SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K
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                        FOR ANNUAL AND TRANSITION REPORTS
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                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
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                         SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
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|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
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For the fiscal year ended December 31, 1997
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                                       OR
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| |  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934
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For the transition period from            to
                               ----------    ----------
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                         Commission file number 0-21600
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                                   ECCS, INC.
             (Exact Name of Registrant as Specified in Its Charter)
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      New Jersey                                       22-2288911
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(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
Incorporation or Organization)
                         
One Sheila Drive, Tinton Falls, New Jersey                       07724
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(Address of Principal Executive Offices)                       (Zip Code)

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

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

  Title of each class              Name of Each Exchange on Which Registered

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value
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                                (Title of Class)

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                                (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:  $36,682,244  at  February  27, 1998 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 27, 1998:

Class                                              Number of Shares
-----                                              ----------------
Common Stock, $.01 par value                           10,918,188

     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 1998 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.


<PAGE>

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

        Item                                                          Page
        ----                                                          ----

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

          2.   Properties...........................................    12

          3.   Legal Proceedings....................................    13

          4.   Submission of Matters to a Vote of Security Holders..    13

PART II   5.   Market For the Company's Common Equity and Related
               Shareholder Matters..................................    14

          6.   Selected Consolidated Financial Data.................    16

          7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations..................    17

          8.   Financial Statements and Supplementary Data..........    26

          9.   Changes in and Disagreements With Accountants on
               Accounting and Financial Disclosure..................    27

PART III 10.   Directors and Executive Officers of the Company......    28

         11.   Executive Compensation...............................    28

         12.   Security Ownership of Certain Beneficial Owners
               and Management.......................................    28

         13.   Certain Relationships and Related Transactions.......    28

PART IV  14.   Exhibits, Financial Statement Schedules,
               and Reports on Form 8-K..............................    29

SIGNATURES .........................................................    30

EXHIBIT INDEX.......................................................    32

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




                                      -i-
<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" or the "Company") 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.


                                     PART I

ITEM 1.    BUSINESS.

GENERAL

     ECCS provides  intelligent  solutions to store,  protect and access mission
critical  information  for the Open  Systems  and related  markets.  The Company
designs,  manufactures and sells high  performance,  fault tolerant data storage
solutions for a wide range of customer  requirements.  ECCS'  flagship  product,
Synchronix,  which the Company  began  selling in 1996,  is a full  feature RAID
(redundant array of independent disks) product family designed for use in NT and
UNIX clustered  environments.  The Company's  products are compatible  with most
Open System  computing  platforms  and enable  customers  to store,  protect and
access data and to centralize data management functions across an organization's
disparate computer environments.

     ECCS' core technology provides data-intensive  environments with protection
against the loss of  critical  data and  provides  performance  and  reliability
characteristics  of a  mainframe,  at a  fraction  of the  cost.  The  Company's
products  offer users (i) fast data transfer  rates by spreading and  retrieving
data simultaneously  among various disk drives, (ii) fault tolerance through the
use of redundant  components  that can be "hot swapped"  during repair and (iii)
high storage capacity.

     From its founding  until 1994,  the  Company's  principal  business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business.  During 1994, as a result of AT&T's acquisition of NCR
and  subsequent  change in its  purchasing  policies,  the  Company  undertook a
product  development  initiative  to  reposition  the  Company as a provider  of
proprietary  mass  storage  enhancement  products.  A number  of  products  have
resulted from these efforts  including  Synchronix and  Synchronection,  a fault
tolerant  network file server.  During 1997  approximately  93% of the Company's
sales were derived from sales of the Company's proprietary products.



<PAGE>

     The Company was  incorporated in New Jersey in February 1980 under the name
The Word Store,  Inc. The Company's  name was changed to ECCS,  Inc. in November
1985.  Unless the context  otherwise  requires,  the terms  "Company" and "ECCS"
refer to ECCS, Inc. and its subsidiaries. The address of the Company's principal
corporate  offices is One Sheila Drive,  Tinton Falls, New Jersey 07724, and its
telephone number is 732-747-6995.

     "RAID 10  Performance  Manager,"  "Intelligent  Rebuild,"  "Split  Mirror,"
"Examodule,"  "Synchronix,"  "Inverse  Mirroring,"  "Synchronection"  and "Split
Volume" are United  States  trademarks  of the  Company.  All other trade names,
trademarks or service marks appearing in this Annual Report on Form 10-K are the
property of their respective owners and are not the property of the Company.

INDUSTRY BACKGROUND

     In response to competitive  pressures,  businesses and other  organizations
have become  increasingly  dependent on their  computing  resources which enable
these  organizations  to  increase  productivity  through  the  distribution  of
computing power across their  enterprise,  providing large numbers of users with
access to applications, information and data. In this environment, it has become
important for organizations to manage the storage of and access to large volumes
of data, which increasingly represent critical information resources.

     These  "data-intensive"  computing  environments  require  large volumes of
data,  perform  intensive  processing and involve  frequent user access to data.
Increasingly,   organizations  are  deploying  data-intensive  applications  and
services as core business  resources.  In addition,  Internet and on-line server
related businesses have grown  significantly.  The data-intensity of the network
environment  is  expected  to  continue  to  increase  substantially  due to the
development  of new  applications  and  services and the more  prevalent  use of
stored  digital  graphic,  voice and  video,  requiring  dramatically  more data
capacity than equivalent alphanumeric information.  The increased data intensity
of computing  environments has created demand for fault tolerant  features which
are now being included in standard operating systems, including Windows NT.

     In this  context,  data  management  has become  increasingly  complex  and
challenging.  For data-intensive  environments,  three significant  requirements
have emerged:  (i) data access  performance,  (ii) data administration and (iii)
data availability and reliability.

     DATA ACCESS  PERFORMANCE.  Traditionally,  management  information  systems
managers and network providers  improved  performance on a network by increasing
central processing unit ("CPU") performance or increasing the underlying network
bandwidth.  In data-intensive network environments,  performance of applications
and services is  increasingly  limited by the time to read or write to hard disk
drives. Improvements in performance for most applications and services have been
limited by disk I/O performance,  which because of the mechanical nature of disk
drives, has not improved as rapidly as CPU performance or network bandwidth.

     DATA  ADMINISTRATION.  A key  requirement  in  data  administration  is the
management   of  hardware  and  software   systems  that  store  data.   In  the
data-intensive network environment, data


                                      -2-
<PAGE>



management is difficult  and complex due to the large number of users  accessing
the data,  the multiple  servers  storing the data and the large volume of data.
Furthermore,  because  data may be widely  distributed  throughout  the network,
administrative  functions such as back-up or expansion of the file system become
substantially  more  difficult.  Finally,  the  budgetary  constraints  of  most
organizations   require  that  this  increasingly   complex   administration  be
accomplished cost-effectively, without increased staffing.

     DATA   AVAILABILITY  AND  RELIABILITY.   As  the   data-intensive   network
environment  grows,  data  availability  becomes critical to the  organization's
productivity,  time-to-market and responsiveness to customers.  Achieving a high
level of data  availability is particularly  difficult  because hard disk drives
are  mechanical  devices,  which are prone to failure over  extended  periods of
intensive use. An organization  may experience  costly down-time or loss of data
from the failure of a single  low-cost,  network-attached  disk  drive.  This is
particularly  important to network service providers whose business is providing
network-stored  data to their user.  Therefore,  it is  imperative  that systems
which are  repositories  of  network-based  data and  services  have low failure
rates, rapid recovery times and the ability to provide  uninterrupted service in
the  event  of  failure  of a  disk  drive.  Organizations  often  improve  data
reliability through the use of RAID technology, which consists of using parallel
disk  drives that work  together  as a single  unit.  RAID  technology  provides
data-intensive Open Systems with protection against the loss of critical data in
addition to the performance and reliability characteristics of a mainframe, at a
fraction of the cost.

THE ECCS APPROACH

     ECCS  designs,  manufactures  and  markets  a  comprehensive  range of high
performance,  user-definable, fault tolerant storage subsystems for Open Systems
and proprietary  systems needs.  The Company  believes that its proprietary mass
storage  enhancement  products  provide a level of  performance  or features not
generally available from competitors.

     The following are the key attributes of the ECCS approach:

     HIGH LEVEL OF DATA ACCESS  PERFORMANCE.  The  Company's  product  offerings
address RAID's inherent  performance  limitations  relating to the speed of data
access.  The  Company's  products  are  designed to provide a high level of data
access performance through the utilization of (i) multiple RAID levels on a wide
variety of disks that possess varying performance  characteristics,  (ii) larger
and upgradeable  cache size to improve speed by avoiding the need for mechanical
access to RAID,  (iii)  solid state disks for  dedicated  memory for  frequently
accessed  information  and (iv)  proprietary  technology for different  software
applications.

     IMPROVED DATA ADMINISTRATION  CAPABILITIES.  The Company's products utilize
an intuitive,  customizable  Graphical User Interface (GUI) which allows for the
monitoring  and  management  of  virtually  all  systems  functions,   including
configuration,  cache  policies and data rebuild.  These  features allow for the
management of data by both sophisticated and unsophisticated users.

     ENHANCED   DATA   AVAILABILITY.   The  Company's   products   enhance  data
availability  by  offering  array-based  failover,   complete  fault  tolerance,
multiple  host  connectivity  across  various


                                      -3-
<PAGE>

Open Systems platforms,  on-line firmware upgrades,  on-line systems maintenance
and hot-swappable  component  replacement.  The Company's  array-based  failover
enables failover protection at the storage array without host intervention.

     SCALABILITY.  The  Company's  products  provide  maximum  scalability  as a
customer's needs change by using a modular approach in designing and configuring
its storage  solutions.  Customers  can  purchase  from 10 to 90 disk drives per
footprint.  This scalability allows the Company to provide solutions for a broad
range of  storage  requirements,  from  low  capacity  users to  enterprise-wide
environments.

STRATEGY

     ECCS'  objective is to further  establish  and solidify its position in the
rapidly growing Open Systems data storage market.  In particular,  the Company's
strategic focus centers around serving users whose mission critical applications
require high performance and high reliability  storage  products.  The Company's
strategy  incorporates  the  following  key  elements:  develop  and broaden OEM
relationships  with market  leaders;  establish first mover position in emerging
clustering  technologies;  continue  direct sales to end users;  and protect its
technological edge.

     DEVELOP AND  BROADEN OEM  RELATIONSHIPS  WITH MARKET  LEADERS.  The Company
believes  that OEMs  represent the most  effective  path to the end user and are
therefore   its  most   significant   revenue   opportunity.   By   establishing
relationships with key OEMs that command a leadership position in their markets,
the Company believes it can gain increased credibility as a leading data storage
solution  provider as well as leverage a large sales  organization  and customer
base. The Company  anticipates  that  potential OEM candidates  will possess the
need for fault  tolerant data storage  solutions as a complement to their market
leading  technology.  The Company is actively  seeking to enter into additional,
long-term  OEM  relationships  and supply  agreements  with  organizations  that
possess the capability to extend the reach of ECCS technology.  Until July 1997,
Unisys  Corporation  ("Unisys")  served as the Company's  only OEM. On March 24,
1998, the Company announced that it had signed a corporate  purchasing agreement
with Tandem Computers  Incorporated  ("Tandem") pursuant to which Tandem has the
ability to purchase  Synchronix from the Company and resell  Synchronix  under a
private label with Tandem's own systems.  The Company's  sales to Tandem will be
made by purchase order. Therefore, the Company has no long-term commitments from
Tandem and Tandem generally may cancel orders upon appropriate written notice to
the Company.  There can be no assurance that orders from Tandem will continue at
their historic  levels or that the Company will be able to obtain any new orders
from Tandem.

     ESTABLISH  FIRST MOVER POSITION IN EMERGING  CLUSTERING  TECHNOLOGIES.  The
Company intends to establish  itself as the data storage  solution of choice for
emerging clustering technologies.  ECCS' technology is compatible with Microsoft
NT and UNIX clustered  environments.  This includes  Microsoft  Cluster  Server,
Microsoft's fault tolerant clustering  technology.  In addition,  the Company is
developing   controller  board  technology  for  Tandem's   ServerNet   product.
ServerNet, an interconnect clustering technology, allows all major components of
a system,  including  processors,  disk drives and I/O devices, to interact with
each


                                      -4-
<PAGE>

other without  processor  intervention.  The ServerNet  architecture  is an Open
System designcapable of managing data applications that incorporate voice, image
or video with  traditional  data. Other vendors who have announced their product
support of ServerNet are Compaq Computer Corp. ("Compaq"), NEC, Oracle, Dell and
Unisys.

     CONTINUE DIRECT SALES TO END USERS. As part of its  distribution  activity,
ECCS also sells directly to commercial  and  government  end users.  The Company
believes that  maintaining  direct contact with end users provides  direction to
its research and development effort and enables the Company to better respond to
market needs and expectations.  In addition, direct sales to end users generally
carry higher gross margins.

     PROTECT  TECHNOLOGICAL  EDGE.  ECCS intends to continue to improve upon its
current  products as well as develop new products for data storage.  The Company
believes that it possesses  substantial technical expertise gained through years
of internal  research  and  development.  ECCS  believes  that its  research and
development  efforts  have  produced a product line with  advanced  features and
functionality that provide it with a competitive advantage in the marketplace.

     The  Company  is  actively  pursuing  each  element  of  its  strategy.  No
assurances can be given, however, as to when or if these goals will be achieved.

PRODUCTS AND TECHNOLOGY

     The Company's  family of mass storage  enhancement  products  includes RAID
products,  external  disk,  optical and tape systems and internal  disk and tape
storage  devices  and storage  related  software.  The Company  designs its RAID
products to comply with standards  adopted by the industry and the RAID Advisory
Board.

     All the Company's  products are compatible  with the SCSI (Small  Computers
Systems  Interface)  protocol,  an industry  standard  interface for  peripheral
devices  supported by the vast  majority of computer  manufacturers,  as well as
with  SCSI 2, an  enhancement  of the SCSI  protocol  and  fiber  protocol.  The
Company's  products operate with many major Open Systems hardware  platforms and
operating systems environments.

     The Company is in the process of applying for ISO 9001 certification.  Such
certification reflects uniform,  industry-wide  standards of quality control for
manufacturing  data-storage  products.  The Company  intends to complete the ISO
9001 certification  application  process in 1998. There can be no assurance that
the Company will meet the  industry-accepted  standards  necessary to obtain ISO
9001 certification.

     Recent   advances  in  the  speed  and   capacity  of  servers  in  network
environments  often  have  exceeded  the  growth in  capability  of  traditional
off-the-shelf  storage  systems.  In  anticipation  of and in  response to these
industry  trends,  the Company has  focused its product  development  efforts on
advanced storage products including the following:

                                      -5-
<PAGE>


     SYNCHRONIX is a full feature product family designed for use in UNIX and NT
environments,   including   Microsoft   Cluster   Server   and  UNIX   clustered
environments.

     Synchronix  features a high  performance,  fault tolerant  architecture  to
satisfy   large-scale,   mission   critical   applications   for  Open   Systems
environments, redundant controllers, cross-platform and dual host support, cache
management,  hot swappable components and array-based automatic server failover,
and provides a scalable,  continuously  available  feature flexible data storage
solution.  The Synchronix family,  which supports RAID levels 0, 1, 3, 5 and 10,
also includes varying offerings of the Synchronix Storage Management  Subsystem,
which provide concurrent, user-definable implementations of RAID fault tolerance
and non-RAID  configurations.  The Synchronix  family of products provides ECCS'
customers with a GUI which allows for the monitoring and management of virtually
all systems functions, including configuration, cache policies, data rebuild and
load balancing. The Company has received the Fault Tolerant Disk System+ (FTDS+)
rating from the RAID Advisory Board for the  Synchronix  Storage  System.  ECCS'
product is one of only  three  products  to have  received  this fault  tolerant
rating at this  time.  Synchronix  can be  configured  to  provide  capabilities
ranging from just an array of independent  disks through multiple levels of RAID
and can  incorporate  advanced,  easy to utilize  storage  management and system
administration  capabilities.  Synchronix became  commercially  available in the
first quarter of 1996.

     SYNCHRONECTION-FT features a high performance,  fault tolerant network file
server coupled with all of the continuous  availability  features of Synchronix,
and provides complete network access in a centralized storage repository for all
network storage requirements. All active components including disk drives, power
supplies, fans and system controllers are fully redundant, hot-swappable and can
be monitored  on-line  through the GUI.  Synchronection  combines the  Company's
Synchronix product family with network software,  offering storage capability up
to 1.6 terabytes.  Synchronection,  due to its software  component,  offers more
flexibility  and a greater degree of  compatibility  with most network  systems,
reducing  the need for  customized  solutions  and  extensive  testing  periods.
Synchronection-FT became available during the second quarter of 1996.

     RAVEN UX 410 is a powerful,  flexible,  all-in-one server for departmental,
Internet and Intranet  requirements.  The Raven UX 410 offers high  performance,
with a  scalable  server  which  provides  for  continuous  availability  server
application with integrated RAID protection. The storage offered on the Raven UX
410 includes  disk,  tape,  CD-ROM and floppy devices and RAID with processor in
one small  desktop,  deskside or  rackmount  footprint.  The Raven UX 410 can be
optionally  configured  with industry  standard tape drives,  CD-ROMs and floppy
disks. The Company sells Raven UX primarily to the U.S. Air Force.

     Historically,  certain computer programs have been written using two digits
rather  than four to define  the  applicable  year,  which  could  result in the
computer  recognizing  a date using "00" as the year 1900  rather  than the year
2000. This, in turn,  could result in major system failures or  miscalculations,
and is generally  referred to as the "Year 2000  Problem." The Company  believes
that  each of  Synchronix,  Synchronection  - FT and  Raven UX 410 is Year  2000
compliant. There can be no assurances, however, that such products are Year 2000
compliant.  Although the Company  believes its products are Year 2000 compliant,
the purchasing  patterns of

                                      -6-
<PAGE>

customers and potential  customers may be affected byissues  associated with the
Year 2000 Problem.  As companies expend  significant  resources to correct their
current data storage  solutions,  these expenditures may result in reduced funds
available to purchase  products such as those offered by the Company.  There can
be no  assurance  that the Year  2000  Problem  will not  adversely  affect  the
Company's business, operating results and financial condition.

SALES AND MARKETING

     The Company  markets  its  products  through  alternate  channel  partners,
including OEMs, value added resellers ("VARs") and distributors, and directly to
Federal and commercial end users through its internal sales force.

     Of its current alternate  channel  partners,  the Company believes that its
key  strategic  relationships  with  Unisys and Tandem  represent  the  greatest
potential for growth.

     RELATIONSHIPS  WITH  UNISYS  AND  TANDEM.  Sales  under the  Company's  OEM
agreement with Unisys  commenced in 1996. All sales to Unisys were sales of mass
storage enhancement products. Such agreement, as subsequently amended, grants to
Unisys  exclusive  world-wide  rights  to sell  and  distribute  certain  of the
Company's proprietary products and a non-exclusive  world-wide right to sell and
distribute  certain other products.  The agreement provides that product pricing
shall  remain in  effect  throughout  the term of the  agreement  unless  market
conditions  dictate that the Company should provide more favorable pricing terms
to Unisys. The agreement is for an initial five year term beginning May 1, 1995,
and Unisys has the right to extend  such term for  successive  one year  periods
upon appropriate  written notice.  The agreement may be terminated under certain
conditions  and  Unisys  may,  subject  to  certain  conditions,  terminate  the
agreement  in the event that the Company  fails to timely  perform its  delivery
obligations under the agreement. The Company's sales are made by purchase order.
Therefore,  the  Company  has no  long-term  commitments  from Unisys and Unisys
generally  may cancel orders on 30 days notice.  There can be no assurance  that
orders from Unisys will  continue at their  historic  levels or that the Company
will be able to obtain any new orders from Unisys.

     On March 24,  1998,  the Company  announced  that it had signed a corporate
purchasing  agreement  with Tandem  pursuant to which  Tandem has the ability to
purchase Synchronix from the Company and resell Synchronix under a private label
with  Tandem's  own  systems.  The  Company's  sales to  Tandem  will be made by
purchase order. Therefore,  the Company has no long-term commitments from Tandem
and Tandem  generally may cancel orders upon  appropriate  written notice to the
Company.  There can be no  assurance  that orders  from Tandem will  continue at
their historic  levels or that the Company will be able to obtain any new orders
from Tandem.

     The Company and Tandem have  executed a  Memorandum  of  Understanding  for
development of a  ServerNet-based,  fault tolerant,  high  performance,  network
storage  system.  Tandem's  ServerNet  architecture  is a  system  area  network
technology  for high  speed,  high  availability  movement  of data for  servers
running  Windows NT. Other vendors who have 

                                      -7-
<PAGE>

announced their product support of ServerNet are Compaq,  NEC, Oracle,  Dell and
Unisys.  No revenues  were  generated  from the sale of ServerNet  in 1997.  The
Company  has  not  yet  enteredinto   any  definitive   agreement  with  Tandem.
Accordingly,  it is too  early to  accurately  determine  the  impact  that such
relationship will have on the Company's revenue in the future.

     In January  1998,  Compaq  announced  its  planned  acquisition  of Digital
Equipment Corp. ("Digital"). Compaq also owns Tandem. Presently, it is too early
to accurately determine the impact of Compaq's potential  acquisition of Digital
on the Company's direct sales to Tandem.

     DIRECT SALES. ECCS currently focuses its direct sales efforts on commercial
and government end user accounts.  The Company's  direct sales force consists of
fourteen  people.  The Company  conducts  sales and marketing from its corporate
headquarters in New Jersey and from its offices in Alpharetta, Georgia; Herndon,
Virginia;  San Jose,  California;  and Houston Texas.  The Company believes that
direct  sales and support can lead to better  account  penetration  and control,
better  communications  and  long-term  relationships  with end user  customers,
opportunities  for  follow-on  sales  to the  existing  customer  base  and more
accurate  identification  of current and future end user  customer  requirements
with which to guide product  specification  and development  efforts.  The sales
activities of the Company's  direct sales force include cold calling,  attending
trade  shows and  exhibitions  and  pursuing  sales  leads  provided  by current
customers.

     During  1996 the  Company  became a  subcontractor  to a prime  contractor,
Hughes Data Systems,  which,  along with Sun  Microsystems,  Inc., was awarded a
contract  by the U.S.  Air Force.  The  Company  uses its direct  sales force to
market to the U.S. Air Force. There are no minimum purchase requirements.  There
can be no assurance that there will be additional sales under this contract.

CUSTOMER SUPPORT

     The Company also provides  technical  support  services to OEMs (third tier
support) and to end users.  The  Company's  technical  support  specialists  are
divided into three "tiers" or "levels" of support, and are thus 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.  The Company tracks service reports through a customer database which
maintains  current  status  reports  as well  as  historical  logs  of  customer
interaction.

     The Company has also established a Professional  Services organization that
provides,  on a contract  basis, a variety of services,  including  hardware and
software installation, training, configuration analysis, integration testing and
application  development.  The Professional  Services organization also provides
pre- and post-sales support.

COMPETITION

     ECCS is engaged in fields within the data processing industry characterized
by  a  high  level  of  competition.   Many  established  companies,   including
manufacturers of computers,

                                      -8-
<PAGE>

systems integrators and manufacturers of mass storage  enhancement  products and
networking  products  compete with the Company.  Many of such  competitors  have
resources greater  thanthose of the Company.  There can be no assurance that the
Company will be able to continue to compete  successfully  with  existing or new
competitors.

     ECCS also  believes it  distinguishes  itself from its  competitors  on the
basis of the combination of its technical expertise, its product uniqueness, its
systems integration  services and its service and customer support.  The Company
believes  it  distinguishes   itself  from  competitors  through  the  available
features, price and performance of its own mass storage enhancement products.

     The Company believes that the currently available  alternative mass storage
devices are not adequate substitutes with respect to the particular applications
addressed  by  the  Company's  products.  Such  alternatives  address  different
requirements for  characteristics  such as storage capacity,  data access speed,
reliability,  fault  tolerance  and  price/performance.  Most  computer  systems
companies and companies that offer memory enhancement  products also offer RAID,
mass  storage  and  backup  products  and   technologies,   or  are  undertaking
development  efforts,  which compete or may compete with the Company in the mass
storage  marketplace  for  Open  Systems-based  networked  computers,  including
companies  considerably  larger  and with  greater  resources  than those of the
Company. To the Company's best knowledge, current providers of RAID products and
technology in the Open Systems  marketplace  on an OEM basis and/or to end users
include,  among others,  EMC, Data General,  Digital and Hyundai's Symbios Logic
Division.  Many  larger  companies  currently  provide  RAID  solutions  for the
mainframe and mini-computer market segments. There can be no assurance that such
companies  will  not  enter  the  RAID   marketplace   for  Open   Systems-based
non-mainframe, non-mini-computer computers.

     In January  1998,  Compaq  announced its  intention to acquire  Digital,  a
competitor of the Company. In addition, in February 1998 Adaptec, Inc. announced
its intention to acquire Symbios Inc. A division of Symbios Inc. is a competitor
of the Company. Presently, it is too early to accurately determine the impact of
such potential acquisitions on the Company's competitive position.

     Competitive factors include relative  price/performance;  product features,
quality and reliability;  adherence to industry  standards;  financial strength;
and service,  support and reputation.  For certain of the Company's products, an
important factor in competition may be the timing of market  introduction of its
or its  competitors'  products,  relative time to market of products and product
availability. Accordingly, the relative speed with which the Company can develop
products and bring them to market also are important competitive factors.

MANUFACTURING AND SUPPLIERS

     ECCS relies on outside  manufacturers to manufacture and produce certain of
the Company's products for use in the Company's  proprietary systems, as well as
for the direct  sale to end users,  and  relies on outside  suppliers  to supply
subassemblies,   component  parts  and  computer  systems  for  resale.  Certain
components used in the Company's business are available

                                      -9-
<PAGE>

only from a limited number of sources.  Any delays in obtaining  component parts
could adversely affect the Company's results of operations. Manufacturing by the
Company consists primarily of light assembly,  systems integration,  testing and
quality  assurance.  The Company relies on independent  contractors  and outside
suppliers to manufacture subassemblies to the Company's specifications.  Each of
the Company's  products  undergoes  testing and quality  inspection at the final
assembly  stage.  The Company has not  experienced  material  problems  with its
proprietary systems  manufacturers or its suppliers of subassemblies.  There can
be no assurance,  however,  that material  problems will not arise in the future
that could significantly impede or interrupt the Company's business. Although no
assurances may be given,  the Company  anticipates  that its current  facilities
coupled  with  the  Company's  ability  to  hire  contract   manufacturers  will
adequately satisfy its manufacturing requirements for the foreseeable future.

     Significant  vendors to the Company  include  Unisys,  Bell  Microproducts,
Seagate  Technology  and  Anthem  Electronics,  Inc.  ("Anthem").  During  1997,
purchases  from these vendors  totaled $7.8 million or 32%, $4.2 million or 17%,
$3.3 million or 14% and $1.1 million or 5%, respectively, of the Company's total
purchases and, for 1996,  $4.3 million or 26%, $2.1 million or 13%,  $250,000 or
2% and $1.2 million or 7%, respectively, of the Company's total purchases.

     On June  27,  1995,  the  Company  entered  into a  Manufacturing  Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support  services.  Pursuant  to such  agreement,  Unisys  will  manufacture
certain of the Company's products for use in the Company's  proprietary  systems
as well as for the direct  sale to  end-users.  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 the Company to
Unisys.  The contract had an initial term of one year and  automatically  renews
for successive one year periods. The contract was automatically  renewed on June
27, 1997.  Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement  with written  notice,  provided,  however,  that if
Unisys  cancels the  agreement,  it shall be  obligated  to  continue  accepting
manufacturing  orders for a period of six months  thereafter.  In the event that
the Company terminates the agreement,  the Company shall be liable for inventory
procured to fill the Company's  orders.  The Company primarily relies on regular
trade  credit  with  open  terms  for the  financing  of  purchases  under  this
agreement.

     The Company has purchase order supply  arrangements with Bell Microproducts
and Anthem pursuant to which the Company orders on terms  negotiated at the time
of  each  such  order.  There  are  no  minimum  purchase  requirements.   These
arrangements are terminable by either party at any time.

RESEARCH AND DEVELOPMENT

     The  Company   participates  in  an  industry  that  is  subject  to  rapid
technological  changes,  and its ability to remain competitive depends on, among
other things,  its ability to anticipate such changes.  As a result, the Company
has devoted substantial resources to product development. The Company's research
and development expenditures were $2,289,000 in 1997, $1,466,000 in

                                      -10-
<PAGE>

1996  and  $1,303,000  in  1995,  of  which  $602,000,  $439,000  and  $180,000,
respectively,  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.

     A   substantial   portion  of  the  Company's   research  and   development
expenditures in 1996 were devoted to the continued development of its Synchronix
family of products. To a lesser extent, research and development expenditures in
1996 related to feature upgrades and advanced engineering of ECCS' other current
product and planned product lines. Research and development expenditures in 1997
related  to  the  Company's  continued  investment  in and  enhancements  to the
Company's current mass storage  enhancement  products.  Research and development
projects  for which the Company  expects to devote  resources in the near future
relate  to:  (i)  the  establishment  of a new  technology  center;  (ii) a next
generation of the  Synchronix  family of products;  (iii) the  development  of a
distributed file system storage architecture; (iv) new interface connectivities;
(v) customized  OEM products;  and (vi) the  development of a ServerNet  product
with Tandem.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     Proprietary protection for the Company's technological  know-how,  products
and product  candidates  is important to its business.  The Company  relies upon
patents,  trade  secrets,  know-how and continuing  technological  innovation to
develop and  maintain  its  competitive  position.  The Company also relies on a
combination  of  copyright  and  trade  secret  protection  and   non-disclosure
agreements  to establish  and protect its  proprietary  rights.  The Company has
filed numerous patent  applications  covering  various aspects of its Synchronix
product  family.  There can be no  assurance  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,  there can be no assurance  that any patents that may be issued to the
Company,  or which the  Company  may  license  from third  parties,  will not be
challenged,  invalidated or circumvented,  or that any rights granted thereunder
will  provide  proprietary  protection  to the  Company.  Although  the  Company
continues to implement protective measures and intends to defend its proprietary
rights,  policing  unauthorized  use of the Company's  technology or products is
difficult and there can be no assurance that these measures will be successful.

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

     The Company has  registered  trademarks  for RAID 10  PERFORMANCE  MANAGER,
INTELLIGENT REBUILD,  SPLIT MIRROR,  EXAMODULE,  SYNCHRONIX,  INVERSE MIRRORING,
SYNCHRONECTION   and  SPLIT  VOLUME.  The  Company  has  applied  for  trademark
registration  for  SYNCHRONISM  and EASY BACKUP.  There can be no assurance that
trademarks will be issued for such applications.

                                      -11-
<PAGE>

     Since 1989,  the Company has required that all new  employees,  consultants
and contractors execute  non-disclosure  agreements as a condition of employment
or  engagement  by the Company.  There can be no  assurance,  however,  that the
Company can limit  unauthorized  or wrongful  disclosures  of  unpatented  trade
secret information.

SEASONALITY

     The  Company's   operating   results  are  affected  by  seasonal  factors,
particularly  the  spending  fluctuations  of its  largest  customers  including
Unisys, Tandem and the Federal government. Due to the relatively fixed nature of
certain of the  Company's  costs,  a decline in net sales in any fiscal  quarter
typically results in lower  profitability in that quarter.  The Company does not
expect such  spending  fluctuations  to be altered in the future.  A significant
reduction in orders from any of the  Company's  largest  customers  could have a
material adverse effect on the Company's results of operations.  There can be no
assurance  that the Company's  largest  customers  will continue to place orders
with the Company or that orders of its customers will continue at their previous
levels.

BACKLOG

     Because the Company  generally ships product within 30 days of receiving an
order, the Company does not customarily have a significant backlog and, based on
the timing of such product shipments, the Company does not believe that projects
in  process  at any one time are a reliable  indicator  or  measure of  expected
future revenue.

EMPLOYEES

     As of December 31, 1997, the Company  employed 96 persons,  of whom 20 were
engaged in marketing and sales; 32 in engineering and research and  development;
21 in operations,  including customer and technical  support,  manufacturing and
fulfillment;  6 in Professional Services; and 17 in finance,  administration and
management. None of the Company's employees are covered by collective bargaining
agreements.  The Company  believes  that it has been  successful  in  attracting
skilled and experienced  personnel;  however,  competition for such personnel is
intense.  The  Company's  future  success  will depend in part on its ability to
continue  to  attract,   retain  and  motivate   highly   qualified   technical,
manufacturing,   marketing  and  management  personnel.  The  Company  considers
relations with its employees to be good.

ITEM 2.    PROPERTIES.

     The Company leases  facilities in Tinton Falls,  New Jersey totaling 32,000
square  feet.  One lease covers  22,000  square feet and expires on December 31,
2000.  Such lease contains a renewal option for an additional  four-year term. A
second lease covers  10,000  square feet and expires on March 31, 1998,  with an
option to renew for an  additional  33 months.  In  December  1997,  the Company
exercised  such renewal option on  substantially  the same terms as the original
lease.  The leased  space in New Jersey is used for  research  and  development,
manufacturing,  quality assurance,  a substantial portion of sales and marketing
and  administration.  The  Company

                                      -12-
<PAGE>

also leases sales offices in Alpharetta,  Georgia; Herndon,  Virginia; San Jose,
California;  and Houston,  Texas.  The Company  believes that its facilities are
sufficient   to  meet  current   needs  for  its   research   and   development,
manufacturing,   quality   assurance,   sales,   marketing  and   administrative
requirements.

ITEM 3.    LEGAL PROCEEDINGS.

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

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

     Not applicable.


                                      -13-
<PAGE>

                                     PART II

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

     The Company's common stock,  $.01 par value (the "Common Stock") was listed
on the Nasdaq National  Market (the "National  Market") from June 14, 1993, when
the Company effected its initial public  offering,  until May 29, 1996, on which
date the Nasdaq Stock Market,  Inc.  delisted the Common Stock from the National
Market due to the Company's  inability to obtain an exception to the shareholder
approval  requirement  in  connection  with the  Company's  issuance and sale of
Cumulative  Convertible  Preferred  Stock,  Series C (the  "Series  C  Preferred
Stock") in May 1996. Effective May 29, 1996, the Common Stock of the Company was
listed on the Nasdaq  SmallCap  Market (the  "SmallCap  Market").  The Company's
Common  Stock is traded  on the  SmallCap  Market  under the  symbol  ECCS.  The
following table sets forth,  for each of the quarters listed below, the high and
low sales  prices  per share of Common  Stock as  reported  by (i) the  National
Market for the  quarter  ended  March 31,  1996 and for the period from April 1,
1996 through May 28, 1996; and (ii) the SmallCap Market for each of the quarters
ended June 30, 1996 (commencing May 29, 1996) through December 31, 1997.

             NATIONAL MARKET: QUARTER ENDED              HIGH     LOW
             ------------------------------              ----    -----
             March 1996 .............................    3.25    1.75
             June 1996 (through May 28, 1996) .......    3.875   1.875

             SMALLCAP MARKET: QUARTER ENDED              HIGH     LOW
             ------------------------------              ----    -----

             June 1996 (commencing May 29, 1996) ....    3.875   2.50
             September 1996 .........................    3.625   2.00
             December 1996 ..........................    4.75    2.25
             March 1997 .............................    5.50    3.625
             June 1997 ..............................    6.00    4.125
             September 1997 .........................    8.50    4.25
             December 1997 ..........................    9.75    5.00


     The prices shown above represent  quotations among securities  dealers,  do
not include  retail  markups,  markdowns or  commissions  and may not  represent
actual transactions.

     On February 27, 1998,  the last sales price of the Common Stock as reported
by  the  SmallCap  Market  was  $4.00  per  share.  The  approximate  number  of
shareholders of record on February 27, 1998 was 196.

     The Company has never  declared or paid any dividends on Common Stock.  The
Company  intends to retain any earnings to fund future  growth and the operation
of its business and, therefore, does not anticipate paying any cash dividends in
the  foreseeable  future.  The Company's  factoring  facility  with  NationsBanc
Commercial  Corporation  ("NCC")  restricts the

                                      -14-
<PAGE>

Company's  ability to pay certain dividends (not including the dividends paid to
the holders of the Company's convertible preferred stock upon the closing of the
Company's  follow-on  public offering in August 1997 (the  "Offering"))  without
NCC's prior written consent.  Effective  December 1, 1997, The Finova Group Inc.
("Finova")  acquired the Company's line of credit  facility with AT&T Commercial
Finance Corporation ("AT&T-CFC").  Such credit facility prohibits the payment of
dividends.  AT&T-CFC  waived such  prohibition  in connection  with the dividend
payments made to the holders of the Company's  convertible  preferred stock upon
the consummation of the Offering.  For a discussion of the dividends paid to the
holders  of  the  Company's   convertible  preferred  stock,  see  "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Liquidity  and Capital  Resources."  For a  discussion  of the change in lenders
under such  credit  facility,  see  "Management's  Discussion  and  Analysis  of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."

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

     No underwriter was employed by the Company in connection with the issuances
and sales of the  securities  described  above.  The Company  believes  that the
issuances  and  sales  of all of  the  foregoing  securities  were  exempt  from
registration  under either (i) Section 4(2) of the  Securities  Act of 1933,  as
amended (the "Act") as transactions not involving any public  offering,  or (ii)
Rule 701 under the Act as transactions  made pursuant to a written  compensatory
benefit  plan or pursuant to a written  contract  relating to  compensation.  No
public offering was involved and the securities were acquired for investment and
not with a view to  distribution.  Appropriate  legends  will be  affixed to the
stock certificates issued upon the exercise of such options.  All recipients had
adequate access to information about the Company.


                                      -15-
<PAGE>

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA.

     The selected consolidated  financial data for the five years ended December
31, 1997,  are derived from the  Company's  audited  financial  statements.  The
following  should  be  read  in  conjunction  with  the  consolidated  financial
statements  and notes  thereto  and  "Management's  Discussion  and  Analysis of
Financial  Condition  and Results of  Operations"  appearing  elsewhere  in this
Annual Report on Form 10-K.

<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                                  -----------------------------------------------------
                                                   1997         1996       1995       1994(2)      1993
                                                  ------       ------     ------      -------     ------
                                                        (In thousands, except per share amounts)

Statement of Operations Data:
<S>                                             <C>         <C>         <C>         <C>         <C>     
Net sales ...................................   $ 34,001    $ 22,604    $ 31,174    $ 42,738    $ 51,574
  Cost of sales .............................     24,226      15,165      23,256      36,563      38,144
                                                --------    --------    --------    --------    --------
Gross profit ................................      9,775       7,439       7,918       6,175      13,430
  Selling, general and
     administrative expenses ................      6,838       6,907       9,967      12,415      10,444
  Research and development
     expenses ...............................      1,687       1,027       1,123         978         758
                                                --------    --------    --------    --------    --------
Operating income (loss) .....................      1,250        (495)     (3,172)     (7,218)      2,228
  Net interest expense ......................         28         274         487         764         586
                                                --------    --------    --------    --------    --------
Income (loss) before extraordinary item......      1,222        (769)     (3,659)     (7,982)      1,642
Extraordinary item ..........................        120        --          --          --          --
                                                --------    --------    --------    --------    --------
Income (loss) from operations
  before provision (benefit) for income
  taxes .....................................      1,102        (769)     (3,659)     (7,982)      1,642
  Provision (benefit) for
     income taxes ...........................       --          --          --        (1,192)        531
                                                --------    --------    --------    --------    --------
Net income (loss) ...........................      1,102        (769)     (3,659)     (6,790)      1,111
  Preferred dividends .......................        192         248          79        --            58
                                                --------    --------    --------    --------    --------
Net income (loss) applicable
  to common shares ..........................   $    910    $ (1,017)   $ (3,738)   $ (6,790)   $  1,053
                                                ========    ========    ========    ========    ========
Net income per share
  before extraordinary item-basic ...........   $   0.16    $   --      $   --      $   --      $   --
Net income (loss) per
  share - basic(1) ..........................   $   0.14    $  (0.23)   $  (0.88)   $  (1.63)   $   0.34
Net income (loss) per share before
  extraordinary item - diluted ..............   $   0.12    $  (0.23)   $  (0.88)   $  (1.63)   $   0.30
Net income (loss) per share - diluted(1) ....   $   0.11    $  (0.23)   $  (0.88)   $  (1.63)   $   0.30
Weighted average common shares
  outstanding basic .........................      6,702       4,346       4,232       4,160       3,095
Weighted average common shares
  outstanding diluted .......................     10,035       4,346       4,232       4,160       3,510

Balance Sheet Data:
Cash ........................................   $ 11,625    $  4,393    $  1,514    $  1,670    $    134
Working capital .............................     15,260       4,280       1,134       2,932      10,115
Total assets ................................     24,992      14,552      12,435      21,507      33,948
Loans payable ...............................      1,031       1,762       1,849       4,089       4,803
Series B redeemable
  convertible preferred stock ...............       --          --         1,794        --          --
Shareholders' equity ........................     17,643       6,177       2,122       5,673      12,373
</TABLE>

----------
(1)        The net income  (loss) per share  amounts for all  periods  have been
           calculated in accordance with SFAS No. 128, EARNINGS PER SHARE.

(2)        Includes  $380,000  related to the write-down of certain  capitalized
           software,   $374,000  related  to  employee   termination  costs  and
           $3,500,000 of inventory adjustments.

                                      -16-
<PAGE>

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

OVERVIEW

     ECCS provides  intelligent  solutions to store,  protect and access mission
critical  information  for the Open  Systems  and related  markets.  The Company
designs,  manufactures and sells high  performance,  fault tolerant data storage
solutions for a wide range of customer requirements.

     From its founding  until 1994,  the  Company's  principal  business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business.  During 1994, as a result of AT&T's acquisition of NCR
and  subsequent  change in its  purchasing  policies,  the  Company  undertook a
product  development  initiative  to  reposition  the  Company as a provider  of
proprietary mass storage enhancement  products.  In 1995, the Company's sales of
its  proprietary  products  exceeded  its sales as a VAR due to both  increasing
sales of its own products and  decreasing  sales as a VAR.  Beginning in 1996, a
substantial  portion of the Company's  revenues has been generated from sales of
its own products.

     The  Company's  revenues are  generated  from three  primary  sources:  (i)
revenues derived from sales of mass storage enhancement products,  which include
sales of all ECCS mass storage  enhancement  products,  including the Synchronix
family of products, and sales of certain third party component products that are
incorporated into such mass storage enhancement systems; (ii) revenues generated
by the Company as a VAR which include the Company's sales to AT&T business units
for non-storage  related products;  and (iii) revenues derived from services and
other revenue which include professional services and maintenance contracts. The
Company believes that revenues  generated by the Company as a VAR, which include
sales to AT&T business units of non-storage related products, will be minimal in
the future.

     The following table sets forth, for the periods  indicated,  the percentage
of net sales  derived  from each of the product  groupings  the Company  uses to
analyze sales and revenue:



                                                       Year Ended December 31,
                                                       -----------------------
                                                        1997     1996     1995
                                                        -----    -----    -----

    ECCS mass storage enhancement products
       (including all ECCS proprietary products and
       certain third party component products)........  92.5%    80.0%    44.9%

     Value added resales .............................   1.1%     8.3%    40.0%

     Services and other revenues .....................   6.4%    11.7%    15.1%


     The  year to year  percentage  increases  in  sales  by the  Company  of is
proprietary  systems, as well as the year to year percentage  decreases in sales
by the Company in its  capacity as a VAR are due,  primarily,  to the  Company's
repositioning  as a provider of its own  proprietary  mass  storage  enhancement
systems including storage subsystems.

                                      -17-
<PAGE>

     Most of the Company's  proprietary products are manufactured under contract
by Unisys  pursuant to the  Company's  specifications.  In  accordance  with the
Company's  instructions,  Unisys  ships the  finished  product  directly  to the
Company's   customers.   The  Company  believes  that  by  outsourcing   certain
manufacturing  requirements,  the Company  benefits from the greater  purchasing
power of the  manufacturers,  reduction  of  inventory  carrying  costs  and the
avoidance of certain investments in plant, property and equipment. Product sales
revenue is generally  recognized upon product shipment.  Periodically,  however,
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.

     The Company's cost of revenues relating to product sales consists primarily
of the costs of purchased material,  direct labor and related overhead expenses,
and  amortization of capitalized  software.  An increase in proprietary  product
sales  combined with the  anticipated  continued  reduction in the sale of third
party product,  which typically carries lower margins, is expected to lower cost
of revenues as a percentage of sales.  Costs of revenues related to services are
comprised primarily of direct labor and related overhead expenses.

     The Company's  OEM sales to date have been  primarily to Unisys and Tandem.
In March 1997, the Company  commenced sales of products to Tandem for resale. On
March 24, 1998, the Company announced that it had signed a corporate  purchasing
agreement  with  Tandem  pursuant  to which  Tandem has the  ability to purchase
Synchronix  from the Company and resell  Synchronix  under a private  label with
Tandem's own  systems.  The  Company's  sales to Tandem will be made by purchase
order.  Therefore,  the Company  has no  long-term  commitments  from Tandem and
Tandem  generally  may cancel  orders  upon  appropriate  written  notice to the
Company.  There can be no  assurance  that orders  from Tandem will  continue at
their historic  levels or that the Company will be able to obtain any new orders
from Tandem.  In addition,  in January  1997,  the Company and Tandem  announced
their  intent to develop a RAID storage  connectivity  for a System Area Network
for the Open  Systems  market.  The  Company and Tandem are seeking to develop a
native  ServerNet  system  connectivity  for  Synchronix  for  departmental  and
enterprise  clusters.  No revenues were generated from this  arrangement  during
1997.  There can be no assurances  that a definitive  agreement  will be reached
with Tandem.

     The  profitability of any particular  quarter is significantly  affected by
the relative sales levels of each of the Company's primary sales channels:  OEM,
Federal  and  commercial.  Gross  margins  on  products  shipped  to  commercial
customers generally provide higher margins,  followed by OEM and Federal. To the
extent that the Company is successful in increasing  its sales of Synchronix and
Synchronection  to the commercial  market directly and through OEM arrangements,
the Company believes gross margins should improve accordingly.

     Selling,  general and  administrative  (SG&A) expenses consist of salaries,
commissions and travel costs for sales and marketing personnel,  trade shows and
expenses  associated  with the Company's  management,  accounting,  contract and
administrative functions. The Company anticipates that SG&A spending levels will
decrease as a percentage of sales to the extent sales to

                                      -18-
<PAGE>

OEMs increase as a percentage of sales.  Sales to OEMs typically  absorb much of
the  administrative  burden otherwise  incurred by the Company.  Since 1994, the
Company has increased its research and  development  activity in connection with
the  development  of Synchronix  and  Synchronection.  Research and  development
expenses  consist  primarily of salaries and related  overhead  expenses paid to
engineers and programmers.  Research and development expenses are anticipated to
increase substantially,  in the near future, to enable the Company to update and
expand upon its existing  product  offerings  and to integrate its products into
systems of future OEMs.

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations contains forward looking statements that involve risks and
uncertainties,  many of which may be beyond the Company's control.  See "Forward
Looking Statements."

RESULTS OF OPERATIONS

     The following table sets forth for the periods  indicated certain financial
data as a percentage of net sales.

<TABLE>
<CAPTION>

                                                           Year Ended December 31,
                                                          ------------------------
                                                           1997     1996      1995
                                                          -----    -----     -----

<S>                                                       <C>      <C>       <C>   
   Net sales ........................................     100.0%   100.0%    100.0%

     Cost of sales ..................................      71.3     67.1      74.6
                                                          -----    -----     -----
   Gross profit .....................................      28.7     32.9      25.4

    Selling, general & administrative expenses ......      20.1     30.6      32.0
    Research & development expenses .................       5.0      4.5       3.6
                                                          -----    -----     -----
   Operating income (loss) ..........................       3.6     (2.2)    (10.2)

    Net interest expense ............................        .1      1.2       1.5
                                                          -----    -----     -----
   Income (loss) before extraordinary item ..........       3.5     (3.4)    (11.7)

   Extraordinary item ...............................        .3     --        --
                                                          -----    -----     -----
   Income (loss) before benefit for income taxes ....       3.2     (3.4)    (11.7)

    Benefit for income taxes ........................      --       --        --
                                                          -----    -----     -----
   Net income (loss) ................................       3.2%    (3.4)%   (11.7)%
                                                          =====    =====     =====
</TABLE>

     Comparison of Years Ended December 31, 1997 and 1996
     ----------------------------------------------------

     NET SALES

     Net  sales  increased  by  approximately  $11,397,000  or  50%,  in 1997 as
compared to net sales in 1996.  Sales of the Company's  proprietary mass storage
enhancement systems,  including sales of certain third party component products,
accounted for 93% and 80% of net sales in 1997 and 1996, respectively.  Sales by
the Company in its capacity as a VAR accounted for 1% and

                                      -19-
<PAGE>

8% of net  sales in 1997 and 1996,  respectively.  Services  and other  revenues
accounted  for 6% and 12% of net  sales  in 1997  and  1996,  respectively.  The
increase in 1997 net sales  resulted  primarily from an increase in sales of the
Company's  mass  storage  enhancement   systems,   including  sales  to  Federal
customers, as well as sales through relationships with OEMs, offset, in part, by
a decrease in value added resales.

     Sales to the U.S.  Air Force  through a Federal  integrator  accounted  for
approximately 44.3% and 25.2% of net sales in 1997 and 1996,  respectively.  The
Company  expects  that sales to the U.S.  Air Force will  continue to comprise a
significant portion of the Company's net sales for the next 12 months. There can
be no  assurance  that the U.S.  Air Force will  continue to  purchase  from the
Company at historical levels, if at all.

     Sales to alternate channel partners accounted for approximately 37% and 38%
of net  sales in 1997 and 1996,  respectively.  Sales to the  Company's  primary
alternate  channel  partner,  Unisys,  accounted  for  approximately  18% of the
Company's net sales in 1997. There can be no assurance that Unisys will continue
to place  orders with the  Company or that  orders from Unisys will  continue at
their previous levels.

     During the first quarter of 1997, the Company commenced selling products to
Tandem.  Sales to Tandem  accounted for  approximately  13% of the Company's net
sales in 1997. In January 1998 Compaq, the corporate owner of Tandem,  announced
its  planned  acquisition  of  Digital.  For  a  discussion  of  such  potential
acquisition see "Business -- Sales and Marketing and -- Competition."

     GROSS PROFIT

     The Company's gross profit increased by approximately $2,336,000 in 1997 to
approximately $9,775,000, from $7,439,000 in 1996. The increase in 1997 resulted
from increased  sales volume.  The Company's gross margin as a percentage of net
sales  decreased  to 29% in 1997,  as compared to 33% in 1996.  The  decrease in
gross margin percentage is due primarily to the higher volume of sales to the U.
S. Air Force  through a Federal  integrator  during 1997, a large  proportion of
which  consist  of  third  party   components   integrated  with  the  Company's
proprietary mass storage enhancement products.  Third party components generally
have lower gross margins than the Company's proprietary products.

      OPERATING EXPENSES

     Selling,  general  and  administrative  expenses  decreased  by  $69,000 to
$6,838,000 in 1997 from $6,907,000 in 1996. Selling,  general and administrative
expenses  decreased as a percentage  of net sales  representing  20% and 31% for
1997 and 1996,  respectively.  Such decreases were primarily due to higher sales
volume in 1997. Salaries,  commissions,  bonuses,  employee benefits and payroll
taxes  were the  largest  components  of  selling,  general  and  administrative
expenses,  accounting  for  70%  and 66% of such  expenses  in  1997  and  1996,
respectively.

     Research and  development  expenses  increased in 1997 by $660,000 or 64.3%
from  $1,027,000  in 1996.  This  increase  is due  primarily  to the  Company's
continued investment in

                                      -20-
<PAGE>

and  enhancements to the Company's  current mass storage  enhancement  products.
Such expenses for 1997 represented approximately 5.0% of the Company's net sales
and,   including  the  amount  capitalized  in  accordance  with  SFAS  No.  86,
represented  approximately  6.6%  of  the  Company's  net  sales.  Research  and
development  projects for which the Company  expects to devote  resources in the
near future relate to: (i) the establishment of a new technology center;  (ii) a
next generation of the Synchronix family of products; (iii) the development of a
distributed file system storage architecture; (iv) new interface connectivities;
(v) customized  OEM products;  and (vi) the  development of a ServerNet  product
with Tandem. The Company believes that the anticipated  increase in its research
and  development  investment  could  adversely  affect earnings in the first six
months of 1998.

     NET INTEREST EXPENSE

     Net  interest  expense for 1997  decreased by $246,000 as compared to 1996,
due principally to a reduction in the borrowings  against the Company's accounts
receivable  line of credit and an increase in interest income due to higher cash
balances resulting from cash generated by the Company's Offering.

     EXTRAORDINARY ITEM

     The  extraordinary  item for 1997 consists  primarily of a one-time  charge
incurred in connection with the termination of the Company's  financing facility
with its former lender.

     Comparison of Years Ended December 31, 1996 and 1995
     ----------------------------------------------------

     NET SALES

     Net sales decreased by $8,570,000, or 28%, in 1996 as compared to net sales
in 1995. The decrease in 1996 resulted  primarily from a decrease of value added
resales to $1,865,000 or 8% of sales in 1996,  from  $12,487,000 or 40% of sales
in 1995. Such decrease  reflects the continued decline in sales to AT&T business
units  and   substantial   reductions  in  system  orders  and  shipments  which
incorporated  NCR  products.  The decline  was, in part,  offset by increases in
sales of the Company's proprietary mass storage systems, including sales to both
Federal customers and OEMs, such as Unisys.

     Sales to the  Federal  government  represented  30% and 21% of net sales in
1996 and 1995,  respectively.  The U.S. Air Force,  an end user of the Company's
products,  purchased  $5.7 million of products  through  federal  integrators in
1996.  Of such  amount,  sales  pursuant to a contract  with Hughes Data Systems
accounted for $3.7 million,  or 16%, of net sales. There are no minimum purchase
requirements  under this contract.  There can be no assurance that there will be
additional sales under this contract.

     Sales to alternate channel partners  accounted for approximately 38% and 8%
of net  sales in 1996 and 1995,  respectively.  Sales to the  Company's  primary
alternate channel partner,  Unisys, accounted for 30% of the Company's net sales
in 1996.  All sales to Unisys,  which began in 1996,  were sales of mass storage
enhancement products. Effective May 1, 1995, the Company

                                      -21-
<PAGE>

entered into an OEM agreement  with Unisys.  For a  description  of the terms of
such agreement, see "Business -- Sales and Marketing."

     In 1996 and 1995, purchases by multiple AT&T business units represented 14%
and 51%,  respectively of all purchases from the Company.  All such sales by the
Company to AT&T were made on an individual  purchase order basis and, therefore,
there were and are no ongoing  written  commitments by AT&T to purchase from the
Company.

     GROSS PROFIT

     The Company's  cost of sales  includes  primarily the cost of the Company's
own and  other  vendors'  products  and  systems.  The  Company's  gross  profit
decreased  by $479,000 or 6% in 1996 as compared to the gross  profit  earned in
1995.  The  decrease in 1996  resulted  from a decrease in net sales,  offset by
higher gross  margins due to a favorable  change in product  mix. The  favorable
change in product mix was primarily due to increased  sales of the Company's own
proprietary  systems,  which typically have higher gross margins.  The Company's
gross margin percentage increased to 33% in 1996 as compared to 25% in 1995 as a
result of an increase in sales of the  Company's  proprietary  products  and the
higher gross margins associated with these products.

     OPERATING EXPENSES

     Selling, general and administrative expenses decreased over $3 million from
1995 levels, and, as a percentage of net sales, to 31% in 1996, a decrease of 1%
from the prior year.  This  decrease was mainly  attributable  to a reduction in
commissions due to lower sales volume,  in addition to  management's  efforts in
controlling these expenses. Salaries, commissions,  bonuses and related employee
benefits and payroll taxes were the largest  components of selling,  general and
administrative  expenses.  During 1996 and 1995, the Company's staff was reduced
by 8% and 13%, respectively, largely through attrition.

     In 1996, net research and  development  expenses (after  capitalized  costs
related  to  internally  developed  software  in  accordance  with SFAS No.  86)
decreased by $96,000 or 9% from  $1,123,000  in 1995.  Research and  development
expenses represented 5% and 4% of net sales in 1996 and 1995, respectively. Such
percentage  increase  reflects the Company's product  development  initiative to
reposition  the Company as a provider of  proprietary  mass storage  enhancement
products.

     NET INTEREST EXPENSE

     In 1996, net interest expense decreased by $213,000 or 44% from $487,000 in
1995. The decrease was due  principally to a combination of decreased  inventory
carrying levels offset by an increase in interest income.

                                      -22-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Since  1994,  the  Company has funded its  operations  primarily  from cash
generated by operations  augmented  with funds from  borrowings  under a line of
credit and inventory  financing  and through  private and public sales of equity
securities.  On December 31, 1997, the Company's cash balance was  approximately
$11.6 million.

     On August 25,  1997,  the Company  consummated  the  Offering of  2,500,000
shares of its Common Stock at a price to the public of $4.50 per share.  Of such
shares,  2,254,018  were  issued and sold by the  Company  and an  aggregate  of
245,982 were sold by certain selling shareholders (the "Selling  Shareholders").
On September 15, 1997 and as part of the Offering,  an additional 375,000 shares
were  issued and sold by the Company at a price to the public of $4.50 per share
to cover over-allotments.  The Company received $4.19 per share, before offering
expenses,   resulting  in  net  proceeds,   after  underwriting   discounts  and
commissions and other expenses,  of approximately  $10,595,000.  The Company did
not receive any proceeds from the sale of shares by the Selling Shareholders.

     Upon the closing of the  Offering,  all  1,600,000  Shares of 6% Cumulative
Redeemable  Convertible  Preferred  Stock,  Series B (the  "Series  B  Preferred
Stock") were  automatically  converted  into  1,770,590  shares of the Company's
Common  Stock,  and all  500,000  shares of the  Series C  Preferred  Stock were
automatically converted into 2,000,000 shares of the Company's Common Stock.

     Prior to the closing of the  Offering,  dividends on the Series B Preferred
Stock  accumulated  at the rate of $0.02  per share per  quarter.  In  addition,
interest of 6% per annum  accrued on any unpaid  dividends.  On August 21, 1997,
the Board of Directors declared a cash dividend  representing  cumulative unpaid
dividends  on the  Series B  Preferred  Stock for the period  from May 19,  1995
through and including August 25, 1997.

     In addition, prior to the closing of the Offering,  dividends on the Series
C  Preferred  Stock  accumulated  at the rate of $0.09 per  share  per  quarter.
Interest  of 6% per annum also  accrued on any unpaid  dividends.  On August 21,
1997, the Board of Directors  declared a cash dividend  representing  cumulative
unpaid  dividends  on the Series C  Preferred  Stock for the period from May 17,
1996 through and including August 25, 1997.

     The Company  used a portion of the net  proceeds  from the  Offering to pay
approximately  $317,000 and $242,000 of cumulative dividends and interest to the
holders  of the  Series B  Preferred  Stock and the  Series C  Preferred  Stock,
respectively.  Such payments  represented both of the cash dividends declared by
the Board of Directors on August 21, 1997.

     Upon  the  closing  of the  Offering  and  the  subsequent  receipt  of the
cumulative  dividends declared by the Board of Directors on August 21, 1997, the
rights of the  holders of the Series B  Preferred  Stock and Series C  Preferred
Stock  relating to the  accumulation  of dividends,  the payment of  accumulated
dividends,  the payment of interest on accumulated  dividends and the right to a
preference payment in the event of any liquidation, dissolution or winding-up of
the Company ceased.

                                      -23-
<PAGE>


     Net cash used in operations  was $782,000 in 1997,  while net cash provided
by operating  activities was $693,000 in 1996. Such use of cash in 1997 resulted
primarily  from an  increase  in  accounts  receivable.  Net  cash  provided  by
financing activities was $9,425,000 in 1997 and $2,412,000 in 1996. The increase
in net cash provided by financing  activities in 1997  resulted  primarily  from
cash generated by the Company's Offering.

     The Company used $809,000 and $642,000 for the  acquisition of equipment by
direct  purchase  during  1997 and 1996,  respectively.  In 1997 and  1996,  the
Company acquired equipment under capital leases of $0 and $78,000, respectively,
and made  payments  under capital  leases of $88,000 and $29,000,  respectively.
Total capital expenditures for 1998 are expected to be approximately $1,000,000,
although  such  amounts  are not  subject  to formal  commitments.  The  Company
anticipates  that  such  expenditures  will  include  the  purchase  of  capital
equipment for research and development  and general  corporate use. There are no
other material commitments for capital expenditures currently  outstanding.  Net
borrowings under the Company's accounts receivable financing facility used funds
of $731,000 and $87,000 for 1997 and 1996, respectively.

     The  Company's  working  capital  was $15.3  million  and $4.3  million  at
December 31, 1997 and 1996, respectively.

     Until July 30, 1997,  the Company had a financing  facility  with  Fidelity
Funding of California,  Inc.  which  provided for maximum  eligible (as defined)
accounts  receivable  financing  of $7 million at the prime  lending rate with a
0.5%  transaction  fee applied to each  borrowing.  In addition,  the  agreement
required  a  commitment  fee of 0.5% of the total  available  financing  amount,
payable  annually on each  anniversary  date of the agreement.  The  obligations
under such agreement were  collateralized  by substantially all of the assets of
the Company. The agreement did not contain any cash withdrawal restrictions, any
requirements  for maintenance of specific  financial ratios or minimum net worth
or limitations on dividend  payments.  Such financing facility was terminated in
July,  1997 in connection  with the  consummation of the Company's new financing
facility with NCC and all  outstanding  amounts have been repaid.  In connection
with the termination of such financing facility, the Company incurred a one-time
extraordinary charge of $120,000.

     On July  9,  1997,  the  Company  entered  into a full  recourse  factoring
facility with NCC which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85% 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 NCC by providing the Company sixty
days prior written  notice)  beginning on July 30, 1997. The  obligations of the
Company under such  agreement are  collateralized  by  substantially  all of the
assets of the Company. As of December 31, 1997 the Company's balance outstanding
under this full recourse factoring facility was approximately $1.0 million.

     On May 17, 1996, the Company's  direct pay line of credit with AT&T-CFC was
terminated  and its general  line of credit with  AT&T-CFC  was  increased to $2
million. The

                                      -24-
<PAGE>

agreement with AT&T-CFC contains  covenants  relating to net worth, total assets
to debt and total  inventory  to debt.  Such  general  line of  credit  has been
extended to March 31, 1998.  The Company uses this line of credit to augment its
purchasing  ability with  various  vendors.  The Company  relied on this line of
credit  for 9.0%  and  7.5% of its  inventory  acquisitions  in 1997  and  1996,
respectively,  the majority of which were purchases from Bell  Microproducts and
Tech Data  Corporation.  The  Company's  obligations  under the  agreement  with
AT&T-CFC  arecollateralized  by substantially  all of the assets of the Company.
The maximum  amount,  during the preceding  twelve months,  that the Company has
drawn under such general line of credit has been approximately $1.7 million.  As
of December 31, 1997, the Company had no balance  outstanding  under this credit
line, and available  credit under such line towards future  inventory  purchases
was approximately $2.0 million.

     Effective  December 1, 1997,  Finova acquired the Company's general line of
credit with  AT&T-CFC.  The Company  intends to renew its general line of credit
with Finova upon its  expiration  on March 31,  1998.  There can be no assurance
that the Company will be able to retain its current access to credit with Finova
on commercially  reasonable  terms. In the event the Company does not renew such
general  line of credit,  the Company  plans to  negotiate  credit with  certain
vendors, on open terms, at the time of purchase from such vendors.  There can be
no assurance that the Company will be able to negotiate  credit on  commercially
reasonable terms at the time of such purchases.

     AT&T-CFC and NCC had entered into an intercreditor  subordination agreement
with respect to their relative  interests in substantially  all of the Company's
assets.  Effective  December 1, 1997,  Finova  entered  into such  intercreditor
subordination agreement with NCC.

     The Company's  agreement  with NCC  restricts the Company's  ability to pay
certain dividends without NCC's prior written consent.  The Company's  agreement
with Finova  prohibits the payment of dividends.  AT&T-CFC,  the previous lender
under the Finova line of credit,  waived such prohibition in connection with the
dividend payments made to the holders of the Series B Preferred Stock and Series
C Preferred Stock.

     On June 6, 1997,  the  Company  loaned its  President  and Chief  Executive
Officer an aggregate amount of $250,000 on a secured basis.

     During 1997, the Company utilized  $222,000 of net operating loss carryover
("NOL") for federal tax purposes.  The Company has a NOL for Federal  income tax
purposes of  approximately  $7,174,000,  which will begin to expire in 2009. The
Company also has  research and  development  tax credit  carryovers  for Federal
income tax  purposes  of  approximately  $226,000  which will begin to expire in
2009.  In  addition,   the  Company  has  alternative  minimum  tax  credits  of
approximately  $68,000.  These credits can be carried forward indefinitely.  The
Company  experienced  a change in ownership in 1996 as defined by Section 382 of
the Internal Revenue Code. Accordingly,  future use of these NOLs and income tax
credits may be limited.

     The Company also has  approximately  $9,974,000 of state NOL  carryforwards
which will begin to expire in 2001 and state research and development tax credit
carryforwards of $219,000 as of December 31, 1997.

                                      -25-
<PAGE>

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

     Subsequent  to the end of the year,  in  mid-February  1998,  the Company's
Board of Directors approved resolutions authorizing the expenditure of up to one
million  dollars  for  research  and  new  product  development,  including  the
development  of  a  distributed  file  system  storage  architecture  and  other
significant enhancements to the current Synchronix product family.

     Historically,  certain computer programs have been written using two digits
rather  than four to define  the  applicable  year,  which  could  result in the
computer  recognizing  a date using "00" as the year 1900  rather  than the year
2000. This, in turn,  could result in major system failures or  miscalculations,
and is generally  referred to as the "Year 2000  Problem." In December 1997, the
Company began developing an implementation plan for a new enterprise  management
system to  internally  resolve the Year 2000  Problem.  The  Company  expects to
complete  such  implementation  by the  first  quarter  of 1999.  As part of the
process,  the  Company  is  currently  evaluating  options  with  respect to the
replacement of certain  hardware and software to make its computer  systems Year
2000  compliant.  Presently,  the  Company  does  not  believe  that  Year  2000
compliance  will result in material  investments  by the  Company,  nor does the
Company anticipate that the Year 2000 Problem will have material adverse effects
on the business operations or financial performance of the Company. There can be
no assurance,  however, that the Year 2000 Problem will not adversely affect the
Company's business, operating results and financial condition.

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

     The  Company's   operating   results  are  affected  by  seasonal  factors,
particularly  the  spending  fluctuations  of its  largest  customers  including
Unisys, Tandem and the Federal government. Due to the relatively fixed nature of
certain of the  Company's  costs,  a decline in net sales in any fiscal  quarter
typically results in lower  profitability in that quarter.  The Company does not
expect such  spending  fluctuations  to be altered in the future.  A significant
reduction in orders from any of the  Company's  largest  customers  could have a
material adverse effect on the Company's results of operations.  There can be no
assurance  that the Company's  largest  customers  will continue to place orders
with the Company or that orders of its customers will continue at their previous
levels.

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."

                                      -26-
<PAGE>


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

     Not applicable.


                                      -27-
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
1998 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 1998  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 1998
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 1998 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.

                                      -28-
<PAGE>


                                     PART IV

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

     (a) (1) Financial Statements.

          Reference is made to the Index to Financial Statements and Schedule on
          Page F-1.

     (a) (2) Financial Statement Schedule.

          Reference is made to the Index to Financial Statements and Schedule on
          Page F-1.

     (a) (3) Exhibits.

          Reference is made to the Exhibit Index on Page 32.

     (b) Reports on Form 8-K.

          None.


                                      -29-
<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 25th day of March,
1998.


                                          ECCS, INC.



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



                                      -30-
<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               March 25, 1998
---------------------         Executive Officer and
Gregg M. Azcuy                Director (Principal
                              Executive Officer)
                              
/s/ Louis Altieri             Vice President,                March 25, 1998
------------------            Finance and 
Louis Altieri                 Administration
                              (Principal Financial
                              and Accounting Officer)
                              
/s/ Michael E. Faherty        Chairman of the Board          March 25, 1998
-------------------------     and Director
Michael E. Faherty             

/s/ Gale R. Aguilar           Director                       March 25, 1998
---------------------
Gale R. Aguilar

/s/ James K. Dutton           Director                       March 25, 1998
---------------------
James K. Dutton

/s/ Donald E. Fowler          Director                       March 25, 1998
---------------------
Donald E. Fowler

/s/ Frank R. Triolo           Director                       March 25, 1998
---------------------
Frank R. Triolo

/s/ Thomas I.Unterberg        Director                       March 25, 1998
---------------------
Thomas I. Unterberg


                                      -31-
<PAGE>
                                      


                           EXHIBIT INDEX

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

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

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

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

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

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

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

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

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



                                      -32-
<PAGE>
                                      

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

   10.1   Form of  Non-Competition  and  Non-Disclosure  Agreement  executed  by
          substantially  all  optionholders.  (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.)



                                      -33-
<PAGE>
                                      

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

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

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

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

   10.12* Senior Staff Change In Control  Severance And  Incentive  Compensation
          Pay Agreement by and between the Company and David J. Boyle.

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

   10.14* 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.)

   10.15* 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.)

   10.16* 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.)

   10.17* Indemnification  Agreement  as of July  8,  1996  by and  between  the
          Company  and  David  J.  Boyle.  (Incorporated  by  reference  to  the
          Company's Quarterly Report on Form 10-Q for the quarterly period ended
          September 30, 1996, filed on November 14, 1996.)

   10.18* 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).


                                      -34-
<PAGE>

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

   10.19* 1995 Employee  Stock  Purchase Plan of the Company.  (Incorporated  by
          reference to the Company's Form S-8, Registration  Statement under the
          Securities Act of 1933 (File No.  33-93480) which became  effective on
          June 14, 1995.)

   10.20   Manufacturing Services Agreement, dated June 15, 1995, by and between
           the Company and Unisys 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).

   10.21   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).

   10.22   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).

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

   23      Consent of Ernst & Young LLP.

   27      Financial Data Schedule.

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

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


                                      -35-
<PAGE>


                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE


                                                                 Page
                                                                 ----

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

Consolidated Balance Sheets as of
  December 31, 1997 and 1996.....................................F-3

Consolidated Statements of Operations for
  each of the three years in the period ended
  December 31, 1997..............................................F-4

Consolidated Statements of Shareholders'
  Equity for each of the three years in
  the period ended December 31, 1997.............................F-5

Consolidated Statements of Cash Flows
  for each of the three years in the period
  ended December 31, 1997........................................F-6

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

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


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



                                      F-1
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ECCS, Inc.

     We have audited the accompanying  consolidated balance sheets of ECCS, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended  December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14 (a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
ECCS, Inc. and  subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting  principles.  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.

                                        ERNST & YOUNG LLP

MetroPark, New Jersey
February 6, 1998


                                      F-2
<PAGE>

<TABLE>

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


                                                                                        December 31,
                                                                                   --------------------
                                                                                      1997        1996
                                                                                   --------    --------
Assets
Current Assets:
<S>                                                                                <C>         <C>     
   Cash and cash equivalents ...................................................   $ 11,625    $  4,393
   Accounts receivable, less allowance for doubtful accounts of $297 in
     1997 and $184 in 1996 .....................................................      5,737       3,162
   Inventories .................................................................      4,596       4,680
   Prepaid expenses and other receivables ......................................        506         257
                                                                                   --------    --------
                                                                                     22,464      12,492
Property, plant and equipment (net) ............................................      1,372       1,190
Capitalized software (net) .....................................................        811         814
Other assets ...................................................................        345          56
                                                                                   --------    --------
                                                                                   $ 24,992    $ 14,552
                                                                                   ========    ========
Liabilities and Shareholders' Equity
Current Liabilities:
   Loans payable ...............................................................   $  1,031    $  1,762
   Payable to AT&T Commercial ..................................................       --            64
   Current portion of capital lease obligations ................................         11          91
   Accounts payable ............................................................      3,833       4,061
   Accrued expenses and other ..................................................      1,385         986
   Warranty ....................................................................        534         414
   Customer deposits, advances and other credits ...............................        410         834
                                                                                   --------    --------
                                                                                      7,204       8,212
Capital lease obligations, net of current portion ..............................       --             8
Deferred rent ..................................................................        145         155
                                                                                   --------    --------
                                                                                      7,349       8,375
                                                                                   --------    --------
Shareholders' Equity:
   Preferred stock, $.01 par value per share, Authorized, 3,000,000 shares;
   Series B cumulative convertible preferred stock, Issued and outstanding,
    none at December 31, 1997 and 1,600,000 shares
    at December 31, 1996 .......................................................       --            16
   Series C cumulative convertible preferred stock, Issued and outstanding,
     none at December 31, 1997 and 500,000 shares
     at December 31, 1996 ......................................................       --             5
   Common stock, $.01 par value per share, Authorized, 20,000,000 shares;
     Issued and  outstanding, 10,918,188 shares and 4,432,216 shares
     at December 31, 1997 and December 31, 1996, respectively ..................        109          44
   Capital in excess of par value - preferred ..................................       --         4,522
   Capital in excess of par value - common .....................................     25,615      10,254
   Deficit .....................................................................     (8,081)     (8,664)
                                                                                   --------    --------

                                                                                     17,643       6,177
                                                                                   --------    --------
         Total Liabilities and Shareholders' Equity ............................   $ 24,992    $ 14,552
                                                                                   ========    ========

                            See notes to consolidated financial statements.
</TABLE>

                                      F-3
<PAGE>
                                   ECCS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)

<TABLE>
                                                     Year Ended December 31,
                                                 --------------------------------
                                                    1997       1996       1995
                                                 --------    --------    --------

<S>                                              <C>         <C>         <C>     
Net sales ....................................   $ 34,001    $ 22,604    $ 31,174

Cost of sales ................................     24,226      15,165      23,256
                                                 --------    --------    --------

  Gross profit ...............................      9,775       7,439       7,918

Operating expenses:
  Selling, general & administrative ..........      6,838       6,907       9,967
  Research & development .....................      1,687       1,027       1,123
                                                 --------    --------    --------
                                                    8,525       7,934      11,090

Operating income (loss) ......................      1,250        (495)     (3,172)

  Net interest expense .......................         28         274         487
                                                 --------    --------    --------

Income (loss) before extraordinary item ......      1,222        (769)     (3,659)

  Extraordinary item .........................        120        --          --
                                                 --------    --------    --------

Net income (loss) ............................   $  1,102    $   (769)   $ (3,659)
                                                 --------    --------    --------

  Preferred dividends ........................        192         248          79
                                                 --------    --------    --------

Net income (loss) applicable to
  common shares ..............................   $    910    $ (1,017)   $ (3,738)
                                                 ========    ========    ========

EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) per common share before
  extraordinary item - basic .................   $   0.16    $  (0.23)   $  (0.88)
                                                 ========    ========    ========

Extraordinary charge .........................   $  (0.02)   $   --      $   --
                                                 ========    ========    ========

Net income (loss) per common
  share - basic ..............................   $   0.14    $  (0.23)   $  (0.88)
                                                 ========    ========    ========

EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Net income (loss) per common  share before
  extraordinary item - diluted................   $   0.12    $  (0.23)   $  (0.88)
                                                 ========    ========    ========

Extraordinary charge .........................   $  (0.01)   $   --      $   --
                                                 ========    ========    ========

Net income (loss) per common
  share - diluted ............................   $   0.11    $  (0.23)   $  (0.88)
                                                 ========    ========    ========

Weighted average number of common and
  dilutive shares - basic ....................      6,702       4,346       4,232
                                                 ========    ========    ========

Weighted average number of common and
  dilutive shares - diluted ..................     10,035       4,346       4,232
                                                 ========    ========    ========
</TABLE>

                 See notes to consolidated financial statements.

                                      F-4
<PAGE>


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

<TABLE>


                                        Common Stock
                                                                  Capital in
                                                                  Excess of
                                      Shares      Amount          Par Value
                                     --------    -----------     -----------
                                     <S>         <C>            <C>    

Balance at January 1, 1995 .....     4,216,350   $   42         $     9,867

Issuance of stock and
  stock option exercises .......        61,625        1                 107

Net loss .......................          --         --                --   
                                   -----------   -----------     -----------

Balance at December 31, 1995 ...     4,277,975       43               9,974


Reclassification of Series B
  Convertible Preferred Stock ..          --         --                --   

Issuance of Series C Convertible
  Preferred Stock ..............          --         --                --   

Issuance of stock and stock
  option exercises .............       154,241        1                 280

Net loss .......................          --         --                --   
                                   -----------   -----------     -----------

Balance at December 31, 1996 ...     4,432,216   $   44          $   10,254

Conversion of Series B and
  Series C Convertible
  Preferred Stock to
  Common .......................     3,770,590       38               4,505

Issuance of stock ..............     2,629,018       26              10,569
Issuance of stock and
  stock option exercises .......        86,364        1                 287

Dividends paid .................          --         --                --   

Net income .....................          --         --                --   
                                   -----------   -----------     -----------

Balance at December 31, 1997 ...    10,918,188   $  109          $   25,615
                                   ===========   ===========     ===========

</TABLE>
                               See notes to consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

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

                                                                 Preferred Stock

                                                                  Capital in        Retained       Total
                                                                  Excess of         Earnings    Shareholders'
                                      Shares         Amount       Par Value         (Deficit)      Equity
                                   -----------    -----------    -----------    -----------    -----------

<S>                                <C>            <C>            <C>            <C>            <C>        
Balance at January 1, 1995 .....          --      $      --      $      --      $    (4,236)   $     5,673

Issuance of stock and
  stock option exercises .......          --             --             --             --              108

Net loss .......................          --             --             --           (3,659)        (3,659)
                                   -----------    -----------    -----------    -----------    -----------

Balance at December 31, 1995 ...          --             --             --           (7,895)         2,122

Reclassification of Series B
  Convertible Preferred Stock ..     1,600,000             16          1,778           --            1,794

Issuance of Series C Convertible
  Preferred Stock ..............       500,000              5          2,744           --            2,749

Issuance of stock and stock
  option exercises .............          --             --             --             --              281

Net loss .......................          --             --             --             (769)          (769)
                                   -----------    -----------    -----------    -----------    -----------

Balance at December 31, 1996 ...     2,100,000    $        21    $     4,522    $    (8,664)   $     6,177

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

Issuance of stock ..............          --             --             --             --           10,595
Issuance of stock and
  stock option exercises .......          --             --             --             --              288

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

Net income .....................          --             --             --            1,102          1,102
                                   -----------    -----------    -----------    -----------    -----------

Balance at December 31, 1997 ...   $      --      $      --      $      --      $    (8,081)   $    17,643
                                   ===========    ===========    ===========    ===========    ===========

                               See notes to consolidated financial statements.

</TABLE>

                                      F-5
<PAGE>


                                   ECCS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

<TABLE>

                                                                    Years Ended December 31,
                                                               ---------------------------------
                                                                  1997        1996       1995
                                                               --------    ---------   ---------
<S>                                                            <C>         <C>         <C>      
Cash flows from operating activities:
Net income (loss) ..........................................   $  1,102    $   (769)   $ (3,659)
   Adjustments to reconcile net income (loss) to net
    cash (used in) provided by operating activities:
     Extraordinary item ....................................        120        --          --
     Depreciation and amortization .........................      1,232       1,311       1,017
     Gain on sale of Illinois property .....................       --          (145)       --
     (Increase) decrease in accounts receivable ............     (2,575)       (395)      5,249
     Decrease in inventories ...............................         84         174       1,734
     Income taxes refunded .................................       --          --           854
     (Increase) decrease in prepaid expenses and other .....       (538)         43         535
     Decrease in payable to AT&T Commercial ................        (64)     (1,190)     (2,547)
     Increase (decrease) in accounts payable, accrued
        liabilities and other ..............................        281       1,820      (2,446)
     (Increase) decrease in customer deposits ..............       (424)       (156)         49
                                                               --------    --------    --------
Net cash (used in) provided by operating activities ........       (782)        693         786
                                                               --------    --------    --------
Cash flows from investing activities:
   Additions to property, plant and equipment ..............       (809)       (642)       (318)
   Gross proceeds from sale of Illinois property ...........       --           855        --
   Additions to capitalized software .......................       (602)       (439)       (180)
                                                               --------    --------    --------
Net cash used in investing activities ......................     (1,411)       (226)       (498)
                                                               --------    --------    --------
Cash flows from financing activities:
   Borrowings under revolving credit agreement .............     18,198      15,379      28,006
   Repayments under revolving credit agreement .............    (18,929)    (15,466)    (30,246)
   Repayment of capital lease obligations ..................        (88)        (29)        (94)
   Repayment of mortgage payable ...........................       --          (502)        (12)
   Gross proceeds from issuance of preferred stock .........       --         3,000       2,000
   Expenses for issuance of preferred stock ................       --          (251)       (206)
   Proceeds from exercise of employee stock options and
     issuance of common stock ..............................     10,883         281         108
   Payment of dividends ....................................       (519)       --          --
   Cash used for extinguishment of debt ....................       (120)       --          --
                                                               --------    --------    --------
Net cash provided by (used in) financing activities ........      9,425       2,412        (444)
                                                               --------    --------    --------
Net increase (decrease) in cash and cash equivalents .......      7,232       2,879        (156)
Cash and cash equivalents at beginning of period ...........      4,393       1,514       1,670
                                                               --------    --------    --------
Cash and cash equivalents at end of period .................   $ 11,625    $  4,393    $  1,514
                                                               ========    ========    ========
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest .............................................   $    148    $    422    $    461
                                                               ========    ========    ========
</TABLE>

                         See notes to consolidated financial statements.

                                        
                                      F-6
<PAGE>

                                    
                                   ECCS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 1 -- THE COMPANY

     ECCS,  Inc.  ("ECCS" or the "Company")  provides  intelligent  solutions to
store,  protect and access mission critical information for the Open Systems and
related markets.  The Company designs,  manufactures and sells high performance,
fault tolerant data storage solutions for a wide range of customer requirements.

     From its founding  until 1994,  the  Company's  principal  business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business.  During 1994, as a result of AT&T's acquisition of NCR
and  subsequent  change in its  purchasing  policies,  the  Company  undertook a
product  development  initiative  to  reposition  the  Company as a provider  of
proprietary  mass  storage  enhancement  products.  A number  of  products  have
resulted from these efforts  including  Synchronix and  Synchronection,  a fault
tolerant network file server.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
and its  subsidiaries.  All significant  intercompany  balances and transactions
have been eliminated.

     CASH AND CASH EQUIVALENTS

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

     INVENTORIES

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

     PROPERTY, PLANT AND EQUIPMENT

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

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


                                      F-7
<PAGE>

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

     INVESTMENT IN REAL ESTATE

     In 1993, the Company purchased real estate,  including a building and land,
in  Romeoville,   Illinois  for  $753,000.  Depreciation  on  the  building  was
recognized  on a  straight  line basis over the  estimated  useful  life of 31.5
years.  On March 19, 1996,  the Company sold such property for gross proceeds of
$855,000.  These  proceeds  were used, in part, to pay off the mortgage in full.
Net  cash  proceeds  to the  Company,  after  repayment  of the  mortgage,  were
approximately $270,000.

     SOFTWARE DEVELOPMENT COSTS

     The Company capitalizes  software  development costs in accordance with the
Statement  of  Financial  Accounting  Standards  ("SFAS") No. 86. Such costs are
capitalized  after  technological   feasibility  has  been  demonstrated.   Such
capitalized  amounts are amortized  commencing  with product  introduction  on a
straight-line  basis  utilizing the estimated  economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales and aggregated $605,000, $544,000 and $307,000 for 1997, 1996 and 1995,
respectively.  At December 31, 1997, the Company has  capitalized  $2,615,000 of
software development costs, of which $1,804,000 has been amortized.

     IMPAIRMENT OF LONG-LIVED ASSETS

     In 1996, the Company  adopted SFAS No. 121,  "Accounting for the Impairment
of Long-Lived  Assets and for Long-Lived Assets to be Disposed Of", which had no
effect on its financial condition or results of operations.  The Company records
impairment  losses on  long-lived  assets used in  operations  or expected to be
disposed of when events and circumstances  indicate that 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.

                                      F-8
<PAGE>

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

     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 can  realistically  only be addressed  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.

     RESEARCH AND DEVELOPMENT COSTS

     Research  and  development  costs are  expensed  as  incurred,  except  for
software development costs which are accounted for as noted 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 is measured as the excess,  if any, of the quoted market price of
the  Company's  stock at the date of the grant over the amount an employee  must
pay to acquire the stock.

     PER SHARE INFORMATION

     In 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 128,
Earnings per Share.  SFAS No. 128 replaced the  calculation of primary and fully
diluted  earnings per share with basic and diluted  earnings  per share.  Unlike
primary  earnings  per share,  basic  earnings  per share  excludes any dilutive
effects of options,  warrants and convertible  securities.  Diluted earnings per
share is very similar to the  previously  reported  fully  diluted  earnings per
share. All

                                      F-9
<PAGE>

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

earnings  per share  amounts  for all  periods  have been  presented,  and where
appropriate, restated to conform to the SFAS No. 128 requirements.

     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 PRONOUNCEMENT

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures  about Segments of an Enterprise and Related  Information,  which is
effective for years  beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial reports.  It also established  standards for related disclosures about
products and services,  geographic  areas, and major customers.  SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997, and therefore the Company will adopt the new requirements retroactively in
1998.  Management  has not  completed  its review of SFAS No. 131,  but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.

NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS

     On June  27,  1995,  the  Company  entered  into a  Manufacturing  Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support  services.  Pursuant  to such  agreement,  Unisys  will  manufacture
certain of the Company's products for use in the Company's  proprietary  systems
as well as for the direct  sale to  end-users.  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 the Company to
Unisys.  The contract had an initial term of one year, and automatically  renews
for successive one year periods. The contract was automatically  renewed on June
27, 1996.  Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement  with written  notice,  provided,  however,  that if
Unisys  cancels the  agreement,  it shall be  obligated  to  continue  accepting
manufacturing  orders for a period of six months  thereafter.  In the event that
the Company terminates the agreement,  the Company shall be liable for inventory
procured to fill the Company's  orders.  The Company primarily relies on regular
trade  credit  with  open  terms  for the  financing  of  purchases  under  this
agreement.  The Company's  purchases under this agreement  totaled $7.8 million,
$4.3 million and zero in 1997, 1996 and 1995, respectively.

     Sales to the Company's primary alternate channel partner, Unisys, accounted
for 18.0% of the  Company's  net  sales in 1997 and 30.0% in 1996.  All sales to
Unisys, which began in 1996,

                                      F-10
<PAGE>

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

were sales of mass storage  enhancement  products.  Effective  May 1, 1995,  the
Company  entered  into  an  OEM  agreement  with  Unisys.  Such  agreement,   as
subsequently  amended,  grants to Unisys exclusive world-wide rights to sell and
distribute certain of the Company's  proprietary  products,  and a non-exclusive
world-wide  right to sell and distribute  certain other products.  The agreement
provides that product pricing shall remain in effect  throughout the term of the
agreement unless market conditions  dictate that the Company should provide more
favorable  pricing  terms to Unisys.  The  agreement is for an initial five year
term  beginning  May 1, 1995 and  Unisys  has the right to extend  such term for
successive one year periods upon appropriate  written notice.  The agreement may
be  terminated  under  certain  conditions  and Unisys  may,  subject to certain
conditions,  terminate  the  agreement  in the event that the  Company  fails to
timely perform its delivery  obligations under the agreement.  While the Company
has an OEM agreement with Unisys that defines the terms of the sales and support
services provided thereunder,  this agreement does not include specific quantity
commitments.

     Federal systems entity sales, which are comprised of sales into the Federal
government,  represented  48%, 30% and 21%, of net sales in 1997, 1996 and 1995,
respectively.  During  1996  the  Company  became  a  subcontractor  to a  prime
contractor,  Hughes Data  Systems,  which was awarded a United  States Air Force
Workstation Contract, along with Sun Microsystems, Inc.

     The United States Air Force,  an end user of the Company's  products  which
purchases such products through Worldwide Technologies,  Hughes Data Systems and
other government  contractors,  purchased $15 million of products, or 44% of the
Company's  total net sales in 1997.  In 1996 such sales  totaled $3.7 million or
16% of total sales. There are no minimum purchase requirements.

     In  1997,  1996  and  1995,  purchases  by  multiple  AT&T  business  units
represented 3%, 14% and 51%, respectively of all purchases from the Company. All
such sales by the  Company  to AT&T were made on an  individual  purchase  order
basis and, therefore,  there were and are no ongoing written commitments by AT&T
to purchase  from the Company.  The Company  historically  sold its mass storage
enhancement  systems and provided  systems  integration  services to AT&T,  and,
acting as a value added  reseller  ("VAR") of NCR  products,  sold NCR  computer
hardware  systems to multiple AT&T business units for either their own use as an
end user or for resale by such business  units to third  parties.  In 1997,  the
Company  purchased less than 1% of its inventory  acquisitions from NCR. In 1996
and 1995, purchases from such vendor represented 7.5% and 37%, respectively,  of
the Company's inventory purchases.

     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.  1997
purchases from Bell Microproducts totaled

                                      F-11
<PAGE>

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

approximately  $4.2  million  or  17.2% of all  purchases  and,  in  1996,  such
purchases totaled $2.1 million or 12.7% of all purchases.

     Anthem Electronics, Inc. ("Anthem") is a significant vendor to the Company.
The Company's  purchases from Anthem totaled $1.1 million, or 4.6%, $1.2 million
or 7.3% and $3.1 million or 12% of the Company's  total  purchases in 1997, 1996
and 1995,  respectively.  Such purchases consisted primarily of disk drives. The
Company purchases from Anthem on an open account basis.

NOTE 4 -- INVENTORIES

     Inventories consist of the following (in thousands):


                                                                 December 31,
                                                             -------------------
                                                              1997          1996
                                                             ------       ------

Purchased parts ......................................       $2,496       $2,181
Finished goods .......................................        2,808        3,280
                                                             ------       ------
                                                              5,304        5,461
      Less: inventory valuation reserve ..............          708          781
                                                             ------       ------
                                                             $4,596       $4,680
                                                             ======       ======



NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following (in thousands):


                                                                  December 31,
                                                               -----------------
                                                                 1997      1996
                                                               ------     ------

Property .................................................     $  464     $  490
Computer equipment .......................................      3,808      3,018
Vehicles .................................................         47         47
Leasehold improvements ...................................        373        350
Equipment under capital leases ...........................        368        367
                                                               ------     ------
                                                                5,060      4,272
Less accumulated depreciation and amortization,
   including $346 and $331 relating to equipment
   under capital leases for the years ended
   December 31, 1996 and December 31, 1995,
   respectively ..........................................      3,688      3,082
                                                                ------     -----
                                                                $1,372    $1,190
                                                                ======    ======


NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL

     Until July 30, 1997,  the Company had a financing  facility  with  Fidelity
Funding of California,  Inc.  which  provided for maximum  eligible (as defined)
accounts  receivable  financing  of $7 million at the prime  lending rate with a
0.5%  transaction  fee applied to each  borrowing.  In addition,  the  agreement
required  a  commitment  fee of 0.5% of the total  available  financing  amount,
payable annually on each anniversary date of the agreement. The weighted average
interest  rate on such  line was 7.3%,  11.5% and 11.0% in 1997,  1996 and 1995,
respectively.  The  obligations  under such  agreement  were  collateralized  by
substantially  all of the assets of the Company.  The  agreement did not contain
any cash withdrawal restrictions, any requirements for

                                      F-12
<PAGE>

NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL (CONTINUED)

maintenance of specific  financial ratios or minimum net worth or limitations on
dividend  payments.  Such  financing  facility was  terminated in July,  1997 in
connection with the  consummation  of the Company's new financing  facility with
NationsBanc Commercial Corporation ("NCC") and all outstanding amounts have been
repaid.  In connection  with the  termination  of such financing  facility,  the
Company incurred a one-time extraordinary charge of $120,000.

     On July  9,  1997,  the  Company  entered  into a full  recourse  factoring
facility with NCC which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85% 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 weighted  average  interest
on such line was 4.3% for the six months ended  December 31, 1997. The factoring
facility is for a period of three years  (unless  terminated by NCC by providing
the Company sixty days prior  written  notice)  beginning on July 30, 1997.  The
obligations  of  the  Company  under  such  agreement  are   collateralized   by
substantially  all of the assets of the  Company.  As of  December  31, 1997 the
Company's balance  outstanding under this full recourse  factoring  facility was
approximately $1.0 million.

     On May 17, 1996, the Company's  direct pay line of credit with AT&T-CFC was
terminated  and its general  line of credit with  AT&T-CFC  was  increased to $2
million.  The agreement with AT&T-CFC contains  covenants relating to net worth,
total assets to debt and total  inventory  to debt.  Such general line of credit
has been  extended to March 31,  1998.  The Company  uses this line of credit to
augment its purchasing ability with various vendors.  The Company relied on this
line of credit for 9% and 7.5% of its inventory  acquisitions  in 1997 and 1996,
respectively,  the majority of which were purchases from Bell  Microproducts and
Tech Data  Corporation.  The  Company's  obligations  under the  agreement  with
AT&T-CFC are  collateralized  by substantially all of the assets of the Company.
The maximum  amount,  during the preceding  twelve months,  that the Company has
drawn under such general line of credit has been approximately $1.7 million.  As
of December 31, 1997, the Company had no balance  outstanding  under this credit
line, and available  credit under such line towards future  inventory  purchases
was approximately $2.0 million.

     Effective December 1, 1997, The Finova Group Inc.  ("Finova")  acquired the
Company's general line of credit with AT&T-CFC.

     AT&T-CFC and NCC entered into an intercreditor subordination agreement with
respect  to their  relative  interests  in  substantially  all of the  Company's
assets.  Effective  December 1, 1997,  Finova  entered  into such  intercreditor
subordination agreement with NCC.

     The Company's  agreement  with NCC  restricts the Company's  ability to pay
certain dividends without NCC's prior written consent.  The Company's  agreement
with Finova  prohibits the payment of dividends.  AT&T-CFC,  the previous lender
under the Finova line of

                                      F-13
<PAGE>

NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL (CONTINUED)

credit, waived such prohibition in connection with the dividend payments made to
the holders of the Series B Preferred Stock and Series C Preferred Stock.

NOTE 7 -- MORTGAGE PAYABLE

     On July 20, 1993, the Company entered into a mortgage  agreement bearing 8%
interest with a bank for the  principal  amount of $529,250,  collateralized  by
property  located in Romeoville,  Illinois.  On March 19, 1996, the Company sold
such property for gross proceeds of $855,000 and used a portion of such proceeds
to repay the mortgage, in full.

NOTE 8 -- LEASES

     The Company has capitalized leases for certain  equipment.  The capitalized
lease  obligations  are  payable  through  the  first  quarter  of 1998 and bear
interest  at rates  ranging  from 7.2% to 19.45%.  In  addition,  the Company is
obligated through the year 2000 under non-cancelable operating leases for office
and warehouse  space. The leases provide for all real estate taxes and operating
expenses to be paid by the Company.  Under certain  leases,  the Company has the
option to renew for additional  terms at specified  rentals.  Rental expense for
such leases  approximated  $507,000,  $501,000  and $571,000 for the years ended
December 31, 1997, 1996 and 1995, 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, 1997 (in thousands):


                                                        Capitalized    Operating
                                                          Leases         Leases
                                                        -----------    ---------

1998 .................................................    $ 11         $  469
1999 .................................................      --            405
2000 .................................................      --            388
Thereafter ...........................................      --             --
                                                          ------       ------
Total minimum lease payments .........................      11         $1,262
                                                          ------       ======
Less amount representing interest ....................      --
                                                          ------
Present value of net minimum lease payments ..........    $ 11
                                                          ======


NOTE 9 -- CONVERTIBLE PREFERRED STOCK

     The Company has an authorized  class of 3,000,000 shares of Preferred Stock
which  may be  issued  by the  Board of  Directors  on such  terms and with such
rights,  preferences  and  designations  as the Board may determine.  On May 19,
1995, the Company  consummated a private  placement of 6% Cumulative  Redeemable
Convertible  Preferred Stock, Series B (the "Series B Preferred Stock") pursuant
to which the Company issued and sold to certain investors

                                      F-14
<PAGE>

NOTE 9 -- CONVERTIBLE PREFERRED STOCK (CONTINUED)

1,600,000  shares of Series B Preferred Stock at a price per share of $1.25. The
Series B Preferred Stock was redeemable by the Company, at its option, after one
year at $1.25 per share,  or $2 million in the  aggregate,  plus any accrued and
unpaid dividends. In addition, it was manditorily redeemable four years from the
date of issuance at the same  amounts.  On May 17, 1996,  the Series B Preferred
Stock was amended to delete the  mandatory  and optional  redemption  provisions
contained  therein.  As a result of the deletion of the  mandatory  and optional
redemption  provisions, the Series B Preferred Stock was reclassified to equity.

     Also on May 17, 1996, 500,000 shares of the Company's  Preferred Stock were
designated  as  Cumulative  Convertible  Preferred  Stock,  Series C  ("Series C
Preferred  Stock").  Of such shares,  462,512 were issued into escrow on May 17,
1996 at a price  per  share of  $6.00.  At any  time,  the  Series  C  Preferred
Shareholders  could convert their Series C Preferred Stock into Common Stock, at
the  initial  rate of four  shares  of Common  Stock for each  share of Series C
Preferred Stock.  The Company reserved  2,000,000 shares of Common Stock for the
conversion of the outstanding  Series C Preferred  Stock.  The 462,512 shares of
Series C Preferred  Stock and the proceeds  thereof were released from escrow on
May 25, 1996 upon  satisfaction of all applicable  conditions to release,  after
denial by Nasdaq of an exception to the shareholder  approval  requirement.  The
issuance of such shares of Series C Preferred Stock without shareholder approval
and  without  an  exception  to such  requirement  constituted  a breach  of the
Company's listing agreement with Nasdaq. Consequently,  the Company was delisted
from the National Market and is now listed on the SmallCap Market. The Company's
Board of Directors  had  determined  that the issuance of the shares of Series C
Preferred  Stock  without  shareholder  approval was necessary for the continued
financial viability of the Company.

     On May 30,  1996,  the Company  issued  directly to certain  investors  the
remaining  37,488  shares  of Series C  Preferred  Stock at a price of $6.00 per
share.

     In  connection  with the  issuance  of the  Series C  Preferred  Stock  and
pursuant to the  anti-dilution  provisions of the Series B Preferred  Stock, the
conversion ratio of the Series B Preferred Stock was adjusted.  As a result, the
Series B Preferred Stock was convertible into approximately  1,770,590 shares of
Common Stock.

     On August 25,  1997,  the Company  consummated  the  Offering of  2,500,000
shares of its Common Stock at a price to the public of $4.50 per share.  Of such
shares,  2,254,018  were  issued and sold by the  Company  and an  aggregate  of
245,982 were sold by certain selling shareholders (the "Selling  Shareholders").
On September 15, 1997 and as part of the Offering,  an additional 375,000 shares
were  issued and sold by the Company at a price to the public of $4.50 per share
to cover  over-allotments.  The Company  received net proceeds of  approximately
$10,595,000. The Company did not receive any proceeds from the sale of shares by
the Selling Shareholders.

                                      F-15
<PAGE>

NOTE 9 -- CONVERTIBLE PREFERRED STOCK (CONTINUED)

     Upon the closing of the  Offering,  all  1,600,000  Shares of 6% Cumulative
Redeemable  Convertible  Preferred  Stock,  Series B (the  "Series  B  Preferred
Stock") were  automatically  converted  into  1,770,590  shares of the Company's
Common  Stock,  and all  500,000  shares of the  Series C  Preferred  Stock were
automatically converted into 2,000,000 shares of the Company's Common Stock.

     Prior to the closing of the  Offering,  dividends on the Series B Preferred
Stock  accumulated  at the rate of $0.02  per share per  quarter.  In  addition,
interest of 6% per annum  accrued on any unpaid  dividends.  On August 21, 1997,
the Board of Directors declared a cash dividend  representing  cumulative unpaid
dividends  on the  Series B  Preferred  Stock for the period  from May 19,  1995
through and including August 25, 1997.

     In addition, prior to the closing of the Offering,  dividends on the Series
C  Preferred  Stock  accumulated  at the rate of $0.09 per  share  per  quarter.
Interest  of 6% per annum also  accrued on any unpaid  dividends.  On August 21,
1997, the Board of Directors  declared a cash dividend  representing  cumulative
unpaid  dividends  on the Series C  Preferred  Stock for the period from May 17,
1996 through and including August 25, 1997.

     The Company  used a portion of the net  proceeds  from the  Offering to pay
approximately  $317,000 and $242,000 of cumulative dividends and interest to the
holders  of the  Series B  Preferred  Stock and the  Series C  Preferred  Stock,
respectively.  Such payments  represented both of the cash dividends declared by
the Board of Directors on August 21, 1997.

NOTE 10 -- STOCK OPTION PLANS

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

THE 1989 STOCK OPTION PLAN

     Under the Company's  1989 Stock Option Plan, as amended,  900,000 shares of
common stock can be issued  through  incentive  stock options and  non-statutory
stock options. The incentive stock options allow designated full-time employees,
including  officers,  to purchase shares of common stock at prices equal to fair
market value at the date of grant.  For individuals who own more than 10% of the
stock of the  Company,  the option price of the shares may not be less than 110%
of the fair  market  value on the date of grant.  The  incentive  stock  options
expire five years from the date of the grant for  shareholders  owning more than
10% of the voting rights (as defined).  The  non-statutory  stock options may be
granted to full-time employees, including

                                      F-16
<PAGE>

NOTE 10 -- STOCK OPTION PLANS (CONTINUED)

officers and  non-employee  directors or  consultants at prices as determined by
the  Board  of  Directors.  The  stock  options  are  exercisable  over a period
determined by the Board of Directors. To date, no options have been granted with
a vesting period of more than five years.

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


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

Balance at January 1, 1995 .............    440,917    $   3.03
                                            -------   
   Options granted .....................    270,000    $   2.21
   Options exercised ...................    (16,375)   $   1.16
   Options canceled ....................    (99,625)   $   2.93
                                            -------  
Balance at December 31, 1995 ...........    594,917    $   2.73
                                            -------   
   Options granted .....................    310,559    $   2.76
   Options exercised ...................    (15,225)   $   3.31
   Options canceled ....................   (126,075)   $   3.22
                                            ------- 
Balance at December 31, 1996 ...........    764,176    $   2.65
                                            ------- 
   Options exercised ...................    (41,283)   $   2.49
   Options canceled ....................    (27,175)   $   2.67
                                            -------
Balance at December 31, 1997 ...........    695,718    $   2.66
                                            -------    
Options exercisable at December 31, 1997    347,470    $   2.44


     The weighted average remaining contractual life for the balance at December
31, 1997 in the 1989 Stock Option Plan is eight (8) years and the exercise price
range is $1.00 - $3.00.

     On October 6, 1994,  the Board of Directors  offered to reduce the exercise
price of certain options to the fair market value of the Company's  Common Stock
on such date. Upon  acceptance by the option  holders,  the vesting period began
from the date of the offer and the options  become  exercisable  ratably  over a
period of four years and expire ten years from the date of issuance.

1996 STOCK OPTION PLAN

     In June 1996,  the Board of  Directors of the Company  adopted,  subject to
shareholder  approval,  such approval  being  granted in July of 1996,  the 1996
Stock Plan.  Under the 1996 Stock Plan,  600,000  shares of common  stock can be
issued through  incentive stock options and  non-statutory  stock options and/or
stock purchase rights.  The incentive stock options allow designated  employees,
non-employee  directors and  consultants  to purchase  shares of common stock at
prices equal to fair market value at the date of grant.  For individuals who own
more than 10% of the stock of the  Company,  the option  price of the shares may
not be less  than  110% of the  fair  market  value on the  date of  grant.  The
incentive stock options expire five (5) years from

                                      F-17
<PAGE>

NOTE 10 -- STOCK OPTION PLANS (CONTINUED)

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 (5) years.

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

                                                  Options Outstanding
                                             ---------------------------
                                                             Weighted-Average
                                                  Shares       Exercise Price
                                                 -------     ----------------
Balance at January 1, 1995 ..................       --                --
                                                 -------- 
   Options granted ..........................     212,000        $   4.06
   Options exercised ........................       --                --
   Options canceled .........................       --                --
                                                 -------- 
Balance at December 31, 1996 ................     212,000        $   4.06
                                                 --------
Options exercisable at December 31, 1996 ....       --                --
   Options granted ..........................     238,500        $   6.28
   Options canceled .........................     (31,000)       $   4.80
                                                 --------
Balance at December 31, 1997 ................     419,500        $   5.28
                                                 --------
Options exercisable at December 31, 1997 ....      50,500        $   4.04


     The weighted average remaining contractual life for the balance at December
31, 1997 in the 1996 Stock Option Plan is nine (9) years and the exercise  price
range is $3.38 - $8.00.

     Subsequent  to the  end of the  year,  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 such options, to certain officers and employees, at an exercise
price of $4.00 per share.

NON-QUALIFIED STOCK OPTIONS

     On February 1, 1995,  306,000 common stock purchase options were granted by
the  Board  to  full-time  employees,  including  officers,  and a  non-employee
consultant.  The exercise price is $2.13, the fair market value of the Company's
Common Stock at the date of grant.  These options are exercisable  over a period
of four years and expire ten years from the date of issuance. These options were
granted  outside the Company's 1989 Stock Option Plan pursuant to  non-qualified
stock option agreements (the  "Non-Qualified  Agreements").  On May 19, 1995, in
connection  with the sale by the  Company  of  1,600,000  shares  of Series B 6%
Cumulative Redeemable  Convertible Preferred Stock (see Note 9), and pursuant to
an  anti-dilution  provision  contained in certain of such options granted to an
officer  of the  Company,  the number of options  granted  to such  officer  was
increased to 113,691.  The exercise price of the 113,691 options granted to such
officer was adjusted to $1.25,  the purchase price of the Series B 6% Cumulative
Redeemable

                                      F-18
<PAGE>

NOTE 10 -- STOCK OPTION PLANS (CONTINUED)

Convertible Preferred Stock. The anti-dilution provision expired on December 31,
1995. No anti-dilution provision was included in connection with the issuance of
the Series C Convertible Preferred Stock.

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



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

Balance at January 1, 1995 ..................     20,000         $   2.38
                                                ---------
   Options granted ..........................    339,691         $   1.83
   Options exercised ........................    (20,000)        $   2.38
   Options canceled .........................    (29,500)        $   2.13
                                                ---------
Balance at December 31, 1995 ................    310,191         $   1.80
                                                ---------
   Options granted ..........................    100,000         $   3.04
   Options exercised ........................    (10,250)        $   2.13
   Options canceled .........................    (57,750)        $   2.13
                                                ---------
Balance at December 31, 1996 ................    342,191         $   2.53
                                                ---------
   Options granted ..........................    498,400         $   8.01
   Options exercised ........................     (7,250)        $   2.13
   Options canceled .........................     (9,500)        $   5.22
                                                ---------
Balance at December 31, 1997 ................    823,841         $   5.82
                                                ---------
Options exercisable at December 31, 1997 ....    140,221         $   2.29
                                                ---------


     The weighted average remaining contractual life for the balance at December
31, 1997 under the  Non-Qualified  Agreements is 7 years and the exercise  price
range is $1.25 - $8.88.

     Subsequent  to the  end of the  year,  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 of 1996, the Board of Directors of the Company adopted, subject
to shareholder  approval,  such approval being granted in July of 1996, the 1996
Non-Employee  Directors  Stock  Option  Plan (the "1996  Non-Employee  Directors
Plan").  150,000  shares of Common  Stock can be issued  under such plan through
non-statutory stock options.  Under the terms of the 1996 Non-Employee Directors
Plan, each  non-employee  director who first becomes a member of the Board after
approval of such plan by the shareholders of the Company, shall be automatically
granted, on the date such person becomes a member of the Board, an option to

                                      F-19
<PAGE>

NOTE 10 -- STOCK OPTION PLANS (CONTINUED)

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 shall vest over a
four (4) year period.

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


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

Balance at January 1, 1997 ...................     --                 --
   Options granted ...........................   60,000          $   4.38
                                                -------
Balance at December 31, 1997 .................   60,000          $   4.38
                                                -------
Options exercisable at December 31, 1997 .....   10,000          $   4.38



STOCK WARRANTS

     On December 6, 1994,  common stock  purchase  warrants  for 266,601  shares
exercisable  at $1.75 per share,  the fair market value of the Company's  Common
Stock on such date,  were  granted to an officer and  director  of the  Company.
These  warrants  become  exercisable  at various dates during the first year and
expire ten years from the date of issuance.  On May 19, 1995, in connection with
the sale by the Company of 1,600,000 shares of the Series B Preferred Stock (see
Note 9), pursuant to an anti-dilution  provision  contained in such common stock
purchase  warrants,  the number of warrants granted to such officer and director
was  increased  to 298,848 and the  exercise  price was  adjusted to $1.25,  the
purchase price of the Series B Preferred Stock. At December 31, 1997, 298,848 of
such warrants were exercisable.

     The Company has reserved  2,130,589 shares of Common Stock for the exercise
of stock options and warrants as described above.

FAS 123 PRO FORMA INFORMATION

     Pro forma  information  regarding  net  income  and  earnings  per share is
required by  Statement  No. 123, and has been  determined  as if the Company had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions for 1997 and 1996:  risk-free interest rates of between  5.74%-6.73%
in 1997 and 5.48%-7.58% in 1996; dividend yields of zero;  volatility factors of
the expected market price of the Company's common stock of .959 in 1997 and 1.02
in 1996; and a  weighted-average  expected life of four (4) years.  The weighted
average fair market value of


                                      F-20
<PAGE>

NOTE 10 -- STOCK OPTION PLANS (CONTINUED)

stock  options  issued  in  1997  and  1996  was  $3.32  and  $2.35  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):


                                                          1997        1996
                                                       ----------  ----------

Net income (loss) as reported ................         $ 1,102     $    (769)

Pro forma net income (loss) ...................        $   383     $  (1,093)
 Income (loss) per share as reported
   Basic .........................................     $   .14     $    (.23)
     
Pro forma income (loss) per share
   Basic .........................................     $   .03     $    (.25)

Income (loss) per share as reported - diluted ....     $   .11     $    (.23)

Pro forma income (loss) per share - diluted ......     $   .03     $    (.25)



NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN

     In June 1995, the Company  adopted a 1995 Employee Stock Purchase Plan (the
"Purchase  Plan") and reserved  for  issuance an aggregate of 150,000  shares of
Common Stock.  The Purchase Plan allows  eligible  employees to purchase  Common
Stock,  through payroll deductions during a Purchase Period, at a purchase price
that  shall  be the  lesser  of (a) 85% of the Fair  Market  Value of a share of
Common Stock on the first day of such  Purchase  Period,  or (b) 85% of the Fair
Market Value of a share of Common Stock on the  Exercise  Date of such  Purchase
Period,  as each of such terms are defined in the 1995 Employee  Stock  Purchase
Plan.  The option to  purchase  stock  under the  Purchase  Plan will  terminate
December 31, 1999.  At December 31, 1997,  112,578  shares were issued under the
Purchase Plan, of which 35,331 were issued in 1997.


                                      F-21
<PAGE>

NOTE 12 -- INCOME TAXES

     The   provision  for  income  taxes  is  comprised  of  the  following  (in
thousands):



                                            December 31,
                             ------------------------------------------
                                 1997           1996            1995 
                             -----------    -----------     -----------

Federal:
   Current.............      $       --     $       --         $    --
   Deferred............              --             --              --

State:
   Current.............              --             --              --
   Deferred............              --             --              --
                              ----------      ----------       --------

Total..................       $      --     $       --         $    --
                              ==========      ===========      ========


     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, 1997 and 1996 are as follows:


                                               1997           1996
                                             ---------     ----------


Tax credits.............................      $   436        $   268

Net operating losses....................        2,882          3,384

Capitalized software....................         (316)          (317)

Other...................................          777            737

Valuation allowance.....................       (3,779)        (4,072)
                                              -------        -------

Total...................................          --              --

Current.................................          --              --
                                              --------       -------

Non-current.............................      $   --         $   --
                                              ========       =======



     During 1997, the Company utilized  $222,000 of net operating loss carryover
("NOL") for federal tax purposes.  The Company has a NOL for Federal  income tax
purposes of  approximately  $7,174,000,  which will begin to expire in 2009. The
Company also has  research and  development  tax credit  carryovers  for Federal
income tax  purposes  of  approximately  $226,000  which will begin to expire in
2009.  In  addition,   the  Company  has  alternative  minimum  tax  credits  of
approximately  $68,000.  These credits can be carried forward indefinitely.  The
Company  experienced  a change in ownership in 1996 as defined by Section 382 of
the Internal Revenue Code. Accordingly,  future use of these NOLs and income tax
credits may be limited.

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


                                      F-22
<PAGE>

NOTE 12 -- INCOME TAXES (CONTINUED)

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


                                                    December 31,
                                             -------------------------
                                              1997      1996     1995
                                             ------    -------  ------

Computed tax expense (benefit)..........     $ 375     $(261)   $(1,210)

Increase in federal valuation allowance       
(use of NOL)............................      (222)      418      1,312

Research and development tax credits....      (153)     (183)      (119)

Other...................................        --        26         17
                                             -------   -------    -------


Actual tax expense (benefit)............     $    --   $    --    $    --
                                             =======    =======   =======



     The Company also has  approximately  $9,974,000 of state NOL  carryforwards
which will begin to expire in 2001 and state research and development tax credit
carryforwards of $219,000 as of December 31, 1997.


                                      F-23
<PAGE>

NOTE 13 -- COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE

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

<TABLE>

                                      1997            1996            1995
<S>                                   <C>             <C>             <C>    

Numerator:

Net income                           $  1,102         $   (769)       $ (3,659)
Preferred stock dividends                (192)            (248)            (79)
                                     ---------         --------        --------

Numerator for basic earnings
  per share - income (loss) 
  available to common 
  shareholders                            910            (1,017)        (3,738)


Effect of dilutive securities:

Preferred stock dividends                 192                --              --
Interest on unpaid preferred
  stock dividends                          20                --              --
                                    ---------          --------        --------
                                          212                --              --
                                    ---------          --------        --------


Numerator for dilutive earnings
  per share - income available to
  common shareholders after
  assumed conversion                    1,122                --              --

Denominator:

Denominator for basic earnings
  per share - weighted-average 
  shares                                6,702             4,346           4,232
 

Effect of dilutive securities:

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

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

Basic earnings per share             $   0.14         $  (0.23)       $  (0.88)
                                      ========        ========         ========

Diluted earnings per share           $   0.11         $  (0.23)       $  (0.88)
                                      ========        ========         ========
</TABLE>




                                      F-24
<PAGE>

NOTE 14 -- 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.

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

NOTE 15 -- RELATED PARTY TRANSACTION

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


                                      F-25
<PAGE>

<TABLE>
<CAPTION>

                                                                                              SCHEDULE II
                                                ECCS, Inc.

                             Schedule II - Valuation and Qualifying Accounts

                                              (in thousands)

Column A                               Column B          Column C                Column D          Column E

                                                         Additions
                                                    --------------------
                                                    Charged     Charged to                        Balance
                                       Balance at   to          Other                               at
          DESCRIPTION                  Beginning    Costs and   Accounts-        Deductions-       End of
                                       of Period    Expenses    Describe         Describe          Period
<S>                                     <C>          <C>        <C>                               <C>   
YEAR ENDED December 31, 1997:
Allowance for Doubtful
Accounts & Returns/Credits ........     $  184       $  183     $        --      $       70 (A)   $  297
                                        ------       ------     ------------     ----------       ------
Tax valuation .....................     $4,072       $   --     $        --      $      293 (C)   $3,779
                                        ------       ------     ------------     ----------       ------
Inventory .........................     $  781       $  840     $        --      $      913 (B)   $  708
                                        ------       ------     ------------     ----------       ------
     Subtotal .....................     $  965       $1,023     $        --      $      983       $1,005
                                        ------       ------     ------------     ----------       ------
Warranty ..........................     $  414       $  886     $        --      $      766       $  534
                                        ------       ------     ------------     ----------       ------
YEAR ENDED December 31, 1996:                                                                    
Allowance for Doubtful                                                                           
Accounts & Returns/Credits ........     $  226       $   --     $        --      $       42 (A)   $  184
                                        ------       ------     ------------     ----------       ------
Tax valuation .....................     $3,654       $   --     $        418 (D) $      --        $4,072
                                        ------       ------     ------------     ----------       ------
Inventory .........................     $  813       $  620     $        --      $      652 (B)   $  781
                                        ------       ------     ------------     ----------       ------
     Subtotal .....................     $1,039       $  620     $        --      $      694       $  965
                                        ------       ------     ------------     ----------       ------
Warranty ..........................     $  350       $   64     $        --      $      --        $  414
                                        ------       ------     ------------     ----------       ------
                                                                                                 
YEAR ENDED December 31, 1995:                                                                    
Allowance for Doubtful                                                                           
Accounts & Returns/Credits ........     $  310       $  186     $        --      $      270 (A)   $  226
                                        ------       ------     ------------     ----------       ------
Tax valuation .....................     $2,051       $   --     $      1,603 (D) $      --        $3,654
                                        ------       ------     ------------     ----------       ------
Inventory .........................     $1,096       $  510     $        --      $      793 (B)   $  813
                                        ------       ------     ------------     ----------       ------
     Subtotal .....................     $1,406       $  696     $        --      $    1,063       $1,039
                                        ------       ------     ------------     ----------       ------
Warranty ..........................     $  163       $  187     $        --      $      --        $  350
                                        ------       ------     ------------     ----------       ------
                                                                                               
</TABLE>


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