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, 2001

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

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

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


           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 ]

     State the  aggregate  market  value of the  voting  common  equity  held by
non-affiliates  of the Registrant:  $1,913,760 at February 28, 2002 based on the
last sales price on that date.

     Indicate  the  number of  shares  outstanding  of each of the  Registrant's
classes of common stock, as of February 28, 2002:

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

Common Stock, $.01 par value                          2,521,970

     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 2002 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.



<PAGE>

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

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

         2.  Properties..............................................     22

         3.  Legal Proceedings.......................................     22

         4.  Submission of Matters to a Vote of Security Holders.....     24

PART II  5.  Market For the Company's Common Equity and Related
             Shareholder Matters.....................................     24

         6.  Selected Consolidated Financial Data....................     28

         7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.....................     29

         7A. Quantitative and Qualitative Disclosures About Market
             Risk....................................................     40

         8.  Financial Statements and Supplementary Data.............     41

         9.  Changes in and Disagreements With Accountants on
             Accounting and Financial Disclosure.....................     41

PART III 10. Directors and Executive Officers of the Company.........     41

         11. Executive Compensation..................................     41

         12. Security Ownership of Certain Beneficial Owners
             and Management..........................................     41

         13. Certain Relationships and Related Transactions..........     41

PART IV  14. Exhibits, Financial Statement Schedules,
              and Reports on Form 8-K.................................    42

SIGNATURES............................................................    43

EXHIBIT INDEX.........................................................    45

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



                                       1

<PAGE>


                           FORWARD LOOKING STATEMENTS

     The  statements  contained in this Annual  Report on Form 10-K that are not
historical facts are forward-looking  statements (as such term is defined in the
Private  Securities   Litigation  Reform  Act  of  1995).  Such  forward-looking
statements may be identified by, among other things,  the use of forward-looking
terminology   such  as  "believes,"   "expects,"   "may,"  "will,"  "should"  or
"anticipates" or the negative thereof or other variations  thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These  forward-looking  statements,  such as  statements  regarding  anticipated
future revenues, capital expenditures, research and development expenditures and
other  statements  regarding  matters  that are not  historical  facts,  involve
predictions. 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
SEI 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
-------

     We supply and support 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, 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: Direct Attached Storage ("DAS"), in which the storage
device is connected directly to a server;  Network Attached Storage ("NAS"),  in
which the storage  device is  installed  on a network;  and Storage Area 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.

     A number of products resulted from our product development efforts over the
last five years, including our Synchronism Storage Management System, Synchronix
and Synchronection product lines. We are a supplier of high performance,  highly
scalable,  fault  tolerant  data  storage  solutions.  Our  direct  sales  force
concentrates  on sales to commercial end users and Federal and

                                       2
<PAGE>



local  government  end users.  Our direct  sales force also works with  selected
Value Added Resellers ("VARs") and assists them in their sales to commercial end
users.  During  the three  years  prior to 1998,  we had  focused  our sales and
marketing  efforts through our primary  alternate channel partners and OEMs like
Unisys  Corporation  and  Tandem  Computers,   Inc.  As  a  result  of  industry
consolidation  and  competitive  factors,  sales to Unisys and  Tandem  declined
significantly  in 2000 and  2001.  We do not  expect  sales  to these  alternate
channel  partners to  constitute a  significant  part of our net sales in fiscal
2002.

     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.
On January 8, 2001,  the  Company  announced  it had  discontinued  the  SANStar
development  effort that had been underway since 1998.  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.

     In September  2000, we introduced  the Synchronix  3000 (SX3000),  our high
performance fault tolerant data storage engine that delivers high speed, storage
capacity,  data protection and storage management,  along with the advantages of
full-fibre  connectivity.  The Synchronix  3000 offers  enhanced RAID technology
(redundant  array of independent  disks) and can become the central data storage
for  different  networks,  including  DAS,  NAS and SAN. We strive to  configure
solutions  that meet the needs of our  customers.  At times  this  includes  the
incorporation of third party products to complete the solution.  We marketed and
sold the SX3000  product  throughout  2001.  In 2001,  we upgraded the SX3000 to
accept  180GB  drives as well as 15K RPM drives for  increased  performance.  In
addition in 2001, the Company received certification by Microsoft that its fault
tolerant,  high  performance,  fibre-based  Synchronix  3000 storage  system was
compliant with Microsoft's Windows NT 4.0 and Windows 2000.

     On May  22,  2001,  we  significantly  enhanced  our  product  offering  by
introducing  the  Synchronism  Storage  Management  System.  Synchronism  is  an
enterprise  class storage  solution/system  which utilizes our  Synchronix  3000
product.  Synchronism  aggregates,   virtualizes  and  manages  diverse  storage
resources  and  provisions   these   resources  over  IP  (internet   protocol).
Synchronism  provides full redundancy and unifies SAN and NAS systems to provide
the best of SAN-type storage management, while integrating NAS applications in a
more extensive and accessible storage network.

     On October 22, 2001, we signed a systems integration and reseller agreement
with LSI Corporation whereby we will market and sell LSI storage offerings. This
broadens our product offerings to enterprise level storage including a 2GB fibre
interface product.

     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.

                                       3
<PAGE>

     We  announced  on  February  11,  2002,  that we had  reduced  our staff by
seventeen.  These reductions did not affect our sales and marketing departments.
As a result, we will take a charge of approximately $100 in the first quarter of
2002.  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 SEI'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 are 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 "2001 Disk Storage Systems
Forecast and Analysis, 2000-2005" by IDC. Although, the report predicts that the
U.S. disk storage  market will improve in the second half of 2002, the worldwide
market is expected to fall by 1.7% this year  according to IDC. By 2003,  IDC is
predicting  the disk  storage  systems  hardware  market  will  again see growth
worldwide of 5.2%.

     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  facilitated by the continued
decline in the cost per unit of storage capacity.

     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.

                                       4
<PAGE>


     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 in 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  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  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.

                                       5

<PAGE>


          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.

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  SEI 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.

     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


                                       6
<PAGE>

          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.

     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 hold several patents on our RAID controller.  We intend
          to improve  upon our current  product  offerings as well as develop or
          obtain new products for data storage.

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

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, 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;

                                       7
<PAGE>


     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

     o    centralized management.

     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.

         SYNCHRONIX 2000 is our DAS product offering. The major features of
Synchronix 2000 include:

     o    support for multiple levels of RAID;

     o    scalable to multiple terabytes;

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

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

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

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

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

     LSI  STORAGE  PRODUCTS  are  offered by SEI  including  the E4600 2GB fibre
array, the industry's  fastest  performing array, the E4400, and the Continustor
product.

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

     RAVEN 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.

                                       8

<PAGE>


     PRODUCTS  UNDER  DEVELOPMENT.  We continue  to enhance our current  product
offerings,  primarily  through  integration of third party hardware and software
for our Synchronism, Synchronix and Synchronection families of products.


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, 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.

                                       9
<PAGE>

     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 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.

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.

                                       10
<PAGE>


     Unisys,  formerly  our  primary  outside  manufacturer  for our  Synchronix
system, closed its Winnipeg computer storage systems manufacturing plant in July
1999 and terminated its manufacturing service agreement with us. We manufactured
such  systems  in-house  from August to December  1999.  In September  1999,  we
entered into a Master Sale Agreement with Hitachi Computer  Products  (America),
Inc. Pursuant to such agreement, Hitachi began 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
such  agreement.  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.  The date of arbitration has not
yet been established. As part of this arbitration arrangement, 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.  Such letter of credit was posted in the first quarter of 2002. We deny
having ordered such component parts.

     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 is Bell Microproducts.  During fiscal 2001,  purchases from
Bell totaled $1,822, or 52.7%, of our total purchases. We purchase products from
Bell on a purchase order basis. There are no minimum purchase requirements. This
arrangement may be terminated by either party at any time.

     In February 1999, we received ISO 9001  certification.  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.

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
$3,150 and $1,308, of which $1,038 and zero were capitalized in

                                       11

<PAGE>

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 in 2000 and 2001, respectively.

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

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

     o    improvements  to  the  Synchronism,   Synchronix  and   Synchronection
          families of products; and

     o    new interface connectivities.

     In June 2000,  we  announced  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.

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.

     In  February  2001,  as part of the  sale of our  SANStar  assets,  we sold
certain patent applications to Ciprico, Inc.

     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

                                       12
<PAGE>

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 reduced our staff by seventeen.  These  reductions
did not affect our sales and marketing departments.  As a result, we will take a
charge of approximately $100 in the first quarter of 2002.

     As of March 15,  2002,  we employed 39 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;  6 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.

Additional Factors That May Affect Future Results
-------------------------------------------------

WE RELY SUBSTANTIALLY ON KEY CUSTOMERS.

     Our  customer  base is highly  concentrated.  Our top 10 customers in 1999,
2000 and 2001 accounted for, in the aggregate,  approximately  82.6%,  64.5% and
79.3% respectively,  of net sales in those periods. Sales to the U.S. Air Force,
through Federal  integrators,  accounted for 58.4%, 30.5% and 47.2% of net sales
in  1999,  2000 and  2001,  respectively.  Federal  integrators  are  government
contractors  who sell directly to U.S.  government  entities.  We believe that a
substantial  portion  of our net sales and gross  profits  will  continue  to be
derived from sales to a concentrated group of customers.  However, the volume of
sales to a specific  customer  is likely to vary from  period to  period,  and a
significant customer in one period may not purchase our products in a subsequent
period.  In general,  there are no ongoing  written  commitments by customers to
purchase our products. All our product sales are made on a purchase order basis.
Our net sales in any period  generally  have been and likely will continue to be
in the near term, derived from a relatively small number of sales  transactions.
Therefore,  the loss of one or more major customers could  materially  adversely
affect our results of operations.

                                       13

<PAGE>


     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 $3,146
at December 31, 2001.

     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.

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 are
expected to testify  before the grand jury.  Not all of such  testimony has been
provided.  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

                                       14
<PAGE>

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.

     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 United
States Air Force.  We continue to work closely with, sell to, and seek solutions
for, our customer, the United States Air Force.

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:

                                       15
<PAGE>


     o    rapid technological change;

     o    evolving industry standards;

     o    changing customer preferences; and

     o    new product and service introductions.

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

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

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

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

     o    enhance existing products;

     o    develop new products that maintain technological leadership;

     o    meet a wide range of changing customer needs; and

     o    achieve market acceptance.

     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 and other Federal  government
end users.  Our direct sales force also recruits  selected VARs and assists them
in their sales to commercial  end users.  Whether we can  successfully  sell our
products and enter new markets will depend on our ability to:

                                       16
<PAGE>


     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 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.

                                       17
<PAGE>


THE LIQUIDITY OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED IF WE ARE DELISTED
FROM THE NASDAQ SMALLCAP MARKET.

     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).  We
were  provided  with 180 calendar  days,  or until  August 28,  2002,  to regain
compliance  by  having  the bid  price for our  common  stock  close at $1.00 or
greater for a minimum  period of 10  consecutive  trading  days. As of March 28,
2002,  we had not  regained  compliance.  In the  event  that  we do not  regain
compliance,  Nasdaq  staff will  determine  whether we meet the initial  listing
criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(A). If
we meet the  initial  listing  criteria,  staff will notify us that we have been
granted an additional 180 calendar day grace period to  demonstrate  compliance.
Otherwise,  the staff  will  provide  written  notification  that the  Company's
securities  will be subject to  delisting  from the Nasdaq  SmallCap  Market and
would trade on the OTC  Bulletin  Board.  A delisting  from the Nasdaq  SmallCap
Market may have a material  adverse effect on our stock price and our ability to
raise capital through the issuance of additional equity. In the event our common
stock is delisted from the Nasdaq  SmallCap  Market,  it would become subject to
certain  securities  law  restrictions  requiring  broker/dealers  who recommend
low-priced  securities to persons (with certain  exceptions) to satisfy  special
sales  practice   requirements,   including  making  an  individualized  written
suitability  determination for the purchaser and receive the purchaser's written
consent prior to the  transaction.  The securities laws also require  additional
disclosure in connection with any trades involving low-priced stocks (subject to
certain  exceptions),  including the delivery,  prior to any  transaction,  of a
disclosure  schedule  explaining  the market for such stocks and the  associated
risks.  These  requirements  could  severely  limit the market  liquidity of our
common stock and the ability of our shareholders to sell our common stock in the
secondary market.

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.

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

     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
such agreement.  We will assemble the Synchronix product previously assembled by
Hitachi  internally 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.  The date of arbitration has not
yet been established.

                                       18
<PAGE>


As part of this arbitration 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.  Such letter of
credit was posted in the first  quarter of 2002.  We deny  having  ordered  such
component parts.

     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 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 A PROPRIETARY SELLER FOR A LIMITED PERIOD OF TIME AND
HAVE A HISTORY OF LOSSES.

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

     We incurred net losses of $2,657,  $12,855, and $7,055 in fiscal 1998, 2000
and 2001 respectively.  Although we had net income of $910 in 1997 and $1,952 in
1999, we cannot be certain that we will be able to maintain profitable levels of
operations in the future.

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

     Our future depends,  in large part,  upon the continued  service of the key
members  of our  management  team,  as well as  marketing,  sales and  technical
personnel.   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 reduced our staff by
seventeen,  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 will take 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

                                       19
<PAGE>

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.

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

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

     o    successfully integrate and manage the acquired operations;

     o    retain the key employees of the acquisition targets;

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

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

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

WE HAVE ONLY LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS.

     Our  future  success  depends  in  part  upon  our  intellectual  property,
including  patents,  trade  secrets,   know-how  and  continuing   technological
innovation.  We cannot be  certain  that the steps  taken by us to  protect  our
intellectual  property  will be  adequate  to prevent  misappropriation  or that
others will not develop  competitive  technologies  or  products.  We have filed
numerous patent applications  covering various aspects of our Synchronix product
family. 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.

                                       20
<PAGE>

WE MAY NOT BE ABLE TO COMPLY WITH INDUSTRY STANDARDS.

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

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

POTENTIAL VOLATILITY OF OUR STOCK PRICE.

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

     o    actual or anticipated quarterly fluctuations in our operating results;

     o    changes  in   recommendations  or  earnings  estimates  by  securities
          analysts;

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

     o    general market or economic conditions.

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

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

     Our certificate of incorporation and New Jersey law contain provisions that
could  make it more  difficult  for a third  party  to  acquire  control  of our
company, even if such change of control would be beneficial to our shareholders.
For example,  our certificate of  incorporation  authorizes  3,000,000 shares of
preferred stock, of which 2,327,617 shares are designated Series A Preferred and
672,382 shares remain undesignated. Subject to certain rights held by our Series
A Preferred  stockholders,  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

                                       21
<PAGE>

of our common  stock at a premium as well as create a  depressive  effect on the
market price of the shares of our common stock.

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

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


     We occupy the following properties, which are all leased:

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

Tinton Falls,       10,000      R&D Manufacturing      Lease expires on 12/31/05
New Jersey                      Business Development

Falls Church,          700      Sales Office           Lease expires on 3/31/02
Virginia
                                                       We intend to renew this
                                                       lease.

Item 3.  Legal Proceedings.

     In November 1999, Mark Ish and David Boyle,  former  executive  officers of
our company,  filed a complaint against us and Gregg M. Azcuy, our President and
Chief  Executive  Officer,  in the Superior  Court of New Jersey,  Law Division,
Monmouth County. By the action,  Messrs. Ish and Boyle are seeking  compensatory
damages,  punitive  damages,  attorneys'  fees,  interest  and costs for alleged
breach of multiple  contracts,  fraud and defamation.  On September 28, 2001, we
received  notification  from the  Superior  Court of New Jersey,  Law  Division,
Monmouth  County that the actions  brought by Mr.  Boyle have been  dismissed on
summary  judgment.  On  November  9, 2001,  we  settled  with Mr. Ish and paid a
nominal amount.

     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 have been
received  by several  of our  employees,  including  certain  officers,  who are
expected to testify before the grand jury.

                                       22
<PAGE>

Not all of such  testimony  has been  provided.  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 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 United
States Air Force.  We continue to work closely with, sell to, and seek solutions
for, our customer, the U. S. Air Force through integrators. 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.

                                       23
<PAGE>


     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.  The  date of  arbitration  has  not yet  been
established. As part of this arbitration 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. Such letter
of credit was posted in the first quarter of 2002.  We deny having  ordered such
component parts.


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

     Not applicable.

                                    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.  In
addition,  we filed  with the  Secretary  of State of the State of New Jersey an
amendment to our amended and restated certificate of incorporation  changing our
name from ECCS,  Inc. to Storage Engine,  Inc.,  effective on July 20, 2001. SEI
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  SEI 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".

     Our common stock  previously was quoted on the Nasdaq National Market under
the symbol  "ECCS".  Prior to February 22, 2000,  our common stock was quoted on
the Nasdaq  SmallCap  Market  under the  symbol  "ECCS."  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 common  stock  began  trading at the post split price on July 23, 2001 under
the symbol "SENG".  As a result,  at that time we satisfied all requirements for
the continued listing on The Nasdaq SmallCap Market.

                                       24
<PAGE>

     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.

                                                  High                Low
                                              ------------       ------------
   Fiscal Year Ended December 31, 2000
            First Quarter.....................  $150.000           $62.250
            Second Quarter....................    85.500            14.628
            Third Quarter.....................     6.000             2.250
            Fourth Quarter....................     2.938             0.250
   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

     On March 28,  2002,  the last  reported  sale price of our common  stock as
reported  by the Nasdaq  SmallCap  Market  was $0.95 per share.  As of March 28,
2002, the approximate number of holders of record of our common stock was 148.

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

     On January 25, 2001, we applied for an exception to Nasdaq Marketplace Rule
4350(i)(1)  requiring SEI receive  shareholder  approval of an equity  financing
when such financing would result in a change of control of the issuer.

     On  February  23,  2001,  Nasdaq  determined  that an  exception  from  the
shareholder approval requirement was warranted subject to the Company mailing to
all shareholders, no later than ten days before the completion of the financing,
a letter  describing the proposed  transaction and alerting  shareholders to our
omission to seek the shareholder approval that would otherwise be required.  The
letter  was  required  to  indicate  that the Audit  Committee  of the Board had
expressly approved the exception. In addition, we were required to issue a press
release describing the transaction.

     On  March  9,  2001,  we  issued  1,450,000  shares  of our  6%  Cumulative
Convertible  Preferred  Stock,  Series A (the  "Series A  Preferred  Stock")  to
accredited  investors for an aggregate gross proceeds equal to $2,900,  pursuant
to a private equity  placement (the "Private  Placement").  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. On July 10, 2001, as a result
of the 1:6 reverse stock split, such conversion ratio was changed to 1.33 shares
of common stock for every one share of Series A Preferred  Stock. No underwriter
was  employed by us in  connection  with the issuance of the  securities  in the
Private Placement,  however C.E. Unterberg, Towbin ("Unterberg Towbin") acted as
our placement agent. As compensation for its services,


                                       25
<PAGE>


Unterberg  Towbin  received a fee equal to 125,000  shares of Series A Preferred
Stock valued at $250, in addition to payment of certain  expenses if fully sold.
Thomas I. Unterberg, a current director of SEI, along with certain affiliates of
Mr. Unterberg,  purchased 567,500 shares of Series A Preferred Stock on the same
terms and conditions as all other  purchasers.  Mr.  Unterberg also is Chairman,
Managing Director and member of the Executive  Committee of Unterberg Towbin. We
believe  that the issuance of shares of Series A Preferred  Stock in  connection
with the Private  Placement was exempt from  registration  under Section 4(2) of
the Securities Act of 1933, as amended (the "Act"), and Rule 506 of Regulation D
promulgated  under the Act, as a transaction  not  involving a public  offering.
Appropriate  legends have been affixed to the stock  certificates  issued to the
purchasers  of the Private  Placement.  All  purchasers  had adequate  access to
information about SEI and each purchaser  acquired the securities for investment
only and not with a view to distribution.

     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 the our Common
Stock. The conversion ratio is subject to adjustments under certain  conditions.
As of  December  31,  2001,  408,125  shares of Series A  Preferred  Stock  were
converted into 544,167 shares of Common Stock.  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 dividend payments.  As a result, the Company issued 96,367
shares of Series A Preferred Stock on January 28, 2002.


                                       26
<PAGE>


     As of December 31, 2001, approximately $11 of dividends had accumulated and
have not been declared and paid representing  dividends in arrears from December
15, 2001.

     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.

     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).  We
were  provided  with 180 calendar  days,  or until  August 28,  2002,  to regain
compliance  by  having  the bid  price for our  common  stock  close at $1.00 or
greater for a minimum  period of 10  consecutive  trading  days. As of March 28,
2002,  we had not  regained  compliance.  In the  event  that  we do not  regain
compliance,  the Nasdaq staff will determine whether we meet the initial listing
criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(A). If
we meet the initial listing criteria,  the staff will notify us that it has been
granted an additional 180 calendar day grace period to  demonstrate  compliance.
Otherwise,  the staff will provide written notification that our securities will
be subject to delisting from the Nasdaq  SmallCap  Market and would trade on the
OTC  Bulletin  Board.  A delisting  from the Nasdaq  SmallCap  Market may have a
material  adverse  effect on our stock  price and our  ability to raise  capital
through the issuance of additional  equity. A delisting could severely limit the
market liquidity of our common stock and the ability of our shareholders to sell
the common stock in the secondary market.

                                       27
<PAGE>


Item 6. Selected Consolidated Financial Data.

     The following selected  consolidated  financial data as of and for the five
years  ended  December  31,  2001  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,
                                            --------------------------------------------------------
                                              1997        1998        1999        2000        2001
                                            --------    --------    --------    --------    --------
                                                     (in thousands, except per share amounts)
<S>                                         <C>         <C>         <C>         <C>         <C>
Statement of Operations Data:
Net sales ...............................   $ 34,001    $ 28,466    $ 39,761    $ 15,022    $ 10,022
  Cost of sales .........................     24,226      20,452      26,777      15,268       6,168
                                            --------    --------    --------    --------    --------
Gross profit (deficit) ..................      9,775       8,014      12,984        (246)      3,854
  Selling, general and
     administrative expenses ............      6,838       8,378       9,693      10,925       5,588
  Research and development
     expenses ...........................      1,687       2,683       1,939       2,112       1,308
                                            --------    --------    --------    --------    --------
Operating income (loss) .................      1,250      (3,047)      1,352     (13,283)     (3,042)
  Gain on sale of SANStar ...............        --          --          --           --         284
  Net interest (expense) income .........        (28)        390         162         193          66
                                            --------    --------    --------    --------    --------
Income (loss) before income tax benefit
  and extraordinary item ................      1,222      (2,657)      1,514     (13,090)     (2,692)
Income tax benefit ......................         --          --         438         235         262
                                            --------    --------    --------    --------    --------
Income (loss) before extraordinary item .      1,222      (2,657)      1,952     (12,855)     (2,430)
     Extraordinary item .................       (120)         --          --          --          --
                                            --------    --------    --------    --------    --------
Net income (loss) .......................      1,102      (2,657)      1,952     (12,855)     (2,430)
  Preferred dividends and accretion .....       (192)         --          --          --      (4,625)
                                            --------    --------    --------    --------    --------
Net income (loss) applicable
  to common shares ......................   $    910    $ (2,657)   $  1,952    $(12,855)   $ (7,055)
                                            ========    ========    ========    ========    ========
Net income (loss) per share before
  extraordinary item -  basic ...........   $   0.92    $  (1.45)   $   1.06    $  (6.71)   $  (3.56)
Net income (loss) per share -  basic ....   $   0.81    $  (1.45)   $   1.06    $  (6.71)   $  (3.56)
Net income (loss) per share before
  extraordinary item -  diluted .........   $   0.60    $  (1.45)   $   0.98    $  (6.71)   $  (3.56)
Net income (loss) per share -  diluted ..   $   0.66    $  (1.45)   $   0.98    $  (6.71)   $  (3.56)
Weighted average common shares
outstanding -  basic ....................      1,117       1,828       1,849       1,915       1,982
Weighted average common shares
outstanding -  diluted ..................      1,673       1,828       1,996       1,915       1,982



                                                            Year Ended December 31,
                                            --------------------------------------------------------
                                              1997        1998        1999        2000        2001
                                            --------    --------    --------    --------    --------
                                                              (in thousands)
Balance Sheet Data:
Cash ....................................   $11,625     $ 5,374     $ 7,993     $ 2,221     $ 3,146
Working capital .........................    15,260      11,969      14,200       3,467       5,533
Total assets ............................    24,992      21,374      23,231       9,632       8,077
Loans payable and payable to Finova
  Capital ...............................     1,031       1,231         968         276          66
6% cumulative convertible
  preferred stock Series A ..............        --          --          --          --       3,839
Shareholders' equity ....................   $17,643     $15,232     $17,701     $ 5,145     $ 2,627

</TABLE>
                                       28

<PAGE>


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

Overview
--------

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

     During 1998, we shifted our sales and marketing focus to the development of
our direct sales  channel from our previous use of alternate  channel  partners.
Our direct sales force  concentrates  on sales to commercial end users,  and the
U.S. Air Force and other Federal  government  end users.  Our direct sales force
also recruits  selected  VARs and assists them in their sales to commercial  end
users.  During  the three  years  prior to 1998,  we had  focused  our sales and
marketing  efforts  through  our  primary  alternate  channel  partners,  Unisys
Corporation and Tandem Computers, Inc. As a result of industry consolidation and
competitive factors,  sales to Unisys and Tandem declined  significantly in 2000
and  2001.  We do not  expect  sales  to these  alternate  channel  partners  to
constitute a significant part of our net sales in fiscal 2002.

     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.

     Sales to the U.S. Air Force accounted for  approximately  58.4%,  30.5% and
47.2% of net sales in 1999,  2000 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.


                                       29
<PAGE>

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

                                                    Year Ended December 31,
                                               -------------------------------
                                                 1999       2000        2001
                                               --------    -------     ------
                                                        (in thousands)
Direct:
 Commercial and other Federal customers....   $ 12,638    $  9,905   $  5,123
 U.S. Air Force............................     23,216       4,576      4,729

 Indirect:
  Alternate channel partners................     3,907         541        170
                                              ---------- ----------- --------

                                              $ 39,761    $ 15,022   $ 10,022
                                              ========== =========== =========


     Direct 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.  Indirect  sales
include sales through OEMs and national resellers.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS

     Financial  Reporting  Release No. 60,  which was  recently  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 2 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 recently 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.

     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.

                                       30
<PAGE>


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

REVENUE

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

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.

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

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,  $586,  $919 and $156 for  1999,  2000 and  2001,  respectively.  At
December  31,  2001,  we have  capitalized  an  aggregate  of $3,905 of software
development costs, of which $366 was written off in 1998, as we discontinued our
efforts to develop a fibre controller and a controller  design that incorporated
Tandem's Server Net Technology. In addition, in 2000, $1,738 was written off and
$250 was sold in connection with our discontinuation of the SANStar project, and
$1,551 has been amortized in the  aggregate.  We did not capitalize any software
development costs during 2001.

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

                                       31
<PAGE>


     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,
                                                               ---------------------------------
                                                                 1999         2000         2001
                                                               -------      -------      -------

<S>                                                               <C>          <C>          <C>
Direct net sales:
    Commercial and other Federal customers ..............         31.8%        65.9%        51.1%
    U.S. Air Force ......................................         58.4         30.5         47.2
Indirect net sales:
    Alternate channel partners ..........................          9.8          3.6          1.7
                                                               -------      -------      -------
Total net sales .........................................        100.0        100.0        100.0
  Cost of sales .........................................         67.3        101.6         61.5
                                                               -------      -------      -------
Gross profit ............................................         32.7         (1.6)        38.5
  Selling, general & administrative expenses ............         24.4         72.7         55.7
  Research & development expenses .......................          4.9         14.1         13.1
                                                               -------      -------      -------
Operating (loss) income .................................          3.4        (88.4)       (30.3)
  Gain on sale of SANStar ...............................          --           --           2.8
  Net interest income ...................................          0.4          1.3          0.7
                                                               -------      -------      -------
Income (loss) before income tax benefit .................          3.8        (87.1)       (26.8)
  Income tax benefit ....................................          1.1          1.6          2.6
                                                               -------      -------      -------
Net income (loss) .......................................          4.9%       (85.5)%      (24.2)%
                                                               =======      =======      =======
</TABLE>


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

     Year Ended  December  31,  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

                                       32
<PAGE>

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  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.  Without these charges in 2000, our gross profit
would have been $4,015 in 2001.

     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.

                                       33
<PAGE>

     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.

     Year Ended  December  31,  2000  Compared to Year Ended  December  31, 1999
     ---------------------------------------------------------------------------

     NET SALES

     Net sales decreased by approximately  $24,739, or 62.2%, to $15,022 in 2000
from $39,761 in 1999. Sales of our fault tolerant  enterprise  storage solutions
accounted for 83.5% and 95.0% of net sales in 2000 and 1999, respectively. Other
revenues  accounted  for  16.5%  and  5.0%  of  net  sales  in  2000  and  1999,
respectively. The decrease in 2000 net sales resulted primarily from lower sales
of our  enterprise  storage  solutions  to the U.S.  Air Force  through  Federal
integrators, alternate channel partners and our commercial customers.

     Sales to the U.S.  Air  Force  through  Federal  integrators  decreased  by
approximately  $18,640,  or 80.3%,  to $4,576 in 2000 from $23,216 in 1999. Such
sales accounted for approximately 30.5% and 58.4% of net sales in 2000 and 1999,
respectively.

     Sales to alternate channel partners  decreased by approximately  $3,366, or
86.2%,  to  $541  in  2000  from  $3,907  in  1999.  Such  sales  accounted  for
approximately  3.6% and 9.8% of net sales in 2000 and 1999,  respectively.  Such
decrease  represents  a  decrease  in sales to  Unisys of  approximately  $2,721
combined with a $645 decrease in sales to Tandem.  Sales to Unisys accounted for
approximately  3.6% and 8.0% of our net  sales in 2000 and  1999,  respectively.
Sales to Tandem accounted for less than 1% and 2.0% of our net sales in 2000 and
1999, respectively.

     Sales to our commercial  customers  decreased by approximately  $2,733,  or
21.6%, to $9,905 in 2000 from $12,638 in 1999.

     GROSS PROFIT

     Our gross profit decreased by approximately  $13,230, or 101.9%, to a gross
deficit of  approximately  $246 in 2000 from a gross  profit of $12,984 in 1999.
Such  decrease in gross  profit is due  primarily to the lower level of sales to
the U.S. Air Force through Federal  integrators,  alternate channel partners and
commercial customers.  Our gross profit in 2000 was adversely affected by $2,523
and $1,738 of charges relating to an increase in inventory  obsolescence and the
write-off of capitalized software,  respectively.  The charges taken in 2000


                                       34
<PAGE>

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 increased by $1,232, or
12.7%,  to $10,925 in 2000 from $9,693 in 1999.  Such increase was primarily due
to the hiring of additional sales and marketing personnel, coupled with enhanced
efforts to market the Company's current and new product offerings.  In addition,
we incurred approximately $237 associated with proposed financing activities and
approximately  $807 in legal and  accounting  fees  associated  with the Federal
investigation.

     SG&A expenses as a percentage of net sales  represented 72.7% and 24.4% for
2000 and 1999,  respectively.  Such  percentage  increase is attributable to the
reduction  in  revenues  combined  with the  overall  higher  spending  in 2000.
Salaries,  commissions,  bonuses,  employee  benefits and payroll taxes were the
largest components of operating  expenses,  accounting for 59% and 70.0% of such
expenses in 2000 and 1999, respectively.

     Research and  development  expenses  increased in 2000 by $173, or 8.9%, to
$2,112 in 2000 from $1,939 in 1999. Such expenditures, before offsetting amounts
capitalized in accordance  with SFAS No. 86,  represented  $3,150 and $2,662 for
the twelve months ending December 31, 2000 and 1999, respectively. This increase
was due primarily to an increased  effort to develop the SANStar  product.  Such
expenses represented  approximately 14.1% and 4.9% of our net sales for 2000 and
1999,  respectively,  and,  including the amount  capitalized in accordance with
SFAS No. 86, represented  approximately 21.0% and 6.7% of our net sales for 2000
and 1999, respectively.

     NET INTEREST INCOME

     Net interest income was $193 and $162 for 2000 and 1999, respectively.  The
increase in interest income was primarily due to decreased  borrowings and floor
planning in 2000 compared to 1999.

Liquidity and Capital Resources
-------------------------------

     Our cash balance was approximately $3,146 at December 31, 2001.

     Net cash used in  operating  activities  was  $2,618 and $3,450 in 2001 and
2000,  respectively.  Net cash used in  operating  activities  in 2001  resulted
primarily  from the net loss from  operations  after  adding back  depreciation,
amortization and the write-off of capitalized

                                       35
<PAGE>

software, coupled with a decrease in accounts payable, accrued liabilities,  and
offset in part by a decrease in accounts  receivable and  inventories.  Net cash
provided  by  investing  activities  was $119 in  2001.  Net  cash  provided  by
financing activities was $3,424 in 2001 resulted primarily from the net proceeds
from the sale of the 6% Series A Preferred Stock.

     We used $461 and $475 for the  acquisition of equipment by direct  purchase
during 2001 and 2000,  respectively.  Such expenditures  primarily  consisted of
computer equipment associated with our research and development efforts.

     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 had working  capital of $5,533 and $3,467 at December 31, 2001 and 2000,
respectively.

     On July 9, 1997,  we entered into a full recourse  factoring  facility with
Bank of America ("BOA") which provides for aggregate  advances not to exceed the
lesser  of $7  million  or up to 85.0% of  Eligible  Receivables  (as  defined).
Interest  on such  advances is payable  monthly in arrears at the prime  lending
rate and we are obligated to pay certain annual fees. The factoring  facility is
for a period of three years  (unless  terminated by BOA by providing the Company
sixty days prior written  notice)  beginning on July 30, 1997. On June 16, 2000,
the  Company  signed  an  amendment  to the  factoring  facility  extending  the
agreement  until  July  30,  2003,  and  from  year  to  year  thereafter  until
terminated. Except as described above, the factoring facility remains unchanged.
On January 1, 2001, GMAC Commercial  Credit LLC (GMAC)  purchased  substantially
all of the  factoring  assets of Bank of  America  Commercial  Corporation.  Our
obligations under such agreement are  collateralized by substantially all of our
assets. As of December 31, 2001, we had an outstanding balance of $66 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 all of which are in  compliance as of
December 31, 2001.

     Our ability to borrow under a $4,000 general line of credit with the Finova
Group,  Inc.  ("Finova") was terminated by Finova in December 2000. We have been
and will be relying on open terms with our vendors to purchase  component  parts
that are  incorporated  into our fault  tolerant  enterprise  storage  solutions
products.

                                       36
<PAGE>


     As of December 31, 2001, we have net operating loss ("NOL")  carryovers for
Federal income tax purposes of approximately $22,537, which will begin to expire
in 2009. We also have research and development tax credit carryovers 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.

     If,  subsequent  to 1996,  a change in the  ownership  of SEI as defined by
Section  382  occurred  or may  occur,  further  use of the NOLs and  income tax
credits generated subsequent to the 1996 Ownership Change may also be limited.

     As of  December  31,  2001,  we have  approximately  $4,886  of  state  NOL
carryforwards  which  will  begin to  expire  in 2005  and  state  research  and
development  tax  credit  carryforwards  of $342,  which will begin to expire in
2004.

     In December 2001, we sold $8,147 of State NOL carryforwards  which resulted
in a tax  benefit  of $262.  In  December  2000,  we sold  $5,189  of State  NOL
carryforwards   and  $40  of  State   Research  and   Development   tax  credits
respectively, which resulted in a tax benefit of $235.

     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, 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 to 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.

     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 to its Series A Preferred Stock shareholders on October
16, 2001.  The Company had 30 business days  following the default date to issue
the default  shares.  On October 16, 2001,  the Company  increased the number of
shares designated as Series A Preferred Stock to 2,231,250.

                                       37
<PAGE>


     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 the our Common
Stock at the  request of certain  Series A  Preferred  Stock  shareholders.  The
conversion  ratio is subject to  adjustments  under  certain  conditions.  As of
December 31, 2001,  408,125  shares of Series A Preferred  Stock were  converted
into 544,167 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
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,  our  board of  directors  declared  dividends  in  arrears  to be paid in
additional  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.

     As of December 31, 2001, approximately $11 of dividends had accumulated and
have not been declared and paid representing  dividends in arrears from December
15, 2001.

     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.

     Nasdaq  Marketplace  Rule  4350(i)(1)  requires SEI to receive  shareholder
approval of an equity  financing when such financing would result in a change of
control of the issuer.  We applied for and received from Nasdaq, an exception to
Nasdaq  Marketplace  Rule  4350(i)(1)  prior  to its  issuance  of the  Series A
Preferred Stock.

     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).  We
were  provided  with 180 calendar  days,  or until  August 28,  2002,  to regain
compliance  by  having  the bid  price for our  common  stock  close at $1.00 or
greater for a minimum  period of 10  consecutive  trading  days. As of March 28,
2002,  we had not  regained  compliance.  In the  event  that  we do not  regain
compliance,  the Nasdaq staff will determine whether we meet the initial listing
criteria for The Nasdaq SmallCap

                                       38
<PAGE>

Market under  Marketplace  Rule  4310(c)(2)(A).  If we meet the initial  listing
criteria,  the staff will notify us that we have been granted an additional  180
calendar day grace period to demonstrate compliance. Otherwise, the Nasdaq staff
will  provide  written  notification  that our  securities  will be  subject  to
delisting  from the Nasdaq  SmallCap  Market and would trade on the OTC Bulletin
Board. A delisting from the Nasdaq SmallCap  Market may have a material  adverse
effect on our stock price and our ability to raise capital  through the issuance
of additional  equity.  A delisting could severely limit the market liquidity of
our common stock and the ability of our shareholders to sell our common stock in
the secondary market.

     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 $516, $712 and $621 for the
years ended December 31, 1999, 2000 and 2001, respectively.

     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, 2001:

                                              Capitalized       Operating
                                                 Leases           Leases
                                              -----------     -----------
                                                     (in thousands)

2002........................................... $    63       $    353
2003...........................................      32            388
2004...........................................      --            342
2005...........................................      --            345
                                                --------       ---------
Total minimum lease payments................... $    95       $  1,428
                                                --------       ==========
Less amount representing interest..............       7
                                                --------
Present value of net minimum lease payments.... $    88
                                                ========

     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  have  agreed to salary  reductions.  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 will take a charge of approximately $100 in the first quarter of
2002,  however,  we believe  that our  restructured  workforce  will help reduce
operating expenses in 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.

     Subject to the risks  discussed  in this  Annual  Report on Form  10-K,  we
believe that our existing available cash, credit  facilities,  proceeds from the
Private  Placement  described  above


                                       39
<PAGE>

and the cash flow expected to be generated from  operations  will be adequate to
satisfy  our current  and  planned  operations  for at least the next 12 months.
There can be no  assurance,  however,  that our  operating  results will achieve
profitability  or adequate  cash flow in the next twelve  months.  Our operating
plan 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.  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.

Recent Accounting Pronouncements
--------------------------------

     In June 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statements of Financial  Accounting  Standards ("SFAS") No. 141 ("SFAS No. 141")
"Business  Combinations",   No.  142  ("SFAS  No.  142"),  "Goodwill  and  Other
Intangible  Assets",  and No.  143  ("SFAS  No.  143"),  "Accounting  for  Asset
Retirement  Obligations."  SFAS No. 141  requires  that the  purchase  method of
accounting be used for all business combinations  initiated after June 30, 2001.
This statement  specifies that certain acquired  intangible assets in a business
combination be recognized as assets  separately  from goodwill and that existing
intangible   assets  and  goodwill  be  evaluated   for  these  new   separation
requirements.  SFAS No.  142 is  effective  for  fiscal  years  beginning  after
December 31, 2001 and changes the accounting  for goodwill from an  amortization
method to an  impairment-only  approach.  Amortization  of  goodwill,  including
goodwill  recorded in past  business  combinations,  will cease upon adoption of
this statement.  In addition,  this statement  requires that goodwill be teested
for impairment at least  annually at the reporting  unit level.  SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002 and addresses  finacial
accounting  and  reporting for  obligations  associated  with the  retirement of
tangible  long-lived  assets  and the  associated  asset  retirement  costs.  In
addition,  in August  2001,  the FASB  issued  SFAS No.  144  ("SFAS  No.  144")
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-Lived  Assets to Be Disposed Of." The statement  retains the previously
existing accounting  requirements  related to the recognition and measurement of
the  impairment  of  long-lived  assets to be held and used while  expanding the
measurement  requirements  of  long-lived  assets to be  disposed  of by sale to
include  discontinued  operations.  It  also  expands  the  previously  existing
reporting requirements for discontinued  operations to include a component of an
entity that either has been  disposed of or is  classified  as held for sale. As
the Company does not have any recorded  intangibles,  SFAS No. 142 will not have
an impact on the financial  position or the results of  operations.  The Company
does not expect  SFAS No. 143 and SFAS No. 144 to have a material  impact on the
Company's financial position or results of operations.

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, 2001, all our available  excess funds were cash
or cash equivalents  whose value is not subject to changes in interest rates. We
currently hold no derivative  instruments and do not earn foreign-source income.
We  expect  to  invest  our cash  only in debt  obligations  issued  by the U.S.
government or its agencies with maturities of less than one year.


                                       40
<PAGE>

Item 8. Financial Statements and Supplementary Data.

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

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

     On November 15, 2000, Ernst & Young LLP ("E&Y") resigned as our independent
auditors.  The  report of E&Y on our  financial  statements  for each of the two
years in the periods ended December 31, 1999 and December 31, 1998, contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty,  audit scope, or accounting principles. During the two fiscal years
ended December 31, 1999 and December 31, 1998, and during the nine-month  period
ended September 30, 2000, there were no  disagreements  with E&Y in its reports.
E&Y has  furnished  us with a letter  addressed to the  Securities  and Exchange
Commission stating their agreement with the above statements.

     On November  21,  2000,  our board of  directors  approved  and we retained
Richard A. Eisner & Company, LLP as our independent auditors.

                                    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 2002 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 2002 Annual  Meeting of  Shareholders  is  incorporated
herein by reference to such proxy statement.

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

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and  Management"  in our definitive  proxy  statement for the 2002 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 2002 Annual Meeting of
Shareholders is incorporated herein by reference to such proxy statement.

                                       41
<PAGE>


                                    PART IV


Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

          (a)  (1) Financial Statements.

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

          o    Report of Independent Auditors - Richard A. Eisner & Company LLP

          o    Report of Independent Auditors - Ernst & Young LLP

          o    Consolidated Balance Sheets - December 31, 2000 and 2001

          o    Consolidated  Statements of Operations - Years ended December 31,
               1999, 2000 and 2001

          o    Consolidated  Statements  of  Shareholders'  Equity - Years ended
               December 31, 1999, 2000 and 2001

          o    Consolidated  Statements of Cash Flows - Years ended December 31,
               1999, 2000 and 2001

          o    Notes to Consolidated Financial Statements - December 31, 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 45.

          (b)  Reports on Form 8-K.

               None.

                                       42
<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
     29th day of March, 2002.

                                   STORAGE ENGINE, INC.


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


                                       43
<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 29, 2002
-------------------------------           Director (Principal Executive Officer)
Gregg M. Azcuy

/s/ Louis Altieri                         Vice President, Finance and                      March 29, 2002
-------------------------------           Administration (Principal Financial and
Louis Altieri                             Accounting Officer)

/s/ Michael E. Faherty                    Chairman of the Board and Director               March 29, 2002
-------------------------------
Michael E. Faherty

/s/ Gale R. Aguilar                       Director                                         March 29, 2002
-------------------------------
Gale R. Aguilar

/s/ James K. Dutton                       Director                                         March 29, 2002
-------------------------------
James K. Dutton

/s/ Donald E. Fowler                      Director                                         March 29, 2002
-------------------------------
Donald E. Fowler

/s/ Frank R. Triolo                       Director                                         March 29, 2002
-------------------------------
Frank R. Triolo

/s/ Thomas I. Unterberg                   Director                                         March 29, 2002
-------------------------------
Thomas I. Unterberg
</TABLE>


                                       44

<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, 2001 filed on November 13, 2001.)

        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.)


                                       45
<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.)





                                       46

<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.)



                                       47

<PAGE>


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

        10.18  Master Sales  Agreement  dated September 23, 1999, by and between
               the Company and Hitachi  Computer  Products  (America)  Inc.,  as
               amended.  (Incorporated  by  reference  to the  Company's  Annual
               Report on Form 10-K for the  annual  period  ended  December  31,
               1999.)

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

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

        10.21  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.)

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

        23.1+   Consent of Ernst & Young LLP.

        23.2+   Consent of Richard A. Eisner & Company, LLP

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

          *    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.

                                       48

<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE

                                                                    Page
                                                                    ----

Report of Independent Auditors - Richard A. Eisner & Co. LLP .......F-2

Report of Independent Auditors - Ernst & Young LLP..................F-3

Consolidated Balance Sheets as of
   December 31, 2000 and 2001.......................................F-4

Consolidated Statements of Operations for
   each of the three years in the period ended
   December 31, 2001................................................F-5

Consolidated Statements of Shareholders'
   Equity for each of the three years in
   the period ended December 31, 2001...............................F-6

Consolidated Statements of Cash Flows
   for each of the three years in the period
   ended December 31, 2001..........................................F-7

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, 2001 and 2000, and the related
consolidated statements of operations,  shareholders' equity, and cash flows for
the years  ended  December  31,  2001 and 2000.  Our  audits  also  include  the
financial  statement  schedule  in so far as  they  relate  to the  years  ended
December 31, 2001 and 2000 listed in the Index at Item 14(a). These consolidated
financial  statements and financial statement 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
the significant estimates made by management,  as well as evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Storage  Engine,  Inc. and  subsidiaries  at December 31, 2001 and 2000, and the
consolidated  results of their  operations  and their cash flows for each of the
years then ended, 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/ RICHARD A. EISNER & COMPANY, LLP

New York, New York
February 22, 2002, except for Note 14 as to which the date is March 1, 2002.


                                      F-2

<PAGE>





                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
STORAGE ENGINE, Inc.

     We have audited the  accompanying  consolidated  statements of  operations,
changes in  shareholders'  equity and cash flows of  Storage  Engine,  Inc.  and
subsidiaries  for the year ended  December 31, 1999. Our audit also included the
financial  statement  schedule  listed in the  Index at Item  14(a) for the year
ended December 31, 1999. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

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


                                               /s/ ERNST & YOUNG LLP


MetroPark, New Jersey
February 8, 2000, except for Note 13,
   as to which the date is April 14, 2000


                                      F-3


<PAGE>


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

                                                                                     December 31,
                                                                                 --------------------
                                                                                   2000       2001
                                                                                 --------    --------
<S>                                                                               <C>         <C>

Assets
Current Assets:
   Cash and cash equivalents ..................................................   $  2,221    $  3,146
   Accounts receivable, less allowance for doubtful accounts of $310
    in 2000 and $20 in 2001 ...................................................        899         961
   Inventories ................................................................      4,452       2,896
   Prepaid expenses and other receivables .....................................        294         111
                                                                                  --------    --------
                                                                                     7,866       7,114
Property and equipment (net) ..................................................      1,299         922
Capitalized software (net) ....................................................        406          --
Other assets ..................................................................         61          41
                                                                                  --------    --------
          Total Assets ........................................................   $  9,632    $  8,077
                                                                                  ========    ========
Liabilities and Shareholders' Equity
Current Liabilities:
   Loans payable ..............................................................   $    161    $     66
   Payable to Finova Capital ..................................................        115          --
   Current portion of capital lease ...........................................        114          58
   Accounts payable ...........................................................      2,069         245
   Accrued expenses and other .................................................      1,150         683
   Warranty ...................................................................        577         387
   Customer deposits, advances and other credits ..............................        213         142
                                                                                  --------    --------
                                                                                     4,399       1,581
Capital lease obligations, net of current portion .............................         88          30
                                                                                  --------    --------
                                                                                     4,487       1,611
    6% cumulative convertible preferred stock Series A, $.01 par value
    per share issued and outstanding; none, and 1,823,125 at
    December 31, 2000 and December 31, 2001, respectively, and 96,367
    shares issuable at December 31, 2001 ......................................         --       3,839

Shareholders' Equity:
    Preferred stock, $.01 par value per share, authorized 3,000,000 shares
     issued 2,231,250, outstanding 1,823,125 as Series A ......................         --          --
   Common stock, $.01 par value per share, authorized, 8,333,333 shares;
     issued and outstanding, 1,927,090 shares and 2,488,637
     shares at December 31, 2000 and December 31, 2001, respectively ..........         19          25
   Capital in excess of par value .............................................     26,767      31,287
   Accumulated deficit ........................................................    (21,641)    (28,685)
                                                                                  --------    --------

Total shareholders' equity ....................................................      5,145       2,627
                                                                                  --------    --------
       Total Liabilities and Shareholders' Equity .............................   $  9,632    $  8,077
                                                                                  ========    ========

</TABLE>



                                      F-4

<PAGE>


<TABLE>
<CAPTION>

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


                                                          Year Ended December 31
-------------------------------------------------------------------------------------------
                                                      1999           2000           2001
                                                    --------       --------       --------
<S>                                                 <C>            <C>            <C>
Product sales ................................      $ 39,341       $ 13,993       $  8,799
Service sales ................................           420          1,029          1,223
                                                    --------       --------       --------
Net sales ....................................        39,761         15,022         10,022
                                                    --------       --------       --------

Cost of sales:
   Product ...................................        26,470         14,684          5,643
   Service ...................................           307            584            525
                                                    --------       --------       --------
Total cost of sales ..........................        26,777         15,268          6,168
                                                    --------       --------       --------

Gross profit (deficit) .......................        12,984           (246)         3,854
                                                    --------       --------       --------

Operating expenses:
  Selling, general & administrative ..........         9,693         10,925          5,588
  Research & development .....................         1,939          2,112          1,308
                                                    --------       --------       --------
                                                      11,632         13,037          6,896

Operating income (loss) ......................         1,352        (13,283)        (3,042)
  Gain on sale of SANStar ....................            --             --            284
  Net interest income ........................           162            193             66
                                                    --------       --------       --------

Income (loss) before income tax benefit ......         1,514        (13,090)        (2,692)
  Income tax benefit .........................           438            235            262
                                                    --------       --------       --------

Net income (loss) ............................         1,952        (12,855)        (2,430)
Preferred stock dividend (including
  beneficial conversion feature of $3,764)....            --             --         (4,625)
                                                    --------       --------       --------

Net income (loss) applicable to common
  shareholders ...............................      $  1,952       $(12,855)      $ (7,055)
                                                    ========       ========       ========

Net income (loss) per share - basic ..........      $   1.06       $  (6.71)      $  (3.56)
                                                    ========       ========       ========


Net income (loss) per share - diluted ........      $   0.98       $  (6.71)      $  (3.56)
                                                    ========       ========       ========

Weighted average number of common shares -
 basic .......................................         1,849          1,915          1,982
                                                    ========       ========       ========

Weighted average number of common
  shares - diluted ...........................         1,996          1,915          1,982
                                                    ========       ========       ========

</TABLE>



                                      F-5
<PAGE>



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


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

<S>                                            <C>         <C>         <C>         <C>          <C>
Balance at January 1, 1999 .................   1,837,847   $      18   $  25,952   $ (10,738)   $  15,232

Issuance of stock and stock
  option exercises .........................      52,372          --         517          --          517

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



Balance at December 31, 1999 ...............   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 $87...........................          --          --       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
                                               =========   =========   =========   =========    =========

</TABLE>




                                      F-6
<PAGE>


<TABLE>
<CAPTION>

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

                                                                            Year Ended December 31,
                                                                         1999         2000        2001
                                                                       --------     --------     --------

<S>                                                                    <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss) .................................................    $  1,952     $(12,855)    $ (2,430)
   Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:

    Depreciation and amortization .................................       1,515        1,986          951
    Gain on sale of SANStar .......................................          --           --         (284)
    Write off of capitalized software .............................          --        1,738           --
Change in operating assets and liabilities:
    Decrease (increase) in accounts receivable ....................         815        4,930          (62)
    (Increase) decrease in inventories ............................          (7)       1,118        1,556
    Decrease (increase) in prepaid expenses and other
      receivables .................................................         259          (39)         203
    Decrease in accounts payable, accrued liabilities
      and other ...................................................        (212)        (472)      (2,481)
    (Decrease) increase in customer deposits ......................         (53)         144          (71)
                                                                       --------     --------     --------
Net cash provided by  (used in) operating activities ..............       4,269       (3,450)      (2,618)
                                                                       --------     --------     --------
Cash flows from investing activities:
   Additions to property and equipment ............................        (812)        (475)        (461)
   Gross proceeds from sale of SANStar ............................          --           --          580
   Additions to capitalized software ..............................      (1,072)      (1,274)          --
                                                                       --------     --------     --------
Net cash (used in) provided by investing activities ...............      (1,884)      (1,749)         119
                                                                       --------     --------     --------
Cash flows from financing activities:
   Borrowings under revolving credit agreement ....................      16,624       17,283        5,673
   Repayments under revolving credit agreement ....................     (16,624)     (17,122)      (5,768)
   Decrease in payable to Finova Capital ..........................        (263)        (853)        (115)
   Repayment of capital lease obligations .........................         (20)        (180)        (114)
   Proceeds from exercise of employee stock options and
     issuance of common stock .....................................         517          299           33
     Net proceeds from sale of Series A Preferred Stock ...........          --           --        3,715
                                                                       --------     --------     --------
Net cash provided by (used in) financing activities ...............         234         (573)       3,424
                                                                       --------     --------     --------
Net  increase  (decrease) in cash and cash equivalents ............       2,619       (5,772)         925
Cash and cash equivalents at beginning of year ....................       5,374        7,993        2,221
                                                                       --------     --------     --------
Cash and cash equivalents at end of year ..........................    $  7,993     $  2,221     $  3,146
                                                                       ========     ========     ========
Supplemental disclosure of cash flow information:
   Cash paid during the year for:
     Interest .....................................................    $    135     $    141     $     44
                                                                       ========     ========     ========
   Supplemental disclosure of non-cash investing and financing
   activities:
     Property acquired under capital lease obligations ............          --     $    157           --
                                                                       ========     ========     ========
     Fees related to issuance of Series A Preferred Stock .........          --           --     $    455
                                                                       ========     ========     ========
     Dividends related to issuance of Series A Preferred Stock ....          --           --     $    193
                                                                       ========     ========     ========
Conversion of Series A Preferred Stock to Common Stock.............          --           --     $    816
                                                                       ========     ========     ========
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>



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

     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 of the Company  was issued in exchange  for
each six outstanding shares of common stock, concurrent with the changing of our
name from ECCS, Inc., to Storage Engine,  Inc. All prior periods  presented have
been adjusted to reflect such stock split.

Note 2 -- 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.

     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.  Depreciation  and amortization
are provided on a  straight-line  basis over the estimated  useful lives ranging
from three to five years.


                                      F-8
<PAGE>


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

     SOFTWARE DEVELOPMENT COSTS

     The Company  capitalizes  software  development  costs in  accordance  with
Statement  of  Financial  Accounting  Standards  ("SFAS") No. 86. Such costs are
capitalized  after  technological   feasibility  has  been  demonstrated.   Such
capitalized  amounts are amortized  commencing  with product  introduction  on a
straight-line  basis  utilizing the estimated  economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of  sales  and  aggregated,  $586,  $919  and $156  for  1999,  2000  and  2001,
respectively.  The Company did not  capitalize  any software  development  costs
during 2001.

     IMPAIRMENT OF LONG-LIVED ASSETS

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

     REVENUE RECOGNITION

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

     WARRANTY

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


                                      F-9
<PAGE>


     RESEARCH AND DEVELOPMENT COSTS

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

     INCOME TAXES

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

     STOCK BASED COMPENSATION

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

     PER SHARE INFORMATION

     Per share  information  is  presented  in  accordance  with  SFAS No.  128,
Earnings per Share.  Basic earnings per share  excludes any dilutive  effects of
options,  warrants and convertible securities.  In fiscal 1999, diluted earnings
per share includes the dilutive  effect of all such  securities.  In fiscal 2000
and 2001,  diluted  earnings  per share do not  include  options,  warrants  and
convertible  securities in the amount of 530,843 and 501,572 shares for 2000 and
2001, respectively, as they are anti-dilutive.

     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.

     RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statements of Financial  Accounting  Standards ("SFAS") No. 141 ("SFAS No. 141")
"Business  Combinations",   No.  142  ("SFAS  No.  142"),  "Goodwill  and  Other
Intangible  Assets",  and No.  143  ("SFAS  No.  143"),  "Accounting  for  Asset
Retirement  Obligations."  SFAS No. 141  requires  that the  purchase  method of
accounting be used for all business combinations  initiated after June 30, 2001.
This statement  specifies that certain acquired  intangible assets in a business
combination be recognized as assets  separately  from goodwill and that existing
intangible   assets  and  goodwill  be  evaluated   for  these  new   separation
requirements.  SFAS No.  142 is  effective  for  fiscal  years  beginning  after
December 31, 2001 and changes the accounting  for goodwill from an  amortization
method to an  impairment-only  approach.  Amortization  of  goodwill,  including
goodwill  recorded in past  business  combinations,  will cease upon adoption of
this statement.  In addition,  this statement  requires that goodwill be teested
for impairment at least  annually at the reporting  unit level.  SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002 and addresses  finacial
accounting  and  reporting for  obligations  associated  with the  retirement of
tangible  long-lived  assets  and the  associated  asset  retirement  costs.  In
addition,  in August  2001,  the FASB  issued  SFAS No.  144  ("SFAS  No.  144")
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-Lived  Assets to Be Disposed Of." The statement  retains the previously
existing accounting  requirements  related to the recognition and measurement of
the  impairment  of  long-lived  assets to be held and used while  expanding the
measurement  requirements  of  long-lived  assets to be  disposed  of by sale to
include  discontinued  operations.  It  also  expands  the  previously  existing
reporting requirements for discontinued  operations to include a component of an
entity that either has been  disposed of or is  classified  as held for sale. As
the Company does not have any recorded  intangibles,  SFAS No. 142 will not have
an impact on the financial  position or the results of  operations.  The Company
does not expect  SFAS No. 143 and SFAS No. 144 to have a material  impact on the
Company's financial position or results of operations.

                                      F-10
<PAGE>

Note 3 -- Transactions with Significant Vendors and Customers

     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 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 2000,  purchases from Hitachi  totaled  $1,053 or 6.6% of all  purchases.  In
2001, such purchases totaled $155 or 4.5% of all purchases. (See Note 13.)

     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
1999 and 2000, purchases from Bell Microproducts totaled approximately  $10,766,
or 43.5%,  and $4,167 or 26.1%,  of all purchases  respectively.  In 2001,  such
purchases totaled $1,822, or 52.7% of all purchases.

     Certain components used in the Company's products are available only from a
limited  number of  sources.  Any  delays in  obtaining  such  components  could
adversely affect the Company's results of operations.

     The U.S. Air Force,  an end user of the Company's  products which purchases
such products  through KKP Corporation,  Worldwide  Technologies,  Logicon,  FDC
Corporation and other government contractors,  purchased $23,216 of products, or
58.4% of the  Company's  total net sales in 1999.  In 2000  such  sales  totaled
$4,576,  or 30.5% of total sales and for 2001 such sales totaled $4,729 or 47.2%
of total  sales.  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 sold product to the U. S. Army through an
integrator in 2001 in the amount of $1,583 or 15.8% of total sales.

     SEGMENT INFORMATION

     All of the  Company's  revenues  are  generated in the United  States.  The
Company  believes that it has one operating  segment and classifies its revenues
based upon its primary sales channels:  commercial and other Federal  customers;
U.S. Air Force; and alternate channel  partners.  The Company's revenue consists
principally  of its high  performance  storage  subsystems.  The U.S.  Air Force
principally  purchases  the  Company's  Raven  products,  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.


                                      F-11
<PAGE>


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

                                                   Year Ended December 31,
                                                   -----------------------
                                               1999        2000         2001
                                               ----        ----         ----
Direct:
  Commercial and other Federal customers... $ 12,638    $  9,905     $  5,123
  U.S. Air Force...........................   23,216       4,576        4,729
Indirect:
  Alternate channel partners...............    3,907         541          170
                                           -----------  ----------  -----------
                                            $ 39,761    $ 15,022     $ 10,022
                                            =========   =========     ========

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

Note 4 -- Inventories

     Inventories consist of the following:
                                                        December 31,
                                              ----------------------------
                                                   2000          2001
                                              ------------- -------------
Purchased parts.............................  $    1,610     $     1,380
Finished goods..............................       5,309           3,439
                                              ----------     ------------
                                                   6,919           4,819
     Less: inventory valuation reserve......       2,467           1,923
                                              ----------     ------------
                                              $    4,452     $     2,896
                                             ============    ============

Note 5 -- Property and Equipment

Property and equipment consist of the following:

                                                         December 31,
                                                 ---------------------------
                                                      2000         2001
                                                  ----------  -------------
Furniture and fixtures........................... $    493        $    483
Computer equipment...............................    6,085           6,231
Vehicles.........................................       35              13
Leasehold improvements...........................      398             369
Equipment under capital leases...................      931             619
                                                 ------------     ----------
                                                  $  7,942         $ 7,715

Less accumulated depreciation and amortization,
  including $711 and $531 relating to equipment
  under capital leases at December 31, 2000 and
  December 31, 2001, respectively................    6,643           6,793
                                                 ------------     -----------
                                                  $  1,299         $   922
                                                 ============     ===========

Depreciation  expenses for the years ended December 31, 1999, 2000, and 2001 was
$929, $1,067, and $795 respectively.

                                      F-12
<PAGE>

Note 6 -- 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  ("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 the our Common
Stock. The conversion ratio is subject to adjustments under certain  conditions.
As of  December  31,  2001,  408,125  shares of Series A  Preferred  Stock  were
converted into 544,167

                                      F-13
<PAGE>


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 dividend payments. As a result,
the Company  issued  96,367  shares of Series A  Preferred  Stock on January 28,
2002.

     As of December 31, 2001, approximately $11 of dividends had accumulated and
have not been declared and paid representing  dividends in arrears from December
15, 2001.

     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.

     Nasdaq  Marketplace  Rule  4350(i)(1)   requires  the  Company  to  receive
shareholder  approval of an equity financing when such financing would result in
a change of control of the issuer.  The Company  applied for and  received  from
Nasdaq, an exception to Nasdaq Marketplace Rule 4350(i)(1) prior to its issuance
of the Series A Preferred Stock.


Note 7 -- Loans Payable to GMAC  Commercial  Credit  Corporation  and Payable to
Finova Capital

     On July  9,  1997,  the  Company  entered  into a full  recourse  factoring
facility with Bank of America ("BOA") which provides for aggregate  advances not
to exceed the lesser of $7 million or up to 85.0% of  eligible  receivables  (as
defined - $598 as of December 31,  2001).  Interest on such  advances is payable
monthly in arrears at the prime lending rate and the Company is obligated to pay
certain  annual  fees.  The  factoring  facility  is for a period of three years
(unless  terminated  by BOA by providing  the Company  sixty days prior  written
notice).  On June 16, 2000,  the Company  signed an  amendment to the  factoring
facility between BOA and the Company extending the agreement


                                      F-14
<PAGE>

until July 30, 2003, and from year to year thereafter until  terminated.  Except
as described above,  the factoring  facility  remains  unchanged.  On January 1,
2001,  GMAC  Commercial  Credit LLC (GMAC)  purchased  substantially  all of the
factoring assets of Bank of America Commercial  Corporation.  The obligations of
the Company under such agreement are  collateralized by substantially all of the
assets of the Company.  As of December 31, 2001,  the Company had an outstanding
balance of $66 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 Stock.

     The Company has certain  covenants with GMAC all of which are in compliance
as of December 31, 2001.

     The Company's  ability to borrow under a $4,000 general line of credit with
the Finova Group, Inc.  ("Finova") was terminated in December 2000. We have been
and will be relying on open terms with our vendors to purchase  component  parts
that are  incorporated  into our fault  tolerant  enterprise  storage  solutions
products.

Note 8 -- 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  $516, $712 and $621 for the years ended December 31, 1999,
2000 and 2001, respectively.

     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, 2001:

                                                      Capitalized   Operating
                                                        Leases        Leases
                                                      ----------   ----------
2002.................................................  $     63     $   353
2003.................................................        32         388
2004.................................................        --         342
2005.................................................        --         345
                                                       --------     --------
Total minimum lease payments.........................  $     95    $  1,428
                                                       --------     ========
Less amount representing interest....................         7
                                                       --------
Present value of net minimum lease payments..........  $     88
                                                       ========

Note 9 -- Stock Option Plans

     The Company has the following stock option plans:


                                      F-15
<PAGE>

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:

                                                         Options Outstanding
                                                --------------------------------
                                                                      Weighted-
                                                                       Average
                                                                      Exercise
                                                       Shares           Price
                                                   ------------   --------------
Balance at January 1, 1999                             31,793       $   15.60
   Options exercised............................      (11,527)          12.12
   Options canceled.............................           --              --
                                                  -------------
Balance at December 31, 1999....................       20,266           12.24
   Options exercised............................       (5,542)           8.88
   Options canceled.............................           --              --
                                                  -------------
Balance at December 31, 2000....................       14,724           13.50
   Options exercised............................           --              --
   Options canceled.............................       (3,449)           8.90
                                                  -------------
Balance at December 31, 2001....................       11,275        $  14.91
                                                  ==============   ============
   Options exercisable at
   December 31, 2001............................       11,275        $  14.91
                                                  ==============   ============



     The weighted average remaining  contractual life for the balance of options
outstanding  at December  31, 2001 in the 1989 Stock  Option Plan is three years
and the exercise price range is $6.00 - $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 2001,  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


                                      F-16
<PAGE>


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:
                                                        Options Outstanding
                                                  ------------------------------
                                                                     Weighted-
                                                                      Average
                                                     Shares       Exercise Price
                                                 --------------   --------------
Balance at January 1, 1999..................        196,483          $ 8.34
   Options granted..........................         62,685           32.76
   Options exercised........................        (13,567)           7.50
   Options canceled.........................        (95,875)           8.10
                                                 -----------
Balance at December 31, 1999................        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 exercised........................             --              --
   Options canceled.........................        (81,623)          26.24
                                                 -----------
Balance at December 31, 2001................        158,216          $15.16
                                                 ===========       =============
Options exercisable at December 31, 2001....         70,565          $16.76
                                                 ============      =============

     The weighted average remaining  contractual life for the balance of options
outstanding  at December  31, 2001 in the 1996 Stock  Option Plan is eight years
and the exercise price range is $1.82 - $103.86.

NON-QUALIFIED STOCK OPTIONS

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

                                                      Options Outstanding
                                                ------------------------------
                                                                   Weighted-
                                                                    Average
                                                   Shares       Exercise Price
                                               --------------   --------------
Balance at January 1, 1999                         95,583          $ 10.44
   Options granted.........................        52,816            64.50
   Options exercised.......................       (20,615)            7.92
   Options canceled........................           (83)           12.78
                                               -----------
Balance at December 31, 1999...............       127,701            32.22
   Options granted.........................       147,383            16.68
   Options exercised.......................            --               --
   Options canceled........................        (3,258)           16.44
                                               -----------
 Balance at December 31, 2000..............       271,826            24.00


                                      F-17
<PAGE>


   Options granted.........................        34,774             4.11
   Options exercised.......................            --               --
   Options canceled........................       (60,350)           15.54
                                               ------------      -------------
Balance at December 31, 2001...............       246,250          $ 23.27
                                               ============      =============
Options exercisable at December 31, 2001...       148,347          $ 21.50
                                               ============      =============


     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2001 under  Non-Qualified  Agreements is eight years
and the exercise price range is $2.63 - $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.

     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, 1999....................       15,000          $ 30.54
   Options granted............................        5,000            10.14
                                                 -------------
Balance at December 31, 1999..................       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 exercisable at December 31, 2001...       23,528          $ 24.28
                                                 ===============  =============

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2001 under the 1996  Non-Employee  Directors Plan is
seven years and the exercise price range is $1.25 - $101.63.

                                      F-18

<PAGE>


     The  following  table  summarizes  information  about the  Company's  stock
options outstanding at December 31, 2001.

-------------------------------------------------------------------------------
                  Outstanding                             Exercisable
-------------------------------------------------------------------------------

                           Weighted Average  Weighted    Number      Weighted
Range of          Number   Remaining Years    Average     of         Average
Exercise           of       of Contractual   Exercise    Options     Exercise
Price             Options       Life          Price                   Price
-------------------------------------------------------------------------------
$0 - $3.00         98,080         9           $2.48       6,033        $1.70
-------------------------------------------------------------------------------
$3.01 - $15.00    129,650         7           $7.83     123,111        $7.84
-------------------------------------------------------------------------------
$15.01 - $40.00   147,469         7          $19.51      88,183       $19.55
-------------------------------------------------------------------------------
$40.01 - $110.00   76,565         8          $67.90      36,388       $66.29
                   ------                                ------
-------------------------------------------------------------------------------
TOTAL             451,764                               253,715
                  =======                               =======

STOCK WARRANTS

     At December  31,  2001,  49,808  common  stock  purchase  warrants  with an
exercise price of $7.50 per share were outstanding to a director of the Company.
Such  warrants  expire in 2004.  At December 31, 2001,  all such  warrants  were
exercisable.

     The Company has reserved 501,572 shares of Common Stock for the exercise of
stock options and warrants as described above.

FAS 123 PRO FORMA INFORMATION

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by  Statement  No. 123, and has been  determined  as if the Company had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions  for  1999,  2000 and  2001:  risk-free  interest  rates of  between
4.6%-6.3% in 1999,  5.8%-6.65% in 2000 and 3.22%-4.82% in 2001;  dividend yields
of zero,  respectively;  volatility  factors of the expected market price of the
Company's common stock of 99.7% in 1999,  116.8% in 2000 and 157.9% in 2001; and
a weighted-average expected life of four years. The weighted average fair market
value of stock options issued in 1999, 2000 and 2001 was $5.47,  $3.31, and $.50
per share, respectively.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility. Because the Company's employee stock options have

                                      F-19
<PAGE>

characteristics  significantly  different  from  those of  traded  options,  and
because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value of its employee
stock options.

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

<TABLE>
<CAPTION>

                                                      1999          2000           2001
                                                  -----------    -----------   -----------

<S>                                               <C>            <C>           <C>
Net income (loss) as reported................     $  1,952       $  (12,855)   $  (7,055)
Pro forma net income (loss)..................     $  1,538       $  (14,814)   $  (9,059)
Income (loss) per share as reported
   basic.....................................     $   1.06       $    (6.71)   $   (3.56)
Pro forma income (loss) per share
   basic.....................................     $    .83       $    (7.74)   $   (4.57)
Income (loss) per share as reported - diluted     $    .98       $    (6.71)   $   (3.56)
Pro forma income (loss) per share - diluted..     $    .78       $    (7.74)   $   (4.57)
</TABLE>


Note 10 -- 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, 2001,  58,536 shares were issued under the
Purchase Plan, of which 17,380 were issued in 2001.

Note 11 -- Income Taxes

     The provision for income taxes is comprised of the following:

                                                 December 31,
                                    ---------------------------------------
                                    1999             2000            2001
                                 ----------       ----------     ----------
Federal:
  Current...................     $      --        $      --       $    --
  Deferred..................            --               --            --

State:
  Current...................          (438)            (235)          (262)
  Deferred..................            --               --             --
                                 ----------       ----------    -----------

Total.......................     $    (438)       $    (235)    $     (262)
                                 ==========       ==========    ===========


                                      F-20
<PAGE>


     Deferred  income taxes reflect the net tax effect of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for tax  purposes.  Significant  components of the
Company's deferred tax balances as of December 31, 2000 and 2001 are as follows:

                                                2000            2001
                                            ------------     ----------

Tax credits................................  $   933          $   927
Net operating losses.......................    6,908            7,907
Capitalized software.......................     (158)              --
Inventory, warranty and other reserves.....    1,540            1,075
Valuation allowance........................   (9,223)          (9,909)
                                            ---------         --------
Total......................................       --               --
                                            ==========        ========

     As of December 31, 2001,  the Company has NOL carryovers for Federal income
tax purposes of approximately  $22,537,  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.

     If, subsequent to 1996, a change in the ownership of the Company as defined
by Section 382 occurred or may occur,  future use of NOLs and income tax credits
generated subsequent to the 1996 Ownership Change may be limited.

     As of December 31, 2001, the Company has approximately  $4,886 of state NOL
carryforwards  which  will  begin to  expire  in 2005  and  state  research  and
development  tax  credit  carryforwards  of $342,  which will begin to expire in
2004.

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

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


<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                           ------------------------------------
                                                                              1999          2000         2001
                                                                         -------------   -----------   ---------
<S>                                                                       <C>             <C>           <C>
Computed tax expense (benefit)......................................      $    509        $ (4,451)     $ (915)
Increase (decrease) in valuation allowance (use of NOL).............          (682)          4,986         686
Sale of state NOL and R&D credit/other..............................          (265)           (770)        (33)
                                                                         ------------    ----------   -----------
Actual tax expense (benefit)........................................      $   (438)       $   (235)     $ (262)
                                                                         ============    ==========   ===========
</TABLE>

                                      F-21
<PAGE>

     During the fourth quarter of 1999, the Company sold approximately $7,100 of
state NOL carryovers and $149 of R&D tax credit carryovers to an unrelated third
party for approximately $438.

     During the fourth quarter of 2000, the Company sold approximately $5,189 of
state NOL carryovers and $40 of research and development  tax credit  carryovers
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.

Note 12-- Computation of Basic and Diluted Earnings (Loss) Per Share

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

<TABLE>
<CAPTION>

                                                               1999             2000             2001
                                                          --------------   -------------    -------------
Numerator:

<S>                                                         <C>              <C>              <C>
Net income (loss)                                           $  1,952         $ (12,855)       $  (2,430)
Preferred stock dividend                                          --                --            4,625
                                                          --------------   --------------   --------------
Net income (loss) applicable to common shareholders         $  1,952         $ (12,855)       $ ( 7,055)
                                                          ==============   ==============   ==============

Denominator:

Denominator for basic earnings per share-
weighted-average shares                                        1,849             1,915            1,982
                                                          --------------    -------------   --------------


Effect of dilutive securities:

Employee stock options                                           121                --               --
Warrants                                                          26                --               --
Convertible preferred stock                                       --                --               --
                                                          --------------    -------------   --------------
                                                                 147                --               --
                                                          --------------    -------------   --------------

Dilutive potential common shares
Denominator for diluted earnings per share -
Adjusted weighted-average shares and
assumed conversion                                               1,996            1,915           1,982
                                                          ==============    =============   ==============
Basic earnings (loss) per share                             $     1.06       $    (6.71)       $  (3.56)
                                                          ==============    =============   ==============
Diluted earnings (loss) per share                           $     0.98       $    (6.71)       $  (3.56)
                                                          ==============    =============   ==============
</TABLE>

Note 13  -- Commitments and Contingencies

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

     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

                                      F-22
<PAGE>


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 have been received by several of our  employees,  including
certain officers,  who are expected to testify before the grand jury. Not all of
such testimony has been provided. 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 the 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 United
States Air Force.

                                      F-23
<PAGE>

     The Company is primarily  self-insured  for its employees health plan which
covers  medical,  hospital  and dental  claims.  We accrue for claims  filed and
estimates of claims incurred but not reported.  We have purchased  aggregate and
specific  stop-loss  coverage in order to limit our exposure to any  significant
level health claims beyond certain amounts.

     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.

     On June 22, 2001, SEI 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.  We  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 SEI 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.
In  December  2001,  both  parties  agreed to  resolve  this  matter in  binding
arbitration.  The date of arbitration has not yet been  established.  As part of
this arbitration  agreement,  Hitachi agreed to deliver to us the goods which we
had paid for in full.  The  Company  agreed  to post a letter  of  credit in the
amount of $162, representing Hitachi's claim against the Company associated with
the purchase of excess  component  parts used to assemble  SEI's  product.  Such
letter of credit was posted in the first  quarter of 2002.  The  Company  denies
having ordered such component parts.

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

     The Company is primarily  self-insured  for its employee health plan, which
covers medical, hospital and dental claims. The Company accrues for claims filed
and  estimates of claims  incurred but not  reported.  The Company has purchased
additional  stop-loss coverage in order to limit its exposure to any significant
levels of health claims.

Note 14 -- Subsequent Events

     On March 1, 2002, the Company  received  notification  from Nasdaq that the
Company's 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). The Company was provided with 180 calendar days, or until August 28,
2002, to regain compliance by having the bid price for our common stock close at
$1.00 or greater for a minimum  period of 10  consecutive  trading  days. In the
event  that the  Company  does not  regain  compliance,  the  Nasdaq  staff will
determine  whether the Company meets the initial listing criteria for The Nasdaq
SmallCap Market under  Marketplace Rule  4310(c)(2)(A).  If it meets the initial
listing  criteria,  the Naasdaq  staff will notify the Company  that it has been
granted an additional 180 calendar day grace period to  demonstrate  compliance.
Otherwise,  the staff  will  provide  written  notification  that the  Company's
securities  will be subject to  delisting  from the Nasdaq  SmallCap  Market and
would trade on the OTC  Bulletin  Board.  A delisting  from the Nasdaq  SmallCap
Market may have a material  adverse effect on the Company's  stock price and our
ability to raise capital through the issuance of additional  equity. A delisting
could severely limit the market  liquidity of the Company's common stock and the
ability of the Company's  shareholders to sell the common stock in the secondary
market.

                                      F-24

<PAGE>



Note 15 -- Quarterly Financial Information

<TABLE>
<CAPTION>

                                                       Quarterly Financial Information
                                                                 (unaudited)
                                                                    2000

                                                    Q1              Q2                Q3            Q4

<S>                                             <C>             <C>              <C>            <C>
Net Sales                                       $4,607          $4,033           $4,429         $ 1,953

Gross profit (deficit)                           1,870           1,120            1,146          (4,382)*

Net loss                                        (1,234)         (2,128)          (1,833)         (7,660)

Net loss per share-basic                         (0.65)          (1.11)           (0.96)          (3.99)

Net loss per share-dilutive                    $ (0.65)         $(1.11)          $(0.96)        $ (3.99)


                                                                    2001

                                                    Q1              Q2                Q3             Q4

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)

</TABLE>


*    Includes write-down of capitalized  software costs of $1,738 and $0.15 on a
     per share basis.
**   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 earnings per share amount.


                                      F-25

<PAGE>

<TABLE>
<CAPTION>

                               STORAGE ENGINE, Inc. and Subsidiaries
                          Schedule II - Valuation and Qualifying Accounts

                                           (in thousands)

Column A                                 Column B          Column C              Column D    Column E

                                                           Additions
                                                    -------------------------
                                                                    Charged to                Balance
                                         Balance at   Charged to     Other                      at
        DESCRIPTION                      Beginning    Costs and     Accounts-    Deductions-  End of
                                         of Period    Expenses      Describe     Describe     Period
                                          ------      ------        --------     ---------    ------

<S>                                       <C>         <C>           <C>          <C>          <C>
YEAR ENDED December 31, 2001:

Allowance for Doubtful
Accounts & Returns/Credits ...........    $  310      $   --        $     --     $  290(A)    $   20
                                          ------      ------        --------     ---------    ------
Tax valuation allowance...............    $9,223      $   --        $ 686(D)     $     --     $9,909
                                          ------      ------        --------     ---------    ------
Inventory valuation allowance.........    $2,467      $  338        $     --     $  882(B)    $1,923
                                          ------      ------        --------     ---------    ------
Warranty reserve......................    $  577      $    1        $     --     $  191(A)    $  387
                                          ------      ------        --------     ---------    ------
YEAR ENDED December 31, 2000:

Allowance for Doubtful
Accounts & Returns/Credits ...........    $   --      $  310        $     --     $     --     $  310
                                          ------      ------        --------     ---------    ------
Tax valuation allowance...............    $4,237      $   --        $4,986(D)    $     --     $9,223
                                          ------      ------        --------     ---------    ------
Inventory valuation allowance.........    $  974      $2,523        $     --     $1,030(B)    $2,467
                                          ------      ------        --------     ---------    ------
Warranty reserve......................    $  746      $   38        $     --     $  207       $  577
                                          ------      ------        --------     ---------    ------
YEAR ENDED December 31, 1999:

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


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



                                      S-1