CONFORMED COPY

                       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, 2002

                                       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

               STORAGE ENGINE, INC. (formerly known as 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
   -------------------                -----------------------------------------
   None
--------------------------            -----------------------------------------

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

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

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

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



<PAGE>


     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 ]

         Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).

                        Yes:                 No:  X
                            ---                  ---

     The   aggregate   market  value  of  the  voting   common  equity  held  by
non-affiliates of the Registrant on June 28, 2002, based on $1.13 per share, the
last  reported  sale price on the  NASDAQ  SmallCap  Market on that date,  was
$ 2.8 million.

     Indicate  the  number of  shares  outstanding  of each of the  Registrant's
classes of common stock, as of March 28, 2003:

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

Common Stock, $.01 par value                                    2,662,519

     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 2003 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.

<PAGE>

                                TABLE OF CONTENTS

           Item                                                            Page

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

         2.   Properties................................................... 23

         3.   Legal Proceedings............................................ 24

         4.   Submission of Matters to a Vote of Security Holders.......... 26

PART II  5.   Market For the Company's Common Equity and Related
              Shareholder Matters.......................................... 27

         6.   Selected Consolidated Financial Data......................... 30

         7.   Management's Discussion and Analysis of Financial
              Condition and Results of Operations.......................... 31

         7A.  Quantitative and Qualitative Disclosures About Market Risk... 43

         8.   Financial Statements and Supplementary Data.................. 43

         9. Changes in and Disagreements With Accountants on
              Accounting and Financial Disclosure.......................... 43

PART III 10.  Directors and Executive Officers of the Company.............. 44

         11.  Executive Compensation....................................... 44

         12.  Security Ownership of Certain Beneficial Owners
              and Management and Related Shareholder Matters............... 44

         13.  Certain Relationships and Related Transactions............... 44

         14.  Controls and Procedures...................................... 44

PART IV  15.  Exhibits, Financial Statement Schedules,
              and Reports on Form 8-K...................................... 45

SIGNATURES         ........................................................ 46

CERTIFICATIONS   .......................................................... 48

EXHIBIT INDEX      ........................................................ 52

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


                                       -i-
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                           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. Storage Engine, Inc.'s ("SEI," the "Company," "We," "Us," or "Our")
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:
our liquidity and capital resources, component quality and availability, changes
in business  conditions,  changes in our sales strategy and product  development
plans, changes in the data storage or network  marketplace,  competition between
the  Company  and  other  companies  that  may  be  entering  the  data  storage
host/network attached markets,  competitive pricing pressures,  continued market
acceptance  of our open  systems  products,  delays  in the  development  of new
technology, and changes in customer buying patterns.

     Explanatory  Note:  All  dollar  amounts,  other  than  share and per share
amounts, are in thousands.

                                     PART I

ITEM 1. BUSINESS.

General

     The Company is a provider of document imaging solutions and fault tolerant,
cost  effective  enterprise  data storage  solutions  that serve a wide range of
business and government markets. We believe we have significant  experience with
handling,  designing,  engineering,  architecting,  installing and  implementing
information  storage solutions to solve data storage needs.  Having manufactured
products  for OEMs as well as end users,  our  knowledge  and quality  practices
ensure that our data storage  products  provide the reliability  demanded by our
customers.  Our goal is to meet and  exceed  our  customers'  expectations.  The
Company earned ISO 9001 certification in 1999 and has continued to maintain this
certification status of quality.

     Through our knowledge of Direct Attached  Storage (DAS),  Network  Attached
Storage  (NAS),  Storage Area  Networks  (SAN) and the  centralization  of those
technologies/resources,  including disaster recovery and backup technologies, we
seek to design and implement the optimal storage  solution to meet users' needs,
including our

                                       1

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data intensive imaging customers.  All of our products and services are measured
to exacting  standards while offering  considerable  savings.  We offer specific
solutions,  as well as comprehensive  information  management systems, that make
storing,  capturing and distributing information easy and affordable,  including
document  conversions,  workflow  and day forward  solutions  for private or web
enabled content. Our product solutions address centralized data storage,  server
consolidation,  backup  enhancements  and  centralized  management  of  new  and
existing data storage resources.

     We offer complete information storage  implementations,  from the beginning
of the planning  process  through  successful  implementation  - including  24x7
service and support - all from a single provider.

     Our storage  products and services  include our Synchronix and  Synchronism
product lines which supplies our customers with fault tolerant storage solutions
that store,  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,
MS,  UNIX and  Linux  operating  systems  and our  Raven  family  of  integrated
solutions with Sun processors and storage. 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;  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. 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.

     Our imaging solutions focus on providing our customers with a bundled suite
of  products  and  services  that solve all of their  imaging  requirements.  In
addition to our storage  suite of products,  we offer a number of services  that
provide our  customers  with a total  solution  for their  imaging  needs.  Such
services  include  on/off site scanning of historical  and day forward  critical
documents,  data base  management,  network and web based  services  and through
strategic  partners,  software  that allows our  customers to manage the scanned
documents including web based enablers and search engine capabilities.

     A number of products resulted from our product development efforts over the
last five  years,  including  our  Synchronism  Storage  Management  System  and
Synchronix  product  lines.  Our direct  sales  force  concentrates  on sales to
commercial  end users and  Federal  and local  government  end users,  including
imaging  services.  Our direct sales force also works with selected  Value Added
Resellers ("VARs") and assists them in their sales to commercial end users.

     On August 20, 2002, we announced our iConsole Synchronism product. The SYSM
iConsole  features many storage  applications  such as: fault tolerance,  remote
replication,  improved backups,  virtualization,  snapshot copy, centralization,
and call

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<PAGE>

home alerts.  The SYSM  iConsole is easy to implement  and provides an intuitive
interface.  This tool will  enable  many IT  managers  to get  control  of their
storage and server infrastructure and improve the quality of service. We believe
the SYSM  iConsole is an ideal  solution to all of today's  issues facing System
and Data Managers.

     We were incorporated in New Jersey in February 1980 under the name The Word
Store,  Inc. Our name was changed to ECCS,  Inc. in November  1985. Our name was
changed to Storage  Engine,  Inc.  in July 2001.  The  address of the  Company's
principal  corporate offices is One Sheila Drive, Tinton Falls, New Jersey 07724
and our telephone number is 732-747-6995.

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.
However,  in its first decline  since 1998,  the disk storage  systems  hardware
market in the U.S. fell by $5.7 billion, or 18.2%, in 2001, according to a study
by International Data Corporation (IDC). IDC estimates that worldwide market for
disk storage hardware, software and services decreased about 6% in 2001 to about
$57 billion, but is expected to increase to $70.6 billion by 2004.

     The U.S. economic recession and the decline of the dot-com companies,  plus
price  competition  in the U.S.,  sent the disk storage  market into a recession
that is expected to continue worldwide as reported in "2002 Disk Storage Systems
Forecast and Analysis,  2000-2005" by IDC.  Although,  the report predicted that
the U.S.  disk  storage  market  would  improve in the second half of 2002,  the
worldwide market was expected to fall by 1.7% in 2002 according to IDC. By 2003,
IDC is predicting the disk storage systems hardware market will again see growth
worldwide of 5.2%, but is tempered by the current slow economy and  geopolitical
developments.

     In particular,  IDC identified  areas of growth in the disk storage market,
which experienced  increases of 8.3% for the NAS and SAN technologies due to the
growth of storage  consolidation  and the need to centralize  and manage storage
resources efficiently.

     IDC estimates that the worldwide market for disk storage hardware, software
and services are estimated to increase to $70.6 billion in 2004. 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 in the  post-September  11  market.  As a
result, the need for high-capacity, high-performance storage devices and systems
is  increasing.  The growth in stored data has been further  facilitated  by the
continued decline in the cost per unit of storage capacity.

     We believe  that  technology  spending  in 2003 will be neutral to down and
that we will  continue to have to compete  aggressively  for every order against
our larger rivals in

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<PAGE>

data  storage.  The  installed  vendors  should  benefit as they likely will see
non-competitive add-on business continue.

     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 downtime 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.  NAS is expected to represent over 19% of worldwide storage systems
sales by 2005.  SANs  currently  represent  25% of the  storage  market  and are
expected to  represent  46% of such  market by 2005.  The  following  is a brief
description of these storage architectures:

          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

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               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.

The Storage Engine Approach

     We believe that our storage and imaging  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 tolerant,
               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 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.

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          o    Imaging.  We offer a complete suite of imaging services including
               our Synchronix and  Synchronection  product lines. We combine all
               of the features of our  scalability,  enhanced data  availability
               and competitive  pricing,  coupled with our imaging  services and
               software products.

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

          o    Focus Our Direct  Sales  Channel.  To better  address  commercial
               customers and Federal and local government  markets, we intend to
               refine and expand our direct sales team where needed.  We believe
               that a well trained and effective  direct sales force will enable
               us to offer  consultative sales and better address customer needs
               for the markets we serve as well as  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,  with a specific emphasis
               on document imaging applications.

          o    Superior  Pre-Sale and  Post-Sale  Support.  We have  significant
               technical  resources  available  to  assist  the  sales  team and
               customers in designing  and  implementing  specific  data storage
               solutions needed by the customer. We believe our superior support
               and service  enhances  our  ability to  identify  and satisfy our
               customers' needs.

          o    Vertical  Imaging Market.  We have identified a vertical  imaging
               market that we are  pursuing for our  solutions  and those of our
               partners. In this market we are providing a seamless data storage
               approach  for  document  management  and  handling  with  current
               technology in a cost effective and  centralized  means.  With the
               addition  of several new hires with long term  experience  in the
               document  imaging  business,  we believe we have  accelerated our
               ability to provide world class imaging services solutions.

          o    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  intend to  improve  upon our
               current  product  offerings  as well as  develop  or  obtain  new
               products for data storage.

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          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 migrate-able across
               various  operating  systems.  A customer can further  protect its
               storage  investment by redeploying our solutions to and from NAS,
               DAS and SAN.

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:

          o    the ability to deploy in major Open Systems-based  networks, such
               as NT, MS, 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:

     Synchronism  Storage Management System,  which utilizes our Synchronix 3000
product,  and is an enterprise  class storage  solution/system  that aggregates,
virtualizes and manages diverse storage resources and provisions these resources
over IP. Synchronism provides full redundancy and unifies NAS and SAN to provide
the best of SAN-type storage management, while integrating NAS applications in a
more extensive and accessible storage network.

     Synchronism offers the following major features:

          o    storage  virtualization  which  allows  for  the  pooling  of  an
               enterprise's   data  storage  over  different   physical  storage
               devices;

          o    SAN over IP which allows a user to  incorporate  our SAN offering
               using Ethernet-based  networks such as LANS (local area networks)
               and WANS (wide area networks) or fibre;

          o    remote replication/disaster recovery;

          o    zero-impact back-up; and

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          o    centralized management.

     We announced our iConsole Synchronism on August 20, 2002. The SYSM iConsole
features many storage applications such as: fault tolerance, remote replication,
improved backups, virtualization,  snapshot copy, centralization,  and call home
alerts.  The SYSM  iConsole  is easy to  implement  and  provides  an  intuitive
interface.  This  tool will  enable IT many  managers  to get  control  of their
storage and server infrastructure and improve the quality of service. We believe
the SYSM  iConsole is an ideal  solution to all of today's  issues facing System
and Data Managers.

     SYSM iConsole Models are the: SYSM iConsole 4000 for the data center;  SYSM
iConsole  4000 HA for high  availability;  SYSM  iConsole  4000 DR for  disaster
recovery; and SYSM iConsole 4000 TA for tape/backup enhancement.

     Synchronix  3000 is our  fault-tolerant  data storage engine  introduced in
September 2000 that delivers  superior  performance in speed,  storage capacity,
data  protection  and  storage  management,  along  with the  advantages  of the
full-fibre  connectivity  in the SAN as well  as DAS and NAS  environments.  The
Synchronix  3000 achieves real  large-block  transfer speeds of 190MB per second
for two channels and storage  capacity of 65TB with three standard 70" cabinets.
In addition, the Synchronix 3000 incorporates all of the major features that are
found in our Synchronix 2000 product line.

     LSI storage products are offered by us including the E4600 2GB fibre array,
the industry's fastest performing array, the E4400, and the Continustor product.

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

     Products  and  Solutions  under  development.  We  continue  to enhance our
current product offerings, primarily through integration of third party hardware
and software for our Synchronism and Synchronix  families of products as well as
our imaging vertical solutions.

Document Imaging

     We have focused our solutions on the need for rapid,  uninterrupted  access
to  information.  Our  solutions  provide  first rate results in cost  effective
document  imaging.  With all of the variables and choices  available in data and
document  management,  the only  criteria  anyone  agrees on is that the  system
always must be up and running. We believe our products are  state-of-the-art and
provide seamless, continuous availability of data and documents.

     We, along with our selected  strategic  partners,  provide an efficient and
economic  alternative  available  to the "how and what"  question in managing an
ever-growing  quantity  of  paper  and  microfilm  documents.  Document  imaging
alleviates  most of the

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burden,  whether facility or economic, in handling the paper and microfilm.  Our
solution will store and retrieve  documents much faster,  less expensively,  and
more easily than the manually processed paper and film.

     Our imaging  vertical  focus provides our customers with a bundled suite of
products and services that solve all of their imaging requirements.  In addition
to our Synchronix suite of products,  we offer a number of services that provide
our  customers  with a total  solution for their  imaging  needs.  Such services
include on/off site scanning of historical and day forward  critical  documents,
data base  management,  network and web based  services  and  through  strategic
partners,  software  that allows our  customers to manage the scanned  documents
including web based enablers and search engine capabilities.

     We  developed  this  imaging  offering  through our  experience  of design,
manufacturing  and integration of affordable  leading edge,  fault tolerant data
storage solutions and services for government and industry. We have achieved our
customers'  design goals in making our storage  solutions  fault  tolerant  with
optional replication.  By providing superior digital imaging technology,  we are
quickly gaining  recognition in the document  conversion  market. We believe our
solutions  provide   reliability  and  durability  in  document  management  and
retrieval.

     We believe the concept of document imaging does not have to be complicated.
We offer a highly efficient and scalable  solution to meet our customer's needs.
In the government  segment,  public  buildings  were not originally  designed to
handle the level of foot traffic  necessary to conduct today's business and meet
the  new  public  access  laws.  Our  imaging   solutions  enable  an  immediate
realization of cost savings and efficiencies in space  utilization while freeing
space up for more logical  uses.  Documents  digitized and made  available  over
intra/internet  connections  greatly reduce the need to accommodate foot traffic
or vehicular  traffic/parking.  The value of document  imaging is the ability to
retrieve documents and send them back to storage until needed again.

     Document  imaging  further  improves  the  way  an  organization   conducts
business.  We offer  workflow  consultation  to speed  the  productivity  of the
customer's  staff. The use of e-documents adds significant  enhancement to paper
file workflow.  Our imaging  solutions offer a fast secure way to transmit data,
provide an audit trail, ensure security, and enable fast search and retrieval of
needed documents. In addition, we can connect our systems into existing networks
and can make this content available to all authorized users.

     We are  developing  additional  technological  advances to further  utilize
electronic  documents  in our target  markets.  We believe we have  demonstrated
expertise in delivering proven information solutions for years. Our imaging team
has the combined  experience  of digitizing  nearly three  quarters of a billion
pages of paper and microfilm.

                                       9
<PAGE>


     The Company  initially  focused its  products and services on the local and
county  markets for its imaging  solutions.  While an important  first step,  we
needed to prove our  solutions  had a broader  imaging  reach,  beyond our local
market.

     We have  expanded our efforts into a six state area  comprised of New York,
Connecticut,  New Jersey,  Pennsylvania,  Maryland  and  Virginia.  Through this
period,  we became more  familiar  with the process that each state  follows for
procurement, bids and solicitations.  In addition, we were able to determine the
identity of our competitors in each area.

Sales and Marketing

     We market our products directly to commercial, Federal and local government
end users and indirectly through our select alternate channel partners.

     Direct Sales.  Our direct sales efforts focus on commercial and Federal and
local government end user accounts,  as well as assisting selected VARs in their
sales to these end users. Our direct sales team consists of thirteen people.  We
conduct sales and marketing  from our corporate  headquarters  in New Jersey and
from our offices in a few select other  locations.  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.

     Indirect Sales Through Alternate  Channel  Partners.  Our alternate channel
effort is focused on a select few resellers that possess the knowledge, skill or
other benefits to help further the sale of our products. We continue to identify
resellers  that will be able to take  advantage  of our  products  and/or  offer
additional  services  to  end-users.  These  resellers  allow us to  market  our
products on a broader basis.

     We also offer  software and hardware  from other vendors in order to design
customized storage solutions and infrastructures needed by our customers.

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,

                                       10
<PAGE>


and are able to diagnose and solve technical  problems,  and 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  service  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;

          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.,
along with large  server  vendors  such as Compaq  and Sun  Microsystems,  among
others, are significant  competitors.  In the NAS market, our primary competitor
is Network Appliance Inc. As we continue to

                                       11
<PAGE>


introduce new 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.

     Our imaging  vertical  competitors  have  typically  included small imaging
organizations, consulting groups, resellers, and larger players like IBM and EDS
for major project opportunities.

Manufacturing and Suppliers

     We 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.

     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 vendors that could significantly impede or
interrupt our  business.  We cannot be certain that our  relationships  with our
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 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 in 2002 was Nu Horizons. During fiscal 2002, purchases from
Nu Horizons totaled $408, or 24.7%, of our total purchases.  We did not have any
purchases  from Nu Horizons in 2001. We purchase  products from Nu Horizons on a
purchase  order  basis.  There  are  no  minimum  purchase  requirements.   This
arrangement may be terminated by either party at any time.

     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 may be terminated by either party at any time. In
2001 and 2002, purchases from Bell Microproducts  totaled  approximately $1,822,
or 52.7%, and $387 or 23.4%, of all purchases respectively.

     In  February   2003,  we  once  again  achieved   certification   with  the
International Standard Organization for the new ISO 9001-2000 standard. Since we
first attained  compliance with ISO 9001-1994 in February 1999, we have remained
compliant thereby

                                       12
<PAGE>


ensuring  strict  quality on all of the products  offered.  This  certification,
which is  evaluated  regularly,  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.  A loss of ISO  certification  may  adversely
impact net sales to customers that require or prefer ISO certification.

Research and Development

     We  participate  in an  industry  that is  subject  to rapid  technological
change, and our ability to remain competitive  depends upon, among other things,
our ability to  maintain a  technological  edge.  As a result,  we have  devoted
resources to product development. Our research and development expenditures were
$3,386,  $1,308 and $683 in 2000, 2001 and 2002,  respectively.  In 2000, $1,274
was  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". Zero was capitalized in 2001 and 2002.

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

          o    integration   of  third  party  hardware  and  software  for  the
               Synchronix and Synchronism families of products;

          o    improvements  to  the  Synchronism  and  Synchronix  families  of
               products;

          o    new interface connectivities; and

          o    improvements  to  the  imaging  vertical  hardware  and  software
               solutions.

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. 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
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.


                                       13
<PAGE>


     In February  2001,  we sold the assets  related to the SANStar  technology,
including certain patent applications,  to Ciprico,  Inc. for aggregate proceeds
of approximately $580, including $250 of SANStar capitalization.

     In August 2002, we sold a majority of our patents and intellectual property
to Veritas  Software  Corporation  of  Mountain  View,  CA for  $1,000.  We have
retained a perpetual, royalty free, non-exclusive license to the patents.

     We have  registered  trademarks  for STORAGE  ENGINE,  RAID 10  PERFORMANCE
MANAGER,  INTELLIGENT  REBUILD,  SPLIT MIRROR,  EXAMODULE,  SYNCHRONIX,  INVERSE
MIRRORING,  SYNCHRONECTION  and SPLIT  VOLUME.  We have  applied  for  trademark
registration  for  SYNCHRONISM  and EASY  BACKUP.  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

     In response to market  conditions,  we reduced our  workforce  by up to 40%
across  most  departments  during the first  quarter of 2001.  We  announced  on
February  11, 2002 that we had further  reduced  our staff by  seventeen.  These
reductions did not affect our sales and marketing  departments.  As a result, we
took a charge of approximately $100 in the first quarter of 2002.

     As of March 15,  2003,  we employed 38 persons,  of whom 13 were engaged in
marketing  and sales;  4 in  engineering  and  research  and  development;  8 in
operations,   including  customer  and  technical  support,   manufacturing  and
fulfillment;  5 in professional services;  and 8 in finance,  administration and
management.   None  of  our  employees  are  covered  by  collective  bargaining
agreements.  We believe  our  streamlined  workforce  will enable us to meet our
business  objectives on a more  competitive  basis. We also believe that we have
been  successful  in  retaining  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.


                                       14
<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 2000,
2001 and 2002 accounted for, in the aggregate,  approximately  64.5%, 79.3%, and
78.4% respectively,  of net sales in those periods. Sales to the U.S. Air Force,
through Federal  integrators,  accounted for 30.5%, 47.2% and 42.6% of net sales
in  2000,  2001 and  2002,  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 of 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.

We  may  require  additional  financing  to  continue  operations  which  may be
difficult to obtain and may dilute our existing owners' interests.

     We may need significant  financing to grow our business.  Historically,  we
have operated with cash from our initial public offering,  cash from the private
sales of securities and cash flow from  operations.  Our cash balance was $2,799
at December 31, 2002.

     If we cannot  raise more funds,  we could be required to reduce our capital
expenditures,  scale back our  research  and  product  developments,  reduce our
workforce and license to others products or technologies we would otherwise seek
to commercialize ourselves.

     We  may  seek  additional  funding  through   collaborative   arrangements,
borrowing money and by the sale of additional  equity  securities.  Any sales of
additional  equity  securities  are likely to result in further  dilution to our
then existing  shareholders.  Further, if we issue additional equity securities,
the new equity  securities may have rights,  preferences or privileges senior to
those of existing  holders of our capital  stock.  Alternatively,  we may borrow
money from  conventional  lenders,  possibly at high interest  rates,  which may
affect the value of our common  stock.  Despite our efforts,  funding may not be
available  to us at all or only on terms  that are  unacceptable  to us. We also
could be required to seek funds through arrangements with collaborative partners
or  others  that  may  require  us  to  relinquish  rights  to  certain  of  our
technologies or products which we would otherwise pursue on our own.

                                       15
<PAGE>

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,  subpoenas  were received by several of our
employees, including certain officers, who have testified before the grand jury.
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 October 2000, one of the integrators to which we sell our products,  KKP
Corp.,  and its  president  pled  guilty to  Federal  charges  of mail fraud and
conspiracy to defraud the United States in connection  with the sale of computer
products and related  services to the U.S. Air Force.  We are referred to in the
court papers (known as the  "Information") in such case. The Information  states
that the defendants  periodically  issued invoices to us for fictitious services
to the U.S. Air Force that were never provided and passed such payments along to
co-conspirators.  The  Information  also states that one of the  co-conspirators
caused us "to pay a kickback of five  hundred  dollars for each unit sold to the
Air Force,  with the proceeds going to the benefit of the  co-conspirators."  We
are not identified as a co-conspirator  in the  Information.  We believe that we
had a  reasonable  basis to believe  these  services to the U.S.  Air Force were
performed;  that all payments made by us to KKP Corp. were properly  authorized;
and that we have not violated any Federal  laws in  connection  with our sale of
computer  products to KKP Corp.  which were ultimately  received by the U.S. Air
Force.

     In October 2000, two employees of a company which assisted the Air Force in
procuring  computer-related  products and other related parties were indicted on
multiple Federal charges, including wire fraud, conspiracy to defraud the United
States and money laundering in connection with the sale of computer products and
related services from several vendors,  including us, to the U.S. Air Force. The
defendants in the Indictment appear to be the co-conspirators referred to in the
Information.  We are  referred  to in the  Indictment  in terms  similar  to the
Information.  We believe that we had a reasonable  basis to believe the services
to the U.S. Air Force billed by some of the  defendants in the  Indictment  were
performed;  that  all  payments  made  by us to  any of  the  defendants  in the
Indictment were properly  authorized;  and that we have not violated any Federal
laws in  connection  with our sale of computer  products  which were  ultimately
received by the U.S. Air Force.

                                       16

<PAGE>


     In  December  2000,  the  United  States   Attorney's   Office  in  Boston,
Massachusetts advised us through our attorneys that the United States government
has no present  intentions of filing charges against us or any of our employees.
We continue to believe that we have not violated any Federal laws in  connection
with our sale of computer  products which were  ultimately  received by the U.S.
Air Force.

     In late 2002, the Company was contacted through its counsel by an Assistant
United States  Attorney in the Civil  Division of the United  States  Attorney's
office in Boston who raised  the  question  of  whether  the  Company  had civil
responsibility  to the government for the events described above. The government
indicated its belief that it may have civil causes of action against the Company
under Federal,  state and common law arising from or in connection with the work
performed for, and billings to, the Federal government.  Discussions are ongoing
between the government and Company  counsel  regarding the merits of such causes
of  action  and the  possible  settlement  of the  same  prior  to any  possible
litigation.

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 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  thirty 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;


                                       17
<PAGE>


          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.

     Our business will be adversely  affected if we fail to maintain,  train and
hire, as needed,  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 2000 and 2001. Our direct sales force concentrates on
sales to commercial end users, the U.S. Air Force


                                       18
<PAGE>


and other  Federal  government  end users.  Our direct sales force also recruits
selected  VARs and  assists  them in their  sales to  commercial  end users.  In
addition,  during  the  later  part of 2001  and  early  in  2002,  we  began an
initiative to pursue the data intensive vertical imaging market. With respect to
this imaging market focus, we hired several  individuals  with imaging  services
experience. Whether we can successfully sell our products and services and enter
new markets will depend on our ability to:

          o    hire and maintain adequate 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.

     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


                                       19
<PAGE>


market. With respect to DAS products, EMC Corp., along with large server vendors
such as Compaq and Sun  Microsystems,  are significant  competitors.  In the NAS
market,  our  primary  competitor  is Network  Appliance  Inc. As we continue to
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.

The  liquidity of our common stock could be adversely  affected  because we were
delisted from the Nasdaq SmallCap Market.

     On May 23, 2002, the Nasdaq  Qualifications Staff notified the Company that
it did not comply with either the  minimum  net  tangible  assets or the minimum
stockholders'  equity  requirements  for  continued  listing set forth in Market
Place  Rule  4310(2)(B).  The  Company  began  trading  on the  Over-the-Counter
Bulletin  Board  (OTCBB)  effective  with the  opening of business on October 3,
2002.

     Investors  may find it more  difficult  to  dispose  of or obtain  accurate
quotations as to the market value of our common stock. In addition,  we would be
subject to a Rule promulgated by the Securities and Exchange Commission that, if
we fail to meet  criteria  set  forth in such  Rule,  imposes  various  practice
requirements  on  broker-dealers  who sell  securities  governed  by the Rule to
persons other than  established  customers and accredited  investors.  For these
types  of  transactions,  the  broker-dealer  must  make a  special  suitability
determination  for the  purchaser  and have  received  the  purchaser's  written
consent  to the  transactions  prior to sale.  Consequently,  the Rule may deter
broker-dealers  from recommending or selling our common stock, which may further
affect the liquidity of our common stock.

     Trading  on the  OTCBB may make  trading  our  shares  more  difficult  for
investors,  potentially leading to further declines in our share price. It could
also make it more difficult for us to raise additional  capital.  Further, if we
may also incur additional costs under state blue sky laws in connection with any
sales of our securities.

We depend on outside vendors to supply our products.

     We 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.

     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 vendors that could significantly impede or
interrupt our business. We


                                       20
<PAGE>


cannot be certain that our  relationships  with our  suppliers  will continue or
that we will 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 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.

We have been operating as an imaging  services  provider 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 VAR.  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.
In 2001, we began the marketing of our products into the data intensive  imaging
market. Accordingly, we have a limited operating history within our current line
of business.

     We incurred net losses of $12,855,  $2,430,and  $2,530 in fiscal 2000, 2001
and 2002  respectively.  Although we had net income of $1,952 in 1999, we cannot
be certain that we will be able to attain 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.   During  fiscal  2000,  our  executive  officers  agreed  to  salary
reductions.  In January  2001, we reduced our workforce by up to 40% across most
departments.  We announced on February 11, 2002, that we had further reduced our
staff by 17; however, we believe that we have retained the personnel who are key
to achieving our goals and implementing our strategies. These reductions did not
affect our sales and  marketing  departments.  As a result,  we took a charge of
approximately $100 in the first quarter of 2002.

     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.  None of our
executive  officers have entered into an employment  agreement.  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.


                                       21
<PAGE>


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. 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 2003, we again achieved  certification  with the  International
Standard  Organization  for the new ISO  9001-2000  standard.  Since the Company
first attained  compliance  with ISO 9001-1994 in February 1999, it has remained
compliant  thereby  ensuring  strict quality on all the products  offered.  This
certification,  which is evaluated  regularly,  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.

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.

                                       22
<PAGE>


     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 us, even if
such change of control would be beneficial to our shareholders. For example, our
certificate of incorporation  authorizes 3,000,000 shares of preferred stock, of
which  2,231,250  shares are  designated  Series A Preferred and 768,750  shares
remain  undesignated.  Subject to certain  rights held by our Series A Preferred
shareholders, our board of directors may issue the undesignated preferred shares
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 GMAC
restricts  our  ability  to pay  certain  dividends  without  its prior  written
consent. Unless we pay dividends, our shareholders will not be able to receive a
return on their shares unless they sell them.

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.
During  2002,  the  Company  consolidated  its  two  Tinton  Falls,  New  Jersey
facilities  into one location and  negotiated  a settlement  which  released the
Company from any and all obligations  associated with the vacated  facility.  As
part of such settlement, the Company paid $71 to the landlord.


                                       23
<PAGE>


         We occupy the following properties, which are all leased:

   Location         Approximate Area        Use           Nature of Occupancy
                      (in sq. feet)
------------------- ----------------  ------------------- ----------------------
Tinton Falls, New       22,000        Executive Office,   Lease expires 12/31/05
Jersey                                R&D, Manufacturing  four-year renewal
                                      Business Development

Falls Church,              500        Sales Office        Lease expires on
Virginia                                                  12/31/03

Item 3. Legal Proceedings.

     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,  subpoenas  were
received  by several of our  employees,  including  certain  officers,  who have
testified  before the grand jury. 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 the sale of computer products ultimately received by the
U.S. Air Force.

     In October 2000, one of the integrators to which we sell our products,  KKP
Corp.,  and its  president  pled  guilty to  Federal  charges  of mail fraud and
conspiracy to defraud the United States in connection  with the sale of computer
products and related  services to the U.S. Air Force.  We are referred to in the
court papers (known as the  "Information") in such case. The Information  states
that the defendants  periodically  issued invoices to us for fictitious services
to the U.S. Air Force that were never provided and passed such payments along to
co-conspirators.  The  Information  also states that one of the  co-conspirators
caused us "to pay a kickback of five  hundred  dollars for each unit sold to the
Air Force,  with the proceeds going to the benefit of the  co-conspirators."  We
are not identified as a co-conspirator  in the  Information.  We believe that we
had a  reasonable  basis to believe  these  services to the U.S.  Air Force were
performed;  that all payments made by us to KKP Corp. were properly  authorized;
and that we have not violated any Federal  laws in  connection  with our sale of
computer products to KKP Corp.,  which were ultimately  received by the U.S. Air
Force.

     In October 2000, two employees of a company which assisted the Air Force in
procuring  computer-related  products and other related parties were indicted on
multiple Federal charges, including wire fraud, conspiracy to defraud the United
States and money


                                       24
<PAGE>

laundering in connection with the sale of computer products and related services
from several vendors, including us, to the U.S. Air Force. The defendants in the
Indictment appear to be the co-conspirators  referred to in the Information.  We
are  referred  to in the  Indictment  in terms  similar to the  Information.  We
believe that we had a  reasonable  basis to believe the services to the U.S. Air
Force billed by some of the defendants in the Indictment  were  performed;  that
all payments made by us to any of the defendants in the Indictment were properly
authorized;  and that we have not violated any Federal laws in  connection  with
our sale of computer  products  which were  ultimately  received by the U.S. Air
Force.

     In  December  2000,  the  United  States   Attorney's   Office  in  Boston,
Massachusetts advised us through our attorneys that the United States government
has no present  intentions of filing charges against us or any of our employees.
We continue to believe that we have not violated any Federal laws in  connection
with our sale of computer  products which were  ultimately  received by the U.S.
Air Force.

     In late 2002, the Company was contacted through its counsel by an Assistant
United States  Attorney in the Civil  Division of the United  States  Attorney's
office in Boston who raised  the  question  of  whether  the  Company  had civil
responsibility  to the government for the events described above. The government
indicated its belief that it may have civil causes of action against the Company
under Federal,  state and common law arising from or in connection with the work
performed for, and billings to, the Federal government.  Discussions are ongoing
between the government and Company  counsel  regarding the merits of such causes
of  action  and the  possible  settlement  of the  same  prior  to any  possible
litigation.

     We continue to work  closely  with,  sell to, and seek  solutions  for, our
customer,  the U.S. Air Force. We cannot be certain that our sales and operating
results will not be adversely affected by the investigation discussed above.

     In September  1999,  we entered into a Master Sale  Agreement  with Hitachi
Computer  Products  (America),  Inc.  Pursuant to such agreement,  Hitachi began
assembling the  Synchronix  2000 in January 2000. 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.  In
1999, purchases from Hitachi totaled $2,540 or 10.3%, of all purchases. In 2000,
such purchases  totaled  $1,053,  or 6.6%, of all purchases,  and in 2001,  such
purchases totaled $155, or 4.5%, of all purchases.

     On June 22, 2001 we notified  Hitachi of our intent to terminate the Master
Sale Agreement as of September 22, 2001 in accordance  with the  requirements of
said  agreement.  We used Hitachi to assemble our Synchronix  2000 products.  We
have been assembling the Synchronix product  previously  assembled by Hitachi in
our New Jersey facility.  Hitachi was refusing to deliver certain goods which we
had paid for in full.  On October 10,  2001,  we filed suit  against  Hitachi in
Federal  District  Court  in New  Jersey  seeking  specific  performance  on the
delivery of such goods.  In December  2001,  both parties agreed to resolve this
matter in binding arbitration. As part of this arbitration


                                       25
<PAGE>


agreement,  Hitachi  agreed to deliver to us the goods  which we had paid for in
full.  We agreed to post a letter of credit in the  amount of $162  representing
Hitachi's  claim  against us  associated  with the purchase of excess  component
parts used to assemble  our  product.  On February  28,  2003,  the  Decision of
Arbitrator was received  awarding Hitachi $24, which was offset by attorney fees
awarded to us in the amount of $6, resulting in a sum payable to Hitachi of $18.

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

          Not applicable.


                                       26
<PAGE>


                                    PART II

Item 5. Market For the Company's Common Equity and Related Shareholder Matters.

     Pursuant to a decision of the Nasdaq  Qualifications  Panel, we transferred
the listing of our common  stock from the Nasdaq  National  Market to the Nasdaq
SmallCap Market, effective July 5, 2001, subject to certain exceptions.  On July
10, 2001, we announced  the approval of a 1:6 reverse  stock split  effective on
the close of business on Friday,  July 20, 2001, pursuant to which one new share
of our common  stock was issued in exchange for each six  outstanding  shares of
common stock.  Our post-split  common stock began trading on the Nasdaq SmallCap
Market  under the symbol  "SENGC" on July 23, 2001 and  continued to trade under
this symbol during an exception  period granted by Nasdaq.  Nasdaq  notified the
Company on August 10,  2001 that we had  satisfied  the Nasdaq  SmallCap  Market
continued  listing  requirements and, on August 14, 2001, our Common Stock began
trading without exception on the Nasdaq SmallCap Market under the symbol "SENG".

     On May 23, 2002, the Nasdaq  Qualifications Staff notified the Company that
it did not comply with either the  minimum  net  tangible  assets or the minimum
stockholders'  equity  requirements  for  continued  listing set forth in Market
Place  Rule  4310(2)(B).  The  Company  began  trading  on the  Over-the-Counter
Bulletin  Board  (OTCBB)  effective  with the  opening of business on October 3,
2002. The trading symbol remains SENG.

     The following  table sets forth the high and low sales price for the common
stock for each of the  quarters  since  December 31, 1999 as adjusted to reflect
the 1:6 stock split. Such quotations reflect inter-dealer prices, without retail
mark-up,  markdown or commission and may not represent actual  transactions.  As
our common stock no longer  trades on an exchange,  we are required to report in
future filings our high and low bid information.

                                                            High        Low
                                                           -------    ------
Fiscal Year Ended December 31, 2001
         First Quarter..................................  $ 0.875    $ 0.281
         Second Quarter.................................    1.070      0.410
         Third Quarter..................................    4.140      1.500
         Fourth Quarter.................................    4.950      0.970
Fiscal Year Ended December 31, 2002
         First Quarter..................................    1.480      0.500
         Second Quarter.................................    1.430      0.820
         Third Quarter..................................    1.150      0.400
         Fourth Quarter.................................    1.010      0.100

                                       27
<PAGE>


     On March 28,  2003,  the last  reported  sale price of our common  stock as
OTCBB was $0.70 per  share.  As of March 28,  2003,  the  approximate  number of
holders of record of our common stock was 172.

     We have never paid, and do not anticipate paying, any cash dividends on our
common  stock for the  foreseeable  future.  Our  factoring  facility  with GMAC
restricts  our  ability  to pay  certain  dividends  without  its prior  written
consent.

     As of December 31, 2002,  we had  1,848,328  shares  outstanding  of our 6%
Cumulative  Convertible  Preferred  Stock,  Series A (the  "Series  A  Preferred
Stock").  Each share of Series A Preferred Stock was initially  convertible,  at
the option of its holder,  at any time after issuance,  into eight shares of our
common stock. As a result of the  one-for-six  reverse stock split of our common
stock,  effective  July 20,  2002,  each  share of Series A  Preferred  Stock is
currently  convertible  into one and  one-third (1 1/3) shares of the our common
stock. The conversion ratio is subject to adjustments under certain  conditions.
During  2001 and 2002,  respectively,  408,125  and  128,141  shares of Series A
Preferred  Stock were  converted into 544,167 and 167,420 shares of common stock
at the request of certain Series A Preferred  Stock  shareholders.  The Series A
Preferred Stock is  automatically  convertible upon the consummation of our sale
of common stock in a public  offering that meets certain  terms.  The holders of
Series A Preferred Stock are entitled to vote on all matters that the holders of
our common stock are entitled to vote upon, on an  as-converted  to common stock
basis.  In  addition,  the vote of 66 2/3% of the  holders of Series A Preferred
Stock is required in certain  circumstances.  The Series A Preferred Stock ranks
senior to the common  stock  with  respect to  dividends  and upon  liquidation,
dissolution,  winding up or otherwise.  The holders of the outstanding shares of
Series A Preferred Stock are entitled to receive, out of funds legally available
for the payment of  dividends,  quarter-annual  dividends.  Each  quarter-annual
dividend is computed by dividing the annual  dividend rate of $0.12 per share by
four and is  payable  in cash or,  at the  option of the  Company,  in shares of
Series A Preferred  Stock.  Series A Preferred  Stock  dividends are cumulative,
whether  or not  declared,  and are  compounded  at an annual  rate of 6% on the
unpaid  cumulative  balance.  No dividends  may be paid or declared  upon junior
securities,  including our common stock, unless full cumulative dividends on all
outstanding  shares of Series A Preferred Stock are paid or have been set apart.
Dividends  may be  declared on parity  securities,  only if  dividends  are also
declared on the Series A Preferred  Stock ratably in  proportion to  accumulated
and unpaid  dividends.  On November  29, 2001,  the Board of Directors  declared
dividends in arrears valued at $193 to be paid in additional  shares of Series A
Preferred Stock associated with the March 15, June 15, September 15 and December
15, 2001 dividend  payments.  As a result,  the Company  issued 96,367 shares of
Series A Preferred Stock on January 28, 2002. On April 26, July 25 and September
26,  2002,  the Board of  Directors  declared  dividends  valued at $57 for each
declaration paid in additional  shares of Series A Preferred Stock. As a result,
the Company issued 28,561 and 28,416 shares of Series A Preferred  Stock for the
March 15 dividend payment and the June 15 dividend payment,  respectively. As of
December 31, 2002, 28,574 shares of Series A Preferred Stock associated with the
September 15 dividend payment have not been issued.

                                       28
<PAGE>


     As of December 31, 2002, approximately $67 of dividends had accumulated and
have not been declared and paid representing dividends in arrears for the period
from  September  16, 2002 through  December 31, 2002.  On January 23, 2003,  the
Board of Directors  declared  dividends valued at approximately  $57 relating to
the quarterly period through December 15, 2002.

     The Series A  Preferred  Stock is subject to  mandatory  redemption  by the
Company four years after its issuance.  The Series A Preferred Stock may also be
redeemed at the option of the Company or the holder  under  certain  conditions.
Subject to certain conditions,  holders of Series A Preferred Stock have a right
of first offer with  respect to the issuance of any new  securities  which would
reduce such holder's holdings by 10% or more.

                                       29
<PAGE>


Item 6. Selected Consolidated Financial Data.

     The following selected  consolidated  financial data as of and for the five
years  ended  December  31,  2002  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,
                                             ---------------------------------------------------------------
                                               1998          1999           2000         2001         2002
                                               ----          ----           ----         ----         ----
                                                         (in thousands, except per share amounts)
Statement of Operations Data:

<S>                                           <C>        <C>            <C>            <C>           <C>
Net sales..............................       $ 28,466   $  39,761      $  15,022      $ 10,022      $  5,413
  Cost of sales........................         20,452      26,777         15,268         6,168         3,606
                                               -------    --------       --------       -------       -------
Gross profit (deficit).................          8,014      12,984           (246)        3,854         1,807

  Selling, general and
     administrative expenses...........          8,378       9,693         10,925         5,588         4,901
  Research and development
     expenses..........................          2,683       1,939          2,112         1,308           683
                                               -------    --------       --------       -------        -------
Operating income (loss)................         (3,047)      1,352        (13,283)       (3,042)       (3,777)
Gain on sale of certain patents &
  Intellectual property................             --          --             --            --         1,000
  Gain on sale of SANStar..............             --          --             --           284            --
  Net interest income (expense) .......            390         162            193            66            (1)
                                               -------    --------       --------       -------        -------
(Loss) income before income tax benefit         (2,657)      1,514        (13,090)       (2,692)       (2,778)
Income tax benefit.....................             --        (438)          (235)         (262)         (248)
                                               -------    --------       --------       -------        -------
Net (loss) income .....................         (2,657)      1,952        (12,855)       (2,430)       (2,530)
Preferred dividends and accretion......             --          --             --        (4,625)         (227)
                                               -------    --------       --------       -------        -------
Net (loss) income applicable
  to common shares.....................       $ (2,657)  $   1,952      $ (12,855)       (7,055)       (2,757)
                                              ========   =========      =========        =======       =======

Net (loss) income per share before
  extraordinary item -  basic..........       $  (1.45)  $    1.06      $   (6.71)     $  (3.56)     $  (1.07)
Net (loss) income per share -  basic...       $  (1.45)  $    1.06      $   (6.71)     $  (3.56)     $  (1.07)
Net (loss) income per share before
  extraordinary item -  diluted........       $  (1.45)  $    0.98      $   (6.71)     $  (3.56)     $  (1.07)
Net (loss) income per share -  diluted.       $  (1.45)  $    0.98      $   (6.71)     $  (3.56)     $  (1.07)
Weighted average common
  shares outstanding -  basic..........          1,828       1,849          1,915         1,982         2,577
Weighted average common shares
  outstanding -  diluted...............          1,828       1,996          1,915         1,982         2,577

                                                                       December 31,
                                               --------------------------------------------------------------
                                               1998          1999           2000         2001         2002
                                               ----          ----           ----         ----         ----
                                                                      (in thousands)
Balance Sheet Data:
Cash...................................       $  5,374   $   7,993      $   2,221      $ 3,146       $2,799
Working capital........................         11,969      14,200          3,467        5,533        3,398
Total assets...........................         21,374      23,231          9,632        8,077        6,435
Loans payable and payable to Finova
  Capital..............................          1,231         968            276           66          484
6% cumulative convertible
  preferred stock Series A.............             --          --             --        3,839        3,754
Shareholders' equity...................       $ 15,232   $  17,701      $   5,145      $ 2,627      $   189
</TABLE>


                                      30

<PAGE>



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

Overview

     Storage Engine,  Inc. is a provider of document imaging solutions and fault
tolerant,  cost effective  enterprise  data storage  solutions that serve a wide
range of  business  and  government  markets.  We  believe  we have  significant
experience with handling, designing, engineering,  architecting,  installing and
implementing  information  storage solutions to solve data storage needs. Having
manufactured  products for OEMs as well as end users,  our knowledge and quality
practices ensure that our data storage products provide the reliability demanded
by our customers. Our goal is to meet and exceed our customers' expectations. We
achieved ISO 9001  certification  in 1999 and have  continued  to maintain  this
certification status of quality.

     In June 2000, we  introduced  SANStar,  a file aware  storage  architecture
intended to unify disparate  data,  including NAS and SAN. In the fourth quarter
of 2000, we discontinued our SANStar development effort due to EMC's purchase of
CrosStor, the supplier of the Real Time Operating System (RTOS) used in SANStar.
The  SANStar  product  did not  account  for any  revenues,  but  represented  a
substantial  portion of  engineering  costs in 2000. The total amount of SANStar
capitalization  of $1,988 was written down to $250 in December 2000. In February
2001, we sold the assets related to the SANStar  technology,  including  certain
patent  applications,  to Ciprico,  Inc. for aggregate proceeds of approximately
$580, including $250 of SANStar capitalization.

     We have  identified a vertical  imaging market that we are pursuing for our
solutions and those of our partners.  In this market we are providing a seamless
data  storage  approach  for  document  management  and  handling  with  current
technology  in a cost  effective  and  centralized  means.  With the addition of
several new hires with long term experience in the document imaging business, we
believe we have  accelerated our ability to provide world class imaging services
solutions.

     In August 2002, we sold a majority of our patents and intellectual property
to Veritas  Software  Corporation  of  Mountain  View,  CA for  $1,000.  We have
retained a perpetual, royalty free, non-exclusive license to the patents.

     Sales to the U.S. Air Force accounted for  approximately  30.5%,  47.2% and
42.6% of net sales in 2000,  2001 and  2002,  respectively.  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.


                                       31
<PAGE>


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


                                                      Year Ended December 31,
                                             ----------------------------------
                                                 2000      2001        2002
                                             ----------------------------------
                                                       (in thousands)
Commercial, other Federal customers,
 and alternate channel partners..............$  10,446   $  5,293   $   2,682
 U.S. Air Force..............................    4,576      4,729       2,307
  Imaging                                           --         --         424
                                              --------   --------   ---------
                                             $  15,022   $ 10,022   $   5,413
                                              ========   ========   =========

     Our  commercial,  other  Federal and imaging  sales  include  sales through
select  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.

     Neither we nor any person acting on our behalf,  has, in this Annual Report
on Form 10-K or otherwise, publicly disclosed material information that includes
a non-GAAP financial measure.

Critical Accounting Policies, Estimates and Risks

     Financial  Reporting  Release No. 60, which was released by the  Securities
and Exchange Commission (SEC), requires all companies to include a discussion of
critical  accounting  policies or methods used in the  preparation  of financial
statements.  Note 3 to the Consolidated  Financial Statements includes a summary
of the  significant  accounting  policies and methods used in the preparation of
our Consolidated  Financial  Statements.  The following is a brief discussion of
the more significant accounting policies and methods used by us.

     In addition,  Financial Reporting Release No. 61 was released by the SEC to
require all  companies to include a discussion  to address,  among other things,
liquidity,   off-balance  sheet   arrangements,   contractual   obligations  and
commercial commitments.

     Our  discussion  and  analysis of our  financial  condition  and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America.  The preparation of financial statements in accordance
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and liabilities,  including the recoverability of tangible and
intangible  assets,  disclosure of contingent  assets and  liabilities as of the
date of the  financial  statements,  and the  reported  amounts of revenues  and
expenses during the reported period.

                                       32

<PAGE>

     On an on-going  basis,  we evaluate such  estimates.  The most  significant
estimates relate to the allowance for doubtful  accounts,  reserve for inventory
obsolescence,  reserve for warranties,  reserve for employee benefits,  deferred
income taxes, depreciation of fixed assets and long-lived assets,  contingencies
and litigation and the recognition of revenue and profits. We base our estimates
on historical  experience and on various other  assumptions that are believed to
be reasonable under the  circumstances,  the results of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent  from other  sources.  Actual  results could vary from the
estimates and assumptions used in the preparation of the accompanying  financial
statements.

     We believe  the  following  critical  accounting  policies  affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial statements:

Revenue

     Revenue  is  recognized  upon  shipment  of the  product  when all risks of
ownership  have  passed  to  the  customer  and  the  Company  has  no  specific
performance  obligations  remaining.  Revenue  related  to imaging  services  is
recognized upon customer  acceptance.  Amounts received in advance of acceptance
are recorded as deferred revenue.  Revenue related to maintenance  contracts are
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 and write-off of capitalized software.

Capitalized Software

     We capitalize  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.
Capitalized  software  amounts that have no future economic  benefit are written
down  to net  realizable  value  in the  period  that  such  value  is  derived.
Amortization of capitalized software development is charged to cost of sales and
aggregated  $919, $156, and zero for 2000, 2001 and 2002,  respectively.  We did
not capitalize any software development costs during 2001 and 2002.


                                       33
<PAGE>


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,  legal,  accounting,
               contract and administrative functions.

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  costs are  expensed as incurred,  except for  software  development
costs  which  are   capitalized   after   technological   feasibility  has  been
demonstrated.

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,
                                                                    2000            2001             2002
Net sales:
    Commercial,other Federal, and
<S>                                                                 <C>              <C>              <C>
     alternate channel partners.............................        69.5%            52.8%             49.6%
    U.S. Air Force..........................................         30.5            47.2              42.6
      Imaging...............................................           --              --               7.8
                                                                ---------       ----------       ----------
Total net sales.............................................        100.0           100.0             100.0
  Cost of sales.............................................        101.6            61.5              66.6
                                                                ---------       ----------       ----------
Gross (deficit) profit......................................         (1.6)           38.5              33.4
  Selling, general & administrative expenses................         72.7            55.7              90.6
  Research & development expenses...........................         14.1            13.1              12.6
                                                                ---------       ----------       ----------
Operating loss..............................................        (88.4)          (30.3)            (69.8)
  Gain on sale of certain patents and intellectual property.           --              --              18.5
  Gain on sale of SANStar...................................           --             2.8                --
  Net interest income.......................................          1.3             0.7                --
                                                                ---------       ----------       ----------
Loss before income tax benefit..............................        (87.1)          (26.8)            (51.3)
  Income tax benefit .......................................          1.6             2.6               4.6
                                                                ---------       ----------       ----------
Net loss ...................................................        (85.5)%         (24.2)%           (46.7)%
                                                                ==========      ===========      ===========
</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.

                                       34
<PAGE>

     Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
     ---------------------------------------------------------------------

     Net Sales

     Net sales decreased by  approximately  $4,609,  or 46.0%, to $5,413 in 2002
from $10,022 in 2001. Sales of our fault tolerant  enterprise  storage solutions
accounted  for 78.9%  and  80.9% of net  sales in 2002 and  2001,  respectively.
Service  revenues  accounted  for 16.8% and 12.2% of net sales in 2002 and 2001,
respectively.  Other  revenues  accounted for 4.3% and 6.9% of net sales in 2002
and 2001,  respectively.  The decrease in 2002 net sales resulted primarily from
lower sales of our enterprise  storage solutions to commercial and other Federal
customers and the U.S. Air Force through Federal  integrators,  partially offset
by an increase in imaging sales.

     Sales to the U.S.  Air  Force  through  Federal  integrators  decreased  by
approximately  $2,422,  or 51.2%,  to $2,307 in 2002 from  $4,729 in 2001.  Such
sales accounted for approximately 42.6% and 47.2% of net sales in 2002 and 2001,
respectively.  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.

     Sales to our commercial,  other Federal  customers,  and alternate  channel
partners  decreased by  approximately  $2,611,  or 49.3%, to $2,682 in 2002 from
$5,293 in 2001. Sales to our commercial,  other Federal  customers and alternate
channel partners decreased  primarily as a result of the U.S. economic recession
and the decline of the dot-com companies. In addition,  price competition in the
U.S.  forced us to cut our prices in certain  cases.  The  decrease  in sales to
commercial,   other  Federal  customers,  and  alternate  channel  partners  was
primarily due to a decrease in sales  volume.  We expect our sales to commercial
and other Federal customers to continue to comprise a significant portion of our
net sales as we concentrate our sales on data intensive  applications.  However,
we do not expect that our alternate  channel partners will continue to represent
a  significant  portion of our net  sales.  Quarterly  fluctuations  in sales to
commercial  and other Federal  customers are the result of several  factors over
which we have no control,  including  highly  competitive  markets  where we are
competing  with much larger  companies.  We cannot be certain  that our sales to
commercial  and other Federal  customers  will not be adversely  affected by the
overall poor economic conditions.

     Sales to our imaging customers increased by approximately $424, or 100%, in
2002 from zero in 2001. Such increase represents  management's  concerted effort
to increase sales within this vertical  market.  Although imaging net sales have
not historically  represented a significant  portion of our net sales, we expect
that our sales to imaging  customers will increase as we devote additional sales
and  marketing  efforts to this market and we gain  greater  recognition  in the
document conversion market.


                                       35
<PAGE>

Quarterly  fluctuations  in sales to our  imaging  customers  are due to several
factors,  including  budget  approval and  departmental  controls.  We cannot be
certain that our imaging market initiative will not be adversely affected by the
overall poor economic conditions.

     Gross Profit

     Our gross  profit  decreased by  approximately  $2,047 to a gross profit of
approximately  $1,807  in 2002  from a gross  profit  of  $3,854  in 2001.  Such
decrease in gross margin is primarily due to the overall  decrease in sales. The
gross  margin  percentage  in 2002 was 33.4% as compared to 38.5% in 2001.  Such
decrease in gross margin  percentage is primarily due to the lower absorption of
fixed overhead cost in 2002 as compared to 2001. We expect that we will generate
gross  margins  from  our  sales  to the U. S. Air  Force  through  integrators,
commercial,  other Federal customers,  and imaging customers.  Our gross margins
could fluctuate depending upon the mix of net sales in any one quarter.

     Operating Expenses

     Selling,  general and  administrative  (SG&A) expenses decreased by $687 or
12.3%, to $4,901 in 2002 from $5,588 in 2001. Such decrease was primarily due to
the reduction in workforce which occurred during the first quarter of 2002.

     SG&A expenses as a percentage of net sales  represented 90.6% and 55.7% for
2002 and 2001,  respectively.  Such  percentage  increase is attributable to the
reduction  in  revenues  offset  by  the  decrease  in  SG&A  costs.   Salaries,
commissions,  bonuses,  employee  benefits  and  payroll  taxes were the largest
components  of  operating  expenses,  accounting  for  61.4%  and  64.5% of such
expenses in 2002 and 2001, respectively.

     Research and development  expenses  decreased in 2002 by $625, or 47.8%, to
$683 in 2002 from $1,308 in 2001.  Such  decrease  represents  the  reduction in
payroll  expense  associated  with the reduction in force which  occurred in the
first quarter of 2002. Such expenses  represented  approximately 12.6% and 13.1%
of our net sales for 2002 and 2001, respectively.

     We will  continue  to  manage  our  overall  cost  structure  and  take the
necessary   steps  reduce  costs  where   appropriate  in  order  to  return  to
profitability. There can be no assurance, however, that we will be successful in
controlling costs to the extent necessary to return to profitability.

     Sale of Certain Patents and Intellectual Property

     In August 2002, we sold a majority of our patents and intellectual property
to Veritas  Software  Corporation  of  Mountain  View,  CA for  $1,000.  We have
retained a perpetual, royalty free, non-exclusive license to the patents.


                                       36
<PAGE>

     Net Interest Expense/Income

     Net interest  expense was $1 in 2002 as compared to net interest  income of
$66 for 2001.  The decrease in interest  income was  primarily  due to decreased
interest rates in 2002, and lower cash balances in 2002.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

     Net Sales

     Net sales  decreased by  approximately  $5,000 or 33.3%, to $10,022 in 2001
from $15,022 in 2000. Sales of our fault tolerant  enterprise  storage solutions
accounted  for 80.9%  and  83.5% of net  sales in 2001 and  2000,  respectively.
Service  revenues  accounted  for  12.2% and 6.8% of net sales in 2001 and 2000,
respectively.  Other  revenues  accounted for 6.9% and 9.7% of net sales in 2001
and 2000,  respectively.  The decrease in 2001 net sales resulted primarily from
lower sales of our enterprise  storage  solutions to alternate  channel partners
and our commercial customers,  offset in part by increased sales to the U.S. Air
Force through Federal integrators.

     Sales to the U.S.  Air  Force  through  Federal  integrators  increased  by
approximately  $153, or 3.3%, to $4,729 in 2001 from $4,576 in 2000.  Such sales
accounted  for  approximately  47.2%  and  30.5% of net  sales in 2001 and 2000,
respectively.  The  increase as a percentage  of sales is  primarily  due to the
decreases in our other sales channels.

     Sales to alternate  channel partners  decreased by  approximately  $371, or
68.6%, to $170 in 2001 from $541 in 2000. Such sales accounted for approximately
1.7%  and  3.6% of net  sales  in 2001 and  2000,  respectively.  Such  decrease
represents a decrease in sales to Unisys of approximately  $407. Sales to Unisys
accounted  for  approximately  1.3% and 3.6% of our net  sales in 2001 and 2000,
respectively.  Sales to  Tandem  accounted  for less than 1% of our net sales in
both 2001 and 2000.  We do not expect  sales to  alternate  channel  partners to
constitute a significant part of our net sales in fiscal 2002.

     Sales  to  our  commercial  and  other  Federal   customers   decreased  by
approximately  $4,782 or 48.3%, to $5,123 in 2001 from $9,905 in 2000.  Sales to
our commercial and other Federal  customers  decreased  primarily as a result of
the U.S.  economic  recession  and the  decline  of the  dot-com  companies.  In
addition,  price  competition in the U.S. forced us to cut our prices in certain
cases.  The decrease in sales to  commercial  and other  Federal  customers  was
primarily due to a decrease in sales volume rather than a decrease in prices.

     Gross Profit

     Our gross  profit  increased by  approximately  $4,100 to a gross profit of
approximately  $3,854 in 2001 from a gross  deficit  of $246 in 2000.  Our gross
profit in 2000 was adversely  affected by $2,523 and $1,738 of charges  relating
to an increase in

                                       37
<PAGE>


inventory obsolescence and the write-off of capitalized software,  respectively.
The  charges   taken  in  2000  for  inventory   obsolescence   relates  to  the
repositioning  of our product  offering  and the  discontinuance  of the SANStar
development effort.

     In June 2000, we  introduced  SANStar,  a file aware  storage  architecture
intended to unify disparate  data,  including NAS and SAN. In the fourth quarter
of 2000, we discontinued our SANStar development effort due to EMC's purchase of
CrosStor, the supplier of the Real Time Operating System (RTOS) used in SANStar.
The SANStar  product did not account for any revenues to date but  represented a
substantial  portion of  engineering  costs which were  capitalized in 2000. The
total  amount of SANStar  capitalization  of $1,988 was written  down to $250 in
December  2000.  In  February  2001,  we sold the assets  related to the SANStar
technology,   including  certain  patent  applications,  to  Ciprico,  Inc.  for
aggregate   proceeds  of   approximately   $580,   including   $250  of  SANStar
capitalization.

     Operating Expenses

     Selling, general and administrative (SG&A) expenses decreased by $5,337, or
48.9%,  to $5,588 in 2001 from $10,925 in 2000.  Such decrease was primarily due
to the  reduction in workforce by up to 40% across most  departments  during the
first  quarter  of 2001 and the  salary  reductions  agreed to by our  executive
officers.

     SG&A expenses as a percentage of net sales  represented 55.7% and 72.7% for
2001 and 2000,  respectively.  Such  percentage  decrease is attributable to the
reduction in revenues combined with decreased SG&A costs. Salaries, commissions,
bonuses,  employee  benefits and payroll  taxes were the largest  components  of
operating expenses,  accounting for 64.5% and 59.0% of such expenses in 2001 and
2000, respectively.

     Research and development  expenses  decreased in 2001 by $804, or 38.1%, to
$1,308 in 2001 from $2,112 in 2000.  Such decrease  represents  the reduction in
payroll  expense  associated  with the reduction in force which  occurred in the
first quarter of 2001. Such expenses  represented  approximately 13.1% and 14.1%
of our net sales for 2001 and 2000, respectively.

     Net Interest Income

     Net interest income was $66 and $193 for 2001 and 2000,  respectively.  The
decrease in interest  income was  primarily due to decreased  interest  rates in
2001 compared to 2000.

Liquidity and Capital Resources

     Our cash balance was approximately $2,799 at December 31, 2002.

     Net cash used in  operating  activities  was  $1,598 and $2,618 in 2002 and
2001,  respectively.  Net cash used in  operating  activities  in 2002  resulted
primarily  from the net loss from  operations  after  adding back  depreciation,
amortization and the gain on the sale

                                       38
<PAGE>

of certain patents and  intellectual  property,  offset in part by a decrease in
inventories,  and an increase  in  accounts  payable,  accrued  liabilities  and
deferred  revenue.  Net cash provided by investing  activities was $872 in 2002,
and  primarily  represents  proceeds  from  the  sale  of  certain  patents  and
intellectual  property.  Net cash provided by financing  activities  was $379 in
2002 and primarily represents net borrowings under a revolving credit agreement.

     We used $128 and $461 for the  acquisition of equipment by direct  purchase
during 2002 and 2001,  respectively.  Such expenditures  primarily  consisted of
computer equipment associated with our research and development efforts.

     In August 2002, we sold a majority of our patents and intellectual property
to Veritas  Software  Corporation  of  Mountain  View,  CA for  $1,000.  We have
retained a perpetual, royalty free, non-exclusive license to the patents.

     We had working  capital of $3,398 and $5,533 at December 31, 2002 and 2001,
respectively.

     On July 9, 1997,  we entered into a full recourse  factoring  facility with
GMAC Commercial  Credit LLC (GMAC) which provides for aggregate  advances not to
exceed  the  lesser of $7 million  or up to 85.0% of  Eligible  Receivables  (as
defined in the  agreement  - $852 as of  December  31,  2002).  Interest on such
advances  is payable  monthly in  arrears at the prime  lending  rate and we are
obligated to pay certain annual fees. The factoring  facility  currently expires
on July  30,  2003 and may be  extended  on an  annual  basis  thereafter  until
terminated by either party upon sixty days prior written notice. Our obligations
under such agreement are  collateralized  by substantially all of our assets. As
of December  31,  2002,  we had an  outstanding  balance of $484 under this full
recourse factoring facility.

     Our  original  agreement  with GMAC  restricted  our ability to pay certain
dividends  without  GMAC's prior  written  consent.  On December 31, 2001,  GMAC
modified the agreement to allow us to pay dividends with respect to the Series A
Preferred Stock in the form of additional shares of Series A Preferred Stock.

     We have certain covenants with GMAC and we are in compliance as of December
31, 2002.

     As of December 31, 2002, we have Net Operating  Loss ("NOL")  carryforwards
for Federal income tax purposes of  approximately  $25,673,  which will begin to
expire in 2009. We also have research and development  tax credit  carryforwards
for Federal  income tax  purposes  of  approximately  $632,  which will begin to
expire  in 2009.  In  addition,  we have  alternative  minimum  tax  credits  of
approximately $76, which can be carried forward  indefinitely.  We experienced a
change in ownership in 1996 ("1996 Ownership  Change") as defined by Section 382
of the Internal Revenue Code.  Accordingly,  future use of these NOLs and income
tax credits will be limited.

                                       39
<PAGE>

     The issuance of Series A Preferred Stock in 2000 may create a change in our
ownership  as defined by Section  382.  Therefore,  further  use of the NOLs and
income tax credits generated subsequent to the 1996 Ownership Change may also be
limited.

     As of  December  31,  2002,  we have  approximately  $8,013  of  state  NOL
carryforwards,  which  will  begin to  expire  in 2005 and  state  research  and
development tax credit carryforwards of $86, which will begin to expire in 2004.

     In  December  2002,  we sold $256 of State  Research  and  Development  tax
credits,  which  resulted in a tax benefit of $225.  In December  2001,  we sold
$8,147 of State NOL carryforwards, which resulted in a tax benefit of $262.

     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 offset our net deferred tax assets.  We will  periodically
reassess the valuation allowance.

     On March 9, 2001, we issued 1,450,000 shares of Series A Preferred Stock to
certain  accredited  investors  pursuant to the  initial  closing of the Private
Placement  for gross  proceeds  equal to $2,900.  On April 4, 2001 and April 19,
2001, we issued to accredited investors 250,000 and 300,000 shares of additional
Series A Preferred Stock,  respectively.  In addition, we issued an aggregate of
125,000 shares of Series A Preferred  Stock to Unterberg  Towbin,  our financial
advisor in the Private  Placement,  for services provided in connection with the
Private Placement.  We received aggregate gross proceeds of $4,000 in connection
with the Private Placement.

     The terms and  conditions  of the  Private  Placement  provided  for a cash
payment or the issuance of additional shares of the our Series A Preferred Stock
if a shelf registration statement covering the shares of Common Stock underlying
the Series A Preferred  Stock issued in the Private  Placement  was not declared
effective by the SEC within 180 days  following  each of three  closing dates in
the Private Placement. Since a shelf registration statement covering such shares
was not declared effective by the SEC within the allowable timeframes, we issued
an aggregate of 106,250 additional shares of its Series A Preferred Stock to its
Series A Preferred  Stock  shareholders  on October 16, 2001. We had 30 business
days  following  the default  date to issue the default  shares.  On October 16,
2001, we increased the number of shares  designated as Series A Preferred  Stock
to 2,231,250.

     Each share of Series A Preferred  Stock was initially  convertible,  at the
option of its  holder,  at any time after  issuance,  into  eight  shares of our
common  stock.  As a result of the  one-for-six  reverse  stock split of the our
common stock, effective July 20, 2001, each share of Series A Preferred Stock is
currently  convertible  into one and  one-third (1 1/3) shares of the our common
stock at the  request of certain  Series A  Preferred  Stock  shareholders.  The
conversion ratio is subject to adjustments under certain conditions. During 2001
and 2002,  respectively,  408,125 and 128,141  shares of Series A Preferred were
converted  into  544,167  and 167,420  shares of common  stock at the request of
certain Series A Preferred Stock  shareholders.  The Series A Preferred Stock is
automatically convertible upon the consummation of our sale of common stock in a

                                       40
<PAGE>

public  offering  that meets  certain  terms.  The holders of Series A Preferred
Stock are  entitled to vote on all matters  that the holders of our common stock
are  entitled  to vote  upon,  on an  as-converted  to common  stock  basis.  In
addition,  the vote of 66 2/3% of the  holders  of Series A  Preferred  Stock is
required in certain circumstances.  The Series A Preferred Stock ranks senior to
the common stock with respect to dividends  and upon  liquidation,  dissolution,
winding  up or  otherwise.  The  holders of the  outstanding  shares of Series A
Preferred Stock are entitled to receive,  out of funds legally available for the
payment of quarter-annual dividends. Each quarter-annual dividend is computed by
dividing the annual  dividend  rate of $0.12 per share by four and is payable in
cash or,  at our  option,  in  shares  of  Series A  Preferred  Stock.  Series A
Preferred  Stock  dividends are  cumulative,  whether or not  declared,  and are
compounded  at an  annual  rate  of 6% on  the  unpaid  cumulative  balance.  No
dividends  may be paid or declared  upon  junior  securities,  including  common
stock,  unless full cumulative  dividends on all outstanding  shares of Series A
Preferred  Stock are paid or have been set apart.  Dividends  may be declared on
parity securities, only if dividends are also declared on the Series A Preferred
Stock ratably in proportion to accumulated and unpaid dividends. On November 29,
2001, the Board of Directors  declared dividends in arrears valued at $193 to be
paid in additional  shares of Series A Preferred Stock associated with the March
15, June 15, September 15 and December 15, 2001 dividend payments.  As a result,
the Company  issued  96,367  shares of Series A  Preferred  Stock on January 28,
2002.  On April 26,  July 25 and  September  26,  2002,  the Board of  Directors
declared  dividends valued at $57 for each declaration paid in additional shares
of Series A Preferred Stock. As a result,  we issued 28,561 and 28,416 shares of
Series A  Preferred  Stock for the  March 15  dividend  payment  and the June 15
dividend payment, respectively. As of December 31, 2002, 28,574 shares of Series
A Preferred  Stock  associated  with the September 15 dividend  payment have not
been issued.

     As of December 31, 2002, approximately $67 of dividends had accumulated and
have not been declared and paid representing dividends in arrears for the period
from  September  16, 2002 through  December 31, 2002.  On January 23, 2003,  the
Board of Directors  declared  dividends valued at approximately  $57 relating to
the quarterly period through December 15, 2002.

     The Series A Preferred Stock is subject to mandatory  redemption by us four
years after its issuance.  The Series A Preferred  Stock may also be redeemed at
our  option  or  the  holder  under  certain  conditions.   Subject  to  certain
conditions, holders of Series A Preferred Stock have a right of first offer with
respect to the issuance of any new  securities  which would reduce such holder's
holdings by 10% or more.

     On March 1, 2002,  we  received  notification  from  Nasdaq that our common
stock had closed below the minimum $1.00 per share  requirement for the previous
30 consecutive trading days as required under Marketplace Rule 4310(c)(4).

     On May 23, 2002, the Nasdaq  Qualifications Staff notified the Company that
it did not comply with either the  minimum  net  tangible  assets or the minimum
stockholders'  equity  requirements  for  continued  listing set forth in Market
Place  Rule  4310(2)(B).  The  Company  began  trading  on the  Over-the-Counter
Bulletin Board

                                       41

<PAGE>


(OTCBB)  effective  with the opening of business on October 3, 2002. The trading
symbol remains SENG.

     We have capital leases for certain equipment. In addition, we are obligated
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 us. Under
certain  leases,  we have the option to renew for additional  terms at specified
rentals.  Rent expense for such leases approximated $712, $621, and $538 for the
years ended December 31, 2000, 2001, and 2002, respectively.

     During 2002,  the Company  consolidated  its two Tinton  Falls,  New Jersey
facilities  into one location and  negotiated  a settlement  which  released the
Company from any and all obligations  associated with the vacated  facility.  As
part of such settlement, the Company paid $71 to the landlord.

     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, 2002:

                                                     Capitalized      Operating
                                                       Leases          Leases

2003.............................................  $        37     $       280
2004.............................................            5             250
2005.............................................            4             250
                                                       -------         -------
Total minimum lease payments.....................           46     $       780
                                                                       =======
Less amount representing interest................            4
                                                       -------
Present value of net minimum lease payments......  $        42
                                                       =======

     In  response  to  competitive  and  financial  pressures,  during the first
quarter of 2001, we reduced our workforce by up to 40% across most  departments.
Additionally,  our executive officers agreed to salary  reductions.  On February
11, 2002, we announced that we had further reduced our staff by seventeen. These
reductions did not affect our sales and marketing  departments.  As a result, we
took a charge of approximately $100 the first quarter of 2002.

     Our operating  results are affected by seasonal  factors,  particularly the
spending  fluctuations  of our largest  customers  including  the U.S. Air Force
through Federal  integrators.  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 future.  A significant  reduction in
orders from any of our largest customers could have a material adverse effect on
our results of operations.  There can be no assurance that our largest customers
will  continue  to place  orders with us or that  orders of our  customers  will
continue at their previous levels.

                                       42
<PAGE>

     Subject to the risks  discussed  in this  Annual  Report on Form  10-K,  we
believe that our existing  available cash and credit facilities will be adequate
to satisfy our current and planned  operations  for at least the next 12 months.
Our operating plan,  which for the year ending  December 31, 2003  anticipates a
loss from operations,  contains assumptions regarding revenue and expenses.  The
achievement of the operating plan depends heavily on the timing of sales and our
ability to gain new customers and make additional sales to current  customers as
well as monitoring our on-going costs.  The  continuation  of operating  losses,
together with the risks  associated with our business,  and other changes in our
operating assets and liabilities,  may have a material adverse affect on the our
future liquidity.  Inability to improve operating results may require us to seek
equity  financing,  which,  if  required,  would  cause  dilution to our current
stockholders.  Further, if we issue additional equity securities, the new equity
securities  may  have  rights,  preferences  or  privileges  senior  to those of
existing holders of our common stock. If needed,  there can be no assurance that
we can obtain  equity  financing,  if at all, on terms  acceptable  to us. If we
cannot  raise  additional  necessary  funds,  we could be required to reduce our
capital expenditures,  scale back our research and product developments,  reduce
our workforce and license to others  products or technologies we would otherwise
seek to commercialize ourselves.

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, 2002,  all of 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 15. 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.

                                       43

<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Company.

     The  information  relating  to our  directors,  nominees  for  election  as
directors and executive  officers under the headings "Election of Directors" and
"Executive  Officers"  in our  definitive  proxy  statement  for the 2003 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 our definitive
proxy  statement for the 2003 Annual  Meeting of  Shareholders  is  incorporated
herein by reference to such proxy statement.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Shareholder Matters.

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and  Management"  in our definitive  proxy  statement for the 2003 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 our definitive  proxy statement for the 2003 Annual Meeting of
Shareholders is incorporated herein by reference to such proxy statement.

Item 14. Controls and Procedures.

     Evaluation of disclosure controls and procedures. Based on their evaluation
of the  Company's  disclosure  controls  and  procedures  (as  defined  in Rules
13a-14(c) and  15d-14(c)  under the Exchange Act) as of a date within 90 days of
the filing date of this Annual Report on Form 10-K, the Company's  president and
chief executive officer  (principal  executive  officer) and the Company's chief
financial officer  (principal  accounting and financial  officer) have concluded
that the Company's  disclosure  controls and  procedures  are designed to ensure
that information  required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded,  processed,  summarized and
reported  within the time  periods  specified  in the  Securities  and  Exchange
Commission's rules and forms and are operating in an effective manner.

     Changes in  internal  controls.  There were no  significant  changes in the
Company's internal controls or in other factors that could significantly  affect
these controls subsequent to the date of their most recent evaluation.


                                       44
<PAGE>

                                    PART IV


Item 15. 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 -Eisner LLP

          o    Consolidated Balance Sheets - December 31, 2001 and 2002

          o    Consolidated  Statements of Operations - Years ended December 31,
               2000, 2001 and 2002

          o    Consolidated  Statements  of  Shareholders'  Equity - Years ended
               December 31, 2000, 2001 and 2002

          o    Consolidated  Statements of Cash Flows - Years ended December 31,
               2000, 2001 and 2002

          o    Notes to  Consolidated  Financial  Statements - December 31, 2002
               and 2001

     (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 43.

     (b) Reports on Form 8-K.

     None.

                                       45

<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 31st day of March,
2003.

                                      STORAGE ENGINE, INC.


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

                                       46

<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           March 31, 2003
-------------------------------           Director (Principal Executive Officer)
Gregg M. Azcuy

/s/ Louis J. Altieri                      Vice President, Finance and                      March 31, 2003
-------------------------------           Administration (Principal Financial and
Louis J. Altieri                          Accounting Officer)

/s/ Michael E. Faherty                    Chairman of the Board and Director               March 31, 2003
-------------------------------
Michael E. Faherty

/s/ Gale R. Aguilar                       Director                                         March 31, 2003
-------------------------------
Gale R. Aguilar

/s/ James K. Dutton                       Director                                         March 31, 2003
-------------------------------
James K. Dutton

/s/ Donald E. Fowler                      Director                                         March 31, 2003
-------------------------------
Donald E. Fowler

/s/ Frank R. Triolo                       Director                                         March 31, 2003
-------------------------------
Frank R. Triolo

/s/ Thomas I. Unterberg                   Director                                         March 31, 2003
-------------------------------
Thomas I. Unterberg
</TABLE>

                                       47

<PAGE>


                                  CERTIFICATION

I, Gregg M. Azcuy, certify that:

     1.   I have  reviewed  this annual  report on Form 10-K of Storage  Engine,
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this annual report is being prepared;

               b)   evaluated the  effectiveness of the registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the  filing  date of this  annual  report  (the  "Evaluation
                    Date"); and

               c)   presented in this annual  report our  conclusions  about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

               a)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    registrant's  auditors any material  weaknesses  in internal
                    controls; and

               b)   any fraud, whether or not material, that involves management
                    or  other  employees  who  have a  significant  role  in the
                    registrant's internal controls; and

                                       48

<PAGE>




     6.   The registrant's other certifying officer and I have indicated in this
          annual  report  whether  or not  there  were  significant  changes  in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



                                            /s/ Gregg M. Azcuy
                                            ------------------------------
Dated:   March 31, 2003                    Gregg M. Azcuy,  President and Chief
                                           Executive Officer
                                           (Principal Executive Officer)

                                       49
<PAGE>


                                  CERTIFICATION

I, Louis J. Altieri, certify that:

     1.   I have  reviewed  this annual  report on Form 10-K of Storage  Engine,
          Inc.;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

               a)   designed such  disclosure  controls and procedures to ensure
                    that  material   information  relating  to  the  registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others  within those  entities,  particularly  during the
                    period in which this annual report is being prepared;

               b)   evaluated the  effectiveness of the registrant's  disclosure
                    controls and procedures as of a date within 90 days prior to
                    the  filing  date of this  annual  report  (the  "Evaluation
                    Date"); and

               c)   presented in this annual  report our  conclusions  about the
                    effectiveness  of the  disclosure  controls  and  procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

               a)   all  significant  deficiencies in the design or operation of
                    internal   controls   which  could   adversely   affect  the
                    registrant's  ability  to  record,  process,  summarize  and
                    report   financial   data  and  have   identified   for  the
                    registrant's  auditors any material  weaknesses  in internal
                    controls; and

               b)   any fraud, whether or not material, that involves management
                    or  other  employees  who  have a  significant  role  in the
                    registrant's internal controls; and


                                       50
<PAGE>




     6.   The registrant's other certifying officer and I have indicated in this
          annual  report  whether  or not  there  were  significant  changes  in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



                                    /s/ Louis J. Altieri
                                    -------------------------------------------
Dated:   March 31, 2003             Louis J. Altieri, Vice President,
                                    Finance and Administration
                                    (Principal Financial and Accounting Officer)


                                       51

<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 Quarterly Report on Form 10-Q for
                    the  quarterly  period  ended  September  30,  2002 filed on
                    November 13, 2002.)

     3.2            Certificate   of  Amendment  to  the  Restated  and  Amended
                    Certificate  of  Incorporation,  filed with the Secretary of
                    State  of  the  State  of  New  Jersey  on  March  8,  2001.
                    (Incorporated  by reference to the Company's  Current Report
                    on Form 8-K filed on March 26, 2001.)

     3.3            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.)

                                       52

<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.)

                                       53

<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.  (Incorporated by reference to the Company's
                    Annual  Report  on Form  10-K for the  annual  period  ended
                    December 31, 1999.)

     10.11*         Senior  Staff  Change In  Control  Severance  And  Incentive
                    Compensation  Pay  Agreement  by and between the Company and
                    Louis  J.  Altieri.   (Incorporated   by  reference  to  the
                    Company's  Annual  Report on Form 10-K for the annual period
                    ended December 31, 1999.)

     10.12*         Senior  Staff  Change In  Control  Severance  And  Incentive
                    Compensation  Pay  Agreement  by and between the Company and
                    Priyan   Guneratne.   (Incorporated   by  reference  to  the
                    Company's  Annual  Report on Form 10-K for the annual period
                    ended December 31, 1999.)

     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.)

                                       54

<PAGE>

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

     10.18          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.)

     10.19          Series A  Convertible  Preferred  Stock  Purchase  Agreement
                    dated  as of March  9,  2001  between  the  Company  and the
                    Purchasers listed therein. (Incorporated by reference to the
                    Company's  Current  Report  on Form 8-K  filed on March  26,
                    2001.)

     21             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.)

     23.1+          Consent of Eisner, LLP.

     99.1+          Certification  of principal  executive  officer  pursuant to
                    Section  906 of the  Sarbanes-Oxley  Act of 2002,  18 U.S.C.
                    1350.

     99.2+          Certification  of principal  financial  officer  pursuant to
                    Section  906 of the  Sarbanes-Oxley  Act of 2002,  18 U.S.C.
                    1350.

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

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

     + Filed herewith. All other exhibits previously filed.


                                       55

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE

                                                                           Page
                                                                           ----

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

Consolidated Balance Sheets as of
   December 31, 2001 and 2002...............................................F-3

Consolidated Statements of Operations for
   each of the three years in the period ended
   December 31, 2002........................................................F-4

Consolidated Statements of Shareholders'
   Equity for each of the three years in
   the period ended December 31, 2002.......................................F-5

Consolidated Statements of Cash Flows
   for each of the three years in the period
   ended December 31, 2002..................................................F-6

Notes to Consolidated Financial Statements..................................F-8

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>




                           INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Storage Engine, Inc.

     We have audited the  accompanying  consolidated  balance  sheets of Storage
Engine,  Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations,  shareholders' equity, and cash flows for
each of the three years in the period ended  December 31, 2002.  Our audits also
included the  financial  statement  schedule  listed in the Index at Item 15(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 and schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  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
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Storage Engine,
Inc.  and  subsidiaries  at  December  31, 2002 and 2001,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2002, in conformity  with  accounting  principles
generally  accepted in the United States of America.  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/ EISNER, LLP (formerly Richard A. Eisner & Company, LLP)

New York, New York
February 28, 2003

                                      F-2

<PAGE>


                      STORAGE ENGINE, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                          ----------------------------------------
                                                                                2001                  2002
Assets
<S>                                                                      <C>                      <C>
Current Assets:
   Cash and cash equivalents...........................................  $       3,146            $      2,799
   Accounts receivable, less allowance for doubtful accounts of $20 in
    2001 and $146 in 2002..............................................            961                   1,048
   Inventories.........................................................          2,896                   1,926
   Prepaid expenses and other receivables..............................            111                     109
                                                                         -------------             -----------
                                                                                 7,114                   5,882

Property and equipment (net)...........................................            922                     522
Other assets...........................................................             41                      31
                                                                         -------------             -----------
          Total Assets.................................................  $       8,077            $      6,435
                                                                         =============             ============

Liabilities and Shareholders' Equity
Current Liabilities:
   Loan payable........................................................  $          66            $        484
   Capital lease obligations...........................................             58                      34
   Accounts payable....................................................            245                     598
   Accrued expenses and other..........................................            683                     524
   Warranty............................................................            387                     293
   Deferred revenue....................................................            142                     551
                                                                         -------------            ------------
                                                                                 1,581                   2,484

Capital lease obligations, net of current portion......................             30                       8
                                                                         -------------            ------------
                                                                                 1,611                   2,492
                                                                         -------------            ------------

   6% cumulative convertible preferred stock, Series A $.01 par value;
    2,231,250 shares authorized; 1,823,125, and 1,848,328 shares issued
    and outstanding at December 31, 2001 and 2002, respectively,
    and 96,367 and 28,574 shares issuable at December 31, 2001
    and 2002, respectively.............................................          3,839                   3,754

Shareholders' Equity:
   Preferred stock, $.01 par value, authorized 3,000,000 shares;
   issued 2,231,250 Series A shares, outstanding 1,848,328 Series A
   shares..............................................................             --                      --
   Common stock, $.01 par value authorized, 8,333,333 shares;
   issued and outstanding, 2,488,637 and 2,662,519 shares at December 31,
   2001 and 2002, respectively ..........................................           25                      27
   Capital in excess of par value .....................................         31,287                  31,548
   Accumulated deficit.................................................        (28,685)                (31,386)
                                                                         -------------            ------------
Total shareholders' equity                                                       2,627                     189
                                                                         -------------            ------------
       Total Liabilities and Shareholders' Equity......................  $       8,077            $      6,435
                                                                         =============            =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

<TABLE>
<CAPTION>

                      STORAGE ENGINE, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)


                                                                          Year Ended December 31
---------------------------------------------------------------------------------------------------------------
                                                             2000                  2001                 2002
                                                     ---------------        -------------        -------------
<S>                                                     <C>                   <C>                   <C>
Product sales - net.......................              $  13,993             $   8,799             $   4,506
Service sales - net......................                   1,029                 1,223                   907
                                                      -----------            ----------             ---------
Total net sales                                            15,022                10,022                 5,413
                                                      -----------            ----------             ---------
Cost of sales:
Product...................................                 14,684                 5,643                 3,220
Service...................................                    584                   525                   386
                                                      -----------            ----------             ---------
Total cost of sales.......................                 15,268                 6,168                 3,606
                                                      -----------            ----------             ---------
Gross (deficit) profit....................                   (246)                3,854                 1,807
                                                      -----------            ----------             ---------

Operating expenses:
  Selling, general & administrative.......                 10,925                 5,588                 4,901
  Research & development..................                  2,112                 1,308                   683
                                                      -----------            ----------             ---------
                                                           13,037                 6,896                 5,584
                                                      -----------            ----------             ---------
Operating loss ...........................                (13,283)               (3,042)               (3,777)

  Gain on sale of certain  patents &
    intellectual
    property..............................                     --                    --                 1,000
  Net gain on sale of SANStar                                  --                   284                    --
  Net interest income (expense)...........                    193                    66                    (1)
                                                      -----------            ----------             ---------
Loss before income tax benefit ...........                (13,090)               (2,692)               (2,778)
  Income tax benefit......................                    235                   262                   248
                                                      -----------            ----------             ---------
Net loss..................................                (12,855)               (2,430)               (2,530)

Preferred stock dividend (including
 beneficial conversion feature of $3,764 in
 2001.....................................                     --                (4,625)                 (227)
                                                      -----------            ----------             ---------
Net loss applicable to common shareholders             $  (12,855)               (7,055)               (2,757)
                                                       ===========          ===========             ===========

Net loss per common share -
basic and diluted.........................             $    (6.71)            $   (3.56)            $   (1.07)
                                                      ===========           ===========             ===========

Weighted average number of common shares -
basic and diluted.........................                  1,915                 1,982                 2,577
                                                      ===========           ============            ===========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>


                      STORAGE ENGINE, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                          Capital in                       Total
                                                           Excess of    Accumulated      Shareholders'
                                   Shares       Amount    Par Value       Deficit           Equity

<S>                              <C>                <C>      <C>           <C>              <C>
Balance at January 1, 2000       1,890,219      $   18    $  26,469     $  (8,786)       $  17,701

Issuance of stock and stock
  option exercises............      36,871           1          298            --              299

Net loss......................          --          --           --       (12,855)         (12,855)
                                  --------       -----       -------      -------           --------

Balance at December 31, 2000     1,927,090          19       26,767       (21,641)           5,145

Issuance of stock and stock
  option exercises............      17,380           1           32            --               33

Dividends on Series A
  preferred stock including
  beneficial conversion
  feature and fees of $3,764            --          --        3,677        (4,614)            (937)

Conversion of Series A
  preferred stock to
  common......................     544,167           5          811            --              816

Net loss......................          --          --           --        (2,430)          (2,430)
                                  --------       -----       -------      -------           --------

Balance at December 31, 2001..   2,488,637          25       31,287       (28,685)           2,627

Issuance of stock under
  employee stock purchase
  plan........................       6,462          --            6            --                6

Dividends on Series A
  Preferred Stock.............          --          --           --          (171)            (171)

Conversion of Series A
  preferred stock to
  common......................     167,420           2          255            --              257

Net loss......................          --          --           --        (2,530)           (2,530)
                                  --------       -----       -------      -------           --------

Balance at December 31, 2002..   2,662,519      $   27     $ 31,548     $ (31,386)        $    189
                                 =========      ======     ========     =========          ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-5

<PAGE>


<TABLE>
<CAPTION>


                      STORAGE ENGINE, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

                                                                             Year Ended December 31,
                                                                 ------------------------------------------------
                                                                        2000              2001             2002
Cash flows from operating activities:
<S>                                                                 <C>              <C>              <C>
Net loss....................................................        $   (12,855)     $  (2,430)       $   (2,530)
   Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization...........................              1,986            951               528
    Gain on sale of SANStar..................................                --           (284)               --
    Gain on sale of certain patents and intellectual property                --             --            (1,000)
    Write off of capitalized software.......................              1,738             --                --
Change in operating assets and liabilities:
    Decrease (increase) in accounts receivable..............              4,930           (62)               (87)
    Decrease in inventories.................................              1,118          1,556               970
    (Increase) decrease in prepaid expenses and other
      receivables...........................................                (39)           203                12
    (Decrease) increase in accounts payable, accrued
      liabilities and other.................................               (472)        (2,481)              100
    Increase (decrease) in deferred revenue.................                144            (71)              409
                                                                     -----------     ---------         ---------
Net cash used in operating activities.......................             (3,450)        (2,618)           (1,598)
                                                                     -----------     ---------         ---------
Cash flows from investing activities:
   Additions to property and equipment......................               (475)          (461)             (128)
   Gross proceeds from sale of SANStar......................                 --            580                --
   Gross proceeds from the sale of certain patents and
   intellectual property ...................................                 --             --             1,000
   Additions to capitalized software........................             (1,274)            --                --
                                                                     -----------     ---------         ---------
Net cash (used in) provided by investing activities.........             (1,749)           119               872
                                                                     -----------     ---------         ---------
Cash flows from financing activities:
   Borrowings under revolving credit agreement..............             17,283          5,673             5,963
   Repayments under revolving credit agreement..............            (17,122)        (5,768)           (5,545)
   Decrease in payable to Finova Capital....................               (853)          (115)               --
   Repayment of capital lease obligations...................               (180)          (114)              (46)
   Proceeds from exercise of employee stock options and
     issuance of common stock...............................                299             33                 7
   Net proceeds from sale of Series A Preferred Stock.......                 --          3,715                --
                                                                     -----------     ---------         ---------
Net cash (used in) provided by financing activities.........               (573)         3,424               379
                                                                     -----------     ---------         ---------
Net  (decrease) increase  in cash and cash equivalents......             (5,772)           925              (347)
Cash and cash equivalents at beginning of year..............              7,993          2,221             3,146
                                                                     -----------     ---------         ---------
Cash and cash equivalents at end of year....................        $     2,221      $   3,146        $    2,799
                                                                    ===========      =========        ==========
Supplemental disclosure of cash flow information:
   Cash paid during the year for:
     Interest...............................................        $       141      $      44        $       34
                                                                    ===========      =========        ==========
   Supplemental disclosure of non-cash investing and
    financing activities:
     Property acquired under capital lease obligations......        $        57             --        $       12
                                                                    ===========      =========        ==========
     Fees related to issuance of Series A Preferred Stock.....               --      $     455                --
                                                                    ===========      =========        ==========

</TABLE>

                                      F-6
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                 <C>              <C>              <C>
     Dividends related to issuance of Series A Preferred Stock               --      $     193        $      171
                                                                    ===========      =========        ==========
     Conversion of Series A Preferred to Common Stock.......                 --      $     816        $      257
                                                                    ===========      =========        ==========
     Issuance of additional Series A Preferred Stock
     relating to shelf registration.........................                 --      $     213                --
                                                                    ===========      =========        ==========
     Beneficial conversion feature on issuance of
      Series A Preferred Stock..............................                 --      $   3,764                --
                                                                    ===========      =========        ==========
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>


                      STORAGE ENGINE, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (Dollars in Thousands Except Per Share Information)


Note 1 -- The Company

     Storage  Engine,  Inc.  ("the  Company") is a provider of document  imaging
solutions and fault tolerant,  cost effective  enterprise data storage solutions
that serve a wide range of business and government markets.

     Through the Company's knowledge of the use of information and its handling,
in connectivity  options such as Direct Attached Storage (DAS), Network Attached
Storage  (NAS),  Storage Area  Networks  (SAN) and the  centralization  of those
technologies/resources, including disaster recovery and backup technologies, the
Company seeks to design and implement the optimal  information  storage solution
to meet user needs,  including the Company's data intensive  imaging  customers.
The Company offers  specific  solutions,  as well as  comprehensive  information
management  systems,  that store,  capture and distribute  information  easy and
affordable,  including document conversions,  workflow and day forward solutions
for private or web enabled content.

Note 2 - Liquidity

     The Company has  incurred  net losses and  utilized  cash in its  operating
activities for each of the years ended December 31, 2000, 2001 and 2002, and its
annual net sales have declined  significantly during such three year period. For
the year ended December 31, 2003,  management  anticipates a growth in net sales
attributable to its imaging division,  and intends to further reduce payroll and
other costs, however,  management  anticipates that net losses will continue and
that  additional  cash  will  be  utilized  for  operations  during  such  year.
Management  believes that its working capital at December 31, 2002 together with
its credit  facility  will be adequate to finance the Company's  operations  for
2003 and enable the Company to execute its business plan and ultimately  achieve
profitable operations.

Note 3 -- Summary of Significant Accounting Policies

     Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned  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.


                                      F-8
<PAGE>

     Inventories

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

     Property and Equipment

     Property and  equipment are carried at cost less  accumulated  depreciation
and amortization.  Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives ranging from three to five 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 and are
amortized  over  their  estimated   useful  lives.   Amortization  of  leasehold
improvements  is computed  using the  straight-line  method over the term of the
lease.

     Fair Value of Financial Instruments

     The fair  value  amounts  for  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,  $919,  $156,  and  zero for  2000,  2001 and  2002,
respectively.  The Company did not  capitalize  any software  development  costs
during 2001 and 2002.

     Impairment of Long-lived Assets

     In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of  Long-Lived  Assets",  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

     Revenue  is  recognized  upon  shipment  of the  product  when all risks of
ownership  have  passed  to  the  customer  and  the  Company  has  no  specific
performance obligations remaining.

     Revenue   related  to  imaging   services  are  recognized   upon  customer
acceptance.  Amounts  received in advance of acceptance are recorded as deferred
revenue in the  accompanying  consolidated  balance sheets.

                                      F-9
<PAGE>


     Revenues   related  to  maintenance   contracts  are  recognized  over  the
respective terms of the maintenance contracts.

     Warranty

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

     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

     The Company accounts 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.  The Company
has adopted the  disclosure-only  provisions  of SFAS No. 123,  "Accounting  for
Stock-Based   Compensation"  and  SFAS  No.  148,  "Accounting  for  Stock-Based
Compensation-Transition and Disclosure",  which was released in December 2002 as
an amendment to SFAS No. 123.

     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):

                                                Year Ended December 31,
                                    ------------------------------------------
                                         2000            2001           2002
                                    -------------  --------------- ------------
Net loss applicable to common
shareholders as reported........... $   (12,855)   $    (7,055)     $  (2,757)
Stock based employee compensation
determined under the fair value
based method.......................      (1,959)        (2,004)        (1,469)
                                       --------       --------       --------
Pro forma net loss................. $   (14,814)   $    (9,059)     $  (4,226)
                                     ===========    ===========      =========
Loss per share as reported
   Basic and diluted............... $     (6.71)   $     (3.56)     $   (1.07)
                                     ===========    ===========      =========
Pro forma loss per share
   Basic and diluted............... $     (7.74)   $     (4.57)     $   (1.64)
                                    ===========    ===========      =========

                                      F-10
<PAGE>


     The fair value for the options was  estimated  at the date of grant using a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions  for  2000,  2001 and  2002:  risk-free  interest  rates of  between
5.8%-6.65% in 2000, 3.22%-4.82% in 2001 and 1.16%-1.92% in 2002; dividend yields
of zero,  respectively;  volatility  factors of the expected market price of the
Company's common stock of 116.8% in 2000, 157.9% in 2001 and 160.9% in 2002; and
a weighted-average  expected life of six years. The weighted average fair market
value of stock options granted in 2000,  2001 and 2002 was $3.31,  $.50 and $.88
per share, respectively.

     Per Share Information

     On July 10, 2001, the Company announced the approval of a 1:6 reverse stock
split effective on the close of business on Friday,  July 20, 2001,  pursuant to
which  one new  share of  common  stock  was  issued  in  exchange  for each six
outstanding  shares  of  common  stock,  concurrent  with  the  changing  of the
Company's  name from  ECCS,  Inc.  to Storage  Engine,  Inc.  All prior  periods
presented have been adjusted to reflect such stock split.

     Basic  earnings  per  common  share  is  calculated  by  dividing  net loss
increased by  cumulative  dividends of Series A Preferred  Stock by the weighted
average  number of common  shares  outstanding  during the year. In fiscal 2000,
2001 and 2002,  diluted  earnings  per share does not include the  anti-dilutive
effects  of  options,   warrants  and  convertible   securities  exercisable  or
convertible into an aggregate of 530,843,  501,572, and 1,485,069 common shares,
respectively.

     Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions relating to the reporting of assets
and liabilities  and the disclosure of contingent  assets and liabilities at the
balance  sheet  date and the  reporting  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

     Reclassification

     Certain   reclassifications  have  been  made  to  the  prior  consolidated
financial statements to conform with the current year's presentation.

Note 4 -- Transactions with Significant Vendors and Customers

     The  Company  relies on certain  distributors  to supply it with  component
products from Sun  Microsystems and Seagate  Technologies.  Although the Company
believes alternative  distributors of these products are available,  the Company
cannot be certain that it can obtain them on a timely and cost-effective  basis.
The  Company's  primary  vendor for these  third  party  products in 2002 was Nu
Horizons. During fiscal 2002, purchases from Nu Horizons totaled $408, or 24.7%,
of the Company's total purchases. The Company did not have any purchases from Nu
Horizons in 2001 and 2000.

                                      F-11
<PAGE>


     The Company also 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 order. In 2000,  2001 and 2002,  purchases
from Bell  Microproducts  aggregated  approximately  $4,167 or 26.1%,  $1,822 or
52.7%, and $387 or 23.4%, of all purchases, respectively.

     Sales to the U.S. Air Force, an end user of the Company's  products through
Federal  integrators,  totaled $4,576 or 30.5%,  $4,729 or 47.2%,  and $2,307 or
42.6% of total  net  sales in 2000,  2001 and 2002,  respectively.  The  Company
cannot  be  certain  that its  sales  to the  U.S.  Air  Force  through  Federal
integrators  will  not  be  adversely  affected  by  the  investigation  further
discussed in Note 13. There are no minimum purchase requirements.

     In  addition,  the  Company  made  sales to the U.S.  Air Force  through an
integrator  in 2001 and 2002 of $1,583 or 15.8% of total net sales and $1,464 or
27.1%  of total  net  sales,  respectively.  Sales  to one  commercial  customer
amounted to $540 or 10% of the Company's total net sales in 2002.

     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,  other  Federal,  alternate
channel  partners,  U. S. Air Force and imaging.  The Company's revenue consists
principally  of its high  performance  storage  subsystems.  The U.S.  Air Force
principally  purchases  certain  products of the Company,  however,  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 the net sales  derived  from each of the
Company's sales channels:



                                                   Year Ended December 31,
                                                   -----------------------
                                             2000          2001          2002
                                           ----------  -----------   -----------
Commercial, other Federal and
   alternate channel partners............. $ 10,446     $  5,293      $  2,682
U.S. Air Force............................    4,576        4,729         2,307
Imaging ..................................       --           --           424
                                           ---------    --------      --------
                                          $  15,022     $ 10,022      $  5,413
                                           =========    ========      =========

     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.

                                      F-12
<PAGE>


Note 5 -- Inventories

         Inventories consist of the following:

                                                            December 31,
                                                --------------------------------
                                                       2001              2002
                                                ---------------   -------------
Purchased parts...............................  $        1,380    $      2,888
Finished goods................................           3,439             364
                                                ---------------   ------------
                                                         4,819           3,252
     Less: inventory valuation reserve........           1,923           1,326
                                                ----------------  ------------
                                                $        2,896    $      1,926
                                                ===============   ============

Note 6 -- Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                         ------------------------------------------
                                                                                  2001                  2002
                                                                         ---------------------  --------------------
<S>                                                                      <C>                      <C>
Furniture and fixtures..............................................     $           483          $         483
Computer equipment..................................................               6,231                  6,390
Vehicles............................................................                  13                     13
Leasehold improvements..............................................                 369                    362
Equipment under capital leases......................................                 619                    476
                                                                         --------------------    -----------------
                                                                                   7,715                  7,724

Less accumulated depreciation and amortization, including $531 and
   $436 relating to equipment under capital leases at December 31
   2001 and 2002, respectively......................................               6,793                  7,202
                                                                         ---------------------   ------------------
                                                                         $           922           $        522
                                                                         =====================   ==================
</TABLE>



Depreciation  and  amortization  expenses for the years ended December 31, 2000,
2001 and 2002 was $1,986, $951 and $528, respectively.


Note 7 -- 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 March 8,
2001,  the Company  designated  1,788,750  shares as 6%  Cumulative  Convertible
Preferred Stock,  Series A ("Series A Preferred Stock"). On April 4, 2001, April
19, 2001 and  October  15,  2001,  the  Company  increased  the number of shares
designated as Series A Preferred  Stock to 1,793,750,  2,125,000 and  2,231,250,
respectively.

     On March 9, 2001, the Company issued 1,450,000 shares of Series A Preferred
Stock to certain  accredited  investors  pursuant  to the  initial  closing of a
private placement of its Series A Preferred Stock (the "Private  Placement") for
gross proceeds equal to $2,900. On April 4, 2001 and April 19, 2001, the Company
issued to accredited investors 250,000 and 300,000 shares of additional Series A
Preferred Stock,  respectively.  In addition, the Company issued an aggregate of
125,000  shares of Series A Preferred  Stock  valued at $250 to C.E.  Unterberg,
Towbin

                                      F-13

<PAGE>


("Unterberg Towbin"),  the Company's financial advisor in the Private Placement,
for services  provided in  connection  with the Private  Placement.  The Company
received  aggregate  gross  proceeds  of $4,000 in  connection  with the Private
Placement.

     In  connection  with the  issuance  of the Series A  Preferred  Stock,  the
Company recorded a dividend to Series A Preferred  shareholders of approximately
$3,764  representing  the  beneficial  conversion  feature  resulting  from  the
difference  between  the  conversion  price and the quoted  market  price of the
Company's  common  stock as at the date of issuance.  In  addition,  the Company
incurred fees related to the issuance of Series A Preferred  Stock in the amount
of $205 as a preferred stock dividend.

     The terms and  conditions  of the  Private  Placement  provided  for a cash
payment or the issuance of additional shares of the Company's Series A Preferred
Stock if a shelf  registration  statement  covering  the shares of Common  Stock
underlying the Series A Preferred Stock issued in the Private  Placement was not
declared  effective by the SEC within 180 days  following  each of three closing
dates in the Private Placement.  Since a shelf  registration  statement covering
such  shares  was  not  declared  effective  by the  SEC  within  the  allowable
timeframes,  the Company issued an aggregate of 106,250 additional shares of its
Series  A  Preferred  Stock  valued  at $213 to its  Series  A  Preferred  Stock
shareholders  on October 16,  2001.

     Each share of Series A Preferred  Stock was initially  convertible,  at the
option of its holder,  at any time after  issuance,  into eight shares of Common
Stock.  As a result of the  one-for-six  reverse  stock  split of the  Company's
Common Stock, effective July 20, 2001, each share of Series A Preferred Stock is
currently convertible into one and one-third (1 1/3) shares of Common Stock. The
conversion ratio is subject to adjustments under certain conditions. During 2001
and 2002,  respectively,  408,125 and 128,141 shares of Series A Preferred Stock
were converted into 544,167 and 167,420 shares of common stock at the request of
certain Series A Preferred Stock  shareholders.  The Series A Preferred Stock is
automatically  convertible upon the consummation of the Company's sale of Common
Stock in a public  offering  that meets certain  terms.  The holders of Series A
Preferred  Stock are  entitled  to vote on all  matters  that the holders of the
Company's  Common Stock are entitled to vote upon, on an  as-converted to Common
Stock  basis.  In  addition,  the  vote of 66 2/3% of the  holders  of  Series A
Preferred  Stock is  required in certain  circumstances.  The Series A Preferred
Stock  ranks  senior to the Common  Stock with  respect  to  dividends  and upon
liquidation,   dissolution,   winding  up  or  otherwise.  The  holders  of  the
outstanding  shares of Series A Preferred Stock are entitled to receive,  out of
funds legally available for the payment of dividends,  quarter-annual dividends.
Each quarter-annual dividend is computed by dividing the annual dividend rate of
$0.12 per share by four and is payable in cash or, at the option of the Company,
in shares of Series A Preferred  Stock.  Series A Preferred  Stock dividends are
cumulative,  whether or not declared, and are compounded at an annual rate of 6%
on the unpaid  cumulative  balance.  No dividends  may be paid or declared  upon
junior securities,  including Common Stock, unless full cumulative  dividends on
all  outstanding  shares of Series A  Preferred  Stock are paid or have been set
apart.  Dividends  may be declared on parity  securities,  only if dividends are
also  declared  on the  Series  A  Preferred  Stock  ratably  in  proportion  to
accumulated and unpaid  dividends.  On November 29, 2001, the Board of Directors
declared  dividends in arrears valued at $193 to be paid in additional shares of
Series A Preferred Stock associated with the March 15, June 15, September 15 and
December 15, 2001


                                      F-14
<PAGE>

dividend  payments.  As a result,  the Company  issued 96,367 shares of Series A
Preferred  Stock on January 28,  2002.  On April 26, July 25 and  September  26,
2002,  the  Board  of  Directors  declared  dividends  valued  at $57  for  each
declaration, paid in additional shares of Series A Preferred Stock. As a result,
the Company issued 28,561 and 28,416 shares of Series A Preferred  Stock for the
March 15 dividend payment and the June 15 dividend payment,  respectively. As of
December 31, 2002, 28,574 shares of Series A Preferred Stock associated with the
September 15 dividend payment have not been issued.

     As of December 31, 2002, approximately $67 of dividends had accumulated and
have not been declared and paid representing dividends in arrears for the period
from  September  16, 2002 through  December 31, 2002.  On January 23, 2003,  the
Board of Directors  declared  dividends valued at approximately  $57 relating to
the quarterly period through December 15, 2002.

     The Series A  Preferred  Stock is subject to  mandatory  redemption  by the
Company four years after its issuance.  The Series A Preferred Stock may also be
redeemed at the option of the Company or the holder  under  certain  conditions.
Subject to certain conditions,  holders of Series A Preferred Stock have a right
of first offer with  respect to the issuance of any new  securities  which would
reduce such holder's holdings by 10% or more.

 Note 8 -- Loan Payable

     The Company has a full recourse  factoring  facility  with GMAC  Commercial
Credit LLC (GMAC) which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85.0% of  eligible  receivables  (as defined - $852 as of
December 31, 2002).  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 currently expires on July 30, 2003 and may be extended on
an annual basis thereafter until terminated by either party upon providing sixty
days prior written  notice.  The obligations of the Company under such agreement
are  collateralized  by  substantially  all of the assets of the Company.  As of
December 31,  2002,  the Company had an  outstanding  balance of $484 under this
full recourse factoring facility.

     The Company's original agreement with GMAC restricted the Company's ability
to pay certain dividends without GMAC's prior written consent. In December 2001,
GMAC modified the  agreement to allow the Company to pay dividends  with respect
to the  Series A  Preferred  Stock in the form of shares  of Series A  Preferred
Stock.

     The Company has certain  covenants with GMAC all of which are in compliance
as of December 31, 2002.

Note 9 -- Leases

     The Company has capital  leases for certain  equipment.  In  addition,  the
Company  is  obligated  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. Rent expense for such
leases  approximated  $712, $621 and $538 for the years ended December 31, 2000,
2001 and 2002, respectively.


                                      F-15
<PAGE>

     During  2002,  the  Company  consolidated  its Tinton  Falls,  New  Jersey,
facilities  into one location and  negotiated  a settlement  which  released the
Company from any and all obligations  associated with the vacated  facility.  As
part of such settlement, the Company paid $71 to the landlord.

     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, 2002:

                                                    Capitalized       Operating
                                                      Leases            Leases

2003............................................ $          37     $       280
2004............................................             5             250
2005............................................             4             250
                                                 -------------     -----------
Total minimum lease payments....................            46     $       780
                                                 -------------     ===========
Less amount representing interest...............             4
                                                 -------------
Present value of net minimum lease payments..... $          42
                                                 =============

Note 10 -- Stock Option Plans

     The Company has the following stock option plans:

The 1989 Stock Option Plan

     Under the Company's  1989 Stock Option Plan, as amended,  150,000 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  exercise  price for 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.

     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 January 1, 2000...........................           20,266            $     12.24
   Options exercised.................................           (5,542)                  8.88
                                                          -------------------
Balance at December 31, 2000.........................           14,724                  13.50
   Options canceled..................................           (3,449)                  8.90
                                                         -------------------
Balance at December 31, 2001.........................           11,275                  14.91
   Options cancelled.................................             (233)                  6.00
                                                         --------------------   -----------------
Balance at December 31, 2002.........................           11,042            $     15.10
                                                         ====================   =================
   Options exercisable at December 31, 2002..........           11,042            $     15.10
                                                         ====================   =================
</TABLE>

                                      F-16
<PAGE>

     The weighted average remaining  contractual life for the balance of options
outstanding  at December 31, 2002 in the 1989 Stock Option Plan is two years and
the exercise price range is $9.00 - $17.22.

1996 Stock Option Plan

     In June 1996, the Board of Directors of the Company  adopted the 1996 Stock
Plan. In June 1998 and June 2002,  the  shareholders  approved  increases in the
number of shares  subject to the 1996  Stock  Plan.  Under the 1996 Stock  Plan,
1,266,667 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 exercise  price for 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.

     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 January 1, 2000.....................         149,726               $   17.70
   Options granted.............................          75,367                   37.14
   Options exercised...........................         (22,742)                   7.62
   Options canceled............................         (32,867)                  27.96
                                                  -----------------
Balance at December 31, 2000...................         169,484                   25.68
   Options granted.............................          70,355                    2.64
   Options canceled............................         (81,623)                  26.24
                                                  -----------------
Balance at December 31, 2001...................         158,216                   15.16
    Options granted............................         432,556                    0.85
    Options canceled...........................        (120,831)                   2.79
                                                  -----------------      -----------------
Balance at December 31, 2002...................         469,941               $    5.17
                                                  ================       =================
    Options exercisable at December 31,2002....         103,341               $   15.16
                                                  ================       =================
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding  at December  31, 2002 in the 1996 Stock  Option Plan is seven years
and the exercise price range is $.30 - $103.86.


                                      F-17
<PAGE>


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 January 1, 2000.....................          127,701           $   32.22
   Options granted.............................          147,383               16.68
   Options canceled............................           (3,258)              16.44
                                                  -------------------
Balance at December 31, 2000...................          271,826               24.00
   Options granted.............................           34,774                4.11
   Options canceled............................          (60,350)              15.54
                                                  -------------------
Balance at December 31, 2001...................          246,250               23.27
   Options granted.............................          662,900                0.89
   Options canceled............................           (7,124)              16.68
                                                  -------------------     -----------------
Balance at December 31, 2002...................          902,026                6.88
                                                  ===================     =================
   Options exercisable at December 31, 2002....          213,328           $   22.16
                                                  ===================     =================
</TABLE>

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2002 under  Non-Qualified  agreements is seven years
and the exercise price range is $.89 - $64.50.

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")  pursuant to which 83,333  shares of Common  Stock can be issued  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 5,000 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  833 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.

                                      F-18
<PAGE>

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


                                                         Options Outstanding
                                                                     Weighted-
                                                                      Average
                                                      Shares      Exercise Price
                                                   -----------------------------
Balance at January 1, 2000.......................     20,000           $25.38
   Options granted...............................      5,000           101.64
                                                   -----------
Balance at December 31, 2000.....................     25,000            40.62
   Options granted...............................     11,023             1.78
                                                   -----------
Balance at December 31, 2001.....................     36,023            28.75
   Options granted...............................     16,229             1.00
                                                   -----------
Balance at December 31, 2002.....................     52,252           $20.13
                                                   ============       ==========
   Options exercisable at December 31, 2002......     39,766           $19.41
                                                   ============       ==========

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2001 under the 1996  Non-Employee  Directors Plan is
six years and the exercise price range is $0.45 - $101.63.

     The  following  table  summarizes  information  about the  Company's  stock
options outstanding at December 31, 2002.

                    Outstanding                               Exercisable
--------------------------------------------------------------------------------
Range of         Number of  Weighted      Weighted          Number of   Weighted
Exercise Price   Options    Average       Average           Options     Average
                            Remaining     Exercise Price                Exercise
                            Years of                                    Price
                            Contractual
                            Life
--------------------------------------------------------------------------------
$0 - $.90        991,407        9           $0.87            5,532        $0.67
--------------------------------------------------------------------------------
$.91 - $8.00     218,912        6           $5.02          164,955        $5.57
--------------------------------------------------------------------------------
$8.01 - $40.00   150,885        6          $19.02          143,000       $16.65
--------------------------------------------------------------------------------
$40.01 - $110.00  74,057        7          $67.67           53,990       $66.68
                 -------                                   -------
--------------------------------------------------------------------------------
Total          1,435,261                                   367,477
               =========                                   =======
--------------------------------------------------------------------------------
Stock Warrants

     At December  31,  2002,  49,808  common  stock  purchase  warrants  with an
exercise price of $7.50 per share were  outstanding.  Such  warrants,  which are
held by a director of the Company,  expire in 2004.  At December  31, 2002,  all
such warrants were exercisable.

                                      F-19

<PAGE>

     The Company has reserved  1,485,069 shares of Common Stock for the exercise
of stock options and warrants as described above.

Note 11 -- Employee Stock Purchase Plan

     In June 1995, the Company  adopted a 1995 Employee Stock Purchase Plan (the
"Purchase Plan").  The Purchase Plan allows eligible employees to purchase up to
an aggregate of 66,667 shares of 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 Purchase Period,  as each of such terms are defined
in the Purchase Plan. At December 31, 2002,  64,998 shares were issued under the
Purchase Plan, of which 6,462 were issued in 2002.

Note 12 -- Income Taxes

     The provision for income tax (benefit) is comprised of the following:

                                                  December 31,
                                 ----------------------------------------------
                                     2000            2001             2002
                                 -----------     ------------    --------------
Federal:
  Current.......................  $      --      $        --       $    (23)
  Deferred......................         --               --             --

State:
  Current.......................       (235)            (262)          (225)
  Deferred......................         --               --             --
                                  ----------     ------------     -----------

Total...........................  $    (235)     $      (262)   $      (248)
                                ============     =============   ============

     Deferred income taxes reflect the net tax effect of net operating loss, tax
credit  carryforward and 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, 2001 and 2002 are as follows:

                                                          2001          2002

Tax credits....................................  $          927      $      763
Net operating losses...........................           7,907           9,130
Inventory, warranty and other reserves.........           1,075             840
Valuation allowance............................          (9,909)        (10,733)
                                                   -------------    -----------
Net............................................             --              --
                                                   ==============   ===========

     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

                                      F-20
<PAGE>


deferred  tax assets since the Company is in a cumulative  loss  position.  Such
valuation allowance will be reassessed periodically by the Company.

     As of  December  31,  2002,  the  Company  has  Net  Operating  Loss  (NOL)
carryforwards  for Federal income tax purposes of approximately  $25,673,  which
will begin to expire in 2009. The Company also has research and  development tax
credit  carryovers for Federal income tax purposes of approximately  $632, which
will begin to expire in 2009. In addition,  the Company has alternative  minimum
tax credits of approximately $76, which can be carried forward indefinitely. The
Company  experienced a change in ownership in 1996 ("1996 Ownership  Change") as
defined by Section 382 of the Internal Revenue Code. Accordingly,  future use of
these NOLs and income tax credits will be limited.

     The issuance of Series A Preferred Stock in 2000 may create a change in the
ownership  of the Company as defined by Section  382.  Therefore,  future use of
NOLs and income tax credits  generated  subsequent to the 1996 Ownership  Change
may be limited.

     As of December 31, 2002 the Company has  approximately  $8,013 of state NOL
carryforwards  which  will  begin to  expire  in 2005  and  state  research  and
development tax credit carryforwards of $86, which will begin to expire in 2004.

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

                                                         December 31,
                                               2000           2001        2002

Computed tax benefit......................  $  (4,451)  $    (915)    $   (944)
Increase in valuation allowance...........      4,986         686          824
Sale of state NOL and R&D credit/other....       (770)        (33)        (128)
                                            ----------    ----------    --------
Actual tax benefit........................  $    (235)  $    (262)    $   (248)
                                            ==========    ==========    ========

     During the fourth quarter of 2000, the Company sold approximately $5,189 of
state  NOL  carryforwards  and  $40  of  research  and  development  tax  credit
carryforwards  to an unrelated third party for  approximately  $235.  During the
fourth  quarter of 2001,  the  Company  sold  approximately  $8,147 of state NOL
carryovers to an unrelated third party for approximately $262.

     During the fourth quarter of 2002, the Company sold  approximately  $256 of
State  research  and  development  tax credits to an  unrelated  third party for
approximately $225.

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-21
<PAGE>

     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,  subpoenas  were  received  by  several  of the  Company's
employees, including certain officers, who have testified before the grand jury.
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 in
connection with the Company's sale of computer products  ultimately  received by
the U.S. Air Force.

     In October  2000,  one of the  integrators  to which the Company  sells its
products,  KKP Corp.,  and its president pled guilty to Federal  charges of mail
fraud and conspiracy to defraud the United States in connection with the sale of
computer  products and related  services to the U.S.  Air Force.  The Company is
referred to in the court papers (known as the  "Information")  in such case. The
Information  states  that the  defendants  periodically  issued  invoices to the
Company for  fictitious  services to the U.S. Air Force that were never provided
and passed such payments along to  co-conspirators.  The Information also states
that one of the  co-conspirators  caused the  Company "to pay a kickback of five
hundred dollars for each unit sold to the Air Force,  with the proceeds going to
the  benefit  of  the  co-conspirators."  The  Company  is not  identified  as a
co-conspirator in the Information. The Company believes that it had a reasonable
basis to believe these services to the U.S. Air Force were  performed;  that all
payments made by us to KKP Corp. were properly authorized;  and that the Company
has not  violated  any  Federal  laws in  connection  with its sale of  computer
products to KKP Corp. which were ultimately received by the U.S. Air Force.

     In October 2000, two employees of a company which assisted the Air Force in
procuring  computer-related  products and other related parties were indicted on
multiple Federal charges, including wire fraud, conspiracy to defraud the United
States and money laundering in connection with the sale of computer products and
related  services from several vendors,  including the Company,  to the U.S. Air
Force.  The  defendants  in the  Indictment  appear  to be  the  co-conspirators
referred to in the Information.  The Company is referred to in the Indictment in
terms similar to the Information.  The Company believes that it had a reasonable
basis to  believe  the  services  to the U.S.  Air  Force  billed by some of the
defendants  in the  Indictment  were  performed;  that all payments  made by the
Company to any of the defendants in the Indictment were properly authorized; and
that the Company has not violated any Federal  laws in  connection  with the its
sale of computer products which were ultimately received by the U.S. Air Force.


                                      F-22
<PAGE>


     In  December  2000,  the  United  States   Attorney's   Office  in  Boston,
Massachusetts  advised the Company  through its attorneys that the United States
government has no present  intentions of filing  charges  against the Company or
any of its employees.  The Company continues to believe that it has not violated
any Federal laws in  connection  with its sale of computer  products  which were
ultimately received by the United States Air Force.

     In late 2002, the Company was contacted through its counsel by an Assistant
United States  Attorney in the Civil  Division of the United  States  Attorney's
office in Boston who raised  the  question  of  whether  the  Company  had civil
responsibility  to the government for the events described above. The government
indicated its belief that it may have civil causes of action against the Company
under Federal,  state and common law arising from or in connection with the work
performed for, and billings to, the Federal government.  Discussions are ongoing
between the government and Company  counsel  regarding the merits of such causes
of  action  and the  possible  settlement  of the  same  prior  to any  possible
litigation.

     In September  1999,  the Company  entered into a Master Sale Agreement with
Hitachi Computer Products  (America),  Inc. Pursuant to such agreement,  Hitachi
began  assembling  the  Synchronix  2000 in January 2001. 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.

     On June 22, 2001, the Company  notified  Hitachi of the Company's intent to
terminate the Master Sale Agreement as of September 22, 2001 in accordance  with
the  requirements  of such  agreement.  The Company will assemble the Synchronix
product  previously  assembled by Hitachi internally in the Company's New Jersey
facility.  Hitachi was refusing to deliver  certain  goods which the Company had
paid for in full. On October 10, 2001, the Company filed suit against Hitachi in
Federal  District  Court  in New  Jersey  seeking  specific  performance  on the
delivery of such goods, which was subsequently delivered. In December 2001, both
parties  agreed to resolve this matter in binding  arbitration.  On February 28,
2003,  the Decision of Arbitrator was received  awarding  Hitachi $24, which was
offset by attorney fees awarded to the Company in the amount of $6, resulting in
a sum payable to Hitachi of $18.


                                      F-23
<PAGE>


Note 14 -- Quarterly Financial Information

<TABLE>
<CAPTION>

                                                       Quarterly Financial Information
                                                                 (unaudited)
                                                                     2001

                                                    Q1              Q2                Q3             Q4

<S>                                             <C>             <C>               <C>            <C>
Net sales                                       $4,207          $2,576            $1,169         $2,070

Gross profit                                     1,793           1,023               196            842

Net income (loss)                                   42            (703)           (1,372)          (397)
 Net loss applicable to common
  shareholders                                  (2,450)         (2,492)           (1,588)          (525)

Net loss per share - basic*                      (1.27)          (1.29)            (0.82)         (0.25)

Net loss per share-dilutive*                    $(1.27)         $(1.29)           $(0.82)        $(0.25)

                                                                    2002

                                                    Q1              Q2                Q3             Q4

Net sales                                       $1,157          $1,419            $1,876           $961

Gross profit                                       431             532               805             39

Net income (loss)                                 (979)           (779)              362         (1,134)

Net loss applicable to common
shareholders                                    (1,034)           (836)              305         (1,192)

Net (loss) income per share-basic                 (.41)           (.33)              .12           (.45)

Net (loss) income per share-dilutive*          $  (.41)          $(.33)             $.07          $(.45)
</TABLE>

*  Earnings per share amounts for both basic and dilutive for each
   quarter are required to be computed independently. As a result,
   their sum does not equal the total year net loss per share
   amount.

                          F-24
<PAGE>




                      STORAGE ENGINE, Inc. and Subsidiaries
                 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

Year ended December 31, 2002:

Allowance for doubtful
<S>                                            <C>              <C>           <C>               <C>          <C>
Accounts & returns/credits...................  $      20        $    126      $     --          $     --    $    146
Tax valuation allowance......................  $   9,909        $     --      $  824(C)         $     --    $ 10,733
Inventory valuation allowance................  $   1,923        $    350      $     --          $  947(B)   $  1,326
Warranty reserve.............................  $     387        $    (94)(D)  $     --          $     --    $    293

Year ended December 31, 2001:

Allowance for doubtful
Accounts & returns/credits...................  $     310        $     --      $     --          $  290(A)    $    20
Tax valuation allowance......................  $   9,223        $     --      $  686(C)         $     --     $ 9,909
Inventory valuation allowance................  $   2,467        $    338      $     --          $  882(B)    $ 1,923
Warranty reserve.............................  $     577        $   (190)(D)  $     --          $     --     $   387

Year ended December 31, 2000:

Allowance for doubtful
Accounts & returns/credits...................  $      --        $    310      $    --           $     --     $   310
Tax valuation allowance......................  $   4,237        $     --      $4,986(C)         $     --     $ 9,223
Inventory valuation allowance................  $     974        $  2,523      $    --           $1,030(B)    $ 2,467
Warranty reserve.............................  $     746        $   (169)(D)  $    --           $     --     $   577
</TABLE>



(A) Amounts written off during the year.
(B) Amounts written off during the year or obsolete inventory sold.
(C) Primarily due to increase in net operating loss carryforwards.
(D) Reduction commensurate with lower sales volume.