  the  respective   terms  of  the
maintenance contracts.  Revenue for certain major product enhancements and major
new product offerings,  for which the Company believes that significant  product
development  risks may exist which  realistically  can be addressed  only during
live  beta  testing  at  end-user  sites,  is not  recognized  until  successful
completion of such end-user beta testing.

     WARRANTY

     Estimated future warranty obligations related to ECCS products are provided
by charges to operations in the period the related revenue is recognized.


                                      F-8
<PAGE>

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     RESEARCH AND DEVELOPMENT COSTS

     Research  and  development  costs are  expensed  as  incurred,  except  for
software development costs as indicated above.

     INCOME TAXES

     Income taxes are accounted for by the liability  method in accordance  with
the provisions of SFAS No. 109 "Accounting for Income Taxes".

     STOCK BASED COMPENSATION

     SFAS No. 123, "Accounting for Stock-Based  Compensation,"  encourages,  but
does not require companies to record compensation cost for stock-based  employee
compensation  plans at fair value. The Company has chosen to continue to account
for  stock-based  compensation  using the intrinsic  value method  prescribed in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"  and related  Interpretations.  Accordingly,  compensation  cost for
stock options  generally is measured as the excess, if any, of the quoted market
price of the Company's stock over the amount an employee must pay to acquire the
stock on the date that both the  exercise  price and the  number of shares to be
acquired pursuant to the option are fixed.

     PER SHARE INFORMATION

     Per share  information  is  presented  in  accordance  with  SFAS No.  128,
Earnings per Share.  Basic earnings per share  excludes any dilutive  effects of
options,  warrants  and  convertible  securities.  Diluted  earnings  per  share
includes the dilutive effect of all such securities.

     USE OF ESTIMATES

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

     NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statements of
Financial  Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities."  SFAS No. 133  establishes  accounting and reporting  standards for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
is now effective for the year beginning January 1, 2001. As the Company does not
currently engage in derivatives or hedging  transactions,  we believe that there
will be no impact to the Company's results of operations,  financial position or
cash flows upon the adoption of SFAS No. 133.

                                      F-9
<PAGE>

NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS

     In 1995, the Company entered into a Manufacturing  Services  Agreement with
Unisys, formerly its primary manufacturer,  which defined the terms of sales and
support services. Pursuant to such agreement, Unisys manufactured certain of the
Company's products for use in the Company's  proprietary  systems as well as for
the direct sale to end-users. In February 1999, Unisys notified the Company that
Unisys was closing its Winnipeg computer storage systems  manufacturing plant by
July  31,  1999  and  accordingly  the  Manufacturing   Services  Agreement  was
terminated at that time. The Company's  purchases  under this agreement  totaled
$7,800, $6,600 and $354 in 1997, 1998 and 1999, respectively.  Subsequent to the
termination of the Manufacturing  Services Agreement,  the Company  manufactured
certain products in-house under such agreement from August to December 1999.

     In September  1999,  the Company  entered into a Master Sale Agreement with
Hitachi Computer Products  (America),  Inc. Pursuant to such agreement,  Hitachi
began manufacturing certain of the Company's products in January 2000 for use in
the Company's fault tolerant  enterprise storage  solutions.  The agreement does
not contain specific  quantity  commitments and purchases are made on a purchase
order basis.  The agreement does not include any long-term  commitment by either
party.

     Sales to the Company's primary alternate channel partner, Unisys, accounted
for  28.0% of the  Company's  net  sales in 1998 and 8.2% in 1999.  All sales to
Unisys were sales of enterprise storage solutions.

     The United States Air Force,  an end user of the Company's  products  which
purchases such products  through KKP  Corporation,  Worldwide  Technologies  and
other government  contractors,  purchased $15,000 of products,  or 44.0%, of the
Company's total net sales in 1997. In 1998 such sales totaled $9,579,  or 33.7%,
of total  sales and for 1999 such  sales  totaled  $23,216,  or 58.4%,  of total
sales.  The  Company  cannot be  certain  that its  sales to the U.S.  Air Force
through Federal  Integrators will not be adversely effected by the investigation
further discussed in Note 15. There are no minimum purchase requirements.

     The Company has a supply  arrangement with Bell  Microproducts  pursuant to
which the Company orders from Bell  Microproducts  when,  and as needed,  and on
terms  negotiated at the time of each such order.  There are no minimum purchase
requirements. The arrangement is terminable by either party at any time. In 1997
and 1998,  purchases from Bell Microproducts  totaled  approximately  $4,200, or
17.2%,  and $5,100,  or 23.3%,  of all  purchases  respectively.  In 1999,  such
purchases totaled $10,776, or 43.5%, of all purchases.


                                      F-10
<PAGE>

NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS (CONTINUED)

     SEGMENT INFORMATION

     All of the  Company's  revenues  are  generated in the United  States.  The
Company  believes that it has one operating  segment and classifies its revenues
based upon its primary sales channels:  commercial and other Federal  customers;
U.S.  Air Force;  and  alternate  channel  partners.  All Company  products  are
available  for  sale in each of the  channels.  Revenues  by sales  channel  are
regularly  reviewed by the chief operating  decision maker.  The following table
sets forth,  for the periods  indicated,  the net sales derived from each of the
Company's sales channels:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                                     -----------------------
                                                                1997          1998          1999
                                                              --------      --------      --------
<S>                                                           <C>           <C>           <C>
     Direct:
       Commercial and other Federal customers..............   $ 6,461       $ 7,960       $12,638
       U.S. Air Force......................................    14,960         9,579        23,216
     Indirect:
       Alternate channel partners..........................    12,580        10,927         3,907
                                                              -------       -------       -------
                                                              $34,001       $28,466       $39,761
                                                              =======       =======       =======
</TABLE>

     All operating  expenses and assets of the Company are combined and reviewed
by the chief operating decision maker on an enterprise-wide  basis, resulting in
no additional discrete financial information or reportable segment information.

NOTE 4 -- INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                             ----------------------------------
                                                                                  1998                 1999
                                                                             --------------       -------------
<S>                                                                          <C>                  <C>
Purchased parts.....................................................         $        2,500       $       1,497
Finished goods......................................................                  3,848               5,047
                                                                             --------------       -------------
                                                                                      6,348               6,544
     Less: inventory valuation reserve..............................                    785                 974
                                                                             --------------       -------------
                                                                             $        5,563       $       5,570
                                                                             ==============       =============
</TABLE>

                                      F-11
<PAGE>

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                -------------------------------
                                                                                   1998                  1999
                                                                                ---------              --------
<S>                                                                             <C>                    <C>
Property............................................................            $    473               $   487
Computer equipment..................................................               4,929                 5,586
Vehicles............................................................                  47                    35
Leasehold improvements..............................................                 407                   424
Equipment under capital leases......................................                 651                   770
                                                                                --------               -------
                                                                                   6,507                 7,302
Less accumulated depreciation and amortization, including $361 and
   $426 relating to equipment under capital leases at December 31,
   1998 and December 31, 1999, respectively.........................               4,591                 5,569
                                                                                --------               -------
                                                                                $  1,916               $ 1,733
                                                                                ========               =======
</TABLE>

NOTE 6 -- LOANS PAYABLE TO BANK OF AMERICA AND NOTE PAYABLE TO FINOVA CAPITAL

     Until July 30, 1997,  the Company had a financing  facility  with  Fidelity
Funding of California,  Inc.  which  provided for maximum  eligible (as defined)
accounts  receivable  financing of $7,000 at the prime  lending rate with a 0.5%
transaction fee applied to each borrowing. The weighted average interest rate on
such line was 7.3% in 1997. Such financing  facility was terminated in July 1997
in connection with the consummation of the Company's new financing facility with
Bank of  America  ("BOA")  and all  outstanding  amounts  have been  repaid.  In
connection with the termination of such financing facility, the Company incurred
a one-time extraordinary charge of $120.

     On July  9,  1997,  the  Company  entered  into a full  recourse  factoring
facility with BOA which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85.0% of Eligible  Receivables (as defined).  Interest on
such  advances is payable  monthly in arrears at the prime  lending rate and the
Company is obligated to pay certain annual fees. The factoring facility is for a
period of three years  (unless  terminated by BOA by providing the Company sixty
days prior written  notice)  beginning on July 30, 1997. The  obligations of the
Company under such  agreement are  collateralized  by  substantially  all of the
assets of the Company.  As of December 31, 1999,  the Company had no outstanding
balance under this full recourse factoring facility.

     On December 1, 1997, Finova Capital Corp. ("Finova") acquired the Company's
$2,000 general line of credit with AT&T-CFC. The Company renewed its credit line
with Finova upon its  expiration  on January 31, 1999 and such  general  line of
credit was  increased to $3,000 and extended  through  January 31, 2000,  on the
same terms and  conditions.  On  January  31,  2000,  the amount of the line was
returned  to $2,000 and the line was  extended  through  January 31,  2001.  The
Company uses this line of credit to augment its purchasing  ability with various
vendors.

                                      F-12
<PAGE>

NOTE 6 -- LOANS  PAYABLE  TO  BANK  OF  AMERICA  AND  NOTE  PAYABLE  TO   FINOVA
          (CONTINUED)

     The   Company's   obligations   under  the   agreement   with   Finova  are
collateralized  by substantially  all of the assets of the Company.  The maximum
amount that the  Company  has drawn down on this line of credit  during 1999 was
$3,295 as the Company  was  allowed to exceed the line of credit by $295.  As of
December  31,  1999,  the Company had a balance of $968  outstanding  under this
credit line,  and  available  credit under such line  towards  future  inventory
purchases was approximately  $2,032. The Company has certain financial covenants
with such line of credit with  Finova.  The Company is in  compliance  with such
covenants as of December 31, 1999.

     Finova and BOA have entered into an intercreditor  subordination  agreement
with respect to their relative  interests in substantially  all of the Company's
assets.

     The Company's  agreement  with BOA  restricts the Company's  ability to pay
certain dividends without Bank of America's prior written consent. The Company's
agreement with Finova prohibits the payment of dividends.

NOTE 7 -- LEASES

     The Company has capitalized leases for certain equipment. Capitalized lease
obligations entered into in 1998 are payable through the second quarter of 2000.
In addition, the Company is obligated through the Year 2000 under non-cancelable
operating leases for office and warehouse space. The leases provide for all real
estate taxes and  operating  expenses to be paid by the Company.  Under  certain
leases,  the Company has the option to renew for  additional  terms at specified
rentals. Rental expense for such leases approximated $507, $523 and $516 for the
years ended December 31, 1997, 1998 and 1999, respectively.

     Deferred rent on the accompanying consolidated balance sheet represents the
excess of rents to be paid in the  future  over  rent  expense  recognized  on a
straight-line basis.

     The following is a schedule of future  minimum  lease  payments for capital
and non-cancelable  operating leases, together with the present value of the net
minimum lease payments, as of December 31, 1999:

<TABLE>
<CAPTION>
                                                          Capitalized             Operating
                                                            Leases                  Leases
                                                       -----------------        --------------
<S>                                                        <C>                     <C>
2000..................................................     $    162                $    494
2001..................................................           60                      25
2002..................................................            8
Thereafter............................................           --                      --
                                                           --------                --------
Total minimum lease payments..........................          230                $    519
                                                           --------                ========
Less amount representing interest.....................            5
                                                           --------
Present value of net minimum lease payments...........     $    225
                                                           ========
</TABLE>

                                      F-13
<PAGE>

NOTE 8 -- CONVERTIBLE PREFERRED STOCK

     The Company has an authorized class of 3,000,000 shares of Preferred Stock,
which  may be  issued by the Board of  Directors  on such  terms,  and with such
rights,  preferences  and  designations  as the Board may determine.  On May 19,
1995, the Company  consummated a private  placement of 6% Cumulative  Redeemable
Convertible  Preferred Stock, Series B (the "Series B Preferred Stock") pursuant
to which the Company issued and sold to certain  investors  1,600,000  shares of
Series B Preferred  Stock at a price per share of $1.25.  Also,  on May 17, 1996
and May 30, 1996, the Company  consummated a private placement of 500,000 shares
of the Cumulative Convertible Preferred Stock, Series C (the "Series C Preferred
Stock") at a price per share of $6.00.  Upon the closing of the Company's public
offering in August 1997,  all 1,600,000  shares of the Series B Preferred  Stock
were  automatically  converted  into  1,770,590  shares of the Company's  Common
Stock, and all 500,000 shares of the Series C Preferred Stock were automatically
converted into 2,000,000 shares of the Company's Common Stock.

NOTE 9 -- STOCK OPTION PLANS

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting  for  Stock  Issued  to  Employees,"  and  related  Interpretations.
Accordingly,  compensation  cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's  stock at the date of the grant
over the amount an employee must pay to acquire the stock.

THE 1989 STOCK OPTION PLAN

     Under the Company's  1989 Stock Option Plan, as amended,  900,000 shares of
common stock can be issued  through  incentive  stock options and  non-statutory
stock options. The incentive stock options allow designated full-time employees,
including  officers,  to purchase shares of common stock at prices equal to fair
market value at the date of grant.  For individuals who own more than 10% of the
stock of the  Company,  the option price of the shares may not be less than 110%
of the fair  market  value on the date of grant.  The  incentive  stock  options
expire five years from the date of the grant for  shareholders  owning more than
10% of the voting rights (as defined).  The  non-statutory  stock options may be
granted to full-time employees, including officers and non-employee directors or
consultants at prices as determined by the Board of Directors. The stock options
are exercisable over a period determined by the Board of Directors.  To date, no
options have been granted with a vesting period of more than five years.


                                      F-14
<PAGE>

NOTE 9 -- STOCK OPTION PLANS (CONTINUED)

     A summary of the changes in outstanding common stock options under the 1989
Stock Option Plan is as follows:

<TABLE>
<CAPTION>
                                                                                           Options Outstanding
                                                                              --------------------------------------------
                                                                                                         Weighted-Average
                                                                                   Shares                 Exercise Price
                                                                              ---------------            ----------------
<S>                                                                                <C>                         <C>
Balance at December 31, 1996........................................               764,176                     $2.65
                                                                                ----------
   Options exercised................................................               (41,283)                    $2.49
   Options canceled.................................................               (27,175)                    $2.67
                                                                                ----------
Balance at December 31, 1997........................................               695,718                     $2.66
                                                                                ----------
   Options exercised................................................               (25,225)                    $2.55
   Options canceled................................................               (479,734)                    $2.69
                                                                                ----------
Balance at December 31, 1998........................................               190,759                     $2.60
                                                                                ----------
   Options exercised................................................               (69,159)                    $2.02
   Options canceled.................................................                    --                        --
                                                                                ----------
Balance at December 31, 1999........................................               121,600                     $2.04
                                                                                ----------
Options exercisable at December 31, 1999............................               121,600                     $2.04
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding  at December 31, 1999 in the 1989 Stock Option Plan is six years and
the exercise price range is $1.00 - $2.87.

1996 STOCK OPTION PLAN

     In June 1996, the Board of Directors of the Company  adopted the 1996 Stock
Plan.  In June 1998,  the  shareholders  approved  an  increase in the number of
shares  subject to the 1996 Stock  Plan.  Under the 1996 Stock  Plan,  1,600,000
shares of common stock  currently can be issued through  incentive stock options
and  non-statutory  stock options  and/or stock purchase  rights.  The incentive
stock options allow designated employees, non-employee directors and consultants
to purchase  shares of common  stock at prices equal to fair market value at the
date of  grant.  For  individuals  who own  more  than  10% of the  stock of the
Company,  the  option  price of the shares may not be less than 110% of the fair
market value on the date of grant. The incentive stock options expire five years
from the date of grant  for  shareholders  owning  more  than 10% of the  voting
rights  (as  defined).  The  non-statutory  stock  options  may  be  granted  to
employees, non-employee directors and consultants at prices as determined by the
Board of Directors.  The stock options are exercisable over a period  determined
by the Board of Directors.  To date, no options have been granted with a vesting
period of more than five years.


                                      F-15
<PAGE>

NOTE 9 -- STOCK OPTION PLANS (CONTINUED)

     A summary of the changes in outstanding common stock options under the 1996
Stock Plan is as follows:
<TABLE>
<CAPTION>

                                                                                        Options Outstanding
                                                                              -------------------------------------
                                                                                                 Weighted-Average
                                                                                Shares            Exercise Price
                                                                              ------------     --------------------

<S>                                                                            <C>                 <C>
Balance at December 31, 1996........................................            212,000             $ 4.06
                                                                              ---------
Options exercisable at December 31, 1996............................                 --                 --
   Options granted..................................................            238,500             $ 6.28
   Options canceled.................................................            (31,000)            $ 4.80
                                                                              ---------
Balance at December 31, 1997........................................            419,500             $ 5.28
                                                                              ---------
   Options granted..................................................          1,408,800             $ 1.62
   Options exercised................................................             (2,500)            $ 2.88
   Options canceled.................................................           (646,900)            $ 4.40
                                                                              ---------
Balance at December 31, 1998........................................          1,178,900             $ 1.39
                                                                              ---------
   Options granted..................................................            376,107             $ 5.46
   Options exercised................................................            (81,400)            $ 1.25
   Options canceled.................................................           (575,250)            $ 1.35
                                                                              ---------
Balance exercisable at December 31, 1999............................            898,357             $ 2.95
                                                                              ---------
Options exercisable at December 31, 1999............................            287,650             $ 1.31
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 1999 in the 1996 Stock Option Plan is nine years and
the exercise price range is $1.25 - $10.75.

     In  mid-February  1998, the Company  canceled  options to purchase  106,000
shares of its Common  Stock  under the 1996 Stock Plan.  The Company  previously
granted  such  options on October  28,  1997 at an  exercise  price of $8.00 per
share.  In addition,  in  mid-February  1998 the Company  reissued an equivalent
number of options,  to certain  officers and employees,  at an exercise price of
$4.00 per share.

     On October 21, 1998, the Board of Directors  unanimously  voted in favor of
offering  to  all  employees  who  were  previously  granted  stock  options  an
opportunity to exchange such options for new stock options to purchase shares of
Common Stock of the Company,  at an exercise price equal to $1.25 per share (the
"New  Options"),  the fair market  value of the  Company's  Common Stock on such
date.  The New Options are  exercisable to the extent of one-half on each of the
first and second  anniversary of the date of grant.  The Company offered the New
Options in order to pursue its commitment to retain key employees,  particularly
in light of the highly  competitive  labor market for  technical  personnel.  On
November 5, 1998,  the Company  formally  offered  its  employees  the option to
exchange all  outstanding  options for the New Options  pursuant to the terms of
the 1996 Stock Plan. The number of  outstanding  options  exchanged  pursuant to
this transaction was 1,487,159.  The New Options were granted from both the 1996
Option Plan and the Non-Qualified Stock Option pools.


                                      F-16
<PAGE>

NOTE 9 -- STOCK OPTION PLANS (CONTINUED)

NON-QUALIFIED STOCK OPTIONS

     A  summary  of the  changes  in  outstanding  common  stock  options  under
Non-Qualified Agreements is as follows:

<TABLE>
<CAPTION>
                                                                                       Options Outstanding
                                                                              ---------------------------------------
                                                                                                   Weighted-Average
                                                                                   Shares           Exercise Price
                                                                             ---------------   ----------------------

<S>                                                                            <C>                     <C>
Balance at December 31, 1996........................................              342,191               $ 2.53
                                                                               ----------
   Options granted .................................................              498,400               $ 8.01
   Options exercised................................................               (7,250)              $ 2.13
   Options canceled.................................................               (9,500)              $ 5.22
                                                                               ----------
Balance at December 31, 1997........................................              823,841               $ 5.82
                                                                               ----------
   Options granted..................................................              993,209               $ 2.97
   Options exercised................................................              (37,625)              $ 2.13
   Options canceled.................................................           (1,205,925)              $ 5.53
                                                                               ----------
Balance at December 31, 1998                                                      573,500               $ 1.74
                                                                               ----------
   Options granted..................................................              316,893               $10.75
   Options exercised................................................             (123,691)              $ 1.32
   Options canceled.................................................                 (500)              $ 2.13
                                                                               ----------
Balance at December 31, 1999........................................              766,202               $ 5.37
                                                                               ----------
Options exercisable at December 31, 1999............................              269,655               $ 1.79
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding  at December 31, 1999 under  Non-Qualified  Agreements is nine years
and the exercise price range is $1.25 - $10.75.

     In  mid-February  1998, the Company  canceled  options to purchase  498,400
shares of its Common  Stock  outside of the  Company's  registered  stock option
plans.  The Company  previously  granted  such options on October 28, 1997 at an
exercise price of $8.00 per share. In addition in mid-February  1998 the Company
reissued such options,  to certain officers and employees,  at an exercise price
of $4.00 per share.



                                      F-17
<PAGE>

NOTE 9 -- STOCK OPTION PLANS (CONTINUED)

1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

     In February  1996,  the Board of Directors of the Company  adopted the 1996
Non-Employee  Directors  Stock  Option  Plan (the "1996  Non-Employee  Directors
Plan").  150,000  shares of Common  Stock can be issued  under such plan through
non-statutory stock options.  Under the terms of the 1996 Non-Employee Directors
Plan, each  non-employee  director who first becomes a member of the Board after
approval of such plan by the shareholders of the Company, shall be automatically
granted,  on the date such  person  becomes a member of the Board,  an option to
purchase 30,000 shares of Common Stock. In addition,  each non-employee director
who is a member  of the  Board on the first  trading  day of each year  shall be
automatically  granted on such date,  without  further  action by the Board,  an
option to purchase  5,000 shares of Common Stock.  The exercise  price per share
under the 1996  Non-Employee  Directors  Plan shall be equal to the fair  market
value (as defined) of a share of Common Stock on the applicable  grant date, and
options  granted under the 1996  Non-Employee  Directors  Plan vests over a four
year period.

     A summary of the changes in outstanding common stock options under the 1996
Non-Employee Directors Plan is as follows:

<TABLE>
<CAPTION>
                                                                                       Options Outstanding
                                                                              ------------------------------------
                                                                                                  Weighted-Average
                                                                                 Shares            Exercise Price
                                                                              ------------       ------------------
<S>                                                                             <C>                    <C>
Balance at January 1, 1997..........................................               --                     --
   Options granted..................................................             60,000                $ 4.38
                                                                                -------
Balance at December 31, 1997........................................             60,000                $ 4.38
                                                                                -------
   Options granted..................................................             30,000                $ 6.50
Balance at December 31, 1998                                                     90,000                $ 5.09
                                                                                -------
   Options granted                                                               30,000                $ 1.69
Balance at December 31, 1999........................................            120,000                $ 4.23
                                                                                -------
   Options exercisable at December 31, 1999.........................             50,000                $ 4.69
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 1999 under the 1996  Non-Employee  Directors Plan is
eight years and the exercise price range is $1.69 - $6.50.

STOCK WARRANTS

     At December  31,  1999,  298,848  common stock  purchase  warrants  with an
exercise price of $1.25 per share were outstanding to an officer and director of
the Company.  Such  warrants  expire in 2004.  At December  31,  1999,  all such
warrants were exercisable.

     The Company has reserved  2,205,007 shares of Common Stock for the exercise
of stock options and warrants as described above.


                                      F-18
<PAGE>

NOTE 9 -- STOCK OPTION PLANS (CONTINUED)

FAS 123 PRO FORMA INFORMATION

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by  Statement  No. 123, and has been  determined  as if the Company had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions  for  1997,  1998 and  1999:  risk-free  interest  rates of  between
5.74%-6.73% in 1997,  4.3%-5.74% in 1998 and 4.6%-6.3% in 1999;  dividend yields
of zero; volatility factors of the expected market price of the Company's common
stock of .959 in 1997,  .947 in 1998  and .997 in 1999;  and a  weighted-average
expected  life of four years.  The  weighted  average fair market value of stock
options  issued in 1997,  1998 and 1999 was  $3.32,  $2.20 and $5.47 per  share,
respectively.

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

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma  information is as follows (in thousands except for earnings per share
information):

<TABLE>
<CAPTION>
                                                               1997                  1998                  1999
                                                            ----------            ----------            ----------
<S>                                                          <C>                   <C>                   <C>
Net income (loss) as reported.........................       $ 1,102               $(2,657)              $ 1,952
Pro forma net income (loss)...........................       $   383               $(3,802)              $ 1,538
Income (loss) per share as reported
   Basic..............................................       $   .14               $  (.24)              $   .18
Pro forma income (loss) per share
   Basic..............................................       $   .03               $  (.35)              $   .14
Income (loss) per share as reported - diluted.........       $   .11               $  (.24)              $   .16
Pro forma income (loss) per share - diluted...........       $   .03               $  (.35)              $   .13
</TABLE>

NOTE 10 -- EMPLOYEE STOCK PURCHASE PLAN

     In June 1995, the Company  adopted a 1995 Employee Stock Purchase Plan (the
"Purchase  Plan") and reserved  for  issuance an aggregate of 150,000  shares of
Common Stock.  The Purchase Plan allows  eligible  employees to purchase  Common
Stock,  through payroll deductions during a Purchase Period, at a purchase price
that  shall  be the  lesser  of (a) 85% of the Fair  Market  Value of a share of
Common Stock on the first day of such  Purchase  Period,  or (b) 85% of the Fair
Market Value of a share of Common Stock on the Exercise Date of such


                                      F-19
<PAGE>

NOTE 10 -- EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)

Purchase  Period,  as each of such terms are defined in the 1995 Employee  Stock
Purchase  Plan.  The  option to  purchase  stock  under the  Purchase  Plan will
terminate  December 31, 1999. At December 31, 1999,  196,108  shares were issued
under the Purchase Plan, of which 39,984 were issued in 1999.

NOTE 11 -- INCOME TAXES

     The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                      ---------------------------------------------
                                                                          1997             1998            1999
                                                                      ------------     ------------    ------------
<S>                                                                    <C>              <C>            <C>
Federal:
  Current........................................................      $    --          $    --        $    --
  Deferred.......................................................           --               --             --

State:
  Current........................................................           --               --           (438)
  Deferred.......................................................           --               --             --
                                                                       -------          -------        -------

Total............................................................      $    --          $    --        $  (438)
                                                                       =======          =======        =======
</TABLE>

     Deferred  income taxes reflect the net tax effect of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for tax  purposes.  Significant  components of the
Company's deferred tax balances as of December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                  1998                      1999
                                                                             -------------             ------------
<S>                                                                           <C>                        <C>
Tax credits.........................................................          $    663                   $   753
Net operating losses................................................             4,311                     2,899
Capitalized software................................................              (508)                     (698)
Other...............................................................               648                     1,283
Valuation allowance.................................................            (5,114)                   (4,237)
                                                                              --------                   -------
Total...............................................................                --                        --
                                                                              ========                   =======
</TABLE>

     During 1999,  the Company  utilized  $1,144 of net operating loss carryover
("NOL") for federal tax  purposes.  The Company has NOL  carryovers  for Federal
income tax purposes of approximately $9,134, which will begin to expire in 2009.
The Company also has research and development tax credit  carryovers for Federal
income tax purposes of  approximately  $490, which will begin to expire in 2009.
In addition,  the Company has alternative  minimum tax credits of  approximately
$83, which can be carried forward indefinitely. The Company experienced a change
in  ownership in 1996 as defined by Section 382 of the  Internal  Revenue  Code.
Accordingly,  future use of some of these NOLs and  income  tax  credits  may be
limited.


                                      F-20
<PAGE>

NOTE 11 -- INCOME TAXES (CONTINUED)

     The Company has approximately  $4,820 of state NOL carryforwards which will
begin  to  expire  in  2001  and  state  research  and  development  tax  credit
carryforwards of $272 as of December 31, 1999.

     Under SFAS No. 109, a valuation  allowance is established,  if based on the
weight of available  evidence,  it is more likely than not that a portion of the
deferred tax asset will not be realized. Accordingly, a full valuation allowance
has been  provided to off-set the  Company's  net  deferred tax assets since the
Company is in a cumulative  loss  position.  Such  valuation  allowance  will be
reassessed periodically by the Company.

     The  differences  between the  provision  for income taxes and income taxes
computed using the Federal income tax rate were as follows:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                           --------------------------------------
                                                                             1997          1998            1999
                                                                           --------      --------        --------

<S>                                                                        <C>          <C>              <C>
Computed tax expense (benefit)......................................       $    375     $   (903)        $   509
Decrease (increase) in federal valuation allowance (use of NOL).....           (222)       1,131            (682)
Research and development tax credits................................           (153)        (228)             --
Sale of state NOL and R&D credit/other..............................             --           --            (265)
                                                                           --------     --------         -------



Actual tax expense (benefit)........................................       $     --     $     --         $  (438)
                                                                           ========     ========         =======
</TABLE>

     During the fourth quarter of 1999, the Company sold approximately $7,100 of
state NOL carry forwards and $149 of research and development tax carry forwards
to an unrelated third party for approximately $438.


                                      F-21
<PAGE>

NOTE 12 -- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:

<TABLE>
<CAPTION>
                                                               1997             1998               1999
                                                            ----------       ---------          ---------
<S>                                                         <C>              <C>                <C>
Numerator:
Net income (loss) before extraordinary item                 $    1,222       $ (2,657)          $   1,952
Extraordinary item                                                 120             --                  --
                                                            ----------       --------           ---------
Net income (loss)                                                1,102             --                  --
Preferred stock dividends                                         (192)            --                  --
                                                            ----------       --------           ---------

Numerator for basic earnings per share -
income (loss) available to common shareholders                     910         (2,657)              1,952

Effect of dilutive securities:

Preferred stock dividends                                          192             --                  --
Interest on unpaid preferred stock dividends                        20             --                  --
                                                            ----------       --------           ---------
                                                                   212             --                  --
                                                            ----------       --------           ---------
Numerator for dilutive earnings per share -
income available to common shareholders after
assumed conversion                                               1,122             --                  --

Denominator:

Denominator for basic earnings per share-
weighted-average shares                                          6,702         10,969              11,093

Effect of dilutive securities:

Employee stock options                                             819             --                 727
Warrants                                                            66             --                 158
Convertible preferred stock                                      2,448             --                  --
                                                            ----------      ---------           ---------
                                                                 3,333             --                 885

Dilutive  potential  common shares
Denominator for diluted earnings per share -
Adjusted weighted-average shares and
assumed conversion                                              10,035         10,969              11,978
                                                            ==========      =========           =========

Basic earnings (loss) per share                             $     0.14      $   (0.24)          $    0.18
                                                            ==========      =========           =========
Diluted earnings (loss) per share                           $     0.11      $   (0.24)          $    0.16
                                                            ==========      =========           =========
</TABLE>

NOTE 13 -- COMMITMENTS AND CONTINGENCIES

     The Company has adopted a plan whereby senior  management  will be entitled
to six months severance  payments in the event of certain  terminations  after a
change-in-control  of the Company,  and an incentive  bonus will be paid if such
persons  are  still  in  the  employ  of the  Company  at  the  completion  of a
change-in-control.

                                      F-22
<PAGE>

NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

     In November 1999, Mark Ish and David Boyle,  former  executive  officers of
the Company,  filed a complaint against us and Gregg M. Azcuy, our President and
Chief  Executive  Officer,  in the Superior  Court of New Jersey,  Law Division,
Monmouth County. By the action,  Messrs. Ish and Boyle are seeking  compensatory
damages,  punitive  damages,  attorneys'  fees,  interest  and costs for alleged
breach of multiple  contracts,  fraud and defamation.  The Company believes such
claims are without merit and it intends to vigorously  defend such actions.  The
Company  does not believe  that the outcome of such  litigation  will  adversely
affect its business.

     There are no other individual  material litigation matters pending to which
the Company is party or to which any of its property is subject.

NOTE 14 -- RELATED PARTY TRANSACTION

     On June 6, 1997,  the  Company  entered  into a loan  transaction  with its
President  and Chief  Executive  Officer  (the  "Borrower")  pursuant  to a $250
promissory note in favor of the Company.  Interest on the outstanding  principal
balance of such promissory note is payable monthly at the prime lending rate. At
December 31, 1998, the balance on such  promissory note was $218. The promissory
note  was  payable  over a  five-year  period  beginning  on May  31,  1999.  In
connection  with such  promissory  note,  the  Borrower  granted  the  Company a
security  interest in the  Borrower's  interests in the Company's 1997 Executive
Compensation  Plan and any and all  future  executive  compensation  bonuses  or
similar  compensation to be received by the Borrower.  The Borrower also pledged
to the Company all of his right,  title and interest to 25,000 restricted shares
of the  Company's  Common  Stock and options to purchase  131,000  shares of the
Company's Common Stock as security for the promissory note. On November 2, 1999,
the  Company  received  payment  from  the  Borrower  in  the  amount  of  $227,
representing full payment of the balance on such promissory note.

NOTE 15 - SUBSEQUENT EVENTS

     In late  January  2000,  the  Company  received a subpoena  from the United
States  Attorney's  Office  in  Boston,  Massachusetts  for  the  production  of
documents  in  connection  with  an   investigation   into  Federal   government
purchasing.  The Company has been and intends to continue  cooperating  with the
investigation  and is complying  fully, and intends to continue to comply fully,
with the subpoena.  The Company sells computer  products to companies  which are
used by the Federal  government  to supply  computer  products  to the U.S.  Air
Force.  In addition,  a subpoena has been  received by an officer of the Company
who is expected to testify  before the grand jury.  Such  testimony  has not yet
been  provided.  Although the  investigation  is still in its early  stages,  it
appears that one avenue of inquiry involves the  relationships  and transactions
of  various  suppliers,   manufacturers   (including  the  Company),  and  other
companies,  with companies that provide product and product-related  services to
the U.S.  Air Force.  The  Company  understands  that the  government's  inquiry
includes  a review of the  conduct  of such  companies  and their  officers  and
employees.  The Company  believes  that it has not  violated any federal laws

                                      F-23
<PAGE>

in connection with the Company's sale of computer products  ultimately  received
by the U.S. Air Force.

     On April 7, 2000, the Company  announced that its net sales for the quarter
ended  March 31,  2000 are  expected  to range from  $4,400 to $4,700,  which is
expected  to result in a net loss of $1,000  to $1,500  for the  quarter.  These
results are due primarily to lower sales to the U.S. Air Force  through  Federal
integrators.  Commercial  sales,  while up from the first quarter 1999, are also
expected to be lower than the fourth quarter 1999 level.

                                      F-24
<PAGE>

                                   ECCS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

Column A                                          Column B               Column C              Column D         Column E

                                                                         Additions
                                                                ---------------------------

                                                                Charged          Charged to                      Balance
                                                 Balance at        to              Other                            at
                 DESCRIPTION                     Beginning     Costs and         Accounts-    Deductions-         End of
                                                 of Period      Expenses         Describe      Describe           Period
<S>                                              <C>            <C>              <C>          <C>                <C>
YEAR ENDED December 31, 1999

Allowance for Doubtful
Accounts & Returns/Credits...................    $    334       $    --          $     --     $    334(A)        $    --
                                                 --------       -------          --------     --------           -------
Tax valuation................................    $  5,114       $    --          $     --     $    877(C)        $ 4,237
                                                 --------       -------          --------     --------           -------
Inventory....................................    $    785       $   840       $        --     $    651(B)        $   974
                                                 --------       -------          --------     --------           -------
Warranty.....................................    $    523       $   436          $     --     $    213           $   746
                                                 --------       -------          --------     --------           -------

YEAR ENDED December 31, 1998:

Allowance for Doubtful
Accounts & Returns/Credits...................    $    297       $   204          $     --     $    167(A)      $     334
                                                 --------       -------          --------     --------         ---------
Tax valuation................................    $  3,779       $    --          $  1,335(D)  $     --         $   5,114
                                                 --------       -------          --------     --------         ---------
Inventory....................................    $    708       $   667          $     --     $    590(B)      $     785
                                                 --------       -------          --------     --------         ---------
Warranty.....................................    $    534       $   273          $     --     $    284         $     523
                                                 --------       -------          --------     --------         ---------

YEAR ENDED December 31, 1997:

Allowance for Doubtful
Accounts & Returns/Credits...................    $    184       $   183          $     --     $     70(A)      $     297
                                                 --------       -------          --------     --------         ---------
Tax valuation................................    $  4,072       $    --          $     --     $    293(C)      $   3,779
                                                 --------       -------          --------     --------         ---------
Inventory....................................    $    781       $   840          $     --     $    913(B)      $     708
Warranty.....................................    $    414       $   886          $     --     $    766         $     534
                                                 --------       -------          --------     --------         ---------
</TABLE>


(A)  Amounts written off during the year.
(B)  Amounts  written  off  during  the year or  obsolete  inventory  sold.
(C)  Primarily  due to  utilization  of net  operating  loss.
(D)  Primarily  due to increase in net operating loss.


                                      S-1