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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB
(Mark One)
             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, 1996
                                       or
            --- Transition Report Pursuant to Section 13 or 15(d) of
                     the Securities and Exchange Act of 1934
                  for the transition period from ______to______


Commission File No. 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)


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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

$0.001 PAR VALUE COMMON STOCK                           AMERICAN STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

NONE

                                (TITLE OR CLASS)

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  twelve 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-B 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-KSB or any amendments to this
Form 10-KSB.  X
            -----

The  aggregate  market  value  of the  Common  Stock of the  Registrant  held by
non-affiliates was approximately $41,528,505 as of March 27, 1997.

As of March 27, 1997, there were issued and outstanding 10,701,341 shares of the
Registrant's Common Stock, with a par value of $.001.


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


DOCUMENTS INCORPORATED BY REFERENCE
NONE

Transitional Small Business Disclosure Format           Yes          No   X
                                                            -----       -----





                          STORAGE COMPUTER CORPORATION


Securities and Exchange Commission
   Item Numbers and Description
   ----------------------------
<TABLE>
<CAPTION>

                                     PART I
                                                                                                                        PAGE
                                                                                                                        ----
<S>                <C>                                                                                                <C>

 ITEM 1.          Business...............................................................................................3

 ITEM 2.          Properties............................................................................................11

 ITEM 3.          Legal Proceedings.....................................................................................11

 ITEM 4.          Submission of Matters to a Vote of Security Holders...................................................12

                                     PART II

 ITEM 5.          Market for Registrant's Common Equity
                  and Related Stockholder Matters.......................................................................12

 ITEM 6.          Management's Discussion and Analysis of Financial
                  Condition and Results of Operations...................................................................14

 ITEM 7.          Financial Statements and Supplementary Data...........................................................21

 ITEM 8.          Changes In and Disagreements With Accountants
                  on Accounting and Financial Disclosure................................................................21

                                    PART III

 ITEM 9.          Directors, Executive Officers, Promoters and Control Persons,
                  Compliance with Section 16(a) of the Exchange Act.....................................................22

 ITEM 10.         Executive Compensation................................................................................25

 ITEM 11.         Security Ownership of Certain Beneficial Owners
                  and Management........................................................................................27

 ITEM 12.         Certain Relationships and Related Transactions........................................................28

 ITEM 13.         Exhibits and Reports on Form 8-K......................................................................30



</TABLE>



         Inasmuch as 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,  represents  the
Registrant's best good faith estimate for purposes of this Annual Report on Form
10-KSB,  and the Registrant  disclaims that such figure is binding for any other
purpose.  The aggregate market value of Common Stock indicated is based upon the
closing  sale price of the Common  Stock  ($15.375)  as reported by the American
Stock  Exchange  for  trading  on  March  27,  1997.  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.



                                      -2-


<PAGE>




                                     PART I

ITEM 1.  BUSINESS


THE COMPANY

         Storage   Computer   Corporation  (the  "Company"  or  "SCC")  designs,
manufactures,  markets and  supports  high-performance,  scalable  data  storage
solutions,   critical  to  success  in  high-availability  commercial  computing
environments. The Company pioneered the RAID 7(R) technology incorporated in its
Virtual Storage  Architecture(TM),  which forms the basis for all its disk array
product  families.  Based  upon  this  performance-optimized  architecture,  the
Company's disk array product families combine  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,  in capacities ranging from
36 gigabytes to over 4 terabytes of shared storage.

COMPANY HISTORY

         The Company's  predecessor,  Cab-Tek,  Inc., began  development of RAID
("Redundant  Array of  Inexpensive  Disks")  in late  1984.  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  resultant  RAID 7 technology  was
transferred to the Company,  which was incorporated in Delaware in August, 1991.
Products based upon the Company's  RAID 7 technology  began shipping to customer
production sites in the second half of 1992.

         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"), a wholly-owned
subsidiary of the Company,  acquired the entire business and  substantially  all
the property and assets of Vermont Research  Corporation ("VRC") in exchange for
shares of the Company's Common Stock (the "Reorganization").  The Reorganization
became  effective  on  March 6,  1995  and was  accounted  for as a  pooling  of
interests.

INDUSTRY OVERVIEW

         The  computer  systems  market is  undergoing  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 new  application  modes are  increasing  demand for data  storage  that is
scalable in terms of capacity, performance,  connectivity and manageability. The
market for high performance  storage is also driven by host computing  platforms
which  continue to make quantum  leaps in  processing  performance.  The Company
believes  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.  The  U.S.  Department  of
Commerce  estimates  the data  storage  market in 1997 to be $100  billion,  and
predicts that it will grow to $1 trillion by the year 2004.

                                      -3-







RAID TECHNOLOGY

         International Data Corporation ("IDC") reported that the multiuser disk
subsystems  market was nearly $24 billion in 1996.  RAID revenues  accounted for
86% of the total multiuser disk subsystems market,  with an annual growth factor
of 26%. IDC projects multiuser disk subsystems revenues of $27 billion in 1997.

         RAID is an emerging  data storage  technology.  A RAID disk array links
together  several  industry  standard disk drives into a single large disk drive
using a combination of hardware, firmware and software to achieve extremely fast
data transfer rates,  high levels of redundancy and large storage  capacity at a
relatively lower cost than embedded storage solutions.

         The  following  is a  discussion  of the  performance  capabilities  of
various  RAID  levels  as  well  as  some  of the  common  applications  of RAID
technologies at such levels:

<TABLE>
<CAPTION>


          RAID Level                            Attributes                               Applications
          ---- -----                            ----------                               ------------
<S>                              <C>                                        <C>
RAID-0                           Offers disk striping without parity        Quick reads and writes for large files
                                                                            without parity protection.

RAID-1: Disk Mirroring           High data reliability but high cost due    High reliability and fast data
                                 to duplication of disk drives and          transfer rates more than storage
                                 associated hardware.                       capacity and cost.

RAID-3: Parallel Data Access     Highest data transfer rate for large       High data  transfer  rates for large
                                 block  sizes  (high  bandwidth)  such as   block  writes.
                                 images.

RAID-5:  Independent Data        High data transfer rate for small          Applications that require frequent
Access                           transaction files.                         access to small blocks of data.

RAID-7:  Asychronous Data        Combines an asychronous hardware           Multi-host environments with a mix of
Access                           environment with a multi-tiered cache      application types.
                                 memory controlled by an embedded
                                 real-time operating system.

OmniRAIDTM                       Concurrent multiple RAID levels (0, 1,     For mixed applications and data
                                 3, 5, 7) applied to data, not to           types.  Protection at multiple levels
                                 physical array topology.                   provides performance scaling.


</TABLE>



RAID 7 PRODUCTS

RAID 7 Virtual Storage Architecture

         Storage Computer pioneered RAID 7 technology, implemented through its


                                      -4-





Virtual  Storage  Architecture,  which  forms the  basis for all its disk  array
product families. Based upon this architecture, the Company's disk array product
families combine high-end controller technology,  standard 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.  The  RAID 7  intelligent  operating  system
controls the  interaction  between the attached host processors and the physical
drives; it tracks where information is stored, by which host(s) that data can be
accessed and at what RAID level each piece of information  is stored.  Employing
dedicated SCSI channels for each disk drive, RAID 7 technology transfers data to
the  host(s)  and  the  processors  asynchronously.  In  the  extensions  to the
architecture,   additional  performance  optimizations  are  achieved  by  fully
distributing the intelligence,  memory,  parity and flow control  throughout the
array.

         The embedded  operating system controls the data flow, thus reducing or
eliminating   the   processing   bottlenecks   inherent   in  many   other  RAID
implementations.   The  Company's  embedded  operating  system  manages  several
components:  the central and channel memory, the distributed processors for each
of the drives and the associated  buffers,  the distributed  processors managing
each host and the related  dedicated  buffers,  plus a  high-speed  data bus and
separate  control bus. Each of these resources is controlled  independently  and
asynchronously.

OmniRAID and OmniForceTM

         With the Company's OmniRAID and OmniForce software solutions, users can
select the  appropriate  level(s)  of data  protection  within a broad  range of
options.  With these products,  data protection  levels can be customized by the
user, specifying the appropriate level of protection for every data transaction.
As  requirements  change  and as new  data is  added,  users  can  revise  their
selections  or add  multiple,  concurrent  protection  levels  while  optimizing
performance at the same time.  OmniRAID and OmniForce allow users the freedom to
scale  performance  and  data  protection  concurrently.  The  user  may  invoke
different levels of protection simultaneously for different data transactions to
achieve  a   cost-effective   business   continuance   strategy  and   increased
performance.

         OmniRAID.  Storage  Computer's  recently  introduced  OmniRAID software
system  combines  features of many RAID levels.  Concurrent  support for RAID 0,
RAID 1, RAID 3, RAID 5 and RAID 7 within a single array is possible  because the
RAID 7  architecture  bases  protection  modes on the data and does not  tightly
couple it to the underlying physical configuration.

         OmniForce.  With  OmniForce,  a new product  offering  announced in the
fourth quarter of 1996, currently undergoing initial shipments, Storage Computer
has  developed  a  product  to  provide  enterprise-level  business  continuance
services,  designed and optimized specifically for the open systems environment.
This online data  protection  facility  allows  primary  production  sites to be
multi-level-mirrored,  locally  and/or  remotely,  to ensure "hot  recovery"  of
critical data to keep the business running with minimal interruption of service.
OmniForce multi-level,  multi-site mirroring is an option suite supported across
the entire OmniRAID  SuperServer product lines and is designed to be implemented
concurrently with all OmniRAID features.

         OmniForce is a data continuity  suite of disaster  recovery tools which
provides  multi-site,  multi-level  mirroring.  OmniForce  offers  scalable data
continuity features, such as the ability to configure multiple concurrent levels
of local and remote data protection,  based on data prioritization.  OmniForce's
fully  user-scalable  protection at the file level, rather than the array level,
allows the user

                                      -5-





to choose the appropriate level of protection.

Storage Management

         Storage  AdministratorTM  enhances  the  monitoring  and control of the
Company's storage product using an open,  standards-based  management  protocol,
SNMP (Simple Network Management  Protocol),  the industry-standard IP (Internet)
communications  protocol  and a  built-in  Ethernet  LAN  (local  area  network)
connection.  This "open  systems"  design  allows  information  from the Storage
Administrator  to be accessed  through any SNMP  Management  Station,  and alarm
conditions  can be sent to  multiple  managers  simultaneously,  anywhere in the
world, over local or remote network connections.  Mission-critical  applications
requiring   uninterrupted  access  to  data  on  the  arrays  are  protected  by
operational  controls  within  the  Storage  Administrator  which  enable  early
detection  and  automatic  alert   notification  when  any  user-defined   alarm
thresholds are reached.

Hardware

         The Company  provides three separate  high-performance  storage product
sets, based on the RAID 7 Virtual Storage Architecture. They include: the RAID 7
Storage  Server (70- and  71-Series)  products,  the  high-performance  OmniRAID
Server  (72-Series),   and  the  enhanced   performance   OmniRAID   SuperServer
(73-Series) and OmniRAID SuperServer/ES (74-Series).

         70- and  71-Series  Storage  Servers.  Based  upon the  Raid 7  Virtual
Storage  Architecture,  the 70- and 71-Series  Storage Servers combine high-end,
intelligent  controller  technology,  disk drives, a scalable  distributed cache
memory  mechanism,  and a real-time  operating  system  software  environment to
deliver high performance,  fault-tolerant storage. The 70-Series is available in
both  desktop and  rackmount  configurations.  The  71-Series  is  available  in
rackmount and console configurations.

         72-Series  OmniRAID Server.  The 72-Series OmniRAID Servers include the
Company's  data-configurable  RAID  implementation  with  support  for  multiple
concurrent data protection  levels.  Both protection and performance  levels for
data can be specified  through the OmniRAID  Table Vector Parity and  Pipelining
features  available in this storage server family.  Initial rollout of these and
other  capabilities  took place with the  announcement of OmniRAID in the fourth
quarter of Fiscal 1996,  prior to which time these  features were available only
on the Company's Storage SuperServer product line.

         73-Series OmniRAID SuperServer. The OmniRAID SuperServer is a family of
performance-supercharged  storage  devices based on the RAID 7 Extended  Virtual
Storage Architecture.  Configurations include high-speed processors, larger base
memory, a dedicated SCSI channel for each drive, distributed intelligence,  SNMP
management,  Local  Management  Facility,  all  OmniRAID  features  and optional
support of OmniForce multi-level mirroring. Through OmniForce Intramirroring and
OmniRAID's Table Vector Parity, Pipelining, Post Write Parity and Dynamic Online
Expansion  features,  customers can specify RAID protection  levels 0,1,3,5,7 at
the file or dataset level to scale both data protection and  performance  levels
while  keeping costs under  control.  Internal  transfer  rates under the RAID 7
Extended Virtual Storage Architecture have been dramatically  increased by fully
distributing  the  intelligence,  memory,  parity  generation  and flow  control
throughout the array. The OmniRAID  SuperServer family features a combination of
redundant  power  and  cooling  systems,  multiple  redundant  array  management
options,  up to four hot-standby  drives,  non-volatile cache and optional fully
mirrored configurations.

                                      -6-







         74-Series  OmniRAID  SuperServer/ES.   Like  the  73-Series,  this  new
product, which made its public debut in March of 1997 at the Cebit trade show in
Hanover, Germany, is built upon the RAID 7 Extended Virtual Storage Architecture
and is available in base  configurations  of 130 GB (expandable to 4TB),  with a
minimum  256MB of memory,  and  includes  the full  OmniRAID  feature  set.  The
OmniRAID  SuperServer/ES  drive packaging makes it fully  front-serviceable  and
provides  large  storage  capacity in a small  footprint,  allowing  data center
managers to maximize use of their current computer room capacities.


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 the goal of the  Company to  continue to
market to existing  customers to leverage its multiple product  offerings and to
continue to expand its customer base for its high-performance storage solutions.


CUSTOMER SERVICE AND SUPPORT

         The Company offers its 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 into the customer's  business model.  Storage  Computer's
technical services organization  comprises a group of skilled support personnel,
located at Storage Computer's corporate  headquarters in Nashua, NH and in field
locations in the U.S., Europe and Asia.

         In addition to the Company's own support engineers and technicians, its
strategic  service  alliances with  third-party  service  providers enable it to
offer comprehensive,  high-quality  programs to support customers on a worldwide
basis.  Storage  Computer's  strategic service alliances formed with third-party
providers include some of the largest and most highly respected organizations in
the  service  industry.   Those  alliances  include  IBM  Service  Organization,
Technology  Service Solutions (a subsidiary of IBM) and DecisionOne (the company
formed in the merger between Decision ServCom and  Bell-Atlantic  Service).  All
in-house and third-party service technicians  supporting the Company's customers
are trained by Storage  Computer,  and service  parts are  generally  stocked in
local  service  offices.  Service  technicians are backed by a technical support
hotline staffed by support analysts at Storage Computer. Storage Computer always
takes the initial  service call,  determines  the logistics of the support plan,
and  manages  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 Data General Corporation, Digital Equipment Corporation, EMC Corporation, IBM
Corporation,,   Hewlett-Packard,   NCR  Corporation,   Storage  Technology,  Sun
Microsystems,  and more than 100 other public and private


                                      -7-





companies   provide  disk  arrays  for  a  wide  variety  of  computer  systems,
workstations  and PCs.  Although  SCC is  currently  unaware of any other vendor
offering an asynchronous  transfer RAID 7 disk array,  there can be no assurance
that the Company will be able to compete successfully against existing companies
or future  entrants  to the  marketplace.  While the Company  believes  that the
price-performance  characteristics  of its products are  currently  competitive,
increased  competition  including  the  introduction  of  new  products  by  the
Company's  competitors,  could result in price reductions,  reduced gross margin
and loss of market share,  any of which could  materially  adversely  affect the
Company's  business,  operating  results and  financial  condition.  Many of the
Company's  current  and  potential   competitors  have   significantly   greater
financial,  technical,  marketing  and other  resources  than the Company.  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 the Company. 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.  The  Company's  products  are sold  domestically  through  a
combination  of  direct  sales  personnel,   value-added   resellers  and  other
distributors. The Company's direct sales organization coordinates the activities
of the Company's  resellers and distributors  and seeks to actively  participate
with them in selling efforts in order to enable the Company to establish  strong
direct ties with its customers and end users.

         International.   The  Company   has   established   several   different
operational methods in order to penetrate and develop international markets. The
Company uses 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 its marketing
and sales efforts.

         Storage Computer Europe, GmbH, a wholly-owned subsidiary of the Company
located in Kelkheim,  Germany,  provides  sales and product  support  throughout
Central and Eastern Europe.  In September 1992, the Company entered into a joint
venture  agreement as a minority  shareholder and formed Storage Computer (Asia)
Ltd. for the purpose of selling and  servicing  the  Company's  products in Hong
Kong and China.  Similarly, in December 1995, the Company 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.
manufactures  products  and  supports  the sales and  service  of the  Company's
products in certain countries in Western Europe.

         The  remaining   international   markets  served  by  the  Company  are
coordinated  and  supported  from  the  United  States,  through  the use of the
Company's  independent  distributor  network.  The  Company's  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  to  establish   relationships   with
value-added resellers, who sell the Company's products to final end users.


                                      -8-






MANUFACTURING

         The Company's  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.  The  Company's  manufacturing  strategy  has  been  to  develop  close
relationships  with its suppliers and  subcontractors  and to exchange  critical
information,  in order to minimize capital investment and overhead  expenditures
and create flexibility for rapid expansion.

         The Company  relies upon a limited  number of  suppliers of several key
components  utilized in the  assembly  of the  Company's  products.  The Company
purchases  disk  drives  and  enclosures  from a  number  of  major  disk  drive
suppliers.  The Company's  reliance on its  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,  the Company 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 the
Company has been able to purchase its requirements of such components,  there is
no assurance  that the Company will be able to obtain its full  requirements  of
such  components  in the  future  or that  prices  of such  components  will not
increase.  In addition,  there can be no assurance 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 the Company's  products and could have a material adverse effect on
the Company's business, operating results and financial condition.


RESEARCH AND DEVELOPMENT

         Since its inception,  the Company has made  substantial  investments in
research and development.  The Company believes that its future performance will
depend  in large  part on its  ability  to  maintain  and  enhance  its  current
products,  develop  new  products  that  achieve  market  acceptance,   maintain
technological   competitiveness   and  meet  an  expanding   range  of  customer
requirements.

         The Company's future growth depends  substantially  upon the success of
the Company's RAID 7 Virtual Storage  Architecture  and related products as well
as new products which may be developed;  however, there can be no assurance that
the  Company's  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.  There can be no assurance that new
products  will be  introduced  on a timely  basis or at all. If new products are
delayed or do not achieve market acceptance,  the Company's business,  operating
results and  financial  condition  will be  materially  adversely  affected.  In
addition,  there can be no  assurance  that  customers  will not defer orders in
anticipation of new product introductions by the Company or its competitors.

         Products  like those  offered by the  Company  may  contain  undetected
software  errors or  failures  when  first  introduced  or as new  versions  are
released.  There can be no assurance that, despite testing by the Company and by
current and potential customers,  errors will not be found in new products after


                                      -9-







commencement  of commercial  shipments,  resulting in loss of or delay in market
acceptance,  which  could  have a material  adverse  effect  upon the  Company's
business, operating results and financial condition.

         The Company's  total expenses for research and  development  for fiscal
years  1996,  1995  and  1994  were  approximately  $2,785,000,  $2,116,000  and
$1,901,000  respectively.  The Company anticipates that research and development
expenses  will  increase in absolute  dollars in future  periods;  however,  the
amount  of  such  increases  cannot  be  accurately   predicted.   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 the  Company's  installed  base with
greater functionality, as well as to attempt to expand that installed base. (For
a  discussion  of recent and ongoing  research  and  development  expenses,  see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations").


PROPRIETARY RIGHTS

         The  Company's  policy is to protect  its  technology  by,  among other
things,  filing  patent  applications  with  respect  to  technology  considered
important  to the  development  of its  business.  The Company has been  awarded
certain  U.S.  patents and has  additional  U.S.  patent  applications  pending.
Foreign  counterparts of certain of these applications have been filed or may be
filed at the  appropriate  time.  The Company  decides on a  case-by-case  basis
whether and in what countries it will file foreign counterparts of a U.S. patent
application.  The Company  currently  has been granted two U.S.  patents and has
seven  pending  patent   applications,   some  of  which  are  continuations  of
applications for which patents have already issued, that relate to various RAID,
storage, fault tolerance and associated technologies. Although the Company often
seeks  patents on its  products,  the Company  believes that patents are of less
significance  in its  industry  than  such  factors  as  innovative  skills  and
technical  expertise,  frequency  of product  enhancements  and  timeliness  and
quality of support services provided by the Company.

         The Company  believes that its products,  trade marks and service marks
do not  infringe on the  proprietary  rights of third  parties.  There can be no
assurance,  however,  that third  parties  will not assert  infringement  claims
against  the Company in the future.  If such a claim is made,  the Company  will
evaluate the claim as it relates to its products and, if appropriate, may seek a
license to use the  protected  technology.  There can be no  assurance  that the
Company 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 the Company.  If the Company or its  suppliers  are
unable to license any such protected technology, the Company could be prohibited
from  incorporating  or marketing  such  products.  The Company could also incur
substantial  costs to redesign  its products or to defend any legal action taken
against  it.  Should  the  Company's  products  be found to  infringe  protected
technology,  the Company could be required to pay damages to the infringed party
or be enjoined from manufacturing and selling such products.

         The Company requires all employees, and technical and other consultants
and advisors to execute  confidentiality  agreements  upon the  commencement  of
employment  or  consulting  relationships  with the  Company.  These  agreements
generally provide that all confidential  information  developed or made known to
the  individual  during the  course of the  individual's  relationship  with the
Company is to be kept  confidential and not disclosed to third parties except in
specific  circumstances.  All of the Company's key technical employees have also
entered into agreements providing for the assignment of rights to inventions

                                      -10-







made by them while in the employ of the Company.  Although the Company continues
to take protective measures to protect its proprietary technology,  there can be
no assurance that these measures will be  successful.  In addition,  the laws of
certain  foreign  countries  may not  protect the  Company's  rights to the same
extent as U.S. law.


EMPLOYEES

         As of December 31, 1996,  the Company had 113 full time  employees.  Of
the total, 95 were based in the United States, 11 in the United Kingdom and 7 in
Germany.  The Company's ability to develop,  manufacture and market its products
and to  establish  and  maintain a  competitive  position in its  industry  will
depend,  in large  part,  upon its  ability  to  attract  and  retain  qualified
technical,  marketing  and  managerial  personnel,  of  which  there  can  be no
assurance.  The Company believes that its relations with its employees are good.
None of the  Company's  employees  is  represented  by a  collective  bargaining
agreement.


ITEM 2.  PROPERTIES

         The  Company  currently  leases,  from an  affiliate,  a 35,000 sq. ft.
facility which is occupied by its light manufacturing,  research and development
and office  operations in Nashua,  New  Hampshire.  In 1996,  the Company paid a
monthly rental of $15,600 to lease this facility.  The current monthly rental is
$16,300,  which the  Company  believes  is  comparable  to  rentals  of  similar
properties  in the area and  indicative of the fair market rental which could be
obtained from an unrelated third party in an arm's-length transaction. See "Item
12 - Certain Relationships and Related  Transactions." The Company leases all of
its domestic and international outside sales offices. All Company properties and
premises are adequately  protected by insurance  coverage.  The Company believes
that its  existing  facilities  are  adequate  for its  current  needs  and that
additional space will be available as needed.


ITEM 3.  LEGAL PROCEEDINGS

         On December 14, 1994,  Raul Kacirek,  a former employee of the Company,
instituted a suit against the Company in Superior Court,  Cheshire  County,  New
Hampshire  (Dkr. No.  94-E-0102).  The suit alleges that the plaintiff  properly
exercised,  in part,  an  employee  stock  option and is  entitled to have up to
300,000  shares  of  Common  Stock  issued  to him,  but does not seek  monetary
damages.  The  Company has filed  responsive  pleadings  (including  motions and
counterclaims)  and  believes  that the  options  were not  properly  and timely
exercised,  and that the Complaint is otherwise without merit, and it intends to
defend the case vigorously.

         During the third  quarter of 1995,  Michael J.  Flannery,  former  Vice
President of U.S.  Sales,  brought  several  legal  actions  against the Company
and/or its President and Chief Executive Officer, Theodore J. Goodlander, two of
which have been  discharged as described  below.  On July 18, 1995, Mr. Flannery
charged the Company and Mr.  Goodlander in Plymouth  Superior Court, in Plymouth
County, Massachusetts,  for wrongful termination of employment due to disability
and age discrimination,  tortious  interference with advantageous  relations and
other  allegations  pertaining to his dismissal from the


                                      -11-





Company  (Massachusetts  Civil Action No.  95-154-A).  On January 14, 1997,  the
court dismissed Mr.  Flannery's age and disability  discrimination  claims.  The
Company  believes that the remaining  counts which were filed,  and other claims
made by Mr.  Flannery,  are untrue and without merit,  and that all  obligations
owed to Mr. Flannery have been satisfied and paid in full. The remaining actions
have been, and will continue to be, vigorously contested.

         The Company does not believe that its  involvement in or the resolution
of the two legal  proceedings  discussed  above will have a material effect upon
the Company's business, operating results or financial condition. The Company is
not presently aware of, or involved in, any other litigation.


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

         None.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         The  Company's  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 the Common  Stock of the  Company  for the fiscal  years ended
December 31, 1996 and 1995, as reported by the American Stock Exchange.


FISCAL 1996                           High                    Low
                                      ----                    ---
First Quarter                        $11.00                  $8.25
Second Quarter                      $18.375                  $8.25
Third Quarter                        $19.00                  $12.25
Fourth Quarter                       $15.00                 $10.375

FISCAL 1995                           High                    Low
                                      ----                    ---
First Quarter                        $13.75                  $6.50
Second Quarter                      $11.875                  $6.25
Third Quarter                        $10.25                  $7.875
Fourth Quarter                      $10.125                  $7.00


         On March 27,  1997,  there  were 374 record  holders  of the  Company's
Common Stock. The Company believes the actual number of beneficial owners of the
Common  Stock is greater than the stated


                                      -12-




number of  holders  of record  because a number of the  shares of the  Company's
Common Stock is held in custodial or nominee accounts for the benefit of persons
other than the record holder.

         The Company has never paid any dividends and does not anticipate paying
any dividends in the  foreseeable  future.  The Company is also  restricted from
paying dividends under the terms of its bank credit facility.





                                      -13-


 ITEM 6.

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

OVERVIEW

         Storage  Computer  Corporation  designs,   manufactures,   markets  and
supports high-performance,  scalable data storage solutions, critical to success
in   high-availability   commercial   computing   environments.   The  Company's
predecessor,  Cab-Tek,  Inc.,  began  development of RAID  ("Redundant  Array of
Inexpensive  Disks") in late 1984. 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 resultant  RAID 7 technology  was  transferred to the Company,
which was  incorporated  in Delaware in August,  1991.  Products  based upon the
Company's RAID 7 technology  began shipping to customer  production sites in the
second half of 1992. Pursuant to the Agreement and Plan of Reorganization  dated
October 4, 1994,  as amended by a First  Amendment to the  Agreement and Plan of
Reorganization  dated January 31, 1995,  VRP, a  wholly-owned  subsidiary of the
Company,  acquired the entire  business and  substantially  all the property and
assets  of VRC in  exchange  for  shares  of the  Company's  Common  Stock  (the
"Reorganization").  The Reorganization became effective on March 6, 1995 and was
accounted for as a pooling of interests.  Accordingly, the results of operations
of VRC are included in the  accompanying  financial  statements  for all periods
presented as if the Reorganization had occurred at the beginning of the earliest
financial reporting period presented. In connection with the Reorganization, the
Company registered certain shares with the Securities and Exchange Commission to
exchange  with VRC  shareholders  whereby  the Company  became an SEC  reporting
company for the first time. The combined financial reporting should be analyzed,
in the opinion of  management,  in the context that prior to March 6, 1995,  the
Company  and  VRC  operated  as  independent  business  concerns  and had (i) no
coordination of business efforts,  (ii) redundant expenses and (iii) independent
management.

Results of Operations

         The  following  table  reflects  consolidated  statement of  operations
information stated as a percentage of net sales for the years ended December 31,
1996, 1995 and 1994.

<TABLE>
<CAPTION>


                                                                1996                 1995                1994
                                                                ----                 ----                ----

<S>                                                          <C>                   <C>                 <C>
Net sales                                                    100.00%               100.00%             100.0%
Cost of goods sold                                             49.40                52.10               43.30
                                                               -----                -----               -----

Gross Profit                                                  50.60%                47.90%             56.70%
                                                              ------                ------             ------


                                       14






Operating Expenses
  Selling and marketing                                       19.70                 20.80               20.30
  General and administrative                                   3.80                 4.70                8.90
  Research and development                                     9.00                 9.10                13.10
  Royalty expense                                              0.00                 2.80                2.30
                                                               ----                 ----                ----
                                                              32.50                37.40               44.60
                                                              -----                -----               -----
Operating income (loss)                                       18.10                10.50               12.10
                                                              -----                -----               -----

Other income (expense)                                         (.30)                 .10                3.60
                                                               -----                                    ----

Income before income taxes                                     17.80                10.60                8.50
                                                               -----                -----                ----
Provision for federal and state income taxes
  Current tax expense (benefit)                                 6.00                 3.80                7.20
  Deferred tax expense (benefit)                               (4.60)                (3.90)                 --
                                                               ------                ------                 --
                                                                1.40                (0.10)               7.20
                                                                ----                ------               ----
Net income (loss)                                              16.40%               10.70%               1.30%
                                                               ======               ======               =====
</TABLE>




NET SALES

         Net sales  for the year  ended  December  31,  1996 were  approximately
$31,011,000,  reflecting an increase in combined  product sales of approximately
$7,881,000 or 34% compared with the year ended  December 31, 1995. Net sales for
the year ended December 31, 1995 was  approximately  $23,130,000,  reflecting an
increase in combined product sales of  approximately  $8,607,000 or 59% compared
with the year ended December 31, 1994.

         The increase in net sales in 1996 and 1995 was  principally  the result
of  increased   international  and  domestic   distribution  channels  utilizing
value-added  resellers,   the  opening  of  corporate  sales  offices/locations,
increased  marketing  and sales efforts and expansion of the direct sales force.
The  increase in sales is strictly due to the increase in the volume of products
sold. The Company did not initiate any material price changes during the period.

         Total sales have been  expressed as a percentage of sales by geographic
region as follows:

                         Year Ended            Year Ended         Year Ended
                      December 31, 1996     December 31, 1995  December 31, 1994
                      -----------------     -----------------  -----------------

US Domestic Sales            47%                   39%               47%
European Sales               23%                   38%               26%
Other Regions                30%                   23%               27%



                                      -15-

         The changes in  percentages  between 1995 and 1996 were  primarily  the
result of an increase in sales and marketing activities  domestically  including
the  expansion of the US direct sales force and increased  product  awareness in
the United States.

         The changes in  percentages  between 1994 and 1995 were  primarily  the
result of the  acquisition of Vermont  Research  Corporation in 1995 which had a
higher  level  of  international  sales as a  percentage  of  total  sales,  the
additional  sales generated by the Western  European sales office located in the
United Kingdom which was acquired as a result of the  Reorganization in March of
1995 and independent  factors  associated with geographic market penetration and
product awareness on a region by region basis.

         All US export sales are  denominated  in US dollars to limit the amount
of foreign  currency  risk.  Domestic  sales  which  occur  through  the Central
European sales office  located in Germany are conducted in the local  functional
currency.  Domestic sales which occur through the Western  European sales office
located in the United Kingdom are  denominated  primarily in US dollars.  Export
sales from the  European  sales  offices  are  substantially  denominated  in US
dollars.  For a further discussion of foreign  operations,  see the analysis and
discussion  of  Foreign  Operations  in  Note  I in the  accompanying  financial
statements,  pages  F-29  through  F-30  for a  more  detailed  analysis  of the
Company's net sales.


COST OF GOODS SOLD

         Cost of goods sold for the years ended December 31, 1996, 1995 and 1994
was approximately $15,327,000, $12,054,000 and $6,295,000, respectively, or 49%,
52% and 43% of net sales.

         The decrease in cost of goods sold percentage  between 1996 and 1995 of
approximately  3  percentage  points was  primarily  caused by the  reduction in
component costs as a result of continued  management of the outsourcing process,
downward  market pricing of  subcomponents  such as DRAM,  reduction of overhead
costs as a  percentage  of  overall  sales  due to the  elimination  of  certain
redundant  manufacturing  expenses associated with Vermont Research  Corporation
and the allocation between cost of goods sold and other operating expenses.  The
decrease  was  offset in part as a result of the  sales mix  shifting  to larger
system sales that incorporate a larger percentage of non-proprietary components,
such as disk drives, which have a lower gross profit margin.

         The increase in cost of goods sold percentage  between 1995 and 1994 of
approximately  9 percentage  points was primarily  caused by the  acquisition of
Vermont Research  Corporation in 1995 which had a larger revenue base in 1994 to
spread  its fixed  overhead  cost as a  percentage  of sales and a change in the
sales mix shifting to larger system sales that  incorporate a larger  percentage
of non  proprietary  components,  such as disk drives,  which have a lower gross
profit margin.


SALES AND MARKETING

                                      -16-





         Sales and  marketing  expenses  for the years ended  December 31, 1996,
1995  and  1994  were  approximately   $6,118,000,   $4,821,000  and  $2,948,000
respectively or 20%, 21% and 20% of net sales.

         The dollar increase of approximately  $1,297,000 and $1,873,000 between
1996 and 1995,  and 1995 and 1994,  respectively,  is  primarily  attributed  to
increased  cost  associated  with the  continued  development  and  expansion of
international sales and marketing activities and expansion of domestic sales and
marketing efforts, including but not limited to, the expansion of a direct sales
force in 1996.


GENERAL AND ADMINISTRATIVE

         General and  administrative  expenses for the years ended  December 31,
1996, 1995 and 1994 were  approximately  $1,186,000,  $1,090,000 and $1,296,000,
respectively or 3.8%, 4.7% and 8.9% of net sales.

         The overall percentage decrease is primarily  attributable to the sales
growth between 1994 to 1996.  The relative  stable dollar cost  associated  with
administrative   expenses  is   attributable   to  the  change  in  the  mix  of
administrative costs between years. The dollar increase between 1996 and 1995 is
a direct result of increased  legal,  accounting  and other  professional  fees.
During the year ended December 31, 1994 VRC  administration  expenses  accounted
for   approximately   50%  of  the  total  true   dollar  cost  of  general  and
administrative  expenses  and  during  1995 a  portion  of these  expenses  were
eliminated due to the Reorganization.


RESEARCH AND DEVELOPMENT

         Research  and  development  expenses  for the years ended  December 31,
1996, 1995 and 1994 were  approximately  $2,785,000,  $2,116,000 and $1,901,000,
respectively, or 9%, 9% and 13% of net sales.

         The stabilization of the research and development expenses between 1996
and 1995 is directly  attributable  to the  consolidation  of the  research  and
development  efforts to one location and the allocation of costs associated with
research and development  efforts. The percentage decrease between 1995 and 1994
was  primarily  attributed  to the  Reorganization  with  VRC  resulting  in the
elimination  of certain  redundant  expenses  and  integration  of the  separate
companies research and development departments.

ROYALTY EXPENSE

         Royalty  expense for the years ended  December 31, 1996,  1995 and 1994
was  approximately  $0, $649,000 and $332,000 or 0%, 2.8% and 2.3% of net sales.
The  elimination of the royalty expense was the result of the termination of the
royalty agreement, with a related party, by mutual consent.


OTHER INCOME/EXPENSE

         The  components  of other  income/expense  for 1996 were  approximately
$209,000  in  interest  expense,  $56,000 of other  income,  $32,000 of interest
income  and  $29,000  of  foreign   exchange   gain.  The  components  of  other
income/expense  for  1995  were  approximately  $238,000  in  interest  expense,
$135,000  of a  reorganization  credit,  $92,000  of other  income,  $85,000  of
interest  income and $9,000


                                      -17-






in foreign exchange gain. The components of other  income/expense  for 1994 were
approximately $506,000 of reorganization expense,  $214,000 of interest expense,
$141,000 of interest  income,  $52,000 of foreign  currency  gain and $35,000 of
other income. For a further discussion and analysis of other  income/expense see
Note A and Note E in the  accompanying  notes to the financial  statements pages
F-15 and F-19, respectively.


PROVISION FOR FEDERAL AND STATE INCOME TAXES

Current tax expense

         The current tax expense for the years ended December 31, 1996, 1995 and
1994 was  approximately  $1,862,000,  $869,000 and $1,047,000  respectively or a
current tax rate based on income  before  income  taxes of 34%, 35% and 85%. The
decrease in the current tax expense  expressed as a percentage  of income before
income taxes between 1996 and 1995 was primarily attributed to the timing of the
deduction of certain  expenses for income tax purposes  which were  expensed for
financial statement purposes.  The decrease in the current tax expense expressed
as a  percentage  of  income  before  income  taxes  between  1995  and 1994 was
primarily the result of the combining of the financial reporting presentation of
SCC  and VRC  for  the  earliest  financial  reporting  period  whereby  the net
operating loss of VRC had been fully reserved.

Deferred tax benefit

         The  deferred tax benefit for the years ended  December 31, 1996,  1995
and 1994 was  approximately  $1,421,000,  $896,000  and $319,  respectively,  or
approximately  28%, 36% and 0% of net income.  The deferred tax benefit for 1996
and 1995 includes the  recognition of certain net operating  loss  carryforwards
for financial reporting purposes.

         See Note H in the accompanying  note to the financial  statements pages
F-26 through F-28, for a more detailed  analysis of the Company's  effective tax
rates and net deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

         The following table is a summary of the consolidated statements of cash
flows:

<TABLE>
<CAPTION>

                               December 31, 1996     December 31, 1995          December 31, 1994

<S>                                <C>              <C>                          <C>
Net cash provided by
    (used in) operating
    activities                     $1,514,101          $(2,271,705)                $(622,510)
Net cash used in
     investing  activities           (483,058)            (443,953)                 (413,678)
Net cash provided by
    (used in) financing
    activities                        (55,454)              297,710                  (48,327)

</TABLE>

                                      -18-





NET CASH PROVIDED BY USED IN OPERATING ACTIVITIES

         From 1994 to 1996 the Company  has gone from a negative  cash flow from
operations to a positive cash flow from operations  which has been driven by the
increase  in net income  from 1994 of  approximately  $183,000  to net income of
$5,061,000  in 1996.  Net income  generated by operations  net of  depreciation,
amortization and deferred tax benefit for the years ended December 31, 1996,1995
and 1994 was approximately $3,900,000, $2,000,000 and $360,000 which is a direct
result of the increase in sales activity from 1994 to 1996.

         The impact sales growth has on the other major  components of cash flow
from  operations  on a year to year  analysis is  illustrated  by the  following
table:


              Accounts                         Payables and         Sales growth
              Receivable        Inventory      accrued expenses     year to year
              % of sales        % of sales     % of sales           percentage
              ----------        ----------     ----------           ----------
1996 .......  29.12%            20.00%         18.20%               34.07%
1995 .......  31.18%            19.80%         19.70%               59.26%
1994 .......  25.64%            19.17%         24.70%               49.50%



         As  illustrated  by the table above the Company has  historically  been
able to generate sales growth percentages in excess of 30% for each year without
a significant  deterioration in the aging of accounts receivable, no significant
increase of inventory levels as a percentage of sales and continued reduction of
current liabilities as a percentage of sales.


NET CASH USED IN INVESTING ACTIVITIES

         The cash used in investing  activities  is primarily  the result of the
purchase of  property  and  equipment.  The  Company  currently  has no material
commitments for capital expenditures.


NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

         The cash flow provided by or used in financing  activities for 1996 and
1995 was primarily  caused by the utilization of the Company's  unsecured demand
line of credit with a bank offset by the payment of bridge  financing  occurring
during  the  development  stage  of  the  Company.  Cash  flows  from  financing
activities in 1994 were  primarily  caused by the repayment of bridge  financing
occurring during the development stage of the Company.

                                      -19-






         On August 20, 1996 the Company's unsecured,  demand line of credit with
a bank was renewed with an increase in the credit  facility  from  $6,000,000 to
$10,000,000.  At December 31, 1996 the remaining balance available on the credit
facility was  approximately  $9,400,000.  The loan bears  interest at the bank's
prime rate or, under certain conditions, at the bank's LIBOR rate plus 200 basis
points. The agreement contains certain conditions including, but not limited to,
restrictions  related  to working  capital,  net worth,  and  certain  financial
ratios.

         The Company's  working  capital at December 31, 1996 was  approximately
$11,400,000.  In  Management's  opinion,  the Company's  current working capital
position,  together with the available  credit  facility of $9,400,000  and cash
from  foregoing  operations, will be sufficient to accommodate  working  capital
requirements through the end of 1997.

FOREIGN CURRENCY TRANSACTIONS

         Management does not currently utilize any derivative  products to hedge
its foreign currency risk. The Company's  foreign  subsidiaries'  obligations to
their parent are  denominated in US dollars.  There is a potential for a foreign
currency  gain or loss based  upon  fluctuations  between  the US dollar and its
subsidiaries'  functional currencies,  currently the German mark and the British
pound.  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 in US dollars.

         Other than the intercompany  balances noted above, the Company does not
believe it has material  unhedged  monetary  assets,  liabilities or commitments
which 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. Management currently has no
plans to utilize any derivative products to hedge its foreign currency risk.


INFLATION

         The Company does not believe that  inflation has had a material  impact
on its operations, sales or net income during the period covered by this report.

FORWARD-LOOKING STATEMENTS

         The Private  Securities  Litigation Reform Act of 1995 contains certain
safe  harbors  regarding   forward-looking   statements.   From  time  to  time,
information  provided  by the  Company  or  statements  made  by its  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  the
Company's markets and customers,  the Company's  objectives and plans for future
operations  and  products  and the  Company's  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 the
Company's  products;  the rate of  growth  in the  industries  of the  Company's
products;  the presence of  competitors  with greater  technical,  marketing and
financial  resources;  the Company's ability to promptly and effectively respond
to technological  change to meet evolving customer needs;  risks associated with
sales in foreign countries; and the Company's ability to successfully expand its
operations.  See also  Exhibit  99 to this  Annual  Report  on Form  10-KSB  for
additional factors to consider.

                                      -20-




ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Index to Financial  Statements  and pages F-1 through F-30 attached
(audited annual  financial  statements for the years ended December 31, 1996 and
1995).

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.



                                      -21-








                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS AND DIRECTORS

         The following table sets forth certain information concerning executive
officers and directors of the Company:

<TABLE>
<CAPTION>

             NAME                   AGE                                    POSITION
             ----                   ---                                    --------
<S>                              <C>        <C>
Theodore J. Goodlander           52         Chairman of the Board, President and Chief Executive Officer, Director
Shigeho Inaoka(1)(2)             53         Director
Steve S. Chen(1)(2)              50         Director
Norunn Heilevang(2)              47         Treasurer
Christopher P.
 Torregrossa, CPA                37         Vice President of Finance
John R. Taylor                   57         Vice President of International Distribution
John J. O'Brien                  46         Vice President of Research and Development
Ronald L. Beckett                52         Vice President of Operations
Sam Sanders                      62         Vice President of North American Sales
</TABLE>


--------------------
(1)      Member of Compensation Committee
(2)      Member of Audit Committee

THEODORE  J.  GOODLANDER,  53, has served as SCC's  President,  Chief  Executive
Officer  and  Chairman of the Board for over five years and since he founded the
Company.  Mr.  Goodlander  served as  President  of  Cab-Tek,  Inc.,  a computer
accessories manufacturing company and a predecessor to the Company, from 1981 to
1984. From 1978 to 1981, he was employed as a private  investor and from 1968 to
1978 Mr.  Goodlander  held various  management  positions at Wang  Laboratories,
Inc., including Vice President International and Far East Marketing Manager. Mr.
Goodlander  attended  Syracuse  University  and is a graduate of the Program for
Management Development at Harvard Business School.

SHIGEHO INAOKA,  54, has been a director of the Company since  September,  1993.
Mr.  Inaoka has served as President of  TechnoGraphy,  Inc., a  manufacturer  of
multimedia  computer  systems  and an  exclusive  distributor  of the  Company's
products in Japan since 1992.  From 1989 to 1992,  Mr.  Inaoka was President and
Chief Executive  Officer of Sony Computer  Systems,  Inc. He received a business
degree from Meiji  University in 1967 and a Masters  degree in Computer  Systems
Engineering from Tokyo Computer Academy in 1968.


                                      -22-





STEVE S. CHEN,  50, has been a director of the Company since May, 1996. Mr. Chen
is also the Executive  Vice  President and Chief  Technology  Officer of Sequent
Computer  Systems,  Inc.  Mr.  Chen was  previously  the Founder and Senior Vice
President  of  Chen  Systems,   Inc.,  a  high   performance   computer   server
manufacturer,  which was  acquired by Sequent  Computer  Systems,  Inc. in 1996.
Prior to that,  Mr. Chen  founded  Supercomputing  Systems,  Inc.,  with partial
funding from IBM. He had previously been Senior Vice President of Cray Research,
with responsibility for development of the Cray XMP and YMP Supercomputers.

NORUNN HEILEVANG,  48, was appointed  Treasurer in October 1994. Since 1982, Ms.
Heilevang has also served as Administration Manager of Cab-Tek Inc. From 1978 to
1982, she served as Vice President and Chief  Financial  Officer of Cizek Audio,
Inc. Ms. Heilevang holds an AA in Accounting from Forde Business College, Forde,
Norway.

CHRISTOPHER P.  TORREGROSSA,  CPA, 37, was promoted to Vice President of Finance
in March of 1997.  Prior to his  promotion  Mr.  Torregrossa  functioned  as the
Company's  Corporate  Controller from August 1995 to February 1997 and Corporate
Financial  Auditor from October 1994 to July 1995.  Prior to joining the Company
Mr.  Torregrossa  was employed at Nathan  Wechseler  and Company,  the Company's
independent  auditor from the Company's inception to 1994. He received his BS in
Accounting  from the University of Denver in 1981 and became a Certified  Public
Accountant in 1983.  After  graduation he was employed by Deloitte and Touche.

JOHN R.  TAYLOR,  57,  has  served  as  SCC's  Vice  President  -  International
Distribution.  Mr.  Taylor  served  as  President  of  EXSAM,  an  international
marketing  and  consulting  company,  from  1991 to 1992 and Vice  President  of
International  Operations for Sequoia  Systems from 1989 to 1991. He also served
as Vice President International  Operations for ICL/Computer Consoles, Inc. from
1987 to 1989.  Mr. Taylor also worked in various  positions  from field sales to
working  directly with the Chief Executive  Officer for Wang  Laboratories  from
1970 to 1987. Mr. Taylor is fluent in German.

JOHN J. O'BRIEN,  46, has served as Vice  President of Research and  Development
since  joining  the  Company  in 1992.  From  1984 to 1992,  Mr.  O'Brien  was a
consultant to Storage Computer,  and during the period from 1987 to 1992, he did
so as President of MetaVenture  Inc., a Manhattan based consulting  company.  He
received a B.S. in Mathematics from St. Vincent's College and B.S. in Electronic
Engineering from Pennsylvania State University. Mr. O'Brien also holds a Masters
degree in Engineering Administration from George Washington University.

RONALD L. BECKETT,  52, has served as SCC's Vice  President of Operations  since
1995.  Prior to being named Vice President of Operations,  Mr. Beckett served as
the Director of Field Service from 1994 to October of 1995 for Storage Computer.
Before joining Storage  Computer,  he served as the Program and Business Manager
at Wang Laboratories directing Worldwide MultiVendor product and service program
from 1988 to 1993.  From 1985 to 1988,  Mr.  Beckett was the Vice  President  of
Operations  for Rhema  Computer.  Previously,  Mr.  Beckett  was the  Manager of
Distributor and OEM sales support at Applicon Schlumberger from 1980 to 1984. He
attended  Washington  Institute of Technology and is a graduate from Merganhaler
Technical School majoring in Electronic Technology.

SAM SANDERS,  62, joined SCC in March 1997 as Vice  President of North  American
Sales.  Immediately  prior to  joining  Storage  Computer,  Sanders  was CEO and
Founder of TAP, a sales and marketing  consulting company,  founded in 1989. His
sales and management  experience at IBM, Wang  Laboratories  and Scientific Data
Systems over an 18-year period led to his appointment at Nucleus  International,
where he served as Vice President of Worldwide Sales from 1984 to 1989.  Sanders
is an  engineering  graduate of the University of California at Berkeley and has
pursued  graduate  studies  toward  his MBA at UCLA  and The  George  Washington
University.

All directors hold office until the next annual meeting of the  stockholders and
until their  successors are elected and  qualified.  All officers of the Company
are  elected  annually  by the  Board of  Directors  and


                                      -23-




serve at the Board's discretion.  There are no family relationships among any of
the directors or executive officers of the Company.

BOARD COMMITTEES

         The  Board of  Directors  has a  Compensation  Committee,  which  makes
recommendations concerning salaries and incentive compensation for employees of,
and  consultants  to, the Company,  and an Audit  Committee,  which  reviews the
results  and scope of the audit and other  services  provided  by the  Company's
independent auditors.

DIRECTOR COMPENSATION

         Members of the Board of Directors do not receive any cash  compensation
for their service on the Board of Directors but are entitled to reimbursement of
expenses  related to  attending  Board of  Directors  meetings.  The Company has
compensated  its  directors  who are not  employees  through  the grant of stock
options.  Upon initial appointment,  each of Messrs. Inaoka and Chen was granted
an option to purchase  30,000 shares of Common Stock at the fair market value on
the date of grant.  Directors  who are employees of the Company are not paid any
additional compensation for serving as directors.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
requires Directors,  executive officers and persons who own more than 10% of the
outstanding  shares of Common  Stock of the Company to file with the  Securities
and Exchange Commission and the American Stock Exchange reports of ownership and
changes in ownership of voting  securities of the Company and to furnish  copies
of such  reports  to the  Company.  Based  solely  on a review of copies of such
reports furnished to the Company or written representations from certain persons
that no reports were required for those persons,  the Company  believes that all
Section  16(a) filing  requirements  were  complied  with during the fiscal year
ended December 31, 1996 with the exception of Christopher P. Torregrossa,  Steve
S. Chen, John J. O'Brien, John R. Taylor, Ronald L. Beckett and Sam Sanders, who
were recently named executive officers, and who have not yet filed Forms 3.


                                      -24-





ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth certain  information with respect to the
compensation paid or accrued by the Company for services rendered to the Company
in all  capacities  for the fiscal  year ended  December  31,  1996 by its Chief
Executive Officer and each of the Company's other executive officers whose total
salary and bonus exceeded $100,000 during such fiscal year  (collectively,  "the
Named Executive Officers"):


<TABLE>
<CAPTION>
                                                                                                LONG-TERM
                                                         ANNUAL                                COMPENSATION
                                                      COMPENSATION                             -------------
                                                      ------------
                                                                          OTHER ANNUAL      STOCK       ALL OTHER
           NAME AND                 FISCAL        SALARY        BONUS     COMPENSATION     OPTIONS      COMPENSA-
      PRINCIPAL POSITION           YEAR(1)            $             $         ($)(2)        (#)        TION ($)(2)
      --------- --------           -------        -----         -----         ------         ---       -------- --

<S>                                <C>         <C>             <C>          <C>            <C>         <C>

Theodore J. Goodlander,
  President and Chief Executive
  Officer..........................  1996      $150,000(4)       ---           ---           ---           ---

John J. O'Brien,
  Vice President of Research
         and Development...........  1996      $102,667          ---           ---       150,000(5)        ---

John R. Taylor,
  Vice Preident of  International
  Development....................    1996      $100,000      $60,000                     160,000(6)        ___

</TABLE>

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

(1)      The Company's fiscal year for 1996 ended on the last day of December.

(2)      In accordance with the rules of the Securities and Exchange Commission,
         other  compensation  in the  form of  perquisites  and  other  personal
         benefits has been omitted  because such  perquisites and other personal
         benefits  constituted less than the lesser of $50,000 or ten percent of
         the total annual salary and bonus  reported for the  executive  officer
         during the fiscal year ended December 31, 1996.

(3)      The Company did not grant any stock options, restricted stock awards or
         stock appreciation  rights (SARs) or make any long-term  incentive plan
         payouts to the above named  executive  officers  during the fiscal year
         ended December 31, 1996.

(4)      As of December  31, 1996 Mr.  Goodlander  was owed  deferred  salary of
         $299,500.

(5)      Includes  150,000  options at $.10 per share  pursuant to the Company's
         Amended and Restated Stock Incentive Plan.

(6)      Includes  120,000  options  at $.10 per share  and  40,000 at $3.60 per
         share pursuant to the Company's  Amended and Restated  Stock  Incentive
         Plan.


                                      -25-





         The  following   table  sets  forth  certain   information   concerning
exercisable and unexercisable stock options held by the Named Executive Officers
as of December 31, 1996:

                  Aggregated Option Exercises In Last Fiscal Year and
                            Fiscal Year-End Option Values(1)



<TABLE>
<CAPTION>

                        Number of Securities Underlying          Value of Unexercised In-the-Money
                     Unexercised Options at Fiscal Year-End(1)       Options at Fiscal Year-End(2)
                     --------------------------------------       ---------------------------------
                       Exercisable         Unexercisable          Exercisable         Unexercisable
                       -----------         -------------          -----------         -------------

Name
----


<S>                      <C>                   <C>                 <C>                   <C>
John R. Taylor           140,000               20,000              $1,753,800            $190,200
John R. O'Brien          150,000                 0                 $1,953,750               __
</TABLE>

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

(1)      No options  were  exercised  during the fiscal year ended  December 31,
         1996 by the Named Executive Officers.

(2)      Based on the difference  between closing price of the underlying shares
         of Common Stock on December 31, 1996 as reported by the American  Stock
         Exchange ($13.125) and the option exercise price.


                                      -26-







ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership  of the Common  Stock as of December  31, 1996 by (i) each
director  of the  Company,  (ii)  each of the  executive  officers  named in the
Summary  Compensation Table above, (iii) all directors and executive officers of
the  Company  as a group  and  (iv)  each  person  known by the  Company  to own
beneficially more than 5% of the Common Stock.




<TABLE>
<CAPTION>

                                                                             Shares of Common Stock
                                                                             Beneficially Owned(10)
                                                                             ----------------------

Directors, Officers and 5% Stockholders                            Number                         Percent
---------------------------------------                            ------                         -------

<S>                                                             <C>                               <C>
Theodore J. Goodlander                                          4,000,000(1)                      37.38%
Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062

Goodlander 1990 Family Trust                                      3,290,000                       30.74%
c/o Jeanie McCready, Trustee
6 Ashland Street
Nashua, New Hampshire  03020

Norunn Heilevang                                                 216,500(2)                        2.02%
8 Nigel Lane
Nashua, New Hampshire  03062

Shigeho Inaoka                                                   453,600(3)                        4.24%
2-16-7 Iwataminani
Komae-shi
Tokyo, Japan  182

Steve S. Chen                                                       0(4)                             *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062

Christopher P. Torregrossa                                          0(5)                             *
10 Hillside Drive
Henniker, NH  03242

John R. Taylor                                                   40,000(6)                           *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062

John J. O'Brien                                                  195,400(7)                          *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062

Ronald L. Beckett                                                    0(8)                            *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062

Sam Sanders                                                         200(9)                           *
c/o Storage Computer Corporation
11 Riverside Street
Nashua, New Hampshire  03062
All directors and executive officers as a                         8,000,300                       74.76%
group(9)...............................................
</TABLE>



                                      -27-




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

(1)      Does  not  include  3,290,000  shares  of  Common  Stock  held  by  the
         Goodlander  1990 Trust  established  for the  exclusive  benefit of Mr.
         Goodlander's  children  and as to which  Mr.  Goodlander  exercises  no
         voting or dispositive control and disclaims beneficial ownership.

(2)      Does not  include  50,000  shares of  Common  Stock  issuable  upon the
         exercise of options  granted under the  Company's  Amended and Restated
         Stock Incentive Plan.

(3)      Includes 211,000 shares of Common Stock held by TechnoGraphy,  Inc. for
         which  Mr.  Inaoka  is an  executive  officer  and in  which  he owns a
         controlling  interest.  Does not include  30,000 shares of Common Stock
         issuable upon exercise of options  granted under the Company's  Amended
         and  Restated  Stock  Incentive  Plan and 20,000  shares held by family
         members.

(4)      Does not  include  30,000  shares of  Common  Stock  issuable  upon the
         exercise of options  granted under the  Company's  Amended and Restated
         Stock Incentive Plan.

(5)      Does not  include  25,000  shares of  Common  Stock  issuable  upon the
         exercise of options  granted under the  Company's  Amended and Restated
         Stock Incentive Plan.

(6)      Does not include  120,000  options at $.10 per share and 40,000 options
         at $3.60 per share pursuant to the Company's Amended and Restated Stock
         Incentive Plan.

(7)      Does not  include  150,000  Options at $.10 per share  pursuant  to the
         Company's Amended and Restated Stock Incentive Plan.

(8)      Does not include  26,000  options at an average cost of $8.59 per share
         pursuant to the Company's Amended and Restated Stock Incentive Plan.

(9)      Does not include  60,000 options at an average cost of $16.75 per share
         pursuant to the Company's amended and Restated Stock Incentive Plan.

(10)     See Footnotes (1) - (9) above.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


CAB-TEK, INC.

         SCC was spun off by  Cab-Tek,  Inc.,  a  company  which is owned by Mr.
Goodlander,  Ms.  Heilevang  and related  parties,  through the  purchase of the
related  inventory and fixed assets used in connection  with the  development of
RAID 7. These assets were in turn contributed as the initial capital of SCC. SCC
subsequently  purchased all of the RAID  technology and the rights to all issued
and pending patents and trademark of Cab-Tek, Inc. for $10,000 plus a royalty of
3% of SCC's total net sales through  March 30, 1996 (up to a cumulative  maximum
royalty of $5,000,000). This royalty agreement was terminated effective December
31, 1995.  No royalties  were paid with respect to Fiscal 1996.  Royalties  with
respect to Fiscal 1995 were $649,000.  The royalty rate was set within the range
of what management believed to be industry practice, and was substantially lower
than the rate management  believes it would have accepted from a  non-affiliated
party.  The maximum  royalty  amount was set by management  through  analysis to
determine  an amount  reasonable  and fair to both  parties.  Among the  factors
considered in the analysis were the history of the related development  expenses
and risks,  the  prospects  for the  Company's  business and  earnings,  and the
development  expenses  of similar and  competing  companies.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Royalty Expense."


KRISTIANIA CORP.

         SCC currently  leases,  as a tenant at will, a 35,000 sq. ft.  facility
which is occupied by its light manufacturing, research


                                      -28-





and development  and office  operations in Nashua,  New Hampshire.  The lease is
with an affiliated  entity of which Mr.  Goodlander and Ms. Heilevang are equity
owners.  The Company  paid annual  rentals of $152,576  and $187,200 in 1995 and
1996, respectively.

RELATED PARTY DEBT

 Since the inception of the Company, Mr. Goodlander and Cab-Tek,  Inc. have made
secured  cash  loans to the  Company  at  interest  rates of prime  plus 1%.  In
December of 1994, the Cab-Tek note payable was assigned to Mr.  Goodlander.  The
aggregate  amount  owing  to Mr.  Goodlander  under  his own  note  and the note
assigned to him by Cab-Tek,  Inc.,  for Fiscal 1996 and Fiscal 1995 was $710,000
and $910,000, respectively.



                                      -29-





ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K


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

                  (1)      Financial Statements

                           The following financial statements of the Company and
                           the  report  of  the  independent   certified  public
                           accountants are filed as part of this report:

                           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 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  in the  footnotes  below.  The
                           location  of  each   document  so   incorporated   is
                           indicated by footnote.

                 *3.1 Restated   Articles  of  Organization   (Incorporated   by
                      reference  as  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 as
                      Exhibit 3.2 to the Company's  Form S-4,  Registration  No.
                      33-87028, as filed on December 2, 1994).
                 *4.1 Specimen  Common  Stock   Certificate   (Incorporated   by
                      reference  as  Exhibit  4.1 to  the  Company's  Form  S-4,
                      Registration No. 33-87028, as filed on December 2, 1994).
                 10.1 Amended and Restated Stock Incentive Plan.
                 10.2 Promissory Note in the principal amount of $710,000 dated
                      December 6, 1996 made payable to  Theodore J. Goodlander.
                *10.3 Letter   Agreement   dated  July  14,  1994   between  the
                      Registrant and Eddie Lu Hwang  (Incorporated  by reference
                      as Exhibit 10.8 to the  Company's  Form S-4,  Registration
                      No. 33-87028, as filed on December 2, 1994).
                *10.4 Joint  Venture  Agreement  between the  Registrant,  Micro
                      Research Computer Limited and Eddie Lu Hwang (Incorporated
                      by reference as Exhibit  10.6 to the  Company's  Form S-4,
                      Registration No. 33-87028, as filed on December 2, 1994).
                *10.5 Amended   and   Restated   1992   Stock   Incentive   Plan
                      (Incorporated  by  reference  as Exhibit 10.5 to Amendment
                      No.  4  to  the  Company's  Form  S-3,   Registration  No.
                      333-04145, as filed on September 13, 1996).
                 10.6 Amendment  dated August 20, 1996, to the Revolving  Credit
                      Agreement  dated  August 6, 1995  between  the Company and
                      State Street Bank and Trust Company.


                                      -30-



                 10.7 $10,000,000  Line of Credit Note from  Registrant to State
                      Street Bank and Trust  Company dated August 20, 1996.
                *10.8 Loan  Agreement  dated  August 6, 1995 between the Company
                      and State Street Bank and Trust Company  (Incorporated  by
                      reference  to  Exhibit  10.2  to  Amendment  No.  4 to the
                      Company's Form S-3,  Registration No. 333-04145,  as filed
                      on September 13, 1996.
                 21   Subsidiaries  of the  Company.
                 23   Consent  of  Richard  A.  Eisner &  Company,  LLP.
                 27   Financial Data Schedule.
                 99   "Safe   Harbor"   Statement   under   Private   Securities
                      Litigation Reform Act of 1995.


--------------------
*        previously filed


         (b)      Reports on Form 8-K

                  None.


                                      -31-









                                   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 28th day of March, l997.

                                STORAGE COMPUTER CORPORATION


                                BY:/s/ Theodore J. Goodlander
                                -----------------------------
                                      Theodore J. Goodlander
                                      President, Chief Executive Officer and
                                      Chief Financial Officer


Pursuant to the  requirements  of the Securities and Exchange Act of l934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in their capacities and on the date indicated.




<TABLE>
<CAPTION>

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


<S>                                <C>                                              <C>
/s/ Theodore J. Goodlander         Chairman of the Board of Directors, CEO          March 28, 1997
--- -------- -- ----------          (Principal Executive Officer and
    Theodore . Goodlander            Principal Accounting Officer)



/s/ Shigeho Inaoka                 Director                                         March 28, 1997
--------------------------
Shigeho Inaoka

________________________           Director                                         ________________, 1997
Steven S. Chen


</TABLE>



                                      -32-





                          STORAGE COMPUTER CORPORATION



                                  - I N D E X -


                                                              PAGE
                                                             NUMBER

REPORT OF INDEPENDENT AUDITORS                                 F-2


CONSOLIDATED BALANCE SHEETS AS AT
DECEMBER 31, 1996 AND DECEMBER 31,
1995                                                           F-4


CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1995 AND DECEMBER 31, 1994                        F-6


CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31,
1996, DECEMBER 31, 1995 AND DECEMBER 31, 1994                  F-8


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996,
DECEMBER 31, 1995 AND DECEMBER 31, 1994                        F-10


NOTES TO FINANCIAL STATEMENTS                                  F-12




                                       F-1





                         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 at December 31, 1996 and December 31,
1995,  and the related  consolidated  statements  of  operations,  stockholders'
equity,  and cash  flows for each of the years in the  three-year  period  ended
December  31,   1996.   These   consolidated   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 generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  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 as at December 31, 1996 and December 31,
1995, and the consolidated  results of their  operations and their  consolidated
cash flows for each of the years in the three-year




                                       F-2





period ended  December 31, 1996 in conformity with generally accepted accounting
principles.



Richard A. Eisner & Company, LLP

New York, New York
January 31, 1997




                                      F-3






                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                         December 31,
                                     A S S E T S                               1996                       1995
                                     -----------                              ------                      -----
<S>                                                                            <C>                         <C>
Current assets:
   Cash and cash equivalents. . . . . . . . .                              $ 1,852,762                $   871,101
   Accounts receivable (Note E) . . . . . . .                                9,030,955                  7,212,091
   Inventories (Note B) . . . . . . . . . . .                                6,274,244                  4,580,066
   Prepaid expenses and other current assets.                                  103,796                    140,754
   Deferred tax asset (Note H). . . . . . . .                                  400,000                    529,997
                                                                          ------------                -----------

          Total current assets. . . . . . . .                               17,661,757                 13,334,009

Deferred tax asset (Note H) . . . . . . . . .                                2,138,550                    588,000

Property and equipment (net of accumulated
   depreciation and amortization of
   $1,155,165 in 1996 and $1,195,662 in
   1995) (Note C) . . . . . . . . . . . . . .                                1,080,002                    790,605

Investment in affiliates. . . . . . . . . . .                                   55,000                     55,000
                                                                          ------------                -----------

          T O T A L . . . . . . . . . . . . .                              $20,935,309                $14,767,614
                                                                          ============                ===========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Note payable (Note D). . . . . . . . . . .                              $   576,421                $   399,973
   Current portion of capital leases and
     equipment note (Note F). . . . . . . . .                                   29,753                     39,677
   Accounts payable . . . . . . . . . . . . .                                2,201,556                  2,350,730
   Accrued expenses . . . . . . . . . . . . .                                2,236,853                    990,171
   Accrued income taxes . . . . . . . . . . .                                  935,600                    931,016
   Deferred stockholder compensation
     (Note E) . . . . . . . . . . . . . . . .                                  299,500                    299,500
                                                                          ------------                -----------

          Total current liabilities . . . . .                                6,279,683                  5,011,067
                                                                          ------------                -----------

Capital lease obligations and equipment
   note, noncurrent (Note D). . . . . . . . .                                   32,672                     61,594
Long-term debt, related party
   (Note D) . . . . . . . . . . . . . . . . .                                  710,000                    910,000
                                                                          ------------                -----------

          Total long-term liabilities . . . .                                  742,672                    971,594
                                                                          ------------                -----------

Commitments and contingencies (Notes E, F and J)

Stockholders' equity (Note G):
   Preferred stock, par value $.001;
     authorized 25,000,000 shares;
     none issued and outstanding
   Common stock,  par value  $.001;  authorized  25,000,000  shares;
     issued and outstanding 10,701,341 shares (1996) and
     10,636,341 shares (1995) . . . . . . . .                                   10,701                     10,636
   Additional paid-in capital . . . . . . . .                               12,290,245                 12,223,860
   Retained earnings (deficit). . . . . . . .                                1,612,008                 (3,449,543)
                                                                          ------------               ------------

          Total stockholders' equity. . . . .                               13,912,954                  8,784,953
                                                                          ------------                -----------


          T O T A L . . . . . . . . . . . . .                              $20,935,309                $14,767,614
                                                                          ============                ===========

</TABLE>



                                       F-4





                 The accompanying notes to financial statements
                          are an integral part hereof.



                                       F-5






                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                                                                Year Ended December 31,
                                                              ---------------------------------------------------------
                                                                   1996                   1995                  1994
                                                              ------------           ------------          ------------
<S>                                                                <C>                    <C>                   <C>
Net sales . . . . . . . . . . . . . . . . . .                  $31,011,429            $23,130,413           $14,522,887
Cost of goods sold. . . . . . . . . . . . . .                   15,326,909             12,054,265             6,295,256
                                                              ------------           ------------           -----------

          Gross profit. . . . . . . . . . . .                   15,684,520             11,076,148             8,227,631
                                                              ------------           ------------           -----------

Operating expenses:
   Selling and marketing. . . . . . . . . . .                    6,117,947              4,820,680             2,948,324
   General and administrative . . . . . . . .                    1,186,239              1,089,797             1,295,858
   Research and development . . . . . . . . .                    2,785,280              2,116,542             1,901,091
   Royalty expense (Note F) . . . . . . . . .                                             648,558               331,862
                                                              ------------           ------------           -----------

                                                                10,089,466              8,675,577             6,447,135
                                                              ------------           ------------           -----------

          Operating income. . . . . . . . . .                    5,595,054              2,400,571             1,750,496
                                                              ------------           ------------           -----------

Other income (expense):
   Reorganization (expense) credit (Note A) .                                             134,821              (506,088)
   Foreign exchange gain. . . . . . . . . . .                       29,407                  8,763                51,785
   Interest income. . . . . . . . . . . . . .                       31,673                 84,804               140,497
   Interest expense (Note E). . . . . . . . .                     (209,495)              (238,414)             (213,826)
   Other income . . . . . . . . . . . . . . .                       55,892                 92,402                34,748
                                                              ------------           ------------           -----------

                                                                  (92,523)                82,376               (492,884)
                                                              ------------           ------------          ------------

Equity in net loss of affiliates. . . . . . .                                            (23,390)               (28,087)
                                                                                     ------------          ------------

          Income before income taxes. . . . .                   5,502,531              2,459,557              1,229,525
                                                              ------------           ------------           -----------

Provision for federal and state income taxes (Note H):
     Current tax expense. . . . . . . . . . .                   1,861,533                869,164              1,046,859
     Deferred tax (benefit) . . . . . . . . .                  (1,420,553)              (896,202)                  (319)
                                                              ------------           ------------          ------------

                                                                  440,980                (27,038)             1,046,540
                                                              ------------           ------------           -----------

NET INCOME. . . . . . . . . . . . . . . . . .                 $ 5,061,551            $ 2,486,595            $   182,985
                                                              ============           ============           ===========


Net income per share. . . . . . . . . . . . .                       $0.43                  $0.21                  $0.02
                                                                   ======                 ======                  =====


Weighted shares outstanding . . . . . . . . .                  11,891,373             11,784,441             10,836,324
                                                              ===========            ===========             ==========


</TABLE>



                                      F-6






                 The accompanying notes to financial statements
                          are an integral part hereof.




                                      F-7







                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                                    Cumulative
                                               Common Stock                Additional            Retained             Foreign
                                      -----------------------------          Paid-In             Earnings            Currency
                                       Shares           Par Value           Capital              (Deficit)          Translation
                                      --------         -----------         ----------           -----------        -------------
<S>                                      <C>               <C>                <C>                    <C>                <C>
Balance -
   December 31,
   1993. . . . . . .                  9,701,341          $ 9,701          $ 9,215,344          $(6,119,123)           $(14,629)

Equity adjustment
   from foreign
   currency
   translation . . .                                                                                                    14,629

Sales of common
   stock . . . . . .                    136,500              137              477,434

Conversion of debt
   into common
   stock . . . . . .                    543,500              543            1,905,137

Net income . . . . .                                                                               182,985
                                    -----------         --------         ------------          -----------            -------------

Balance -
   December 31,
   1994. . . . . . .                 10,381,341           10,381           11,597,915           (5,936,138)               - 0 -

Conversion of debt
   into common
   stock (Note D). .                    135,000              135              624,865

Exercise of stock
   options . . . . .                    120,000              120                1,080

Net income . . . . .                                                                             2,486,595
                                    -----------         --------         ------------          -----------            -------------

Balance -
   December 31,
   1995. . . . . . .                 10,636,341           10,636           12,223,860           (3,449,543)               - 0 -

Exercise of stock
   options . . . . .                     65,000               65               66,385

Net income . . . . .                                                                             5,061,551
                                    -----------         --------         ------------          -----------            -------------


BALANCE -
   DECEMBER 31,
   1996. . . . . . .                10,701,341          $10,701          $12,290,245           $ 1,612,008            $ - 0 -
                                    ===========         ========         ============          ============           =======
</TABLE>




                                      F-8








                 The accompanying notes to financial statements
                          are an integral part hereof.



                                       F-9







                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                                  -------------------------------------------------
                                                                                      1996               1995              1994
                                                                                  ------------        ----------       ------------
<S>                                                                                   <C>                <C>               <C>
Cash flows from operating activities:
   Net income                                                                   $ 5,061,551       $ 2,486,595        $   182,985
     Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
         Depreciation and amortization                                              310,505           302,041            216,093
         Deferred tax (benefit)                                                  (1,420,553)         (896,202)              (319)
         Amortization of debt discount                                                                 74,854
         Equity in net loss of affiliates                                                              23,390             28,807
         Gain on foreign currency translation adjustment                            (29,407)           (8,763)           (51,785)
         Gain on sale of property                                                                                        (14,668)
         Changes in operating assets and liabilities:
           Accounts receivable                                                   (1,818,864)       (3,487,958)        (1,401,656)
           Inventories                                                           (1,694,178)       (1,796,189)        (1,423,200)
           Other current assets                                                       2,955           (68,979)            41,445
           Accounts payable and accrued expenses                                  1,102,092         1,099,506          1,799,788
                                                                                ------------      ------------        -----------
             Net cash provided by (used in) operating
               activities                                                         1,514,101        (2,271,705)          (622,510)
                                                                                ------------      ------------       ------------


Cash flows from investing activities:
   Proceeds from the sale of property                                                                                     34,500
   Capital expenditures                                                            (483,058)         (388,953)          (448,178)
   Investment in affiliate                                                                            (55,000)
                                                                                ------------      ------------       ------------
             Net cash (used in) investing activities                               (483,058)         (443,953)          (413,678)
                                                                                ------------      ------------       ------------


Cash flows from financing activities:
   Net proceeds from credit line                                                    176,448           399,973
   Repayment of long-term debt and capital lease
     obligations                                                                    (98,352)          (15,263)          (525,898)
   Repayment of long-term debt, related party                                      (200,000)
   Net proceeds from issuance of common stock                                        66,450                              477,571
   Reduction of other long-term liabilities                                                           (87,000)
                                                                                ------------      ------------       ------------
             Net cash provided by (used in) financing
               activities                                                           (55,454)          297,710            (48,327)
                                                                                ------------      ------------       ------------

Effect of exchange rate changes on cash                                               6,072               943              5,969
                                                                                ------------      ------------       -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                981,661        (2,417,005)        (1,078,546)

Cash and cash equivalents - beginning of year                                       871,101         3,288,106          4,366,652
                                                                                ------------      ------------       -----------


CASH AND CASH EQUIVALENTS - END OF YEAR                                         $ 1,852,762       $   871,101        $ 3,288,106
                                                                                ============      ============       ===========


Supplemental disclosures of cash flow information: Cash payments for:
     Interest                                                                   $   132,747       $   141,865        $   125,949
     Taxes                                                                        1,831,338         1,035,000             35,000

Supplemental schedule of noncash financing activities:

   Equipment acquired under capitalized lease                                                     $    77,000        $    24,000
                                                                                                  ============       ===========

   Equipment financed by long-term debt                                                           $    12,000
                                                                                                  ===========

   Debt converted to common stock  135,000  shares issued 1995;  543,500  shares
     issued 1994:
       Increase in common stock                                                                           135                543
       Increase in additional paid-in capital                                                         624,865          1,905,137
                                                                                                  ------------       -----------

          DECREASE IN DEBT                                                                        $   625,000        $ 1,905,680
                                                                                                  ============       ===========

</TABLE>

                                      F-10





                 The accompanying notes to financial statements
                          are an integral part hereof.





                                      F-11




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - Nature of Business and Significant Accounting Policies:

         [1]      Nature of business:

                  The  Company is engaged in the  development,  manufacture  and
sale of  computer  disk  arrays  and  computer  equipment  worldwide.  The  term
"Company"  means,  unless the context  requires  otherwise,  the Company and its
subsidiaries and their respective predecessors.

         [2]      Significant accounting policies:

                  (a)      Principles of consolidation:

                           The  consolidated  financial  statements  include the
         accounts  of the  Company and its wholly  owned  subsidiaries,  Storage
         Computer  Europe  GmBH,  and Vermont  Research  Products,  Inc. and its
         subsidiary,  Storage  Computer  UK Ltd.  All  significant  intercompany
         accounts and transactions  have been  eliminated.  The Company accounts
         for its  investments  in  Storage  Computer  (Asia)  Ltd.  and  Storage
         Computer  France,  SA,  20%-owned  affiliates,  by the equity method of
         accounting.

                           On March 6, 1995, Vermont Research Products,  Inc., a
         wholly owned subsidiary of the Company acquired the entire business and
         substantially  all of the  property  and  assets  of  Vermont  Research
         Corporation   ("VRC")  in   exchange   for  SCC  common   stock   ("the
         Reorganization").  The Reorganization was accounted for as a pooling of
         interests.  Accordingly,  the results of operations of Vermont Research
         Products,  Inc. are included in the consolidated  financial  statements
         for all periods presented as if the Reorganization had been consummated
         at the  beginning of the earliest  period  presented.  The  transaction
         required the issuance of approximately  748,000 shares of the Company's
         common  stock.  In  connection  with the  Reorganization,  the  Company
         accrued  certain  expenses in 1994  resulting  in an expense  charge of
         $506,088.  Actual  expenses were less than  anticipated  resulting in a
         credit of $134,821 in 1995.

                           The following is a  reconciliation  of 1994 sales and
         net income to include  the  operations  of Vermont  Research  Products,
         Inc.:


(continued)

                                      F-12





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



                                                                     Net Income
                                                    Net Sales          (Loss)
                                                  ------------       ----------

Storage Computer Corporation.                      $11,983,279       $1,118,192
Vermont Research Products, Inc.                      2,539,608         (935,207)
                                                  ------------       ----------

Combined                                           $14,522,887       $  182,985
                                                  ============       ==========



(continued)


                                      F-13





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - Nature of Business and Significant Accounting Policies:
           (continued)

         [2]      Significant accounting policies:  (continued)

                  (a)      Principles of consolidation:  (continued)

                           Summary  results of  operations  for the 1995  period
                           prior  to  the  consummation  of  the  Reorganization
                           (January 1, 1995 to March 6, 1995) are not available.

                  (b)  Inventories:

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

                  (c)      Depreciation and amortization:

                           Depreciation   and   amortization   of  property  and
         equipment  is computed  using both the  straight-line  and  accelerated
         methods over the following useful lives:

                                                                Years
                                                                -----
                           Computer equipment. . . . . . . . .  5 - 7
                           Machinery and equipment . . . . . .  5 - 7
                           Office equipment. . . . . . . . . .  5 - 7
                           Leasehold improvements. . . . . . .    15
                           Research and development equipment.  5 - 7
                           Vehicle . . . . . . . . . . . . . .    5

                  (d)      Revenue recognition:

                           The Company  recognizes revenue when its products are
         shipped to its customers.

                  (e)  Cash and cash equivalents:

                           The Company  considers all highly liquid  instruments
         with a maturity  of three  months or less,  when  acquired,  to be cash
         equivalents.


(continued)


                                      F-14




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



(Continued)
                                      F-15






(NOTE A) - Nature of Business and Significant Accounting Policies:
           (continued)

         [2]  Significant accounting policies:  (continued)


                  (f)  Earnings per share:

                           Earnings or loss per share data is computed using the
         weighted  average  number of common  shares  outstanding  and  dilutive
         common equivalent shares.

                  (g)      Warranty costs:

                           The Company offers various  maintenance  and warranty
         agreement  plans.  The Company provides for future warranty costs based
         on actual claims experience.

                  (h)      Stock-based compensation:

                           The Financial  Accounting  Standards Board has issued
         Statement of Accounting Standards No. 123, "Accounting for Stock- Based
         Compensation"  ("SFAS 123").  As permitted  under SFAS 123, the Company
         has adopted the  disclosure  requirements  of SFAS 123 and will account
         for its employee stock option plans under  Accounting  Principles Board
         Opinion No. 25, "Accounting for Stock Issued to Employees".

                  (i)  Use of estimates:

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



                                      F-16





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE B) - Inventories:
(Continued)


         At  December  31,  1996  and  December  31,  1995,  the  components  of
inventories were as follows:
                                                            December 31,
                                                            ------------
                                                         1996        1995
                                                         ----        ----
                  Raw materials and
                     purchased components . . . . .  $4,476,995   $2,128,947
                  Work in process . . . . . . . . .     888,396      615,200
                  Finished goods. . . . . . . . . .     908,853    1,835,919
                                                     -----------  ----------

                                                     $6,274,244   $4,580,066
                                                     ===========  ==========
(continued)





                                      F-17




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE C) - Property and Equipment:

         Included in property  and  equipment  for the years ended  December 31,
1996  and  December  31,  1995 is  equipment  acquired  under  capital  lease of
approximately  $101,000.  Property  and  equipment  are  stated  at cost and are
summarized as follows:

                                               December 31,
                                               ------------
                                            1996         1995
                                            ----         ----
     Computer equipment and
        software. . . . . . . . . . . .  $  653,151   $  370,139
         Machinery and equipment. . . .     790,277      939,869
         Office equipment . . . . . . .     220,453      117,885
         Vehicles . . . . . . . . . . .     179,024      191,303
         Research and development
            equipment . . . . . . . . .     310,328      318,604
         Leasehold improvements . . . .      81,934       48,467
                                             ------       ------

                   T o t a l. . . . . .   2,235,167    1,986,267

         Less accumulated depreciation
            and amortization. . . . . .   1,155,165    1,195,662
                                         -----------  ----------

                   B a l a n c e. . . .  $1,080,002   $  790,605
                                         ===========  ==========


(NOTE D) - Indebtedness:

         Details of the Company's indebtedness are as follows:

         (a)  Note payable:

                  As of December 31, 1996,  the Company had an unsecured  demand
bank line of credit with maximum  borrowings of $10,000,000.  During the term of
the  agreement,  borrowings  bear  interest at the bank's prime rate,  which was
8.25% at December 31, 1996. The agreement contains certain conditions including,
but not limited to,  restrictions  related to working  capital,  net worth,  and
certain financial ratios.

         (b)  Long-term debt related party:

(Continued)


                                      F-18





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



                  Note  payable to the  president  of the Company is due January
1998 with interest at prime plus 1%,  unsecured and  subordinated  to the demand
line of credit.

(continued)


                                      F-19







                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - Related Party Transactions:

         The  Company  leased its U.S.  headquarter  facilities  in 1996 from an
affiliated  entity as a  tenant-at-will  for a monthly  rental of $15,600.  Rent
expense under this lease for 1996, 1995 and 1994 amounted to $187,200,  $152,576
and $105,456,  respectively.  The monthly rental increased to $16,300  effective
January 1, 1997.

         Interest expense from related parties amounted to $84,000,  $91,000 and
$80,604 for 1996, 1995 and 1994, respectively.

         The  deferred  compensation  payable  due  to the  President  is due on
demand.

         For  1996,  1995 and 1994  the  Company  had  sales  to  affiliates  of
approximately  $2,021,000,  $1,700,000 and $442,000,  respectively.  Included in
accounts  receivable  at December 31, 1996 and December 31, 1995 are amounts due
from affiliates of approximately $887,000 and $731,000, respectively.

         In  connection  with the  acquisition  of certain  patent  rights,  the
Company  paid a royalty to an  affiliate  of $648,558  and  $331,862 in 1995 and
1994,  respectively.  The royalty  agreement was terminated by mutual consent at
the end of 1995.


(NOTE F) - Lease Obligations:

         [1]      Operating leases:

                  The  Company  leases  certain  property  and  equipment  under
noncancelable leases which expire at various dates through 2001.
Future minimum payments are as follows:

                Year Ending
                December 31,
                ------------
                   1997. . . . . . . . . . . . .  $207,092
                   1998. . . . . . . . . . . . .   133,252
                   1999. . . . . . . . . . . . .    93,627
                   2000. . . . . . . . . . . . .     7,285



(Continued)

                                      F-20






                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



                   2001. . . . . . . . . . . . .     5,731
                                                  --------

                                                  $446,987
                                                  ========


         Amounts  charged  to  operations  under  these  leases  were  $203,415,
$185,009 and $13,872 for the years ended  December  31, 1996,  December 31, 1995
and December 31, 1994, respectively.

(continued)



                                      F-21







                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Lease Obligations:  (continued)

         [2]      Capital leases and equipment note:

                  Present value of capital leases and
                     equipment note at December 31, 1996.  $62,425

                  Less amounts due within one year. . . .   29,753
                                                          --------
                  Amounts due after one year. . . . . . .  $32,672
                                                          ========

(NOTE G) - Stock Option Plan:

         The Company has a stock option plan which  provides for the granting of
options to purchase up to  2,500,000  shares of common  stock.  Option  activity
during 1994, 1995 and 1996 is summarized as follows:

                                                      Weighted-Average
                                          Number of     Option Price
                                            Shares        Per Share

     Balance - December 31, 1993 . . . .. 1,723,500        $  .25
         Granted . . . . . . . . . . . .    642,700        $ 3.57
         Cancelled . . . . . . . . . . .   (497,000)       $  .25
                                          ----------

         Balance - December 31, 1994 . .  1,869,200        $ 1.33
         Granted . . . . . . . . . . . .    121,950        $ 2.81
         Exercised . . . . . . . . . . .   (120,000)       $  .10
         Cancelled . . . . . . . . . . .   (363,750)       $ 2.49
                                          ----------

         Balance - December 31, 1995 . .  1,507,400        $ 1.35

         Granted . . . . . . . . . . . .    382,000        $10.01
         Exercised . . . . . . . . . . .    (65,000)       $ 1.02
         Cancelled . . . . . . . . . . .   (160,900)       $ 3.32
                                          ----------

         Balance - December 31, 1996 . .  1,663,500        $ 3.41
                                          ==========



                                      F-22






                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS




         Options for 1,228,101  shares are  exercisable  at December 31, 1996 at
exercise  prices  ranging  from $.01 to $14.75 and a  weighted-average  price of
approximately  $1.52 per share, with a  weighted-average  remaining  contractual
life of approximately 9 years. At December 31, 1996, options to purchase 651,500
shares were available for grant under the plan.

(continued)


                                      F-23




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE G) - Stock Option Plan:  (continued)

         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 1996 or 1995. 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,  net income per share would have been  changed to the pro forma
amounts indicated below:

                                              Year Ended December 31,
                                              -----------------------
                                                  1996         1995
                                              -----------   ---------
         Net income:
            As reported. . . . . . . . . . .  $5,061,551   $2,486,595
            Pro forma. . . . . . . . . . . .   4,874,280    2,453,295

         Net income per share:
            As reported. . . . . . . . . . .      $0.43       $0.21
            Pro forma. . . . . . . . . . . .       0.41        0.21

         The fair value of the Company's stock options used to compute pro forma
net income and net income per share  disclosures is the estimated  present value
at grant date using the  Black-Shoales  option-pricing  model with the following
weighted average assumptions for 1996 and 1995: dividend yield of 2.5%; expected
volatility of 30%; a risk free interest  rate of 7.5%;  and an expected  holding
period of ten years.

         The weighted-average grant-date fair value of options granted was $4.10
per share and $1.57 per share for the years ended December 31, 1996 and December
31, 1995, respectively.

(continued)


                                      F-24




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE H) - Income Taxes:

         As of December  31, 1996 and  December  31,  1995,  the Company has net
deferred tax assets as shown in the following table.

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

                  Deferred wages. . . . . . . . .  $  115,128   $   102,000

                  Deferred inventory
                     capitalization costs . . . .      15,522        10,168

                  Deferred revenue. . . . . . . .     112,606        40,000

                  Accrued expenses. . . . . . . .      32,000        20,000

                  General business tax credits. .     360,000       360,000

                  Domestic net operating loss
                     carryover. . . . . . . . . .   2,061,843     2,380,000

                  Foreign net operating loss
                     carryover. . . . . . . . . .     736,152       613,800
                                                   -----------  -----------

                            Total deferred tax
                                  assets. . . . .   3,433,251     3,525,968

                  Valuation allowance . . . . . .    (894,701)   (2,407,971)
                                                   -----------  ------------

                  Net deferred tax assets . . . .   2,538,550     1,117,997

                  Less current portion. . . . . .     400,000       529,997
                                                   -----------  -----------

                  Noncurrent. . . . . . . . . . .  $2,138,550   $   588,000
                                                   ===========  ===========

         The domestic net operating loss carryovers,  amounting to approximately
$6,000,000  expire at various  dates  through 2009 and the foreign net operating
loss  carryovers  amounting to  approximately  $1,700,000 can be carried forward
indefinitely.  The Company is subject to Internal  Revenue Code provisions which
limit the domestic

(continued)

                                      F-25





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS




net operating  loss  carryovers  available  annually.  The general  business tax
credits expire at various dates through 2001.

(continued)



                                      F-26




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE H) - Income Taxes:  (continued)

         The U.S.,  foreign  and state and  local  components  of the  provision
(benefit) for income taxes are as follows:

                                                       December 31,
                                           -----------------------------------
                                             1996         1995         1994
                                           ----------  -----------  ----------

         Current:
         Federal, net of business tax
           credits of $50,000, $115,000
           and $122,000 in 1996, 1995
           and 1994, respectively. . . . .$ 1,514,000   $ 691,000   $  864,000
         State and local . . . . . . . . .    348,000     178,000      183,000
                                          ------------  ----------  ----------

                                            1,862,000     869,000    1,047,000
                                          ------------  ----------  ----------

      Deferred:
        Federal. . . . . . . . . . . . . . (1,223,000)   (358,000)
        Foreign. . . . . . . . . . . . . .   (198,000)   (538,000)
                                          ------------  ----------

                                           (1,421,000)   (896,000)
                                           ----------    --------

      Provision (benefit) for income
        taxes. . . . . . . . . . . . . . .$   441,000   $ (27,000)  $1,047,000
                                          ============  ==========  ==========

         The following table  reconciles the tax provision per the  accompanying
statements  of  operations  with the  expected  provision  obtained  by applying
statutory rates to the pretax income.

<TABLE>
<CAPTION>


                                                  1996         1995          1994
                                              ------------  -----------  --------
<S>                                               <C>          <C>           <C>
      Income before income taxes . . . . . .  $ 5,502,531   $2,459,577   $1,229,525
                                              ============  ===========  ==========

      Expected tax at U.S. statutory rate
         of 34%. . . . . . . . . . . . . . .  $ 1,871,000   $  836,000   $  418,000

      Adjustments due to:
         Difference between foreign rate
           and U.S. statutory rate . . . . .      165,000       85,000
         State taxes, net of federal benefit      230,000       99,000      118,000
         Increase (decrease) in valuation
              reserve . . . . . . . . . . . . .(1,513,000)    (947,000)     492,000
         Adjustment of prior years'
           deferred tax assets related to
           foreign entities. . . . . . . . .     (295,000)
         Tax credits . . . . . . . . . . . .      (50,000)    (115,000)    (122,000)


(Continued)

                                      F-27





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



         Nontaxable income . . . . . . . . .                   (56,000)     205,000
         Other . . . . . . . . . . . . . . .       33,000       71,000      (64,000)
                                              ------------  -----------  -----------

      Tax provision (benefit) per financial
         statements. . . . . . . . . . . . .  $   441,000   $  (27,000)  $1,047,000
                                              ============  ===========  ==========
</TABLE>


         For the years ended December 31, 1995 and December 31, 1994, nontaxable
income  relates  primarily to costs  incurred with the Company's  reorganization
with Vermont Research Products, Inc.
(Note A).

(continued)


                                      F-28




                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS


(NOTE I) - Foreign Operations:

         Operations by geographic area are summarized as follows:

<TABLE>
<CAPTION>

                                  United
                                  States       Europe     Eliminations  Consolidated
                               -----------   ----------   ------------  ------------
<S>                                 <C>         <C>            <C>           <C>
1996:
   Domestic sales to
     unaffiliated customers .  $14,636,000   $3,538,000                 $18,174,000
   Export sales to
     unaffiliated customers .   10,124,000    2,713,000                  12,837,000
   Transfers between
     geographic areas . . . .    4,245,000    1,296,000   $(5,541,000)
                               ------------  -----------  ------------

          Total revenue . . .  $29,005,000   $7,547,000   $(5,541,000)  $31,011,000
                               ============  ===========  ============  ===========


   Net income (loss). . . . .  $ 5,196,000   $  809,000   $  (943,000)  $ 5,062,000

   Total assets . . . . . . .   25,621,000    4,980,000    (9,666,000)   20,935,000

   Total liabilities. . . . .   10,048,000    4,476,000    (7,502,000)    7,022,000

1995:
   Domestic sales to
     unaffiliated customers .  $ 8,928,000   $5,260,000                 $14,188,000
   Export sales to
     unaffiliated customers .    6,328,000    2,613,000                   8,941,000
   Transfers between
     geographic areas . . . .    6,414,000      290,000   $(6,704,000)
                               ------------  -----------  ------------

          Total revenue . . .  $21,670,000   $8,163,000   $(6,704,000)  $23,129,000
                               ============  ===========  ============  ===========


   Net income (loss). . . . .  $ 2,466,000   $ (103,000)  $   124,000   $ 2,487,000

   Total assets . . . . . . .   16,307,000    3,661,000    (5,200,000)   14,768,000

   Total liabilities. . . . .    6,464,000    3,996,000    (4,477,000)    5,983,000

1994:
   Domestic sales to
     unaffiliated customers .  $ 6,832,000   $3,029,000                 $ 9,861,000
   Export sales to
     unaffiliated customers .    4,145,000      517,000                   4,662,000
   Transfers between
     geographic areas . . . .    2,399,000      179,000   $(2,578,000)      - 0 -
                               ------------  -----------  ------------  ---------

(Continued)


                                      F-29






                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS



          Total revenue . . .  $13,376,000   $3,725,000   $(2,578,000)  $14,523,000
                               ============  ===========  ============  ===========


   Net income (loss). . . . .  $   938,000   $ (555,000)  $  (200,000)  $   183,000

   Total assets . . . . . . .   11,615,000    1,966,000    (2,853,000)   10,728,000

   Total liabilities. . . . .    4,755,000    2,000,000    (1,699,000)    5,056,000
</TABLE>



(continued)


                                      F-30





                  STORAGE COMPUTER CORPORATION AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS




(NOTE I) - Foreign Operations:  (continued)

         Total  revenue by geographic  area includes both sales to  unaffiliated
customers and transfers  between  geographic areas. Such transfers are accounted
for at prices which the Company  considers  comparable  to normal,  unaffiliated
customer sales.

         Export  sales  from the United  States to  unaffiliated  customers  are
summarized as follows:

                               1996         1995          1994
                           ------------  -----------  ----------

         Far East . . . .  $ 8,563,000   $4,542,000   $3,009,000
         Other. . . . . .    1,561,000    1,786,000    1,136,000
                           ------------  -----------  ----------

                           $10,124,000   $6,328,000   $4,145,000
                          ============   ===========  ==========

         For the years ended  December 31, 1996,  December 31, 1995 and December
31, 1994 sales to one  unaffiliated  customer were in excess of 10% of net sales
and amounted to $6,303,000, $2,756,000 and $1,881,000, respectively.


(NOTE J) - Legal Proceedings:

         A former  employee  of the Company has  instituted  a suit  against the
Company  alleging  that he is  entitled  to have up to 300,000  shares of common
stock  issued  to him  under  an  option  arrangement.  The  Company  has  filed
responsive pleadings (including motions and counterclaims) and believes that the
option  was not  properly  and  timely  exercised,  and  that the  complaint  is
otherwise without merit, and intends to defend the case vigorously.