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, 2000

                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
For the transition period from            to
                               ----------    -------------

                         Commission file number 0-21600
                                   ECCS, INC.
             -----------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

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

One Sheila Drive, Tinton Falls, New Jersey                         07724
--------------------------------------------------------------------------------
(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 stock held by non-affiliates
of the Registrant: $5,972,435 at February 28, 2001 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, 2001:

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

Common Stock, $.01 par value                        11,562,540

     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 2001 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.
<PAGE>



                                     TABLE OF CONTENTS
                                     -----------------

         Item                                                          Page
         -----                                                         ----

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

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

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

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

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

         6.  Selected Consolidated Financial Data....................   24

         7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.....................   25

         7A. Quantitative and Qualitative Disclosures About Market Risk 34

         8.  Financial Statements and Supplementary Data.............   34

         9.  Changes in and Disagreements With Accountants on
             Accounting and Financial Disclosure.....................   34

PART III 10. Directors and Executive Officers of the Company.........   35

         11. Executive Compensation..................................   35

         12. Security Ownership of Certain Beneficial Owners
             and Management..........................................   35

         13. Certain Relationships and Related Transactions..........   35

PART IV  14. Exhibits, Financial Statement Schedules,
             and Reports on Form 8-K.................................   35

SIGNATURES   ........................................................   37

EXHIBIT INDEX........................................................   39

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


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<PAGE>


                           FORWARD LOOKING STATEMENTS

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


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

                                     PART I

Item 1. Business.


GENERAL

     We design, manufacture,  sell and support fault tolerant enterprise storage
solutions that protect and ensure access to an organization's critical data. Our
products include high performance, 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  Synchronix  and  Synchronection  product lines.
Today,  we are a  manufacturer  of  high  performance,  highly  scalable,  fault
tolerant data storage solutions. Our

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<PAGE>


direct sales force  concentrates  on sales to  commercial  end users and Federal
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 1999 and  2000.  We do not  expect  sales  to these  alternate
channel  partners to  constitute a  significant  part of our net sales in fiscal
2001.

     In January  2000,  we  introduced  Synchronix  SAN, an  enterprise  storage
solution  for the SAN  architecture.  This new product  combines  Fibre  Channel
switched fabric and SAN management with the fault tolerant features found in our
Synchronix storage products.  We believe that companies' growing storage demands
will lead them increasingly to consider SAN products.

     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.

     In September 2000, we introduced the Synchronix  3000, our high performance
fault-tolerant  data storage  engine that  delivers  tremendous  speed,  storage
capacity,  data protection and storage management,  along with the advantages of
full-fibre connectivity. The Synchronix 3000 offers enhanced RAID technology 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 its customers.
At times this includes the incorporation of third party products to complete the
solution.

     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.

INDUSTRY BACKGROUND

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

                                        3

<PAGE>

create redundant sources of data to enable continuous error-free access to data.
As a result,  the need for high-capacity,  high-performance  storage devices and
systems  is  dramatically  increasing.  The  growth  in  stored  data  has  been
facilitated by the continued decline in the cost per unit of storage capacity.

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

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

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

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

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

     -    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

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


                                        4
<PAGE>


The ECCS Approach
-----------------

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

     -    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.

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

     -    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.

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

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

     -    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  ECCS as the data
storage solution of choice for companies with growing and  increasingly  complex
data needs. Our strategy incorporates the following key elements:

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<PAGE>


     -    FOCUS OUR DIRECT SALES CHANNEL. To better address commercial customers
          and Federal  markets,  we intend to refine and expand our direct sales
          team where needed.  Our direct sales force also assists  selected VARs
          in their sales efforts with  commercial  customers.  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.

     -    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.

     -    SUPERIOR PRE-SALE AND POST-SALE SUPPORT. We have significant technical
          resources  available  to  assist  the  sales  team  and  customers  in
          designing and implementing  specific data storage  solutions needed by
          the customer. We believe our superior support and service enhances our
          ability to identify and satisfy our customers' needs.

     -    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.

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

PRODUCTS AND TECHNOLOGY

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

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

     -    scalable storage capacity;

     -    fault tolerance;

     -    fast data transfer rates; and

     -    ease of storage system management.


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<PAGE>

Our families of products include the following:

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

     -    support for multiple levels of RAID;

     -    scalable to multiple terabytes;

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

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

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

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

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

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 190 MB per second
for two  channels  and  storage  capacity of 65TB with three  standard  70" inch
cabinets.

Synchronix SAN is our fault tolerant SAN solution.  This product  combines Fibre
Channel  switched  fabric and SAN management  with the fault  tolerant  features
found in our  Synchronix  storage  engine.  This  turnkey  product  includes the
following features:

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

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

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

Synchronection  is our NAS product  offering.  Synchronection  incorporates  the
features of Synchronix  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.

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<PAGE>


     PRODUCTS  UNDER  DEVELOPMENT.  We continue  to enhance our current  product
offerings, primarily through the following:

     -    Integration  of third party  hardware and software for the  Synchronix
          and Synchronection families of products,

     -    improvements  to  the  Synchronix  and   Synchronection   families  of
          products; and

     -    new interface connectivities.

SALES AND MARKETING

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

     DIRECT SALES.  Our direct sales efforts focus on commercial and Federal end
user  accounts,  as well as assisting  selected VARs in their sales to these end
users.  Our direct sales team consists of 10 to 15 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:

     -    better customer account penetration, loyalty and diversity;

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

     -    opportunities for increased customer referrals; and

     -    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.

     -    Resellers - 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.

     In December  2000,  we entered into a partnering  arrangement  with Brocade
Communications  System,  Inc.  ("Brocade"),  a leading  provider of Storage Area
Network  infrastructure,  to become a Brocade  Fabric  Integrator.  As a Brocade
Fabric  Integrator,  we have  completed  comprehensive  training  on the Brocade
SilkWorm family of Fibre Channel switches and software.  Brocade SilkWorm fabric
switches  provide  a  scalable,   reliable  networking  foundation  for  storage
environments   by   connecting   servers   and   storage   systems   through   a
high-performance  SAN. As a Brocade Fabric  Integrator,  we will provide Brocade
switches as a complement to our ECCS branded storage appliances.  We believe our
relationship with Brocade

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<PAGE>

will significantly contribute to our ability to expand and adapt our business in
the storage area networking industry.

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

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

COMPETITION

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

     -    relative price/performance;

     -    product features, quality and reliability;

     -    speed to market;

     -    adherence to industry standards;

     -    financial strength; and

     -    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.

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<PAGE>


     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 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.

MANUFACTURING AND SUPPLIERS

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

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

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

     We rely on certain  distributors to supply us with component  products from
Sun  Microsystems  and Seagate  Technologies.  Although  we believe  alternative
distributors  of these products are available,  we cannot be certain that we can
obtain them on a timely and  cost-effective  basis. Our primary vendor for these
third party products is Bell Microproducts.  During fiscal 2000,  purchases from
Bell totaled $4,167,  or 26%, of our total purchases.  We purchase products from
Bell on a purchase order basis. There are no minimum purchase requirements. This
arrangement is terminable by either party at any time.

                                       10
<PAGE>


     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 on, among other things,
our ability to  maintain a  technological  edge.  As a result,  we have  devoted
substantial  resources to product  development.  Our  research  and  development
expenditures  were $3,150 in fiscal 2000,  of which $1,038 were  capitalized  in
accordance with the Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting  for the Costs of Computer  Software to be Sold,  Leased or Otherwise
Marketed.

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

     -    Integration  of third party  hardware and software for the  Synchronix
          and Synchronection families of products;

     -    improvements  to  the  Synchronix  and   Synchronection   families  of
          products; and

     -    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  and  intend  to  file  additional
applications for products under  development.  We cannot be certain that patents
will  issue  from any  applications  or, if  patents  do issue,  that any claims
allowed will be  sufficiently  broad to prohibit  others from marketing  similar
products.  In addition, we cannot be certain that any patents that may be issued
to us, or which we may  license  from  third  parties,  will not be  challenged,
invalidated or circumvented,  or that any rights granted thereunder will provide
proprietary  protection.  Although we continue to implement  protective measures
and intend to defend our proprietary  rights,  policing  unauthorized use of our
technology or products is difficult and we cannot be certain that these measures
will be successful.

                                       11
<PAGE>


     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  ECCS,  RAID 10  PERFORMANCE  MANAGER,
INTELLIGENT REBUILD,  SPLIT MIRROR,  EXAMODULE,  SYNCHRONIX,  INVERSE MIRRORING,
SYNCHRONECTION and SPLIT VOLUME. We have applied for trademark  registration for
SYNCHRONISM 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. As of March 15, 2001,
we employed 55 persons,  of whom 11 were  engaged in marketing  and sales;  8 in
engineering and research and development;  15 in operations,  including customer
and  technical  support,   manufacturing  and  fulfillment;  5  in  professional
services;  and  16 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 1998,
1999 and 2000 accounted for, in the aggregate,  approximately  85.6%,  82.6% and
64.5%, respectively, of net sales in those periods. Sales to the U.S. Air Force,
through Federal  integrators,  accounted for 33.7%, 58.4% and 30.5% of net sales
in  1998,  1999 and  2000,  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.

                                       12
<PAGE>


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

     In late  January  2000,  we  received  a subpoena  from the  United  States
Attorney's  Office in Boston,  Massachusetts  for the production of documents in
connection with an investigation  into Federal  government  purchasing.  We have
been and intend to continue cooperating with the investigation and are complying
fully,  and intend to  continue  to comply  fully,  with the  subpoena.  We sell
computer  products  to  companies  which are used by the Federal  government  to
supply  computer  products to the U.S. Air Force.  In addition,  subpoenas  were
received  by several  of our  employees,  including  certain  officers,  who 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 $500 for each unit sold to the Air Force,  with
the proceeds going to the benefit of  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 United States Air Force.

                                       13
<PAGE>


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:

     -    rapid technological change;

     -    evolving industry standards;

     -    changing customer preferences; and

     -    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.

                                       14
<PAGE>

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

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

     -    enhance existing products;

     -    develop new products that maintain technological leadership;

     -    meet a wide range of changing customer needs; and

     -    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 1999 and 2000. 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 (value  added
resellers) 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:

     -    hire and maintain an adequate direct sales personnel;

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

     -    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:

     -    relative price/performance;

     -    product features, quality and reliability;

                                       15
<PAGE>


     -    speed to market;

     -    adherence to industry standards;

     -    financial strength; and

     -    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  competitiors.  In the NAS market, our primary competitor is Network
Appliance  Inc. As we introduce our fault  tolerant SAN  products,  we expect to
compete with a number of existing and new  competitors  introducing  products in
this emerging market.

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

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

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

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

     Certain  components  used in our products are available only from a limited
number of sources.  Any delays in  obtaining  such  components  could  adversely
affect our results of  operations.  We cannot be certain that material  problems
will not arise in the future  with our  outside  manufacturers  or vendors  that
could significantly impede or interrupt our business.  We cannot be certain that
our relationships with our outside manufacturers and suppliers will

                                       16
<PAGE>

continue  or that we would  be able to  obtain  alternative  sources  of  supply
without  a  material  disruption  in our  ability  to  provide  products  to our
customers  if our  relationships  with our  existing  outside  manufacturers  or
suppliers are terminated.

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

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

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

     We incurred net losses of $769, $2,657 and $12,855 in fiscal 1996, 1998 and
2000,  respectively.  Although we had net income of $1,102 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, however, we believe that we have retained the personnel that is key
to achieving our goals and  implementing  our strategies.  None of our executive
officers have entered into an  employment  agreement.  Equally  important is our
ability to attract and retain new  management and other  personnel.  Competition
for such  personnel is intense,  and there can be no  assurance  that we will be
able to retain our key employees or that we will be successful in attracting and
retaining  new  personnel in the future.  The loss of any one or more of our key
personnel  or the  failure to attract  and  retain  key  personnel  could have a
material adverse effect on our business.

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

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

     -    successfully integrate and manage the acquired operations;

     -    retain the key employees of the acquisition targets;

                                       17
<PAGE>


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

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

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

WE HAVE ONLY LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS.

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

WE MAY NOT BE ABLE TO COMPLY WITH INDUSTRY STANDARDS.

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

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

                                       18
<PAGE>


NASDAQ NATIONAL MARKET DELISTING.

     On January 4, 2001,  we received  notification  from Nasdaq that our common
stock had  failed  to  maintain  a minimum  bid price of $1.00 per share for the
thirty days prior to the date of  notification.  We have 90 days from the notice
date 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 23,  2001,  we have not regained  compliance.  In the event that we do not
regain  compliance,  we will be subject to  delisting  from the Nasdaq  National
Market and would trade on the OTC Bulletin  Board.  A delisting  from the Nasdaq
National  Market may have a material  adverse  effect on our stock price and our
ability to raise capital through the issuance of additional equity.

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:

     -    actual or anticipated quarterly fluctuations in our operating results;

     -    changes  in   recommendations  or  earnings  estimates  by  securities
          analysts;

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

     -    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 1,788,750 shares are designated Series A Preferred and
1,211,250  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 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.


                                       19
<PAGE>

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.           Use              Nature of Occupancy
                       feet)
--------------------------------------------------------------------------------
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, New      10,000   R&D Manufacturing    Lease expires on 12/31/05
Jersey                          Business Development

Falls Church,            700    Sales Office         Lease expires on 3/31/02
Virginia

Item 3. Legal Proceedings.

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

     In late  January  2000,  we  received  a subpoena  from the  United  States
Attorney's  Office in Boston,  Massachusetts  for the production of documents in
connection with an investigation  into Federal  government  purchasing.  We have
been and intend to continue cooperating with the investigation and are complying
fully,  and intend to  continue  to comply  fully,  with the  subpoena.  We sell
computer  products  to  companies  which are used by the Federal  government  to
supply computer products to the U.S. Air Force. In addition, 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

                                       20
<PAGE>


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 $500 for each unit sold to the Air Force,  with
the proceeds going to the benefit of  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.

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

     Not applicable.

                                       21
<PAGE>


                                     PART II



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

     Our common stock is quoted on the Nasdaq  National  Market under the symbol
"ECCS."  Prior to February 22,  2000,  our common stock was quoted on the Nasdaq
Small Market under the symbol  "ECCS." The  following  table sets forth the high
and low sales price for the common stock for each of the quarters since December
31, 1999. 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, 1999

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

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

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

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

  Fiscal Year Ended December 31, 2000

        First Quarter.............................       25.000     10.375

        Second Quarter............................       14.250      2.438

        Third Quarter.............................        6.000      2.250

        Fourth Quarter............................        2.938      0.250


     On March 23,  2001,  the last  reported  sale price of our common  stock as
reported by the Nasdaq National Market was $.50 per share. As of March 23, 2001,
the approximate number of holders of record of our common stock was 146.

     On January 4, 2001,  we received  notification  from Nasdaq that our common
stock had  failed  to  maintain  a minimum  bid price of $1.00 per share for the
thirty days prior to the date of  notification.  We have 90 days from the notice
date 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 23,  2001,  we have not regained  compliance.  In the event that we do not
regain  compliance,  we will be subject to  delisting  from the Nasdaq  National
Market and would trade on the OTC Bulletin Board.

     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 November 10, 2000, we sought shareholder approval for the issuance of up
to 6,857,143  shares of 6% cumulative  convertible  preferred  stock Series A to
raise up to an aggregate of $12,000 of gross proceeds.  The shareholder  meeting
was originally  scheduled for November 30, 2000, and was adjourned  twice by the
Company  to  December  22,  2000 in  order  to  give  shareholders  the  maximum
opportunity to vote. The Company was unable, however, to


                                       22
<PAGE>

obtain the requisite  quorum to conduct a meeting  within the statutory  maximum
sixty-day period. As the record date for the shareholder meeting was October 26,
2000,  the last day we could hold the meeting was December 25, 2000. The Company
did obtain the sufficient  votes on the 61st day, or December 26, 2000. Of those
shareholders   responding,   an   overwhelming   95.1%   approved  the  proposed
transaction.  Since  the  quorum  was  achieved  past the date of the  statutory
maximum,  we believe it was  necessary  to apply to Nasdaq for an  exception  to
shareholder approval.

     On January 25, 2001, we applied for an exception to Nasdaq Marketplace Rule
4350(i)(1)  requiring the Company to 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 the
Company's  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,  the  Company was
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").  The Series A Preferred
Stock has a 6% cumulative  coupon and is initially  convertible  into our Common
Stock on an 8-for-1 basis. The Series A Preferred Stock also has liquidation and
dividend preferences superior to those of existing stockholders.  The purchasers
of Series A Preferred Stock also acquired certain anti-dilution and registration
rights. 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,
Unterberg  Towbin  received a fee equal to 78,125  shares of Series A  Preferred
Stock,  in  addition to payment of certain  expenses  if fully  sold.  Thomas I.
Unterberg,  a former director of the Company,  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 the Company and each  purchaser  acquired the  securities for
investment only and not with a view to distribution.

                                       23
<PAGE>


Item 6. Selected Consolidated Financial Data.

The following selected consolidated  financial data as of and for the five years
ended  December  31, 2000 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>
                                                                    Year Ended December 31,
                                                                    -----------------------
                                               1996          1997           1998         1999         2000
                                               ----          ----           ----         ----         ----
                                                         (in thousands, except per share amounts)
Statement of Operations Data:

<S>                                           <C>         <C>              <C>        <C>           <C>
Net sales...........................          $22,604     $ 34,001         $ 28,466   $  39,761     $  15,022
  Cost of sales.....................           15,165       24,226           20,452      26,777        15,268
                                             --------       ------          -------    ---------    ----------
Gross profit (deficit)..............            7,439         9,775           8,014      12,984          (246)
  Selling, general and
     administrative expenses........            6,907         6,838           8,378       9,693        10,925
  Research and development
     expenses.......................            1,027         1,687           2,683       1,939         2,112
                                             --------       -------        -------    ----------   -----------
Operating (loss) income.............             (495)        1,250          (3,047)      1,352       (13,283)
  Net interest expense (income) ....              274            28            (390)       (162)         (193)
                                             --------       ---------      --------   -----------  -----------
(Loss) income before income tax benefit
  and extraordinary item............             (769)        1,222          (2,657)      1,514       (13,090)
Income tax benefit..................               --            --              --        (438)         (235)
                                             --------        --------      ---------  -----------  -----------
                                                 (769)        1,222          (2,657)        1,952     (12,855)
(Loss) income before extraordinary item
     Extraordinary item.............               --           120              --            --          --
                                             --------       ---------      ----------    ---------   ---------
Net (loss) income...................             (769)        1,102          (2,657)        1,952     (12,855)
  Preferred dividends...............              248           192              --             --         --
                                             --------       --------        ---------    ----------  ---------

Net (loss) income applicable
  to common shares..................         $ (1,017)      $   910         $(2,657)      $ 1,952    $(12,855)
                                             ========       =======         ========       =======   =========

Net (loss) income per share before
  extraordinary item -  basic.......         $  (0.23)      $  0.16         $ (0.24)       $ 0.18    $  (1.12)
Net (loss) income per  share -  basic        $  (0.23)      $  0.14         $ (0.24)       $ 0.18    $  (1.12)
Net (loss) income per share before
  extraordinary item -  diluted.....         $  (0.23)      $  0.12         $ (0.24)       $ 0.16    $  (1.12)
Net (loss) income per share -  diluted       $  (0.23)      $  0.11         $ (0.24)       $ 0.16    $  (1.12)
Weighted average common shares
outstanding -  basic................            4,346         6,702          10,969        11,093      11,490
Weighted average common shares
outstanding -  diluted..............            4,346        10,035          10,969        11,978      11,490
</TABLE>
<TABLE>
                                                                     As of December 31,
                                                                     ------------------
                                               1996          1997           1998         1999         2000
                                               ----          ----           ----         ----         ----
                                                                      (in thousands)
Balance Sheet Data:
<S>                                          <C>            <C>             <C>        <C>          <C>
Cash................................         $  4,393       $11,625         $ 5,374    $ 7,993      $  2,221
Working capital.....................            4,280        15,260          11,969     14,200         3,467
Total assets........................           14,552        24,992          21,374     23,231         9,632
Loans payable and payable to Finova
  Capital...........................            1,762         1,031           1,231        968           276

Series B redeemable
  convertible preferred stock.......               --            --             --          --            --
Shareholders' equity................         $  6,177        $17,643       $15,232    $  17,701    $    5,145
</TABLE>

                                       24
<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: 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.

     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 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,  Unisys Corporation and Tandem Computers, Inc. As a result of industry
consolidation  and  competitive  factors,  sales to Unisys and  Tandem  declined
significantly  in 1999 and  2000.  We do not  expect  sales  to these  alternate
channel  partners to  constitute a  significant  part of our net sales in fiscal
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  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  30.5% of net sales
in 2000.  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.

                                       25
<PAGE>


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


                                                Year Ended December 31,
                                                -----------------------
                                               1998      1999      2000
                                               ----      ----      ----
      Direct:
        Commercial and other Federal
      customers.............................  $ 7,960   $12,638  $ 9,905

        U.S. Air Force......................    9,579    23,216    4,576

       Indirect:
        Alternate channel partners..........   10,927     3,907      541
                                               ------     -----      ---

                                              $28,466   $39,761  $15,022
                                              =======   =======  =======



     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.

REVENUE

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

COST OF REVENUE

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

     -    the costs of purchased material;

     -    direct labor and related overhead expenses; and

     -    amortization and write-off of capitalized software.

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

     Capitalized  software  amounts  that have no future  economic  benefit  are
written down to net realizable value in the period that such value is derived.

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily of:

                                       26
<PAGE>


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

     -    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:


                                                Year Ended December 31,
                                             -----------------------------
                                              1998       1999       2000
                                              ----       ----       ----
Direct net sales:
   Commercial and other Federal
   customers.............................     28.0%      31.8%      65.9%
   U.S. Air Force........................     33.7       58.4       30.5
Indirect net sales:
   Alternate channel partners............     38.3        9.8        3.6
                                             -----      -----      -----
Total net sales..........................    100.0      100.0      100.0
  Cost of sales..........................     71.9       67.3      101.6
                                             -----      -----      -----
Gross profit.............................     28.1       32.7       (1.6)
  Selling, general & administrative
  expenses...............................     29.4       24.4       72.7
  Research & development expenses........      9.4        4.9       14.1
                                             -----      -----      -----
Operating (loss) income..................    (10.7)       3.4      (88.4)
  Net interest income....................     (1.4)      (0.4)      (1.3)
                                             -----      -----      -----
(Loss)  Income before  extraordinary  item
and tax benefit..........................     (9.3)       3.8      (87.1)
  Extraordinary item.....................       --         --         --
  Benefit for income taxes...............       --       (1.1)      (1.6)
                                              -----      -----     -----
Net (loss) income........................     (9.3)%      4.9%     (85.5)%
                                              ====        ===      =====

     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.

                                       27
<PAGE>


     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 for
inventory  obsolescence  relate to the discontinuance of the SANStar development
effort and the repositioning of our product offering.

     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.

                                       28
<PAGE>

      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  $2,662 and $3,150 for
the twelve months ending December 31, 1999 and 2000, 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.

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

      NET SALES

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

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

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

                                       29
<PAGE>


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

      GROSS PROFIT

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

      OPERATING EXPENSES

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

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

      NET INTEREST (INCOME) EXPENSE

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

LIQUIDITY AND CAPITAL RESOURCES

     Our cash balance was approximately $2,200 at December 31, 2000.

     Net cash provided by operating activities in 1999 was $4,269. Net cash used
in  operating  activities  was  $3,450  in  2000.  Net  cash  used in  operating
activities in 2000 resulted  primarily from the net loss from  operations  after
adding back depreciation, amortization and the write-off

                                       30
<PAGE>

of  capitalized  software,  coupled  with an  increase  in prepaid  expenses,  a
decrease in  accounts  payable,  accrued  liabilities,  deferred  rent and other
expenses,  and  offset  in  part  by  a  decrease  in  accounts  receivable  and
inventories.  Net cash used in investing activities was $1,749 in 2000. Net cash
used in financing activities was $573 in 2000.

     We used $812 and $475 for the  acquisition of equipment by direct  purchase
during 1999 and 2000, respectively. Such expenditures in 1999 and 2000 primarily
consisted of computer  equipment  associated  with our research and  development
efforts.  There  are no other  material  commitments  for  capital  expenditures
currently outstanding.

     We had working capital of $14,200 and $3,467 at December 31, 1999 and 2000,
respectively.

     On July 9, 1997,  we entered into a full recourse  factoring  facility with
Bank of America ("BOA"),  formerly known as NationsBanc Commercial  Corporation,
which  provides for aggregate  advances not to exceed the lesser of $7,000 or up
to 85% 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  us sixty days prior  written  notice)
beginning  on  July  30,  1997.  Our   obligations   under  such  agreement  are
collateralized  by substantially all of our assets. As of December 31, 2000, our
balance  outstanding  under this full recourse  factoring  facility was $115. On
June 16, 2000,  we signed an amendment to the factoring  facility  extending the
agreement  until  July  30,  2003,  and  from  year  to  year  thereafter  until
terminated.   Except  as  referenced  above,  the  factoring   facility  remains
unchanged.

     Our ability to borrow under a $4,000 general line of credit with the Finova
Group, Inc. ("Finova") has been terminated.  The agreement with Finova contained
covenants  relating to net worth,  total  assets to debt and total  inventory to
debt. Our  obligations  under the agreement with Finova were  collateralized  by
substantially all of the assets of the Company.  During 1999, Finova temporarily
increased the general line of credit to $3,000 through  January 31, 2000, on the
same terms and  conditions.  On  January  31,  2000,  the amount of the line was
returned to $2,000 and the line was extended  through January 31, 2001. On April
17, 2000, the line of credit extended to us by Finova was permanently  increased
by $2,000,  raising the total  amount of funds  available to us under the Finova
general line of credit to $4,000. In December 2000, Finova terminated our credit
facility with them. During 1999 and 2000 we used our general line of credit with
Finova to augment our purchasing  ability with various  vendors.  As of December
31, 1999 and 2000,  we had $968 and $115  outstanding  under this  credit  line,
respectively.


     During 1999, we utilized $1,144 of net operating loss carryover ("NOL") for
federal tax  purposes.  As of December  31,  2000,  we have NOL  carryovers  for
Federal income tax purposes of approximately $18,932, 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  and in 2001 as  defined  by  Section  382 of the  Internal  Revenue  Code.
Accordingly, future use of these NOLs and income tax credits will be limited.

                                       31
<PAGE>

     As of  December  31,  2000,  we have  approximately  $9,400  of  state  NOL
carryforwards  which  will  begin to  expire  in 2006  and  state  research  and
development tax credit carryforwards of $342.

     In  December  2000,  we sold $5,189 of State NOL  carryforwards  and $40 of
State  Research and  Development  tax credits 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 November 10, 2000, we sought shareholder approval for the issuance of up
to 6,857,143  shares of 6% cumulative  convertible  preferred  stock Series A to
raise up to an aggregate of $12,000 of gross proceeds.  The shareholder  meeting
was originally  scheduled for November 30, 2000, and was adjourned  twice by the
Company  to  December  22,  2000 in  order  to  give  shareholders  the  maximum
opportunity  to vote. The Company was unable,  however,  to obtain the requisite
quorum to conduct a meeting within the statutory  maximum sixty (60) day period.
As the record date for the  shareholder  meeting was October 26, 2000,  the last
day we could hold the meeting was December 25, 2000.  The Company did obtain the
sufficient  votes on the 61st day, or December 26, 2000.  Of those  shareholders
responding,  an overwhelming 95.1% approved the proposed transaction.  Since the
quorum was achieved  past the date of the statutory  maximum,  we believe it was
necessary to apply to Nasdaq for an exception to shareholder approval.

     On January 25, 2001, we applied for an exception to Nasdaq Marketplace Rule
4350(i)(1)  requiring the Company to 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 the
Company's  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,  the  Company was
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").  The Series A Preferred
Stock has a 6% cumulative  coupon and is initially  convertible  into our Common
Stock on an 8-for-1 basis. The Series A Preferred Stock also has liquidation and
dividend preferences superior to those of existing stockholders.  The purchasers
of Series A Preferred Stock also acquired certain anti-dilution and registration
rights. 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,
Unterberg  Towbin  received a fee equal to 78,125  shares of Series A  Preferred
Stock,  in  addition to payment of certain  expenses  if fully  sold.  Thomas I.
Unterberg,  a former director of the Company,  along with certain  affiliates of
Mr. Unterberg,


                                       32
<PAGE>


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.

     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.

     On January 4, 2001,  we received  notification  from Nasdaq that our common
stock had  failed  to  maintain  a minimum  bid price of $1.00 per share for the
thirty days prior to the date of  notification.  We have 90 days from the notice
date 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 23,  2001,  we have not regained  compliance.  In the event that we do not
regain  compliance,  we will be subject to  delisting  from the Nasdaq  National
Market and would  trade on the OTC  Bulletin  Board.  A  delisting  from  Nasdaq
National Market may have an adverse effect on our stock price and our ability to
raise capital through the issuance of additional equity.

     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.  As a
result of the  changes  we made to our  workforce,  we have  incurred  a onetime
charge in the first quarter of 2001 of approximately  $200,  however, we believe
that our restructured workforce will help reduce operating expenses in 2001.

     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 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

                                       33
<PAGE>


improve  operating  results may require us to seek equity  financing,  which, if
required, would cause dilution to our current stockholders. If needed, there can
be no  assurance  that we can  obtain  equity  financing,  if at all,  on  terms
acceptable to us.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statements of
Financial  Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities."  SFAS No. 133  establishes  accounting and reporting  standards for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, and for hedging activities. SFAS No. 133, as amended is now effective
for the  year  beginning  January  1,  2001.  As the  Company  does not have any
outstanding  derivative  positions at December 31, 2000, there will be no impact
to the Company's  results of operations,  financial  position or cash flows upon
the initial adoption of SFAS No. 133.

     In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting   Bulletin   ("SAB")  No.  101  "Revenue   Recognition  in  Financial
Statements."  SAB No.  101, as amended,  is  required to be  implemented  in the
quarter ended  December 31, 2000.  The Company is currently in  compliance  with
such SAB,  and  accordingly,  the  implementation  thereof  had no effect on the
Company's financial statements.

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, 2000, all our available  excess funds were cash
or cash equivalents  whose value is not subject to changes in interest rates. We
currently hold no derivative  instruments and do not earn foreign-source income.
We  expect  to  invest  our cash  only in debt  obligations  issued  by the U.S.
government or its agencies with maturities of less than one year.

Item 8. Financial Statements and Supplementary Data.

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

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

     On  November  15,  2000,  Ernst  &  Young  LLP  ("E & Y")  resigned  as our
independent  auditors.  The report of E&Y on the Company's 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 on any matters of  accounting  principles  or practices,
financial  statement  disclosure,   or  auditing  scope  and  procedure,   which
disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y
to make reference to the subject matter of the disagreements 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.

                                       34
<PAGE>


     On November  21,  2000,  the Board of  Directors  approved  and the Company
retained Richard A. Eisner & Company, LLP as its independent auditors.

                                    PART III

Item 10. Directors and Executive Officers of the Company.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
2001 Annual Meeting of Shareholders is incorporated  herein by reference to such
proxy statement.

Item 11. Executive Compensation.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 2001  Annual  Meeting of  Shareholders  is
incorporated herein by reference to such proxy statement.

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

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 2001
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.

Item 13. Certain Relationships and Related Transactions.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 2001 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.

                                     PART IV

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

          (a) (1) Financial Statements.

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

     -    Report of Independent Auditors - Ernst & Young LLP

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

     -    Consolidated Balance Sheets - December 31, 1999 and 2000

     -    Consolidated Statements of Operations - Years ended December 31, 1998,
          1999, and 2000

                                       35
<PAGE>

     -    Consolidated Statements of Shareholders' Equity - Years ended December
          31, 1998, 1999, and 2000

     -    Consolidated Statements of Cash Flows - Years ended December 31, 1998,
          1999, and 2000

     -    Notes to Consolidated Financial Statements - December 31, 2000

          (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 39.

          (b) Reports on Form 8-K.

                    On November 22, 2000, the Company filed a report on Form 8-K
                    relating to a change in the Company's Certifying Accountant.

                    On January 31, 2001,  the Company filed a report on Form 8-K
                    relating to the Company  reaching an  agreement in principal
                    for a  private  equity  placement  of $2,000 to $4,000 of 6%
                    Convertible Preferred Stock.

                    On February 26, 2001, the Company filed a report on Form 8-K
                    relating  to the  Company's  Nasdaq  waiver  of  shareholder
                    approval for a private equity placement.

                    On March 26,  2001,  the Company  filed a report on Form 8-K
                    relating to the issuance of 1,450,000 shares of its series A
                    Preferred Stock for gross proceeds of $2,900.

                                       36
<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 30th day of March,
2001.

                                    ECCS, INC.


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


                                       37
<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.



        Signature                      Title                       Date
        ---------                      -----                       ----

/s/ Gregg M. Azcuy           President, Chief Executive       March 30, 2001
----------------------       Officer and Director
Gregg M. Azcuy               (Principal Executive
                             Officer)

/s/ Louis Altieri            Vice President, Finance and      March 30, 2001
----------------------       Administration (Principal
Louis Altieri                Financial and Accounting
                             Officer)

/s/ Michael E. Faherty       Chairman of the Board and        March 30, 2001
----------------------       Director
Michael E. Faherty


/s/ Gale R. Aguilar          Director                         March 30, 2001
----------------------
Gale R. Aguilar


/s/ James K. Dutton          Director                         March 30, 2001
----------------------
James K. Dutton


/s/ Donald E. Fowler         Director                         March 30, 2001
-----------------------
Donald E. Fowler


/s/ Frank R. Triolo          Director                         March 30, 2001
-----------------------
Frank R. Triolo


                                       38
<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, 2000 filed on November 3, 2000.)

     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.)



                                       39
<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.)



                                       40
<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.)


                                       41
<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 arrangement  required to
          be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

     +    Filed herewith. All other exhibits previously filed.


                                       42
<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE

                                                                          Page
                                                                          ----

Report of Independent Auditors - Ernst & Young LLP.........................F-2

Report of Independent Auditors - Richard A. Eisner & Co. LLP ..............F-3

Consolidated Balance Sheets as of
  December 31, 1999 and 2000...............................................F-4

Consolidated Statements of Operations for
  each of the three years in the period ended
  December 31, 2000........................................................F-5

Consolidated Statements of Shareholders'
  Equity for each of the three years in
  the period ended December 31, 2000.......................................F-6

Consolidated Statements of Cash Flows
  for each of the three years in the period
  ended December 31, 2000..................................................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>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ECCS, Inc.

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

     We conducted our audits 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 audits provide a reasonable  basis
for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
ECCS, Inc. and subsidiaries at December 31,  1999, and the consolidated  results
of their operations and their cash flows for the years ended  December 31,  1999
and 1998, in conformity with  accounting  principles  generally  accepted in the
United States.  Also, in our opinion,  the related financial  statement schedule
for the years ended  December 31,  1999 and 1998, 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 12,
   as to which the date is April 14, 2000


                                       F-2
<PAGE>




                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ECCS, Inc.

     We have audited the accompanying  consolidated  balance sheet of ECCS, Inc.
and  subsidiaries  as  of  December  31,  2000,  and  the  related  consolidated
statements of operations,  shareholders equity, and cash flows for the year then
ended. Our audit also includes the financial  statement schedule in so far as it
relates to the year ended  December  31, 2000 listed in the Index at Item 14(a).
These   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 audit.

     We conducted our audit 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  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 financial position of
ECCS, Inc. and subsidiaries at December 31, 2000, and the  consolidated  results
of their  operations and their cash flows for the year 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
March 2, 2001, except for Note 13 as to which the date is March 9, 2001.


                                       F-3
<PAGE>

                           ECCS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

                                                            December 31,
                                                            ------------
                                                        1999           2000
                                                        ----           ----
Assets
Current Assets:
  Cash and cash equivalents.........................   $ 7,993        $2,221
  Accounts receivable, less allowance for
   doubtful accounts of $0 in 1999 and $310 in
   2000.............................................     5,829           899
  Inventories.......................................     5,570         4,452
  Prepaid expenses and other receivables............       254           294
                                                           ---           ---
                                                        19,646         7,866

Property and equipment (net)........................     1,733         1,299
Capitalized software (net)..........................     1,790           406
Other assets........................................        62            61
                                                            --            --
          Total Assets..............................   $23,231        $9,632
                                                       =======        ======

Liabilities and Shareholders' Equity
Current Liabilities:
  Loans payable ....................................   $    --        $  161
  Payable to Finova Capital.........................       968           115
  Current portion of capital lease..................       158           114
  Accounts payable..................................     1,631         2,069
  Accrued expenses and other........................     1,874         1,150
  Warranty..........................................       746           577
  Customer deposits, advances and other credits.....        69           213
                                                            --           ---
                                                         5,446         4,399

Capital lease obligations, net of current portion...        67            88
Deferred rent.......................................        17            --
                                                         -----         -----
                                                         5,530         4,487
                                                         -----         -----
Shareholders' Equity:
  Preferred stock, $.01 par value per share, authorized
   3,000,000 shares; none
   issued and outstanding at December 31, 1999 and
   December 31, 2000................................        --            --
  Common stock, $.01 par value per share,
   Authorized, 50,000,000 shares; issued and outstanding
    11,341,318 shares and
    11,562,540 shares at December 31, 1999 and
    December 31, 2000, respectively.................       113            116
  Capital in excess of par value ...................    26,374         26,670
  Accumulated deficit...............................    (8,786)       (21,641)
                                                        ------        -------

                                                        17,701         5,145
                                                        ------         -----
     Total Liabilities and Shareholders' Equity.....   $23,231        $9,632
                                                       =======        ======


                                       F-4
<PAGE>


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


                             Year Ended December 31
--------------------------------------------------------------------------------
                                      1998          1999           2000
                                      ----          ----           ----

Net sales....................      $  28,466     $  39,761     $  15,022

Cost of sales................         20,452        26,777        15,268
                                      ------        ------        ------

  Gross profit (deficit).....          8,014        12,984          (246)

Operating expenses:
  Selling, general &
  administrative.............          8,378         9,693        10,925
  Research & development.....          2,683         1,939         2,112
                                       -----         -----         -----
                                      11,061        11,632        13,037
                                      ------        ------        ------

Operating (loss) income .....         (3,047)        1,352       (13,283)

  Net interest income........           (390)         (162)         (193)

(Loss) income before income tax
benefit .....................         (2,657)        1,514       (13,090)
  Income tax benefit.........             --          (438)         (235)
                                        -----         ----          ----


Net (loss) income  ..........      $  (2,657)    $   1,952     $ (12,855)
                                   =========     =========     =========


Net (loss) income per share -
basic........................      $   (0.24)    $    0.18     $   (1.12)
                                   =========     =========     =========


Net (loss) income per share -
diluted......................      $   (0.24)    $    0.16     $   (1.12)
                                   =========     =========     =========

Weighted average number of
common shares - basic........         10,969        11,093        11,490
                                      ======        ======        ======

Weighted average number of
common shares - diluted......         10,969        11,978        11,490
                                      ======        ======        ======



                                       F-5
<PAGE>



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

                                  Common Stock
                      ------------------------------------

<TABLE>
<CAPTION>
                                                             Capital
                                                               in
                                                              Excess                      Total
                                                              of Par     Accumulated   Shareholders'
                                   Shares       Amount        Value       Deficit        Equity
                                  ----------   ----------   ----------   ----------    ----------

<S>                               <C>          <C>          <C>          <C>           <C>
Balance at January 1, 1998.....   10,918,188   $      109   $   25,615   $   (8,081)   $   17,643

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

Net loss ......................         --           --           --         (2,657)       (2,657)
                                  ----------   ----------   ----------   ----------    ----------

Balance at December 31, 1998 ..   11,027,084          110       25,860      (10,738)       15,232

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

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

Balance at December 31, 1999 ..   11,341,318          113       26,374       (8,786)       17,701

Issuance of stock and stock
  option exercises ............      221,222            3          296         --             299

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

Balance at December 31, 2000 ..   11,562,540   $      116   $   26,670   $  (21,641)   $    5,145
                                  ==========   ==========   ==========   ==========    ==========
</TABLE>


                                      F-6


<PAGE>


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

                                                         Year Ended December 31,
                                                     --------------------------------
                                                       1998        1999        2000
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Cash flows from operating activities:
Net (loss) income ................................   $ (2,657)   $  1,952    $(12,855)
  Adjustments to reconcile net (loss)
   income to net cash provided by (used
   in) operating activities:
   Depreciation and amortization .................      1,035       1,515       1,986
   Write off of capitalized software .............        366        --         1,738
Change in operating assets and liabilities:
   (Increase) decrease in accounts
    receivable ...................................       (907)        815       4,930
   (Increase) decrease in inventories ............       (967)         (7)      1,118
   Decrease (increase) in prepaid expenses
    and other receivables.........................        276         259         (39)
   Decrease in accounts payable, accrued
    liabilities and other ........................     (1,289)       (212)       (472)
   (Decrease) increase in customer deposits ......       (288)        (53)        144
                                                     --------    --------    --------
Net cash (used in) provided by operating
 activities ......................................     (4,431)      4,269      (3,450)
                                                     --------    --------    --------
Cash flows from investing activities:
  Additions to property and equipment ............     (1,208)       (812)       (475)
  Additions to capitalized software ..............     (1,047)     (1,072)     (1,274)
                                                     --------    --------    --------
Net cash used in investing activities ............     (2,255)     (1,884)     (1,749)
                                                     --------    --------    --------

Cash flows from financing activities:
  Borrowings under revolving credit
   agreement .....................................     11,381      16,624      17,283
  Repayments under revolving credit
   agreement .....................................    (12,412)    (16,624)    (17,122)
  Decrease in payable to Finova Capital ..........      1,231        (263)       (853)
  Repayment of capital lease obligations .........        (11)        (20)       (180)
  Proceeds from exercise of employee stock
   options and issuance of common stock ..........        246         517         299
                                                     --------    --------    --------
Net cash provided by (used in) financing
 activities ......................................        435         234        (573)
                                                     --------    --------    --------

Net (decrease) increase in cash and cash
 equivalents .....................................     (6,251)      2,619      (5,772)
Cash and cash equivalents at beginning of
 period ..........................................     11,625       5,374       7,993
                                                     --------    --------    --------
Cash and cash equivalents at end of period .......   $  5,374    $  7,993    $  2,221
                                                     ========    ========    ========
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
   Interest ......................................   $     88    $    135    $    141
                                                     ========    ========    ========
  Supplemental disclosure of non-cash investing and
   financing activities:
   Property acquired under capital lease
    obligations ..................................   $    245        --           157
                                                     ========    ========    ========
</TABLE>


                                       F-7
<PAGE>

                           ECCS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 2000

               (Dollars in Thousands Except Per Share Information)


Note 1 -- The Company

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

Note 2 -- Summary of Significant Accounting Policies

      PRINCIPLES OF CONSOLIDATION

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

     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.

                                       F-8

<PAGE>

      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,  $190,  $586  and $919  for  1998,  1999  and  2000,
respectively.  At December 31, 2000, the Company has capitalized an aggregate of
$3,905 of software  development costs, of which $366 was written off in 1998, as
the  Company  discontinued  its  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 in connection with the Company's discontinuation
of the SANStar project, and $1,395 has been amortized in the aggregate.

      IMPAIRMENT OF LONG-LIVED ASSETS

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

      REVENUE RECOGNITION

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

      WARRANTY

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


                                       F-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,
diluted  earnings per share does not include  options,  warrants and convertible
securities as they are anti-dilutive.

      USE OF ESTIMATES

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

      NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statements of
Financial  Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities."  SFAS No. 133  establishes  accounting and reporting  standards for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts, and for hedging activities. SFAS No. 133, as amended is now effective
for the  year  beginning  January  1,  2001.  As the  Company  does not have any
outstanding  derivative  positions at December 31, 2000, there will be no impact
to the Company's  results of operations,  financial  position or cash flows upon
the initial adoption of SFAS No. 133.


                                      F-10
<PAGE>


     In December 1999, the Securities and Exchange Commission Staff issued Staff
Accounting   Bulletin   ("SAB")  No.  101  "Revenue   Recognition  in  Financial
Statements."  SAB No.  101, as amended,  is  required to be  implemented  in the
quarter ended  December 31, 2000.  The Company is currently in  compliance  with
such SAB,  and  accordingly,  the  implementation  thereof  had no effect on the
Company's financial statements.

Note 3 -- Transactions with Significant Vendors and Customers

     In 1995, the Company entered into a Manufacturing  Services  Agreement with
Unisys, formerly its primary manufacturer,  which defined the terms of sales and
support services. Pursuant to such agreement, Unisys manufactured certain of the
Company's products for use in the Company's  proprietary  systems as well as for
the direct sale to end-users. In February 1999, Unisys notified the Company that
Unisys was closing its Winnipeg computer storage systems  manufacturing plant by
July  31,  1999  and  accordingly  the  Manufacturing   Services  Agreement  was
terminated at that time. The Company's  purchases  under this agreement  totaled
$6,600,  $354 and zero in 1998, 1999 and 2000,  respectively.  Subsequent to the
termination of the Manufacturing  Services Agreement,  the Company  manufactured
certain products in-house under such agreement from August to December 1999.

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

     Sales to the Company's primary alternate channel partner, Unisys, accounted
for  28.0%,  8.2% and 3.6% of the  Company's  total net sales in 1998,  1999 and
2000,  respectively.  All  sales to  Unisys  were  sales of  enterprise  storage
solutions.

     The Company has a supply  arrangement with Bell  Microproducts  pursuant to
which the Company orders from Bell  Microproducts  when,  and as needed,  and on
terms  negotiated at the time of each such order.  There are no minimum purchase
requirements. The arrangement is terminable by either party at any time. In 1998
and 1999,  purchases from Bell Microproducts  totaled  approximately  $5,100, or
23.3%,  and $10,776,  or 43.5%,  of all purchases  respectively.  In 2000,  such
purchases totaled $4,167, or 26.1% of all purchases.

     The United States Air Force,  an end user of the Company's  products  which
purchases such products  through KKP  Corporation,  Worldwide  Technologies  and
other  government  contractors,  purchased  $9,579 of products,  or 33.7% of the
Company's total net sales in 1998. In 1999 such sales totaled $23,216,  or 58.4%
of total sales and for 2000 such sales totaled $4,576,  or 30.5% of total sales.
The  Company  cannot  be  certain  that its sales to the U.S.  Airforce  through
Federal integrators will not be adversely affected by the investigation  further
discussed in Note 12. There are no minimum purchase requirements.


                                      F-11

<PAGE>

      SEGMENT INFORMATION

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



                                                 Year Ended December 31,
                                               -------------------------
                                               1998       1999      2000
                                               ----       ----      ----
       Direct:
        Commercial and other Federal
          customers......................... $ 7,960    $12,638   $ 9,905
        U.S. Air Force......................   9,579     23,216     4,576
      Indirect:
        Alternate channel partners..........  10,927      3,907       541
                                             -------    -------   -------
                                             $28,466    $39,761   $15,022
                                             =======    =======   =======

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

Purchased parts................................     $    1,497     $    1,610
Finished goods.................................          5,047          5,309
                                                    ----------     ----------
                                                         6,544          6,919
   Less: inventory valuation reserve...........            974          2,467
                                                    ----------     ----------
                                                    $    5,570     $    4,452
                                                    ==========     ==========

Note 5 -- Property and Equipment

Property and equipment consist of the following:

                                                            December 31,
                                                    ------------------------
                                                       1999             2000
                                                    --------         --------
Furniture and fixtures.........................     $    487         $    493
Computer equipment.............................        5,586            6,085
Vehicles.......................................           35               35
Leasehold improvements.........................          424              398
Equipment under capital leases.................          770              931
                                                    --------         --------
                                                       7,302            7,942
Less accumulated depreciation and amortization,
  including $426 and $711 relating to equipment
  under capital leases at December 31, 1999
  and December 31, 2000, respectively..........        5,569            6,643
                                                    --------         --------
                                                    $  1,733         $  1,299
                                                    ========         ========

                                      F-12
<PAGE>


Note 6 -- Loans Payable to Bank of America 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).  Interest on such advances is payable  monthly in arrears at the prime
lending  rate and the Company is  obligated  to pay  certain  annual  fees.  The
factoring  facility is for a period of three years (unless  terminated by BOA by
providing  the Company sixty days prior  written  notice)  beginning on July 30,
1997. The obligations of the Company under such agreement are  collateralized by
substantially  all of the assets of the Company.  On June 16, 2000,  the Company
signed an amendment to the Factoring  Agreement  between Bank of America and the
Company  extending  the  Agreement  until July 30,  2003,  and from year to year
thereafter until terminated.  Except as described above, the Factoring Agreement
remains  unchanged.  As of December  31,  2000,  the Company had an  outstanding
balance under this full recourse factoring facility of $161.

     On December 1, 1997, Finova Capital Corp. ("Finova") acquired the Company's
$2,000 general line of credit with AT&T-CFC. The Company renewed its credit line
with Finova upon its  expiration  on January 31, 1999 and such  general  line of
credit was  increased to $3,000 and extended  through  January 31, 2000,  on the
same terms and  conditions.  On  January  31,  2000,  the amount of the line was
returned to $2,000 and the line was extended  through January 31, 2001. On April
17, 2000,  Finova approved a permanent  increase in the line of $2,000,  raising
the total  amount of funds  available  to the Company  under the general line of
credit to $4,000.  The Company  received a sixty-day  notice of termination from
Finova on December 11, 2000  terminating the $4,000 general line of credit.  The
Company used this line of credit to augment its purchasing  ability with various
vendors.

     The   Company's   obligations   under  the   agreement   with   Finova  are
collateralized by substantially all of the assets of the Company. As of December
31, 2000, the Company had a balance of $115  outstanding  under this credit line
which has been subsequently  repaid. The Company has certain financial covenants
with such line of credit with  Finova.  The Company is in  compliance  with such
covenants as of December 31, 2000.

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

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

                                      F-13
<PAGE>


Note 7 -- 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  $523, $516 and $712 for the years ended December 31, 1998,
1999 and 2000, respectively.

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

     The following is a schedule of future  minimum  lease  payments for capital
and non-cancelable  operating leases, together with the present value of the net
minimum lease payments, as of December 31, 2000:

                                                 Capitalized      Operating
                                                   Leases           Leases
                                                 -----------      ---------
2001.......................................         $ 123          $  446
2002.......................................            63             417
2003.......................................            32             403
2004.......................................           - -             406
2005.......................................           - -             409
Thereafter.................................           - -             - -
                                                    -----          ------
Total minimum lease payments...............           218          $2,081
                                                    -----          =======
Less amount representing interest..........            16
                                                    -----
Present value of net minimum lease payments         $ 202
                                                    =====

Note 8 -- Stock Option Plans

     The Company has the following stock option plans:

THE 1989 STOCK OPTION PLAN

     Under the Company's  1989 Stock Option Plan, as amended,  900,000 shares of
common stock can be issued  through  incentive  stock options and  non-statutory
stock options. The incentive stock options allow designated full-time employees,
including  officers,  to purchase shares of common stock at prices equal to fair
market value at the date of grant.  For individuals who own more than 10% of the
stock of the  Company,  the  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.


                                      F-14
<PAGE>

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

                                                       Options Outstanding
                                                       -------------------
                                                                Weighted-Average
                                                     Shares      Exercise Price
                                                     ------      --------------
Balance at January 1, 1998.....................      695,718          $2.66
   Options exercised...........................      (25,225)          2.55
   Options canceled...........................      (479,734)          2.69
                                                    --------
Balance at December 31, 1998...................      190,759           2.60
   Options exercised...........................      (69,159)          2.02
   Options canceled............................           --             --
                                                     -------
Balance at December 31, 1999...................      121,600           2.04
   Options exercised...........................      (33,250)          1.48
   Options canceled............................          - -            - -
                                                     -------
Balance at December 31, 2000...................       88,350           2.25
                                                     -------
Options exercisable at December 31, 2000.......       88,350          $2.25


     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2000 in the 1989 Stock Option Plan is five years and
the exercise price range is $1.00 - $2.87.

1996 STOCK OPTION PLAN

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

                                      F-15
<PAGE>

     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, 1998.....................      419,500         $5.28
   Options granted.............................    1,408,800          1.62
   Options exercised...........................       (2,500)         2.88
   Options canceled............................     (646,900)         4.40
                                                   ---------
 Balance at December 31, 1998...................   1,178,900          1.39
   Options granted.............................      376,107          5.46
   Options exercised...........................      (81,400)         1.25
   Options canceled............................     (575,250)         1.35
                                                   ---------
Balance at December 31, 1999...................      898,357          2.95
   Options granted.............................      452,200          6.19
   Options exercised...........................     (136,450)         1.27
   Options canceled............................     (197,200)         4.66
                                                   ---------
Balance at December 31, 2000...................    1,016,907          4.28
                                                   ---------
Options exercisable at December 31, 2000.......      447,738        $ 1.60

     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2000 in the 1996 Stock Option Plan is nine years and
the exercise price range is $1.25 - $17.31.

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

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


                                      F-16
<PAGE>

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, 1998.....................      823,841        $5.82
   Options granted.............................      993,209         2.97
   Options exercised...........................      (37,625)        2.13
   Options canceled............................   (1,205,925)        5.53
                                                  ----------
Balance at December 31, 1998...................      573,500         1.74
   Options granted.............................      316,893        10.75
   Options exercised...........................     (123,691)        1.32
   Options canceled............................         (500)        2.13
                                                  ----------
Balance at December 31, 1999...................      766,202         5.37
   Options granted.............................      884,300         2.78
   Options exercised...........................         --            --
   Options canceled............................      (19,550)        2.74
                                                  ----------
Balance at December 31, 2000...................    1,630,952         4.00
                                                  ----------
Options exercisable at December 31, 2000.......      550,103        $3.18

     The weighted average remaining  contractual life for the balance of options
outstanding  at December 31, 2000 under  Non-Qualified  Agreements is nine years
and the exercise price range is $1.25 - $10.75.

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

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 500,000  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 30,000 shares of Common Stock. In addition,  each non-employee director
who is a member  of the  Board on the first  trading  day of each year  shall be
automatically  granted on such date,  without  further  action by the Board,  an
option to purchase  5,000 shares of Common Stock.  The exercise  price per share
under the 1996  Non-Employee  Directors  Plan shall be equal to the fair  market
value (as defined) of a share of Common Stock on the applicable  grant date, and
options  granted  under  the  1996  Non-Employee  Directors  Plan  vests  over a
four-year period.

                                      F-17
<PAGE>

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

                                                       Options Outstanding
                                                   -----------------------------
                                                                Weighted-Average
                                                     Shares      Exercise Price
                                                   ----------   ----------------
Balance at January 1, 1998.....................       60,000         $4.38
   Options granted.............................       30,000          6.50
                                                   ---------
Balance at December 31, 1998                          90,000          5.09
   Options granted.............................       30,000          1.69
                                                   ---------
Balance at December 31, 1999...................      120,000          4.23
   Options granted.............................       30,000         16.94
                                                   ---------
Balance at December 31, 2000...................      150,000          6.77
                                                   ---------
   Options exercisable at December 31, 2000....       75,000         $4.52


     The weighted average remaining  contractual life for the balance of options
outstanding at December 31, 2000 under the 1996  Non-Employee  Directors Plan is
eight years and the exercise price range is $1.69 - $16.94.

     The  following  table  summarizes  information  about  ECCS  stock  options
outstanding at December 31, 2000.


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

Range of        Number of    Weighted     Weighted      Number of    Weighted
Exercise        Options      Average      Average       Options      Average
Price           -------      Remaining    Exercise      -------      Exercise
-----                        Years of     Price                      Price
                             Contractual  -----                      -----
                             Life
                             ----

$0 - $2.00        862,759       8          $1.27         806,066     $1.27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$2.01 - $5.00   1,261,750       9          $2.94         232,750     $3.21
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$5.01 - $12.00    700,200       9          $9.02         122,375    $10.23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$12.01 - $20.00    61,500       9         $16.53              --        --
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL           2,886,209                              1,161,191
--------------------------------------------------------------------------------


STOCK WARRANTS

     At December  31,  2000,  298,848  common stock  purchase  warrants  with an
exercise price of $1.25 per share were outstanding to a director of the Company.
Such  warrants  expire in 2004.  At December 31, 2000,  all such  warrants  were
exercisable.

     The Company has reserved  3,185,057 shares of Common Stock for the exercise
of stock options and warrants as described above.


                                      F-18
<PAGE>

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  1998,  1999 and  2000:  risk-free  interest  rates of  between
4.3%-5.74% in 1998, 4.6%-6.3% in 1999 and 5.8%-6.65% in 2000; dividend yields of
zero;  volatility  factors of the expected market price of the Company's  common
stock of .947 in 1998,  .997 in 1999 and 1.168 in 2000;  and a  weighted-average
expected  life of four years.  The  weighted  average fair market value of stock
options  issued in 1998,  1999 and 2000 was  $2.20,  $5.47 and $3.31 per  share,
respectively.

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

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

                                           1998           1999          2000
                                           ----           ----          ----

Net income (loss) as reported........    $(2,657)       $  1,952       $(12,855)
Pro forma net income (loss)..........    $(3,802)       $  1,538       $(14,814)
Income (loss) per share as reported
  Basic..............................    $  (.24)       $     .18      $  (1.12)
Pro forma income (loss) per share
  Basic..............................    $  (.35)       $     .14      $  (1.29)
Income (loss) per share as reported      $  (.24)       $     .16      $  (1.12)
- diluted............................
Pro forma income (loss) per share -      $  (.35)       $     .13      $  (1.29)
diluted..............................

Note 9 -- 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 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,
2000,  247,630  shares were issued under the Purchase Plan, of which 51,522 were
issued in 2000.


                                      F-19
<PAGE>


     In June 1998, the shareholders approved an increase in the number of shares
reserved for issuance under the Plan to 400,000 from 150,000.

Note 10 -- Income Taxes

     The provision for income taxes is comprised of the following:

                                                         December 31,
                                                         ------------
                                                    1998       1999        2000
                                                    ----       ----        ----
Federal:
  Current...................................     $    --    $   --      $   --
  Deferred..................................          --        --          --

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

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


     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, 1999 and 2000 are as follows:


                                                        1999               2000
                                                        ----               ----

Tax credits....................................     $   753             $   933
Net operating losses...........................       2,899               6,908
Capitalized software...........................        (698)               (158)
Inventory, warranty and other reserves.........       1,283               1,540
Valuation allowance............................      (4,237)             (9,223)
                                                     ------              ------
Total..........................................          --                 --
                                                     =======             =======

     During 1999,  the Company  utilized  $1,144 of net operating loss carryover
("NOL") for federal tax purposes.  As of December 31, 2000,  the Company has NOL
carryovers for Federal income tax purposes of approximately  $18,932, 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 and in 2001 as  defined by
Section 382 of the Internal Revenue Code. Accordingly,  future use of these NOLs
and income tax credits will be limited. (See Note 13.)

     As of December 31, 2000, the Company has approximately  $9,400 of state NOL
carryforwards  which  will  begin to  expire  in 2006  and  state  research  and
development tax credit carryforwards of $342.

     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

                                      F-20
<PAGE>

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

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

                                                          December 31,
                                                          -----------
                                                    1998      1999       2000
                                                    ----      ----       ----
Computed tax expense (benefit).................   $ (903)   $  509    $(4,451)
Increase (decrease) in valuation
allowance (use of NOL).........................    1,131      (682)     4,986
Research and development tax credits...........     (228)       --         --
Sale of state NOL and R&D credit/other.........       --      (265)      (770)
                                                    ----       ----       ----
Actual tax expense (benefit)...................    $  --    $ (438)   $  (235)
                                                   ======    ======    =======

     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.

Note 11 -- Computation of Basic and Diluted Earnings (Loss) Per Share

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

                                        1998          1999        2000
                                        ----          ----        ----

Numerator:


Net income (loss)                      $ (2,657)   $  1,952      $(12,855)
                                       --------    --------      --------
Denominator:

Denominator for basic earnings per
share-weighted average shares            10,969      11,093        11,490
                                         ------      ------        ------

Effect of dilutive securities:

Employee stock options                       --         727            --
Warrants                                     --         158            --
Convertible preferred stock                  --          --            --
                                          ------     ------         ------

                                             --         885            --
                                          ------     ------         ------
Dilutive potential common shares
Denominator for diluted earnings per
share -Adjusted weighted-average shares
and assumed conversion                    10,969      11,978        11,490
                                          ======      ======       =======


Basic earnings (loss) per share          $ (0.24)     $ 0.18       $ (1.12)
                                          ======      ======       =======


Diluted earnings (loss) per share        $ (0.24)     $ 0.16       $ (1.12)
                                          ======      ======       =======


                                      F-21
<PAGE>

Note 12 - 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 November 1999, Mark Ish and David Boyle,  former  executive  officers of
the Company,  filed a complaint against us and Gregg M. Azcuy, our President and
Chief  Executive  Officer,  in the Superior  Court of New Jersey,  Law Division,
Monmouth County. By the action,  Messrs. Ish and Boyle are seeking  compensatory
damages,  punitive  damages,  attorneys'  fees,  interest  and costs for alleged
breach of multiple  contracts,  fraud and defamation.  The Company believes such
claims are without merit and it intends to vigorously  defend such actions.  The
Company  does not believe  that the outcome of such  litigation  will  adversely
affect its business.

     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.  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 $500 for each unit sold to the Air Force,  with
the proceeds going to the benefit of  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,


                                      F-22
<PAGE>


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.

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

Note 13 - Subsequent Events

     On November 10, 2000, we sought shareholder approval for the issuance of up
to 6,857,143  shares of 6% cumulative  convertible  preferred  stock Series A to
raise up to an aggregate of $12,000 of gross proceeds.  The shareholder  meeting
was originally  scheduled for November 30, 2000, and was adjourned  twice by the
Company  to  December  22,  2000 in  order  to  give  shareholders  the  maximum
opportunity  to vote. The Company was unable,  however,  to obtain the requisite
quorum to conduct a meeting within the statutory  maximum sixty (60) day period.
As the record date for the  shareholder  meeting was October 26, 2000,  the last
day we could hold the meeting was December 25, 2000.  The Company did obtain the
sufficient  votes on the 61st day, or December 26, 2000.  Of those  shareholders
responding,  an overwhelming 95.1% approved the proposed transaction.  Since the
quorum was achieved  past the date of the statutory  maximum,  we believe it was
necessary to apply to Nasdaq for an exception to shareholder approval.

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

     On February 22, 2001,  Thomas  Unterberg  rendered his resignation from the
Board of Directors of ECCS, Inc.

     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 the
Company's  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,  the  Company was
required to issue a press release describing the transaction.


                                      F-23
<PAGE>

     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").  The Series A Preferred
Stock has a 6% cumulative  coupon and is initially  convertible  into our Common
Stock on an 8-for-1 basis. The Series A Preferred Stock also has liquidation and
dividend preferences superior to those of existing stockholders.  The purchasers
of Series A Preferred Stock also acquired certain anti-dilution and registration
rights. 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,
Unterberg  Towbin  received a fee equal to 78,125  shares of Series A  Preferred
Stock,  in  addition to payment of certain  expenses  if fully  sold.  Thomas I.
Unterberg,  a former director of the Company,  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. In
addition,  the issuance of these shares will be considered a change in ownership
for  Federal  income tax  purposes  as defined  in Section  382 of the  Internal
Revenue Code, thereby limiting the Company's use of its NOL carryforwards.

     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 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.  The  SANStar  product did not  account  for any  revenues,  but
represented a substantial potion of the engineering costs in 2000.

                                      F-24


<PAGE>

Note 14 -- Quarterly Financial Information

                         Quarterly Financial Information
                                   (unaudited)
                                      1999


                           Q1         Q2          Q3        Q4          TOTAL

Net sales               $9,433     $8,909     $11,737    $9,682        $39,761
Gross profit             2,939      3,200       3,623     3,222         12,984
Net income                  73        208         701       970          1,952
Net income per
share-basic               0.01       0.02        0.06      0.09           0.18
Net income per
share-dilutive          $ 0.01     $ 0.01       $0.06     $0.08          $0.16


                                      2000

                           Q1         Q2          Q3        Q4          TOTAL

Net sales                $4,607     $4,033      $4,429    $1,953       $15,022
Gross profit (deficit)    1,870      1,120       1,146    (4,382)*        (246)
Net loss                 (1,234)    (2,128)     (1,833)   (7,660)      (12,855)
Net loss per
share-basic               (0.11)     (0.18)      (0.16)    (0.67)        (1.12)
Net loss per
share-dilutive           ($0.11)    ($0.18)     ($0.16)   ($0.67)       ($1.12)

* Included write-down of capitalized  software costs of $1,738 and $.15 on a per
share basis.

                                      F-25
<PAGE>


                           ECCS, Inc. and Subsidiaries
                 Schedule II - Valuation and Qualifying Accounts

                                 (in thousands)

Column A                       Column B        Column C      Column D  Column E

                                              Additions
                                              ---------

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

YEAR ENDED December 31, 2000
Allowance for Doubtful
Accounts & Returns/Credits..... $   - -   $   310  $           $         $  310
Tax valuation.................. $ 4,237   $        $ 4,986(D)  $         $9,223
Inventory...................... $   974   $ 2,523  $           $1,030(B) $2,467
Warranty....................... $   746   $    38  $           $  207    $  577
YEAR ENDED December 31, 1999
Allowance for Doubtful
Accounts & Returns/Credits..... $   334   $    --  $    --     $  334(A) $   --
Tax valuation.................. $ 5,114   $    --  $    --     $  877(C) $4,237
Inventory...................... $   785   $   840  $    --     $  651(B) $  974
Warranty....................... $   523   $   436  $    --     $  213    $  746
YEAR ENDED December 31, 1998:
Allowance for Doubtful
Accounts & Returns/Credits..... $   297   $   204  $    --     $  167(A) $  334
Tax valuation.................. $ 3,779   $    --  $ 1,335(D)  $   --    $5,114
Inventory...................... $   708   $   667  $    --     $  590(B) $  785
Warranty....................... $   534   $   273  $    --     $  284    $  523



(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