<PAGE>


HISTORICAL FINANCIAL SUMMARY

SELECTED FINANCIAL DATA: The following table presents information regarding 
the financial condition and results of operations of the Company for the past 
five years. The data as of December 31, 1998 and 1997 and for each of the 
three years ended December 31, 1998 should be read in conjunction with the 
consolidated financial statements and notes thereto included elsewhere in 
this annual report.

<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS:                                               For the years ended December 31,
                                             ---------------------------------------------------------------------------------
(In thousands, except per share data)           1998              1997              1996              1995              1994 
------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>               <C>               <C>               <C>
Revenues                                      $  3,853            12,660            51,269            60,181            81,121
Cost of goods sold                               2,361            12,525            35,416            60,483            50,862
                                              --------          --------          --------          --------          --------
Gross margin                                     1,492               135            15,853              (302)           30,259
                                              --------          --------          --------          --------          --------

Research and development                         2,473             3,981             7,264             8,621             7,291
Sales and marketing                                991             4,312            18,395            21,897            18,456
General and administrative                         714             1,697             5,578             6,333             3,692
Nonrecurring items, net                           (195)              864                --                --                --
Other income, net                                 (380)              (12)             (180)               --            (1,017)
                                              --------          --------          --------          --------          --------
                                                 3,603            10,842            31,057            36,851            28,422
                                              --------          --------          --------          --------          --------
Income (loss) before income taxes               (2,111)          (10,707)          (15,204)          (37,153)            1,837
Provision for income taxes                          --              (224)               --                --              (125)
                                              --------          --------          --------          --------          --------
Net income (loss)                             $ (2,111)          (10,931)          (15,204)          (37,153)            1,712
                                              --------          --------          --------          --------          --------
                                              --------          --------          --------          --------          --------
Net income (loss) per share - basic
  and diluted                                 $  (0.14)            (0.81)            (1.14)            (2.81)             0.13
                                              --------          --------          --------          --------          --------
                                              --------          --------          --------          --------          --------
</TABLE>

<TABLE>
<CAPTION>
                                                                                December 31,
                                                           ------------------------------------------------------
FINANCIAL POSITION (IN THOUSANDS):                            1998         1997       1996       1995       1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>       <C>        <C>        <C>
Working Capital                                            $   5,599       2,977      8,140     20,020     51,872
Total Assets                                                   7,353       6,755     21,938     40,167     77,144
Stockholder's Equity                                       $   5,842       3,667     14,175     28,754     64,454

</TABLE>
<TABLE>
<CAPTION>
                                                                     December 31,
                                                            -------------------------------
GENERAL DATA AND RATIOS                                       1998       1997        1996
-------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>        <C>
Current Ratio                                                  4.7:1       2.0:1      2.0:1
Common shares outstanding (in thousands)                      18,961      13,460     13,407
Book value per share                                        $   0.31        0.27       1.06
Number of employees                                               35          38        156
Average revenue per employee (in thousands)                 $    110         166        291
</TABLE>

TRICORD SYSTEMS, INC.
4

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

GENERAL
Throughout 1998 the Company continued to focus its development 
efforts exclusively on storage system management software, the strategy it 
defined in 1997. The storage system management software architecture includes 
an entirely new generation of distributed file system and file-intelligent 
input/output ("I/O") technology known as Tricord Storage Management Software 
("TSMS"). No revenues were generated by TSMS for 1998, and the Company may 
not receive revenues from TSMS-based products in 1999.

The Company has historically engaged in the business of designing, 
manufacturing, marketing and supporting high-performance enterprise servers 
for use in mission critical applications principally running on Microsoft 
Windows NT-Registered Trademark- and Novell-Registered Trademark- 
NetWare-Registered Trademark-. All revenues generated through December 31, 
1998 relate to the server line of business (sometimes referred to as the 
"legacy business").

RESULTS OF OPERATIONS

REVENUES
Revenues for 1998 decreased 70% from 1997 compared to a decrease of
approximately 75% from 1996 to 1997. The decreases in product revenues are
primarily due to the Company's announcement in February 1997, that it would not
bring its next generation enterprise server to market. As a result, product
revenues for 1998 and 1997 consisted primarily of the sale of spare parts, disk
drives, memory and expansion products from its server line of business. The
Company continued to sell new service contracts, with revenues from such
contracts of approximately $1,600,000 for 1998 and approximately $2,000,000 each
for 1997 and 1996. In 1998 and 1997, no single customer accounted for more than
10% of the Company's revenues. Toshiba Corporation and Memorex Telex Corporation
accounted for 14.9% and 14.5% of revenues in 1996, respectively.

The Company currently anticipates that revenues will continue to decrease in 
1999 and expenses will continue to rise as the Company continues to focus its 
resources on developing and marketing TSMS. The Company intends to sell its 
remaining enterprise server product inventory, consisting primarily of spare 
parts and expansion products, as long as there is sufficient customer demand 
and materials are available. The Company will honor its service agreements 
and enter into new agreements as long as there is sufficient demand and 
provided such agreements are profitable. Since the Company has not completed 
its development of TSMS products, the Company may not receive revenues in 
1999 from the sale or licensing of TSMS-based products.

                                                          TRICORD SYSTEMS, INC.
                                                                              5
<PAGE>

GROSS MARGIN
As a percent of revenues, gross margin increased to 38.7% in 1998 compared to 
1.1% in 1997 and 30.9% in 1996. The increase in gross margin from 1997 to 
1998 was primarily due to the impact of a full year of cost reductions in 
1998, compared to only a partial year impact in 1997, and due to a 1997 
adjustment of $1,332,000 to write-down inventories to their estimated net 
realizable values.

The decrease in gross margin from 1996 to 1997 was primarily due to the
significant decrease in the Company's sales volume and the write-down of
inventory discussed above. Gross margin was negatively impacted in 1997 by sales
volume decreasing before certain variable costs were reduced. In addition, the
product sales mix, which consisted primarily of spare parts and expansion
products in 1997, resulted in a lower gross margin than in 1996, when the mix
was comprised primarily of system sales. The Company currently anticipates that
gross margin dollars will continue to decline in 1999 because of the anticipated
decrease in revenues in 1999 as discussed above.

RESEARCH AND DEVELOPMENT
During the last three years, expenses for research and development consisted 
primarily of personnel costs and depreciation on capital equipment used in 
the research and development process. Research and development expenses 
decreased to $2,473,000 in 1998 from $3,981,000 in 1997 and $7,264,000 in 
1996. The decreases from 1997 to 1998 and from 1996 to 1997 were due 
primarily to a decrease in salary and benefit costs associated with the 
workforce reduction which took effect at the end of the second quarter of 
1997. In addition, 1996 costs included a $335,000 charge to research and 
development expense in connection with the acquisition of certain assets of 
Reliable Distributed Information Corporation. The Company currently 
anticipates that research and development costs will rise during 1999 as the 
Company continues to focus on the development of TSMS.

SALES AND MARKETING
For 1998, sales and marketing expenses consisted primarily of compensation and
trade shows and marketing materials. For 1997 and 1996, sales and marketing
expenses included compensation, sales commissions, travel, trade shows and
marketing materials, and facility costs associated with domestic and
international sales offices. Sales and marketing expenses decreased to $991,000
in 1998 from $4,312,000 in 1997 and from $18,395,000 in 1996. The decreases from
1997 to 1998 and from 1996 to 1997 were primarily due to lower salaries and
benefits due to the workforce reduction which took place at the end of the
second quarter of 1997, the reduction of commissions related to reduced
revenues, and the closing of the Company's domestic and international sales
offices. The Company currently anticipates that sales and marketing expenses
will increase significantly in 1999 as the Company continues to focus on the
development and marketing of TSMS and explores market and sales opportunities.

GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $714,000 in 1998 from
$1,697,000 in 1997 and $5,578,000 in 1996. The decrease from 1997 to 1998 was
due to lower salaries

TRICORD SYSTEMS, INC.
6
<PAGE>

and benefits associated with fewer team members, lower depreciation expense, 
and fourth quarter 1998 reductions in general and administrative expenses 
totaling $400,000, including $250,000 related to warrants previously made 
available for settlement purposes related to the securities class action 
lawsuit that were not required and therefore were cancelled and a $150,000 
refund from the escrow account also related to the securities class action 
lawsuit. These reversals were made after the securities lawsuit was resolved 
in the Company's favor and all appeals were exhausted. All estimated loss 
accruals related to the securities litigation amounts were originally charged 
to general and administrative expense in 1996.

The decrease from 1996 to 1997 was due to the 1996 increase in the allowance for
doubtful accounts of $1,700,000 for Memorex Telex due to their bankruptcy filing
and lower salaries and benefits associated with fewer team members.

The Company currently anticipates that general and administrative expenses 
for 1999 will be higher than in 1998 due to the additional costs associated 
with the December 1998 addition of J. David Cabello, Vice President, General 
Counsel and Interim Chief Financial Officer and the planned addition of a new 
Chief Financial Officer in 1999.

CERTAIN NON-CASH CHARGES

The Company recorded non-cash charges in the fourth quarter of 1998 of 
$194,000 for the amortization of unearned compensation related to the grants 
of restricted stock awards and for employee stock options granted subject to 
shareholder approval. These non-cash charges will be amortized over the 
vesting periods and are estimated to be $1,531,000 in 1999.

NONRECURRING ITEMS
Nonrecurring items, net for 1998 included a payment to the Company of 
$300,000 from the sale of its former headquarters facility pursuant to a 
termination agreement with its previous landlord net of the write-off of the 
remaining net present value of the sublease payments receivable of $105,000.

Nonrecurring items, net for 1997 included the following items: a charge of 
$975,000 for the net value of leasehold improvements written off due to the 
termination of the Company's lease at its former headquarters facility; a 
charge of $764,000 for the write-down of certain equipment based on an 
updated review of the equipment required to support the operations of the 
Company; a charge of $125,000 for the settlement and mutual release between 
the Company and International Business Machines ("IBM") without admission of 
liability by either party regarding IBM's assertion that certain of the 
Company's server systems and related products infringed IBM's patents; and a 
credit of $1,000,000 for a one-time license fee paid to the Company by 
Toshiba for the world-wide, non-exclusive right and license to the 
Availability Management System ("AMS") Software. The AMS Software was related 
to the Company's server line of business.

                                                          TRICORD SYSTEMS, INC.
                                                                              7
<PAGE>

INCOME TAXES
As of December 31, 1998, for federal income tax purposes, the Company had 
domestic net operating loss carryforwards of approximately $70,000,000. These 
loss carryforwards expire if not utilized by various dates between 2002 and 
2018. Due to uncertainty as to the realizability of the loss and tax credit 
carryforwards, full valuation allowances have been established for the 
benefits associated with these carryforwards. The Company did not incur tax 
liabilities in 1998, 1997 and 1996 due to its net losses.

Included in 1997 is a charge of $224,000 to the provision for income taxes to
establish a reserve for a deferred tax asset related to the Company's
alternative minimum tax credit carryforwards.

FINANCIAL INSTRUMENTS
The Company invests excess funds not required for current operations in cash 
equivalents, primarily money market funds or commercial paper. As of 
December 31, 1998, cash equivalents had an average maturity of less than 
three months. Market risk was estimated as the potential decrease in interest 
income resulting from a hypothetical one percent decrease in interest rates 
for the cash equivalents, which would result in an annual interest income 
decrease of approximately $30,000.

LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,277,000 in 1998. Cash was primarily
used in 1998 to fund the Company's net loss, and was offset by decreases in
accounts receivable and inventories due primarily to lower sales. Cash used in
operating activities was $2,060,000 in 1997 and $4,774,000 in 1996. Cash was
primarily used in 1997 and 1996 to fund the Company's net loss in each year and
was offset by decreases in accounts receivable and inventories and the primarily
non-cash nature of certain 1997 charges.

Cash used in investing activities in 1998, 1997 and 1996 was $55,000, $361,000,
and $1,346,000, respectively, principally due to capital expenditures, which was
partially offset in 1996 by proceeds from the maturity of investments. The
Company anticipates that its capital expenditures in 1999 will be more than the
1998 level. Other than capital expenditures associated with the opening of the
Company's Houston facility in early 1999 which are estimated to be $74,000, the
Company has no significant commitments for the purchase of capital equipment.

Cash from financing activities in 1998, 1997 and 1996 was $3,834,000, $85,000,
and $443,000, respectively, principally due to $3,000,000 received from a
private placement in 1998, as described below, and stock options exercised and
stock issued under the Company's Employee Stock Purchase Plan in each of the
three years.

In December 1998, the Company received $3,000,000 from a private placement of 
3,000,000 shares of common stock at a price of $1.00 per share. In connection 
with this private placement, investors also received warrants to purchase an 
equal number of additional shares of common stock at an exercise price of 
$3.50 per share. The warrants are exercisable for a five-year period and 
expire on December 15, 2003. The Company intends to use these funds to 
further its TSMS development and marketing efforts in 1999.

As of December 31, 1998, the Company had $6,215,000 in cash and cash
equivalents. If the Company's operations progress as currently anticipated, of
which there can be no assurance, the Company believes that it will be able to
manage its cash resources to

TRICORD SYSTEMS, INC.
8
<PAGE>

continue operations for at least the next twelve months. However, should the 
Company incur additional costs within the next twelve months due to the 
product launch of its TSMS-based products (which have yet to be fully 
developed), the related channel development for distributing TSMS-based 
products and other significant increases in research and development costs 
and marketing and sales costs, the Company will need to adjust its plans as 
necessary, if it fails to secure additional financing.

In any event, however, the Company will need to raise additional capital in
order to complete development and commence commercial marketing of its
TSMS-based products. The Company may seek such additional capital through the
sale of debt or equity securities. In addition, the Company continues to look
for additional capital through OEM or other strategic investments or alliances.
There can be no assurance, however, that additional capital will be available on
acceptable terms or at all, and the failure to obtain additional capital as
needed may have an adverse effect on the Company.

YEAR 2000
The Company previously initiated a project to prepare its computer systems 
for the Year 2000. This project encompasses information technology ("IT") 
systems, non-IT systems, Company products and third party products and 
systems. Based on its efforts to date, management believes the Year 2000 
issue will not have a significant impact on operations.  If additional 
modifications and conversions are necessary, however, and cannot be completed 
on a timely basis, the Year 2000 issue could have an adverse effect on the 
Company's operations. At this time, the Company believes that it is 
unnecessary to adopt a contingency plan covering the possibility that 
additional modifications and conversions will be needed, but, as part of the 
overall project, the Company will continue to assess the need for such a 
contingency plan, and will continue to analyze its computer systems to 
determine if additional modifications and conversions will be needed.

The Company has reviewed its main IT system and to date has determined that a 
Year 2000 problem does not exist in that system. However, the Company has 
other smaller supporting business systems which it has not yet completely 
reviewed. In the event that the Company determines that its smaller 
supporting business systems will not transition properly at the end of the 
millenium, the Company will transition these systems to its main business 
system in order to mitigate any business disruption.

By the end of June, 1999, the Company expects to have completed an evaluation 
of its telephone, facility heating and cooling and other non-IT systems for 
Year 2000 readiness and to have completed any remedial action as necessary.

The Company has also reviewed its software related to its legacy business and 
has completed a fix for the Year 2000 issue. The Company has made this fix 
available to its customers on its web site. The Company will also commence an 
effort to contact as many of its legacy business customers as possible. The 
Company has not yet released any TSMS-based products, but it intends to 
review and correct any Year 2000 issues, if necessary, prior to release to 
market of these products.

The Company has reviewed suppliers for its legacy business and has determined 
that, due to the declining revenues associated with sales of spare parts, 
there is no material impact to the Company.  The Company has not yet released 
any TSMS-based products, but it intends to work with future suppliers to 
ensure that no Year 2000 issues will exist prior to release to market of 
these products.

Substantially all of the Company's Year 2000 efforts have been made using 
internal personnel, therefore, the costs associated with the Year 2000 
assessment and corrections have not been, and currently are not anticipated 
to be, material to the Company. All such costs to date have been expensed as 
incurred.

Due to the complexity and pervasiveness of the Year 2000 issue and, in 
particular, the uncertainty regarding the Year 2000 compliance programs of 
third parties, no assurance can be given that a Year 2000 issue will not have 
a material adverse effect on the Company's business or results of operations.

                                                          TRICORD SYSTEMS, INC.
                                                                              9
<PAGE>

This Annual Report contains certain forward looking statements within the 
meaning of the Private Securities Reform Act of 1995. For this purpose, any 
statements contained in this Annual Report that are not statements of 
historical fact are deemed to be forward looking statements. Without limiting 
the foregoing, words such as "may," "will," "should," "expects," 
"anticipates," "estimates," "believes," or "plans," or comparable 
terminology, are intended to indicate forward looking statements. These 
statements by their nature are based on current expectations and assumptions 
and entail various risks and uncertainties that could cause actual results to 
differ materially from those expressed in such forward looking statements, 
including the following risks:

    -  The Company will not realize sufficient revenues from its legacy 
       business to fund its ongoing TSMS product development and marketing 
       operations. The Company intends to manage its current cash to fund 
       its operations throughout 1999; however, continued aggressive product 
       development and product introduction necessarily requires that the 
       Company obtain additional funds from investors. The Company continues 
       to pursue additional investors, however, there can be no assurance that
       funds will be obtained.

    -  The market window for the Company's products is limited inasmuch as 
       many competitors with established brand identity are beginning to 
       enter the market with products that will be positioned against the 
       Company's products. Although the Company believes it has a significant 
       headstart and that its technology is superior, established product 
       channels and bundling arrangements may impede the Company's product 
       introduction and market acceptance.

    -  The market for distributed file system products for the Windows NT and 
       UNIX environment is new and developing. The Company believes that its 
       future success will depend upon the continued growth and acceptance of 
       the Windows NT operating system and the growth in demand for attached 
       storage. In addition, the Company's success is dependent upon its 
       ability to develop, test and release products for this market on a 
       timely basis.

    -  The market for storage products currently is characterized by rapid 
       technological change and evolving industry standards and is expected 
       to be highly competitive with respect to timing of product innovation. 
       The introduction of products embodying new technology and the 
       emergence of new industry standards can render products, either 
       existing or under development, obsolete and unmarketable. The 
       Company's success is dependent in part upon its ability to anticipate 
       changes in technology and industry standards and to successfully 
       develop and introduce new and enhanced products on a timely basis. If 
       the Company is unable for technological or other reasons to develop 
       products in a timely manner in response to changes in the industry, or 
       if products or product enhancements that the Company develops do not 
       achieve market acceptance, the Company's business will be materially 
       and adversely affected.

TRICORD SYSTEMS, INC.
10
<PAGE>

    -  The Company currently intends to market its TSMS throgh OEM and other 
       channels, and the failure to establish such relationships on 
       acceptable terms could adversely affect the Company's ability to 
       introduce and market TSMS-based products successfully.

    -  The Company will need to maintain compliance with the Nasdaq SmallCap 
       Market requirements.

    -  Many of the Company's potential competitors in the market for UNIX and 
       Windows NT storage products are the same companies that represent 
       potential OEM partners. The Company's ability to introduce and market 
       its products could be adversely affected if one or more of these 
       competitors elects to develop and market its own products. 
       Additionally, the Company's ability to market its products will 
       necessarily require the endorsement of industry leaders if the 
       Company's products are to gain wide-scale acceptance by the industry.

    -  The Company's sales' lead time may be longer than most storage 
       products due to the general market reluctance to accept new entrants 
       and due to the sensitivity of the data on today's storage devices.

    -  The Company will need to attract new team members and consultants and 
       retain existing team members and consultants.

TRICORD SYSTEMS, INC.
11
<PAGE>

REPORT OF MANAGEMENT



To the Stockholders and
Board of Directors of
Tricord Systems, Inc.:

The management of Tricord Systems, Inc. is responsible for the preparation,
integrity and objectivity of the financial statements and all other financial
information included in this annual report. Management believes that the
financial statements have been prepared in accordance with generally accepted
accounting principles, and that any amounts included herein which are based on
estimates of the expected effects of events and transactions have been made with
sound judgment and approved by qualified personnel.

Tricord maintains a system of internal controls to provide reasonable assurance
that assets are safeguarded and that transactions and events are recorded
properly. The system of internal controls is regularly reviewed, evaluated, and
revised as necessary by management.

The financial statements in this report have been audited by the independent
accounting firm of PricewaterhouseCoopers LLP. Their audits were conducted in
accordance with generally accepted auditing standards and included an evaluation
of our internal control system, as they considered necessary, to determine the
extent of tests and audit procedures required for expressing an opinion on the
Company's financial statements.

The Audit Committee of the Board of Directors is composed of Mr. Donald L. 
Lucas, Chairman, and Mr. Tom R. Dillon. The Audit Committee meets 
periodically with the independent accountants and management to review 
accounting, auditing, internal control and financial reporting matters. The 
independent accountants have full and free access to the Audit Committee and 
its individual members at any time.

John J. Mitcham                        J. David Cabello
Chairman and Chief                     Interim Chief Financial Officer
Executive Officer         

                                                          TRICORD SYSTEMS, INC.
                                                                             12
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors
and Stockholders of
Tricord Systems, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related 
consolidated statements of operations of cash flows and of stockholders' 
equity present fairly, in all material respects, the consolidated financial 
position of Tricord Systems, Inc. at December 31, 1998 and 1997, and the 
results of its operations and its cash flows for each of the three years in 
the period ended December 31, 1998, in conformity with generally accepted 
accounting principles. These financial statements are the responsibility of 
the Company's management, our responsibility is to express an opinion on 
these financial statements based on our audits. We conducted our audits of 
these statements in accordance with generally accepted auditing standards 
which 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, assessing 
the accounting principles used and significant estimates made by management, 
and evaluating the overall financial statement presentation. We believe that 
our audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 10, 1999, except as to the
information in Note 7, for which the
date is March 17, 1999

TRICORD SYSTEMS, INC.
13
<PAGE>

                                                TRICORD SYSTEMS, INC.
                                        CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                  -----------------------------------------------------
(in thousands, except per share data)                                  1998                1997               1996
                                                                  --------------        ------------       ------------
<S>                                                               <C>                   <C>                <C>
Revenues:
     Product sales                                                $       2,243              10,676             49,162
     Service contracts                                                    1,610               1,984              2,107
                                                                    ------------        ------------       ------------
                                                                          3,853              12,660             51,269

Cost of goods sold:
     Product sales                                                        1,988              11,966             35,008
     Service contracts                                                      373                 559                408
                                                                    ------------        ------------       ------------
                                                                          2,361              12,525             35,416

         Gross margin                                                     1,492                 135             15,853
                                                                    ------------        ------------       ------------

Operating expenses:
     Research and development                                             2,473               3,981              7,264
     Sales and marketing                                                    991               4,312             18,395
     General and administrative                                             714               1,697              5,578
     Nonrecurring items, net                                               (195)                864                  -
                                                                    ------------        ------------       ------------
                                                                          3,983              10,854             31,237
                                                                    ------------        ------------       ------------

         Operating loss                                                  (2,491)            (10,719)           (15,384)
                                                                    ------------        ------------       ------------

Other income (expense):
     Interest, net                                                          193                 204                385
     Other, net                                                             187                (192)              (205)
                                                                    ------------        ------------       ------------
                                                                            380                  12                180
                                                                    ------------        ------------       ------------

Loss before provision for income taxes                                   (2,111)            (10,707)           (15,204)
Provision for income taxes                                                    -                 224                  -
                                                                    ------------        ------------       ------------

         Net loss                                                 $      (2,111)            (10,931)           (15,204)
                                                                    ------------        ------------       ------------
                                                                    ------------        ------------       ------------

         Net loss per share  - basic and diluted                  $       (0.14)              (0.81)             (1.14)
                                                                    ------------        ------------       ------------
                                                                    ------------        ------------       ------------

         Weighted average common shares outstanding -
                     basic and diluted                                   14,573              13,447             13,357
                                                                    ------------        ------------       ------------
                                                                    ------------        ------------       ------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                                          TRICORD SYSTEMS, INC.
                                                                             14
<PAGE>


                                               TRICORD SYSTEMS, INC.
                                            CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                           At December 31,
                                                                               --------------------------------------
(In thousands, except per share data)                                                  1998               1997
                                                                               -------------------  -----------------
<S>                                                                            <C>                  <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                 $            6,215              3,713
     Accounts receivable, net                                                                 162                681
     Inventories, net                                                                         637              1,497
     Other current assets                                                                      96                174
                                                                                 -----------------  -----------------
         Total current assets                                                               7,110              6,065

Equipment and improvements, net                                                               243                565

Other assets                                                                                    -                125
                                                                                 -----------------  -----------------

         Total Assets                                                          $            7,353              6,755
                                                                                 -----------------  -----------------
                                                                                 -----------------  -----------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                          $              398                708
     Accrued payroll, benefits and related taxes                                              344                509
     Deferred revenue                                                                         525                946
     Other accrued expenses                                                                   244                925
                                                                                 -----------------  -----------------
         Total current liabilities                                                          1,511              3,088

Commitments and contingencies

Stockholders' equity:
     Common stock ,$.01 par value; 27,000 shares authorized,
         18,961 and 13,460 shares outstanding                                                 190                135
     Additional paid-in capital                                                            87,483             77,606
     Unearned compensation                                                                 (5,564)                 -
     Cumulative translation adjustments                                                         -                 82
     Accumulated deficit                                                                  (76,267)           (74,156)
                                                                                 -----------------  -----------------
         Total stockholders' equity                                                         5,842              3,667
                                                                                 -----------------  -----------------

         Total Liabilities and Stockholders' Equity                            $            7,353              6,755
                                                                                 -----------------  -----------------
                                                                                 -----------------  -----------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

TRICORD SYSTEMS, INC.
15
<PAGE>

                                                    TRICORD SYSTEMS, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
(In thousands)                                                                         Year Ended December 31,
                                                                     ----------------------------------------------------------
                                                                           1998                 1997                 1996
                                                                     ----------------       --------------       --------------
<S>                                                                  <C>                    <C>                  <C>
Cash flows from operating activities:
     Net loss                                                        $        (2,111)             (10,931)             (15,204)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
         Restructuring credits                                                     -                    -               (1,848)
         Depreciation and amortization                                           355                2,598                4,485
         Loss on disposal of equipment                                            22                  643                  353
         Provision for losses on accounts receivable                            (142)                (455)               2,028
         Provision for losses on inventories                                      71                1,818                  994
         Loss on termination of facilities lease                                   -                  975                    -
         Provision for loss on equipment                                           -                  764                    -
         Deferred income taxes                                                     -                  224                    -
         Amortization of unearned compensation                                   194                    -                    -
         Other                                                                    82                  196                  250
         Changes in operating assets and liabilities:
             Accounts receivable                                                 661                4,410                3,381
             Inventories                                                         789                1,669                3,726
             Other current assets                                                 86                  704                  195
             Accounts payable                                                   (310)              (2,189)              (3,229)
             Accrued payroll, benefits and related taxes                         (75)                (766)                 (68)
             Deferred revenue                                                   (421)                 (99)                (158)
             Other accrued expenses                                             (478)              (1,621)                 321
                                                                       --------------       --------------       --------------
                Net cash used in operating activities                         (1,277)              (2,060)              (4,774)
                                                                       --------------       --------------       --------------
Cash flows from investing activities:
     Proceeds from maturity of investments                                         -                    -                1,000
     Capital expenditures                                                        (55)                (420)              (2,501)
     Change in other assets                                                        -                   59                  155
                                                                       --------------       --------------       --------------
                Net cash used in investing activities                            (55)                (361)              (1,346)
                                                                       --------------       --------------       --------------
Cash flows from financing activities:
     Stock option exercises and employee stock purchase plan                     834                   85                  443
     Proceeds from private placement                                           3,000                    -                    -
                                                                       --------------       --------------       --------------
                Net cash provided by financing activities                      3,834                   85                  443
                                                                       --------------       --------------       --------------
Effect of exchange rate changes on cash                                            -                  338                  (68)
                                                                       --------------       --------------       --------------
Net increase (decrease) in cash and cash equivalents                           2,502               (1,998)              (5,745)
Cash and cash equivalents at beginning of year                                 3,713                5,711               11,456
                                                                       --------------       --------------       --------------

Cash and cash equivalents at end of year                             $         6,215                3,713                5,711
                                                                       --------------       --------------       --------------
                                                                       --------------       --------------       --------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                                          TRICORD SYSTEMS, INC.
                                                                             16
<PAGE>

                              TRICORD SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
(In thousands, except shares)                           Common Stock
                                       -----------------------------------------------
                                                                         Additional                       Cumulative
                                                             Par          Paid-In         Unearned        Translation   Accumulated
                                            Shares          Value         Capital       Compensation      Adjustments     Deficit
                                       -----------------    -------    ---------------  ---------------   -----------   -----------
<S>                                    <C>                  <C>        <C>              <C>               <C>           <C>
Balances, December 31, 1995              13,272,560         $  133         76,830            --              (188)        (48,021)

Stock options and employee stock
purchase plan                               134,570              1            442            --              --              --
Warrant issued related to
class action  matter                           --             --              250            --              --              --
Foreign currency translation
adjustments                                    --             --             --              --               (68)           --
Net loss                                       --             --             --              --              --           (15,204)
                                         ----------     ----------     ----------      ----------      ----------      ----------

Balances, December 31, 1996              13,407,130            134         77,522            --              (256)        (63,225)

Stock options and employee stock
purchase plan                                52,754              1             84            --              --              --
Foreign currency translation
adjustments                                    --             --             --              --               338            --
Net loss                                       --             --             --              --              --           (10,931)
                                         ----------     ----------     ----------      ----------      ----------      ----------

Balances, December 31, 1997              13,459,884            135         77,606            --                82         (74,156)

Sale of common stock and warrants         3,000,000             30          2,970            --              --              --
Stock options and employee stock
purchase plan                               965,462             10            824            --              --              --
Stock issued to employees                   482,526              5            344            --              --              --
Stock issued to Directors                   221,997              2            149            --              --              --
Restricted stock issued to employees        831,143              8            498            (506)           --              --
Stock compensation for options
issued subject to shareholder
approval                                       --             --            5,252          (5,252)           --              --
Amortization of unearned
compensation                                   --             --             --               194            --              --
Stock options issued for services                                              90            --              --              --
Cancellation of warrant                        --             --             (250)           --              --              --
Foreign currency translation
adjustments                                    --             --             --              --               (82)           --
Net loss                                       --             --             --              --              --            (2,111)
                                         ----------     ----------     ----------      ----------      ----------      ----------

Balances, December 31, 1998              18,961,012         $  190         87,483          (5,564)           --           (76,267)
                                         ----------     ----------     ----------      ----------      ----------      ----------
                                         ----------     ----------     ----------      ----------      ----------      ----------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

TRICORD SYSTEMS, INC.
17
<PAGE>

                              TRICORD SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION 
Throughout 1998, Tricord Systems, Inc. (the "Company") continued to focus its 
development efforts exclusively on storage system management software, the 
strategy it defined in 1997. The storage system management software 
architecture includes an entirely new generation of distributed file system 
and file-intelligent input/output ("I/O") technology known as Tricord Storage 
Management Software ("TSMS"). No revenues were generated by TSMS for 1998, 
and the Company may not receive revenues from TSMS-based products in 1999.

The Company has historically engaged in the business of designing, 
manufacturing, marketing and supporting high-performance enterprise servers 
running on industry standard network systems, principally Microsoft Windows 
NT and Novell NetWare. All revenues generated through December 31, 1998 
relate to the server line of business.

In 1997 the Company redefined its corporate strategy to focus its development
efforts exclusively on storage system management software. During the second
quarter of 1997, this strategic shift in the Company's business necessitated a
reduction in the Company's workforce affecting approximately 90 employees.

The Company intends to sell its remaining enterprise server product inventories,
consisting primarily of spare parts and expansion products, as long as there is
sufficient customer demand and materials are available. The Company will honor
its service agreements and enter into new agreements as long as there is
sufficient demand and provided such agreements are profitable. The
Company's product sales during 1998 and 1997 have consisted mainly of spare 
parts, disk drives, memory and expansion products.

If the Company's operations progress as currently anticipated, of which there 
can be no assurance, the Company believes that it will be able to manage its 
cash resources to continue operations for at least the next twelve months. 
However, should the Company incur additional costs within the next twelve 
months due to the product launch of its TSMS-based products (which have yet 
to be fully developed), the related channel development for distributing the 
TSMS-based products and other significant increases in research and 
development costs and marketing and sales costs, the Company will need to 
adjust its plans as necessary if it fails to secure additional financing.

In any event, however, the Company will need to raise additional capital in 
order to complete development and commence commercial marketing of its 
TSMS-based products. The Company may seek such additional capital through the 
sale of debt or equity securities. The Company continues to look for 
additional capital through OEM or other strategic investments or alliances.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. The Company liquidated all of its international
subsidiaries during 1998, except for the United Kingdom.

CASH EQUIVALENTS
The Company considers investments with original maturities of three months or
less to be cash equivalents. Cash and cash equivalents at December 31, 1998 and
1997 are concentrated in money market accounts and commercial paper.

INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs, which approximate costs determined using the first-in, first-out
method. Appropriate consideration is given to deterioration, obsolescence and
other factors in the evaluation of net realizable value. Inventories consist
mostly of spare parts and expansion products for the Company's legacy business.

EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful asset lives of
generally two to five years. Expenditures for maintenance and repairs that do
not improve or extend the life of the respective assets are expensed. The cost
and related accumulated

                                                          TRICORD SYSTEMS, INC.
                                                                             18
<PAGE>

depreciation or amortization of assets sold or disposed of are removed from 
the accounts and the resulting gain or loss is included in the results of 
operations.

REVENUE RECOGNITION
Revenue on product sales is recognized upon shipment. Revenue under service
contracts is deferred and recognized on a straight-line basis over the contract
period.

RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred.
Software development costs are expensed as incurred. Such software development
costs are required to be expensed until the point that technological feasibility
and proven marketability of the product are established.

INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recorded based on differences between
the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes. A valuation allowance is provided to reduce deferred tax
assets to the amount expected to be realized.

NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during each period. Potential dilutive
common shares relate to common stock options and warrants. Potentially dilutive
common shares are excluded from the calculation of net loss per share as their
impact is antidilutive.

COMPREHENSIVE INCOME (LOSS)
The Company has no significant comprehensive income (loss) items other than 
net loss.

USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in 
conformity with generally accepted accounting principles requires management 
to make estimates and assumptions that affect the reported amounts of assets 
and liabilities and disclosure of contingent assets and liabilities at the 
date of the financial statements and the reported amounts of revenues and 
expenses during the reporting period. Actual results could differ from those 
estimates.

TRICORD SYSTEMS, INC.
19
<PAGE>


2. SELECTED FINANCIAL STATEMENT INFORMATION

SUPPLEMENTAL BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
                                                                   December 31,
                                                             --------------------------
                                                               1998               1997
                                                             -------             -------
<S>                                                          <C>                 <C>
Accounts receivable:
  Accounts receivable ...........................            $   841               1,894
  Less allowance for doubtful accounts ..........               (679)             (1,213)
                                                             -------             -------
                                                             $   162                 681
                                                             -------             -------
                                                             -------             -------

Inventories:
  Spare parts and expansion products.............            $ 3,946               7,515
  Less inventory reserves........................             (3,309)             (6,018)
                                                             -------             -------
                                                             $   637               1,497
                                                             -------             -------
                                                             -------             -------

Equipment and improvements:
  Office equipment and leasehold improvements ...            $ 1,314               1,369
  Engineering equipment .........................                770                 869
  Production equipment ..........................                 99                 204
                                                             -------             -------
                                                               2,183               2,442
   Less accumulated depreciation and amortization             (1,940)             (1,877)
                                                             -------             -------
                                                             $   243                 565
                                                             -------             -------
                                                             -------             -------

Other accrued expenses:
  Warranty ......................................            $   144                 371
  Relocation ....................................               --                   175
  Other .........................................                100                 379
                                                             -------             -------
                                                             $   244                 925
                                                             -------             -------
                                                             -------             -------
</TABLE>

SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION:

OTHER INCOME:
Other income includes foreign currency losses of approximately $202 in 1996.

                                                          TRICORD SYSTEMS, INC.
                                                                             20
<PAGE>

NONRECURRING ITEMS, NET:

During the second quarter of 1998, the Company recorded a net reduction in 
operating expenses of $195, which included a payment to the Company of $300 
for the Company's portion of the proceeds from the sale of its former 
headquarters facility based on a termination agreement with its previous 
landlord and a related charge of $105 for the write-off of the remaining net 
present value of the sublease payments receivable.

Included in the second quarter of 1997 are nonrecurring items, net, for the 
following items: A charge of $975 for the net value of leasehold improvements 
written off due to the termination of the Company's lease at its former 
headquarters facility; a charge of $764 for the write-down of certain 
equipment based on an updated review of the equipment required to support the 
operations of the Company; a charge of $125 for the mutual settlement and 
release between the Company or International Business Machines ("IBM") 
without admission of liability by either party regarding IBM's assertion that 
certain of the Company's server systems and related products infringed IBM's 
patents; and a credit of $1,000 for a one-time license fee paid to the 
Company by Toshiba for the world-wide, non-exclusive right and license to the 
Availability Management System ("AMS") Software. The AMS Software license 
related to the Company's server line of business.

SUPPLEMENTAL CASH FLOW INFORMATION:
During 1998, $90 of accrued payroll obligations and $203 of other accrued
expenses were settled through the issuance of 402,236 shares of common stock of
the Company. Also during 1998, expenses of $207 were settled through the
issuance of 302,287 shares of common stock of the Company to employees and 
directors.

GEOGRAPHICAL DATA AND MAJOR CUSTOMERS

<TABLE>
<CAPTION>
                                          UNITED STATES       INTERNATIONAL          CONSOLIDATED
                                          -------------       -------------          ------------
<S>                                       <C>                 <C>                    <C>
1996
Sales to unaffiliated customers             $ 43,626                 7,643                51,269
Operating income (loss)                      (15,866)                  482               (15,384)
Identifiable assets                           19,758                 2,180                21,938
</TABLE>

International activity historically related to activities of the Company's 
Japanese subsidiary, Tricord K.K. The Company's other international 
subsidiaries were sales and marketing channels. The Company exported its 
products to unaffiliated customers located in those channels. Substantially 
all of the Company's international sales were denominated in U.S. dollars, 
except Japan, in which sales were negotiated, invoiced and paid in yen. The 
Company had no significant international sales or operations during 1998 and 
1997 and liquidated most of its international subsidiaries during 1998. The 
Company had no significant gains or losses related to the liquidation of 
these international subsidiaries in 1998. The Company's United Kingdom 
subsidiary remains in existence, but has no significant operating activity.

United States sales to unaffiliated customers in 1997 included export sales of
$857 to Europe and $613 to other foreign countries. Toshiba Corporation
("Toshiba") and Actium Tools, Inc. comprised 17.0% and 10.3%, respectively, of
the Company's accounts receivable balance at December 31, 1997.

United States sales to unaffiliated customers in 1996 included export sales 
of $3,982 to Europe and $2,653 to other foreign countries. Sales to Toshiba 
and Memorex Telex Corporation accounted for 14.9% and 14.5%, respectively, of 
the Company's revenues during 1996. Substantially all sales of Tricord K.K. 
were sales to Toshiba.

TRICORD SYSTEMS, INC.
21
<PAGE>

3. LEASES

The Company leases office and warehouse facilities and certain equipment under
cancelable and noncancelable operating leases expiring at various dates through
2002. The Company's headquarters facility lease has a three-year term and
includes a provision that the Company pay a pro rata share of the lessor's
operating costs, including real estate taxes. Rent expense under all leases was
$101, $691 and $1,546 for the years 1998, 1997 and 1996, respectively.

As of December 31, 1998 future minimum lease payments due under noncancelable
operating leases, excluding operating costs, are as follows:

<TABLE>
<S>                                                                   <C>
1999 ....................................................             $166
2000 ....................................................              149
2001 ....................................................               88
2002 ....................................................                7
                                                                      ----
                                                                      $410
                                                                      ----
                                                                      ----
</TABLE>

In January 1999, the Company entered into an operating lease for a marketing 
office facility in Houston, Texas, which includes a provision that the 
Company pay a pro rata share of the lessor's operating costs, including real 
estate taxes. The Company may cancel the lease agreement, which expires in 
January 2002, but the company must pay a minimum of two years of lease 
payments.

4. INCOME TAXES

As of December 31, 1998, the Company had generated domestic net operating 
loss carryforwards of approximately $70,000 for tax reporting purposes that 
may be offset against future taxable income. Such net operating losses expire 
if not used within 15 years of the date they were generated (20 years for the 
1998 net operating loss). In addition, as of December 31, 1998 the Company 
also had available approximately $2,100 of research and experimentation tax 
credit carryovers available to reduce future income taxes. Such tax credit 
carryovers expire if not used within 15 years of the date they were generated 
(20 years for the 1998 credit carryover). Due to uncertainty as to the 
realizability of the loss and tax credit carryforwards, full valuation 
allowances have been established for the benefits associated with these 
carryforwards and for net deductible temporary differences related primarily 
to accounts receivable and obsolete inventory allowances, and depreciation 
and deferred revenue.

For 1996, the domestic and foreign components of loss

                                                          TRICORD SYSTEMS, INC.
                                                                             22
<PAGE>

before provision for income taxes were $11,817 and $3,387, respectively.

5. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution profit sharing plan covering all
employees, which is intended to qualify under Section 401(k) of the Internal
Revenue Code. Employee contributions are limited to 20% of their earnings,
subject to yearly limitations. At the discretion of the Board of Directors, the
Company may make profit sharing contributions, which are allocated to eligible
employees based on their salary without regard to whether they have made any
contributions to the plan, or matching contributions, which are allocated to
eligible employees based upon the amount of contributions made to the plan
during the year. The Board of Directors approved $28, $46 and $114 of matching
contributions for 1998, 1997 and 1996, respectively.

The Company has determined that a partial termination of its 401(k) plan 
under the Internal Revenue Code occurred in 1997. A partial termination 
requires that the 401(k) plan must vest 100% of an affected participant's 
Company matching contribution. The Company has been advised that a partial 
termination is a tax concept and has no other significance. The Company 
estimates that approximately $38 of unvested matching contributions became 
100% vested plus an appropriate earnings factor. The Company currently does 
not anticipate that additional cash will be required to fund this partial 
termination.

6. LEGAL PROCEEDINGS

In June 1997, a federal jury in St. Paul, Minnesota absolved the Company of 
any liability in a class action lawsuit alleging securities fraud. In July 
1996, one of the insurance carriers had assumed complete defense of this 
matter for the Company and the individual defendants and agreed to hold all 
defendants harmless against any further liability with respect to the matter 
in exchange for the Company's deposit of $400 into an escrow account and 
making available warrants for settlement purposes to purchase 100,000 shares 
of the Company's common stock at an exercise price of $6.00 per share. At 
that time, the Company charged $650 to general and administrative expense for 
the $400 cash deposit and the $250 estimated value of the warrants.

In October 1997, the plaintiffs for the class action appealed the jury decision.
In December 1997, the insurance company reached an agreement with the attorneys
for the plaintiffs to pay for a portion of the legal costs incurred by the
attorneys for the class.

TRICORD SYSTEMS, INC.
23
<PAGE>

This agreement was accepted by the federal court and the appeal by the 
plaintiffs was dismissed in February 1998. In December 1998, the Company 
received a $150 refund of a portion of the cash escrow payment and canceled 
the warrants. As a result, the Company recorded a $400 reduction to general 
and administrative expense.

During 1997, a dispute occurred between the Company and Novell, Inc. 
("Novell") regarding alleged royalties owed to Novell with respect to 
Novell's software that the Company disposed of when such software could not be 
sold. The Company had entered into an OEM agreement with Novell, pursuant to 
which it purchased Novell's software that was to be installed on the 
Company's servers. The Company paid Novell $100 in advance royalties pursuant 
to the OEM agreement. The Company's sales of Novell's software did not result 
in royalties in excess of this advance royalty payment, and the Company 
disposed of the remaining Novell software. Novell has requested that the 
Company pay royalties of approximately $800 on the software it disposed of. 
The Company has informed Novell that it does not owe royalties on the 
disposed software because the OEM agreement only provides for the payment of 
royalties on the sale of the software shipped for use with the Company's 
servers. During 1998, an additional dispute arose between the Company and 
Novell regarding the return to the Company of five multi-processing 
enterprise server units originally sent to Novell under the OEM agreement, 
along with certain other computer hardware equipment provided to Novell. In 
addition, the Company has claimed damages due to alleged defects in Novell's 
software product. Both the Company and Novell have commenced legal action by 
filing complaints regarding the disputes as discussed above. Management does 
not believe that the resolution of these disputes will have a material effect 
on its financial position, results of operations or liquidity.

In addition to matters disclosed above, the Company is party to various 
claims and disputes arising in the ordinary course of business and pertaining 
to the enterprise server business. While the outcome of these matters cannot 
be predicted with certainty, management presently believes the disposition of 
these matters will not have a material effect on the financial position, 
results of operations or liquidity of the Company.

7. STOCKHOLDERS' EQUITY

PRIVATE PLACEMENT
In December 1998, the Company sold 3,000,000 shares of the Company's common 
stock at a price of $1.00 per share to a group of private investors. These 
investors also received warrants to purchase an equal number of additional 
shares of common stock at an exercise price of $3.50 per share. The warrants 
are exercisable immediately and expire on December 15, 2003. At December 31, 
1998, none of these warrants have been exercised.

The common stock sold to the private investors has not been registered by the
Company and such stock is subject to certain restrictions on resale by the
investors. The investors have piggyback registration rights and can request
registration if the Company files a registration statement for a public
offering. In addition, the majority investor can demand

                                                          TRICORD SYSTEMS, INC.
                                                                             24
<PAGE>

registration by the Company under certain conditions and can cause the 
Company to use its best efforts to have a representative of such majority 
investor elected as a director of the Company.

RESTRICTED STOCK
During 1998, the Company issued restricted common stock related to the 
settlement of the contingent payment related to a 1996 acquisition (207,143 
shares) and to new officers of the Company (600,000 shares). The restrictions 
are generally based on continuous employment for a defined time period. The 
Company recorded the full value of the restricted stock as unearned 
compensation at the closing market price ($0.50 and $0.66 per share) of the 
Company's common stock on the date of the issuance. The portion of the 
restricted stock for which restrictions have lapsed as of December 31, 1998 
has been included as a charge to operations for 1998 ($136) and the unearned 
compensation amount was reduced accordingly.

UNEARNED COMPENSATION
On December 7, 1998, the Company granted options for 2,895,000 shares of 
common stock, 2,240,615 of which were subject to shareholder approval due to 
the fact that no shares remained available for grant under the 1998 Stock 
Incentive Plan (the "1998 Plan"). The options granted subject to shareholder 
approval have been recorded by the Company as unearned compensation in 
stockholders' equity, in the amount of $5,252, which is equal to the 
aggregate difference between the market closing price of the Company's common 
stock on March 17, 1999 (the date of shareholder approval) and the option 
price at date of grant. Unearned compensation will be charged to operations 
over the 48 months vesting term of these options.

STOCK OPTION PLANS
On February 20, 1998, the Company's Board of Directors established the 1998
Plan, which succeeds a prior plan which was terminated upon approval of the 1998
Plan by the Company's stockholders in May 1998. The 1998 Plan provides for
grants of incentive and nonqualified stock options, stock appreciation rights,
restricted stock awards, performance unit awards and stock bonus awards to
officers, employees, non-employee consultants and independent contractors. The
Company has reserved 1,000,000 shares of common stock for issuance under the
1998 Plan, plus any unissued shares from previous stock option plans. On March
17, 1999, the Company's shareholders approved an increase in the number of
shares reserved for issuance under the 1998 Plan from 1,000,000 to 5,000,000
shares and an increase in the per participant limitation from 100,000 shares to
500,000 shares. The 1998 Plan terminates in 2008. Options may be granted to
purchase shares of the Company's common stock at not less than the fair market
value at the date of grant. Options generally become exercisable over periods of
up to four years from the date of grant and expire within ten years from date of
grant.

On February 20, 1998, the Company's Board of Directors established the 1998
Non-Employee Director Stock Plan (the "1998 Director Plan"). The 1998 Director
Plan replaced the 1995 Non-Employee Director Stock Plan, which expired in June
1997. The

TRICORD SYSTEMS, INC.
25
<PAGE>

1998 Director Plan provides for awards of options and common stock to 
directors who are not employees of the Company. The Company has reserved 
350,000 shares of common stock for issuance under the 1998 Director Plan, 
which terminates in 2003. On March 17, 1999, the Company's shareholders 
approved an increase in the number of shares reserved for issuance under the 
1998 Director Plan from 350,000 to 550,000 shares. The Company's 1998 
Director Plan provides for the granting to all non-employee directors of 
certain grants of options to purchase common stock at the fair market value 
on the date of grant. Such grants generally are exercisable for periods of up 
to three years and expire within five years. These options include an initial 
one-time grant of 25,000 shares and an annual grant of 10,000 shares. In 
addition, each non-employee director may be granted, at the Board's 
discretion, an annual stock award in lieu of any cash retainer for services 
as a Director. Also, each non-employee director may be granted, at the 
Board's discretion, a meeting fee stock award in lieu of any cash meeting 
fees for services as a director at Board meetings or Board committee 
meetings.

The following summarizes stock option activity during each of the three years in
the period ended December 31, 1998:

<TABLE>
<CAPTION>
Shares                                   1998                   1997                     1996    
-------------------------------------------------------------------------------------------------
<S>                                 <C>                       <C>                    <C>
Granted                                 3,976,000               3,717,261               1,962,000
Exercised                                 934,541                    --                   (64,691)
Canceled                                 (585,465)             (4,021,907)             (1,564,219)
                                    -------------            ------------            ------------

December 31:
Options outstanding                     5,563,994               3,108,000               3,412,646
                                    -------------            ------------            ------------
                                    -------------            ------------            ------------

Options exercisable                       676,798                 182,375                 894,810
                                    -------------            ------------            ------------
                                    -------------            ------------            ------------

<CAPTION>
Weighted average exercise
price per share                           1998                  1997                     1996 
-------------------------------------------------------------------------------------------------
<S>                                 <C>                       <C>                    <C>
Granted                             $        0.64                    0.86                    3.05
Exercised                                    0.87                    --                      3.19
Canceled                                     3.01                    3.41                    4.74

December 31:
Options outstanding                          0.78                    1.41                    4.33

Options exercisable                          1.47                    9.99                    6.08
</TABLE>

                                                          TRICORD SYSTEMS, INC.
                                                                             26
<PAGE>

Stock options outstanding at December 31, 1998 had a range of exercise prices 
of $0.50 to $25.00 and an average contractual useful life of 3.9 years. 
Approximately 99% of the options outstanding had an exercise price of $3.00 
or less, of which approximately 12% of these options are exercisable and have 
a weighted average contractual life of 3.9 years.

EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") has reserved
250,000 shares of common stock for issuance. Under the Purchase Plan, the
Company's employees may purchase shares of the Company's common stock at a price
equal to 85% of the fair market value of the stock as of the first or last day
of the twelve month offering period, whichever is lower. The Company issued
approximately 30,000, 53,000 and 46,000 shares in 1998, 1997 and 1996,
respectively.

WARRANTS
At December 31, 1998, the Company has exercisable warrants outstanding to 
purchase 200,000 shares of the Company's common stock at a price of $10.00 
per share. These warrants were issued to an original equipment manufacturer
and expire in June 1999.

The Company issued additional warrants during 1998 in connection with its sale
of common stock as described above.

ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Company has continued to measure compensation cost for its stock incentive
and option plans using the intrinsic-value-based method of accounting. Had the
Company used the fair-value-based method of accounting for its stock option and
incentive plans grants beginning in 1995 and charged the related compensation
cost to operations over the vesting period, net loss and net loss per share
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                         1998                1997                    1996
-------------------------------------------------------------------------------------------
<S>                                  <C>                     <C>                   <C>
Net loss
  As reported                        $  (2,111)              (10,931)              (15,204)
  Pro forma                             (4,572)              (13,306)              (16,845)

Net loss per common share
  As reported                        $   (0.14)                (0.81)                (1.14)
  Pro forma                              (0.31)                (0.99)                (1.26)
</TABLE>

TRICORD SYSTEMS, INC.
27
<PAGE>

The pro forma information above only includes stock options granted since 
1995. Compensation expense under the fair-value-based method of accounting 
will increase over the next few years as additional stock option grants are 
considered and as the full impact of the 1998 activity is reflected.

The weighted average grant-date fair value of the options granted in 1998, 1997
and 1996 was $0.43, $0.56 and $1.89 per share, respectively. The fair value was
computed using the Black-Scholes option-pricing model. The assumptions used by
the Company to compute the estimated fair value of options at the grant dates
were as follows: the options were assumed to be exercised approximately one year
earlier than the end of their term at date of grant; no dividends will be paid
by the Company during the term of the options granted; cumulative stock price
volatility ranged from approximately 91% to 95%; and the weighted average
risk-free interest rate was 5.01%, 5.92% and 6.67% for 1998, 1997 and 1996,
respectively. In addition, average forfeitures were assumed to be 4%, 35% and
23% for 1998, 1997 and 1996, respectively.

SHAREHOLDERS' RIGHTS PLAN
The Company maintains a shareholder rights plan, pursuant to which the 
Company declared a dividend distribution of one Preferred Share Purchase 
Right on each outstanding share of the Company's Common Stock. Each Right 
will entitle stockholders to purchase one one-thousandth of a share of the 
Company's Series A Junior Preferred Stock at an exercise price of $50.00, 
subject to adjustment in the event of a change in control of the Company, as 
defined. The description and terms of the Rights are set forth in a Rights 
Agreement dated October 24, 1994, as amended December 7, 1998 and January 
30,1999, between the Company and Norwest Bank Minnesota, N.A., as Rights 
Agent. The rights will expire in October 2004.

AUTHORIZED CAPITAL
On March 17, 1999, the Company's shareholders approved an increase in the number
of authorized shares of common stock from 27,000,000 to 75,000,000 shares.

8. BUSINESS SEGMENTS

The Company had only one business segment, the server business, for 1996. In 
February 1997 the Company changed its business focus to concentrate on 
storage system management software (see Note 1). The table below represents 
information related to the Company's business segments as of and for the 
years ended December 31, 1998 and 1997. Effective December 31, 1998, the 
Company adopted Statement of Financial Accounting Standards No. 131, 
"Disclosure About Segments of an Enterprise and Related Information," which 
requires disclosure of segment data in a manner consistent with that used by 
an enterprise for internal reporting and decision making. The Company 
continues to report its operations as being comprised of two business 
segments. Cost allocations are necessary in the determination of operating 
results by segment. For this reason, management does not represent that these 
segments, if operated as independent businesses, would result in the 
operating results shown.

<TABLE>
<CAPTION>
                                 December 31,        December 31,
                                      1998               1997   
                                 ------------        ------------
<S>                              <C>                 <C>
Revenues:
Server business                     $ 3,853              12,660
Software business                      --                  --

                                                          TRICORD SYSTEMS, INC.
                                                                             28
<PAGE>


                                 ------------        ------------
   Total                              3,853              12,660
                                 ------------        ------------
Operating income (loss):
Server business                       1,528              (8,116)
Software business                    (4,019)             (2,603)
                                 ------------        ------------
   Total                             (2,491)            (10,719)
                                 ------------        ------------

Total assets:
Server business                       4,100               6,347
Software business                     3,060                 124
Corporate                               243                 284
                                 ------------        ------------
   Total                              7,403               6,755
                                 ------------        ------------

Depreciation expense:
Server business                          94               2,049
Software business                       103                 130
Corporate                               158                 419
                                 ------------        ------------
   Total                                355               2,598
                                 ------------        ------------

Capital expenditures:
Server business                          --                 175
Software business                        50                  35
Corporate                                 5                 210
                                 ------------        ------------
   Total                                 55                 420
                                 ------------        ------------
</TABLE>

9.  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                             First              Second            Third            Fourth
                            Quarter             Quarter          Quarter           Quarter
                            -------             -------          -------           -------
<S>                         <C>                 <C>              <C>               <C>
1998
Revenues                    $ 1,315               993               999               546
Gross margin                    513               333               453               193
Net loss                       (692)             (555)             (234)             (630)
Net loss per share -
  basic and diluted           (0.05)            (0.04)            (0.02)            (0.04)


1997
Revenues                    $ 4,873             3,311             2,582             1,894
Gross margin                    (43)           (1,179)              662               695
Net loss                     (5,149)           (4,563)           (1,014)             (205)
Net loss per share  -
  basic and diluted           (0.38)            (0.34)            (0.08)            (0.02)
</TABLE>

Quarterly calculations of net loss per share are made discretely for each 
quarter during the fiscal year.

TRICORD SYSTEMS, INC.
29
<PAGE>

1998:
During the fourth quarter of 1998, the Company recorded a reduction to 
general and administrative expense of $400 comprised of the $250 cancellation 
of warrants previously made available for settlement purposes related to the 
securities class action lawsuit (see Note 6) and a $150 refund from the 
escrow account also related to the securities class action lawsuit. The net 
impact of these adjustments benefited the fourth quarter net loss by $0.03 
per share.

During the second quarter of 1998, the Company recorded a net reduction in 
operating expenses of $195, as discussed in Note 2. This reduction in 
operating expenses benefited the quarterly net loss by $0.01 per share.

1997:
During the fourth quarter of 1997, the Company recorded credits to cost of goods
sold of $270 for a reduction to the Company's obsolete and excess inventory
reserves and $226 for a reduction to the warranty accrual. Also during the
fourth quarter of 1997, the Company took credits to general and administrative
expense totaling $440 to reduce the allowance for doubtful accounts and to
reduce a benefits accrual. These adjustments were made based on analyses the
Company performed during the fourth quarter of 1997. These adjustments totaled
$936, or $.07 per share.

During the third quarter of 1997, the Company agreed to a $350, or $.03 per 
share, settlement of the Memorex Telex Corporation Chapter 11 bankruptcy 
preferential payment claim. The Company recorded the required payment as a 
charge to general and administrative expense in the third quarter of 1997. 
Also included in the third quarter of 1997 is a charge of $224 to provision 
for income taxes for the establishment of a reserve for a deferred tax asset 
related to the Company's alternative minimum tax credit carryforwards.

During the second quarter of 1997, the Company completed an updated forecast 
of its anticipated usage of current on-hand inventories and determined that 
it had more inventory than was required. Accordingly, the Company recorded a 
second quarter 1997 charge of $1,332, or $.10 per share, to cost of goods 
sold to adjust inventories to their net realizable value.

Also included in the second quarter of 1997 were nonrecurring items, net, of 
$864, as discussed in Note 2. This increased the second quarter 1997 net loss 
by $0.06 per share.

                                                          TRICORD SYSTEMS, INC.
                                                                             30
<PAGE>

INVESTOR INFORMATION

NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held at the Radisson Hotel and
Conference Center in Plymouth, Minnesota, beginning at 1:00 p.m. local time, on
Friday May 21, 1999. A formal notice of the meeting, together with proxy
statement and proxy, will be mailed on or about April 14, 1999 to stockholders
of record on April 9, 1999.

STOCKHOLDERS' INQUIRIES
Communications concerning transfer requirements, change of address and lost
certificates should be directed to the Transfer Agent.

To meet the general information needs of shareholders and investors, Tricord 
Systems, Inc. maintains an investor relations department at its corporate 
headquarters. Inquiries are welcome by letter or telephone to: Investor 
Relations Department, Tricord Systems, Inc., 2905 Northwest Boulevard, Suite 
20, Plymouth, Minnesota 55441; telephone (612) 557-9005.

SECURITIES LISTINGS
The Company's common stock is listed and traded on the Nasdaq SmallCap Market
System. The Nasdaq trading symbol is TRCD.

FORM 10-K
The Company will provide a copy of its most recent Annual Report on Form 10-K to
any shareholder requesting a copy. Inquiries should be directed to the Investor
Relations Department at the address above.

TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
P.O. Box 738
South St. Paul, Minnesota  55075-0738

COMMON STOCK PRICES
The following table sets forth, for the periods indicated, the high and low
closing sales prices per share for the Company's common stock as reported by the
Nasdaq National Market (until July 29, 1998) and the Nasdaq SmallCap Market
(since July 30, 1998). These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.

<TABLE>
<CAPTION>
                                        1998                    1997
                                        ----                    ----
                                    High     Low            High     Low
                                    ------------            ------------
<S>                               <C>       <C>             <C>     <C>
First quarter                     $ 1.31    0.56            2.03    0.63
Second quarter                      1.19    0.84            1.31    0.50
Third quarter                       1.09    0.50            1.22    0.63

                                                          TRICORD SYSTEMS, INC.
                                                                             31
<PAGE>

Fourth quarter                      2.97    0.44            1.50    0.50
</TABLE>

On March 25, 1999, the closing price for the Company's common stock was $2.59.

On March 25, 1999, there were approximately 399 shareholders of record of the
Company's common stock. The Company estimates that an additional 5,600
shareholders own stock held for their accounts at brokerage firms and financial
institutions.

DIVIDENDS
The Company has not declared any cash dividends with respect to its common
stock. The Company currently does not intend to declare or pay any cash
dividends on the Company's common stock and there can be no assurance that the
Company will ever declare or pay cash dividends on its common stock.

TRICORD SYSTEMS, INC.
32
<PAGE>

CORPORATE INFORMATION


DIRECTORS
Yuval Almog - President, CORAL Group, Inc.
Tom R. Dillon - Vice President and CIO, Candescent Technologies, Inc.
Donald L. Lucas - Private Investor
Fred G. Moore - President, Horison, Inc.
John J. Mitcham - Chairman of the Board of Directors; Chief 
                  Executive Officer, Tricord Systems, Inc.

COMMITTEES OF THE BOARD OF DIRECTORS

FINANCE AND AUDIT COMMITTEE
Donald L. Lucas, Chairman
Tom R. Dillon

COMPENSATION COMMITTEE
Yuval Almog, Chairman
Donald L. Lucas

EXECUTIVE OFFICERS
John J. Mitcham - Chief Executive Officer
J. David Cabello - Vice President and General Counsel, Interim Chief 
                   Financial Officer and Secretary
Kathleen H. Clark - Vice President, Marketing
Dr. Alexander H. Frey - Senior Vice President, Architecture
Charles E. Pearsall - Vice President, Engineering

CORPORATE HEADQUARTERS
Plymouth, Minnesota

SATELLITE OFFICE
Houston, Texas

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota

CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly LLP
San Jose, California
                                                          TRICORD SYSTEMS, INC.
                                                                             33