SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

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

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
For the fiscal year ended December 31, 1998
                                       OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
For the transition period from            to
                               ----------    ----------

                         Commission file number 0-21600

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

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


                   One Sheila Drive, Tinton Falls, New Jersey
                   ------------------------------------------
                    (Address of Principal Executive Offices)

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

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

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

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

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

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

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


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

                   Yes: X                                   No:
                       ---                                     ---

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

     State the aggregate market value of the voting stock held by non-affiliates
of the  Registrant:  $11,597,948  at  February  26, 1999 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 26, 1999:

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

Common Stock, $.01 par value                                11,027,084

     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 1999 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................................................   13

           3.   Legal Proceedings.........................................   14

           4.   Submission of Matters to a Vote of Security Holders.......   14

PART II    5.   Market For the Company's Common Equity and Related
                Shareholder Matters.......................................   15

           6.   Selected Consolidated Financial Data......................   17

           7.   Management's Discussion and Analysis of Financial
                Condition and Results of Operations.......................   18

           8.   Financial Statements and Supplementary Data...............   28

           9.   Changes in and Disagreements With Accountants on
                Accounting and Financial Disclosure.......................   28

PART III   10.  Directors and Executive Officers of the Company...........   29

           11.  Executive Compensation....................................   29

           12.  Security Ownership of Certain Beneficial Owners
                and Management............................................   29

           13.  Certain Relationships and Related Transactions............   29

PART IV    14.  Exhibits, Financial Statement Schedules,
                and Reports on Form 8-K...................................   30

SIGNATURES................................................................   31

EXHIBIT INDEX.............................................................   33

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


                                      -i-
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                           FORWARD LOOKING STATEMENTS

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


                                     PART I

Item 1. Business.

General

     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 fault
tolerant 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.


<PAGE>

     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 and 1998, approximately 93% and 96% of
the  Company's  sales  were  derived  from  sales of the  Company's  proprietary
products,  respectively.  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

                                      2
<PAGE>

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 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.

                                       3
<PAGE>

     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  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.

     Host or Network Attached.  The Company's products allow users the choice of
either direct attachment to a host/platform or a fault tolerant network attached
storage device.

Strategy

     ECCS'  objective is to further  establish  and solidify its position in the
rapidly  growing Open Systems  fault  tolerant  storage  market.  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 end user
sales revenues of all its products;  increased  focus on fault tolerant  network
attached storage, focus on furthering the development of clustering technologies
and distributed file systems that offer unique value-added features; broaden its
marketing  penetration  into the  Federal  business  sector;  continue to pursue
alternate  channels  of  sales  for the  Company's  products;  and  protect  its
technological edge.

     The Company continues to focus on offering  superior,  value-added  product
features to the Open Systems storage market. The Company is developing  products
to meet this  objective  and plans to make several  enhancements  to its product
offerings this year.

     First  Mover  Position  in Emerging  Technologies.  The Company  intends to
continue to establish itself as the data storage solution of choice for emerging
clustering  technologies such as Microsoft Cluster Server technology  (MSCS). In
addition,  the Company has started  development  of new  technologies  that will
offer  control  of  files at the  storage  system  level.  If  successful,  this
development would enable the Company to offer file management  features superior
to product offerings  available in the industry today. The Company also plans to
develop  several  product  features to enhance  performance,  backup and storage
control.

     Sales to End Users.  The Company  will place  emphasis on the  marketing of
fault tolerant  network-attached storage products developed by the Company which
incorporate  the  Synchronix

                                       4
<PAGE>

family systems. Network-attached products are increasingly gaining acceptance as
a method to attach  storage.  The  Company  believes  that its  network-attached
storage products offer significant value compared to other available  offerings.
The Company  anticipates that increased sales of its  network-attached  products
will provide an increased  momentum and referral base  necessary for the Company
to successfully  implement this strategy. The Company will continue to offer all
of its other fault  tolerant  products,  Synchronix  1000 and 2000,  Raven,  and
vanity-based  solutions to this market. The end user sales organization is being
increased in order to focus sales efforts on commercial  and government end user
accounts. Direct sales generally carry higher gross margins.

     Federal Sales. The Company has maintained a significant  volume of sales to
the Federal  Government,  principally the U.S. Air Force through several Federal
integrators.  The Company plans to broaden its sales base to include  additional
Federal Government entities by establishing direct contact with such entities in
conjunction with the use of select Federal  Government  resellers.  In 1998, the
Company had limited sales to other Federal Government entities, including the US
Navy.  The Company will continue to develop  products that meet the  anticipated
needs of these customers.

     Protect  Technological  Edge.  ECCS intends to continue to improve upon its
current products as well as develop, or acquire for resale, new product for data
storage. The Company believes that it possesses  substantial technical expertise
gained through years of internal  research and  development.  ECCS holds several
patents on its RAID controller and associated technology. ECCS believes that its
development  efforts  have  produced a product line with  advanced  features and
functionality  that provide it with a competitive  advantage in the marketplace.
The Company further believes that its position as an innovator of fault tolerant
storage  systems will continue due to its ongoing  investment in engineering and
the Company's understanding of its customers changing needs.

     Alternate  Channel  Sales.  The  Company  markets  its  products to several
organizations  that  provide  their own sales  forces  to resell  the  Company's
products. These efforts offer the Company significant revenue opportunities. The
use of alternate channel partners  provides the Company increased  visibility in
the industry,  additional  marketing  opportunities  and the ability to leverage
additional sales organizations.

     The  Company  continues  its  efforts to market its  products to larger OEM
companies  and  believes  that several of its products  under  development  will
attract the interest of these  customers.  The  Company's  OEM sales efforts are
divided into two broad  groups  through  which the Company  markets its products
and/or services.

o    Resellers  and Value  Added  Resellers  (VARs) - The  Company  has  several
     resellers  that it currently  engages to resell the Company's  full line of
     products. These resellers augment the end user effort and contribute to the
     revenue goals of the Company.  The Company  actively focuses on identifying
     resellers  that will be able to take  advantage of the  Company's  products
     and/or offer additional services to end users.

                                       5
<PAGE>

o    OEMs - In addition to its relationship with Unisys and Tandem,  the Company
     continues efforts to establish  potential OEM relationships for versions of
     all of its product  lines.  There can be no assurance,  however,  that such
     additional relationships will be established, or if established,  that they
     will decrease the Company's reliance on the established relationships.

     The Company is actively pursuing each element of its strategy. No assurance
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 fault
tolerant RAID  products,  external  disk,  optical and tape systems and internal
disk and tape storage devices and storage related software.  The Company designs
its fault  tolerant  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.

     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:

     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.

                                       6
<PAGE>

     During 1998, the Company announced the introduction of the Synchronix 2000,
the Company's next generation of high performance,  continuously  available data
storage   system.   In  addition  to  the  original   Synchronix   features  and
functionality,  the Synchronix 2000 has been uniquely packaged using independent
controller enclosures known as the Array Controller Enclosure (ACE) and separate
disk drive array packaging or Disk Array Enclosure  (DAE).  The Company believes
that the use of redundant  active/active  RAID  controllers with dual Ultra SCSI
host busses and fully protected  mirrored  cache,  combined with five Ultra SCSI
data busses, delivers superior performance over competing products.

     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 Federal Government.

     Synchronix  FibrePACC  combines the speed and  scalability of Fibre Channel
Arbitrated Loop (FC-AL),  with high performance  datapool,  RAID data protection
and high availability cluster options in a flexible  space-efficient package for
fibre channel drives. The Company introduced  Synchronix  FibrePACC in September
1998.

     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,  Raven  UX  410  and  Synchronix
FibrePACC 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  customers  and  potential
customers may be affected by issues  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.

                                       7
<PAGE>

Sales and Marketing

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

     Relationships  with  Unisys  and  Tandem.  Sales  under the  Company's  OEM
agreement with Unisys  commenced in 1996. All sales to Unisys have been 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.

     Compaq Computer Corp.  ("Compaq"),  the corporate owner of Tandem Computers
Incorporated ("Tandem"),  acquired Digital Equipment Corporation ("Digital"),  a
competitor of the Company,  in 1998. On March 24, 1998, the Company  announced a
relationship with Tandem pursuant to which Tandem could purchase Synchronix from
the  Company  and resell  Synchronix  under a private  label with  Tandem's  own
systems. Although Tandem purchased product from the Company throughout 1998, the
acquisition of Digital by Compaq has adversely  effected the Company's  sales to
Compaq/Tandem.  As a result of Compaq's  acquisition of Digital,  whose products
included a similar  storage system to that of ECCS,  Compaq decided to focus its
marketing  efforts  on its own  products  in lieu of  outsourced  products.  The
Company was informed  that Tandem  intends to  discontinue  the marketing of the
Company's  product after the second  quarter of 1999.  Accordingly,  the Company
notified  Tandem that it would  terminate  the contract  effective  February 15,
1999, which, pursuant to the reseller agreement, would give Tandem an additional
ninety days to purchase product from the Company.

     In August  1998,  the Company  executed an agreement  with Hewlett  Packard
Company ("HP") pursuant to which HP may resell the Company's Synchronix products
and services  through  HP's North  American  Local  Product  Organization.  This
agreement provides the Company with an additional alternate channel partner. The
Company believes that HP provides ECCS with an established  reseller  capability
in a wide  range of  markets.  In  addition,  HP  customers  will now be able to
acquire ECCS'  product and services as part of an integrated HP solution.  There
can be no assurance,  however,  that the Company's sales or Synchronix products,
or other products,  will increase as a result of its agreement with HP. In 1998,
there were no significant sales to HP.

                                       8
<PAGE>

     The Company continues efforts to establish  potential OEM relationships for
specialized and standard versions of its Synchronix product line, in addition to
its relationships  with Unisys and Tandem.  There can be no assurance,  however,
that such additional relationships will be established, or if established,  that
they will  decrease the Company's  reliance on its  previously  established  OEM
relationships with Unisys and 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
twenty-three 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.

     The Company  uses its direct  sales force to market to the U.S.  Air Force,
primarily through several Federal Government  integrators.  There are no minimum
purchase  requirements.  The Company  plans to broaden its sales base to include
additional Federal Government  entities by establishing direct contact with such
entities in  conjunction  with the use of select Federal  Government  resellers.
There  can be no  assurance  that  there  will be  additional  sales to  Federal
Government entities.

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,  systems  integrators  and  manufacturers  of mass
storage  enhancement  products and networking products compete with the Company.
Many of such competitors have resources greater than those of the

                                       9
<PAGE>

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 fault
tolerant, 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 fault tolerant
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 LSI Logic.
Many  larger  companies  currently  provide  fault  tolerant  solutions  for the
mainframe and mini-computer market segments. There can be no assurance that such
companies  will  not  enter  the  fault  tolerant  RAID   marketplace  for  Open
Systems-based non-mainframe, non-mini-computer computers.

     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  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

                                       10
<PAGE>

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 1998,  $6.6 million or 30%, $5.1 million or 23%, $2.6 or 12%
and $.5 million or 2%, respectively, of the Company's total purchases.

     On June  27,  1995,  the  Company  entered  into a  Manufacturing  Services
Agreement  with Unisys (the  "Manufacturing  Services  Agreement"),  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.

     In  February  1999,  Unisys,  the  primary  outside  manufacturer  for  the
Synchronix  system,  notified  the Company  that Unisys was closing its Winnipeg
computer storage systems  manufacturing  plant by July 31, 1999 and accordingly,
the Manufacturing Service Agreement will be terminated at that time. The Company
plans to locate another third party manufacturer and/or manufacture such systems
in-house. Although the Company anticipates that it has sufficient facilities and
expertise to manufacture the Synchronix 1000 and Synchronix 2000 in-house, there
can be no assurance  that  material  problems  will not arise in the future that
could materially adversely effect the Company's results of operations.

     In  February  1999,  the  Company  received  ISO 9001  certification.  Such
certification reflects uniform,  industry-wide  standards of quality control for
manufacturing  data-storage products. There can be no assurance that the Company
will continue to meet the industry-accepted  standards necessary to maintain ISO
9001 certification.

     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  $1,466,000 in 1996,  $2,289,000 in 1997 and
$3,592,000 in 1998, of which $439,000, $602,000 and $909,000, respectively, were

                                       11
<PAGE>

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.

     Research and  development  expenditures  in 1998  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)  improvements  to
the next generation of the Synchronix  family of products;  (ii) the development
of a  distributed  file system  storage  architecture;  and (iii) new  interface
connectivities. In 1998, the Company discontinued its efforts to develop a fibre
controller  and a  controller  design  that  incorporates  Tandem's  Server  Net
Technology.  As a result,  the  Company  incurred a  one-time  charge in 1998 of
$366,000.

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.

     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.

                                       12
<PAGE>

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, 1998, the Company employed 125 persons,  of whom 31 were
engaged in marketing and sales; 39 in engineering and research and  development;
24 in operations,  including customer and technical  support,  manufacturing and
fulfillment; 11 in Professional Services; and 20 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 expired on March 31, 1998,  and was
renewed  for an  additional  33 months 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 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.


                                       13
<PAGE>

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.


                                       14
<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") is traded
on the Nasdaq  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 the Nasdaq  SmallCap Market for each of the
quarters ended March 31, 1997 through December 31, 1998.


                 Quarter Ended                       High             Low
   -------------------------------------        -------------      ---------
   
   March 1997............................            5.50             3.625
   June 1997.............................            6.00             4.125
   September 1997........................            8.50             4.25
   December 1997.........................            9.75             5.00
   March 1998............................            7.00             3.750
   June 1998.............................            4.063            2.375
   September 1998........................            3.250            1.00
   December 1998.........................            3.125            0.906

     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 26, 1999,  the last sales price of the Common Stock as reported
by  the  SmallCap  Market  was  $1.25  per  share.  The  approximate  number  of
shareholders of record on February 26, 1999 was 160.

     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 Company's ability to pay certain
dividends  without NCC's prior  written  consent.  The Company's  line of credit
facility with The Finova Group Inc. also prohibits the payment of dividends. For
a discussion of the Company's credit  facilities,  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. In  mid-February  1998, the Company  canceled the Options  previously
granted on October 28, 1997. In addition, at that time, 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.

                                       15
<PAGE>

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

     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.



                                       16
<PAGE>


Item 6. Selected Consolidated Financial Data.

     The selected consolidated  financial data for the five years ended December
31, 1998,  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,
                                         ------------------------------------------------------------------
                                          1994(1)         1995          1996          1997          1998
                                          -------         ----          ----          ----          ----
Statement of Operations Data:

<S>                                        <C>          <C>            <C>          <C>            <C>     
Net sales...........................       $ 42,738     $ 31,174       $22,604      $ 34,001       $28,466
  Cost of sales.....................         36,563       23,256        15,165        24,226        20,452
                                           --------     --------      --------        ------       -------
Gross profit........................          6,175        7,918         7,439      $  9,775         8,014
  Selling, general and
     administrative expenses........         12,415        9,967         6,907          6,838        8,378
  Research and development
     expenses.......................            978        1,123         1,027          1,687        2,683
                                           --------     --------      --------        -------      -------
Operating income (loss).............         (7,218)      (3,172)         (495)         1,250       (3,047)
  Net interest expense (income) ....            764          487           274             28         (390)
                                           --------     --------      --------        -------   -----------
Income (loss) before extraordinary
item................................         (7,982)      (3,659)         (769)         1,222       (2,657)
Extraordinary item..................             --           --            --            120          --
                                           --------     --------      --------        -------   ----------
Income (loss) from operations
  before provision (benefit)
for income taxes....................         (7,982)      (3,659)         (769)          1,102      (2,657)
  Provision (benefit) for
     income taxes...................         (1,192)          --            --              --          --
                                           --------     --------      --------        --------     -------
Net income (loss)...................         (6,790)      (3,659)         (769)          1,102       (2,657)
  Preferred dividends...............             --           79           248             192           --
                                           --------     --------      --------        --------     -------
Net income (loss) applicable
  to common shares..................       $ (6,790)    $ (3,738)     $ (1,017)       $   910      $(2,657)
                                           ========     ========      ========        =======      =======
Net income per share
  before extraordinary item-basic...       $     --     $     --      $     --        $  0.16      $    --
Net income (loss) per
  share - basic.....................       $  (1.63)    $ (0.88)      $  (0.23)       $  0.14      $ (0.24)
Net income (loss) per share before
  extraordinary item - diluted......       $  (1.63)    $ (0.88)      $  (0.23)       $  0.12      $ (0.24)
Net income (loss) per share - diluted      $  (1.63)    $ (0.88)      $  (0.23)       $  0.11      $ (0.24)
Weighted average common
shares outstanding basic............          4,160       4,232          4,346          6,702       10,969
Weighted average common
shares outstanding diluted..........          4,160       4,232          4,346         10,035       10,969

Balance Sheet Data:
Cash................................       $  1,670     $  1,514      $  4,393        $11,625      $ 5,374
Working capital.....................          2,932        1,134         4,280         15,260       11,969
Total assets........................         21,507       12,435        14,552         24,992       21,374
Loans payable.......................          4,089        1,849         1,762          1,031        1,231
Series B redeemable
  convertible preferred stock.......             --        1,794            --             --           --
Shareholders' equity................          5,673        2,122         6,177         17,643       15,232
</TABLE>

----------
(1)  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.



                                       17
<PAGE>

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

Overview

     ECCS is a provider of  enterprise  storage  solutions to protect and ensure
access to critical data for server attached,  Storage Area Networks (SAN), Fibre
Channel  Storage,   and  Network   Attached   storage  markets.   ECCS  designs,
manufactures,  sells and supports high  performance,  user-definable,  fault and
non-fault  tolerant  storage  subsystems  to  meet  a  wide  range  of  customer
applications,  needs and  Operating  Systems (NT and UNIX).  These  connectivity
options enable  storage users the  flexibility to choose and deploy a particular
storage  solution  to  meet  their  needs,  accommodating  both  centralized  to
distributed storage environments.

     ECCS products are sold globally  through OEMs, VARs and System  Integrators
and  domestically  on a direct  basis.  ECCS'  customers  cross all  industries,
including  large  database  companies (or those that use  databases),  financial
enterprises,  retail,  non-profit  organizations,  Internet  Service  Providers,
imaging users, telecommunications and the Federal Government.

     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:

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                               -----------------------
                                                               1996       1997      1998
                                                               ----       ----      ----
  
     <S>                                                      <C>       <C>        <C>  
      ECCS mass storage enhancement  products
       (including all ECCS proprietary products and 
       certain third party component products)..............   80.0%     92.5%      96.0%
     Value added resales....................................    8.3%      1.1%        -0-
     Services and other revenues............................   11.7%      6.4%       4.0%
</TABLE>

     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.

                                       18
<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.  In February
1999,  Unisys,  the primary  outside  manufacturer  for the  Synchronix  system,
notified  the Company  that Unisys was closing  its  Winnipeg  computer  storage
systems  manufacturing  plant by July 31, 1999 and accordingly the Manufacturing
Services  Agreement will be terminated at that time. The Company plans to locate
another  third party  manufacturer  and/or  manufacture  such systems  in-house.
Although the Company anticipates that it has sufficient facilities and expertise
to manufacture the Synchronix 1000 and Synchronix 2000 systems  in-house,  there
can be no assurance  that  material  problems  will not arise in the future that
could materially adversely effect the Company's results of operations.

     In  February  1999,  the  Company  received  ISO 9001  certification.  Such
certification reflects uniform,  industry-wide  standards of quality control for
manufacturing  data-storage products. There can be no assurance that the Company
will continue to meet the industry-accepted  standards necessary to maintain ISO
9001 certification.

     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. As a result of Compaq's acquisition of Digital, whose products included
a similar storage system to that of ECCS,  Compaq decided to focus its marketing
efforts on its own  products  in lieu of  outsourced  products.  The Company was
informed  that Tandem  intends to  discontinue  the  marketing of the  Company's
product  after the second  quarter of 1999.  Accordingly,  the Company  notified
Tandem that it would terminate the contract  effective February 15, 1999, which,
pursuant to the reseller agreement, would give Tandem an addional ninety days to
purchase  product from the


                                       19
<PAGE>

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  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 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 be a substantial  part of the Company's cost structure in the
near future to enable the Company to update and expand upon its existing product
offerings.

     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."


                                       20
<PAGE>

Results of Operations (Dollars in Thousands)

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

<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                                                  -----------------------
                                                            1996           1997             1998
                                                            ----           ----             ----

<S>                                                        <C>              <C>              <C> 
Net sales............................................      100.0%           100.0%           100%
  Cost of sales......................................        67.1            71.3           71.9
                                                          -------         -------        -------
Gross profit.........................................        32.9            28.7           28.1
  Selling, general & administrative expenses.........        30.6            20.1           29.4
  Research & development expenses....................         4.5             5.0            9.4
                                                          -------         -------        -------
Operating income (loss)..............................        (2.2)            3.6          (10.7)
  Net interest expense...............................         1.2              .1           (1.4)
                                                          -------         -------        -------
Income (loss) before extraordinary item..............        (3.4)            3.5           (9.3)
Extraordinary item...................................        --                .3             --
                                                          -------         -------          -----
Income (loss) before benefit for income taxes........        (3.4)            3.2           (9.3)
  Benefit for income taxes...........................        --              --               --
                                                          -------         --------         -----
Net income (loss)....................................        (3.4)%           3.2%          (9.3)%
                                                          ========        ========       =======
</TABLE>

     Comparison of Years Ended December 31, 1997 and 1998
     ----------------------------------------------------

     Net Sales

     Net sales decreased by approximately  $5,535 or 16%, in 1998 as compared to
net sales in 1997. Sales of the Company's  proprietary mass storage  enhancement
systems,  including sales of certain third party component  products,  accounted
for 93% and 96% of net sales in 1997 and 1998, respectively.  As expected, sales
by the Company in its capacity as a VAR  continued  to be minimal and  accounted
for 1% and 0% of net sales in 1997 and 1998,  respectively.  Services  and other
revenues  accounted  for 6% and 4% of net sales in 1997 and 1998,  respectively.
The decrease in 1998 net sales  resulted  primarily  from a decrease in sales of
the Company's mass storage enhancement systems,  including sales to the U.S. Air
Force through Federal integrators.

     Sales to the U.S.  Air Force  through  Federal  integrators  accounted  for
approximately  44% and 33% of net  sales in 1997  and  1998,  respectively.  The
Company  believes  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 1998,  respectively.  Sales to the  Company's  primary
alternate  channel  partner,  Unisys,  accounted  for  approximately  28% of the
Company's net sales in 1998. There can be no assurance

                                       21
<PAGE>

that Unisys will  continue to place  orders with the Company or that orders from
Unisys will continue at their previous levels.

     Sales to  Tandem,  another of the  Company's  alternate  channel  partners,
accounted for  approximately  10% of the  Company's net sales in 1998.  Although
Tandem  purchased  product from the Company  throughout 1998, the acquisition of
Digital by Compaq has adversely  affected the Company's sales to  Compaq/Tandem.
As a result of  Compaq's  acquisition  of  Digital,  whose  products  included a
similar  storage  system to that of ECCS,  Compaq decided to focus its marketing
efforts on its own  products  in lieu of  outsourced  products.  The Company was
informed  that Tandem  intends to  discontinue  the  marketing of the  Company's
product  after the second  quarter of 1999.  Accordingly,  the Company  notified
Tandem that it would terminate the contract  effective February 15, 1999, which,
pursuant to the reseller agreement,  would give Tandem an additional ninety days
to purchase product from the Company.

     Sales to the  Company's  commercial  customers  were  $7,960  in  1998,  or
approximately  28% of net sales.  Such sales represent a 17% increase over sales
to commercial  accounts in the year ended 1997.  Such increase was primarily due
to the Company's  continued focus on commercial sales of its Synchronix  product
line offering.

     Gross Profit

     The Company's  gross profit  decreased by  approximately  $1,761 in 1998 to
approximately  $8,014, from $9,775 in 1997. Such decrease in gross profit is due
primarily  to the lower volume of sales to the U.S.  Air Force  through  Federal
integrators  during  1998,  a large  portion of which  consists  of  third-party
components  integrated with the Company's  proprietary mass storage  enhancement
products.

     Operating Expenses

     Selling,  general and administrative (SG&A) expenses increased by $1,540 to
$8,378 in 1998 from $6,838 in 1997. Selling, general and administrative expenses
increased as a  percentage  of net sales  representing  20% and 29% for 1997 and
1998, respectively.  Such increase was due primarily to the hiring of additional
sales and  marketing  personnel,  coupled  with  enhanced  efforts to market the
Company's  current and new  product  offerings.  SG&A  expenses  increased  as a
percentage of revenue as a result of a  combination  of higher SG&A expenses and
lower sales  volume.  Salaries,  commissions,  bonuses,  employee  benefits  and
payroll taxes were the largest components of selling, general and administrative
expenses,  accounting  for  70%  and 66% of such  expenses  in  1997  and  1998,
respectively. The Company anticipates that SG&A spending levels will decrease as
a percentage  of sales to the extent sales to OEMs  increase as a percentage  of
sales.  Sales  to OEMs  typically  absorb  more of the  administrative  expenses
otherwise incurred by the Company.

     Research  and  development  expenses  increased in 1998 by $996 or 59% from
$1,687 in 1997.  This  increase  is due  primarily  to the hiring of  additional
engineers to continue the product  development  initiative  associated  with the
enhancements  to the  Company's  proprietary  mass  storage  products and to the
development  of a new  technology  center.  Such  expenses for 1998


                                       22
<PAGE>

represented  approximately  9.4% of the Company's  net sales and,  including the
amount capitalized in accordance with SFAS No. 86, represented approximately 16%
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) a next
generation  of the  Synchronix  family of products;  (ii) the  development  of a
distributed   file   system   storage   architecture;    (iii)   new   interface
connectivities;  and (iv) customized OEM products. The Company believes that the
anticipated increase in its research and development  investment could adversely
affect earnings in the first six months of 1999;  however,  such adverse impact,
if any,  may be offset in part by the  Company's  decision  to  discontinue  the
development  of its new  technology  center.  In  addition,  in 1998 the Company
discontinued its efforts to develop a fibre  controller and a controller  design
that  incorporates  Tandem's  Server Net  Technology.  As a result,  the Company
incurred a one-time charge in 1998 of $366,000.

     Net Interest Expense

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

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

     Net Sales

     Net sales increased by approximately $11,397 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 80% and 93% of net  sales  in 1996  and  1997,  respectively.  Sales  by the
Company in its  capacity as a VAR  accounted  for 8% and 1% of net sales in 1996
and 1997, respectively.  Services and other revenues accounted for 12% and 6% of
net  sales  in 1996 and  1997,  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  Federal  integrators  accounted  for
approximately 25% and 44% of net sales in 1996 and 1997, respectively.

     Sales to alternate channel partners accounted for approximately 38% and 37%
of net  sales in 1996 and 1997,  respectively.  Sales to the  Company's  primary
alternate  channel  partner,  Unisys,  accounted  for  approximately  18% of the
Company's net sales in 1997. Sales to Tandem, another of the Company's alternate
channel partners,  accounted for approximately 13% of the Company's net sales in
1997.

     Gross Profit

     The Company's  gross profit  increased by  approximately  $2,336 in 1997 to
approximately  $9,775 from $7,439 in 1996.  The increase in 1997  resulted  from
increased sales volume.  The

                                       23
<PAGE>

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  was due
primarily to the higher volume of sales to the U. S. Air Force  through  Federal
integrators  during 1997, a large  proportion of which  consisted 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 to $6,838 in
1997 from $6,907 in 1996. Selling, general and administrative expenses decreased
as a  percentage  of net  sales  representing  31% and 20% for  1996  and  1997,
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,  and
accounted for 66% and 70% of such expenses in 1996 and 1997, respectively.

     Research  and  development  expenses  increased in 1997 by $660 or 64% from
$1,027 in 1996.  This  increase  was due  primarily to the  Company's  continued
investment in and enhancements to the Company's current mass storage enhancement
products.  Such expenses for 1997 represented  approximately 5% of the Company's
net sales and,  including the amount capitalized in accordance with SFAS No. 86,
represented approximately 7% of the Company's net sales.

     Net Interest Expense

     Net interest  expense for 1997  decreased by $246 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 that was due to
higher cash balances resulting from cash generated by the Company's Offering.

     Extraordinary Item

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

Liquidity and Capital Resources (Dollars in Thousands)

     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, 1998, the Company's cash balance was  approximately
$5,374.

     Net  cash  used in  operations  was  $782  and  $3,200  in 1997  and  1998,
respectively. Such use of cash in 1998 resulted primarily from the net loss from
operations. Net cash provided by financing activities was $9,425 in 1997 and net
cash used in financing activities was $551 in 1998.

                                       24
<PAGE>

     The Company used $809 and $1,453 for the acquisition of equipment by direct
purchase during 1997 and 1998, respectively. Such expenditures in 1998 primarily
consisted  of  a  capital   investment   associated   with  the   Company's  new
enterprise-wide  ERP software system, as well as capital  equipment  relating to
the Company's  research and development  efforts.  In 1997 and 1998, the Company
acquired equipment under capital leases of $0 and $283,  respectively,  and made
payments  under  capital  leases  of $88 and $49,  respectively.  Total  capital
expenditures  for 1999 are  expected to be  approximately  $500,  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 payments under the Company's
accounts  receivable  financing facility were $731 and $1,031 for 1997 and 1998,
respectively.

     The  Company's  working  capital was  approximately  $15,300 and $12,000 at
December 31, 1997 and 1998, respectively.

     On July  9,  1997,  the  Company  entered  into a full  recourse  factoring
facility with  NationsBanc  Commercial  Corporation  ("NCC") which  provides for
aggregate  advances  not to exceed the lesser of $7,000 or up to 85% of Eligible
Receivables  (as  defined).  Interest  on such  advances  is payable  monthly in
arrears at the prime  lending  rate and 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,  1998,  the Company  had no  outstanding  balance  under this full
recourse factoring facility.

     The Company also has a $2,000  general line of credit with the Finova Group
Inc.  ("Finova").  The agreement with Finova contains  covenants relating to net
worth,  total  assets  to debt  and  total  inventory  to  debt.  The  Company's
obligations under the agreement with Finova are  collateralized by substantially
all of the assets of the Company.  Finova  increased such general line of credit
to $3,000 through January 31, 1999, on the same terms and conditions. After such
date, the line returned to $2,000.

     The Company  uses its line of credit with Finova to augment its  purchasing
ability with various  vendors.  The maximum amount,  during the preceding twelve
months,  that the Company has drawn under such  general  line of credit has been
approximately   $1,231.  As  of  December  31,  1998,  the  Company  had  $1,231
outstanding under this credit line, and available credit under such line towards
future inventory purchases was $769.

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

     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.

                                       25
<PAGE>

     During 1997,  the Company  utilized  $1,118 of net operating loss carryover
("NOL") for federal tax  purposes.  The Company has NOL  carryovers  for Federal
income tax  purposes  of  approximately  $10,278,  which will begin to expire in
2009. The Company also has research and  development  tax credit  carryovers for
Federal income tax purposes of approximately $376, which will begin to expire in
2009.  In  addition,   the  Company  has  alternative  minimum  tax  credits  of
approximately  $67.  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 some of these NOLs and
income tax credits may be limited.

     The Company also has approximately $12,965 of state NOL carryforwards which
will  begin to expire in 2001 and state  research  and  development  tax  credit
carryforwards of $334 as of December 31, 1998.

     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.

     In  February  1998,  the  Company's  Board  of  Directors   authorized  the
expenditure of up to $1,000 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. Subsequently,
on November 19, 1998 the Board of Directors approved  resolutions to discontinue
expenditures related to the Company's technology center in San Jose, California,
however,  research and new product  development  will  continue at the Company's
discretion.

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

Impact of the Year 2000

General

     Computer  systems were originally  designed to recognize  calendar years by
the last two digits in the date code field.  Beginning  in the Year 2000,  these
date  code  field  will  need  to  accept  four  digit  entries  to  distinguish
twenty-first  century dates from twentieth  century dates. Any of ECCS' computer
programs  that have  time-sensitive  software may recognize a date using "00" as

                                       26
<PAGE>

the year 1900 rather than the Year 2000.  This could result in a system  failure
or miscalculations  causing  disruptions of operations,  including,  among other
things, a temporary inability to process transactions,  send invoices, or engage
in similar  normal  business  activities.  As a result,  in the coming year, the
computerized systems (including both information and non-information  technology
systems) and applications used by ECCS will need to be reviewed,  evaluated and,
if and where  necessary,  modified or  replaced  to ensure  that all  financial,
information and operating systems are Year 2000 compliant.

     State of Readiness

     ECCS has formed an internal task force comprised of  representatives of its
various relevant  departments to address Year 2000 compliance matters.  The task
force has  undertaken a preliminary  review of internal and external  areas that
are likely to be affected by Year 2000 compliance matters and has classified the
various areas as mission critical, important or non-critical/non-important.

     With  respect  to  internal  matters,  ECCS has  completed  a review of its
hardware  and software to determine  whether its  business-related  applications
(including   applications  relating  to  distribution,   finance,   inventories,
operations,   products,  purchasing  and  sales/marketing)  will  be  Year  2000
compliant.  In  addition,  in 1998,  programs  designed  to  identify  Year 2000
problems associated with dates embedded in certain  business-related  files were
created and executed to identify any Year 2000  compliance  issues.  The testing
unearthed  a few Year  2000  problems,  all of which  have  been  addressed  and
retested for Year 2000 readiness. While the results of the tests are still being
analyzed,  relatively  few Year 2000 problems were  identified.  There can be no
assurance,  however,  that  such  testing  has  detected,  or will  detect,  all
compliance issues related to the Year 2000 problem.

     With respect to external matters,  ECCS has distributed  questionnaires and
requests for certification to its mission critical vendors and in the process of
obtaining and reviewing the responses thereto. The questionnaires have requested
information  concerning embedded  technologies of such vendors, the hardware and
software  applications used by such vendors and the Year 2000 compliance efforts
of such vendors relating thereto.

     Estimated Year 2000 Compliance Costs

     Through December 31, 1998, ECCS has incurred  approximately $1,275 in costs
(excluding in-house labor and hardware),  which includes installation of the ERP
system in 1998, in connection with Year 2000 compliance matters.  ECCS estimates
that it will expend  approximately  $100 on  additional  hardware,  software and
other items related to the Year 2000 compliance matters.

     Risks Relating to Year 2000 Compliance Matters

     ECCS' goal to become Year 2000 compliance with respect to internal  matters
during calendar year 1999. Although ECCS has begun and is undertaking testing of
its internal business-related  hardware and software applications,  there can be
no  assurances  that such  testing  will  detect  all  applications  that may be
affected by year 2000 compliance problems. With respect to

                                       27
<PAGE>

external matters, due to the multi-dependent and interdependent issues raised by
Year 2000 compliance,  including many factors beyond its control,  ECCS may face
the possibility  that one or more of its mission critical  vendors,  such as its
utilities,  telephone carriers or equipment manufacturers,  may not be Year 2000
compliance  on a timely  basis.  Because of the unique  nature of such  vendors,
alternate providers may not be available.

     Contingency Planning

     ECCS has begun the  process of  assessing  contingency  plans that might be
available  in the event of either  internal  or  external  Year 2000  compliance
problems.  To this end, ECCS' various internal departments have begun to prepare
assessments of potential contingency alternatives. The task force will undertake
a review of these  assessments in respect of application of contingency plans on
a  department-by-department  basis and on a company-wide  basis. ECCS intends to
complete its contingency  planning in respect to Year 2000 compliance during the
third quarter of calendar year 1999.

     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 7A. Quantitative and Qualitative Disclosures Above Market Risk.

     Not applicable.

Item 8. Financial Statements and Supplementary Data.

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

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

     Not applicable.


                                       28
<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
1999 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 1999  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 1999
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 1999 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.


                                       29
<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 33.

        (b)             Reports on Form 8-K.

               None.



                                       30
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
1999.


                                              ECCS, INC.



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



                                       31
<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.



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

/s/ Gregg M. Azcuy         President, Chief Executive Officer    March 30, 1999
-----------------------    and Director (Principal Executive
Gregg M. Azcuy             Officer)

/s/ Louis Altieri          Vice President, Finance and           March 30, 1999
-----------------------    Administration (Principal Financial
Louis Altieri              and Accounting Officer)

/s/ Michael E. Faherty     Chairman of the Board and Director    March 30, 1999
-----------------------    Director
Michael E. Faherty

/s/ Gale R. Aguilar        Director                              March 30, 1999
-----------------------
Gale R. Aguilar

/s/ James K. Dutton        Director                              March 30, 1999
-----------------------
James K. Dutton

/s/ Donald E. Fowler       Director                              March 30, 1999
-----------------------
Donald E. Fowler

/s/ Frank R. Triolo        Director                              March 30, 1999
-----------------------
Frank R. Triolo

/s/ Thomas I. Unterberg    Director                              March 30, 1999
-----------------------
Thomas I. Unterberg


                                       32
<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.)

                                       33
<PAGE>

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

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

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

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

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

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

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

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

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

                                       34
<PAGE>

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

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

10.10*         Senior  Staff   Change  In  Control   Severance   And   Incentive
               Compensation  Pay  Agreement by and between the Company and Gregg
               M. Azcuy.  (Incorporated  by  reference to the  Company's  Annual
               Report on Form 10-K for the year ended December 31, 1997 filed on
               March 25, 1998.)

10.11*         Senior  Staff   Change  In  Control   Severance   And   Incentive
               Compensation  Pay  Agreement by and between the Company and Louis
               J. Altieri.  (Incorporated  by reference to the Company's  Annual
               Report on Form 10-K for the year ended December 31, 1997 filed on
               March 25, 1998.)

10.12*         Senior  Staff   Change  In  Control   Severance   And   Incentive
               Compensation  Pay  Agreement by and between the Company and David
               J. Boyle.  (Incorporated  by  reference to the  Company's  Annual
               Report on Form 10-K for the year ended December 31, 1997 filed on
               March 25, 1998.)

10.13*         Senior  Staff   Change  In  Control   Severance   And   Incentive
               Compensation  Pay Agreement by and between the Company and Priyan
               Guneratne.  (Incorporated  by reference to the  Company's  Annual
               Report on Form 10-K for the year ended December 31, 1997 filed on
               March 25, 1998.)

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.)

                                       35
<PAGE>

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

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).

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.



                                       36
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  AND SCHEDULE


                                                                            Page

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

Consolidated Balance Sheets as of
   December 31, 1997 and 1998...............................................F-3

Consolidated Statements of Operations for
   each of the three years in the period ended
   December 31, 1998........................................................F-4

Consolidated Statements of Shareholders'
   Equity for each of the three years in
   the period ended December 31, 1998...................................... F-5

Consolidated Statements of Cash Flows
   for each of the three years in the period
   ended December 31, 1998..................................................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 1998, and the related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended  December 31, 1998. 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 1998, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1998,  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 19, 1999


                                       F-2
<PAGE>
                                   ECCS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                               -------------------------
                                                                               1997                 1998
                                                                               -----------       --------

<S>                                                                         <C>                 <C>      
 Assets
 Current Assets:
   Cash and cash equivalents...........................................     $  11,625           $   5,374
   Accounts receivable, less allowance for doubtful accounts of $297
    in 1997 and $334 in 1998...........................................         5,737               6,644
   Inventories.........................................................         4,596               5,563
   Prepaid expenses and other receivables..............................           506                 314
                                                                            ---------           ---------
                                                                               22,464              17,895
Property, plant and equipment (net)....................................         1,372               1,916
Capitalized software (net).............................................           811               1,302
Other assets...........................................................           345                 261
                                                                            ---------           ---------
          Total assets.................................................     $  24,992           $  21,374
                                                                            =========           =========
Liabilities and Shareholders' Equity
Current Liabilities:
   Loans payable.......................................................     $   1,031           $     --
   Payable to Finova Capital...........................................            --               1,231
   Current portion of capital lease....................................            11                 110
   Accounts payable....................................................         3,833               2,800
   Accrued expenses and other..........................................         1,385               1,140
   Warranty............................................................           534                 523
   Customer deposits, advances and other credits.......................           410                 122
                                                                               ------             -------
                                                                                7,204               5,926
Capital lease obligations, net of current portion......................            --                 135
Deferred rent..........................................................           145                  81
                                                                            ---------           ---------
                                                                                7,349               6,142
                                                                            ---------           ---------
Shareholders' Equity:
   Preferred stock, $.01 par value per share, Authorized, 3,000,000
    shares;
   Zero issued and outstanding at December 31, 1997 and
   December 31, 1998...................................................           --                   --
   Common stock, $.01 par value per share, Authorized, 20,000,000 shares; 
    Issued and outstanding, 10,918,188 shares and 11,027,084
    shares at December 31, 1997 and December 31, 1998, respectively....           109                 110
   Capital in excess of par value - common.............................        25,615              25,860
   Accumulated deficit.................................................        (8,081)            (10,738)
                                                                            ----------           ---------
                                                                               17,643              15,232
                                                                            ---------            --------
       Total Liabilities and Shareholders' Equity                           $  24,992            $ 21,374
                                                                            =========           =========
</TABLE>

                See notes to consolidated financial statements.

                                       F-3
<PAGE>
<TABLE>
<CAPTION>

                                               ECCS, INC.
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (In Thousands, Except Per Share Amounts)
                                                   1996                1997                 1998

<S>                                             <C>                 <C>                 <C>          
Net sales.................................      $    22,604         $    34,001         $      28,466

Cost of sales.............................           15,165              24,226                20,452
                                                -----------         -----------         -------------
  Gross profit............................            7,439               9,775                 8,014

Operating expenses:
  Selling, general & administrative.......            6,907               6,838                 8,378
  Research & development..................            1,027               1,687                 2,683
                                                -----------         -----------         -------------
                                                      7,934               8,525                11,061

Operating (loss) income...................             (495)              1,250                (3,047)

  Net interest expense (income)...........              274                  28                  (390)
                                                -----------         -----------         -------------
(Loss) income before extraordinary item...             (769)              1,222                (2,657)

  Extraordinary item......................               --                 120                    --
                                                -----------         -----------         --------------
Net (loss) income ........................      $      (769)        $     1,102         $      (2,657)
                                               ------------         -----------         --------------
  Preferred dividends.....................              248                 192                    --
                                               ------------         -----------         --------------
Net (loss) income applicable to
  common shares...........................      $    (1,017)        $       910         $      (2,657)
                                                ===========         ===========         =============
Earnings (loss) per common share:
Net  (loss) income per common share before
extraordinary item - basic ...............      $    (0.23)         $      0.16         $       (0.24)
                                                ==========          ===========         =============
Extraordinary charge......................      $       --          $     (0.02)        $          --
                                                ==========          ===========         =============
Net (loss) income per common
  share - basic...........................      $    (0.23)         $      0.14         $       (0.24)
                                                ==========          ===========         =============
Earnings per common share - assuming
dilution:
Net (loss) income per common  share before
extraordinary item - diluted..............      $    (0.23)         $      0.12         $       (0.24)
                                                ==========          ===========         =============
Extraordinary charge......................      $       --          $     (0.01)        $          --
                                                ==========          ===========         =============
Net (loss) income per common
  share - diluted.........................      $    (0.23)         $      0.11         $       (0.24)
                                                ==========          ===========         =============
Weighted average number of common and
dilutive shares - basic...................           4,346                6,702                10,969
                                                ==========          ============        =============
Weighted average number of common and
dilutive shares - diluted.................           4,346               10,035                10,969
                                                ==========          ===========         =============

</TABLE>
                See notes to consolidated financial statements.
                                      F-4
<PAGE>
<TABLE>
<CAPTION>

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

                                                  Common Stock                   Preferred Stock

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


<S>                                    <C>           <C>    <C>         <C>         <C>         <C>      <C>        <C>
Balance at January 1, 1996........      4,277,975      43     9,974            --      --        --      (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.......................        154,241       1       280            --      --        --          --        281

Net loss..........................             --      --        --            --      --        --        (769)      (769)
                                        ---------   -----   -------     ---------    ----   -------     -------     ------
Balance at December 31, 1996......      4,432,216   $  44   $10,254     2,100,000    $ 21   $ 4,522     $(8,664)   $ 6,177

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

Issuance of stock.................      2,629,018      26    10,569            --      --        --          --     10,595
Issuance of stock and stock option
  excercises......................         86,364       1       287            --      --        --          --        288

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

Net income........................             --      --        --            --      --        --       1,102      1,102
                                       ----------   -----   -------     ---------    ----   -------     -------    -------
Balance at December 31, 1997......     10,918,188   $ 109   $25,615     $      --    $ --   $    --     $(8,081)   $17,643
                                       ==========   =====   =======     =========    ====   =======     =======    =======
Stock option
 exercises........................        108,896       1       245            --      --        --          --        246
                                       ==========   =====   =======     =========    ====   =======     =======    =======

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

                See notes to consolidated financial statements.
                                      F-5
<PAGE>
<TABLE>
<CAPTION>



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

                                                                               Years Ended December 31,
                                                                      ---------------------------------------------
                                                                        1996               1997               1998
                                                                      ---------         ----------        ---------


<S>                                                                  <C>               <C>              <C>        
Cash flows from operating activities:
Net  (loss) income..........................................         $    (769)        $   1,102        $   (2,657)
   Adjustments  to reconcile net (loss) income to net
    cash (used in) provided by operating activities:
    Extraordinary item......................................                --               120                --
    Depreciation and amortization...........................             1,311             1,232             1,099
    Write off of capitalized software
                                                                            --                --               366
    Gain on sale of Illinois property.......................              (145)               --                --
Change in operating assets and liabilities:
    Increase in accounts receivable.........................              (395)           (2,575)             (907)
    Decrease (increase) in inventories......................               174                84              (967)
    Decrease (increase) in prepaid expenses and other.......                43              (538)              276
    Decrease (increase) in payable to AT&T Commercial/Finova            (1,190)              (64)            1,231
    Increase (decrease) in accounts payable, accrued
      liabilities and other.................................             1,820               281            (1,353)
    Increase (decrease) in customer deposits................              (156)             (424)             (288)
                                                                     ---------      ------------        ----------
Net cash (used in) provided by operating activities.........               693              (782)           (3,200)
                                                                     ---------      ------------        ----------
Cash flows from investing activities:
   Additions to property, plant and equipment...............              (642)             (809)           (1,453)
   Gross proceeds from sale of Illinois property............               855                --                --
   Additions to capitalized software........................              (439)             (602)           (1,047)
                                                                     ---------      ------------       -----------
Net cash used in investing activities.......................              (226)           (1,411)           (2,500)
                                                                     ---------      ------------       -----------
Cash flows from financing activities:
   Borrowings under revolving credit agreement..............            15,379            18,198            11,381
   Repayments under revolving credit agreement..............           (15,466)          (18,929)          (12,412)
   (Repayment of) proceeds from capital lease obligations...               (29)              (88)              234
   Repayment of mortgage payable............................              (502)               --                --
   Gross proceeds from issuance of preferred stock..........             3,000                --                --
   Expenses for issuance of preferred stock.................              (251)               --                --
   Proceeds from exercise of employee stock options and
     issuance of common stock...............................               281            10,883               246
   Payment of dividends.....................................                --              (519)               --
   Cash used for extinguishment of debt.....................                --              (120)               --
                                                                     ---------      ------------        ----------
Net cash provided by (used in) financing activities.........             2,412             9,425              (551)
                                                                     ---------      ------------        ----------
Net increase (decrease) in cash and cash equivalents........             2,879             7,232            (6,251)
Cash and cash equivalents at beginning of period............             1,514             4,393            11,625
                                                                     ---------      ------------        ----------
Cash and cash equivalents at end of period..................         $   4,393      $     11,625       $     5,374
                                                                     =========      ============       ===========
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
     Interest...............................................         $     422      $        148        $       88
                                                                     =========      ============        ==========

</TABLE>
                See notes to consolidated financial statements.
                                      F-6
<PAGE>


                                   ECCS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1998
               (Dollars in Thousands Except Per Share Information)


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. 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.  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.

     Software Development Costs

     The Company  capitalizes  software  development  costs in  accordance  with
Statement  of  Financial  Accounting  Standards  ("SFAS") No. 86. Such costs are
capitalized  after  technological   feasibility  has  been  demonstrated.   Such
capitalized  amounts are amortized  commencing  with product  introduction  on a
straight-line  basis  utilizing the estimated  economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of  sales  and  aggregated  $544,  $605  and  $190  for  1996,  1997  and  1998,
respectively.  At December  31,  1998,  the Company  has  capitalized  $3,661 of
software  development  costs,  of which $366 has been written off and $1,993 has
been amortized. In 1998, the Company discontinued its efforts to develop a fibre
controller  and a  controller  design  that  incorporates  Tandem's  Server  Net
Technology. As a result, the Company incurred a one-time charge in 1998 of $366.

     Impairment of Long-lived Assets

     In  accordance  with  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of",  the Company
records impairment losses on long-lived assets used in operations or expected to
be  disposed  of when  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

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



                                      F-9
<PAGE>

Note 2 -- Summary of Significant Accounting Policies (continued)

     Use of Estimates

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

     New Authoritative Accounting Pronouncements

     In June 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  adopted the new  requirements  in 1998.  The
adoption  of SFAS No. 131 did not  affect  results of  operations  or  financial
position, but did affect the disclosure of segment information. See Note 3.

     In March 1998, the Accounting  Standards  Executive  Committee of the AICPA
issued  Statement of Position (SOP) 98 -1,  Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which has been adopted
prospectively  as of January 1, 1999,  requires  the  capitalization  of certain
costs incurred in connection with developing or obtaining internal use software.
Management  does not expect the  effect of  adopting  the SOP to have a material
affect on the Company's results of operations.

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,  which  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 has been automatically  renewed on
each anniversary date.  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


                                      F-10
<PAGE>

Note 3 -- Transactions with Significant Vendors and Customers (continued)

financing of purchases under this agreement.  The Company's purchases under this
agreement   totaled   $4,300,   $7,800  and  $6,600  in  1996,  1997  and  1998,
respectively.

     In  February  1999,  Unisys,  the  primary  outside  manufacturer  for  the
Synchronix  system  notified the  Company,  that Unisys was closing its Winnipeg
computer  storage systems  manufacturing  plant by July 31, 1999 and accordingly
the Manufacturing Services Agreement will be terminated at that time. Management
believes  it  will be  able  to  locate  another  third  party  manufacturer  or
manufacture the Synchronix systems in-house.

     Sales to the Company's primary alternate channel partner, Unisys, accounted
for  18.0% of the  Company's  net  sales in 1997 and 28% in 1998.  All  sales to
Unisys,  which began in 1996, 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 to the Federal
Government,  represented  30%, 48% and 34%, of net sales in 1996, 1997 and 1998,
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  $15,000 of  products,  or 44% of the
Company's  total net sales in 1997. In 1998 such sales totaled  $9,579 or 34% of
total sales. There are no minimum purchase requirements.

     In  1996,  1997  and  1998,  purchases  by  multiple  AT&T  business  units
represented  14%, 3% and less than 1%,  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

                                      F-11
<PAGE>

Note 3 -- Transactions with Significant Vendors and Customers (continued)

user or for resale by such business units to third parties. In 1998, the Company
purchased less than 1% of its inventory acquisitions from NCR. In 1996 and 1997,
purchases from such vendor represented 7.5% and less than 1%,  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. In 1996
and 1997,  purchases from Bell  Microproducts  totaled  approximately  $2,100 or
12.7% and $4,200 or 17.2% of all purchases respectively. In 1998, such purchases
totaled $5,100 or 23.3% of all purchases.

     Anthem Electronics, Inc. ("Anthem") is a significant vendor to the Company.
The Company's  purchases from Anthem totaled $1,200 or 7.3%, $1,100, or 4.6% and
$507  or  2.3%  of the  Company's  total  purchases  in  1996,  1997  and  1998,
respectively.  Such purchases  consisted  primarily of disk drives.  The Company
purchases from Anthem on an open account basis.

     Segment Information

     All of the  Company's  revenues  are  generated in the United  States.  The
Company  classifies  its revenues  based upon its primary sales  channels:  OEM,
Federal and commercial.  All Company  products are available for sale in each of
the  channels.  Revenues by sales  channel are  regularly  reviewed by the chief
operating decision maker and are as follows:

          Net Sales                    1996         1997          1998
          ---------                    ----         ----          ----
          OEM                        $8,590      $12,580       $10,532
          Federal                     5,651       14,960         9,678
          Commercial                  8,363        6,461         8,256
                                      -----        -----         -----
               Total                $22,604      $34,001       $28,466
                                    =======      =======       =======

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

Note 4 -- Inventories

     Inventories consist of the following:

                                                          December 31,
                                                   --------------------------
                                                     1997             1998
                                                   ---------     ------------
Purchased parts............................        $   2,496      $     2,500
Finished goods.............................            2,808            3,848
                                                   ---------      -----------
                                                       5,304            6,348
  Less: inventory valuation reserve........              708              785
                                                   ---------      -----------
                                                   $   4,596      $     5,563
                                                   =========      ===========

                                      F-12
<PAGE>

Note 5 -- Property, Plant and Equipment

     Property, plant and equipment consist of the following:

                                                            December 31,
                                                    ------------------------
                                                        1997          1998
                                                    ------------  ----------
Property........................................... $    464       $    473
Computer equipment.................................    3,808          4,929
Vehicles...........................................       47             47
Leasehold improvements.............................      373            407
Equipment under capital leases.....................      368            651
                                                    ---------       --------
                                                       5,060           6,507
Less accumulated depreciation and amortization,
  including $346 and $361 relating to equipment
  under capital leases at December 31, 1997
  and December 31, 1998, respectively..............    3,688           4,591
                                                    ---------       --------
                                                    $  1,372        $  1,916
                                                    =========       =========

Note 6 -- Loans Payable to NCC and Finova

     Until July 30, 1997,  the Company had a financing  facility  with  Fidelity
Funding of California,  Inc.  which  provided for maximum  eligible (as defined)
accounts  receivable  financing of $7,000 at the prime  lending rate with a 0.5%
transaction fee applied to each borrowing. 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 11.5% and 7.3% in 1996 and  1997,  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 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.

     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, 1998,  the Company had no outstanding
balance under this full recourse factoring facility.

     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 $2,000.
The agreement with AT&T-CFC  contained  covenants  relating to net worth,  total
assets to debt and


                                      F-13
<PAGE>

Note 6 -- Loans Payable to NCC and Finova (continued)

total  inventory to debt.  On December 1, 1997,  Finova  acquired the  Company's
$2,000 general line of credit with AT&T-CFC. The Company renewed its credit line
with Finova upon its  expiration on March 31, 1998. On October 31, 1998,  Finova
increased such general line of credit to $3,000 and extended it through  January
31, 1999, on the same terms and  conditions.  After such date, the line returned
to  $2,000.  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 8.5% of its  inventory  acquisitions  in 1997 and  1998,  respectively,  the
majority  of  which  were  purchases  from  Bell  Microproducts  and  Tech  Data
Corporation.  The  Company's  obligations  under the  agreement  with Finova 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  $1,231.  As of December 31,
1998,  the Company had $1,231  balance  outstanding  under this credit line, and
available  credit  under  such  line  towards  future  inventory  purchases  was
approximately  $769. The weighted average interest rate on such line was 6.8% in
1998.

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

     The Company's  agreement  with 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.

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,  collateralized  by
property  located in Romeoville,  Illinois.  On March 19, 1996, the Company sold
such property for gross  proceeds of $855 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  were  payable  through  the first  quarter  of 1998 and bear
interest at rates  ranging  from 7.2% to 19.5%.  Capitalized  lease  obligations
entered into in 1998 are payable  through the second quarter of 2000 and bear an
interest  rate of  approximately  3.0%.  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  $501,  $507 and $523 for the years ended December 31,
1996, 1997 and 1998, 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.

                                      F-14
<PAGE>

Note 8 -- Leases (continued)

     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, 1998:

                                                   Capitalized       Operating
                                                     Leases            Leases
                                                  ----------        ----------
1999.............................................  $   118           $    536
2000.............................................      118                494
2001.............................................       20                 25
Thereafter.......................................       --                 --
                                                   -------           --------
Total minimum lease payments.....................      256           $  1,055
                                                   -------           ========
Less amount representing interest................       11
                                                   -------
Present value of net minimum lease payments......  $   245
                                                   =======


                                      F-15
<PAGE>


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  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


                                      F-16
<PAGE>

Note 9 -- Convertible Preferred Stock (continued)

to cover  over-allotments.  The Company  received net proceeds of  approximately
$10,595. 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 and $242 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


                                      F-17
<PAGE>

Note 10 -- Stock Option Plans (continued)

five years from the date of the grant for  shareholders  owning more than 10% of
the voting rights (as defined).  The non-statutory  stock options may be granted
to  full-time  employees,  including  officers  and  non-employee  directors  or
consultants at prices as determined by the Board of Directors. The stock options
are exercisable over a period determined by the Board of Directors.  To date, no
options have been granted with a vesting period of more than five years.

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

                                                     Options Outstanding
                                                -------------------------------
                                                               Weighted-Average
                                                   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 exercised........................        (25,225)          $2.55
   Options canceled.........................       (479,734)          $2.69
                                                -----------
Balance at December 31, 1998................        190,759           $2.60
                                                -----------
Options exercisable at December 31, 1998            166,760           $2.11

     The weighted average remaining contractual life for the balance at December
31, 1998 in the 1989 Stock Option Plan is six (6) years and the  exercise  price
range is $1.00 - $3.03.

     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 expires 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. In June 1998, the shareholders approved an increase in the number of
shares  subject to the 1996 Stock  Plan.  Under the 1996 Stock  Plan,  1,600,000
shares of common stock  currently can be issued through  incentive stock options
and  non-statutory  stock options  and/or stock purchase  rights.  The incentive
stock options allow designated employees, non-employee directors and consultants
to purchase shares


                                      F-18
<PAGE>

Note 10 -- Stock Option Plans (continued)

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 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 granted...........................    1,408,800         $ 1.62
   Options exercised.........................       (2,500)        $ 2.88
   Options canceled..........................     (646,900)        $ 4.40
                                               -----------
Balance at December 31, 1998.................    1,178,900         $ 1.39
                                               -----------
Options exercisable at December 31, 1998                --             --

     The weighted average remaining contractual life for the balance at December
31, 1998 in the 1996 Stock Option Plan is ten (10) years and the exercise  price
range is $1.25 - $2.10.

     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.

     On October 21, 1998, the Board of Directors  unanimously  voted in favor of
offering  to  all  employees  who  were  previously  granted  stock  options  an
opportunity to exchange such options for new stock options to purchase shares of
Common Stock of the Company,  at an exercise price equal to $1.25 per share (the
"New  Options"),  the fair market  value of the  Company's  Common Stock on such
date.  The New Options are  exercisable to the extent of one-half on each of the
first and second  anniversary of the date of grant.  The Company offered the New
Options in order to pursue its commitment to retain key employees,  particularly
in light of the highly competitive


                                      F-19
<PAGE>

Note 10 -- Stock Option Plans (continued)

labor market for technical personnel.  On November 5, 1998, the Company formally
offered its employees the option to exchange all outstanding options for the New
Options  pursuant to the terms of the 1996 Stock Plan. The number of outstanding
options  exchanged  pursuant to this transaction was 1,487,159.  The New Options
were granted from both the 1996 Option Plan and the  Non-Qualified  Stock Option
pools.

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  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 granted..............................      993,209        $ 2.97
   Options exercised............................      (37,625)       $ 2.13
   Options canceled.............................   (1,205,925)       $ 5.53
                                                  -----------
Balance at December 31, 1998                          573,500        $ 1.74
                                                  -----------
Options exercisable at December 31, 1998........      163,145        $ 1.99


                                      F-20
<PAGE>


Note 10 -- Stock Option Plans (continued)

     The weighted average remaining contractual life for the balance at December
31, 1998 under the  Non-Qualified  Agreements is nine (9) years and the exercise
price range is $1.25 - $2.88.

     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
purchase 30,000 shares of Common Stock. In addition,  each non-employee director
who is a member  of the  Board on the first  trading  day of each year  shall be
automatically  granted on such date,  without  further  action by the Board,  an
option to purchase  5,000 shares of Common Stock.  The exercise  price per share
under the 1996  Non-Employee  Directors  Plan shall be equal to the fair  market
value (as defined) of a share of Common Stock on the applicable  grant date, and
options granted under the 1996 Non-Employee Directors Plan vests over a four (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 granted...........................   30,000           $ 6.50
Balance at December 31, 1998                    90,000           $ 5.09
                                              --------
Options exercisable at December 31, 1998.....   24,167           $ 4.38


                                      F-21
<PAGE>

Note 10 -- Stock Option Plans (continued)

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, 1998, all such
warrants were exercisable.

     The Company has reserved  2,332,007 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  1996,  1997 and  1998:  risk-free  interest  rates of  between
5.48%-7.58% in 1996, 5.74%-6.73% in 1997 and 4.3%-5.74% in 1998; dividend yields
of zero; volatility factors of the expected market price of the Company's common
stock of 1.02 in 1996,  .959 in 1997  and .947 in 1998;  and a  weighted-average
expected life of four (4) years. The weighted average fair market value of stock
options  issued in 1996,  1997 and 1998 was  $2.35,  $3.32 and $2.20 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.


                                      F-22
<PAGE>

Note 10 -- Stock Option Plans (continued)

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

                                                     1996            1997          1998
                                                    -------       ----------    ---------
<S>                                                 <C>           <C>           <C>      
Net (loss) income as reported.....................  $  (769)      $  1,102      $ (2,657)
Pro forma net (loss)income .......................  $(1,093)      $    383      $ (3,802)
 (Loss) income per share as reported
   Basic..........................................  $  (.23)      $    .14      $   (.24)
Pro forma (loss) income per share
   Basic..........................................  $  (.25)      $    .03      $   (.35)

(Loss) income per share as reported - diluted.....  $  (.23)      $    .11      $   (.24)

Pro forma (loss) income per share - diluted.......  $  (.25)      $    .03      $   (.35)

</TABLE>

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. In June 1998, the shareholders  approved an increase in the number
of shares  subject to the Purchase  Plan to 400,000  shares.  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, 1998,  156,124
shares were issued under the Purchase Plan, of which 43,546 were issued in 1998.

Note 12 -- Income Taxes

     The provision for income taxes is comprised of the following:

                                                   December 31,
                                    ------------------------------------------
                                      1996              1997            1998
                                    -----------    ------------     ----------
Federal:
  Current.....................      $       --       $       --      $      --
  Deferred....................              --               --             --

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

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


                                      F-23
<PAGE>

Note 12 -- Income Taxes (continued)

     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 1998 are as follows:

                                               1997                1998
                                            -------------     -----------

Tax credits.........................         $     436         $       663
Net operating losses................             2,882               4,311
Capitalized software................              (316)               (508)
Other...............................               777                 648
Valuation allowance.................            (3,779)             (5,114)
                                             ---------         -----------
Total...............................                --                  --
Current.............................                --                  --
                                             ---------         -----------
Non-current.........................         $      --         $        --
                                             =========         ===========

     During 1997,  the Company  utilized  $1,118 of net operating loss carryover
("NOL") for federal tax  purposes.  The Company has NOL  carryovers  for Federal
income tax purposes of approximately $10,278 which will begin to expire in 2009.
The Company also has research and development tax credit  carryovers for Federal
income tax purposes of approximately $376 which will begin to expire in 2009. In
addition,  the Company has alternative minimum tax credits of approximately $67.
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 some 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.

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

                                                                      December 31,
                                                          -------------------------------
                                                             1996       1997        1998
                                                          --------  ----------- ---------
<S>                                                       <C>       <C>          <C>     
Computed tax expense (benefit)..........................  $  (261)  $    375     $  (903)
Increase (decrease) in federal valuation allowance
 (use of NOL)...........................................      418       (222)      1,131
Research and development tax credits....................     (183)      (153)       (228)
Other...................................................       26         --          --
                                                           -------   -------      ------
Actual tax expense (benefit)............................  $    --   $     --      $   --
                                                          ========   =======      ======
</TABLE>


                                      F-24
<PAGE>

Note 12 -- Income Taxes (continued)

     The Company also has approximately $12,965 of state NOL carryforwards which
will  begin to expire in 2001 and state  research  and  development  tax  credit
carryforwards of $334 as of December 31, 1998.

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>
<CAPTION>

                                                          1996             1997             1998
                                                          ----             ----             ----


<S>                                                <C>               <C>                 <C>       
Numerator:

Net (loss) income                                  $      (769)      $     1,102         $  (2,657)
Preferred stock dividends                                 (248)             (192)               --
                                                     ---------       -----------         ---------

Numerator for basic earnings per share -
(loss) income available to common shareholders          (1,017)              910            (2,657)

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                                   4,346            6,702            10,969

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                              $   (0.23)    $       0.14          $   (0.24)
                                                      =========     ============          =========
Diluted earnings per share                            $   (0.23)    $       0.11          $   (0.24)
                                                      =========     ============          =========
</TABLE>


                                      F-25
<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
promissory note in favor of the Company.  Interest on the outstanding  principal
balance of such promissory note is payable monthly at the prime lending rate. At
December 31, 1998, the balance on such  promissory note was $218. The promissory
note 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-26
<PAGE>
<TABLE>
<CAPTION>

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

YEAR ENDED December 31, 1998:

Allowance for Doubtful
<S>                                            <C>             <C>          <C>          <C>            <C>
Accounts & Returns/Credits...................  $  297          $ 204        $   --        $ 167(A)      $     334
                                               ------          -----        ------        -----         ---------
Tax valuation................................  $3,779          $  --        $1,335(D)     $  --         $   5,114
                                               ------          -----        ------        -----         ---------
Inventory....................................  $  708          $ 667        $   --        $ 590(B)      $     785
                                               ------          -----        ------        -----         ---------
Warranty.....................................  $  534          $ 273        $   --        $ 284         $     523
                                               ------          -----        ------        -----         ---------
YEAR ENDED December 31, 1997:

Allowance for Doubtful
Accounts & Returns/Credits...................  $  184          $ 183        $   --        $  70 (A)     $     297
                                               ------          -----        ------        ------        ---------
Tax valuation................................  $4,072          $  --        $   --        $ 293 (C)     $   3,779
                                               ------          -----        ------        ------        ---------
Inventory....................................  $  781          $ 840        $   --        $ 913 (B)     $     708
                                               ------          -----        ------        ------        ---------
Warranty.....................................  $  414          $ 886        $   --        $ 766         $     534
                                               ------          -----        ------        -------       ---------
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
                                               ------          -----        ------        ------         --------
Warranty.....................................  $  350          $  64        $   --        $  --          $    414
                                               ------          -----        ------        ------         --------

</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.




<PAGE>


                                   EXHIBIT 23





<PAGE>




                         Consent of Independent Auditors

     We consent to the incorporation by reference in the Registration  Statement
(Form S-8 Registration  No. 33-93480)  pertaining to the 1989 Stock Option Plan,
as amended (the "Option  Plan");  the 1995  Employee  Stock  Purchase  Plan (the
"Purchase  Plan");  and 306,000 shares  issuable under certain  options  granted
outside the Option Plan in February  1995 (the  "February  1995  Options");  the
Registration  Statement (Form S-8 Registration No. 333-15529)  pertaining to the
1996 Non-Employee  Directors Stock Option Plan (the "Non-Employee Plan") and the
1996  Stock  Plan  (the  "Stock  Plan")  and the  Registration  Statement  (Post
Effective Amendment No. 1 to Form S-8/S-8  Registration No. 333-8416) pertaining
to  the  Option  Plan;  the  Purchase  Plan;  the  February  1995  Options;  the
Non-Employee  Plan; the Stock Plan;  298,848 shares  issuable under that certain
warrant  granted in December 1994;  90,000 shares issuable under certain options
granted  outside the Option Plan,  the Stock Plan and the  Non-Employee  Plan in
June 1996;  10,000 shares  issuable under certain  options  granted  outside the
Option Plan,  the Stock Plan and the  Non-Employee  Plan in December  1996;  and
498,400 shares  issuable under certain  options granted outside the Option Plan,
the Stock Plan and the  Non-Employee  Plan in February  1998 of our report dated
February 19, 1999,  with respect to the  consolidated  financial  statements and
schedule of ECCS,  Inc.  included in the Annual  Report (Form 10-K) for the year
ended December 31, 1998 filed with the Securities and Exchange Commission.






                                           ERNST & YOUNG LLP


MetroPark, New Jersey
March 29, 1999