<PAGE>


================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K
                                    ---------

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     AND EXCHANGE ACT OF 1934


     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         Commission File Number 1-13616

                          STORAGE COMPUTER CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

              DELAWARE                                      02-0450593
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                        Identification No.)

11 RIVERSIDE STREET, NASHUA, NEW HAMPSHIRE                  03062-1373
 (Address of Principal Executive Offices)                   (Zip Code)

Registrant's telephone number, including area code: (603) 880-3005

           Securities registered pursuant to section 12(b) of the act:
                                                       NAME OF EACH EXCHANGE
TITLE OF EACH CLASS                                     ON WHICH REGISTERED
-------------------                                    ---------------------
Common Stock  $0.001 par value                        American Stock Exchange


Securities registered pursuant to section 12(g) of the act: None

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

                        Yes   X     No
                             ---        -----

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

    The aggregate market value of the common stock of the registrant held by
non-affiliates was approximately $62,672,000 as of April 8, 2002. On April 8,
2002 there were issued and outstanding 19,201,667 shares of the registrant's
common stock, with a par value of $0.001.

<PAGE>

    Because the calculation of shares of registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, such calculation has
been made solely on the basis of information, reports and notices filed by
affiliates of the registrant under the Securities Exchange Act of 1934, as
amended. The aggregate market value of common stock indicated is based upon the
closing sale price of the common stock of $5.70 as reported by the American
Stock Exchange for trading on April 8, 2002. All outstanding shares beneficially
owned by executive officers and directors of the registrant or by any
shareholder beneficially owning more than 5% of registrant's common stock, as
disclosed herein, were considered solely for purposes of this disclosure to be
held by affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III incorporates by reference portions of the Proxy Statement for
the Annual Meeting of Shareholders to be held on June 7, 2002.

                                       2

<PAGE>

                          STORAGE COMPUTER CORPORATION

            Securities and Exchange Commission
            Item Numbers and Description

                                   PART I PAGE

ITEM 1      Business                                                    4
ITEM 2      Properties                                                 10
ITEM 3      Legal Proceedings                                          10
ITEM 4      Submission of Matters to a Vote of Security Holders        11

                                   PART II

ITEM 5      Market for Registrant's Common Equity and Related
            Stockholder Matters                                        12
ITEM 6      Selected Financial Data                                    12
ITEM 7      Management's Discussion and Analysis of Financial
            Condition and Results of Operations                        14
ITEM 7A     Quantitative and Qualitative Disclosure About Market       22
            Risk

ITEM 8      Financial Statements and Supplementary Data                23

ITEM 9      Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                     23

                                  PART III

ITEM 10     Directors and Executive Officers of the Registrant         24
ITEM 11     Executive Compensation                                     24
ITEM 12     Security Ownership of Certain Beneficial Owners
            and Management                                             24
ITEM 13     Certain Relationships and Related Transactions             24


                                   PART IV

ITEM 14     Exhibits, Financial Statement Schedules and Reports        25
            on Form 8-K




                                       3

<PAGE>

                                     PART I


ITEM 1.  Business

The Company

     Storage Computer Corporation (the "Company", "SCC" or "we") develops and
manufactures advanced storage architectures to address the emerging needs of
high-bandwidth and other "performance-impaired" applications.

     Storage Computer's technology supports a variety of applications including
advanced database activities, wide area networked storage and sophisticated
business continuity topologies.

     o  Networked Attached Storage
     o  Storage Area Networks
     o  Direct Attached Storage
     o  Storage Wide Area Networking

     Based on advanced architectures, parallel processing hardware, and
embedded, real-time operating system, we have the industry's most versatile
collection of connectivity options. A single storage system can simultaneously
support multiple heterogeneous hosts through any combination of connectivity
interfaces, including NAS, SAN, FibreChannel, SCSI and IP. These high-end
solutions also entail peer-to-peer connectivity, allowing high-speed volume
connectivity and date transfer or replication over Fiber and OC12/48.

     Through our Cyber product lines, and patented storage software, these
solutions support multiple open systems servers and are modular and scalable for
future growth.

     Based on our performance-optimized Virtual Storage Architecture(TM) , the
product line combines intelligent controller, disk drive, and memory technology
with patented memory mapping techniques and a powerful real-time operating
system to deliver high-performance and data protection across the mix of
applications found in today's open system environments.

Company History

     Initial work began in late 1984 with the development of RAID ("Redundant
Array of Independent Disks") technologies within a predecessor company Cab-Tek,
Inc. From 1984 to 1990, products at RAID levels 3, 4, 5 and 6 were developed and
tested. Development then commenced on the Virtual Storage Architecture to
overcome the performance bottlenecks inherent in other RAID implementations and
to achieve fault tolerant storage without impeding performance. The resulting
patented technology was transferred to the newly established Storage Computer
Corporation in August 1991.

     Products based upon the Company's unique RAID technology began shipping to
customer production sites in the second half of 1992. The Company pioneered the
RAID 7 (patented) technology incorporated in our Virtual Storage Architecture,
which formed the basis for our StorageSuite product family and is found in our
OmniRaid products. Based upon this performance-optimized architecture, the
product line combines high-end controller technology, disk drives, scalable
centralized and distributed memory mechanisms, proprietary memory mapping
techniques, and a real-time operating system to deliver high-performance,
fault-tolerant storage solutions.

     Pursuant to the Agreement and Plan of Organization dated October 4, 1994,
as amended by a First Amendment to the Agreement and Plan of Organization dated
January 31, 1995, Vermont Research Products, Inc. ("VRP"), our wholly-

                                       4

<PAGE>

owned subsidiary, acquired the entire business and substantially all the
property and assets of Vermont Research Corporation ("VRC") in exchange for
shares of our common stock (the "Reorganization"). The Reorganization became
effective on March 6, 1995 and was accounted for as a pooling of interests.

     In September 2000, Storage Computer Corporation acquired CyberStorage
Systems Corporation. This acquisition enabled us to expand the development of
our advanced storage and server solutions to migrate into the Optical Networking
world and brought us extensive technical expertise in the area of networking,
optical interfaces, and advanced media delivery architectures. Founded in 1998,
Cyber Storage Systems emerged as a strong provider of innovative Information
Management Solutions for the Digital Communications marketplace and
Hardware/Software, IP based, Multimedia (IVOD, Multicast, Telemedicine, Distance
Learning, Training, Video Conferencing) solutions.

     In 2001, we began integrating the Virtual Storage Architecture onto the
next-generation, advanced storage and server platforms. We are now in a position
to rapidly advance into the next dimension of networked storage and server
solutions. With product lines addressing the NAS (network attached storage), SAN
(storage area networks), and DAS (direct attached storage) market spaces as well
as solutions based on those product lines targeted to reduce the stress
associated with "performance-impaired" applications.

Industry Overview

     Although Internet usage and demand continues to grow at unprecedented
rates, the last year has been one of turmoil for the technology sector markets.
Generally, telecommunications companies had a weak year with large companies
declaring losses and even bankruptcy in a few cases. Technology companies have
terminated tens of thousands of employees and have taken huge restructuring
charges. Despite this, demand for data storage and manageability of that data
continues to be on the forefront of corporate needs. Over the past 5+ years all
markets have undergone a dramatic shift to new information processing modes,
such as client/server computing incorporating enterprise databases, data
warehousing, image processing, multi-media, video-on-demand, virtual reality
processing and Internet/Intranet services. These application modes are
continuing to increase demand for data storage that is scalable in terms of
capacity, performance, connectivity and manageability.

     The data storage market has itself gone through turmoil this past year.
September 11th events have created a strong focus on Business Continuance
practices while the economy in general has forced companies to become more cost
conscious within their IT data centers. Host computing platforms that continue
to make quantum leaps in processing performance drive the market for high
performance storage. We believe that users and networks will increasingly demand
high-performance storage systems to eliminate performance bottlenecks and to
take full advantage of increased server/workstation processing power.

     Significant market shifts have occurred over the last year with increase
focus on networking elements. Momentum has been gained in the deployment of
Storage Area Networks (SAN) and Network Attached Storage (NAS). Momentum in
these areas is based on the implementation of advanced high speed networking
technologies. With the increased deployment of Gigabit Ethernet as well as
Optical networks, storage methods based on IP (Internet Protocol) networks is
gaining strength. International Data Corporation (IDC) predicts that although
the entire disk market was down 18% in 2001, Networked storage will account for
67% of disk storage systems by 2005. Overall disk storage systems market is
expected to rebound in 2002.

Market Positioning

     Storage Computer is directly focused on the networked storage market. Our
NAS (Network Attached Storage) appliance was in Beta trials in November and
December 2001 and is now generally available. Last year we introduced the

                                       5

<PAGE>

CyberBorg storage system, which is a high speed, high performance SAN (Storage
Area Network) component with various connectivity options. Yankee Group recently
visited Storage Computer facilities analyzing our market space and product
positioning. Their view is over the next several years market adoption will
increasingly focus on converged storage systems, those which combine the best
elements of NAS and SAN topologies.

     Storage Computer is committed to building converged storage product
offerings. By integrating our Virtual Storage Architecture into integrated NAS
and SAN hardware platforms we will achieve an extremely high level of
flexibility and functionality for our customer base. Our storage platforms
entail a diverse set of interconnectivity options including OC12 and OC48
(Optical Carrier) which yields a position in Storage Wide Area Networking
(SWAN). Although the telecommunications industry was in turmoil over the last
few years, the Internet and optical backbones are stronger than ever. With
increased demand for streamlining the efficiency of corporate wide area networks
as well as an increase in metro optical area build outs, Storage Computer's
product and market positioning associated with SWAN is positioned for not only
addressing near term customer needs, but for the future.

Product Line

CYBERBORG:

     The CyberBorg is an advanced information storage and delivery system
capable of simultaneously delivering large blocks of information, including
digital images and financial data in record time. It has scalability to over 100
Terabytes and sustained data rates of 450MB per second. It can be integrated
into existing networks and servers and adapted for either direct attached, SAN
or NAS. The system's flexibility results in significant savings in cost and time
by eliminating the need to invest in totally new networks and storage
architectures.

CYBERNAS:

     The CyberNAS is a Network Attached Storage appliance, which is targeted to
mid to large corporations. The product combines a disk storage subsystem, RAID
implementation and file server all in one. The file system supports Microsoft
Windows environment (CIFS), Unix (NFS) and AppleShare. The CyberNAS also has a
diverse set of connectivity options including Ethernet, Gigabit Ethernet (wire
speed) and OC12/48 (optical carrier).

CYBERFIBRE:

     The CyberFibre is a SAN ready storage system with truly large systems
(18TeraBytes+) of optimized storage management power on a single controller and
is configurable up to 120 disk drives per loop pair. With multiple host
connections, its flexibility and scalability to adapt to expanding storage
needs, the CyberFibre supports dynamic addition of disk capacity to existing
RAID sets.

Customers and Applications

     The Company has an extensive worldwide customer list. Products based upon
the Virtual Storage Architecture have been sold to customers across a broad
range of industries including banking and financial services, education,
technology, telecommunications, military/aerospace, general services,
government, and manufacturing. It is our goal to continue to market to existing
customers to leverage our multiple product offerings and to continue to expand
our customer base for high-performance storage solutions.

Customer Service And Support

     We offer our customers a full array of customizable support options and
programs. Customers have the option to decide how they want their service and
support structured, so that the maintenance of the customer's data storage
equipment fits

                                       6

<PAGE>

into the customer's business model. Our technical services organization
comprises a group of skilled support personnel, located at our corporate
headquarters in Nashua, New Hampshire and in field locations in the United
States, Europe and Asia.

     In addition to our own support engineers and technicians, our strategic
service alliances with third-party service providers enable us to offer
comprehensive, high-quality programs to support customers on a worldwide basis.
Our strategic service alliances formed with third-party providers who are some
of the most respected organizations in the service industry. All in-house and
third-party service technicians supporting our customers are trained by our
personnel, and service parts are generally stocked in local service offices.
Service technicians are backed by a technical support hotline staffed by support
analysts at our facilities. Our personnel always take the initial service call,
determine the logistics of the support plan, and manage the process. Onsite
services may be tailored to customer requirements in terms of hours covered,
response times and onsite hardware service providers.

Competition

     The information storage market is extremely competitive. Companies such as
Compaq, EMC Corporation, IBM Corporation, Hewlett-Packard, NCR Corporation,
Storage Technology, Sun Microsystems, and more than 100 other public and private
companies provide disk arrays for a wide variety of computer systems,
workstations and PCs. It is interesting to note that over the second half of
2001 a number of these large organizations have had difficulty maintaining
profitable quarters. EMC had two consecutive loss quarters. Storage industry
analysts contribute some of this to the larger corporations inability to quickly
react to increasing pressure from smaller, more cost and performance competitive
companies. Although we are currently unaware of any other vendor offering
identical product offerings, we cannot assure you that we will be able to
compete successfully against existing companies or future entrants to the
marketplace. While we believe that the price-performance characteristics of our
products are currently competitive, increased competition including the
introduction of new products by our competitors, could result in price
reductions, reduced gross margin and loss of market share, any of which could
materially adversely affect our business, operating results and financial
condition. Many of our current and potential competitors have significantly
greater financial, technical, marketing and other resources than us. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than us. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.

Sales And Marketing

     Domestic. Our products are sold domestically through a combination of
direct sales personnel, value-added resellers and other distributors. Our direct
sales organization coordinates the activities of our resellers and distributors
and seeks to actively participate with them in selling efforts in order to
enable us to establish strong direct ties with our customers and end users.

     International. We have established several different operational methods in
order to penetrate and develop international markets. We use distributors and
value-added resellers, combined with the selling efforts of wholly-owned
subsidiaries, and affiliated, minority-owned entities, to penetrate certain
international markets and maximize returns on our marketing and sales efforts.

     Storage Computer Europe, GmbH, our wholly-owned subsidiary located in
Kelkheim, Germany, provides sales and product support throughout Central and
Eastern Europe. In September 1992, we entered into a joint venture agreement as
a minority shareholder and formed Storage Computer (Asia) Ltd. for the purpose
of selling and servicing our products in Hong Kong and China. Similarly, in
December 1995, we made a minority equity investment in Open Storage Solutions,
S.A., in France, for the purpose of collaborating to sell and service products
in France. Storage Computer (UK) Ltd.

                                       7

<PAGE>

manufactures products and supports the sales and service of the Company's
products in the UK and certain countries in Western Europe. In October of 1998
the Company made an additional investment in Open Storage Solutions, SA,
acquiring a majority interest and in January 2001, we acquired the remaining
interest and changed our name to Storage Computer France SAS.

     The remaining international markets served by us are coordinated and
supported from the United States through the use of our independent distributor
network. Our distributors are responsible for penetrating and developing their
respective markets, providing support and maintenance services and maintaining
an inventory of spare parts. The distributors are also responsible for
establishing relationships with value-added resellers, who sell our products to
final end users. (See our Financial Statements included elsewhere herein for
more detailed information regarding revenues.)

Manufacturing

     Our manufacturing operations, which are located in Nashua, New Hampshire,
U.S.A. and Leatherhead, England, undertake procurement of materials, product
assembly, product assurance, quality control and final testing. Our
manufacturing strategy has been to develop close relationships with our
suppliers and subcontractors and to exchange critical information, in order to
minimize capital investment and overhead expenditures and to control
inventories.

     We rely upon a limited number of suppliers of several key components
utilized in the assembly of our products. We purchase disk drives and enclosures
from a number of major disk drive suppliers. Our reliance on our suppliers
involves certain risks, including a potential inability to obtain an adequate
supply of required components, price increases, timely delivery and component
quality. This risk is particularly significant with respect to suppliers of disk
drives because in order to meet product performance requirements, we must obtain
disk drives with extremely high quality and data storage capacity. In addition,
there is currently a significant market demand for disk drives and for
semiconductor memory components, which could result in component shortages,
selective supply allocations and increased prices of such components. Although
to date we have been able to purchase our requirements of such components,
we cannot assure you that we will be able to obtain our full requirements of
such components in the future or that prices of such components will not
increase. In addition, we cannot assure you that problems with respect to
yield and quality of such components and timeliness of deliveries will not
occur. Disruption or termination of the supply of these components could delay
shipments of our products and could have a material adverse effect on our
business, operating results and financial condition.

Research And Development

     Since our inception, we have made substantial investments in research and
development. We believe that our future performance will depend in large part on
our ability to maintain and enhance our current products, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. Our future growth depends
substantially upon the success of our current product line and related products
as well as new products that may be developed; however, we cannot assure you
that our products will attain broad market acceptance. Due to the complexity of
the engineering effort required to produce new data storage subsystem products,
the development and commercial exploitation of new products are subject to
significant technical risks. We cannot assure you that new products will be
introduced on a timely basis or at all. If new products are delayed or do not
achieve market acceptance, our business, operating results and financial
condition will be materially adversely affected. In addition, we cannot assure
you that customers will not defer orders in anticipation of new product
introductions by our competitors or us.

     Our product may contain undetected software errors or failures when first
introduced or as new versions are released. We cannot assure you that, despite
testing by us and by current and potential customers, errors will not be found
in new products until after commencement of commercial shipments, resulting in
loss of or delay in market acceptance, which could have a material adverse
effect upon our business, operating results and financial condition.

                                       8

<PAGE>

     Our total expenses for research and development for fiscal years 2001, 2000
and 1999 were $4,335,000, $1,496,000 and, $1,981,000, respectively. Research and
development efforts are expected to be focused on increasing the individual
capabilities and performance of existing products and developing new value added
software and hardware products to provide our installed base with greater
functionality, as well as to attempt to expand that installed base.

Proprietary Rights

     Our policy is to protect our technology by, among other things, filing
patent applications with respect to technology considered important to the
development of our business. We have been awarded certain U.S. patents and have
additional U.S. patent applications pending. Foreign counterparts of certain of
these applications have been filed or may be filed at the appropriate time. We
decide on a case-by-case basis whether and in what countries we will file
foreign counterparts of a U.S. patent application.

     We believe that our products, trademarks and service marks do not infringe
on the proprietary rights of third parties. We cannot assure you, however, third
parties will not assert infringement claims against us in the future. If such a
claim is made, we will evaluate the claim as it relates to its products and, if
appropriate, may seek a license to use the protected technology. We cannot
assure you that we would be able to obtain a license to use any such protected
technology or that any such license could be obtained on terms that would not
have a material adverse effect on us. If we, or our suppliers, are unable to
license any such protected technology, we could be prohibited from incorporating
or marketing such products. We could also incur substantial costs to redesign
our products or to defend any legal action taken against them. In the event our
products are found to infringe protected technology, we could be required to pay
damages to the infringed party or be enjoined from manufacturing and selling
such products.

     We require all employees, and technical and other consultants and advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with us. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with us is to be kept confidential and
not disclosed to third parties except in specific circumstances. All of our key
technical employees have also entered into agreements providing for the
assignment of rights to inventions made by them while in our employment.
Although we continue to take protective measures to protect our proprietary
technology, we cannot assure you that these measures will be successful. In
addition, the laws of certain foreign countries may not protect our rights to
the same extent as U.S. law.

     During 1999, we completed a thorough evaluation of our patents, claims and
other intellectual property rights. Upon completion of such evaluation,
management firmly believes that several manufacturers in the computer storage
marketplace have infringed several of our patents. In 2000, we began
aggressively pursuing the enforcement of our intellectual property rights
secured by the patents and have retained a major law firm, on a contingency
basis, to enforce our rights. In 2001, we commenced litigation against several
alleged infringing companies, including Hitachi Data Systems, Ltd. in the United
Kingdom and Veritas Inc. in the Federal District Court for the Northern District
of Texas. In addition, we commenced an action against XIOtech Corporation, a
wholly owned subsidiary of Seagate Technologies LLC and later settled this
action through mediation.

     We believe that there are more products being sold that infringe our
patents and we will continue to vigorously enforce our intellectual patent
property right .We will be seeking royalties for the past infringement, in
addition to licensing agreements for the future production and sale of such
infringing products.

Employees

     As of December 31, 2001, we had 75 full time employees. Of the total, 64
were based in North America, and 11 in the United Kingdom and Western Europe.
Our ability to develop, manufacture and market our products and to establish and
maintain a competitive position in our industry will depend, in large part, upon
our ability to attract and retain qualified technical,

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marketing and managerial personnel, of which there can be no assurance. We
consider our relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.

ITEM 2.  Properties

    We currently lease, from an affiliate, a 35,000 sq. ft. facility that is
occupied by our light manufacturing, research and development and administrative
operations in Nashua, New Hampshire. In 2001, we paid annual rental of $300,000
to lease this facility. In December 2000, we executed a five-year operating
lease for these facilities, which provides for annual adjustments to the monthly
rental payment based upon the previous year's consumer price index. The lease
has a five year renewal option, exercisable at our election, and does not
provide us with a purchase option for the property. The current monthly rental
is $25,000, which we believe is comparable to rentals of similar properties in
the area and indicative of the fair market rental that could be obtained from an
unrelated third party in an arm's-length transaction. See "Item 13 - Certain
Relationships and Related Transactions." We lease all of our domestic and
international outside sales offices. All our properties and premises are
adequately protected by insurance coverage. We believe that our existing
facilities are adequate for our current needs and that additional space will be
available as needed.

ITEM 3.  Legal Proceedings

     In December 2001, Marketlink Technologies, LLC filed a civil action against
us in the Circuit Court for Oakland County, Michigan, alleging that we owed them
a $156,000 termination payment under the terms of a manufacturers representative
agreement that we terminated for cause in April 2001 because of Marketlink's
inability to sell our products and perform the services required by the
agreement. In January 2002, we filed counterclaims against Marketlink in this
matter, including Marketlink's breach of contract. We believe the claims of
Marketlink are without merit and deny all allegations. Further, we intend to
vigorously defend this action. We are unable to predict any outcome but we do
not believe that our involvement in final settlement of or litigation costs
defending this claim will have a material effect on our business, operating
results or financial condition.

     In March 2001, we filed an action against XIOTech Corporation ("XIOTECH")
and its parent company, Seagate Technology Inc. ("SEAGATE INC"), in the United
States District Court for the Northern District of Texas claiming that its
products infringe one of our patents. In December, 2001, we settled all matters
in controversy that were pending in that action against XIOTECH, SEAGATE INC.,
and a related company, Seagate Technology LLC ("SEAGATE LLC"). Specifically,
such matters included the alleged infringement of one of our patents, namely our
U.S. Patent No. 5,893,919, by XIOTECH. The settlement between XIOTECH and us
includes a one-time $2,500,000 royalty payment to us by XIOTECH for a fully paid
up, royalty-free, worldwide, perpetual, license covering the `919 Patent, with
no right to sublicense, and a royalty free cross license agreement between
XIOTECH and us for all of our respective patents. Additionally, we entered into
a cross license with SEAGATE, LLC providing a royalty-free, worldwide,
perpetual, cross license, with no right to sublicense, between SEAGATE LLC and
us for all of our patents and for all of SEAGATE LLC's storage system patents.
All cross license agreements entered into to include all patents of Storage
Computer Corporation and XIOTECH, and all storage system patents of SEAGATE LLC,
including current and later acquired patents, domestic as well as foreign.
Further, the parties agreed to dismiss all claims against each other and entered
into certain mutual releases covering the subject matter, from any other action
that may be brought as a result of these issues.

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Additionally, SEAGATE LLC has agreed to withdraw its oppositions in the European
Patent Office to our `287 and `494 patents.

     During March 2001 we filed legal actions against Hitachi Data Systems
Limited in the United Kingdom for infringement of two of the European patents in
our intellectual property portfolio. The trial date is set for June 17, 2002.

     In October 2001 we filed a patent infringement action in the United States
District Court for the Northern District of Texas, against Veritas Software
Corporation and Veritas Software Global Corporation, alleging that certain
Veritas Software Corporation storage products infringe Storage Computer's
intellectual property patent number U.S. 5,893,919 entitled "Apparatus and
Method for Storing Data with Selectable Data Protection Using Mirroring and
Selectable Parity Inhibition." In February 2002, we filed an additional patent
infringement action in the United States District Court for the Northern
District of Texas, against Veritas Software Corporation and Veritas Software
Global Corporation alleging that certain Veritas Software Corporation storage
products infringe Storage Computer's intellectual property, specifically U.S.
5,257,367 entitled "Data Storage system with Asynchronous Host Operating System
Communication Link". These actions have been referred to a court appointed
mediator with a mediation date set for late April 2002. In March 2002, we filed
a third patent infringement action against Veritas Software Corporation and
Veritas Software Global Corporation alleging certain Veritas Software
Corporation storage products infringe Storage Computer's intellectual property
patent number U.S. 6,098,128 entitled "Universal Storage Management System." The
Storage Computer claim is for injunctive relief, damages and legal costs arising
from the alleged infringement.

     The outcome in the Hitachi and Veritas unresolved patent proceedings cannot
possibly be predicted, but we intend to vigorously pursue the enforcement of our
intellectual property rights and our claims in these actions and against other
manufacturers whose products we believe infringe on our patents and intellectual
property rights. Our failure to successfully enforce our patent rights could
have a material adverse effect on our business, operating results and financial
condition.

     We are involved from time to time in various other minor legal actions in
the ordinary course of our business, which we believe do not have a material
adverse effect on our business, operating results or financial condition.

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

      No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended December 31, 2001.

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                                     PART II

ITEM 5. Market For Registrants Common Equity And Related Stockholder Matters

     Our Common Stock is traded on the American Stock Exchange under the symbol
"SOS".

     The following table sets forth the range of the high and low closing sales
prices for our Common Stock for the fiscal years ended December 31, 2001 and
2000, as reported by the American Stock Exchange.

                                   FISCAL 2001
                                   -----------
                                                 High      Low
                                                 ----      ---
               First Quarter                     9.80      6.50
               Second Quarter                    9.62      5.00
               Third Quarter                     8.85      3.72
               Fourth Quarter                    9.40      3.75

                                   FISCAL 2000
                                   -----------
                                                 High      Low
                                                 ----      ---
               First Quarter                     15.44    3.31
               Second Quarter                    14.00    6.00
               Third Quarter                     14.63    8.75
               Fourth Quarter                    24.01    4.80

     On April 8, 2002, there were 347 record holders of our Common Stock. We
believe the actual number of beneficial owners of the Common Stock is in excess
of 5,400 holders because many of the shares of our Common Stock are held in
custodial or nominee accounts for the benefit of persons other than the record
holder.

     We have never paid any cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. We are also restricted from paying cash
dividends under the terms of our Series A, B, C and E Preferred Stock.

     During the first quarter of our fiscal year 2002, our common stock traded
at prices ranging from a low closing price of $5.88 to a high closing price of
$7.99.

     On August 15, 2001, we completed a $5,000,000 private placement of a new
Series E Convertible Preferred Stock to the holder of our Series C Preferred
Stock, RGC International Investors, LDC. Because the sale was made to a single
accredited investor, the sale was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The shares
of Series E Convertible Preferred Stock are convertible into 771,605 shares of
common stock at a fixed conversion price of $6.48 and may be converted at any
time until October 31, 2003 when conversion is automatic. In connection with the
investment we issued a warrant to purchase 771,605 shares of common stock at
$10.80 per share.

ITEM 6.  Selected Financial Data

     The following data, insofar as it relates to the three fiscal years 1999
through 2001 has been derived from the consolidated financial statements
appearing elsewhere herein, including the Consolidated Balance Sheets as of
December 31, 2001 and December 31, 2000, and the related Consolidated Statements
of Operations for each of the three years in the period ended December 31, 2001,
and notes thereto. The data, insofar as it relates to the Balance Sheet Data as
of December 31, 1999, December 31, 1998 and December 31, 1997, and the
Statements of Operations Data for the fiscal years 1998 and 1997, has been
derived from our historical financial statements for such periods.


                                       12

<PAGE>
<TABLE>
<CAPTION>
                                                                                  Year ended December 31
                                                               ------------------------------------------------------------
                                                                  2001         2000         1999       1998          1997
                                                                  ----         ----         ----       ----          ----
                                                                          (in thousands, except for per share data)
<S>                                                            <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA

Revenues:
   Products and services....................................   $  6,548     $  6,506     $ 10,526     $ 17,052     $ 37,146
   License fees.............................................      2,500            0            0            0            0
                                                               --------     --------     --------     --------     --------
      Total revenues........................................      9,048        6,506       10,526       17,052       37,146
                                                               --------     --------     --------     --------     --------
Costs and expenses:
   Cost of products and services............................      5,546        6,525        6,303       11,839       18,153
   Costs of license fees, primarily legal costs.............      2,311            0            0            0            0
   Research and development.................................      4,335        1,497        1,981        4,258        2,852
   Selling and marketing....................................      4,408        2,262        4,099        8,872        7,960
   General and administrative...............................      3,110        2,316        2,357        2,388        1,526
   Amortization of intangibles..............................      2,832          836            0            0            0
   Restructuring costs......................................          0          800            0            0            0
   Write down of investment.................................          0            0            0        2,094            0
                                                               --------     --------     --------     --------     --------
      Total costs and expenses..............................     22,542       14,236       14,740       29,451       30,491
                                                               --------     --------     --------     --------     --------

Operating income (loss).....................................    (13,494)      (7,730)      (4,214)     (12,399)       6,655

Other income (expense)......................................        277         (430)        (562)        (636)        (399)
                                                               --------     --------     --------     --------     --------

Income (loss) before income taxes...........................    (13,217)      (8,160)      (4,776)     (13,035)       6,256

Provision (benefit) for income taxes .......................          0        1,816         (200)      (2,145)       2,364
                                                               --------     --------     --------     --------     --------

Net income (loss)...........................................    (13,217)      (9,976)      (4,576)     (10,890)       3,892

Dividends on preferred stock including amortization
   of the beneficial conversion features....................     (7,709)     (10,075)           0            0            0
                                                               --------     --------     --------     --------     --------

Income (loss) applicable to common stockholders before
   cumulative effect of change in accounting principle......    (20,926)     (20,051)      (4,576)     (10,890)       3,892

Cumulative effect of change in accounting principle.........          0         (810)           0            0            0
                                                               --------     --------     --------     --------     --------

Net income (loss) applicable to common stockholders.........   ($20,926)    ($20,861)     ($4,576)    ($10,890)      $3,892
                                                               ========     ========     ========     ========     ========

Income (loss) available to common stockholders before
   cumulative effect of change in accounting principal
   per basic and dilutive share.............................     ($1.32)      ($1.57)      ($0.40)      ($0.97)       $0.33

Net income (loss) available to common stockholders
   per basic and dilutive share.............................     ($1.32)      ($1.64)      ($0.40)      ($0.97)       $0.33


BALANCE SHEET DATA

Cash and cash equivalents...................................   $  5,628     $ 14,852     $  1,182     $    925     $  1,113
Working capital.............................................      9,126       16,327          429        3,399       12,606
Total assets................................................     33,710       45,118       14,229       22,900       30,812
Long-term obligations.......................................        328        1,489        1,060          710          710
Redeemable preferred stock..................................      3,725       12,557            0            0            0
Stockholders' equity........................................     26,543       26,984        4,017        8,346       18,901
</TABLE>


                                       13

<PAGE>

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

FORWARD-LOOKING STATEMENTS

THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 CONTAINS CERTAIN SAFE
HARBORS REGARDING FORWARD-LOOKING STATEMENTS. FROM TIME TO TIME, INFORMATION
PROVIDED BY THE COMPANY OR STATEMENTS MADE BY OUR DIRECTORS, OFFICERS OR
EMPLOYEES MAY CONTAIN "FORWARD-LOOKING" INFORMATION SUBJECT TO NUMEROUS RISKS
AND UNCERTAINTIES. ANY STATEMENTS MADE HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE CHARACTERISTICS AND GROWTH OF OUR MARKETS AND
CUSTOMERS, OUR OBJECTIVES AND PLANS FOR FUTURE OPERATIONS AND PRODUCTS AND OUR
EXPECTED LIQUIDITY AND CAPITAL RESOURCES. SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON A NUMBER OF ASSUMPTIONS AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES, AND, ACCORDINGLY, ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: THE CONTINUED
AND FUTURE ACCEPTANCE OF OUR PRODUCTS; THE RATE OF GROWTH IN THE INDUSTRIES OF
OUR PRODUCTS; THE PRESENCE OF COMPETITORS WITH GREATER TECHNICAL, MARKETING AND
FINANCIAL RESOURCES; OUR ABILITY TO PROMPTLY AND EFFECTIVELY RESPOND TO
TECHNOLOGICAL CHANGE TO MEET EVOLVING CUSTOMER NEEDS; RISKS ASSOCIATED WITH
SALES IN FOREIGN COUNTRIES; AND OUR ABILITY TO SUCCESSFULLY EXPAND OUR
OPERATIONS.

INTRODUCTION

     This discussion summarizes the significant accounting policies, accounting
estimates and other significant factors affecting the liquidity, capital
resources and result of operations of the Company for the three-year period
ended December 31, 2001. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in Item 14 of this annual report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. These accounting
principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. Our management
is also required to make certain judgments that affect the reported amounts of
revenues and expenses during the reporting period. We periodically evaluate our
estimates including those relating to the allowance for doubtful accounts;
inventory reserves for lower of cost or market adjustments, excess quantities
and discontinued products; estimated lives and impairment of tangible and
intangible long-life assets; restructuring costs; litigation and other
contingencies. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable based on the specific
circumstances, the results of which form the basis for making judgments about
the carrying value of certain assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.

     We believe the following critical accounting policies impact the most
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Revenue Recognition

     We recognize revenue from product sales at the time of shipment. Revenue
from services is recognized over the contract period or as services are
provided. Revenue from license fees is recognized over the contract period or
when received for fully-paid license agreements. These revenue accounting
policies do not require significant estimates by management.

Impairment of Goodwill and Intangible Assets

     Goodwill and other intangible assets that resulted from our acquisition of
CyberStorage Systems in 2000 which was accounted for as a purchase, are recorded
at amortized cost. We periodically review the carrying amounts of these
intangible assets for indications of impairment based on the integration of the
acquired technology into our product lines and market conditions for the sale of
these products. If indications of impairment are present, we assess the value of
the intangible assets. During 2001 and continuing into the first quarter of
2002, considerable turmoil existed in storage technology markets and the impact
of overall economic conditions on introduction of our new products, signaled an
indication of the potential for impairment. On the other hand, the events of
September 11th created a strong focus on business continuance practices and
information storage and redundancy. We have analyzed the positioning of our
existing and new product technologies in our market place and concluded that
there was no impairment in the value of our various intangible assets. Future
events could cause us to conclude that impairment indicators exist and that
intangible assets associated with acquired businesses are impaired.

     Beginning in 2002, the method for assessing potential impairments of
intangibles will change based on new accounting rules issued by the Financial
Accounting Standards Board (FASB). The Company has not yet determined how the
pronouncements will affect its future financial position and results of
operations. The new accounting rules will result in the elimination of the
non-cash charge to our operations for amortization of goodwill.

Allowance for Doubtful Accounts

     We maintain an allowance for doubtful accounts to reflect the expected
non-collection of accounts receivable based on past collection history and
specific risks identified in our portfolio of receivables. If the financial
condition of our customers deteriorates resulting in an impairment of their
ability to make payments, or if payments from customers are significantly
delayed, additional allowances might be required.

Restructuring Costs

     During 2000, we recorded significant restructuring accruals in connection
with the integration of our acquisition of CyberStorage Systems into our
existing business. These accruals included estimated costs to settle certain
contractual obligations, personnel related costs for benefit programs and
redundancy, and charges related to excess inventory quantities and parts for
discontinued products. The majority of our estimates were based on reasonably
determinable facts and circumstances and our actual costs incurred were
consistent with our estimates. During 2001 additional reserves were provided for
inventories related to discontinued products.

Intellectual Property Rights, Contingencies and Litigation

     We have a substantial portfolio of patents, claims and other intellectual
property rights. Costs and expenses in connection with the development of and
the enforcement of our rights are expensed when incurred. Certain contingent
fees for legal services are due upon the receipt of license fees over contract
periods or upon receipt of payment for paid-up license arrangements. We
currently are in legal proceedings in connection with the enforcement of our
intellectual property rights the results of which cannot be predicted. Our
failure to successfully enforce our patent rights could have a material adverse
effect on our business, operating results and financial condition.

     In the normal course of our business, we are subject to various other
proceedings, lawsuits and claims relating to product, technology, labor and
other matters as further described in Item 3. Legal Proceedings. We are required
to assess the likelihood of any adverse outcomes and the potential range of
probable losses in these matters. The amount of loss accrual, if any, is
determined after careful analysis of each matter, and is subject to adjustment
if warranted by new developments or revised strategies. We believe that none of
the existing matters will result in a material adverse effect on our business,
operating results and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

     Our future success depends on maintaining adequate liquidity and working
capital to meet our operational requirements. Given the recent volatility in the
securities markets and, in particular, the securities of technology companies,
we cannot assure that continuing investors' investments will be available to us
or that we will receive additional equity financing. Our failure to maintain
adequate liquidity and working capital could have a material adverse impact on
us.

     We have continued to incur operating losses in 2002. While development and
introduction of our new products continues and our marketing and sales
activities have increased, we have implemented cost reductions programs where
possible, primarily in employee headcount and the use of independent software
contractors. Management believes that available working capital coupled with the
ability for raising additional equity financing will support the Company's
operating plan. We continue to evaluate opportunities for raising additional
financing and believe that such will be available on reasonable terms to the
Company.

Cash flows

     Our cash flows, cash and cash equivalents, and working capital for the
three years ended December 31, 2001 are summarized as follows:

<TABLE>
<CAPTION>
                                                    2001        Change       2000       Change       1999
                                                    ----        ------       ----       ------       ----
                                                                        (In thousands)
                                                                        --------------
<S>                                                <C>          <C>        <C>         <C>          <C>
Net cash provided (used) in operations             ($11,503)    ($9,062)   ($2,441)    ($5,032)     $2,591
Net cash provided (used) in investing activities       (144)       (191)        47          52          (5)
Net cash provided (used) in financing activities      2,446     (13,474)    15,920      18,189      (2,269)

Cash and cash equivalents                             5,628      (9,224)    14,852      13,670       1,182
Working capital                                       9,126      (7,201)    16,327      15,898         429
</TABLE>


     Cash flow used in operations increased in 2000 due to increased operating
losses and an increase in working capital accounts, excluding cash, that was
partially offset by amortization of intangible assets, a provision for
restructuring costs and a deferred tax provision. Cash flows used in operations
continued to increase in 2001 due to increased operating losses and continued
increases in working capital accounts, excluding cash, that were partially
offset by the net effect of an increase in amortization of intangible assets,
non-cash compensation for services, a reduced provision for restructuring cost
and a reduction in the provision for deferred taxes.

     Cash flows from investing activities have not been material. The Company
does not have or anticipate any significant capital equipment requirements at
this time.

     Cash flow from financing activities increased dramatically in 2000. We
issued redeemable convertible preferred stock (Series A, B and C) and warrants
to private investors for $20.8 million, warrants to purchase common stock were
exercised for $1.1 million and employee stock options were exercised for $1.1
million. $7 million of the proceeds from the financings were used to pay-off our
bank credit facility that was then terminated. Cash flow from financing
activities in 2001 consisted of a convertible preferred stock financing at a
fixed conversion rate (Series E) for $4.8 million which was partially offset by
the redemption of the remaining Series A and B convertible preferred stock
outstanding and held by outside investors for $2.1 million. The terms of the
financings are described in the Notes to the Consolidated Financial Statements
in Item 14 of this annual report. We believe that the terms were the best
available to the Company at that time of each financing.

Credit facilities, debt and lease payment commitments

     We currently have no outstanding secured debt or amounts due on credit
facilities and we due not have a line of credit at the present time. We
previously had a revolving credit facility with a bank that was repaid and
terminated in 2000.

     Our annual debt maturities and lease payment under noncancellable operating
leases are as follows:

                           Debt maturities       Lease payments
                           ---------------       --------------
        2002                  $285,254              $399,005
        2003                   234,434               341,408
        2004                    93,750               307,958
        2005                                         281,264
        2006                                           2,322

Related party transactions

     In August 2001 our Board of Directors approved a plan to make demand loans
with interest at prime plus 1% to directors and executive officers of the
Company up to an aggregate of $500,000 to purchase common stock of the Company
in the public market and $126,178 including accrued interest was outstanding at
December 31, 2001. The Board of Directors also approved a temporary advance to
the Chief Executive Officer of the Company of up to $1,750,000 of which
$1,314,620 including accrued interest at prime plus 1% was outstanding at
December 31, 2001. In January 2002, $1,000,000 of the advance was repaid and the
balance was offset against a note payable and accrued interest due to the
officer.

     The Company has a notes payable to the Chief Executive Officer of the
Company of $710,000 with interest at prime plus 1% and $100,000 with interest at
6% which is convertible into common stock of the Company at $4.00 per share. The
notes and related accrued interest are due in April of 2002. They were offset
against the temporary advance to this officer at December 31, 2001. In January
2002, the balance of the temporary advance remaining unpaid of $314,620 was
offset against the accrued interest and the notes payable leaving a balance due
on the notes of approximately $770,000 which will be due on demand in April
2002.


                                       14

<PAGE>

Foreign currency transactions

     We do not currently utilize any derivative products to hedge its foreign
currency risk. Our foreign subsidiaries' obligations to their parent are
denominated in United States dollars. There is a potential for a foreign
currency gain or loss based upon fluctuations between the United States dollar
and our subsidiaries' functional currencies, currently the German mark and the
British pound and the French franc. This exposure is limited to the period
between the time of accrual of such liability to the parent in the subsidiaries'
functional currency and the time of its payment.

     Other than the intercompany balances noted above, we do not believe we have
any material unhedged monetary assets, liabilities or commitments that are
denominated in a currency other than the operations' functional currency.
Management expects such exposure to continue until its foreign subsidiaries
reach a more mature level of operation. We currently have no plans to utilize
any derivative products to hedge our foreign currency risk.

RECENT ACCOUNTING PRONOUNCEMENTS

     During the fourth quarter of 2000, the FASB issued Emerging Issues Task
Force (EITF) 00-27 "Application of EITF issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingency
Adjustable Conversion Ratios, to certain Convertible Instruments". EITF No.
00-27 requires the remeasurement of the original issue discount on preferred
stock with characteristics similar to the convertible preferred stock issued by
the Company, during fiscal year 2000. This accounting change required the value
of the warrants issued with the preferred stock to be included in the
calculating the beneficial conversion value. This resulted in a cumulative
charge of $809,364 to loss applicable to common stockholders in the fourth
quarter of 2000.

     In June 2001, the FASB finalized FASB Statements NO. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if they meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after
July 1, 2001. The FASB also requires, upon adoption of SFAS 142, that the
Company classify the carrying amounts of intangible assets and goodwill based
on the criteria in SFAS 141.

     SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and ceases
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.

     The Company's acquisition of CyberStorage Systems in 2000 was accounted
for using the purchase method. All future business combinations will be
accounted for under the purchase method, which may result in the recognition of
goodwill and other intangible assets, some of which may subsequently be charged
to operations, either by amortization or impairment charges. For purchase
business combinations completed prior to June 30, 2001, the net carrying amount
of goodwill was $16,287,911 and other intangible assets were $3,958,906 as of
Decemeber 31, 2001. Amortization expense during the year ended December 31, 2001
was $2,831,736. The Company is assessing but has not yet determined how the
adoption of SFAS No. 141 and SFAS No. 142 will affect its future financial
position and results of operations.

     The Company did not acquire any goodwill or other intangible assets between
the period June 30, 2001 and December 31, 2001. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions for the Disposal of a Segment of a Business."
SFAS No. 144 became effective for fiscal years beginning after December 15,
2001. The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair values less costs to sell. The Company expects
to adopt SFSAS No. 144 in the first quarter of fiscal year 2002 and is currently
reviewing the effects of adopting SFSAS No. 144 on its financial position and
results of operations.



                                       15

<PAGE>

RESULTS OF OPERATIONS

    The following table presents our consolidated statement of operations stated
as a percentage of revenue for the years ended December 31, 2001, 2000, 1999,
1998 and 1997.
<TABLE>
<CAPTION>

                                                  2001        2000        1999       1998        1997
                                                  ----        ----        ----       ----        ----
<S>                                             <C>        <C>          <C>        <C>         <C>
Revenue

  Products and services                          72.37%     100.00%     100.00%    100.00%     100.00%

  License fees                                   27.63           0           0          0           0
                                               -------     -------      ------     ------      ------

     Total revenues                             100.00      100.00      100.00     100.00      100.00
                                               -------     -------      ------     ------      ------

Costs and expenses:

  Cost of products and services                  61.30      100.30       59.88      69.43       48.87

  Cost of license fees                           25.53           0           0          0           0

  Research and development                       47.91       23.00       18.82      24.97        7.68

  Selling and marketing                          48.71       34.77       38.94      52.03       21.43

  General and administrative                     34.37       35.59       22.40      14.00        4.11

  Amortization of intangibles                    31.30       12.85           0          0           0

  Restructuring costs                                0       12.30           0          0           0

  Write Down of Investment                           0           0           0      12.28           0
                                               -------     -------      ------     ------      ------

    Total                                       249.12      218.81      140.04     172.71       82.09
                                               -------     -------      ------     ------      ------

Operating income (loss)                        (149.12)    (118.81)     (40.04)    (72.71)      17.91

Other income (loss)(expense)                      3.06       (6.61)      (5.34)     (3.73)      (1.08)
                                               -------     -------      ------     ------      ------

Income (loss) before income taxes              (146.06)    (125.42)     (45.38)    (76.44)      16.83

Provision (benefit) for income taxes                 0       27.92       (1.90)    (12.58)       6.37
                                               -------     -------      ------     ------      ------

Net income (loss)                              (146.06)%   (153.34)%    (43.48)%   (63.86)%     10.46%
                                               =======     =======      ======     ======      ======

</TABLE>


Revenue

     Revenues from sales of products and services decreased $4,020,000 in 2000
due to the continuing contraction of our customer base due to customers
concerns about our financial condition, delays in delivery of upgrade features,
reduced sales and marketing staff and unsuccessful attempts to reestablish our
re-seller sales and marketing channel. Revenues from sales of products and
services increased only slightly in 2001 and consisted primarily of legacy RAID
products and the Cyber products existing at the time that CyberStorage Systems
was acquired. Introduction of our new product lines of CyberBorg, CyberNAS and
CyberFibre did not begin until late in 2001 and will continue in 2002. We expect
future sales to come primarily from our new product lines described elsewhere in
this annual report.

     Revenues from license fees with respect to our patents and other
intellectual properties began in 2001 with our settlement of our claims against
XIOTech Corporation and its parent company, Seagate Technology, Inc. We
currently are in legal proceedings, in connection with the enforcement of our
patents and other intellectual property rights, the results of which cannot be
predicted. Our failure to successfully enforce our patent rights and receive
revenue from license fees could have a material adverse effect on our business,
operating results and financial condition.

     Revenues by geographic region expressed as a percentage of total revenues
is as follows:

                              Year Ended        Year Ended          Year Ended
                              December 31,      December 31,        December 31,
                              2001              2000                1999
                              -----------       ------------        ------------
North America                    79%                55%                 44%

Asia                             10%                22%                 22%

European Sales                    9%                21%                 33%

Other Regions                     2%                 2%                  1%

     The shift in revenue from 1999 through 2001 resulted from a reduction in
the European direct sales force and revenues from license fees in North America
in 2001.

     For the years ended December 31, 2001 and 1999, sales to one customer were
in excess of 10% of revenue.

     All United States export sales are denominated in United States dollars to
limit the amount of foreign currency risk. Export sales from the European sales
offices are denominated in United States dollars. Sales occuring through our
subsidiaries located in England and Germany are conducted in the local
functional currency.


                                       16

<PAGE>

Cost of products and services

     Cost of products and services increased $222,000 in 2000 due to additional
direct and indirect manufacturing personnel associated with the CyberStorage
Systems acquisition in September 2000 and decreased $979,000 in 2001 due to
lower level of manufacturing activity, the shift to our new product lines and
staffing reductions in our factory. Included in costs of products and services
were writedowns of inventory in the amount of $2.9 million and $1.0 million in
2000 and 2001, respectively in connection with the restructuring.

Gross profit

     Gross profit on the sale of products and services is summarized as follows:


                                   2001               2000             1999
                                   ----               ----             ----
                               (In thousands except for % of sales amounts)

     Gross profit            $1,002   15.3%       ($19)  (.3%)   $4,223   40.1%
     Restructuring costs
      included in the
      cost of products
      and services.........  $1,000   15.2%     $2,900  44.6%         -      -


Gross profits were reduced in 2000 and 2001 primarily due to provisions for
restructuring costs associated with excess inventory quantities and inventories
related to discontinued products discussed above.

Cost of license fees

     Costs associated with to the enforcement of our patent and other
intellectual property rights totaling $2,311,000 in 2001 were for legal and
consulting fees and expenses incurred.

Research and development expenses

     Research and development expenses, relating primarily to personnel costs,
expenses for independent contractors, purchase of software and supplies, were
reduced by $484,000 in 2000 due to working capital reductions partially offset
by increases in costs for personnel that joined the Company with the
CyberStorage Systems acquisition. Research and development expenses to develop
our new product lines increased by $2,838,000 in 2001 with the availability of
equity financing funds.

     The Company expects to expend approximately $4,500,000 on research and
development, during fiscal 2002, relating to improvements in existing products
and new product offerings, subject to the availability of working capital.

Selling and marketing expenses

     Selling and marketing expenses relating to personnel staffing, expenses for
public relations, trade shows, trade publications, sales commissions and travel
were reduced by $1,837,000 in 2000 due to working capital reductions. Selling
and marketing expenses increased by $2,146,000 in 2001 with the rebuilding of
the sales and marking organization and expenses associated with the introduction
on existing CyberStorage Systems products and our new product lines.

General and administrative expenses

     General and administrative expenses remained virtually unchanged in 2000
since the reductions in executive and administrative support personnel earlier
in the year were offset by the hiring of new senior management personnel and the
addition of CyberStorage Systems employees. General and administrative expenses
increased by $794,000 in 2001 due primarily to continued increases in support
personnel ($647,000), travel expenses ($64,000), legal and auditing services
($83,000).

Amortization of intangibles

     Amortization of goodwill and other intangible assets relate to the
acquisition of CyberStorage Systems in September 2000. Four months of
amortization were recorded in 2000 and a full year of amortization was recorded
in 2001. Amortization of goodwill of approximately $1,900,000 annually will be
eliminated in 2002 with the adoption of SFAB 142 described elsewhere in the
annual report.


                                       17

<PAGE>

Other income (expense), net

     Other income (expense), net was reduced by $132,000 in 2000 due to the
reduction in interest cost on our bank credit facility partially offset by
decreases in other expenses primarily translation losses. Other income
(expense), net income increased by $707,000 in 2001 due primarily to increased
interest income on invested cash and cash equivalents.

Provision for income taxes

     Our provision for income taxes increased in 2000 due primarily to the
reduction of our deferred tax assets to zero by increasing the valuation reserve
by $2,194,000.

Inflation

     Inflation has not had a material impact on our operations.


                                       18

<PAGE>

Acquisitions

     On September 14, 2000, we acquired CyberStorage Systems Corporation
("CyberStorage") as a wholly owned subsidiary in a stock for stock acquisition
and merged the two operating companies. Although on a short-term basis the
acquisition of CyberStorage is expected to be dilutive to our earnings, on a
long term basis we expect that the CyberStorage acquisition will add to our
earnings per share on a fully diluted basis.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our Stock Price is Volatile

     Our stock price, like that of other technology companies, is subject to
significant volatility because of factors such as:

     - the announcement of new products, services or technological innovations
       by us or our competitors
     - quarterly variations in our operating results
     - changes in revenue or earnings estimates by the investment community
     - speculation in the press or investment community
     - failure to meet earning expectations


                                       19

<PAGE>

     In addition, our stock price may be affected by general market conditions
and domestic and international economic factors unrelated to the Company's
performance such as the dramatic decreases suffered by almost every public
company in the high technology sector in 2000. Further, until recently, our
stock was thinly traded. Because of these factors, recent trends should not be
considered reliable indicators of future stock prices or financial results.

Our Business May Suffer If We Cannot Protect Our Intellectual Property

     We generally rely upon patent, copyright, trademark and trade secret laws
and contract rights in the United States and in other countries to establish and
maintain our proprietary rights in our technology and products. However, we
cannot assure you that any of our proprietary rights will not be challenged,
invalidated or circumvented. In addition, the laws of certain countries do not
protect our proprietary rights to the same extent, as do the laws of the United
States. Therefore, we cannot assure you that we will be able to adequately
protect our proprietary technology against unauthorized third-party copying or
use, which could adversely affect our competitive position. Further, we cannot
assure you that we will be able to obtain licenses to any technology that it may
require to conduct our business or that, if obtainable, such technology can be
licensed at a reasonable cost.

Intellectual Property Rights

     We are aggressively pursuing the enforcement of our intellectual property
rights after an extensive patent review conducted in 1999. In 2000, we retained
a major law firm to enforce these rights against infringing parties, the number
of which management believes to be extensive. In 2001, we began bringing legal
actions against companies whose products we believed infringed on our
intellectual property rights and patent portfolio. We intend to vigorously
pursue these actions. Despite ours and our legal representatives' efforts, there
can be no assurance or predictability as to any amount of recovery or the length
of time it will take us to recover any royalties or license fees which may be
recoverable. Despite our efforts to protect these intellectual property rights,
unauthorized use may still occur, particularly in foreign countries.

Development of New Products and Solutions

     We must make continuous investment in research and development to maintain
our ongoing effort to continually improve our products and provide innovative
solutions to our customers. The development of software products is a difficult
and costly process and subject to many other products' requirements. Our
inability to timely deliver new products in the past has had an adverse effect
on our operating and financial results. We cannot assure you that we will be
able to effectively develop new products in the future.

Competition

     We compete with many established companies in the computer storage and
server industries and certain of these companies have substantially greater
financial, marketing and technological resources, larger distribution
capabilities, earlier access to customers and more opportunity to address
customers' various information technology requirements than we do. Our business
may be adversely affected by the announcement or introduction of new products by
our competitors, including hardware, software and services, price reductions of
our competitors' equipment or services and the implementation of effective
marketing strategies by our competitors.

     Competitive pricing pressures exist in the computer storage and server
markets and have had and may in the future have an adverse effect on our
revenues and earnings. There also has been and may continue to be a willingness
on the part of certain competitors to reduce prices in order to preserve or gain
market share, which we cannot foresee. We currently believe that pricing
pressures are likely to continue. The relative and varying rates of product
price and component cost declines could have an adverse effect on our earnings.

                                       20

<PAGE>

Rapid Technological Changes

     The computer industry is changing both dramatically and rapidly. The
development of "open systems computing", the introduction of the Internet, new
fibre technologies (SAN) and the increasing storage density in disk drive
technologies, have caused an increase in new product development and shorter
time to bring the new products to market. While we believe that our Virtual
Storage Architecture, StorageSuite and CyberBORG products are advanced when
compared to competitive products, and complement many other products utilized in
total customer solutions, we cannot assure that this will continue in the
future. The failure to remain consistently ahead of competitive technologies
would have a negative impact on our operating results and financial condition.

Business Alliances

     Many companies are forming business alliances with their competitors, to be
able to provide totally integrated storage solutions to their customers. One
result of these alliances is to effectively preclude competitive products from
being offered to customers. Many of the relationships are exclusive and our
failure to develop similar relationships will effectively reduce the number of
qualified sales opportunities we will have for our products in the future. We
believe that we address this issue by our return to the reseller channel sales
model and having the integrator/solution providers/value added-resellers perform
the solution selling required. Our failure to open these sales channels will
have a negative effect on our operating results and financial condition.

Operations

     Our products operate near the limits of electronic and physical performance
and are designed and manufactured with relatively small tolerances. If flaws in
design, production, assembly or testing were to occur by us or our suppliers, we
could experience a rate of failure in our products that would result in
substantial repair or replacement costs and potential damage to our reputation.
Continued improvement in manufacturing capabilities and control of material and
manufacturing quality and costs are critical factors in our future growth. We
frequently revise and update manufacturing and test processes to address
engineering and component changes to our products and evaluate the reallocation
of manufacturing resources among our facilities. We cannot assure that our
efforts to monitor, develop and implement appropriate test and manufacturing
processes for our products will be sufficient to permit us to avoid a rate of
failure in our products that results in substantial delays in shipment,
significant repair or replacement costs and potential damage to our reputation,
any of which could have a material adverse effect on our business, results of
operations or financial condition.

     Additionally, most companies in the high technology arena are under
pressure to be able to acquire and retain the services of talented individuals.
At present, there is a shortage in the number of qualified employees who are
available, creating a lucrative job market for qualified and talented high tech
employees. We have had a decline in revenue in each of the three previous years
and comparable reduction in our work force. While we believe that we have the
required core personnel to effectively manage and grow, we cannot assure that
key employees will not leave the company in the future. The failure to maintain
key employees could adversely affect our future operating and financial results
in the future.

                                       21

<PAGE>

Liquidity and Working Capital

     Our future success depends on maintaining adequate liquidity and working
capital to meet our operational requirements. Given the recent volatility in the
securities markets and, in particular, the securities of technology companies,
we cannot assure you that continuing investors' investments will be available to
us and that we will receive additional equity financing. Our failure to maintain
adequate liquidity and working capital could have a material adverse impact on
us.

Failure of Suppliers to Provide Quality Products

     We purchase several sophisticated components and products from one or a
limited number of qualified suppliers. These components and products include
disk drives, high density memory components and power supplies. We have
experienced delivery delays from time to time because of high industry demand or
the inability of some vendors to consistently meet our quality and delivery
requirements. If any of our suppliers were to fail to meet the quality or
delivery requirements needed to satisfy customer orders for our products, we
could lose time-sensitive customer orders and have significantly decreased
quarterly revenues and earnings, which would have a material adverse effect on
our business, results of operations or financial condition. Additionally, we
periodically transition our product line to incorporate new technologies. The
importance of transitioning our customers smoothly to new technologies, along
with our historically uneven pattern of quarterly sales, intensifies the risk
that a supplier who fails to meet our delivery or quality requirements will have
an adverse impact on our revenues and earnings.

Changes in Laws, Regulations Or Other Conditions That Could Adversely Impair Our
Condition

     Our business, results of operations and financial condition could be
adversely affected if any laws, regulations or standards, both foreign and
domestic, relating to us or our products were newly implemented or changed.

Litigation That We May Become Involved In May Adversely Affect Us

     In the ordinary course of business, we may become involved in litigation,
administrative proceedings and governmental proceedings. Such matters can be
time-consuming, divert management's attention and resources and cause us to
incur significant expenses. Furthermore, we cannot assure you that the results
of any of these actions will not have a material adverse effect on our business,
results of operations or financial condition.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     We have only the market risk inherent in financial instruments that relate
primarily in fluctuations in the prime rate of interest to be charged under the
terms of the several promissory notes due from and to certain of our executive
officers and directors because we terminated the credit facility tied to the
prime rate of interest in August 2000. We do not use derivative products and do
not have any material unhedged monetary assets, except for the inter-company
balances outstanding, which are detailed above in ITEM 7 "Foreign Currency
Transactions".

                                       22

<PAGE>

ITEM 8. Financial Statements and Supplementary Data

     The financial statement data listed in the Index to Consolidated Financial
Statements at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K.

     The following supplementary data is incorporated by reference:

     Quarterly Financial Results (unaudited) for the two years ended December
31, 2001 (see Note M of the "Notes to the Consolidated Financial Statements"
contained in this Form 10-K).

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

     Not applicable.

                                       23

<PAGE>

                                    PART III

     The information required by Part III, Items 10, 11 12, and 13, are
incorporated herein by reference to our Proxy Statement for our 2002 Annual
Meeting of Shareholders (the "2002 Proxy Statement") as follows:

ITEM 10.  Directors and Executive Officers of the Company

     Incorporated by reference to sections entitled "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the 2002 Proxy
Statement.

ITEM 11. Executive Compensation

     Incorporated by reference to sections entitled "Executive Compensation" and
"Performance Graph" of the 2001 Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

     Incorporated by reference to sections entitled "Who are the largest owners
of the Company's Stock?" and "How much stock do the Company's directors and
executive officers own?" of the 2002 Proxy Statement.

ITEM 13.  Certain Relationships and Related Transactions

     Incorporated by reference to section entitled "Certain Relationships and
Related Transactions" of the 2002 Proxy Statement.

                                       24

<PAGE>

                                     PART IV

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

     (a) The following documents are included as part of the report:

     (1) Financial Statements

     Our following financial statements and the report of the independent
auditors are filed as part of this report:

     (1) Index to Financial Statements

         Report of Independent Auditors

         Consolidated Balance Sheets
         Consolidated Statements of Operations
         Consolidated Statements of Stockholders' Equity
         Consolidated Statements of Cash Flows
         Notes to Consolidated Financial Statements

     (2) Financial Statement Schedules

         None

     (3) Exhibits

     Certain of the exhibits listed hereunder have been previously filed with
the Commission as exhibits to certain prior registration statements and periodic
reports as indicated below.

3.1  Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
     the Company's Form S-4, Registration No. 33-87028, as filed on December 2,
     1994).

3.2  Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 to
     the Company's Form S-4, Registration No. 33-87028, as filed on December 2,
     1994).

3.3  Amended Certificate of Designation establishing Series A 8% Convertible
     Preferred 3.2 Stock (Incorporated by reference to Exhibit 2.1 to the
     Company's Current Report on Form 8-K as filed on October 6, 2000).

3.4  Certificate of Designation establishing Series B 8% Convertible Preferred
     Stock 3.3 (Incorporated by reference to Exhibit 2.2 to the Company's
     Current Report on Form 8-K as filed on October 6, 2000).

3.5  Certificate of Designation establishing Series C Convertible Preferred
     Stock. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly
     Report on Form 10-Q for the quarter period ended September 30, 2000).

3.6  Certificate of Designation establishing Series E Preferred Stock
     (Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed
     on August 22, 2001).

4.1  Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1
     to the Company's Form S-4, Registration No. 33-87028, as filed on December
     2, 1994).

                                       25

<PAGE>

4.2   Restated and Amended Stock Incentive Plan (Incorporated by reference as
      Exhibit 4.1 to the Company's Form S-8, Registration No. 333-31207, as
      filed on July 14, 1997).

4.3   Form of Restated and Amended Stock Incentive Plan, Stock Award
      (Incorporated by reference to Exhibit 4.2 to the Company's Form S-8,
      Registration No. 333-31207, as filed on July 14, 1997).

4.4   The Company's 401(k) Savings Plan (Incorporated by reference to Exhibit
      4.1 to the Company's Form S-8, Registration No. 333-48987, as filed on
      March 31, 1998).

4.5   1999 Amended Stock Incentive Plan (Incorporated by reference to Exhibit
      4.1 to the Company's Form S-8, as filed on August 16, 2000).

4.6   The 2000 Stock Option Plan of CyberStorage Systems Corporation
      (Incorporated by reference to Exhibit 4.2 to the Company's Form S-8,
      Registration No. 333-69536, as filed on September 18, 2001).

4.7   Form of Common Stock Warrant associated with Series A Preferred Stock,
      together with Schedule of Warrants (Incorporated by reference to Exhibit
      4.6 to the Company's 2000 Form 10-K, as filed on April 16, 2001).

4.8   Common Stock Warrant associated with Series B Preferred Stock
      (Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for
      the period ended September 30, 2000).

4.9   Common Stock Warrant associated with Series C Preferred Stock
      (Incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q for
      the period ended September 30, 2000).

4.10  Form of Common Stock Warrant issued to Citizens Financial Group, Inc.,
      together with Schedule of Warrants (Incorporated by reference to Exhibit
      4.9 of the Company's 2000 Form 10-K, as filed on April 16, 2001).

4.11  Common Stock Warrant associated with Series E Preferred Stock
      (Incorporated by reference to Exhibit 4.2 to our Report on Form 8-K filed
      August 22, 2001).

10.1  Promissory Note in the principal amount of $710,000 dated December 6, 1997
      made Payable to Theodore J. Goodlander (Incorporated by reference to
      Exhibit 10.2 of the Company's 1999 Form 10-K, as filed on April 14, 2000).

10.2  Lease Agreement between Kristiania Corporation and Storage Computer
      Corporation dated December 1, 2000 (Incorporated by reference to Exhibit
      10.10 of the Company's 2000 Form 10-K, as filed on April 13, 2001).

10.3  Executive Employment Agreement effective September 16, 2000 between John
      Thonet and the Company (Incorporated by reference to Exhibit 10.13 of the
      Company's 2000 Form 10-K, as filed on April 13, 2001).

21    Subsidiaries of the Company.

23    Consent of BDO Seidman, LLP.

24    Power of Attorney (Included in Signature page hereto).


                                       26

<PAGE>

     (b) Reports on Form 8-K

          1. December 18, 2001 - Other Events. The Company reported the
          settlement of its litigation with XIOtech Corporation for a payment of
          $2,500,000 and cross-license agreements between the parties.

                                       27

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Nashua, New
Hampshire, on the 12th day of April, 2002.

                                      STORAGE COMPUTER CORPORATION

                                      BY:      /s/Theodore J. Goodlander
                                         ---------------------------------
                                         Theodore J.  Goodlander
                                         Chairman of the Board of Directors, CEO
                                         (Principal Executive Officer)

                                       28

<PAGE>

     The undersigned directors and officers of Storage Computer Corporation
hereby severally constitute and appoint Theodore J. Goodlander and Peter N. Hood
as our true and lawful attorneys-in-fact and agent with full power of
substitution, and each of them acting alone to execute in our name and behalf
in the capacities indicated below any and all amendments to this annual report
to be filed with the Securities and Exchange Commission and hereby ratify and
confirm all that such attorney-in-fact and agent shall lawfully do or cause to
be done by virtue thereof.

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

Signature                    Capacity                             Date
---------                    --------                             ----

/s/ Theodore J. Goodlander   Chairman of the Board of Directors   April 12, 2002
--------------------------   CEO (Principal Executive Officer)
Theodore J. Goodlander


/s/ Edward A. Gardner        President and Director               April 12, 2002
--------------------------
Edward A. Gardner

/s/ John L. Thonet           Chief Operating Officer and          April 12, 2002
--------------------------   Director
John L. Thonet

/s/ Peter N. Hood            Treasurer and CFO (Principal         April 12, 2002
--------------------------   Accounting Officer)
Peter N. Hood

                             Director
--------------------------
Steven Chen

/s/ Roger E. Gauld           Director                             April 12, 2002
--------------------------
Roger E. Gauld

/s/ Thomas A. Wooters        Director                             April 12, 2002
--------------------------
Thomas A. Wooters

                                       29

<PAGE>

                          STORAGE COMPUTER CORPORATION

                                  - I N D E X -


                                                                    Page
                                                                    Number
                                                                    ------

Report of Independent Auditors                                       F-1

Consolidated Balance Sheets at
December 31, 2001 and December 31, 2000                              F-2

Consolidated Statements of Operations for the Years Ended
December 31, 2001, December 31, 2000 and December 31, 1999           F-3

Consolidated Statements of Stockholders'
Equity for the Years Ended December 31,
2001, December 31, 2000 and December 31, 1999                        F-4

Consolidated Statements of Cash Flows
for the Years Ended December 31, 2001,
December 31, 2000 and December 31, 1999                              F-5

Notes to Consolidated Financial Statements                       F-6 to F-20

                                       30

<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062

   We have audited the accompanying consolidated balance sheets of Storage
Computer Corporation and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Storage
Computer Corporation and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.

                                            BDO Seidman, LLP

Boston, Massachusetts
February 27, 2002

                                      F-1

<PAGE>

                         STORAGE COMPUTER CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                 --------------------------
                                                                                     2001          2000
                                                                                 ------------  ------------
<S>                                                                              <C>           <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents.................................................... $  5,627,855  $ 14,852,259
   Accounts receivable, net (Note B)............................................    1,644,366       847,829
   Inventories (Note B).........................................................    3,811,658     4,316,104
   Due from officers and directors (Note D).....................................      356,269            --
   Other current assets.........................................................      799,530       399,302
                                                                                 ------------  ------------
       Total current assets.....................................................   12,239,678    20,415,494

Property and equipment, net (Note B)............................................      828,817     1,141,299
Goodwill and other intangibles, net of accumulated amortization of $3,668,000 in
  2001 and $836,000 in 2000 (Notes B and C).....................................   20,246,817    23,317,443
Other assets....................................................................      394,902       244,040
                                                                                 ------------  ------------
       Total assets............................................................. $ 33,710,214  $ 45,118,276
                                                                                 ============  ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable............................................................. $    802,015  $    896,049
   Accrued expenses (Note B)....................................................    1,533,689     2,436,291
   Deferred revenue.............................................................      492,987       492,028
   Current maturities of long-term debt (Note E)................................      285,254       263,863
                                                                                 ------------  ------------
       Total current liabilities................................................    3,113,945     4,088,231
                                                                                 ------------  ------------
Long-term debt, less current maturities (Note E)................................      328,184     1,489,299
                                                                                 ------------  ------------
Commitments and contingencies (Notes F, G and J)................................

Redeemable convertible preferred stock (Note K).................................    3,725,015    12,556,661
                                                                                 ------------  ------------
Stockholders' equity (Notes E, H and K):
   Preferred stock, $.001 par value,
     1,000,000 shares authorized; shares
     outstanding: 15,600 in 2001 and 76,000 in 2000;
     13,100 in 2001 and 76,000 in 2000 included
     in redeemable convertible preferred stock..................................    1,178,319            --
   Common stock, $.001 par value,
     25,000,000 shares authorized; shares
     outstanding: 19,134,773 in 2001 and
     15,041,882 in 2000.........................................................       19,135        15,042
   Additional paid-in capital...................................................   76,001,699    57,792,635
   Accumulated deficit..........................................................  (50,656,083)  (30,823,592)
                                                                                 ------------  ------------
   Total stockholders' equity...................................................   26,543,070    26,984,085
                                                                                 ------------  ------------
   Total liabilities and stockholders' equity................................... $ 33,710,214  $ 45,118,276
                                                                                 ============  ============
</TABLE>

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

                                      F-2

<PAGE>

                         STORAGE COMPUTER CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                         ---------------------------------------
                                                             2001          2000         1999
                                                         ------------  ------------  -----------
<S>                                                      <C>           <C>           <C>
Revenues:
  Products and services................................. $  6,547,627  $  6,505,628  $10,525,658
  License fees (Note A).................................    2,500,000            --           --

                                                         ------------  ------------  -----------
   Total revenues.......................................    9,047,627     6,505,628   10,525,658
                                                         ------------  ------------  -----------
Costs and expenses:
  Cost of products and services.........................    5,546,119     6,525,316    6,303,125
  Cost of license fees, primarily legal fees (Note A)...    2,310,650            --           --
  Research and development..............................    4,335,237     1,496,382    1,980,988
  Selling and marketing.................................    4,407,735     2,262,136    4,098,347
  General and administrative............................    3,110,418     2,315,463    2,357,254
  Amortization of intangibles...........................    2,831,736       835,937           --
  Restructuring costs (Note C)..........................           --       800,140           --

                                                         ------------  ------------  -----------
   Total costs and expenses.............................   22,541,895    14,235,374   14,739,714

                                                         ------------  ------------  -----------
Operating loss..........................................  (13,494,268)   (7,729,746)  (4,214,056)

                                                         ------------  ------------  -----------
Other income (expense):
  Interest income (expense), net (Note E)...............      296,051      (283,167)    (840,253)
  Other income (expense)................................      (18,596)     (147,000)     278,114

                                                         ------------  ------------  -----------
   Total other income (expense).........................      277,455      (430,167)    (562,139)

                                                         ------------  ------------  -----------
Loss before income taxes (benefit)......................  (13,216,813)   (8,159,913)  (4,776,195)

                                                         ------------  ------------  -----------
Provision (benefit) for income taxes (Note I):
  Current taxes (benefit)...............................           --        34,852     (199,868)
  Deferred taxes........................................           --     1,781,331           --

                                                         ------------  ------------  -----------
   Total provision (benefit) for income taxes...........           --     1,816,183     (199,868)

                                                         ------------  ------------  -----------
Net loss................................................  (13,216,813)   (9,976,096)  (4,576,327)
Dividends on preferred stock including
  amortization of the beneficial conversion features....   (7,709,661)  (10,075,074)          --

                                                         ------------  ------------  -----------
Loss applicable to common stockholders before cumulative
  effect of change in accounting principle..............  (20,926,474)  (20,051,170)  (4,576,327)
Cumulative effect of change in accounting principle.....           --      (809,364)          --

                                                         ------------  ------------  -----------
Net loss applicable to common stockholders.............. $(20,926,474) $(20,860,534) $(4,576,327)

                                                         ============  ============  ===========
Loss applicable to common stockholders before cumulative
  effect of change in accounting principle per basic and
  dilutive share........................................ $      (1.32) $      (1.57) $     (0.40)
Net loss available to common stockholders
  per basic and dilutive share.......................... $      (1.32) $      (1.64) $     (0.40)
Basic and dilutive shares...............................   15,891,223    12,756,088   11,376,082
</TABLE>

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

                                      F-3

<PAGE>

                         STORAGE COMPUTER CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          Preferred Stock       Common Stock
                                        -------------------  ------------------ Additional
                                                 Carrying                 Par    Paid-In     Accumulated
                                        Shares    Value        Shares    Value   Capital       Deficit
                                        ------  -----------  ---------- ------- -----------  ------------
<S>                                     <C>     <C>          <C>        <C>     <C>          <C>
Balance--December 31, 1998.............                      11,347,840 $11,348 $13,721,021  $ (5,386,731)

Warrants issued in connection with
  bank financing (Note E)..............                                             111,387
Exercise of stock options..............                          50,000      50      76,950
Stock issued to 401(k) plan............                          37,040      37      58,905
Net loss...............................                                                        (4,576,327)

                                                             ---------- ------- -----------  ------------
Balance--December 31, 1999.............                      11,434,880  11,435  13,968,263    (9,963,058)

Exercise of stock -options.............                         632,019     632   1,071,851
Stock issued to 401(k) plan............                           4,619       5      38,686
Warrants issued in connection with
  bank financing (Note E)..............                                             114,434
Warrants exercised (Note K)............                         132,000     132   1,143,316
Stock issued in note conversion
(Note E)...............................                         132,500     132     264,868
Stock issued to acquire CyberStorage
Systems (Note C).......................                       2,200,000   2,200  22,437,800
Issuance of redeemable convertible
  preferred stock with a beneficial
  conversion feature of $12,253,900
  and related warrants, net of issuance
  costs of $1,175,500 (Note K).........                                          17,514,774    (6,314,923)
Conversion of redeemable convertible
  preferred shares into common
  shares and related accrued
  dividends paid in common shares
  (Note K).............................                         505,864     506   1,238,643      (118,388)
Amortization of beneficial conversion
  feature of preferred stock (Note K)..                                                        (4,052,794)
Dividends on preferred stock (Note K)..                                                          (398,333)
Net loss...............................                                                        (9,976,096)

                                                             ---------- ------- -----------  ------------
Balance--December 31, 2000.............                      15,041,882  15,042  57,792,635   (30,823,592)

Exercise of stock options..............                          63,611      64      89,400
Stock issued to 401(k) plan............                          11,768      12      63,297
Stock options issued in lieu of
  compensation for services............                                           1,086,973
Issuance of Series E convertible
  preferred stock with a beneficial
  conversion feature of $3,112,672
  and related warrants, net of issuance
  costs of $169,783 (Note K)...........  5,000  $ 2,026,217                       5,916,672    (3,112,672)
Redemption of redeemable convertible
  preferred stock......................                                          (1,093,983)
Conversion of convertible preferred
  shares into common shares and
  related accrued dividends paid in
  common shares (Note K)............... (2,500)  (1,095,714)  3,736,240   3,736   8,891,796
Amortization of beneficial conversion
  feature of preferred stock (Note K)..             247,816                       2,113,711    (2,361,527)
Dividends on preferred stock (Note K)..                         281,272     281   1,141,198    (1,141,479)
Net loss...............................                                                       (13,216,813)
                                        ------  -----------  ---------- ------- -----------  ------------
Balance--December 31, 2001.............  2,500  $ 1,178,319  19,134,773 $19,135 $76,001,699  $(50,656,083)
                                        ======  ===========  ========== ======= ===========  ============
</TABLE>

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

                                      F-4

<PAGE>

                         STORAGE COMPUTER CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (NOTE K)

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                       2001          2000         1999
                                                                   ------------  ------------  -----------
<S>                                                                <C>           <C>           <C>
Cash flows from operating activities:
   Net loss....................................................... $(13,216,813) $ (9,976,096) $(4,576,327)
   Reconciliation to operating cash flows:
     Depreciation and amortization of property and
       equipment..................................................      544,856       460,129      488,883
     Amortization of goodwill and other intangibles...............    2,831,736       835,937           --
     Warrants issued for banking fees.............................           --       114,434      111,387
     Stock issued to 401(k) plan..................................       63,309        38,691       58,942
     Provision for restructuring costs............................    1,000,000     3,744,727           --
     Deferred tax provision.......................................           --     1,781,331           --
     Non-cash compensation for services...........................    1,086,973            --           --
   Changes in operating assets and liabilities, net of effects of
     CyberStorage Systems acquisition:
     Accounts receivable..........................................     (796,537)      435,958    4,436,274
     Income tax refund receivable.................................           --            --    2,151,677
     Inventories..................................................     (473,231)      246,237    1,942,850
     Due from officers and directors..............................   (1,126,178)           --           --
     Other assets.................................................     (400,228)      462,061      (26,864)
     Accounts payable and accrued expenses........................   (1,017,576)     (585,306)  (1,996,304)
                                                                   ------------  ------------  -----------
     Net cash provided by (used in) operations....................  (11,503,689)   (2,441,897)   2,590,518

                                                                   ------------  ------------  -----------
Cash flows from investing activities:
   Capital expenditures...........................................     (232,375)     (125,757)      (4,882)
   Other assets...................................................     (150,862)      383,120           --
   CyberStorage acquisition (costs) credits.......................      238,890      (210,027)          --

                                                                   ------------  ------------  -----------
     Net cash provided by (used in) investing activities..........     (144,347)       47,336       (4,882)

                                                                   ------------  ------------  -----------
Cash flows from financing activities:
   Net reduction in credit line...................................           --    (7,035,445)  (2,695,932)
   Reduction (increase) of long term debt.........................     (329,724)      (84,608)     350,000
   Net proceeds from issuance of common stock for stock
     options and exercise of warrants.............................       89,864     2,215,850       77,000
   Issuance of preferred stock....................................    4,830,217    20,824,518           --
   Redemption of preferred stock..................................   (2,144,402)           --           --

                                                                   ------------  ------------  -----------
     Net cash provided by (used in) financing activities..........    2,445,955    15,920,315   (2,268,932)

                                                                   ------------  ------------  -----------
Effect of exchange rate changes on cash...........................      (22,323)      144,311      (59,769)

                                                                   ------------  ------------  -----------
Net increase (decrease) in cash and cash equivalents..............   (9,224,404)   13,670,065      256,935
Cash and cash equivalents--beginning of year......................   14,852,259     1,182,194      925,259

                                                                   ------------  ------------  -----------
Cash and cash equivalents--end of year............................ $  5,627,855  $ 14,852,259  $ 1,182,194

                                                                   ============  ============  ===========
Supplemental cash flow information:
   Cash payments of interest...................................... $     88,649  $    407,000  $   836,000
Noncash investing and financing activities:
   Conversion of preferred stock into common stock................ $  8,895,532  $  1,239,149
   Acquisition of CyberStorage:
     Fair value of assets acquired................................               $ 25,200,123
     Common stock issued..........................................                (22,440,000)
     Liabilities assumed..........................................                 (2,550,096)

                                                                                 ------------
   Acquisition costs paid.........................................               $    210,027

                                                                                 ============
   Preferred stock dividends paid in common stock................. $  1,159,659  $    118,388
</TABLE>


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

                                      F-5

<PAGE>

                         STORAGE COMPUTER CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A--Significant Accounting Policies

Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, CyberStorage System Corporation, Storage
Computer Europe Gmbh, Vermont Research Products, Inc., Storage Computer UK
Ltd., and Storage Computer France, SAS. All significant intercompany accounts
and transactions have been eliminated. The Company also has 20% ownership of
Storage Computer (Asia) Ltd. which is accounted for by the equity method.

Use of Estimates

   The preparation of 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.

Cash and Cash Equivalents

   The Company considers all highly liquid instruments with original maturities
of three months or less, to be cash equivalents.

Inventories

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

Property and Equipment

   Property and equipment are stated at cost. Depreciation of property and
equipment is computed utilizing the straight-line method for financial
reporting and accelerated methods for tax reporting, over a period not to
exceed 5 years.

Goodwill and other intangible assets

   Goodwill and other intangible assets result from the excess of the purchase
price over the fair values of the net assets acquired in the purchase of
CyberStorage Systems and are being amortized as follows:

         Identified intangibles     5 to 7 years
         Goodwill                 10 years

Fair Value of Financial Instruments

   The carrying amounts of cash, accounts receivable, other current assets,
accounts payable and accrued expenses and non-related party long-term debt
approximate fair value because of the short maturity of those instruments.

Revenue Recognition

   The Company recognizes revenue from product sales at the time of shipment.
Revenue from services is recognized over the contracted period or as the
services are provided. Revenue from license fees is recognized over the
contract period or when received for fully-paid license agreements.

                                      F-6

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



Costs of License Fees

   Costs incurred in connection with pursuing the Company's patent and
intellectual property rights consist of legal fees, the value of options
granted, professional consultant fees, travel and related expenses.

Research and Development

   Research and development costs are expensed as incurred.

   The Company reviews software development costs incurred in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", which requires that certain costs incurred in the development of
computer software to be sold or leased be capitalized once technological
feasibility is reached. The Company has not capitalized any software
development costs because development costs incurred subsequent to the
establishment of technological feasibility have not been material.

Foreign Currency Translations

   The functional currency for the Company's foreign operations is the U.S.
dollar. The translation from the applicable foreign currencies to U.S. dollars
is performed for all monetary assets and liabilities using current exchange
rates in effect at the balance sheet date; for non-monetary assets and
liabilities using historical rates; and for revenue and expense accounts using
a weighted average exchange rate during the period. The resulting translation
adjustments and gains or losses resulting from foreign currency transactions
which were not material, are included in the Company's statement of operations.

Income Taxes

   The Company follows Statement of Financial Accounting Standards No. 109
("SFAS 109") Accounting for Income Taxes. Under the asset and liability method
of SFAS 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

   During 2000, the Company determined that the carrying value of its deferred
tax asset could not be reasonably assumed and increased its valuation allowance
to fully reserve this asset during the fourth quarter of 2000.

Per Share Data

   The Company calculates per share data in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share". Basic
earnings per share is determined utilizing only the weighted average of
outstanding common shares. The effect of potentially dilutive options, warrants
and convertible securities is included in the calculation of diluted per share
data. Options, warrants and convertible securities have not been considered
since their inclusion would be anti-dilutive.

Stock-Based Compensation

   The FASB has issued Statement of Financial Accounting Standards No. 123,
("SFAS 123"), Accounting for Stock Based Compensation which requires disclosure
of pro forma effects as if SFAS 123 had been adopted. The Company has adopted
the disclosure only requirements of SFAS 123 and accounts for its employee
stock option plans under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.

                                      F-7

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



Recent Accounting Pronouncements


   During the fourth quarter of 2000, the FASB issued Emerging Issues Task
Force (EITF) 00-27 "Application of EITF issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingency
Adjustable Conversion Ratios, to certain Convertible Instruments". EITF No.
00-27 requires the remeasurement of the original issue discount on preferred
stock with characteristics similar to the convertible preferred stock issued by
the Company, during fiscal year 2000. This accounting change requires the value
of the warrants issued with the preferred stock to be included in the
calculating the beneficial conversion value. This resulted in a cumulative
charge of $809,364 to loss applicable to common stockholders in the fourth
quarter of 2000.

   In June 2001, the FASB finalized FASB Statements NO. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if they meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. The FASB also requires, upon adoption of SFAS 142, that the Company
classify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141. Our accounting for the acquisition of Cyberstorage
Systems in 2000 described in Note C complies with these provisions of SFAS 141
and 142.

   SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and ceases
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.

   The Company's previous business combination was accounted for using the
purchase method. All future business combinations will be accounted for under
the purchase method, which may result in the recognition of goodwill and other
intangible assets, some of which may subsequently be charged to operations,
either by amortization,"or impairment charges. For purchase business
combinations completed prior to June 30, 2001, the net carrying amount of
goodwill was $16,287,911 and other intangible assets were $3,958,906 as of
December 31, 2001. Amortization expense during the year ended December 31, 2001
was $2,831,736. The Company is assessing but has not yet determined how the
adoption of SFAS No. 141 and SFAS No. 142 will affect its future financial
position and results of operations.

   The Company did not acquire any goodwill or other intangible assets between
the period June 30, 2001 and December 31, 2001. The Company will apply the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter of 2002.

   In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for the Disposal of a Segment of
a Business." SFAS No. 144 became effective for fiscal years beginning after
December 15, 2001. The Company reviews the carrying values of its long-lived
and identifiable intangible assets for possible impairment whenever events or
changes in

                                      F-8

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

circumstances indicate that the carrying amounts of the assets may not be
recoverable. Any long-lived assets held for disposal are reported at the lower
of their carrying amounts or fair values less costs to sell. The Company
expects to adopt SFAS No. 144 in the first quarter of fiscal year 2002 and is
currently reviewing the effects of adopting SFAS No. 144 on its financial
position and results of operations.

Note B--Balance Sheet Components

<TABLE>
<CAPTION>
                                                    2001        2000
                                                 ----------- -----------
        <S>                                      <C>         <C>
        Allowance for doubtful accounts......... $   197,278 $   172,237

                                                 =========== ===========
        Inventories, net:
           Raw Material......................... $ 2,592,296 $ 1,078,700
           Work in Process......................      62,388   1,368,942
           Finished Goods.......................   1,156,974   1,868,462

                                                 ----------- -----------
                                                 $ 3,811,658 $ 4,316,104

                                                 =========== ===========
        Property and Equipment:
           Machinery and equipment.............. $ 2,308,963 $ 2,137,031
           Office furniture and fixtures........     503,276     502,912
           Research and development equipment...   1,834,222   1,823,047
           Other property.......................     231,202     192,730

                                                 ----------- -----------
               Total............................   4,877,663   4,655,720
           Less accumulated depreciation........   4,048,846   3,514,421

                                                 ----------- -----------
               Net property and equipment....... $   828,817 $ 1,141,299

                                                 =========== ===========
        Goodwill and other intangibles:
           Goodwill............................. $18,714,476 $18,953,366
           Other intangibles....................   5,200,000   5,200,000
                                                 ----------- -----------
                                                  23,914,476  24,153,366
                                                 ----------- -----------
        Less accumulated amortization
           Goodwill.............................   2,426,565     555,117
           Other intangibles....................   1,241,094     280,806
                                                 ----------- -----------
                                                   3,667,659     835,923
                                                 ----------- -----------
        Net goodwill and other intangibles...... $20,246,817 $23,317,443
                                                 =========== ===========
        Accrued Liabilities:
           Restructuring costs.................. $    88,426 $   675,725
           Salaries and wages...................     406,753     326,755
           Interest.............................          --     216,066
           Dividends............................     333,298     238,353
           Taxes................................      18,065     220,606
           Other................................     687,147     758,786

                                                 ----------- -----------
                                                 $ 1,533,689 $ 2,436,291
                                                 =========== ===========
</TABLE>

Note C--CyberStorage Systems Corporation Acquisition and Related Restructuring

Acquisition of CyberStorage Systems Corporation:

   On September 14, 2000 the Company completed the acquisition of CyberStorage
Systems Corporation in exchange for 2,200,000 shares of its common stock in a
transaction accounted for as a purchase. The results of operations are included
in the consolidated financial statements from that date. The purchase price was
allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess purchase price over the fair values of the net
assets acquired of approximately $24 million was allocated $5 million to certain

                                      F-9

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


identifiable intangible assets and $19 million to goodwill. The balance of the
purchase price of $1 million was allocated to current assets and equipment.

   The unaudited pro forma combined results of operations of the Company and
CyberStorage Systems for the year ended December 31, 2000, assuming that the
acquisition had occurred on January 1, 2000 and after giving effect to certain
pro forma adjustments are as follows:

<TABLE>
               <S>                                  <C>
               Revenues............................ $ 8,941,500
               Net loss............................  12,303,000
               Net loss per share basic and diluted $     (0.86)
</TABLE>

Restructuring:

   As a result of the CyberStorage Systems acquisition, the Company adopted a
plan to restructure its existing business to take advantage of the combined
technologies and resources of both companies to extend, accelerate and improve
the platform and delivery of its existing products and services. Accordingly,
provisions for $3.7 million in restructuring costs were charged to operations
in the third quarter of fiscal 2000, including $2.9 million related to
inventories charged to cost of products and services and $800,000 related to
personnel costs, cancellation of leases and contracts charged to restructuring
costs.

   In the fourth quarter of 2001, the Company made a provision of $1,000,000
for restructuring costs charged to cost of product and services related to
inventories associated with products which have been discontinued.

Note D--Due from Officers and Directors

   In August 2001, the Company's Board of Directors approved the issuance of
advances secured by demand notes receivable with interest at prime plus 1% to
executive officers and directors of the Company in the aggregate amount of
$500,000 for the purpose of purchasing the common stock of the Company in the
public market. Demand notes receivable and accrued interest totaling $126,178
were outstanding at December 31, 2001.

   The Company's Board of Directors also approved a temporary advance to the
Chief Executive Officer of the Company of up to $1,750,000 with interest at
prime plus 1%. An advance and accrued interest of $1,314,620 was outstanding at
December 31, 2001. Notes payable to the Chief Executive Officer due in April
2002 (See Note E) and related accrued interest totaling $1,084,529 were offset
against the temporary advance at December 31, 2001. In January 2002, $1,000,000
of the temporary advance was repaid and the balance plus accrued interest to
the date of repayment was offset against the notes payable and accrued interest
due to the Chief Executive Officer.

Note E--Borrowing Arrangements

   At December 31, 1999 the Company had a demand bank line of credit with
maximum borrowings of $6,900,000 secured by all assets of the Company. In
connection with an amendment to the note in 1999, the Company issued a warrant
to purchase 25,000 shares of the Company's common stock to the bank at an
exercise price of $3.00 per share to expire in October 2009. The warrants were
valued using the Black Scholes option-pricing model. The resulting value of
$111,387 was accounted for as additional interest on the debt in 1999. The loan
agreement provided for interest at the bank's prime rate plus .25%.

   At December 31, 1999, the Company was in violation of certain covenants of
the bank line of credit. In April and May 2000 the Company reached agreements
with the bank on new terms extending the Company's line of credit until
December 31, 2000 and waiving violation of all covenants on these dates.
In connection therewith the Company issued additional warrants to purchase
25,000 shares of common stock at $15.00 per share to expire in May 2010. The
value of these warrants of $114,434 was charged to interest expense in 2000.

   The Company repaid its bank borrowings in August 2000 with proceeds of
equity financings consummated in 2000. Interest expense amounted to $163,800
and $711,886 for 2000 and 1999, respectively.

                                     F-10

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Long term debt in the amount of $250,000 at December 31, 1999 was payable to
the president of one of the Company's major customers who was also then a
member of the Board of Directors. The note accrued interest at 6% and was
convertible into the Company's common stock at $2.00 per share. Interest
amounted to $4,917 and $10,083 for 2000 and 1999. This debt plus accrued
interest was converted into 132,500 shares of common stock of the Company in
June 2000.

   Long-term debt in the amount of $810,000 at December 31, 2001 and 2000 is
payable to the Chief Executive Officer and stockholder of the Company. The note
is unsecured, and $710,000 bears interest at prime plus 1%, and $100,000 bears
interest at 6% and is convertible into the Company's common stock at $4.00 per
share. Interest expense related to the obligation amounted to $62,484, $84,697
and $68,632, for 2001, 2000 and 1999. This debt becomes due upon demand in
April 2002. This note and related accrued interest were offset against a
temporary advance due from the Chief Executive Officer at December 31, 2001.
See Note D.

   Long-term debt in the amount of $343,750 at December 31, 2001 is payable to
a investment company for an unsecured term loan. The note bears interest at
12%, is paid $10,417 monthly plus interest and matures September 2004. Interest
expense was $44,589 and $17,123 in 2001 and 2000, respectively.

   Long-term debt in the amount of $269,688 at December 31, 2001 is payable to
an officer and stockholder of the Company. The note is unsecured, bears
interest at 10%, is payable $15,000 monthly including interest and matures
January 2004. Interest expense was $35,819 and $14,547 in 2001 and 2000,
respectively.

   Annual maturities of the Company's debt are as follows:

<TABLE>
                             <S>          <C>
                             December 31,
                                2002..... $285,254
                                2003.....  234,434
                                2004.....   93,750
                                          --------
                                TOTAL.... $613,438

                                          ========
</TABLE>

Note F--Related Party Transactions

   The Company leases plant and office facilities from an affiliated entity
under a noncancellable, five-year, triple net operating lease agreement, which
was entered into as of December 1, 2000. The lease provides for monthly rental
payments of $25,000 commencing in January 2001, and is increased annually based
on a change in the consumer price index. Additionally, the lease provides for
an additional five-year renewal option by the Company and contains no purchase
option. Rent expense under the current and prior lease amounted to $300,000,
$226,400 and $224,800, respectively for the current and two prior years.
Minimum future rental payments on this lease amount to $300,000 annually for
the years 2002 through 2005.

   The president of one of the Company's major customers is a former member of
the board of directors of the Company who resigned his directorship in June
2000.

   See Notes D and E for further information on related party transactions.

Note G--Commitments

   The Company leases certain property and equipment under noncancellable
operating leases, including related party leases, which expire at various dates
through 2006. Future minimum lease payments are $399,005, $341,408, $307,958,
$281,264 and $2,322 for the years 2002 through 2006, respectively. Amounts
charged to operations for operating leases were $419,740, $49,000 and $232,000
for the years ended December 31, 2001, 2000 and 1999, respectively.

                                     F-11

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



Note H--Stock Option Plans

   The Company's 1994, 1999, and 2000 Stock Incentive Plans provide for the
granting of options to purchase up to 4,598,930 shares of common stock. Option
activity during 2001, 2000 and 1999 is summarized as follows:

<TABLE>
<CAPTION>
                                                   Weighted Average
                                       Number of   Option Price Per
                                        Shares          Share
                                       ----------  ----------------
            <S>                        <C>         <C>
            Balance--December 31, 1998  1,472,400       $1.64
               Granted................  1,576,650        1.22
               Exercised..............    (50,000)       1.54
               Canceled............... (1,209,800)       1.30

                                       ----------
            Balance--December 31, 1999  1,789,250        1.51
               Granted................  1,340,230        7.69
               Exercised..............   (631,269)       3.19
               Canceled...............   (278,624)       1.97

                                       ----------
            Balance--December 31, 2000  2,219,587        5.50
               Granted................  1,122,000        5.38
               Exercised..............    (63,611)        .83
               Canceled...............   (432,753)       4.32
                                       ----------
            Balance--December 21, 2001  2,845,223        5.75
                                       ==========
</TABLE>

   Options granted generally vest over a period not to exceed four years.
Options for 1,113,663 shares are exercisable at December 31, 2001 at exercise
prices ranging from $.88 to $12.13 and a weighted average price of
approximately $5.79 per share, with a weighted average remaining contractual
life of approximately eight and one half years. At December 31, 2001, options
to purchase 157,733 shares were available for grant under the plan.

   The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
There was no compensation expense recognized in 2001, 2000 or 1999. If the
Company had elected to recognize compensation cost for the plans based on the
fair value at the grant date for awards under the plans, consistent with the
method prescribed by SFAS No. 123, pro forma net loss applicable to Common
Shareholders would have been $24,418,981 in 2001, $22,968,025 in 2000 and
$6,431,002 in 1999. Pro forma net loss applicable to common stockholders per
basic and diluted share applicable to common stockholders would have been $1.54
in 2001, $1.80 in 2000 and $.57 in 1999.

   The fair value of the Company's stock options used to compute pro forma net
income and net income per diluted share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1999 through 2001: dividend yield of
0%; expected volatility of 80%; a risk free interest rate ranging from 4.50% to
6.11%, and an expected holding period of four years. The weighted average fair
value per share at the date of grant was $6.46, $5.65 and $.79 for the years
2001, 2000 and 1999, respectively.

                                     F-12

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   All options outstanding at December 31, 2001 are categorized by the ranges
shown in the table below:

<TABLE>
<CAPTION>
                                                                Weighted Average
                                               Weighted Average    Remaining
                                                Exercise Price  Contractual Life      Number of
Range                                             Per Share         in Years           Shares
-----                                          ---------------- ----------------      ---------
<S>                                            <C>              <C>              <C>
$.88 to $1.75.................................      $ 1.30            6.9               407,598
$2.50 to $7.00................................        5.21            8.8             1,934,825
$8.75 to $12.50...............................       11.95            8.8               502,800
                                                                                      ---------
                                                                                      2,845,223
                                                                                      =========

All options exercisable at December 31, 2001 are categorized by the ranges shown in the table below:

                                                                Weighted Average
                                               Weighted Average    Remaining
                                                Exercise Price  Contractual Life      Number of
Range                                             Per Share         in Years           Shares
-----                                          ---------------- ----------------      ---------
$.88 to $1.75.................................      $ 1.34            7.1               163,039
$2.50 to $7.00................................        4.04            8.5               648,944
$8.75 to $12.50...............................       11.95            8.8               301,680
                                                                                      ---------
                                                                                      1,113,663
                                                                                      =========
</TABLE>

Note I--Income Taxes

   During 2000, the Company determined that carrying value of deferred tax
assets may not be realized and accordingly increased the valuation allowance at
December 31, 2000 to fully reserve the asset.

   At December 31, 2001 and December 31, 2000, the Company has net deferred tax
assets as follows:

<TABLE>
<CAPTION>
                                                    December 31,
                                             -------------------------
                                                 2001         2000
                                             ------------  -----------
         <S>                                 <C>           <C>
         Accounts receivable reserve........ $     42,000  $    52,000
         Inventory costs....................      739,000      926,000
         Reserve on other assets............      102,000      102,000
         Deferred revenue...................      165,000      148,000
         Accrued expenses...................       35,000       17,000
         General business tax credits.......      818,000      622,000
         Domestic operating loss carryover..    8,627,000    4,819,600
         Foreign operating loss carryover...    3,177,000    2,491,000
                                             ------------  -----------
            Total deferred tax assets.......   13,705,000    9,177,600
         Valuation allowance................  (13,705,000)  (9,177,600)
                                             ------------  -----------
         Net deferred tax assets, noncurrent $         --  $        --
                                             ============  ===========
</TABLE>

   The domestic operating loss carryovers, amounting to approximately
$39,900,000 expire at various dates through 2021 and the foreign operating loss
carryovers amounting to approximately $7,000,000 can be carried forward
indefinitely. The Company is subject to Internal Revenue Code provisions which
limit the domestic net operating loss carryovers available annually. The
general business tax credits expire at various dates through 2021.

                                     F-13

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   The United States, foreign, and state components of the tax provision
(benefit) are as follows:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                         ----------------------------------------
                                                             2001           2000        1999
                                                         ------------   -----------  -----------
<S>                                                      <C>            <C>          <C>
Current:
       United States...................................  $         --   $        --  $  (199,868)
       Foreign.........................................            --         8,026           --
       State...........................................            --        26,826           --
                                                         ------------   -----------  -----------
                                                                   --        34,852     (199,868)

                                                         ------------   -----------  -----------
Deferred:
       United States...................................            --     1,781,331           --
       Foreign.........................................            --            --           --

                                                         ------------   -----------  -----------
                                                                   --     1,781,331           --
                                                         ------------   -----------  -----------
   Provision (benefit) for income taxes................  $         --   $ 1,816,183  $  (199,868)

                                                         ============   ===========  ===========

   At December 31, 2001, the Company's foreign entities have accumulated deficits. The Company
intends its investments in these entities to be permanent.

   The following table reconciles the provision for taxes with the expected income tax obligation
obtained by applying the United States federal statutory rate to pretax income.

                                                             2001           2000        1999
                                                         ------------   -----------  -----------
Loss before income taxes................................ $(13,216,813)  $(8,159,913) $(4,776,195)

                                                         ------------   -----------  -----------
Expected benefit at statutory rate of 34%...............   (4,494,000)   (2,774,000)  (1,624,000)
Adjustments due to:
   Difference between foreign rate and U.S. statutory
     rate...............................................      (33,400)       (6,122)          --
   State taxes, net of federal benefit..................           --        17,705           --
   Increase in valuation reserve........................    4,527,400     4,578,600    1,624,000
   Adjustment of prior year tax refunds.................           --            --     (199,868)

                                                         ------------   -----------  -----------
Provision (benefit) for income taxes.................... $         --   $ 1,816,183  $  (199,868)

                                                         ============   ===========  ===========
</TABLE>

   Of the above loss before income taxes, approximately ($11,200,000),
($6,438,000) and ($4,200,000) was attributable to domestic operations and the
balance due to foreign operations in 2001, 2000 and 1999, respectively.

Note J--Legal Proceedings

   In December 2001, Marketlink Technologies, LLC filed a civil action against
the Company in the Circuit Court for Oakland County, Michigan, alleging that
the Company owed them a $156,000 termination payment under the terms of a
manufacturers representative agreement that the Company terminated for cause in
April 2001 because of Marketlink's inability to sell the Company's products and
perform the services required by the agreement. In January 2002, the Company
filed counterclaims against Marketlink in this matter, including

                                     F-14

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Marketlink's breach of contract. The Company believes the claims of Marketlink
are without merit and denys all allegations. Further, the Company intends to
vigorously defend this action. The Company is unable to predict any outcome but
the Company does not believe that the Company's involvement in final settlement
of or litigation costs defending this claim will have a material effect on its
business, operating results or financial condition.

   In March 2001, the Company filed an action against XIOTech Corporation
("XIOTECH") and its parent company, Seagate Technology Inc. ("SEAGATE INC"), in
the United States District Court for the Northern District of Texas claiming
that its products infringe one of the Company's patents. In December, 2001, the
Company settled all matters in controversy that were pending in that action
against XIOTECH, SEAGATE INC., and a related company, Seagate Technology LLC
("SEAGATE LLC"). Specifically, such matters included the alleged infringement
of one of the Company's patents, namely the Company's U.S. Patent No.
5,893,919, by XIOTECH. The settlement between XIOTECH and the Company includes
a one-time $2,500,000 royalty payment to the Company by XIOTECH for a fully
paid up, royalty-free, worldwide, perpetual, license covering the '919 Patent,
with no right to sublicense, and a royalty free cross license agreement between
XIOTECH and the Company for all of the Company's respective patents.
Additionally, the Company entered into a cross license with SEAGATE, LLC
providing a royalty-free, worldwide, perpetual, cross license, with no right to
sublicense, between SEAGATE LLC and the Company for all of the Company's
patents and for all of SEAGATE LLC's storage system patents. All cross license
agreements entered into to include all patents of Storage Computer Corporation
and XIOTECH, and all storage system patents of SEAGATE LLC, including current
and later acquired patents, domestic as well as foreign. Further, the parties
agreed to dismiss all claims against each other and entered into certain mutual
releases covering the subject matter, from any other action that may be brought
as a result of these issues.

   Additionally, SEAGATE LLC has agreed to withdraw its oppositions in the
European Patent Office to the Company's '287 and '494 patents.

   During March 2001, the Company filed legal actions against Hitachi Data
Systems Limited in the United Kingdom for infringement of two of the European
patents in the Company's intellectual property portfolio. The trial date is set
for June 17, 2002.

   In October 2001, the Company filed a patent infringement action in the
United States District Court for the Northern District of Texas, against
Veritas Software Corporation and Veritas Software Global Corporation, alleging
that certain Veritas Software Corporation storage products infringe Storage
Computer's intellectual property patent number U.S. 5,893,919 entitled
"Apparatus and Method for Storing Data with Selectable Data Protection Using
Mirroring and Selectable Parity Inhibition." In February 2002, the Company
filed an additional patent infringement action in the United States District
Court for the Northern District of Texas, against Veritas Software Corporation
and Veritas Software Global Corporation alleging that certain Veritas Software
Corporation storage products infringe Storage Computer's intellectual property,
specifically U.S. 5,257,367 entitled "Data Storage system with Asynchronous
Host Operating System Communication Link". These actions have been referred to
a court appointed mediator with a mediation date set for late April 2002. In
March 2002, the Company filed a third patent infringement action against
Veritas Software Corporation and Veritas Software Global Corporation alleging
certain Veritas Software Corporation storage products infringe Storage
Computer's intellectual property patent number U.S. 6,098,128 entitled
"Universal Storage Management System." The Company's claim is for injunctive
relief, damages and legal costs arising from the alleged infringement.

   The outcome in the Hitachi and Veritas unresolved patent proceedings cannot
possibly be predicted, but the Company intends to vigorously pursue the
enforcement of the Company's intellectual property rights and the Company's
claims in these actions and against other manufacturers whose products the
Company believes infringe on the Company's patents and intellectual property
rights. The Company's failure to successfully enforce their patent rights could
have a material adverse effect on the Company's business, operating results and
financial condition.

                                     F-15

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company is involved from time to time in various other minor legal
actions in the ordinary course of its business which management believes will
not have a material adverse effect on its business, operating results or
financial position.

Note K--Convertible Preferred Stock

   The Company has authorized 1,000,000 shares of preferred stock, $.001 par
value. During 2000 the Board of Directors authorized the designation and
issuance of three series of convertible preferred stock. In August 2001 the
Board of Directors authorized the designation and issuance of Series E
convertible preferred stock. Series A, B, and C rank prior to other capital
stock of the Company and pari passu with each other. Series E ranks prior to
other capital stock of the Company but junior to Series A, B and C. The holders
of preferred stock have no voting rights except as provided by the laws of the
State of Delaware. Generally, as long as preferred shares are outstanding, the
Company must obtain approval by vote or consent of the preferred shareholders
to alter or change the rights, preferences or privileges of the preferred
stock, to increase the authorized number of shares of each preferred stock
class, or to create any new class or series of capital stock having a
preference over the preferred stock.

Series E Convertible Preferred Stock

   In August 2001, Series E Convertible Preferred stock was designated to
consist of 5,000 shares with a stated value of $1,000 per share and the Company
issued 5,000 shares. There are no dividends or premium amounts associated with
Series E. The Series E shares are convertible into common shares of the Company
at a fixed conversion price of $6.48. On the third anniversary date of issue,
the Company must convert any remaining outstanding shares into common stock of
the Company at $6.48 per share. The Company does not have the right to redeem
the Series E shares.

   In connection with the issuance of the Series E Convertible Preferred Stock,
the Company issued warrants to purchase 771,605 shares of common stock. The
warrants are exercisable at any time at an exercise price of $10.80 per share.
The value assigned to the warrants was approximately $2,804,000. In addition,
the Company recorded a beneficial conversion feature on the Preferred Stock of
$3,112,672.

   In the event of any liquidation, dissolution or winding-up of the affairs of
the Company, the holders of Series E will be entitled to a liquidation
preference equal to the stated value of the shares then outstanding after all
liquidation preferences are paid on the Series A, B and C shares then
outstanding.

   The terms of the Series E Designation, the securities Purchase Agreement and
related agreements contain registration rights, anti-dilution provisions and
other protective covenants. The Company has reserved 1,929,000 shares of common
stock for issuance upon conversion and exercise of warrants issued with the
Series E Convertible Preferred Stock.

Series A, B and C 8% Redeemable Convertible Preferred Stock

   Series A was designated in April and amended in August of 2000 to consist of
90,000 shares with a stated value of $100 per share, Series B was designated in
September 2000 to consist of 20,000 shares with the same stated value and
Series C was designated in October 2000 to consist of 12,000 shares with a
stated value of $1,000 per share. Dividends on Series A and B are cumulative
from the date of issue and are payable semi-annually beginning on December 31,
2000 at the rate of 8% payable in cash or the issuance of common shares
calculated using the applicable conversion price described below. Series C does
not require the payment of dividends.

                                     F-16

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   In the event of any liquidation, dissolution or winding-up of the affairs of
the Company, the holders of Series A and B will be entitled to a liquidation
preference equal to 130% of the stated value of the shares then outstanding
plus any accrued and unpaid dividends. The liquidation preference for Series C
is the stated value of the shares then outstanding plus an amount equal to 8%
per annum of such stated value from the issue date to the event of the
liquidation ("premium amount"). In the event of a reorganization, merger; sale,
transfer or disposition of substantially all of the assets of the Company; or a
change in more than 50% of the voting power of the Company, the holders will be
entitled to the greater of the liquidation preference described above or
consideration equivalent to that which would be received by a common
shareholder for the shares into which the preferred shareholder could convert
the then outstanding preferred shares. The liquidation value of Series A, C and
E Preferred Stock at December 31, 2001 was $1,300,000, $3,402,000 and
$2,500,000, respectively.

   The Series A and B shares and any accrued and unpaid dividends may be
converted into common stock of the Company at the option of the holder at any
time after 120 days from issue at a conversion price of the lower of $8.66 for
Series A and $13.41 for Series B or 82.5% of the market price or, if after 181
days from issue 78.5% of the market price or, if after 271 days from issue 75%
of the market price or, if after 361 days from issue 65% of market price. The
market price is the average of the three lowest closing prices during the last
30 trading days prior to the conversion. On the third anniversary date of
issue, the company must convert any remaining outstanding shares plus accrued
and unpaid dividends at the conversion price described above.

   The Series C shares and any premium amount may be converted into common
stock of the Company at the option of the holder at any time at a conversion
price of $13.25. Accordingly, the beneficial conversion feature was recorded at
the date of issuance as a dividend. After July 31, 2001 the conversion price is
the lower of $13.25 or the market price. The market price is the average of the
five lowest closing prices during the last 20 trading days prior to the
conversion. On the third anniversary date of issue, the company must convert
any remaining outstanding shares at $13.25 per share plus any premium amount.

   If the Company dishonors or rejects any conversion notice or fails to comply
with other contractual provisions, the holders may require mandatory redemption
of the shares for cash at a price of 125% of the stated value plus accrued and
unpaid dividends for Series A and B, and for Series C at a price of 120% of the
stated value plus the premium amount.

   At any time prior to the third anniversary date of issue, the company has
the option to redeem any outstanding preferred stock at 125% (120% for Series C
prior to November 1, 2001) of the stated value plus accrued and unpaid
dividends (or premium amount with respect to Series C) if the current market
price is less than $8.66 per share for Series A, $13.41 per share for Series B
and $13.25 per share for Series C.

   The terms of the Series A, B and C 8% Convertible Preferred Stock
Designations, the Securities Purchase Agreements and related agreements contain
registration rights, anti-dilution provisions, rights of first refusal with
respect to future issues of similar securities and other protective covenants.
The company has reserved 2,000,000 shares, 1,000,000 shares and 1,514,000
shares of common stock, respectively, for issuance upon conversion, payment of
dividends and exercise of warrants issued with the Series A, B and C 8%
Convertible Preferred Stock.

                                     F-17

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



Redeemable Convertible Preferred Stock Transactions

   Redeemable Convertible preferred stock transaction during the years ended
December 31, 2001 and 2000 are summarized as follows:

<TABLE>
<CAPTION>
                                               Shares    Series A     Series B     Series C         Total
                                               -------  -----------  -----------  -----------    -----------
<S>                                            <C>      <C>          <C>          <C>            <C>
Proceeds from issuance of shares of 8%
  convertible preferred stock:
   Issued in April and May 2000...............  60,000  $ 5,746,800                              $ 5,746,800
   Issued in August 2000......................  20,000    1,852,500                                1,852,500
   Issued in September 2000...................  20,000               $ 1,865,000                   1,865,000
   Issued in October 2000.....................  12,000                            $11,630,700     11,630,700

                                               -------  -----------  -----------  -----------    -----------
                                               112,000    7,599,300    1,865,000   11,630,700     21,095,000
Allocation of fair value to
  warrants using the Black-
  Scholes option-pricing model................           (2,183,300)  (1,342,000)  (2,006,000)    (5,531,300)
Beneficial conversion feature at commitment
  date charged to preferred stock (excludes
  $6,314,923 applicable to Series C charged
  directly to accumulated deficit)............           (5,416,000)    (523,000)                 (5,939,000)
Amortization of beneficial conversion feature,
  warrants and other costs charged to
  accumulated deficit.........................            3,420,833      500,000      131,961      4,052,794
Carrying value of preferred stock converted to
  common shares during the year............... (36,000)  (1,095,833)     (25,000)                 (1,120,833)

                                               -------  -----------  -----------  -----------    -----------
Balance of convertible preferred stock
  outstanding at December
  31, 2000....................................  76,000    2,325,000      475,000    9,756,661     12,556,661
Amortization of beneficial conversion feature,
  warrants and other costs charged to
  accumulated deficit.........................              933,333      441,666      738,712      2,113,711
Carrying value of preferred stock converted to
  common shares during the year............... (45,900)  (1,791,666)    (333,333)  (7,770,358)    (9,895,357)
Redempton of preferred stock for cash......... (17,000)    (466,667)    (583,333)                 (1,050,000)
                                               -------  -----------  -----------  -----------    -----------
Balance of convertible preferred stock
  outstanding at December 31, 2001............  13,100  $ 1,000,000  $        --  $ 2,725,015    $ 3,725,015
                                               =======  ===========  ===========  ===========    ===========
</TABLE>

                                     F-18

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   All of the convertible preferred shares were issued in placements to private
investors including an officer of the company in transactions that were exempt
under Section 4(2) of the Securities Act of 1933. The Company has registered
for resale the common stock underlying the preferred shares, related dividends,
premium amounts and warrants. In connection with these placements, the Company
paid investment banking fees, legal and accounting fees, registration and other
costs totaling $169,783 in 2001 and $1,175,450 in 2000 and in 2000 issued
86,000 warrants to investment bankers to purchase common stock exercisable for
three years at prices ranging from $8.66 to $21.71 per share. Warrants,
exercisable for three years, for 771,605 shares in 2001 and 753,132 in 2000
were issued to the private investors at prices ranging from $8.66 to $21.71 per
share. Warrant exercise prices approximated the market price of the Company's
common stock on the commitment date of each transaction. Warrants for 132,000
shares were exercised in the year ended December 31, 2000. As of December 31,
2001 and 2000, exercisable warrants for the purchase of 1,528,737 shares and
889,132 shares were outstanding, respectively. During Fiscal 2001, the Company
redeemed 17,000 shares of preferred stock at a premium of $1,093,983.

Note L--Business Segment Information

   The Company's operations are conducted in one business segment: the design,
manufacture and sale of high-performance scalable data storage, maintenance
services and, beginning in 2001, license fees. Revenues and long-lived assets
by geographic area are summarized as follows:

<TABLE>
<CAPTION>
                             United States   Europe   Eliminations  Consolidated
                             ------------- ---------- ------------  ------------
<S>                          <C>           <C>        <C>           <C>
2001:
   Domestic.................  $ 7,030,643  $  976,527 $         --  $ 8,007,170
   Export...................      761,047     261,089           --    1,022,136
   Exports to affiliates....      622,620          --     (604,299)      18,321
                              -----------  ---------- ------------  -----------
       Total revenues.......  $ 8,414,310  $1,237,616 $   (604,299) $ 9,047,627
                              ===========  ========== ============  ===========
   Long-lived assets........  $26,207,641  $   71,740 $ (4,808,845) $21,470,536
                              ===========  ========== ============  ===========
2000:
   Domestic.................  $ 3,607,464  $1,347,162 $         --  $ 4,954,626
   Export...................      992,678     119,789           --    1,112,467
   Exports to affiliates....      840,160          --     (401,625)     438,535

                              -----------  ---------- ------------  -----------
       Total revenues.......  $ 5,440,302  $1,466,951 $   (401,625) $ 6,505,628
                              ===========  ========== ============  ===========
   Long-lived assets........  $28,608,987  $  243,511 $ (4,149,715) $24,702,783
                              ===========  ========== ============  ===========
1999:
   Domestic.................  $ 4,541,522  $3,384,013 $         --  $ 7,925,535
   Export...................    2,460,664      63,281           --    2,523,945
   Exports to affiliates....    1,360,418          --   (1,284,240)      76,178

                              -----------  ---------- ------------  -----------
       Total revenues.......  $ 8,362,604  $3,447,294 $ (1,284,240) $10,525,658
                              ===========  ========== ============  ===========
   Long-lived assets........  $12,730,889  $  116,089 $(10,743,832) $ 2,103,146
                              ===========  ========== ============  ===========

Export sales from the United States are summarized as follows:

                                 2001         2000        1999
                             ------------- ---------- ------------
Far East....................  $   947,285  $1,416,467 $  2,331,076
Europe......................      436,382     415,530    1,442,336
Other.......................           --         840       47,670
                              -----------  ---------- ------------
                              $ 1,383,667  $1,832,837 $  3,821,082
                              ===========  ========== ============
</TABLE>

                                     F-19

<PAGE>

                         STORAGE COMPUTER CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   For the years ended December 31, 2001 and December 31, 1999 product sales to
one customer were in excess of 10% of revenues and amounted to $1,370,000 and
$2,246,000, respectively.

Note M--Quarterly Financial Results (Unaudited)

   Summarized quarterly results of operations for the two years ended December
31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                               First Quarter Second Quarter Third Quarter Fourth Quarter
                                               ------------- -------------- ------------- --------------
<S>                                            <C>           <C>            <C>           <C>
Year ended December 31, 2001
Revenues......................................  $ 2,059,362   $   950,913    $ 2,176,028   $  3,861,324
Operating loss................................   (2,641,917)   (4,077,592)    (3,558,731)    (3,216,028)
Net loss......................................   (2,418,632)   (4,010,443)    (3,669,872)    (3,117,866)
Net loss applicable to common stockholders....   (4,007,999)   (5,916,279)    (7,349,315)    (3,652,881)
Basic and diluted loss per share applicable to
common stockholders...........................  $     (0.26)  $     (0.37)   $     (0.47)  $      (0.19)

                                               First Quarter Second Quarter Third Quarter Fourth Quarter
                                               ------------- -------------- ------------- --------------
Year ended December 31, 2000
Revenues......................................  $ 2,094,998   $ 2,054,678    $ 1,037,920   $  1,318,031
Operating loss................................      (85,498)     (390,005)    (5,318,734)    (1,935,509)
Net loss......................................     (151,028)     (497,190)    (5,641,943)    (3,685,935)
Net loss applicable to common stockholders....     (151,028)   (1,118,540)    (6,633,784)   (12,957,182)
Basic and diluted loss per share applicable to
  common stockholders.........................  $     (0.01)  $     (0.09)   $     (0.53)  $      (0.87)
</TABLE>

   The above includes the following items in various quarters. The fourth
quarter 2001 includes revenues from license fees of $2,500,000 and an increase
in inventory reserves of $1,000,000 related to discontinued products. Third
quarter 2000 includes restructuring costs and an increase in inventory reserve
of approximately $3,700,000. Fourth quarter 2000 includes a write off of
approximately $2,194,000 deferred tax asset.

Note N--Valuation and Qualifying Accounts

   Changes in the accounts receivable and inventory reserves were as follows:

<TABLE>
<CAPTION>
                                                     Accounts
                                                    Receivable  Inventory
                                                    ---------- -----------
    <S>                                             <C>        <C>
       Balance at December 31, 1998................ $ 686,862  $   500,000
       Additions charged to costs and expenses.....   399,930      195,388
       Amounts used during year....................  (479,193)    (122,635)

                                                    ---------  -----------
       Balance at December 31, 1999................   607,599      572,753
       Recoveries credited to costs and expenses...  (119,626)   2,944,598
       Amounts used during year....................  (315,736)    (738,237)

                                                    ---------  -----------
       Balance at December 31, 2000................   172,237    2,779,114
       Additions changed to assets and expenses....    35,391    1,000,000
       Amounts used during year....................   (10,350)  (1,301,801)
                                                    ---------  -----------
       Balance at December 31, 2001................ $ 197,278  $ 2,477,313

                                                    =========  ===========
</TABLE>


                                     F-20