<PAGE>   1
HISTORICAL FINANCIAL SUMMARY


<TABLE>
<CAPTION>

SUMMARY OF OPERATIONS:                                                For the years ended December 31,
                                                  ------------------------------------------------------------------------
(In thousands, except per share data)                2000           1999            1998            1997            1996
                                                  --------        --------        --------        --------        --------
<S>                                             <C>             <C>             <C>             <C>             <C>
Research and development                          $  7,386        $  3,442        $  2,473        $  2,351        $     --
Sales and marketing                                  4,206           2,645             905           1,058              --
General and administrative                           3,109           1,890             856           1,099           3,256
Interest and other income, net                        (975)           (270)           (380)            (12)             --

                                                  --------        --------        --------        --------        --------
Loss from continuing operations                    (13,726)         (7,707)         (3,854)         (4,496)         (3,256)
                                                  --------        --------        --------        --------        --------

Discontinued operations:
Income (loss) from operations of
     legacy server business (net of taxes
     of $224 in 1997)                                   --             228           1,743          (6,435)        (11,948)
Gain (loss) on disposal of legacy
     server business                                   146            (158)             --              --              --
                                                  --------        --------        --------        --------        --------
                                                       146              70           1,743          (6,435)        (11,948)
                                                  --------        --------        --------        --------        --------

Net loss                                          $(13,580)       $ (7,637)       $ (2,111)       $(10,931)       $(15,204)
                                                  ========        ========        ========        ========        ========
Loss per share from continuing
     operations - basic and diluted               $  (0.60)       $  (0.39)       $  (0.26)       $  (0.33)       $  (0.24)
                                                  ========        ========        ========        ========        ========
Income (loss) per share from
     discontinued operations - basic
     and diluted                                  $   0.01        $     --        $   0.12        $  (0.48)       $  (0.90)
                                                  ========        ========        ========        ========        ========

Net loss per share - basic and diluted            $  (0.59)       $  (0.39)       $  (0.14)       $  (0.81)       $  (1.14)
                                                  ========        ========        ========        ========        ========

FINANCIAL POSITION:
(In thousands)
Cash and cash equivalents                         $ 16,825        $  3,082        $  6,215        $  3,713        $  5,711
Working capital                                   $ 14,310        $  2,625        $  5,599        $  2,977        $  8,140
Total assets                                      $ 20,133        $  3,432        $  7,353        $  6,755        $ 21,938
Stockholders' equity                              $ 17,312        $  2,902        $  5,842        $  3,667        $ 14,175
Common shares outstanding                           24,278          20,169          18,961          13,460          13,407

GENERAL DATA AND RATIOS:
Current ratio                                          6.3             6.0             4.7             2.0             2.0
Book value per share                              $   0.71        $   0.14        $   0.31        $   0.27        $   1.06
</TABLE>


TRICORD SYSTEMS, INC.

4
<PAGE>   2

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

The following discussion of our financial condition and results of operations
should be read together with the financial statements and the related notes.
This discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements consist of statements that are
not purely historical, including, without limitation, statements regarding our
expectations, beliefs, intentions or strategies regarding the future. When used
in this report, the words "anticipates," "believes", "expects," "intends,"
"forecasts," "plans," "future," "strategy," or words of similar import are
intended to identify forward-looking statements. Other statements of the
Company's plans and objectives may also be considered to be forward-looking
statements. The actual results that Tricord achieves may differ materially from
those anticipated by any forward-looking statements due to risks and
uncertainties such as those described below under "Factors That May Affect
Future Results."

OVERVIEW
Tricord Systems, Inc. designs, develops and markets innovative server appliances
for content-hungry applications. In December 2000, we announced our first server
appliance, Lunar Flare(TM) NAS - specifically designed to meet the general file
serving needs of growing organizations, workgroups, corporate departments and
e-businesses. The core of our new technology is our patented Illumina(TM)
software that aggregates multiple appliances into a cluster, managed as a single
resource. Easy to deploy, manage and grow, our products are designed to allow
users to add capacity to a cluster with minimal administration costs. Our
appliances are designed to be plug-and-play, offering seamless growth and
continuous access to content with no downtime. As we ended 2000, our initial
Lunar Flare NAS appliance was in beta testing, and we expect to begin commercial
shipments in 2001. During 2000, we did not generate any revenues.

Before focusing our efforts exclusively on the development of Illumina, the
Company had 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's Windows(R) NT(R) and
Novell(R) NetWare(R).

In August 1999, we sold all assets related to our server line of business
(sometimes referred to as the "legacy business"), except for existing trade
accounts receivable, in exchange for the assumption of all liabilities of the
legacy business.

In July 1999, we effected a workforce reduction to streamline our operations.
The reduction resulted in the severance of eleven employees primarily engaged in
performing legacy business activities. The costs of this workforce reduction,
which included severance payments and stock compensation charges totaling $0.3
million, have been included in the 1999 loss from discontinued operations.

We have reported results of operations of the legacy business as discontinued
operations for all periods presented. Except where otherwise indicated, the
discussion of our financial results relates to continuing operations.

Since we began focusing on developing our aggregation software, we have incurred
substantial costs to develop our technology and products, and to recruit and
train personnel for our engineering, sales and marketing, technical support and
administration departments. We anticipate that our operating expenses will
increase in the future as we increase our sales and marketing efforts, develop
distribution channels, fund additional new product development, expand our
technical support and improve our operational and financial systems. During
2000, we generated no revenues and our limited experience in the server
appliance market increases the difficulty of predicting future operating
results.

See "Factors That May Affect Future Results" at the end of this section for a
discussion regarding forward-looking statements contained herein.


                                                           TRICORD SYSTEMS, INC.

                                                                               5

<PAGE>   3

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development, fees paid to
consultants and outside service providers, depreciation of prototype and test
units and other expenses related to the design, development, testing and
enhancement of our products. Through 2000, all research and development costs
have been expensed as incurred.

Research and development expenses increased to $7.4 million in 2000 from $3.4
million in 1999 and $2.5 million in 1998. The increase from 1999 to 2000 was due
primarily to continuing development of our Illumina(TM) aggregation software and
development and testing of our initial Lunar Flare(TM) NAS server appliance, as
well as increased compensation and related costs as research and development
headcount increased. The increase from 1998 to 1999 was due primarily to $0.5
million of non-cash compensation expense in 1999 related to certain options
granted and restricted stock issued in 1998 and $0.3 million in non-cash
consulting expense related to an increase in the value of options granted to
non-employee development contractors for services provided in 1999.

We believe that a significant level of investment in product research and
development is required to remain competitive. Accordingly, we expect to
continue to devote substantial resources to product research and development. As
a result, we currently expect research and development expenses to increase in
absolute dollars in 2001.

SALES AND MARKETING
Selling and marketing expenses consist primarily of salaries, incentives and
related expenses for personnel engaged in sales, marketing and business
development functions, as well as costs associated with advertising, trade
shows, public relations and marketing materials.

Sales and marketing expenses increased to $4.2 million in 2000 from $2.6 million
in 1999 and $0.9 million in 1998. The increase from 1999 to 2000 was primarily
due to a significant increase in personnel costs due to headcount additions
related to the ramp-up of sales and marketing in preparation for the
introduction of our initial Lunar Flare NAS server appliance in 2001. The
increase in 2000 is also attributable to increased promotional costs as a result
of our Lunar Flare market awareness campaign and increased trade show costs. The
increase from 1998 to 1999 was primarily due to increases in personnel costs due
to headcount additions and expenses for marketing research and analysis for our
aggregation software technology, as well as $0.6 million of non-cash stock
compensation expense.

We currently anticipate that sales and marketing expenses will increase
significantly in 2001 as we execute our strategy to aggressively market our
Lunar Flare NAS server appliance and develop additional market and product
opportunities for our Illumina aggregation software.

GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and other
related costs for executive and general administration, as well as legal and
other professional fees.

General and administrative expenses increased to $3.1 million in 2000 from $1.9
million in 1999 and $0.9 million in 1998. The increase from 1999 to 2000 was
primarily due to increased personnel costs due to headcount additions, an
increase in non-cash stock compensation expense and costs associated with
expanding our general and administrative infrastructure. The increase from 1998
to 1999 was due to an increase in personnel costs related to headcount
additions, an increase in professional fees and a $0.3 million increase in
non-cash compensation expense in 1999 related to certain options granted and
restricted stock issued in 1998.

We currently expect these expenses to increase in absolute dollars in 2001 as we
add administrative personnel and incur additional costs related to the growth of
our business.


TRICORD SYSTEMS, INC.

6

<PAGE>   4

STOCK COMPENSATION
Included in operating expenses are charges for non-cash, stock-based
compensation expense as shown in the following table. Stock-based compensation
increased to $2.1 million in 2000 from $2.0 million in 1999 and $0.4 million in
1998. Stock-based compensation expense results from options granted to
non-employee contractors, options granted to employees in 1998 subject to
shareholder approval and restricted stock awards. These amounts do not affect
our net stockholders' equity. These non-cash items increased our expenses, loss
from continuing operations and net loss per share as follows:

<TABLE>
<CAPTION>

     NON-CASH STOCK COMPENSATION EXPENSE
     (In millions, except per share amounts)                     2000        1999        1998
                                                               --------    --------    --------
<S>                                                          <C>         <C>         <C>
     Research and development                                  $    1.0    $    0.8    $     --
     Sales and marketing                                            0.2         0.6         0.1
     General and administrative                                     0.9         0.6         0.3
                                                               --------    --------    --------
                                                               $    2.1    $    2.0    $    0.4
                                                               ========    ========    ========

     Impact per diluted share                                  $   0.09    $   0.10    $   0.03
                                                               ========    ========    ========
</TABLE>



OTHER INCOME, NET
Other income, net increased to $1.0 million in 2000 from $0.3 million in 1999
and $0.4 million in 1998. The increase was due primarily to an increase in
interest income in 2000, as a result of the investment of the net proceeds from
our private equity placement in April 2000.

DISCONTINUED OPERATIONS
In August 1999, we sold all remaining assets related to our server line of
business (sometimes referred to as the "legacy business"). The sale of the
legacy business resulted in an initial loss of $207,000 in 1999. Pursuant to the
terms of the sale agreement, we were entitled to receive up to $200,000 of cash
payments contingent upon the level of sales of Tricord server-related products
and services from the date of sale through December 31, 2000. In 1999 the
Company received contingent payments of approximately $49,000, which reduced the
net loss from the sale of the legacy business to $158,000 for the year ended
December 31, 1999. For the year ended December 31, 2000, the Company recorded a
gain of $146,000 on disposal of the legacy server business consisting of
$121,000 received in contingent payments and reversal of a previously recorded
accrual of $25,000 for legacy business year 2000 issues.

INCOME TAXES
We had domestic net operating loss carryforwards for federal income tax purposes
of approximately $91 million as of December 31, 2000. These loss carryforwards
expire if not utilized at various dates between 2002 and 2020. Due to
uncertainty as to our ability to realize the value of these loss carryforwards,
we have established a full valuation allowance to offset the benefits associated
with the net operating loss and tax credit carryforwards. We did not incur
income tax liabilities in 2000, 1999 and 1998 due to our net losses.

FINANCIAL INSTRUMENTS
We invest excess funds not required for current operations primarily in money
market funds or high-grade commercial paper. Market risk is estimated as the
potential decrease in interest income resulting from a hypothetical one percent
decrease in interest rates, which would result in an estimated annual interest
income decrease of approximately $0.2 million.


                                                           TRICORD SYSTEMS, INC.

                                                                               7
<PAGE>   5

LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had cash and cash equivalents totaling $16.8
million. Cash and cash equivalents consist primarily of money market funds or
high-grade commercial paper with maturities of less than three months.

Cash used in operating activities was $9.0 million, $5.2 million, $1.3 million
during 2000, 1999 and 1998, respectively. Cash used in operating activities in
2000 was primarily due to a net loss of $13.6 million offset in part by
increases in accounts payable, accrued expenses and non-cash charges for stock
compensation and depreciation. Cash used in operating activities in 1999 was
primarily due to a net loss of $7.6 million partially offset by non-cash stock
compensation expense and depreciation expense. Cash used in operating activities
in 1998 was primarily due to a net loss of $2.1 million partially offset by
non-cash charges for depreciation.

Cash used in investing activities was $3.1 million, $0.2 million and $0.1
million in 2000, 1999 and 1998, respectively. Cash used in investing activities
was primarily due to capital expenditures. We anticipate that our capital
expenditures in 2001 will be approximately equivalent to 2000. We have no
significant commitments to purchase capital equipment as of December 31, 2000.

Cash provided by financing activities was $25.9 million, $2.3 million and $3.8
million in 2000, 1999 and 1998, respectively. In 2000, cash provided by
financing activities was primarily generated through a private placement of
3,250,000 shares of common stock at a price of $8.00 per share through which we
raised net proceeds of approximately $24.4 million. In 1999, cash provided by
financing activities was primarily generated through a private placement of
840,000 shares of common stock at a price of $2.50 per share. In 1998, cash
provided by financing activities was primarily generated through a private
placement of 3,000,000 shares of common stock at a price of $1.00 per share and
warrants with a 5-year term to purchase up to 3,000,000 shares of the Company's
Common Stock at $3.50 per share.

On February 27, 2001, we closed a private placement of $25 million in
Convertible Preferred Stock. Net proceeds from the placement were approximately
$23.4 million. Under terms of the offering, the Company issued 25,000 shares of
its newly created class of Series E Convertible Preferred Stock. Each share of
the Series E Preferred Stock is convertible into such number of shares of common
stock as is determined by dividing (i) the stated value ($1,000) of the share of
Series E Preferred Stock, which value is increased by a premium accruing daily
at the annual rate of 4.75% of the stated value, by (ii) the conversion price,
which is currently $9.50 per share. In connection with this private placement,
the Company issued a warrant with an 18-month term to purchase up to 986,842
additional shares of the Company's Common Stock at $12.40 per share, and a
warrant with a 24-month term to purchase up to 986,842 additional shares of the
Company's Common Stock at $14.50 per share.

We currently believe that cash and cash equivalents as of December 31, 2000,
combined with the additional financing raised in February 2001, will be
sufficient to fund our operations for at least the next twelve months.

NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB statement No. 133," is effective for fiscal years
beginning after June 15, 2000. In June 2000, Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities - an Amendment of FASB Statement No. 133," was issued to clarify
certain provisions of SFAS 133. SFAS 133 will be effective for our fiscal year
ended December 31, 2001. We believe the adoption of this statement will not have
a significant impact on our financial position, results of operations or cash
flows.


TRICORD SYSTEMS, INC.

8

<PAGE>   6

In November 2000 the Emerging Issues Task Force ("EITF") reached a consensus in
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock," which is effective for
certain instruments in calendar year 2000 and is effective for all instruments
in 2001. This issue addresses whether certain equity securities should be
classified as equity, "mezzanine securities", assets or liabilities. The Company
has concluded that the EITF 00-19 consensus will not impact its financial
position or results of operations as of and for the year ended December 31,
2000.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report contains certain forward looking statements within the
meaning of the Private Securities Reform Act of 1995. When used in this report,
the words "anticipates," "believes", "expects," "intends," "forecasts," "plans,"
"future," "strategy," or words of similar import are intended to identify
forward-looking statements. Other statements of the Company's plans and
objectives may also be considered to be forward-looking statements. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially from those expressed in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof. Readers are urged to carefully review and consider the various
disclosures made in this Annual Report by the Company as well as the Company's
other filings with the Securities and Exchange Commission.

The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us, or that are
currently deemed immaterial, may also impair our business operations. If any of
these risks actually occur, our financial condition and operating results could
be materially adversely affected. You should carefully consider the following
factors as well as the other information in this Annual Report and in the
Company's Form 10-K.

DURING 2000, WE DID NOT GENERATE ANY REVENUES, AND WE ANTICIPATE THAT ANY
REVENUES THAT WE DO GENERATE WILL COME FROM PRODUCTS BASED ON A SINGLE TYPE OF
NEW SOFTWARE TECHNOLOGY THAT HAS NOT BEEN PREVIOUSLY USED IN THE MARKETPLACE.

Since we sold the remaining assets associated with our server line of business
in August 1999, we have not generated any revenues from the sale of products.
Although we currently anticipate generating revenues again starting in 2001,
beginning with sales of our initial Lunar Flare NAS server appliance, we cannot
assure you when we will generate revenues or that we will be able to generate
revenues at a level that meets expectations.

Further, Lunar Flare NAS utilizes Illumina, and all other products we currently
plan to develop are also designed to utilize Illumina. Because Illumina is a new
type of software technology, we cannot be sure that we will sell a significant
number of Lunar Flare NAS appliances, nor can we be sure that anyone will buy
our other Illumina-based products that we may develop. If demand for Lunar Flare
NAS and any other Illumina-based products that we may develop fails to
materialize, we will not have any products to sell for the foreseeable future.


SOFTWARE ERRORS OR FAILURES FOUND IN OUR PRODUCTS MAY RESULT IN A DELAY IN
DELIVERY OF OUR PRODUCTS OR LOSS OF, OR DELAY IN, MARKET ACCEPTANCE OF OUR
PRODUCTS WHICH COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

Software errors or failures found in our products may result in a delay in
delivery of our products. Further, even though we have performed a significant
amount of testing of our Illumina software and our initial Lunar Flare NAS
server appliance, they may still contain software errors or failures that may be
discovered by customers after shipment, which could result in loss of, or delay
in, market acceptance, which could in turn materially adversely affect our
operating results. Similarly, other products we develop may contain software
errors or failures which may result in a delay in delivery of such products or
which are not detected or remedied until after we ship such products. The
occurrence of such errors in either the Lunar Flare NAS or other Illumina-based
products could result in:

         -   The delay in delivery of these products;
         -   The loss of, or delay in, market acceptance and sales of these
             products;
         -   Diversion of development resources;
         -   Injury to our reputation; or
         -   Increased maintenance and warranty costs.

Moreover, because of the way customers may use our products, we may be subject
to significant liability claims if our products do not work properly. Although
the agreements we use to sell our Illumina-based products contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation-of-liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. If we are
found to be liable to defective product claims, such liability may have a
harmful effect on our business and financial condition.

THE SUCCESS OF OUR LUNAR FLARE NAS SERVER APPLIANCES AND OTHER ILLUMINA-BASED
PRODUCTS DEPENDS UPON MARKET ACCEPTANCE OF OUR TECHNOLOGY.

Due to the fact that we have been focusing all of our resources on developing
products which utilize Illumina, our future financial performance will be
largely dependent on the acceptance of our Illumina aggregation software. We
cannot assure you that the server appliance market, our target market for our
aggregation software, will accept Illumina or the products utilizing it. Factors
that may affect the market acceptance of our products, some of which are beyond
our control, include the following:

         -   The growth and changing requirements of the server appliance
             market;
         -   The availability, performance, quality, price and total cost of
             ownership of our products;


                                                           TRICORD SYSTEMS, INC.

                                                                               9

<PAGE>   7

         -   The availability, performance, quality, price, and total cost of
             ownership of competing products and technologies; and
         -   The successful development of our relationships with licensed
             manufacturers, original equipment manufacturers and channel
             partners.

If customers do not purchase the Lunar Flare NAS or our other Illumina-based
products for any reason, our revenues and operating results will be adversely
affected because we currently have no other products to sell.

WE OPERATE IN AN EXTREMELY COMPETITIVE AND RAPIDLY CHANGING MARKETPLACE, AND
SOME OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US WHICH MAY ALLOW THEM TO
MORE QUICKLY REACT TO CHANGES IN THE MARKETPLACE.

We operate in an extremely competitive and rapidly changing marketplace, and we
cannot assure you that we can establish and maintain a competitive position
against current and potential competitors, especially those with greater
financial, marketing, service, support, technical and other resources. In
addition, we expect that the market for the Lunar Flare NAS, our initial server
appliance targeting the network-attached storage market, will become
consolidated with larger companies possibly being in a better position than us
to compete in this rapidly changing marketplace. As the server appliance market
continues to develop, a number of companies which have greater resources than us
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or potential business partners.

IF GROWTH IN THE NETWORK-ATTACHED-STORAGE ("NAS") MARKET DOES NOT MEET OUR
EXPECTATIONS, OUR FUTURE FINANCIAL PERFORMANCE COULD BE NEGATIVELY IMPACTED.

We believe our future financial performance will depend in large part upon the
continued growth in the NAS market. We expect that any revenues that we are able
to generate from product sales in 2001 will come primarily from Illumina-based
products which are sold in the NAS marketplace. The market for NAS products,
however, may not continue to grow at the current rate and could possibly
decline. Long-term trends in storage technology may change and competing
technologies, such as storage area networks, may emerge as the preferred storage
solution. If

TRICORD SYSTEMS, INC.

10

<PAGE>   8
the NAS market grows more slowly than anticipated or declines, our operating
results could be materially adversely affected.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO EXPERIENCE LOSSES IN THE FUTURE, WHICH
COULD RESULT IN THE MARKET PRICE OF OUR COMMON STOCK DECLINING.

Over the last five years, we have incurred significant net losses, including net
losses of $13.6 million, $7.6 million and $2.1 million in 2000, 1999 and 1998
respectively. We expect to continue to have losses in the future. In addition,
we had an accumulated deficit of $97.5 million as of December 31, 2000. We
believe that our future growth depends upon the success and market acceptance of
Lunar Flare NAS and other Illumina-based products, as well as our ability to
develop new products and adopt successful marketing and sales strategies, all of
which will require us to incur significant product development and sales and
marketing expenses. We anticipate that our expenses will increase substantially
in 2001 as we:

         -   Increase our sales and marketing activities;
         -   Introduce and expand our Lunar Flare product line;
         -   Establish and expand our distribution channels;
         -   Continue and expand our product development activities;
         -   Develop strategic partnerships and alliances with third parties;
         -   Create and market additional server appliance products based on
             Illumina; and
         -   Implement additional internal systems, develop additional
             infrastructure and hire additional personnel to keep pace with our
             growth.

As a result of our expected increases in expenses, we will need to generate
significant revenues to achieve profitability. If we do not significantly
increase our revenues or if we fail to control our costs as we implement our
business strategies, it will be difficult to achieve and maintain profitability.
If we do not achieve and maintain profitability, the market price of our common
stock may decline substantially.

IF WE FAIL TO ESTABLISH SUFFICIENT DIRECT AND INDIRECT SALES CHANNELS FOR OUR
PRODUCTS, OUR ABILITY TO GENERATE REVENUE MAY BE LIMITED.

In order to grow our business, we will need to increase market awareness of our
server appliances and proprietary software. To achieve these objectives, we
believe it will be necessary to establish and expand our direct and indirect
sales channels. We plan to sell our products directly to end consumers as well
as through indirect sales channels, including value added resellers, agents and
original equipment manufacturers. These potential sales strategies present risks
to our business. To sell our products directly to end consumers, our sales
people that we hire will need to sell an entirely new product to customers in a
market in which we have not previously sold. We cannot assure you that we will
be able to successfully market our products to end consumers or that we will be
able to do so profitably.

To sell our Illumina-based products through distribution partnerships and other
indirect sales channels, we will need to establish relationships with businesses
with whom we do not currently have relationships. Our failure to establish such
relationships on acceptable terms or in sufficient numbers could adversely
affect our ability to introduce and market our products successfully. Even if we
do establish such distribution relationships, using other businesses to sell the
products we are developing presents several risks to our business. These risks
include our inability to control the distributors, our dependence upon their
continued commercial success and financial stability, and the possibility that
they may be unable to market or sell our products effectively. In addition, we
anticipate our agreements with distribution partners will typically be
non-exclusive, so they could carry competing product lines, devote their efforts
to other products in different markets, reduce or discontinue sales of our
products, fail to devote the resources necessary to provide effective sales and
marketing support of our products or develop their own competing product lines.


                                                           TRICORD SYSTEMS, INC.

                                                                              11

<PAGE>   9

WE FACE RISKS OF TECHNOLOGICAL CHANGES THAT MAY RENDER OUR PRODUCTS OBSOLETE.

The markets we serve are characterized by rapid technological change, changing
customer needs, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards could render our products and software,
including Lunar Flare NAS and Illumina, obsolete and unmarketable. Our future
success will depend upon our ability to develop and introduce new products
(including new software releases and enhancements) on a timely basis that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of our customers. We cannot assure you that
we will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards. If we are unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, our operating results will be materially adversely affected.

OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OPERATING SYSTEM SOFTWARE FOR WHICH WE
HAVE NO RESPONSIBILITY OR CONTROL.

Our initial Lunar Flare NAS server appliance is designed to be used with the
Linux operating system, which is not designed or manufactured by us. We
anticipate that Lunar Flare NAS may in the future, after we further modify and
enhance it, be able to be used with the Windows NT and UNIX operating systems,
both of which are designed and manufactured by parties over whom we have no
control. Similarly, we anticipate future Illumina-based products may also be
designed to be used with the Windows NT, Linux and UNIX operating systems.
Therefore, our business depends on the market acceptance of Windows NT, Linux
and UNIX to run computer networks and the willingness of the manufacturers of
these operating systems to continue to offer a quality product. Because we have
no control over the market acceptance of any of this operating software or their
manufacturers to continue to offer quality products that fulfill market demand,
our ability to generate revenues will be largely dependent on the ability and
desire of such manufacturers to continue to offer quality products that fulfill
market demand.

WE MAY BE UNABLE TO HIRE AND RETAIN REQUIRED, HIGHLY-SKILLED MANAGERIAL AND
TECHNICAL PERSONNEL.

Our future success depends, in significant part, upon retaining the continued
service and performance of our senior management, team members, consultants and
other key personnel as well as our continued ability to attract and recruit
qualified personnel. Losing the services of any member of our management team
could impair our ability to effectively manage our company and to carry out our
business plan. We also need to hire additional sales, marketing, engineering,
service and administrative personnel to grow our business and generate revenues.
If we are unable to hire and retain these employees, our business and operations
would be adversely affected. Competition for people with the skills we require
is intense, and we cannot assure you that we will be able to hire such people or
that we will be able to do so without offering these people salaries that are
significantly higher than we have historically paid. Additions of new personnel
and departures of existing personnel could disrupt our business and may result
in the departure of other employees. We also depend on the continued service of
our key personnel and even though we have entered into employment agreements
with key management personnel, these agreements cannot prevent their departure.

WE RELY ON CONTRACT MANUFACTURERS/INTEGRATORS TO PRODUCE OUR PRODUCTS AND, IF
OUR MANUFACTURERS FAIL TO MEET OUR REQUIREMENTS, WE MAY BE UNABLE TO MEET
CUSTOMER REQUIREMENTS AND OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.

Our arrangements with our contract manufacturers who produce our products
currently do not guarantee production levels or manufacturing prices. These
manufacturers may not have additional capacity available when we need it and
they may experience shortages in supply of key components for an extended time,
which would cause delays in the production of our products,


TRICORD SYSTEMS, INC.

12

<PAGE>   10

prevent us from satisfying our contractual obligations and meeting customer
expectations, and result in lost sales or customers. Also, commencing volume
production or expanding production to another facility they own may be expensive
and time-consuming. In addition, commencement of the manufacturing of our
products at additional manufacturing sites we may need in the future may cause
transitional problems, including delays and quality control issues, which could
cause us to lose sales and impair our ability to achieve profitability. We may
need to find new or additional outside manufacturers to manufacture our products
in higher volume and at lower cost to meet increased demand and competition. If
we are required or choose to change outside manufacturers, we may lose sales and
our business could be materially adversely affected.

OUR RELIANCE UPON PATENTS, DOMESTIC TRADEMARK LAWS AND CONTRACTUAL PROVISIONS TO
PROTECT OUR PROPRIETARY RIGHTS MAY NOT BE SUFFICIENT TO PROTECT OUR INTELLECTUAL
PROPERTY FROM OTHERS WHO MAY SELL SIMILAR PRODUCTS.

Our products are differentiated from those of our competitors because we utilize
Illumina, our internally developed software. If we fail to protect Illumina and
our other intellectual property, other vendors could develop and sell products
with features similar to ours, and this could reduce demand for our products. We
have been granted one U.S. patent related to Illumina and we currently have
eight additional United States patent applications pending with respect to
Illumina to protect our intellectual property rights. We also rely on a
combination of trade secret and other intellectual property law, nondisclosure
agreements and other protective measures to establish and protect our
proprietary rights in our intellectual property.

We believe that the steps we have taken to safeguard our intellectual property
afford only limited protection. Others may develop technologies that are similar
or superior to our technology or design around the patents and trade secrets we
own. Despite the precautions we have taken, laws and contractual restrictions
may not be sufficient to prevent misappropriation of our technology or deter
others from developing similar technologies.

In addition, the laws of the countries in which we may market our services and
solutions may offer little or no effective protection of our proprietary
technology. Reverse engineering, unauthorized copying or other misappropriation
of our patented, proprietary technology or disclosure as a result of the use of
open source software, could enable third parties to benefit from our technology
without paying us for it, which would significantly harm our business.

OTHERS MAY ASSERT INTELLECTUAL PROPERTY CLAIMS AGAINST US AND OUR OPERATING
RESULTS WOULD SUFFER IF WE WERE SUBJECT TO A PROTRACTED INFRINGEMENT CLAIM OR IF
WE BECOME OBLIGATED TO PAY A SIGNIFICANT DAMAGE AWARD.

Substantial litigation regarding intellectual property rights and brand names
exists in our industry. We expect that server appliance products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. We do not believe that our products employ
technology that infringes any proprietary rights of third parties. However,
third parties may claim that we infringe their intellectual property rights and
such claims may be found to be valid. Any claims, with or without merit, could:


         -   Be time-consuming to defend;
         -   Result in costly litigation;
         -   Divert our management's attention and resources;
         -   Cause product shipment delays; and
         -   Require us to enter into royalty or licensing agreements.

If we are found to be infringing upon the rights of others, we could be forced
to develop a non-infringing alternative that could be costly and time-consuming.
We may also be required, if we are found to be infringing on the intellectual
rights of others, to enter into royalty or licensing agreements with a third
party, which agreements may not be available on terms acceptable to us. A


                                                           TRICORD SYSTEMS, INC.

                                                                              13

<PAGE>   11

valid claim by a third party of product infringement against us or our failure
or inability to license the infringed or similar technology could adversely
affect our business because we would not be able to sell the impacted product
without redeveloping it or incurring significant additional expenses.

WE MAY NEED ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE TO US AND, IF RAISED,
MAY DILUTE OUR EXISTING INVESTORS' OWNERSHIP INTEREST IN US.

We may need to raise additional funds to develop or enhance our software and
server appliances, fund expansion, respond to competitive pressures or acquire
complementary products, businesses or technologies. Additional financing may not
be available on terms that are acceptable to us or at all. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders would be reduced and these
securities may have rights, preferences and privileges senior to those of our
current stockholders which may adversely impact current stockholders. If
adequate funds are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
products or services, or otherwise respond to competitive pressures would be
significantly limited.

OUR STOCK IS SUBJECT TO POTENTIAL DILUTION THROUGH THE CONVERSION OF SERIES E
PREFERRED STOCK AND THE ACCOUNTING TREATMENT FOR THE SERIES E PREFERRED STOCK
CONVERSION FEATURE WILL RESULT IN A CHARGE AGAINST INCOME AVAILABLE FOR COMMON
STOCKHOLDERS.

The shares of Series E Preferred Stock issued in February 2001 are convertible
into shares of our common stock at a conversion price of $9.50 per share of
common stock. However, the conversion price may be decreased (which would result
in an increase in the number of shares of common stock issued upon conversion of
the Series E Preferred Stock), including if we sell shares of our common stock
in certain circumstances below this conversion price. In addition, if the Series
E Preferred Stock is not converted to our common stock prior to February 27,
2004 (unless the Company elects to redeem the Preferred Stock), it will
automatically convert to common stock on that date, and the conversion price
will be based on the average market price of our common stock during the fifteen
trading days preceding that date. If the average market price of our common
stock is lower than $9.50 during these fifteen days, the conversion price will
be lower than $9.50 and the number of shares of common stock into which the
Series E Preferred Stock is convertible will increase, possibly by a substantial
amount, which would dilute the percentage ownership of our existing
stockholders. An increase in the number of shares issued or issuable upon
conversion of the Series E Preferred Stock could have a material adverse effect
on the market price of the Common Stock.

Further, accounting for the preferred stock conversion feature in accordance
with Emerging Issues Task Force (EITF) issue No. 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Rates" and EITF Issue No. 00-27 "Application of Issue 98-5
to Certain Convertible Investments" will result in the allocation of
approximately $11 million of the preferred stock proceeds to a "beneficial
conversion feature". This beneficial conversion feature will be charged against
income available to common stockholders while the preferred stock is
outstanding, which will reduce the income (increase the loss) per common share
reported by the Company.

WE CURRENTLY DO NOT ANTICIPATE PAYING ANY CASH DIVIDENDS.

We currently intend to retain any future earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future. Therefore,
any gains from your investment in our common stock will have to come from
increase in its market price.

THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE AND ANY BROAD MARKET
FLUCTUATIONS MAY MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.

The market price of our common stock has been volatile in the past, and several
factors could cause the price to fluctuate substantially in the future. These
factors include:

         -   Successful and timely development and introduction of Lunar Flare
             NAS and other Illumina-based products;
         -   Fluctuations in our operating results;
         -   Fluctuations in the valuation of companies perceived by investors
             to be comparable to us;
         -   A shortfall in revenues or earnings compared to securities
             analysts' expectations;
         -   Changes in analysts' recommendations or projections;


TRICORD SYSTEMS, INC.

14

<PAGE>   12

         -   Announcements of new products, applications or product enhancements
             by us or our competitors; and
         -   Changes in our relationships with our suppliers, channel partners
             and customers.

In addition, the stock market has recently experienced volatility that has
particularly affected the market prices of equity securities of many technology
companies and that often has been unrelated to the operating results of such
companies. As a result, the market price of our common stock may fluctuate
significantly in the future and any broad market fluctuations may materially
adversely affect the market price of common stock. In the past, companies that
have experienced volatility in the market price of their stock have been the
subject of securities class action litigation. If we were the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.


                                                           TRICORD SYSTEMS, INC.

                                                                              15

<PAGE>   13

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 accounting principles
generally accepted in the United States of America, 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 auditing standards generally accepted in the United States of
America 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, Mr. Yuval Almog 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.



Joan M. Wrabetz                                   Steven E. Opdahl
President and Chief Executive Officer             Chief Financial Officer


TRICORD SYSTEMS, INC.

16

<PAGE>   14

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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards generally
accepted in the United States of America, 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 our opinion.







Minneapolis, Minnesota
January 19, 2001 except as to
Note 9, for which the date is
February 27, 2001


                                                           TRICORD SYSTEMS, INC.

                                                                              17

<PAGE>   15

                              TRICORD SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                     -----------------------------------
(in thousands, except per share data)                                  2000          1999         1998
                                                                     --------      --------     --------
<S>                                                                <C>           <C>          <C>
Operating expenses:
    Research and development                                         $  7,386      $  3,442     $  2,473
    Sales and marketing                                                 4,206         2,645          905
    General and administrative                                          3,109         1,890          856
                                                                     --------      --------     --------
                                                                       14,701         7,977        4,234
                                                                     --------      --------     --------

Operating loss                                                        (14,701)       (7,977)      (4,234)
                                                                     --------      --------     --------

Other income:
    Interest, net                                                         971           216          193
    Other, net                                                              4            54          187
                                                                     --------      --------     --------
                                                                          975           270          380
                                                                     --------      --------     --------

Loss from continuing operations                                       (13,726)       (7,707)      (3,854)
                                                                     --------      --------     --------

Discontinued operations:
    Income from operations of legacy server business                       --           228        1,743
    Gain (loss) on disposal of legacy server business                     146          (158)          --
                                                                     --------      --------     --------

       Income from discontinued operations                                146            70        1,743
                                                                     --------      --------     --------

Net loss                                                             $(13,580)     $ (7,637)    $ (2,111)
                                                                     ========      ========     ========

Loss per share from continuing operations -
    basic and diluted                                                $  (0.60)     $  (0.39)    $  (0.26)
                                                                     ========      ========     ========

Income per share from discontinued
    operations - basic and diluted                                   $   0.01      $     --     $   0.12
                                                                     ========      ========     ========

Net loss per share - basic and diluted                               $  (0.59)     $  (0.39)    $  (0.14)
                                                                     ========      ========     ========

Weighted average common shares outstanding -
    basic and diluted                                                  23,070        19,472       14,573
                                                                     ========      ========     ========
</TABLE>


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

TRICORD SYSTEMS, INC.

18

<PAGE>   16

                              TRICORD SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                           At December 31,
                                                                       -----------------------
(In thousands, except per share data)                                    2000          1999
                                                                       ---------     ---------
<S>                                                                  <C>           <C>
ASSETS
Current assets:
    Cash and cash equivalents                                          $  16,825     $   3,082
    Other current assets                                                     194            73
                                                                       ---------     ---------
       Total current assets                                               17,019         3,155

Equipment and improvements, net                                            3,114           277
                                                                       ---------     ---------

       Total Assets                                                    $  20,133     $   3,432
                                                                       =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                   $   1,521     $      98
    Accrued payroll, benefits and related taxes                            1,065           306
    Other accrued expenses                                                   123           126
                                                                       ---------     ---------
       Total current liabilities                                           2,709           530

Capital lease obligation                                                     112            --

Commitments and contingencies

Stockholders' equity:
    Common stock, $.01 par value; 75,000 shares authorized,
       24,278 and 20,169 shares outstanding                                  243           202
    Additional paid-in capital                                           115,704        91,277
    Unearned compensation                                                 (1,151)       (4,673)
    Accumulated deficit                                                  (97,484)      (83,904)
                                                                       ---------     ---------
       Total stockholders' equity                                         17,312         2,902
                                                                       ---------     ---------

       Total Liabilities and Stockholders' Equity                      $  20,133     $   3,432
                                                                       =========     =========
</TABLE>


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


                                                           TRICORD SYSTEMS, INC.

                                                                              19

<PAGE>   17

                              TRICORD SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

(In thousands)                                                            Year Ended December 31,
                                                                     --------------------------------
                                                                       2000        1999        1998
                                                                     --------    --------    --------
<S>                                                                <C>         <C>         <C>
Cash flows from operating activities:
    Net loss                                                         $(13,580)   $ (7,637)   $ (2,111)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
       Stock compensation                                               2,110       2,208         401
       Depreciation and amortization                                      570         227         355
       Loss on disposal of equipment                                       25          --          22
       Provision for losses on accounts receivable                         --         (22)       (142)
       (Gain) loss on sale of legacy server business                     (146)        158          --
       Provision for losses on inventories                                 --          --          71
       Other                                                               --         (42)       (125)
       Changes in operating assets and liabilities:
          Accounts receivable                                              --         184         661
          Inventories                                                      --         333         789
          Other current assets                                           (121)         12          86
          Accounts payable                                              1,423        (169)       (310)
          Accrued payroll, benefits and related taxes                     759          37         (75)
          Deferred revenue                                                 --        (395)       (421)
          Other accrued expenses                                          (68)       (118)       (478)
                                                                     --------    --------    --------
            Net cash used in operating activities                      (9,028)     (5,224)     (1,277)
                                                                     --------    --------    --------
Cash flows from investing activities:
    Capital expenditures                                               (3,255)       (282)        (55)
    Sale of legacy server business                                        146          49          --
                                                                     --------    --------    --------
            Net cash used in investing activities                      (3,109)       (233)        (55)
                                                                     --------    --------    --------
Cash flows from financing activities:
    Stock option and warrant exercises and stock purchase plan          1,502         224         834
    Net proceeds from private placement                                24,378       2,100       3,000
                                                                     --------    --------    --------
            Net cash provided by financing activities                  25,880       2,324       3,834
                                                                     --------    --------    --------
Net increase (decrease) in cash and cash equivalents                   13,743      (3,133)      2,502
Cash and cash equivalents at beginning of year                          3,082       6,215       3,713
                                                                     --------    --------    --------

Cash and cash equivalents at end of year                             $ 16,825    $  3,082    $  6,215
                                                                     ========    ========    ========
</TABLE>


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


TRICORD SYSTEMS, INC.

20

<PAGE>   18

                              TRICORD SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

(In thousands, except shares)                                      Common Stock
                                                       ------------------------------------
                                                                                 Additional
                                                                        Par       Paid-In        Unearned
                                                         Shares        Value       Capital     Compensation
                                                       -----------    -------    ----------    -------------
<S>                                                   <C>           <C>        <C>           <C>
Balances, December 31, 1997                             13,459,884    $   135    $   77,606    $         --

Sale of common stock and warrants                        3,000,000         30         2,970              --
Exercise of stock options                                  935,256         10           807              --
Stock issued under employee stock purchase plan             30,206         --            17              --
Stock issued to employees and Directors                    704,523          7           493              --
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                        --         --            --              --
Net and comprehensive loss                                      --         --            --              --
                                                       -----------    -------    ----------    ------------

Balances, December 31, 1998                             18,961,012    $   190    $   87,483    $     (5,564)

Sale of common stock                                       840,000          8         2,092              --
Exercise of stock options                                  249,253          4           435              --
Stock issued under employee stock purchase plan             22,809         --            22              --
Stock issued to employees and Directors                     56,332         --           165              --
Amortization of unearned compensation                           --         --            --           1,530
Stock issued for services                                   39,872         --            90              --
Stock options issued for services                               --         --           990            (639)
Net and comprehensive loss                                      --         --            --              --
                                                       -----------    -------    ----------    ------------

Balances, December 31, 1999                             20,169,278    $   202    $   91,277    $     (4,673)

Sale of common stock, net of offering costs              3,250,000         33        24,345              --
Exercise of stock options                                  812,690          8           683              --
Stock issued under employee stock purchase plan             11,116         --            24              --
Exercise of warrants                                       225,000          2           785              --
Stock issued to Directors                                    9,733         --           107              --
Amortization of unearned compensation                           --         --            --           2,003
Stock options issued for services                               --         --         2,120          (2,120)
Cancellation of stock options                                   --         --        (3,508)          3,508
Cancellation of restricted stock                          (200,000)        (2)         (129)            131
Net and comprehensive loss                                      --         --            --              --
                                                       -----------    -------    ----------    ------------

Balances, December 31, 2000                             24,277,817    $   243    $  115,704    $     (1,151)
                                                       ===========    =======    ==========    ============
</TABLE>

<TABLE>
<CAPTION>

                                                        Cumulative                           Total
                                                       Translation     Accumulated      Stockholders'
                                                       Adjustments        Deficit           Equity
                                                       -----------     -----------      -------------
<S>                                                  <C>             <C>              <C>
Balances, December 31, 1997                            $        82     $   (74,156)     $     3,667

Sale of common stock and warrants                               --              --            3,000
Exercise of stock options                                       --              --              817
Stock issued under employee stock purchase plan                 --              --               17
Stock issued to employees and Directors                         --              --              500
Restricted stock issued to employees                            --              --               --
Stock compensation for options issued subject to
shareholder approval                                            --              --               --
Amortization of unearned compensation                           --              --              194
Stock options issued for services                               --              --               90
Cancellation of warrant                                         --              --             (250)
Foreign currency translation adjustments                       (82)             --              (82)
Net and comprehensive loss                                      --          (2,111)          (2,111)
                                                       -----------     -----------      -----------

Balances, December 31, 1998                            $        --     $   (76,267)     $     5,842

Sale of common stock                                            --              --            2,100
Exercise of stock options                                       --              --              439
Stock issued under employee stock purchase plan                 --              --               22
Stock issued to employees and Directors                         --              --              165
Amortization of unearned compensation                           --              --            1,530
Stock issued for services                                       --              --               90
Stock options issued for services                               --              --              351
Net and comprehensive loss                                      --          (7,637)          (7,637)
                                                       -----------     -----------      -----------

Balances, December 31, 1999                            $        --     $   (83,904)     $     2,902

Sale of common stock, net of offering costs                     --              --           24,378
Exercise of stock options                                       --              --              691
Stock issued under employee stock purchase plan                 --              --               24
Exercise of warrants                                            --              --              787
Stock issued to Directors                                       --              --              107
Amortization of unearned compensation                           --              --            2,003
Stock options issued for services                               --              --               --
Cancellation of stock options                                   --              --               --
Cancellation of restricted stock                                --              --               --
Net and comprehensive loss                                      --         (13,580)         (13,580)
                                                       -----------     -----------      -----------

Balances, December 31, 2000                            $        --     $   (97,484)     $    17,312
                                                       ===========     ===========      ===========
</TABLE>

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

                                                           TRICORD SYSTEMS, INC.

                                                                              21
<PAGE>   19

                              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
Tricord Systems, Inc. (the "Company") designs, develops and markets innovative
server appliances. In December 2000, the Company announced its first server
appliance, Lunar Flare(TM) NAS -- specifically designed to meet the general file
serving needs of growing organizations, workgroups, corporate departments and
e-businesses. The core of the Company's new technology is its patented
Illumina(TM) software that aggregates multiple appliances into a single cluster,
managed as a single resource. From 1997 through the end of 2000, the Company
raised approximately $30 million from several successful private placements
while the Company expended approximately $17 million of cash on its operating
activities and $4 million of cash on related capital expenditures. During this
same period, the Company generated cumulative losses from continuing operations
of approximately $30 million.

Before focusing its efforts exclusively on the development of Illumina, the
Company had 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's Windows NT(R) and
Novell(R) NetWare(R).

DISCONTINUED OPERATIONS
In August 1999, the Company sold all assets related to the server line of
business (sometimes referred to as the "legacy business"), except for existing
trade accounts receivable, in exchange for the assumption of all liabilities of
the legacy business. The sale of the legacy business resulted in an initial loss
of $207 in 1999. Pursuant to the terms of the sale agreement, the Company was
entitled to receive up to $200 of cash payments, contingent upon the level of
sales of legacy server-related products and services through December 31, 2000.
In 1999 the Company received payments of approximately $49 related to this
contingent payment portion of the sale agreement, which reduced the net loss
from the sale of the legacy business to $158 for the year ended December 31,
1999. For the year ended December 31, 2000 the Company recorded a gain of $146
on disposal of the legacy server business consisting of $121 of cash payments
received related to the contingent payment portion of the sale agreement and
reversal of a previously recorded accrual of $25 for the estimated cost of
resolving legacy business year 2000 issues.

In July 1999, the Company effected a workforce reduction to streamline its
operations. The reduction resulted in the severance of eleven employees engaged
in performing legacy business activities. The costs of the workforce reduction,
which included severance payments and stock compensation charges totaling $339,
have been included in the 1999 loss from discontinued operations.

The Company has reported results of operations of the legacy business as
discontinued operations for all periods presented. Revenues from the legacy
server business included in discontinued operations were $291 in 1999 and $3,853
in 1998.

CASH EQUIVALENTS
The Company considers all highly liquid investments acquired with maturities of
three months or less to be cash equivalents. Cash and cash equivalents at
December 31, 2000 and 1999 are concentrated in money market accounts and
high-grade commercial paper.


TRICORD SYSTEMS, INC.

22

<PAGE>   20

EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost and depreciated using the
straight-line method over their estimated useful lives of generally two to five
years. Property and equipment held under capital leases are stated at the
present value of the minimum lease payments at the inception of the lease and
are amortized using the straight-line method over the lesser of the life of the
related assets or the term of the lease. Expenditures for maintenance and
repairs that do not improve or extend the life of the respective assets are
expensed as incurred. The cost and related accumulated depreciation or
amortization of assets sold or disposed of are removed from the accounts and any
resulting gain or loss is included in the determination of net income or loss.

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.

INCOME (LOSS) PER SHARE
Loss per share from continuing operations is computed by dividing loss from
continuing operations by the weighted average number of common shares
outstanding during each period. Income per share from discontinued operations is
computed by dividing income from discontinued operations by the weighted average
number of common shares outstanding during each period. Net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during each period. Potentially dilutive common shares are excluded
from the calculation of loss per share from continuing operations and net loss
per share as their impact is antidilutive. Loss per share from continuing
operations and net loss per share do not include common stock options and
warrants ultimately exercisable for the purchase of approximately 11,800,000,
8,500,000 and 8,600,000 shares as of December 31, 2000, 1999 and 1998,
respectively.

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

RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under SFAS No. 133, all derivatives must be recognized as assets and liabilities
and measured at fair value. The Company is required to adopt the provisions of
SFAS No. 133, as amended by SFAS No. 137 and 138, in 2001. The Company does to
expect the adoption of SFAS No. 133 to have a significant impact on the
Company's financial position, results of operations or cash flows.

In November 2000 the Emerging Issues Task Force ("EITF") reached a consensus in
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock," which is effective for
certain instruments in calendar year 2000 and is effective for all instruments
in 2001. This issue addresses whether certain equity securities should be
classified as equity, "mezzanine securities", assets or liabilities. The Company
has concluded that the EITF 00-19 consensus will not impact its financial
position or results of operations as of and for the year ended December 31,
2000.


                                                           TRICORD SYSTEMS, INC.

                                                                              23

<PAGE>   21

USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities 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.

2. SELECTED FINANCIAL STATEMENT INFORMATION

SUPPLEMENTAL BALANCE SHEET INFORMATION:

<TABLE>
<CAPTION>

                                                                       December 31,
                                                                  ----------------------
                                                                    2000          1999
                                                                  --------       -------
<S>                                                              <C>           <C>
Equipment and improvements:
     Office equipment and leasehold improvements                   $ 2,337       $   537
     Engineering equipment                                           1,694           127
                                                                   -------       -------
                                                                     4,031           664
     Less accumulated depreciation and amortization                   (917)         (387)
                                                                   -------       -------
                                                                   $ 3,114       $   277
                                                                   =======       =======

Other accrued expenses:
     Warranty                                                      $    --       $    25
     Capital lease obligation                                           65            --
     Other                                                              58           101
                                                                   -------       -------
                                                                   $   123       $   126
                                                                   =======       =======
</TABLE>


SUPPLEMENTAL CASH FLOW INFORMATION:
During 2000, expenses of $107 were settled through the issuance of 9,733 shares
of common stock of the Company to directors.

During 2000, the Company acquired $177 of equipment under capital leases.

During 1999, $75 of accrued payroll obligations were settled through the
issuance of 22,640 shares of common stock of the Company. Also during 1999,
expenses of $180 were settled through the issuance of 73,564 shares of common
stock of the Company to directors and consultants.

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
The Company had no significant international operations during 2000, 1999 or
1998 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 liquidated its remaining United
Kingdom subsidiary in 2000, which had no significant operating activity, and
generated no significant gain or loss upon liquidation.


TRICORD SYSTEMS, INC.

24

<PAGE>   22

3. COMMITMENTS AND CONTINGENCIES

LEASES
The Company leases office and certain equipment under cancelable and
noncancelable operating leases expiring at various dates through 2006. The
Company's headquarters facility lease has a five-year term and requires the
Company to pay a pro rata share of the lessor's operating costs, including real
estate taxes. In February 2000, the Company amended its headquarters facility
lease to extend the term through August 2002. In November 2000, the Company
agreed to lease approximately 15,000 square feet of office space in Westminster,
Colorado beginning February 2001. The lease for the Colorado facility expires in
February 2006 and has a renewal option for five years.

Rent expense under all leases was $285, $237 and $101 for the years 2000, 1999
and 1998, respectively. Rent expense for 2000 includes a reduction of $43
related to an adjustment of the 1999 accrual to the actual expense incurred for
the Company's remaining rent obligations, net of estimated sublease rental
income, for its Houston, Texas office, which the Company vacated during 1999.

As of December 31, 2000 future minimum lease payments due under noncancelable
operating leases, excluding operating costs, are as follows:

<TABLE>

<S>                                                  <C>
       2001                                           $       474
       2002                                                   351
       2003                                                   261
       2004                                                   268
       2005                                                   276
       Thereafter                                              23
                                                      -----------
                                                      $     1,653
                                                      ===========
</TABLE>

The Company leases certain equipment under capital lease arrangements. As of
December 31, 2000 future minimum lease payments due under capital leases and
present values of net minimum lease payments are as follows:

<TABLE>

<S>                                                  <C>
       2001                                           $        72
       2002                                                    72
       2003                                                    54
                                                      -----------
       Total minimum lease payments                   $       198
       Less: imputed interest                         $        33
                                                      -----------
       Present value of net minimum lease payments    $       165
                                                      ===========
</TABLE>

4. INCOME TAXES

As of December 31, 2000 and 1999, the Company had generated domestic net
operating loss carryforwards of approximately $91,000 and $80,000, respectively,
for tax reporting purposes that may be offset against future taxable income. In
addition, as of December 31, 2000 and 1999, the Company also had available
approximately $2,100 and $1,800, respectively, of research and experimentation
tax credit carryovers available to reduce future income taxes. These net
operating losses and credit carryforwards expire if not utilized by various
dates between 2002 and 2020. 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 other
net future deductible temporary differences related primarily to depreciation as
of December 31, 2000 and 1999.


                                                           TRICORD SYSTEMS, INC.

                                                                              25

<PAGE>   23

Under the Internal Revenue Code, certain stock transactions, including sales of
stock and the granting of options and warrants to purchase stock, could limit
the amount of net operating loss carryforwards that may be utilized on an annual
basis to offset taxable income in future periods. If utilization is limited by
such transactions, there is a greater likelihood that the net operating loss
carryforwards may expire before they are utilized.

5. BENEFIT PLANS

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 $43, $24 and $28 of matching
contributions for 2000, 1999 and 1998, respectively.

The Company has determined that partial terminations of its 401(k) plan, as
defined in the Internal Revenue Code, occurred in 1999 and 1997. A partial
termination requires that the 401(k) plan must vest 100% of an affected
participant's Company matching contributions. The Company estimates that it will
be required to fund approximately $75 of unvested matching contributions in 2001
that became 100% vested as a result of these partial terminations.

6. STOCKHOLDERS' EQUITY

PRIVATE PLACEMENTS
In April 2000, the Company sold 3,250,000 shares of the Company's common stock
at a price of $8.00 per share to a group of private investors. The common stock
sold to the private investors was not initially registered by the Company and
such stock was subject to certain restrictions on resale by the investors. The
investors had registration rights.

In August 2000, the Company's S-3 registration statement was declared effective.
The registration of shares was required by the April 2000 group of investors as
a condition of their involvement in the private placement. Additionally, all
previous private placement investors' remaining shares were registered as a
condition of their release of rights under the previous private placement
agreements.

In July 1999, the Company sold 840,000 shares of the Company's common stock at a
price of $2.50 per share to a group of private investors. The common stock sold
to the private investors was not initially registered by the Company and such
stock was subject to certain restrictions on resale by the investors. The
investors had piggyback registration rights.

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, 2000,
225,000 of these warrants have been exercised. The common stock sold to the
private investors was not initially registered by the Company and such stock was
subject to certain restrictions on resale by the investors. The investors had
piggyback registration rights and could request registration if the Company
filed a registration statement for a public offering. In addition, the majority
investor could demand registration by the Company under certain conditions and
could cause the Company to use its best efforts to have a representative of such
majority investor elected as a director of the Company.


TRICORD SYSTEMS, INC.

26

<PAGE>   24

RESTRICTED STOCK
During 1998, the Company issued restricted common stock related to the
settlement of a contingent payment related to a 1996 acquisition (207,143
shares) and to new officers of the Company (600,000 shares). The restrictions on
the shares issued to officers of the Company lapse based on continuous
employment for a defined time period. The Company recorded the full fair market
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. During 2000, 200,000 shares of restricted stock were cancelled
when certain officers terminated employment with the Company. The portion of the
restricted stock for which restrictions have lapsed as of December 31, 2000 has
been included as charges to operations of $51, $187 and $136 in 2000, 1999 and
1998, respectively. As of December 31, 2000 restrictions on all 607,143 shares
of restricted stock outstanding have lapsed.

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.
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 Wells Fargo Bank Minnesota, N.A., as Rights Agent. The
rights will expire in October 2004.

7. STOCK COMPENSATION PLANS

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: The definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000 and has been adopted by the Company.

In 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 were recorded
by the Company as unearned compensation in stockholders' equity in the amount of
$5,252 as of December 31, 1998, 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 the date the options
were granted. Compensation expense resulting from these options was $803, $1,343
and $58 for 2000, 1999 and 1998, respectively. During 2000 the Company
eliminated $1,989 of unearned stock compensation related to option holders who
terminated employment and forfeited their unvested options.

As of December 31, 2000, the Company has outstanding options for the purchase of
123,100 shares of common stock, which were granted to non-employee contractors.
The Company records related compensation expenses based upon the fair value of
the options during the period the contractors provide services. Such fair values
are measured using the Black-Scholes option-pricing model. Compensation expense
related to these options was $1,149, $351 and $90 during 2000, 1999 and 1998,
respectively. As of December 31, 2000, the Company has recorded $92 unearned
compensation related to 41,000 unvested options.

STOCK OPTION PLANS
On February 20, 1998, the Company's Board of Directors established the 1998
Plan, which succeeds a prior plan that was terminated upon approval of the 1998
Plan by the Company's


                                                           TRICORD SYSTEMS, INC.

                                                                              27

<PAGE>   25

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 initially
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 in any fiscal year from 100,000 shares to
500,000 shares. On May 18, 2000, the Company's shareholders approved an increase
in the number of shares reserved for issuance under the 1998 Plan from 5,000,000
to 8,000,000 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 the
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 1998 Director Plan provides for awards of options and common stock to
directors who are not employees of the Company. The Company initially 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. On May 18, 2000, the Company's shareholders
approved an increase in the number of shares reserved for issuance under the
1998 Director Plan from 550,000 to 800,000 shares. The Company's 1998 Director
Plan provides for the granting to all non-employee directors options to purchase
common stock at the fair market value on the date of grant. Such grants
generally become exercisable over periods of up to three years and expire within
five years.

The following summarizes stock option activity during each of the three years in
the period ended December 31, 2000:

<TABLE>
<CAPTION>

                                                                            Wtd. Avg.
                                                                Number       Exercise
                                                              of Shares       Price
                                                             -----------    ---------
<S>                                                         <C>           <C>
        Outstanding, December 31, 1997                         3,108,000    $    1.41
        Granted                                                3,976,000         0.64
        Canceled                                                (585,465)        3.01
        Exercised                                               (934,541)        0.87
                                                             -----------    ---------

        Outstanding, December 31, 1998                         5,563,994         0.78
        Granted                                                  521,000         2.68
        Canceled                                                (326,937)        1.58
        Exercised                                               (249,253)        0.79
                                                             -----------    ---------

        Outstanding, December 31, 1999                         5,508,804         0.92
        Granted                                                5,002,000        11.39
        Canceled                                              (1,230,318)        3.11
        Exercised                                               (812,690)        0.85
                                                             -----------    ---------

        Outstanding, December 31, 2000                         8,467,796         6.79
                                                             ===========    =========
</TABLE>


TRICORD SYSTEMS, INC.

28

<PAGE>   26


The following table summarized the stock options outstanding at December 31,
2000:

<TABLE>
<CAPTION>

                                          Options Outstanding                Options Exercisable
                             -------------------------------------------- --------------------------
                                                            Weighted
                                             Weighted        Average                       Weighted
                                Number        Average       Remaining                       Average
                                  of          Exercise     Contractual      Number of      Exercise
   Exercise Price Range         Options        Price     Life (in years)     Options         Price
---------------------------- -------------   ---------  ----------------- ------------    ----------
<S>                          <C>           <C>          <C>              <C>             <C>
$0.50 - $2.00                    3,285,796     $ 0.72          7.05          2,019,584      $ 0.75
$2.01 - $10.00                   2,249,500     $ 5.97          8.99            219,166      $ 2.86
$10.01 - $22.25                  2,932,500     $14.23          9.45             15,000      $14.00
                             -------------                                ------------
                                 8,467,796                                   2,253,750
                             =============                                ============
</TABLE>


NON-PLAN OPTIONS
During 2000, stock options totaling 250,000 shares were granted to certain
executive officers. These stock options were not issued from one of the
Company's stock option plans. As of December 31, 2000 there were 250,000 options
outstanding at exercise prices of $14.00 and $14.50, no options had been
exercised and 200,000 options are exercisable.

EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 250,000 shares of common stock for issuances under the
Employee Stock Purchase Plan (the "Purchase Plan"). 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 sold
approximately 11,000, 23,000 and 30,000 shares under the Purchase Plan in 2000,
1999 and 1998, respectively.

WARRANTS
The Company issued warrants for the purchase of 136,500 common shares at $8.00
per share during 2000 in connection with its sale of common stock in April 2000
as described above. All of these warrants were outstanding at December 31, 2000.

The Company issued warrants for the purchase of 3,000,000 common shares at $3.50
per share during 1998 in connection with its December 1998 sale of common stock
as described above. During 2000, 225,000 of these warrants were exercised and
2,775,000 remained outstanding at December 31, 2000.

ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Company has continued to measure compensation cost for its employee grants
under its stock incentive and option plans using the intrinsic-value-based
method of accounting pursuant to APB Opinion No. 25 and related interpretations.
Had the Company used the fair-value-based method of accounting for grants made
under its stock option and incentive plans, net loss and net loss per share
would have been increased to the following pro forma amounts:


                                                           TRICORD SYSTEMS, INC.

                                                                              29

<PAGE>   27

<TABLE>
<CAPTION>

                                           2000           1999           1998
                                         --------       -------        --------
<S>                                    <C>             <C>           <C>
Net loss
     As reported                         $(13,580)      $(7,637)       $ (2,111)
     Pro forma                            (20,685)       (9,896)         (4,512)

Net loss per common share
     As reported                         $  (0.59)      $ (0.39)       $  (0.14)
     Pro forma                              (0.90)        (0.51)          (0.31)
</TABLE>

The weighted average grant-date fair value of the options granted in 2000, 1999
and 1998 was $8.84, $1.99 and $0.43 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 at the end of four
years, which is generally the vesting period of the option grants; no dividends
will be paid by the Company during the term of the options granted; cumulative
stock price volatility ranged from approximately 104% to 114%; and the weighted
average risk-free interest rate was 6.50%, 6.50% and 5.01% for 2000, 1999 and
1998, respectively. In addition, average forfeitures were assumed to be 2% each
year for 2000, 1999 and 1998, respectively.

8. BUSINESS SEGMENTS

The Company managed its operations as two business segments; server and
software, until August 1999, when the server business was sold (see Note 1).

9. SUBSEQUENT EVENT

On February 27, 2001 the Company closed a private placement of $25 million in
Convertible Preferred Stock. Net proceeds from the placement were approximately
$23.4 million. Under terms of the offering, the Company issued 4.75% PIK Series
E Convertible Preferred Stock, which is convertible into the Company's Common
Stock at $9.50 per share subject to adjustment in certain circumstances. In
addition, the Company issued warrants with an 18-month term to purchase up to
986,842 additional shares of the Company's Common Stock at $12.40 per share, and
warrants with a 24-month term to purchase up to 986,842 additional shares of the
Company's Common Stock at $14.50 per share. The terms of the offering require
the Company to register for resale the shares of Common Stock issuable upon
conversion of the preferred stock or exercise of the warrants within 120 days of
closing.

Accounting for the preferred stock conversion feature in accordance with
Emerging Issues Task Force (EITF) issue No. 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Rates" and EITF Issue No. 00-27 "Application of Issue 98-5 to Certain
Convertible Investments" will result in the allocation of approximately $11
million of the preferred stock proceeds to a "beneficial conversion feature".
This beneficial conversion feature will be charged against income available to
common stockholders while the preferred stock is outstanding, which will reduce
the income (increase the loss) per common share reported by the Company.

TRICORD SYSTEMS, INC.

30

<PAGE>   28

10. QUARTERLY FINANCIAL DATA (UNAUDITED)


<TABLE>
<CAPTION>

                                                            First    Second     Third    Fourth
                                                           Quarter   Quarter   Quarter   Quarter
                                                           -------   -------   -------   -------
<S>                                                     <C>        <C>        <C>      <C>
2000
Loss from continuing operations                            $(2,237)  $(3,146)  $(3,379)  $(4,964)
Income from discontinued operations                             44        40        16        46
Net loss                                                    (2,193)   (3,106)   (3,363)   (4,918)
Loss per share from continuing operations -
   basic and diluted                                         (0.11)    (0.13)    (0.14)    (0.20)
Income (loss) per share from discontinued
   operations - basic and diluted                               --        --        --        --
Net loss per share - basic and diluted                       (0.11)    (0.13)    (0.14)    (0.20)

1999
Loss from continuing operations                            $(2,160)  $(1,851)  $(1,620)  $(2,076)
Income (loss) from discontinued operations                     322       152      (453)       49
Net loss                                                    (1,838)   (1,699)   (2,073)   (2,027)
Loss per share from continuing operations -
   basic and diluted                                         (0.12)    (0.10)    (0.08)    (0.10)
Income (loss) per share from discontinued
   operations - basic and diluted                             0.02      0.01     (0.02)       --
Net loss per share - basic and diluted                       (0.10)    (0.09)    (0.10)    (0.10)
</TABLE>


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


                                                           TRICORD SYSTEMS, INC.

                                                                              31

<PAGE>   29

INVESTOR INFORMATION

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, telephone or email to: Investor
Relations Department, Tricord Systems, Inc., 2905 Northwest Boulevard, Suite 20,
Plymouth, Minnesota 55441; telephone (763) 551-6402; email ir@tricord.com.

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 and 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
Wells Fargo Bank Minnesota, N.A.
161 North Concord Exchange Street
South St. Paul, Minnesota 55075-1139
Telephone:  (800) 468-9716

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 SmallCap Market. These prices do not include adjustments for retail
mark-ups, markdowns or commissions.

<TABLE>
<CAPTION>

                                     2000                           1999
                             ----------------------        ----------------------
                               High           Low            High          Low
                             -------        -------        -------        -------
<S>                        <C>            <C>            <C>            <C>
First quarter                $ 19.13        $  4.31        $  3.88        $  2.13
Second quarter                 18.06           5.81           3.75           1.75
Third quarter                  22.94          11.75           4.50           2.75
Fourth quarter                 21.25           6.66           7.00           3.50
</TABLE>

On March 28, 2001, there were approximately 300 shareholders of record of the
Company's common stock.


TRICORD SYSTEMS, INC.

32

<PAGE>   30

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.

                                                                              33

<PAGE>   31

CORPORATE INFORMATION


DIRECTORS
Yuval Almog - President, CORAL Group, Inc.
Tom R. Dillon - Vice President of Operations, Netflix.com Inc.
Donald L. Lucas - Private Investor
Fred G. Moore - President, Horison, Inc.
John J. Mitcham - Former CEO, Tricord Systems, Inc.
Joan M. Wrabetz - President and Chief Executive Officer, Tricord Systems, Inc.

COMMITTEES OF THE BOARD OF DIRECTORS

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

COMPENSATION COMMITTEE
Yuval Almog, Chairman
Donald L. Lucas

EXECUTIVE OFFICERS
Joan M. Wrabetz - President and Chief Executive Officer
Dennis J. Cindrich - Vice President, Sales
Gregory A. Dahl - Vice President, Marketing and Business Development
Dr. Alexander H. Frey - Senior Vice President and Chief Technical Officer
Steven E. Opdahl - Chief Financial Officer
Charles E. Pearsall - Vice President, Operations
Kerry R. Yndestad - Vice President, Product Development

CORPORATE HEADQUARTERS
Plymouth, Minnesota

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota

CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly LLP
Palo Alto, California



TRICORD SYSTEMS, INC.

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