BOX HILL SYSTEMS CORP, 424B4, 1997-09-17

BOX HILL SYSTEMS CORP
424B4, 1997-09-17
COMPUTER STORAGE DEVICES

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<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration No. 333-31873
PROSPECTUS

5,500,000 SHARES

BOXHILL LOGO

COMMON STOCK
($.01 PAR VALUE)

Of the 5,500,000 shares of common stock, $.01 par value per share (the "Common
Stock"), of Box Hill Systems Corp. ("Box Hill" or the "Company") offered hereby
(the "Shares"), 3,300,000 shares are being issued and sold by the Company and
2,200,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of shares of Common Stock by the Selling Shareholders. See "Principal
and Selling Shareholders."

Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.

The Common Stock has been approved for listing on the New York Stock Exchange
under the symbol "BXH," subject to official notice of issuance.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES BEING OFFERED
HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1) SELLING
SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share...................... $15.00 $1.05 $13.95 $13.95
Total(2)....................... $82,500,000 $5,775,000 $46,035,000 $30,690,000
- ---------------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting expenses of the Offering payable by the Company estimated
at $700,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 825,000 additional shares of Common Stock at the Price to
Public less the Underwriting Discount solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $94,875,000,
$6,641,250 and $57,543,750, respectively. See "Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about September 22, 1997.

SALOMON BROTHERS INC MONTGOMERY SECURITIES

The date of this Prospectus is September 16, 1997.
<PAGE> 2

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING AND SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF
A PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

Certain statements contained in this "Prospectus Summary" and in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," including statements regarding the
anticipated development and expansion of the Company's business, the intent,
belief or current expectations of the Company, its directors or its officers,
primarily with respect to the future operating performance of the Company and
the products it expects to offer and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements. Because
such statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements include, but are not
limited to, the factors set forth in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, financial statements, including
the notes thereto, and pro forma financial information appearing elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under "Risk Factors." Unless otherwise stated, or unless the context
otherwise requires, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. All share totals stated herein reflect
a 3.3-for-1 stock split which will occur in connection with the Offering. See
"Glossary" for the Company's definitions of certain terms and acronyms used
herein.

THE COMPANY

Box Hill designs, manufactures, markets and supports high-performance data
storage systems for the Open Systems computing environment. The Company's
storage solutions encompass a broad range of scalable products and services
targeting high-end customers who demand high performance, high availability and
the highest level of customer and technical support. The Company has a history
of providing storage solutions that meet these requirements by combining
extensive design and implementation experience with leading edge technologies.
The Company was among the first to develop and successfully commercialize a
hot-swappable SCSI Disk Array storage system and a Redundant Array of
Inexpensive/Independent Disks ("RAID") storage system for UNIX. In addition, the
Company recently introduced the Fibre Box(R), one of the first Fibre Channel
storage systems, and is finalizing the development of its X/ORaid(TM) Module,
which takes advantage of the new RAID capabilities that are currently being
embedded in Fibre Channel drives. Box Hill is also a leader in providing
comprehensive "best of breed" backup solutions to the Open Systems marketplace.

Demand for the Company's products is fueled by the rapid proliferation of
new data-intensive applications, such as video, the Internet, intranets,
multimedia, data warehousing and data mining, as well as the migration of
mission-critical applications off mainframe computers. These products are
targeted to the high end of the Open Systems market, which is characterized by
large capacity UNIX and Windows NT servers operating in multi-platform
environments, generally running mission-critical applications. International
Data Corporation ("IDC"), an independent market research firm, estimates that
the worldwide market for RAID storage systems in UNIX environments will grow at
a compounded annual growth rate of 19.3%, increasing from $6.3 billion in 1996
to $12.9 billion in 2000. In addition, IDC estimates that the worldwide market
for RAID storage systems in Windows NT environments will grow at a compounded
annual growth rate of 34.1%, increasing from $1.3 billion in 1996 to $4.3
billion in 2000.

The Open Systems market's current storage options include Disk Arrays, RAID
storage systems and tape backup systems, each of which are generally attached to
hosts by the Small Computer Systems Interface ("SCSI"). Fibre Channel, an
emerging high-speed serial interface that has recently become commercially
available, enables the transfer of data between computers and peripherals at
substantially increased rates, over greatly increased cabling lengths and among
a greater number of host/device connections. Fibre Channel also enables industry
standard RAID functionality to be efficiently embedded

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in Fibre Channel disk drives, thereby eliminating the necessity for traditional
RAID approaches that include CPU-intensive software RAID or an additional
hardware RAID controller. In addition, the Company envisions the development of
storage area networks ("SAN"s), enabled principally by Fibre Channel and
"clustering" software, such as Microsoft's "Wolfpack," that will add networking
capabilities to storage devices.

The Company's family of products and services is intended to provide
high-end users in the Open Systems market with the following benefits: (i)
faster response times, greater capacities, higher availability of data and
minimum system downtime; (ii) reliable, high quality, well-integrated backup
systems designed to satisfy customers' individual needs; (iii) all-encompassing
solutions, including design consulting, installation, integration, training and
comprehensive, 24-hour, post-sales service and technical support, as well as
software-based management tools; (iv) systems specifically designed to be
compatible with a variety of UNIX and Windows NT platforms; and (v) scalable
systems designed to satisfy the changing information technology needs of
customers.

The Company employs a direct marketing strategy targeted at data-intensive
industries, which to date primarily include financial services,
telecommunications, health care, government/defense and academia. Some of the
Company's customers include Merrill Lynch, Smith Barney, AT&T, Bell Atlantic,
Lucent Technologies, Bristol-Meyers Squibb, Hoffmann-LaRoche, Lockheed Martin,
NASA, Columbia University and Rutgers University.

Box Hill's objective is to continue its growth and enhance its position as
a leading independent provider of storage solutions to the Open Systems
marketplace. To achieve this objective, the Company plans to build upon its
record of successfully introducing and commercializing new products and
technologies that address the evolving data storage needs of its high-end
customer base. Key elements of this strategy are to maintain technological
leadership and innovation, focus on high-end markets in target industries,
expand geographically, focus on direct sales to end users and develop
relationships with OEM customers.

The Company was incorporated in New York in April 1988. Its executive
offices are located at 161 Avenue of the Americas, New York, NY 10013 and its
telephone number is (212) 989-4455.

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<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered:
By the Company...................................... 3,300,000 shares
By the Selling Shareholders......................... 2,200,000 shares
Total....................................... 5,500,000 shares
Common Stock Outstanding After the Offering(1)........ 13,200,000 shares
Use of Proceeds....................................... The net proceeds to the Company from
the Offering will be used principally
to fund the Company's growth and
expansion plans, increase working
capital and for other general
corporate purposes. In addition, a
portion of the net proceeds will be
used to distribute to the current
shareholders the previously taxed,
but undistributed, S Corporation
earnings, estimated at $10,500,000
had the termination occurred on June
30, 1997. See "Use of Proceeds."
New York Stock Exchange Symbol........................ BXH
</TABLE>

- ---------------
(1) Excludes 1,645,797 shares of Common Stock issuable upon exercise of
outstanding stock options. See "Management -- Incentive Program" and Note 5
of Notes to the Company's Financial Statements.

RISK FACTORS

See "Risk Factors" beginning on page 7 for a discussion of certain factors
that should be considered by prospective purchasers of the Shares being offered
hereby.

5
<PAGE> 6

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues...................................... $27,608 $44,956 $55,232 $40,225 $50,027 $23,144 $32,228
Cost of goods sold................................ 17,018 26,453 33,568 24,067 33,028 15,234 20,828
------- ------- ------- ------- ------- ------- -------
Gross profit...................................... 10,590 18,503 21,664 16,158 16,999 7,910 11,400
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Shareholder officers' compensation.............. 6,021 12,608 15,174 9,067 6,347 2,914 4,908
Engineering and product development............. 659 975 1,420 1,634 2,071 1,036 1,082
Sales and marketing............................. 955 1,569 2,405 3,150 5,325 2,479 3,285
General and administrative...................... 526 831 1,351 1,931 2,348 1,065 1,418
------- ------- ------- ------- ------- ------- -------
Total operating expenses.......................... 8,161 15,983 20,350 15,782 16,091 7,494 10,693
------- ------- ------- ------- ------- ------- -------
Operating income.................................. 2,429 2,520 1,314 376 908 416 707
Interest expense (income), net.................... (16) (80) 62 33 (144) (43) (22)
------- ------- ------- ------- ------- ------- -------
Income before income taxes........................ 2,445 2,600 1,252 343 1,052 459 729
Income taxes(1)................................... 238 459 426 311 226 103 160
------- ------- ------- ------- ------- ------- -------
Net income(1)..................................... $ 2,207 $ 2,141 $ 826 $ 32 $ 826 $ 356 $ 569
======= ======= ======= ======= ======= ======= =======
Pro forma income before income taxes(2)........... $ 6,124 $ 2,735 $ 4,999
Pro forma income taxes(3)......................... 2,358 1,053 1,925
------- ------- -------
Pro forma net income.............................. $ 3,766 $ 1,682 $ 3,074
======= ======= =======
Pro forma net income per share(4)................. $ .32 $ .14 $ .26
======= ======= =======
Shares used in computing pro forma net income per
share(4)........................................ 11,737 11,727 11,746
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 6,536 $ 6,536 $ 41,371
Working capital (deficit)................................................ 8,685 (1,201) 44,134
Total assets............................................................. 26,483 27,171 62,006
Shareholders' equity (deficit)........................................... 9,338 (474) 44,861
</TABLE>

- ---------------
(1) For the periods presented, the Company was an S Corporation and,
accordingly, was not subject to federal and state income taxes. Income taxes
consist of New York City taxes and state franchise taxes.

(2) Pro forma income before income taxes reflects a pro forma adjustment to
reduce shareholder officers' compensation expense to reflect recently
executed employment agreements with the Company's three shareholder officers
which extend through December 31, 2000. The agreements provide for combined
minimum annual base compensation for the three shareholder officers of
$1,275,000. In addition, the shareholder officers are eligible for a
combined annual bonus equal to 1.0% of the Company's net revenues in excess
of $100,000,000, plus 8.0% of the Company's income before income taxes in
excess of $20,000,000. See Notes 2 and 8 of Notes to the Company's Financial
Statements and "Management -- Employment and Compensation Agreements."

(3) Pro forma income taxes have been computed as if the Company was subject to
federal and state income taxes for all periods presented, based on the tax
laws in effect during those periods. See Note 2 of Notes to the Company's
Financial Statements.

(4) Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding for the respective
periods, adjusted for the effect of dilutive common stock options, and after
giving effect to the estimated number of shares that would be required to be
sold at the initial public offering price after deducting the underwriting
discount to fund a distribution to the current shareholders of all
previously taxed, but undistributed, S Corporation earnings, estimated at
$10,500,000 had the termination occurred on June 30, 1997. See Note 2 of
Notes to the Company's Financial Statements and "Termination of S
Corporation Status and Dividend Policy."

(5) Adjusted to give pro forma effect to (i) a final S Corporation distribution
to the current shareholders, representing all previously taxed, but
undistributed, S Corporation earnings, estimated at $10,500,000 had the
termination occurred on June 30, 1997 and (ii) a net deferred tax asset
which will be recorded by the Company as a result of the termination of its
S Corporation status, estimated at $688,000 had such termination occurred on
June 30, 1997. See Note 2 of Notes to the Company's Financial Statements and
"Termination of S Corporation Status and Dividend Policy."

(6) Adjusted to give effect to (i) the pro forma adjustments described in (5)
above and (ii) the sale by the Company of 3,300,000 shares of Common Stock
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."

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<PAGE> 7

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the anticipated
development and expansion of the Company's business, the intent, belief or
current expectations of the Company, its directors or its officers, primarily
with respect to the future operating performance of the Company and the products
it expects to offer and other statements contained herein regarding matters that
are not historical facts, are "forward-looking" statements. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the risk factors set forth below
before making an investment in the Common Stock.

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INTRODUCTION OF FIBRE
CHANNEL PRODUCT LINE

The Open Systems storage market in which the Company operates is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. Customer preferences in that market are
difficult to predict. The introduction of products embodying new technologies by
the Company's competitors and the emergence of new industry standards could
render the Company's existing products as well as new products being introduced,
such as the Fibre Box(R), its recently introduced Fibre Channel storage system,
obsolete and unmarketable. The Company's success will depend upon its ability to
address the increasingly sophisticated needs of its customers and to develop and
introduce, on a timely basis, new competitive products (including new software
and enhancements to existing software) that keep pace with technological
developments and emerging industry standards and to enhance existing products.
The introduction of new and enhanced products such as the Fibre Box(R) also
requires that the Company manage transitions from older products in order to
minimize disruptions in customer orders and ensure that adequate supplies of new
products can be delivered to meet customer orders. There can be no assurance
that the Company will be successful in identifying, managing, developing,
manufacturing or marketing product enhancements or new products that respond to
technological change or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of such products, or that its new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. Further risks inherent in new product introductions
include the uncertainty of price performance relative to products of
competitors, including competitors' responses to new introductions. The
Company's business and operating results could be materially and adversely
affected if the Company were to be unsuccessful, or to incur significant delays,
in developing and introducing new products or enhancements.

The Company has begun shipping the Fibre Box(R) principally for customer
evaluation and has made limited sales to date. The Company does not anticipate
commencing significant commercial shipment of the Fibre Box(R) until 1998.
Currently, Fibre Box(R) is compatible only with Windows NT platforms, and there
can be no assurance that the Company will be successful in modifying the Fibre
Box(R) and its key components to be compatible with any of the UNIX platforms.
Moreover, the X/ORaid(TM) Module, a future optional component of the Fibre
Box(R) product line which activates RAID processors embedded on the Fibre
Channel disk drives, is currently in development, and there can be no assurance
that the Company will be successful in bringing it to market. The failure of the
Fibre Box(R) and other new products to adequately meet current preferences of
the marketplace or achieve market acceptance could have a

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<PAGE> 8

material adverse effect on the Company's business, financial position and
results of operations. See "Business -- Current and Emerging Technologies."

DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS

The Company relies on other companies to supply certain key components of
its products that are available only from limited sources in the quantities and
quality demanded by the Company. The Company purchases substantially all of its
disk drives and all of its Fibre Channel drives from Seagate Technology, Inc.
("Seagate"), its DLT tape drives only from Quantum Corporation ("Quantum") and
its hardware RAID controllers only from CMD Technology, Inc. ("CMD").
Approximately 35.6%, 52.7% and 39.4% of the Company's raw material purchases
were from Seagate and approximately 13.8%, 16.5% and 9.7% of the Company's total
raw material purchases were from Quantum in the years ended December 31, 1995
and 1996 and for the six months ended June 30, 1997, respectively. In addition,
the Company purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements, and
maintains minimum inventory levels. Quantum is the only supplier of DLT tape
drives, which are currently in tight supply, and Seagate is the only
manufacturer and distributor of Fibre Channel drives. If the Company faced a
shortage of DLT tape drives or Fibre Channel drives, manufacture and shipment of
certain of the Company's products could be delayed indefinitely, as long as
there continue to be no alternative sources of supply. Even if alternative
sources of supply became available, the incorporation of such components from
alternative suppliers and the manufacture and shipment of such products could be
delayed while modifications to such products and accompanying software were made
to accommodate the introduction of alternative suppliers' components. The
Company has experienced a shortage of DLT tape drives in the past, and there can
be no assurance that the Company will not experience shortages of these or other
components in the future. Although hardware RAID controllers are available from
other sources, the Company estimates that replacing CMD's hardware RAID
controllers with those of another supplier would involve several months of
hardware and software modification. The Company's reliance on the limited number
of suppliers for key components of its products, the absence of long term
purchase agreements in connection therewith, the fact that the Company maintains
minimum inventory levels and the fact that there is currently a significant
market demand for disk drives, tape drives and hardware RAID controllers involve
several risks in addition to inadequate supply. These risks include the
potential for price increases, selective supply allocations, late deliveries and
poor component quality. They are particularly significant with respect to
suppliers of disk drives because, in order to meet product performance or
individual customer requirements, the Company must obtain disk drives with
extremely high quality and capacity. There can be no assurance that the Company
will not experience shortages of key components in the future or that the
Company will not be subject to selective supply allocations and increased prices
of components. Any shortage of key components and any delay or other difficulty
in obtaining such components from other suppliers and integrating them into the
Company's products could materially and adversely affect the Company's business,
financial position and results of operations.

CONCENTRATION OF CUSTOMERS IN TARGETED INDUSTRIES AND THE UNIX MARKETPLACE

The Company has historically targeted industries requiring high-end storage
products, and a material portion of the Company's revenues to date has been
derived from sales to customers in the financial services industry and the
telecommunications industry. In 1995, direct sales to customers in the financial
services and telecommunications industries constituted 55% and 9%, respectively,
of Box Hill's net revenues and in 1996, 42% and 18%, respectively. An economic
downturn in any industry targeted by the Company with a material concentration
of customers could result in a material decrease in revenues. In 1994, a severe
downturn in the bond market caused several of the Company's large customers in
the financial services industry to reduce significantly their purchasing. This
contributed to a material decrease in net revenues of 27% from 1994 to 1995.

In addition, historically, a material percentage of the Company's revenues
in each year has been derived from a limited number of customers. For example,
in 1995, the Company's top five customers,

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<PAGE> 9

including distributors, accounted for approximately 36% of the Company's total
net revenues (a reduction from 45% in 1994). Similarly, in 1996, sales to the
top five customers (some of which were different from the top five in 1995)
represented approximately 36% of the Company's total net revenues. In 1995, two
customers (a major investment banking firm and a distributor in Tokyo) were each
responsible for more than 10% of the Company's revenues (24% in the aggregate).
In 1996 and 1997, no customer was responsible for 10% or more of the Company's
revenues, but in the six months ended June 30, 1997, direct sales to Lucent
Technologies Inc. and AT&T Corp. represented, in the aggregate, approximately
17% thereof. The Company generally does not enter into long-term contracts with
its customers, and customers generally have certain rights to extend or delay
the shipment of their orders or cancel orders without penalty. Loss of any one
or more principal customers or a material decrease in their orders could
materially and adversely affect the Company's business, financial position and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Substantially all of the Company's revenues to date have been concentrated
in the UNIX marketplace, and within the UNIX marketplace, a significant portion
of the Company's revenues are associated with versions of UNIX manufactured by
Sun Microsystems, Inc. ("Sun Microsystems"). If Sun Microsystems were to change
its policy of supporting Open Systems computing environments and if the
Company's products were thereby rendered incompatible with Sun Microsystems'
products, the Company's business, financial position and results of operations
could be materially and adversely affected.

DIFFICULTIES IN MANAGING GROWTH

The Company's growth and expansion may place a significant strain on its
administrative, operational and financial resources and increased demands on its
manufacturing, sales and customer service functions, especially as the Company
attempts to expand its geographic reach and becomes less reliant on the
financial services and telecommunications industries. The Company's operations
have been based in New York City since its incorporation, and its sales have
been effected primarily in the northeastern region of the United States. The
opening of new offices may result in the loss of benefits derived from the
concentration of marketing and technical support in the Company's New York
office and the close proximity of such resources to a significant portion of its
customer base. To manage its growth effectively, the Company will need to hire,
train, motivate and manage new management, technical and sales employees. In
connection with its planned geographical expansion, the Company will incur
travel, telecommunications and other incremental costs, as well as increased
human resources costs. The failure by the Company to generate sufficient
revenues to offset the costs of geographical expansion could have a material
adverse effect on the Company's business, operating results or financial
condition. If the Company is able to successfully execute its expansion plans
but growth in demand for its products increases at a significantly higher rate
than anticipated, the Company may lack the production capacity necessary to
satisfy such demand in a timely fashion and its customers may experience
manufacturing or delivery delays or interruptions in service and support which
could have a material adverse effect on the Company's business and financial
position. This risk may be exacerbated by the fact that the Company does not
have long term purchase agreements with customers and maintains minimal
inventory levels, making it difficult for the Company to forecast demand for its
products, optimize utilization of manufacturing capacity and avoid the
possibility that the Company's resources may be excessively burdened from time
to time if customers place orders for substantially more products than they
customarily require. There can be no assurance that the Company will be able to
manage expansion successfully or that the Company's infrastructure, including
but not limited to its systems, procedures and controls, will be adequate to
support such expansion. In addition, there can be no assurance that the Company
will be able to achieve commercial success and maintain client service and
support in a geographically expanded area of operations at levels that it
historically achieved and provided in a geographically concentrated area.

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COMPETITION

The market for Open Systems storage is intensely competitive. The Company
competes primarily with traditional suppliers of computer systems such as Compaq
Computer Corporation, Hewlett-Packard Company ("Hewlett-Packard"), Sun
Microsystems, International Business Machines Corporation ("IBM"), Data General
Corporation and Digital Equipment Corporation, which market storage systems as
well as other computer products. The Company also competes against independent
storage system suppliers to the high-end Open Systems market, including EMC
Corporation, Network Appliance, Inc., Ciprico Inc. and MTI Technology
Corporation ("MTI"). In the area of tape backup, the Company competes with
suppliers of tape-based storage systems such as Datalink Corporation, MTI and
numerous resellers.

Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of products than the Company, or to
deliver competitive products at a lower end-user price. The Company also expects
that competition will increase as a result of industry consolidations. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
may result in price reductions, reduced operating margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition.

COMPETITIVE PRICING

Competitive pricing pressures exist in the data storage market, and have
had and may in the future have an adverse effect on the Company's revenues and
earnings. There also has been, and may continue to be, a willingness on the part
of certain large competitors to reduce prices in order to preserve or gain
market share, which cannot be foreseen by the Company. The Company believes that
pricing pressures are likely to continue as competitors develop more competitive
product offerings.

DEPENDENCE ON KEY PERSONNEL

The Company's future operating results depend in significant part upon the
continued contributions of its officers and other key management and technical
personnel, particularly engineers, many of whom would be difficult to replace.
The Company's employees, including several members of its management team, may
voluntarily terminate their employment with the Company at any time, and
competition for qualified employees in the data storage industry is intense. The
Company has employment agreements with Dr. Benjamin Monderer and Ms. Carol
Turchin (who are husband and wife) and Mr. Mark Mays that run through December
31, 2000. Dr. Monderer, the Company's President, Chairman of the Board and Chief
Technical Officer, Ms. Turchin, a Director and Executive Vice President of the
Company, and Mr. Mays, a Director, Vice President and Secretary of the Company,
are co-founders of the Company. Although the employment agreements with each of
these officers and the Company's Compensation Plan and Agreement with Mr. Philip
Black, its Chief Executive Officer, contain non-competition and confidentiality
agreements (see "Management" and "Principal and Selling Shareholders"), there
can be no assurance that these provisions will be enforceable in whole or in
part. In addition, the Company does not maintain key-person insurance on any
executive officer in the Company, although the Company under its employment
agreements with Dr. Monderer and Ms. Turchin is required to obtain insurance on
each of their lives in the principal amount of $1,000,000 payable to his or her
spouse. The loss of any employee who is critical to the Company's success could
have a material adverse effect on the business, financial position and results
of operations of the Company. In addition, the Company's future operating
results depend in part upon its ability to attract, train, retain and motivate
qualified management, technical, manufacturing, sales and support personnel for
its operations. Competitive factors that could affect the

10
<PAGE> 11

Company's ability to attract and retain such personnel include compensation,
benefits, equity incentives and geographic location. There can be no assurance
that the Company will be successful in attracting or retaining such key
personnel, and the failure of the Company to recruit and retain additional key
personnel could materially and adversely affect the Company's business,
financial position and results of operations. See "-- Difficulties in Managing
Growth," "Business -- Employees" and "Management -- Employment and Compensation
Agreements."

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT

The Company has no patent protection for its products and has attempted to
protect its proprietary software and other intellectual property rights through
copyrights, trade secrets and other measures. There can be no assurance,
however, that the Company will be able to protect its proprietary software and
other intellectual property rights adequately or that competitors, all of whom
have legitimate access to any non-proprietary technical standards utilized by
the Company in any of its products or systems (such as those established by the
American National Standards Institute ("ANSI")) will not be able to develop
similar technology independently. For example, a number of the Company's
competitors are producing or plan to produce products that incorporate Fibre
Channel technology.

The Company may from time to time be notified by third parties that it may
be infringing patents owned by or proprietary rights of third parties, although
no such claims are currently pending against the Company. If necessary, the
Company may have to seek a license under any such patent, or redesign or modify
its products and processes in order to avoid infringement of such patents. There
can be no assurance that such a license would be available on acceptable terms,
if at all, or that the Company could so avoid infringement of such patents, in
which case the Company's business, financial position and results of operations
could be materially and adversely affected.

There has been substantial litigation in the computer industry regarding
intellectual property rights, and litigation may be necessary to protect the
Company's proprietary technology. It is also possible that companies in the
storage system market will increasingly be subject to infringement claims as the
number of products and competitors in the Company's target markets grows. Any
such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign or modify its products or
require the Company to enter into royalty or licensing agreements, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology or duplicate the Company's products or design. See
"Business -- Proprietary Technology and Intellectual Property."

DEPENDENCE ON SINGLE FACILITY

The Company believes that its success to date has been, and future results
of operations will be, dependent in large part upon its ability to manufacture
and deliver products promptly upon the receipt of orders and to provide prompt
and efficient service to its customers. As a result, any disruption of the
Company's day-to-day operations could have a material adverse effect upon the
Company. The Company's operations, including manufacturing, research, marketing,
customer service and distribution functions, are based in and managed from a
single facility in New York City. A fire, flood, earthquake or other disaster or
condition affecting the Company's facility could disable these functions. Any
such damage to, or other condition interfering with the operation of, this
facility would have a material adverse effect on the Company's business,
financial position and results of operations. See "Business -- Facilities."

11
<PAGE> 12

FLUCTUATIONS IN OPERATING RESULTS

The Company believes that its operating results may continue to fluctuate
annually and quarterly (and within quarters) due to a variety of factors, some
of which are beyond the Company's control, including: the level of competition
and the development of new products by competitors; developments and changes in
storage technology; levels of expenditures on research and development; the
ability of the Company to develop and introduce new products and product
enhancements on a timely basis and within the allocated budget; the Company's
success in expanding its sales and marketing programs, including its strategy to
increase OEM sales; acceptance of and demand for the Company's products
(including the Company's recently introduced Fibre Box(R) and any other new
products and product enhancements); changes in customers' storage requirements
or purchasing policies with respect to equipment and services related thereto;
the size, timing, cancellation or rescheduling of significant orders;
postponements or deferrals of orders for new products in anticipation of new
products or product enhancements; the mix of products and systems sold; changes
in pricing by the Company or any of its competitors; component costs and
availability, particularly with respect to those components for which the
Company has only one supplier; changes in Company strategy; general economic
trends; and other factors. For the years ended December 31, 1994, 1995 and 1996,
net revenues of the Company were $55.2 million, $40.2 million and $50.0 million,
respectively, and operating income of the Company before shareholder officers'
compensation was $16.5 million, $9.4 million and $7.3 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The Company establishes expenditure levels for product development and
other operating expenses based in large part on expected future revenues.
However, for all of the reasons set forth above and because the market for the
Company's products is rapidly evolving and purchase decisions by customers may
be affected by budgetary considerations, sales for any future quarterly or
annual period cannot be predicted with a significant degree of accuracy and
period-to-period comparisons should not be relied upon as indications of future
performance. The Company experienced increases in revenues at the end of each
quarter of 1996 and at the end of each of the first two quarters of 1997. If
revenues fall below expected levels, expenditure levels could be
disproportionately high as a percentage of revenues and operating results could
be materially and adversely affected. Fluctuations in operating results could
result in volatility in the price of the Common Stock.

WARRANTY EXPOSURE

Products offered by the Company may contain defects in hardware, software
or workmanship that remain undetected or that may not become apparent until
after commercial shipment. As a general policy, the Company ships replacement
hardware components to customers in advance of receiving returns of defective
components under a standard warranty, which runs from one to five years. The
Company occasionally issues credit in lieu of replacing a piece of equipment.
Any loss or delay in customer or market acceptance attributable to such defects
or any material replacement or repair expenses due to any such defects could
have a material adverse effect on the Company's business, financial position and
results of operations.

The Company's standard warranties as to hardware products generally mirror
those the Company receives from its component suppliers. To the extent that the
Company designs and manufactures its own subassemblies, its own warranty is not
supported by a supplier warranty. If a supplier were to fail to meet its
warranty obligations to the Company, and to the extent that the Company designs
and manufactures it own subassemblies, the Company would be liable to its
customers under its own warranty. The Company's standard warranty also contains
a cap on damages and an exclusion of liability for consequential damages and for
negligent or improper use of the product. It is possible that the limitation of
liability provisions contained in the Company's warranties will not be
enforceable. There can be no assurance that suppliers will be willing or able to
cover warranty costs to the Company or its end users, that the Company's
warranty costs will not be significant in the future, or that the limitation of
liability provisions will be enforceable. Any such failure of a supplier to
honor its warranty obligations or

12
<PAGE> 13

failure of liability limitations to be enforceable could have a material adverse
effect on the Company's business, financial position and results of operations.
See "Business -- Customer Service and Support."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

Although sales of the Company's products outside of the United States to
date have represented less than 20% of net revenues, the Company intends to
expand its operations internationally. These efforts will require significant
management attention and financial resources. There can be no assurance that
said efforts will be successful. Although sales are effected in U.S. dollars,
international sales are subject to a number of risks, including longer payment
cycles, unexpected changes in regulatory requirements, import and export
restrictions and tariffs, the burden of complying with a variety of foreign
laws, potentially adverse tax consequences, currency fluctuations, the
imposition of currency exchange or price controls, and political and economic
instability abroad. Additionally, proprietary rights and intellectual property
may be more difficult to protect outside of the United States. If the Company
increases its international sales, its total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.

MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS

The Company has not designated any specific use for a substantial portion
of the net proceeds payable to the Company from the sale of Common Stock
described in this Prospectus. The Company will use a portion of the proceeds to
distribute to the current shareholders all of the previously taxed, but
undistributed, S Corporation earnings of the Company. As of June 30, 1997, this
amount is estimated at $10,500,000. The actual amount of the distribution will
be adjusted to reflect the S Corporation's pro rata portion of the Company's
1997 taxable income and any shareholder distributions from July 1, 1997 through
the termination of the S Corporation status. The Company intends to use the
balance of the net proceeds payable to the Company primarily to fund its growth
and expansion generally and to increase the Company's working capital and for
general corporate purposes which the management of the Company will determine
from time to time. Accordingly, the Board of Directors and management of the
Company will have significant flexibility in applying such remaining proceeds of
the Offering. The failure of the Company's management to use such funds
effectively could have a material adverse effect on the Company's business,
financial position and results of operations. See "-- Prior S Corporation Status
and Distribution to Current Shareholders", "Use of Proceeds" and "Termination of
S Corporation Status and Dividend Policy."

CONTROL BY CURRENT SHAREHOLDERS

Immediately following the consummation of the Offering, the three current
shareholders of the Company, each of whom is an officer and director of the
Company, will own beneficially approximately 58.3% of the outstanding Common
Stock (approximately 54.9% if the Underwriters' over-allotment option is
exercised in full), based on shares outstanding at the date of the Prospectus.
These shareholders have entered into a voting agreement to vote these shares for
their elections as directors and to vote in accordance with the determination of
the holders of a majority of the shares they own on proposals to merge,
consolidate or sell substantially all the assets of the Company. As a result of
their share ownership they will be able to elect a majority of the Company's
Board of Directors and approve all matters requiring shareholder approval, and
will have significant control over the Company and the conduct of its business.
Such concentration of ownership and the voting agreement may have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Principal and Selling Shareholders."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or, if one develops, that it will be maintained. The
initial public offering price, which was established by negotiations among the

13
<PAGE> 14

Company, the Selling Shareholders and the representatives of the Underwriters
(the "Representatives"), may not be indicative of prices that will prevail in
the trading market for the Common Stock. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
In addition, the market price of the Common Stock may be volatile. Factors such
as fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to the proprietary rights of the Company or its
competitors, and general market conditions may have a significant effect on the
market price of the Common Stock.

PRIOR S CORPORATION STATUS AND DISTRIBUTION TO CURRENT SHAREHOLDERS

The Company elected to be treated as an S Corporation for federal and state
income tax purposes for its taxable years beginning on or after October 1, 1990.
Unlike a C Corporation, an S Corporation is generally not subject to income tax
at the corporate level; instead, the S Corporation's income is taxed on the
personal income tax returns of its shareholders. The Company's status as an S
Corporation will terminate concurrent with the Offering. If S Corporation status
were denied for any periods prior to this termination by reason of a failure to
satisfy the S Corporation election or eligibility requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company would be subject to
tax on its income as if it were a C Corporation for these periods.

In connection with the termination of the Company's S Corporation status,
the Company will make a distribution to the current shareholders of all
previously taxed, but undistributed, S Corporation earnings of the Company. As
of June 30, 1997, such distribution amount is approximately $10,500,000. The
actual amount of the distribution will be adjusted to reflect the S
Corporation's pro rata portion of the Company's 1997 taxable income and any
shareholder distributions from July 1, 1997 through the termination of the S
Corporation status. Purchasers of Common Stock in this offering will not receive
any of the distributions described above. See "Use of Proceeds," and
"Termination of S Corporation Status and Dividend Policy."

NO DIVIDENDS IN FORESEEABLE FUTURE

The Company does not intend to pay cash dividends in the foreseeable future
and plans to retain all future earnings for use in the expansion and operation
of its businesses and for general corporate purposes. See "Termination of S
Corporation Status and Dividend Policy."

SHARES ELIGIBLE FOR FUTURE SALES

Immediately following the consummation of the Offering, the Company will
have outstanding 13,200,000 shares of Common Stock (14,025,000 shares
outstanding if the Underwriters' over-allotment option is exercised in full),
including 7,700,000 outstanding shares of Common Stock beneficially owned by the
current shareholders. The 5,500,000 shares of Common Stock to be sold by the
Company and the Selling Shareholders pursuant to the Offering (6,325,000 shares
if the Underwriters' over-allotment option is exercised in full) will be
eligible for sale without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), in the public market after the consummation of
the Offering. Holders of the remaining 7,700,000 shares have agreed with the
Underwriters not to offer, sell, pledge or otherwise dispose of any shares of
Common Stock for a period of 270 days after the date of this Prospectus without
the prior written consent of Salomon Brothers Inc. Additionally, the Company and
the officers and directors who are not Selling Shareholders have agreed not to
issue and sell (other than issuances by the Company pursuant to the Incentive
Program and the Employee Stock Purchase Plan and other than bona fide gifts to
persons who agree in writing to be bound by the terms of such restrictions) any
shares of Common Stock or other equity securities of the Company for a period of
180 days after the date of this Prospectus without the prior written consent of
Salomon Brothers Inc. Following the expiration or waiver of the foregoing
restrictions on dispositions, 7,700,000 shares of Common Stock owned by the
current shareholders, each of whom is an affiliate of the Company, will be
available for sale into the public market pursuant to Rule 144 (including the
volume and other limitations set forth therein) and could impair the

14
<PAGE> 15

Company's future ability to raise capital through an offering of its equity
securities. Sales of substantial amounts of Common Stock of the Company in the
public market, or the prospect of such sales, could materially and adversely
affect the market price of the Common Stock. See "Description of Capital Stock"
and "Shares Eligible for Future Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION

The purchasers of shares of Common Stock pursuant to the Offering will
experience dilution of $11.60 per share in the net tangible book value per share
of Common Stock from the initial offering price of $15.00 per share. See
"Dilution."

BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS

This Offering will provide substantial benefits to three current
shareholders of the Company, each of whom is a director and an executive officer
of the Company. Consummation of this Offering is expected to create a public
market for the Common Stock of the Company. This Offering will result for the
current shareholders, who paid a nominal amount for an aggregate of 9,900,000
shares of Common Stock, in a gain to them of approximately $30,690,000 from the
sale of an aggregate of 2,200,000 shares and a gross unrealized gain in the
aggregate of approximately $115.5 million based on the initial public offering
price of $15.00 per share. In addition the Company will distribute to those
shareholders from the proceeds of the Company's offering all previously taxed
but undistributed S Corporation earnings of the Company, which as of June 30,
1997 amounted to approximately $10,500,000. See "-- No Prior Public Market,
Possible Volatility of Stock Price", "Dilution" and "Termination of S
Corporation Status and Dividend Policy."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Business Corporation Law of the State of New York
("NYBCL") could have the effect of making it more difficult for a third party to
acquire, and as a result discourage a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock.

15
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the Offering, after deducting
estimated underwriting discount and expenses of the Offering payable by the
Company, will be approximately $45,335,000. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Shareholders.
The principal purposes of this Offering are to fund the Company's growth and
expansion generally, increase the Company's working capital and equity base,
provide a public market for its Common Stock, provide liquidity to shareholders
and facilitate future access to the public capital markets. The Company also
plans to use a portion of the net proceeds of this Offering payable to the
Company to fund the final S Corporation distribution to the current
shareholders. This distribution will constitute all of the previously taxed, but
undistributed, S Corporation earnings. As of June 30, 1997, such distribution
amount is approximately $10,500,000. The actual amount of the distribution will
be adjusted to reflect the S Corporation's pro rata portion of the Company's
1997 taxable income and any shareholder distributions from July 1, 1997 through
the termination of the S Corporation status.

Since the proceeds of the Offering will be applied over time, the actual
expenditure of such proceeds for any purpose could vary significantly from the
anticipated expenditures described above. Pending their use by the Company as
described above, the Company intends to invest the net proceeds of the Offering
in short-term, investment-grade instruments.

TERMINATION OF S CORPORATION STATUS AND DIVIDEND POLICY

On October 1, 1990, the Company elected to be treated as an S Corporation
and since then has been, and through the effective date of the Offering will be,
subject to taxation under Subchapter S under the Internal Revenue Code of 1986,
as amended (the "Code"). As a result, the Company's earnings have been taxed for
federal and state income tax purposes directly to the shareholders rather than
to the Company. Upon conversion from S Corporation to C Corporation status, the
Company will become subject to federal and state corporate income taxes.

In connection with the termination of the Company's S Corporation status,
the Company will make a distribution to the current shareholders of all
previously taxed, but undistributed, S Corporation earnings of the Company. As
of June 30, 1997, such distribution amount is approximately $10,500,000. The
actual amount of the distribution will be adjusted to reflect the S
Corporation's pro rata portion of the Company's 1997 taxable income and any
shareholder distributions from July 1, 1997 through the termination of the S
Corporation status. Following the termination of its S Corporation status, the
Company will record a net deferred tax asset on its balance sheet and record a
corresponding income tax benefit in its statement of income which will
ultimately increase retained earnings. See Note 2 of Notes to the Company's
Financial Statements.

The Company does not intend to pay cash dividends in the foreseeable future
and plans to retain all of its future earnings for use in the expansion and
operation of its business and for general corporate purposes. The payment of
dividends in the future, if any, will be at the discretion of the Board of
Directors of the Company and will depend upon, among other factors, the
Company's earnings, financial condition, capital requirements and general
business outlook at the time the dividend is considered as well as the impact of
the distribution of dividends on the Company's financial condition and tax
liabilities.

16
<PAGE> 17

CAPITALIZATION

The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the final S Corporation distribution to the current
shareholders and the recognition of a deferred tax asset resulting from the
termination of the Company's S Corporation status as if the distribution and
termination occurred on June 30, 1997, and (iii) the pro forma capitalization as
adjusted to give effect to the sale by the Company of 3,300,000 shares of Common
Stock at the initial public offering price.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Indebtedness.............................................. $ -- $ -- $ --(1)
====== ====== ======
Shareholders' equity (deficit):
Preferred Stock: $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding(2)...... $ -- $ -- $ --
Common Stock: $.01 par value, 40,000,000 shares
authorized; 9,900,000 shares issued and outstanding,
actual and pro forma; and 13,200,000 shares issued
and outstanding, as adjusted(3)...................... 99 99 132
Additional paid-in capital.............................. -- -- 45,302
Retained earnings (accumulated deficit)................. 9,239 (573)(4) (573)(4)
------ ------ ------
Total shareholders' equity (deficit)................. 9,338 (474) 44,861
------ ------ ------
Total capitalization............................ $9,338 $(474) $44,861
====== ====== ======
</TABLE>

- ---------------
(1) The Company received a commitment in August 1997 from a bank to provide
during the period following the Offering through April 30, 1998, a line of
credit of up to $10,000,000 bearing interest at the bank's prime rate,
pursuant to an agreement which will require the borrowings to be secured by
a pledge of substantially all of the Company's assets.

(2) Concurrent with the Company's conversion to C Corporation status, the
Company will amend its Certificate of Incorporation to authorize a class of
Preferred Stock.

(3) Does not include the following shares of Common Stock: (i) 2,392,500 shares
reserved for issuance upon exercise of options authorized under the
Company's Incentive Program, (ii) 250,000 shares reserved for issuance under
the Company's Employee Stock Purchase Plan, and (iii) 825,000 shares to be
issued upon exercise of the over-allotment option granted to the
Underwriters. See "Management -- Incentive Program" and "-- Employee Stock
Purchase Plan" and Note 5 of Notes to the Company's Financial Statements.

(4) Adjusted to give pro forma effect to (i) a final S Corporation distribution
to the current shareholders, representing all previously taxed, but
undistributed, S Corporation earnings, estimated at $10,500,000 had the
termination occurred on June 30, 1997 and (ii) a net deferred tax asset
which will be recorded by the Company as a result of the termination of its
S Corporation status, estimated at $688,000 had such termination occurred on
June 30, 1997. See Note 2 of Notes to the Company's Financial Statements and
"Termination of S Corporation Status and Dividend Policy."

17
<PAGE> 18

DILUTION

The net tangible book value of the Company as of June 30, 1997 was
$9,338,000, or $.94 per share of Common Stock. Net tangible book value per share
is determined by dividing the Company's tangible net worth (tangible assets less
total liabilities) by the number of shares of Common Stock outstanding. After
giving effect to (i) the sale by the Company of 3,300,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom
(after deducting estimated Offering expenses and the underwriting discount),
(ii) the final S Corporation distribution to the current shareholders, estimated
at $10,500,000, had the termination occurred on June 30, 1997, and (iii) the
recognition of a deferred tax asset, estimated at $688,000, resulting from the
termination of the Company's S Corporation status had such termination occurred
on June 30, 1997, the pro forma, as adjusted, net tangible book value of the
Company at June 30, 1997 would have been $44,861,000, or $3.40 per share. This
represents an immediate dilution of $11.60 per share in the net tangible book
value to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price..................................... $15.00
Net tangible book value at June 30, 1997........................ $ .94
Decrease attributable to the final S Corporation distribution,
net of increase attributed to the recognition of a deferred
tax asset.................................................... (.99)
Increase attributable to new investors.......................... 3.45
----
Pro forma, as adjusted, net tangible book value after Offering.... 3.40
-----
Dilution per share to new investors............................... $11.60
=====
</TABLE>

The above table excludes shares of Common Stock issuable upon exercise of
outstanding options under the Company's Incentive Program. If all outstanding
options at June 30, 1997 with exercise prices less than the initial public
offering price per share were exercised, the pro forma, as adjusted, net
tangible book value after the Offering would be $3.43 per share and the dilution
per share to new investors in this Offering would be $11.57 per share.

The following table summarizes, as of June 30, 1997, on a pro forma basis
and after giving effect to the Offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share paid by the existing shareholders and to be paid by new
investors purchasing Common Stock in the Offering.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Current shareholders(1)... 9,900,000 75% $ 8,000 .02% $ .001
New investors(1).......... 3,300,000 25 49,500,000 99.98 15.00
---------- --- ---------- ----- -------
Total........... 13,200,000 100% 49,508,000 100%
========== === ========== =====
</TABLE>

- ---------------
(1) The above table does not give effect to the sale of Common Stock by the
Selling Shareholders. The sale by the Selling Shareholders of 2,200,000
shares in the Offering will reduce the number of shares held by current
shareholders to 7,700,000, or approximately 58.3%, and will increase the
number of shares held by new investors to 5,500,000, or approximately 41.7%,
of the outstanding Common Stock to be outstanding after the Offering.

18
<PAGE> 19

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The selected historical financial data set forth below as of and for the
year ended December 31, 1996 has been derived from the Company's financial
statements audited by Arthur Andersen LLP, independent public accountants,
included elsewhere in this Prospectus. The selected historical financial data
set forth below as of December 31, 1995 and for the years ended December 31,
1994 and 1995 has been derived from the Company's financial statements audited
by Perelson Weiner, independent auditors, included elsewhere in this Prospectus.
The selected historical financial data set forth below as of December 31, 1994
has been derived from the Company's financial statements audited by Perelson
Weiner, independent auditors, which are not included in this Prospectus. The
selected historical financial data set forth below as of and for the years ended
December 31, 1992 and 1993 and for the six month periods ended June 30, 1996 and
1997 have been derived from unaudited financial statements of the Company which
have been prepared on the same basis as the audited financial statements and, in
the opinion of the Company, reflect all adjustments necessary (consisting only
of normal recurring adjustments) for the fair presentation of the Company's
financial position and results of operations for such periods. Results for
interim periods are not necessarily representative of the results to be expected
for a full year, and historical results are not necessarily indicative of the
results of operations to be expected in the future. The pro forma financial data
for the year ended December 31, 1996 and for the six months ended June 30, 1996
and 1997 give effect to (i) the Company's conversion to a C Corporation and (ii)
new employment agreements with the Company's shareholder officers. The pro forma
adjustments are based upon available information and certain assumptions that
management of the Company believes are reasonable. All of the financial data set
forth below are qualified in their entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's audited financial statements, the
notes thereto, and the other financial and statistical information included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues................................ $27,608 $44,956 $55,232 $40,225 $50,027 $23,144 $32,228
Cost of goods sold.......................... 17,018 26,453 33,568 24,067 33,028 15,234 20,828
------- ------- ------- ------- ------- ------- -------
Gross profit................................ 10,590 18,503 21,664 16,158 16,999 7,910 11,400
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Shareholder officers' compensation........ 6,021 12,608 15,174 9,067 6,347 2,914 4,908
Engineering and product development....... 659 975 1,420 1,634 2,071 1,036 1,082
Sales and marketing....................... 955 1,569 2,405 3,150 5,325 2,479 3,285
General and administrative................ 526 831 1,351 1,931 2,348 1,065 1,418
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 8,161 15,983 20,350 15,782 16,091 7,494 10,693
------- ------- ------- ------- ------- ------- -------
Operating income............................ 2,429 2,520 1,314 376 908 416 707
Interest expense (income), net.............. (16) (80) 62 33 (144) (43) (22)
------- ------- ------- ------- ------- ------- -------
Income before income taxes.................. 2,445 2,600 1,252 343 1,052 459 729
Income taxes(1)............................. 238 459 426 311 226 103 160
------- ------- ------- ------- ------- ------- -------
Net income(1)............................... $ 2,207 $ 2,141 $ 826 $ 32 $ 826 $ 356 $ 569
======= ======= ======= ======= ======= ======= =======
Pro forma income before income taxes(2)..... $ 6,124 $ 2,735 $ 4,999
Pro forma income taxes(3)................... 2,358 1,053 1,925
------- ------- -------
Pro forma net income........................ $ 3,766 $ 1,682 $ 3,074
======= ======= =======
Pro forma net income per share(4)........... $ .32 $ .14 $ .26
======= ======= =======
Shares used in computing pro forma net
income per share (4)...................... 11,737 11,727 11,746
======= ======= =======
</TABLE>

19
<PAGE> 20

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
--------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 ACTUAL PRO FORMA(5)
------- ------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 675 $ 3,417 $ 2,037 $ 3,478 $ 994 $ 6,536 $ 6,536
Working capital (deficit)... 5,926 9,741 10,645 7,269 8,069 8,685 (1,201)
Total assets................ 8,179 14,612 15,927 13,945 17,416 26,483 27,171
Shareholder loans payable... 1,200 3,000 3,401 -- -- -- --
Shareholders' equity
(deficit)................. 4,944 7,085 7,911 7,943 8,769 9,338 (474)
</TABLE>

(4) Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding for the respective
periods, adjusted for the effect of dilutive common stock options, and after
giving effect to the estimated number of shares that would be required to be
sold at the initial public offering price after deducting the underwriting
discount to fund a distribution to the current shareholders of all
previously taxed, but undistributed, S Corporation earnings, estimated at
$10,500,000, had the termination occurred on June 30, 1997. See Note 2 of
Notes to the Company's Financial Statements and "Termination of S
Corporation Status and Dividend Policy."

20
<PAGE> 21

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

OVERVIEW

Box Hill was founded in 1988, and in 1990, the Company elected to be taxed
as a Subchapter S Corporation under the Internal Revenue Code.

Since its inception, Box Hill has focused exclusively on providing storage
solutions for high-end customers, primarily in the UNIX environment. The Company
initially focused on the financial services industry in response to that
industry's need for high-availability, high-performance, fault-tolerant storage
systems and high levels of customer and technical support. Box Hill leveraged
its position as a company focused exclusively on storage solutions to bring new
products to market faster than its competitors. As a result, Box Hill has
produced significant profits since inception and has financed its growth
primarily with cash generated from operations. The Company currently has no
indebtedness or other third-party financing.

During 1993 and 1994, the Company experienced rapid sales growth with net
revenues doubling from $27.6 million in 1992 to $55.2 million in 1994. During
these years a significant portion of revenues came from sales to customers in
the financial services industry. In 1994, a severe downturn in the bond market
caused several of the Company's large customers in the financial services
industry to reduce significantly their purchasing. This contributed to a
decrease in net revenues of 27.2% to $40.2 million in 1995. As a result, the
Company realized that it needed to diversify its customer base to reduce the
risk associated with dependence on one industry. Box Hill then embarked on a
strategy to target other industries that were using Open Systems technology,
such as telecommunications. In 1994, direct sales to the financial services and
telecommunications industries represented 62% and 6% of the Company's revenues,
respectively. For the six months ended 1997, direct sales to customers in the
telecommunications industry had grown to 20%, while direct sales to the
financial services industry represented 37% of net revenues.

During the early years of the Company's growth, its operating expenses were
exceptionally low, as measured against revenues. This was primarily due to a
level of management and administration that worked well for a smaller company
but was insufficient to support future revenue growth. In addition, the
Company's close proximity to a majority of its customer base created sales
efficiencies that could not be sustained in serving a more geographically
dispersed customer base. In 1995, the Company began hiring a professional senior
management team, commencing with its Chief Executive Officer, who joined the
Company in May of that year. In 1996, the Company hired a Vice President of
Sales, a Financial Controller and a North American Sales Director, and, in 1997,
a Chief Financial Officer. In addition, in 1995, certain of the Company's key
employees were promoted to management positions and expenses were incurred to
expand international sales, and, in 1996, a new sales office was opened in the
greater Washington, D.C. metropolitan area. As a consequence of these and other
changes, the Company's operating expenses (excluding shareholder officers'
compensation) grew from 9% of net revenues in 1994 to 17% and 20% of net
revenues in 1995 and 1996, respectively.

Box Hill's manufacturing operations consist primarily of assembly and
integration of components and subassemblies into the Company's products with
certain of those subassemblies manufactured by independent contractors. The
Company's cost of goods sold consists primarily of direct material costs. On an
annual basis, between 1992 and 1996, gross margins have ranged from 41.2% in
1993 to 34.0% in 1996. In 1996, gross margins were lower partially as a result
of the Company's strategy to lower prices on its existing product line to adjust
to changing market conditions, as well as an unusually high level of sales of
certain low margin disk products to an international distributor. The Company
generally extends to its customers the warranties provided to the Company by its
suppliers. To date, the Company's suppliers have covered the majority of the
Company's warranty costs. There can be no assurance that such suppliers will
continue to cover such costs in the future, the failure of which could have a
material adverse effect on the Company's financial position or results of
operations. On a quarterly and annual

21
<PAGE> 22

basis the Company's gross margins have been and will continue to be affected by
a variety of factors, including competition, product configuration, product mix,
the availability of new products and product enhancements, and the cost and
availability of components. The Company's long-term strategy includes
maintaining or improving existing gross margins. See "Risk
Factors -- Fluctuations in Operating Results."

The Company has entered into employment agreements effective upon
consummation of the Offering with its three shareholder officers providing for
combined minimum annual base compensation of $1,275,000. The agreements and a
current agreement in force with the Company's Chief Executive Officer provide
that these four officers are to receive combined annual bonuses equal to 1.5% of
net revenues in excess of $100,000,000 and 12.0% of the amount of pre-tax income
which exceeds $20,000,000 for a fiscal year. In addition, the Company's
agreement with its Chief Executive Officer also provides for him to receive a
bonus of .05% of net revenues up to $100,000,000 and 1.12% of the pre-tax
income, as defined, up to $20,000,000. See "Management -- Employment and
Compensation Agreements."

RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's income
statements as a percentage of net revenues for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 60.8 59.8 66.0 65.8 64.6
----- ----- ----- ----- -----
Gross profit.................................... 39.2 40.2 34.0 34.2 35.4
----- ----- ----- ----- -----
Operating expenses:
Shareholder officers' compensation............ 27.5 22.5 12.7 12.6 15.2
Engineering and product development........... 2.6 4.1 4.1 4.5 3.4
Sales and marketing........................... 4.4 7.8 10.6 10.7 10.2
General and administrative.................... 2.3 4.9 4.8 4.6 4.4
----- ----- ----- ----- -----
Total operating expenses.............. 36.8 39.3 32.2 32.4 33.2
----- ----- ----- ----- -----
Operating income................................ 2.4% 0.9% 1.8% 1.8% 2.2%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net revenues -- Net revenues increased 39.4% to $32.2 million for the six
months ended June 30, 1997, compared to $23.1 million for the six months ended
June 30, 1996. The increase resulted from an increase in volume, which was
partially offset by price reductions. The increase in volume was primarily the
result of the ramp up of new RAID products, which were introduced in November
1995. Net revenues from sales of RAID products increased $5.5 million, or
189.7%, to $8.4 million for the six months ended June 30, 1997, compared to $2.9
million for the six months ended June 30, 1996. Net revenues from sales of the
Company's traditional storage products and backup products also increased for
the six months ended June 30, 1997 compared to the six months ended June 30,
1996, primarily due to an increased sales staff in 1997.

Gross profit -- Gross profit increased 44.3% to $11.4 million from $7.9
million for the comparable period of 1996. As a percentage of net revenues,
gross profit increased from 34.2% to 35.4%, principally as a result of decreases
in sales of certain low margin disk products.

Shareholder officers' compensation -- Shareholder officers' compensation
consists of salaries and bonuses paid to the Company's three shareholder
officers. Shareholders officers' compensation increased 69.0% to $4.9 million
for the six months ended June 30, 1997 as compared to $2.9 million for the

22
<PAGE> 23

six months ended June 30, 1996. The increase in shareholder officers'
compensation is attributable to higher bonuses for the first half of 1997 as
compared to the first half of 1996. In connection with the Offering, the Company
will enter into new employment agreements with the shareholder officers. See
"Management -- Employment and Compensation Agreements".

Engineering and product development -- Engineering and product development
expenses consist primarily of employee compensation, engineering equipment and
supply expenses and fees paid for third-party design services. To date, no
engineering and development expenses have been capitalized. Engineering and
product development increased slightly to $1.1 million for the six months ended
June 30, 1997 from $1.0 million for the comparable period of 1996. As a
percentage of net revenues, engineering and product development decreased to
3.4% for the first half of 1997 from 4.5% for the first half of 1996.

Sales and marketing -- Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional costs and travel expenses.
Sales and marketing expenses increased 32.0% to $3.3 million for the six months
ended June 30, 1997 from $2.5 million for the six months ended June 30, 1996.
The increase was primarily due to an increase in the direct sales forces and
field service staff and increased commissions based on the increase in sales. As
a percentage of net revenues, sales and marketing expenses decreased slightly to
10.2% for the first half of 1997 from 10.7% for the first half of 1996.

General and administrative -- General and administrative expenses consist
primarily of compensation to employees performing the Company's administrative
functions and expenditures for the Company's administrative facilities. General
and administrative expenses increased 27.3% to $1.4 million for the six months
ended June 30, 1997 from $1.1 million for the six months ended June 30, 1996.
The increase was due to an increase in support staff to support the Company's
growth. As a percentage of net revenues, general and administrative expenses
decreased slightly to 4.4% for the first half of 1997 from 4.6% for the first
half of 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net revenues -- Net revenues increased 24.4% to $50.0 million for 1996,
compared to $40.2 million for 1995. The increase primarily resulted from an
increase in volume, mostly due to sales of new RAID products, which were
introduced in November 1995. Net revenues from sales of these RAID products were
$10.9 million for the year ended December 31, 1996 and were derived principally
during the second half of the year. Net revenues from sales of these RAID
products were insignificant in 1995. The Company's penetration into new
industries, as well as an increase in sales force, contributed to the revenue
increase in 1996.

Gross profit -- Gross profit increased 4.9% to $17.0 million for 1996 from
$16.2 million for 1995. As a percentage of net revenues, gross profit decreased
from 40.2% to 34.0%. This decrease reflected the Company's strategy to lower
prices on its existing product line to adjust to changing market conditions, as
well as an unusually high level of sales of certain low margin disk products to
a distributor. The gross margin decline was partially offset by the contribution
provided by new features in the Company's RAID products.

Shareholder officers' compensation -- Shareholder officers' compensation
decreased 30.8% to $6.3 million for 1996 from $9.1 million for 1995. The
decrease in shareholder officers' compensation in 1996 is attributable to lower
bonuses for 1996 as compared to 1995.

Engineering and product development -- Engineering and product development
expenses increased 31.3% to $2.1 million for 1996 from $1.6 million for 1995.
The increase in engineering and product development was primarily due to
research and development work on the Fibre Box(R) in 1996. As a percentage of
net revenues, engineering and product development remained flat at 4.1%.

Sales and marketing -- Sales and marketing expenses increased 65.6% to $5.3
million for 1996 from $3.2 million for 1995. As a percentage of net revenues,
sales and marketing increased to 10.6% from 7.8%. The increase was due to (i)
the hiring of a new Vice President of Sales in early 1996; (ii) an

23
<PAGE> 24

increase in the direct sales force and field service staff; (iii) increased
commissions based on the increase in sales; and (iv) a full year of sales
service expenditures in Europe by an affiliated company which commenced
operations in the last quarter of 1995.

General and administrative -- General and administrative expenses increased
21.1% to $2.3 million for 1996 from $1.9 million for 1995. The increase was due
to an increase in staff to support the Company's growth and the full salary
impact of the hiring of a Chief Executive Officer in late May 1995. As a
percentage of net revenues, general and administrative expenses decreased
slightly to 4.8% from 4.9%.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net revenues -- Net revenues decreased 27.2% to $40.2 million for 1995,
compared to $55.2 million for 1994. The decrease was primarily due to a severe
downturn in the bond market in 1994 that caused several of the Company's large
customers in the financial services industry to reduce significantly their
purchasing volumes in 1995. Sales to customers in the financial services
industry decreased 35.1% to $22.2 million for 1995 from $34.2 million for 1994.

Gross profit -- Gross profit decreased by 25.3% to $16.2 million for 1995
from $21.7 million for 1994. The decrease was a direct result of the decrease in
net revenues. As a percentage of net revenues, gross profit increased slightly
from 39.2% in 1994 to 40.2% in 1995.

Shareholder officers' compensation -- Shareholder officers' compensation
decreased 40.1% to $9.1 million for 1995 from $15.2 million for 1994. The
decrease was due to lower bonuses in 1995 as compared to 1994.

Engineering and product development -- Engineering and product development
increased 14.3% to $1.6 million for 1995 from $1.4 million for 1994 due to an
increase in engineering staff and compensation increases in 1995. As a
percentage of net revenues, engineering and product development increased to
4.1% from 2.6%.

Sales and marketing -- Sales and marketing expenses increased 33.3% to $3.2
million for 1995 from $2.4 million for 1994 primarily due to an increase in the
direct sales force and field service support. As a percentage of net revenues,
sales and marketing increased to 7.8% from 4.4%.

General and administrative -- General and administrative expenses increased
35.7% to $1.9 million for 1995 from $1.4 million for 1994 due to the hiring of a
Chief Executive Officer in late May 1995, the hiring of MIS and accounting
employees during 1995, and the full salary impact of employees who were hired
during 1994. As a percentage of net revenues, general and administrative
expenses increased to 4.9% in 1995 from 2.3% in 1994.

24
<PAGE> 25

QUARTERLY RESULTS

The following table sets forth certain quarterly financial data for each of
the quarters in 1996 and the first and second quarters of 1997. This quarterly
information is unaudited, has been prepared on the same basis as the annual
financial statements and, in the opinion of the management of the Company,
reflects all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative of results for
any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 11,099 $ 12,045 $12,853 $ 14,030 $ 15,232 $ 16,996
Gross profit.................... 4,203 3,707 3,947 5,142 5,213 6,187
Operating income................ 280 136 152 340 534 173
Net income...................... 231 125 154 316 464 105
Pro forma net income(1)......... 1,053 629 794 1,290 1,394 1,680
</TABLE>

- ---------------
(1) Pro forma net income reflects a pro forma adjustment for shareholder
officers' compensation in excess of agreed upon future levels under new
employment agreements and has been computed as if the Company was a C
Corporation and had been subject to federal and state income taxes during
all of the periods presented. See Notes 2 and 8 to the Company's Financial
Statements and "Management -- Employment and Compensation Agreements."

The Company's results of operations over the last six quarters ending June
30, 1997 reflect increases in net revenues each quarter. This revenue increase
was driven by higher sales of new RAID products and backup solutions, as well as
the Company's penetration into new targeted industries, principally
telecommunications.

Gross margins ranged from approximately 38% in the first quarter of 1996 to
31% in the second and third quarters of 1996. Gross margins during the second
and third quarters of 1996 were adversely impacted by an unusually high level of
sales of low margin disk products to one distributor. Additionally, the
Company's price decreases, which were announced in late 1995, did not have a
significant impact on gross margins until beginning in the second quarter due to
the timing of customer orders. Gross margins for the fourth quarter of 1996 and
the first and second quarters of 1997 improved over the second and third
quarters of 1996, principally due to continually declining material costs and a
more favorable product mix.

The Company does not believe that quarterly comparisons are necessarily
reflective of its overall performance. The Company's quarterly operating results
have varied in the past and may vary in the future depending on a number of
factors, some of which are beyond the Company's control. These factors include
the timing of customer orders, changes in the Company's product and customer
mix, the introduction of new products by the Company or its competitors, pricing
pressures and economic conditions. In addition, the Company often incurs
significant development, sales and marketing expenses in anticipation of future
revenues. See "Risk Factors -- Fluctuations in Operating Results."

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1997, cash provided by operating
activities was $5.6 million compared to cash provided by operating activities of
$.8 million for the same period in 1996. The increase was primarily due to an
increase in accounts payable and accrued expenses, primarily shareholder
officers' bonuses, and a smaller increase in accounts receivable for the six
months ended June 30, 1997 as compared to the same period of 1996, partially
offset by an increase in inventories. For the year ended December 31, 1996, cash
used in operating activities was $2.2 million compared to cash provided by
operating activities of $5.0 million for the same period in 1995. The change was
primarily due to an

25
<PAGE> 26

increase in accounts receivable and inventories as a result of increased sales
volume, partially offset by increases in net income, accrued expenses and
customer deposits.

Cash used in investing activities consists primarily of purchases of
property and equipment. Capital expenditures were $375,000, $284,000 and $92,000
for the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997, respectively.

As of June 30, 1997, working capital was $8,685,000 and cash and cash
equivalents was $6,536,000. In August 1997, a commercial bank committed to
provide the Company with a $10 million revolving line of credit. The commitment
is subject to the completion of the Offering. Under the proposed terms of the
commitment, borrowings will be collateralized by a pledge of substantially all
of the Company's assets, with borrowings greater than $5 million also to be
secured by short-term investments. Additionally, the Company will be required to
comply with certain financial covenants, as defined. The outstanding balance
under the revolver will be due on April 30, 1998. The Company presently expects
that the net proceeds of the Offering, together with cash generated from
operations and available under the revolver, should be sufficient to meet its
operating and capital requirements for at least the next twenty-four months.
However, the Company may need additional capital to pursue acquisitions or
significant capital improvements, neither of which is currently contemplated.

In connection with the Offering, the Company plans to make a distribution
to the current shareholders of all of the previously taxed, but undistributed, S
Corporation earnings, estimated at $10,500,000 had the termination occurred on
June 30, 1997. The actual amount of the distribution will reflect the S
Corporation's pro rata portion of the Company's 1997 taxable income and any
shareholder distributions during the period from July 1, 1997 through the
termination of the S Corporation status. The Company plans to use a portion of
the net proceeds of the Offering to make the distribution. See "Use of
Proceeds."

26
<PAGE> 27

BUSINESS

Box Hill designs, manufactures, markets and supports high-performance data
storage systems for the Open Systems computing environment. The Company's
storage solutions encompass a broad range of scalable products and services
targeting high-end customers. With data becoming an increasingly critical
business tool, these customers are demanding certain characteristics in their
storage systems, particularly high availability, high performance and fault
tolerance, as well as the highest level of customer and technical support. The
Company has a history of providing high-end storage solutions that meet these
requirements by combining extensive design and implementation experience with
leading edge technologies. The Company was among the first to develop and
successfully commercialize a hot-swappable SCSI Disk Array storage system and a
Redundant Array of Inexpensive/Independent Disks ("RAID") storage system for
UNIX. In addition, the Company recently introduced the Fibre Box(R), one of the
first Fibre Channel storage systems, and is finalizing the development of its
X/ORaid(TM) Module, which takes advantage of the new RAID capabilities that are
currently being embedded in Fibre Channel drives. The Company employs a direct
marketing strategy targeted at data-intensive industries, which to date
primarily include financial services, telecommunications, health care,
government/defense and academia.

INDUSTRY OVERVIEW

The demand for Open Systems data storage is fueled by the rapid
proliferation of new data-intensive applications, such as video, the Internet,
intranets, multimedia, data warehousing and data mining, as well as the
migration of mission-critical applications off mainframe computers. Disk storage
systems, tape backup systems and software-based management tools designed to
operate on multiple platforms are becoming a strategic part of the MIS
environment. MIS purchase decisions are becoming "storage centric" and, in many
instances, capital expenditures on storage systems are equal to or greater than
those made on computer processing hardware.

The high end of the Open Systems market is characterized by large capacity
UNIX and Windows NT servers operating in multi-platform environments, generally
running mission-critical applications. International Data Corporation ("IDC"),
an independent market research firm, estimates that the worldwide market for
RAID storage systems in UNIX environments will grow at a compounded annual
growth rate of 19.3%, increasing from $6.3 billion in 1996 to $12.9 billion in
2000. In addition, IDC estimates that the worldwide market for RAID storage
systems in Windows NT environments, will grow at a compounded annual growth rate
of 34.1%, increasing from $1.3 billion in 1996 to $4.3 billion in 2000.

The Company believes that storage purchase decisions at the high end of the
Open Systems computing environment are based on a variety of factors, including
(i) response time, capacity and minimization of downtime; (ii) data protection;
(iii) all-encompassing solutions; (iv) multi-platform compatibility; and (v)
scalability.

Current and Emerging Technologies

The Open Systems market's current storage options include Disk Arrays, RAID
storage systems and tape backup systems, each of which are generally attached to
hosts by the Small Computer Systems Interface ("SCSI"). Fibre Channel, an
emerging high-speed serial interface that has recently become commercially
available, enables faster data transfer to Disk Arrays and RAID storage systems.
Fibre Channel also enables industry standard RAID functionality to be
efficiently embedded directly onto Fibre Channel disk drives.

SCSI vs. Fibre Channel. SCSI has been the dominant commercially available
interface, and is currently used in most Disk Array and RAID storage systems.
Its potential successor, Fibre Channel, is regarded by many industry
participants as the storage industry's next-generation interface, given the many
advantages it has over SCSI. Fibre Channel enables the transfer of data between
computers and

27
<PAGE> 28

peripherals at substantially increased rates, over greatly increased cabling
lengths and among a greater number of host/device connections, as indicated in
the following table:

<TABLE>
<CAPTION>
MAXIMUM
DATA
TRANSFER MAXIMUM MAXIMUM
RATE CABLING HOST/DEVICE RAID EMBEDDED
INTERFACE (MB/SEC) LENGTHS CONNECTIONS ON THE DRIVE
- ---------------------------------------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C>
SCSI.................................... 20 25 m 16 No
Ultra SCSI.............................. 40 25 m 16 No
Fibre Channel (Single Loop)............. 100 10 km 126 Yes
Fibre Channel (Dual Loop)............... 200 10 km 126 Yes
</TABLE>

Although the Fibre Channel interface has only recently become commercially
available and has essentially no market penetration (see "Risk Factors -- Rapid
Technological Change; Dependence on New Products; Introduction of Fibre Channel
Product Line"), a number of industry leaders, including Microsoft Corporation,
Seagate, Quantum, Fujitsu Limited, Adaptec, Inc., Emulex Corporation, Gadzoox
Networks, Inc., Vitesse Semiconductor Corporation and VLSI Technology, Inc.,
have indicated support for Fibre Channel technology and are producing or plan to
produce products that incorporate it. Seagate began shipping Fibre Channel disk
drives in the fourth quarter of 1996. In addition, the Fibre Channel Association
and the Fibre Channel Loop Community, trade associations formed to foster the
development of Fibre Channel technology, have more than 100 members, including
the Company and several of the foregoing industry leaders.

RAID. RAID storage systems address the need for high availability and
fault tolerance in disk storage systems. Traditionally, RAID functionality for
SCSI storage systems has been implemented in one of two ways: purely by software
on the host or by a hardware controller interposed between a host and a Disk
Array. These methods have different drawbacks: software-based RAID
implementations can slow down CPU processing time, while hardware
controller-based RAID implementations require an additional piece of hardware
which may be costly and is an additional point of failure. The recent advent of
Fibre Channel introduces a new RAID paradigm. Fibre Channel allows the major
RAID functions to be efficiently performed on disk drives themselves,
eliminating the need for burdensome CPU processing or a hardware RAID
controller.

Future Trend: Storage Area Networks

To address the growing demand for higher availability and increased
connectivity in Open Systems computing environments, the Company envisions the
development of storage area networks ("SAN"s) that will add networking
capabilities to storage devices. The Company believes that SANs will be enabled
principally by two emerging technologies: (i) Fibre Channel and (ii)
"clustering" software, such as Microsoft's "Wolfpack." Fibre Channel will allow
for a wider range of higher speed connections between and among a greater number
of hosts and storage devices in the SAN, and clustering software will allow for
the interconnection of multiple hosts to multiple storage devices (currently
commercially available systems typically only allow the attachment of one host
to one storage system). The Company believes that the high-performance,
high-availability features that clustering software is contemplated to possess
will enhance the ability of Windows NT, one of the Company's principal targeted
computing environments, to capture market share in high-end mission-critical
applications.

THE BOX HILL SOLUTION

Box Hill develops and markets a comprehensive range of storage systems
designed to meet the requirements of the high-end Open Systems market. The
Company's family of products and services is intended to provide users with the
following benefits:

High performance, high availability and fault tolerance. Recognizing the
increased demand for faster response times, greater capacities, higher
availability of data and minimum system downtime, the Company has focused on
developing high-end, high-performance storage products using SCSI, Ultra

28
<PAGE> 29

SCSI and Fibre Channel interfaces. The Company was among the first to develop
and successfully commercialize a hot-swappable SCSI Disk Array and a RAID
storage system for the UNIX environment. More recently, the Company was one of
the first to introduce a Fibre Channel storage system and is finalizing
development of what it believes will be the first Fibre Channel storage system
activating RAID functionality on the disk drives.

High-performance backup. To satisfy market demand for reliable,
high-quality backup products and systems, the Company offers a broad variety of
backup products, including tape library systems, backup software, training and
documentation. The Company has specialized expertise in the design and
implementation of effective, well-integrated backup solutions designed to
satisfy customers' individual needs, from departmental server systems to
enterprise network systems.

All-encompassing solutions. The Company delivers all-encompassing
solutions, including design consulting, installation, integration, training, and
comprehensive, 24-hour, post-sales service and technical support, as well as
software-based management tools. The Company employs a full staff of direct
sales personnel and applications engineers to assist customers in making
appropriate and effective storage system purchases and in addressing, analyzing
and solving complex, pre-deployment storage problems. This value-added
capability fosters customer loyalty and allows the Company to identify emerging
customer requirements for future data storage products.

Multi-platform support. As an independent provider of storage products,
Box Hill is well positioned to provide storage systems specifically designed to
be compatible with a variety of UNIX and Windows NT platforms. This
cross-platform capability allows end users to standardize on a single storage
system that can readily be reconfigured and redeployed at minimal cost as
operating systems or other Open System components change.

Scalability. The Company's products are designed using a flexible, modular
architecture allowing the Company to size and configure storage systems to the
application-specific requirements of individual customers. In addition, this
architecture allows the Company to resize and reconfigure these systems to adapt
to the changing needs of customers, while allowing them to retain capital value
in their underlying systems.

STRATEGY

Maintain Technological Leadership and Innovation. The Company intends to
continue developing and commercializing high-end SCSI, Ultra SCSI and Fibre
Channel-based storage solutions. The Company intends to capitalize on Fibre
Channel components and technology by adding enabling software to create products
for high-availability storage systems and future-envisioned SAN environments.
With respect to its backup products, the Company will continue to research and
integrate "best of breed" tape libraries and software, to develop its own
software, and to improve its expertise as a leader in backup integration.

Focus on High-End Markets in Target Industries. The Company intends to
continue to target users of UNIX and Windows NT computing environments who
require high-performance, high-availability and fault-tolerant storage
solutions, such as end users in data-intensive industries which, to date,
include financial services, telecommunications, health care, government/defense
and academia. In addition, it intends to expand its focus to include other
data-intensive vertical markets, such as video, multimedia and imaging. The
Company, as an independent provider of storage systems, believes that it is
better suited than captive providers are to address the multi-platform computing
requirements of these targeted high-end users.

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<PAGE> 30

Expand Geographically. The Company was founded in New York City and
historically focused its sales efforts primarily in the northeastern region of
the United States. Having achieved commercial success in that region, the
Company plans to expand its geographic reach by increasing its direct sales
staff, opening additional offices in the United States and further developing a
network of international distributors to increase international sales.

Focus on Direct Sales to End Users. The Company believes that its direct
sales strategy maximizes the effectiveness of its sales efforts. In addition,
direct customer contact provides the Company with invaluable market feedback and
the ability to provide high-quality technical support and enhance customer
loyalty.

Develop Relationships with OEM Customers. The Company intends to augment
its traditional direct sales strategy by selling to select OEM customers in
situations where market dynamics are such that the Company would not otherwise
have access to these markets.

PRODUCTS AND SYSTEMS

Box Hill's family of products is a flexible, highly scalable set of
hardware and software storage solutions for Open Systems applications. The
Company's storage products feature modular building blocks that provide
customers with a variety of storage solutions ranging from SCSI Disk Array
configurations to multi-terabyte Ultra SCSI RAID storage systems to the Fibre
Channel RAID storage system, which is in the final stages of development. In
addition, Box Hill's backup products incorporate "best of breed" tape library
products and backup management software.

STORAGE PRODUCTS. The Company's principal disk storage products include
the Mod Box 5000(TM), the RAID Box 5300 Turbo(TM) product line and the recently
introduced Fibre Box(R).

Mod Box 5000(TM). The Mod Box 5000(TM) is a modular, scalable,
hot-swappable, SCSI and Ultra SCSI capable Disk Array system which can be
configured with a wide range of storage devices. The Mod Box 5000(TM)
architecture supports both 3 1/2" and 5 1/4" device form factors, enabling Box
Hill to support the highest capacity drives, and is compatible with both UNIX
and Windows NT platforms.

RAID Box 5300 Turbo(TM). Box Hill integrates hardware RAID controllers with
the Mod Box 5000(TM) Disk Array to create the RAID Box 5300 Turbo(TM) product
line. The Company also supplies remote monitoring and configuration software as
a key part of the RAID Box 5300 Turbo(TM) system. This high-end, high-speed,
hot-swappable, SCSI and Ultra SCSI capable RAID storage system supports
redundant failover controllers and capacities up to 2.7 TB. The Company believes
that its RAID Box 5300 Turbo(TM) is one of the fastest Ultra SCSI RAID storage
systems available for both UNIX and Windows NT platforms.

Fibre Box(R). The Company recently introduced the Fibre Box(R), one of the
first storage systems based on Fibre Channel technology. The Fibre Box(R)
enables data transfer rates of up to 200 MB per second, transmission distances
of up to 10 kilometers, connectivity of up to 126 host/device connections and
capacities up to 1.2 TB. In addition, the Fibre Box(R) contains up to eight 9 GB
Fibre Channel disk drives in an intelligent enclosure and features
hot-swappability, redundancy of key components, and automatic environmental
monitoring to enable failure prediction. Included with the Fibre Box(R) is the
Company's Fibre Box Array Explorer(TM) software program, which provides users
with the benefits of system monitoring and configuration, event reporting and
remote disk maintenance and administration.

Fibre Box(R) with X/ORaid(TM) Module. The Company is in the final stages
of developing what it believes will be the first Fibre Channel RAID storage
system activating RAID functionality directly on the disk drives. The Company's
X/ORaid(TM) Module will provide certain RAID capabilities by activating RAID
functionality embedded in each Fibre Channel disk drive.

The Fibre Box(R) and the Fibre Box Array Explorer(TM) are compatible, and
the X/ORaid(TM) Module will be compatible, with Windows NT platforms and the
Company intends to make each of them compatible with UNIX platforms.

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<PAGE> 31

BACKUP PRODUCTS. Box Hill's backup solutions consist of a variety of "best
of breed" tape libraries and enterprise-wide backup software from industry
leaders, proprietary Company software and comprehensive integration and
customization services that produce turnkey solutions. The Company believes it
has unique abilities to custom design system-wide and enterprise-wide backup
systems and effectively integrate "best of breed" hardware and software backup
products. The principal tape backup products offered by the Company include the
Magna Box, an enterprise-wide automated DLT library with capacities ranging from
800 GB to 41 TB, and the Echo Box, which, together with the Company's
proprietary Tape Mirroring Software, allows for the simultaneous real-time
creation of two sets of backup tapes, one for fast, local retrieval of data and
the other for remote, off-site storage.

For a discussion of the risks associated with the development and
introduction of new products, see "Risk Factors -- Rapid Technological Change;
Dependence on New Products; Introduction of Fibre Channel Product Line."

CUSTOMERS

Box Hill markets its products principally to high-end users in the Open
Systems market. The Company has placed major storage system installations
principally in data-intensive industries in which customers require
high-performance, high-availability, fault-tolerant storage solutions, such as
financial services, telecommunications, health care, government/defense and
academia. In addition, the Company intends to expand its focus to include other
data-intensive vertical markets, such as video, multimedia and imaging. The
Company enjoys strong relationships with its customers, which are reflected in
high levels of repeat business over many years.

Some of the customers in each of the Company's targeted industries include:

<TABLE>
<S> <C> <C>
Financial Services Telecommunications Health Care
- ------------------------------ --------------------------------- ----------------------
Chase Manhattan Bank AT&T Abbott Laboratories
Merrill Lynch Bell Atlantic Bristol-Meyers Squibb
Salomon Brothers Lucent Technologies Hoffmann-LaRoche
Smith Barney NYNEX Pfizer
UBS Securities Sprint Warner-Lambert

Government/Defense Academic Institutions
- ------------------------------ ---------------------------------
Lockheed Martin Columbia University
NASA New York University
National Institutes of Health Rensselaer Polytechnic Institute
TRW Rutgers University
U. S. Department of Justice University of Pennsylvania
</TABLE>

See "Risk Factors -- Concentration of Customers in Targeted Industries and
the UNIX Marketplace" for a discussion of the risks arising from a significant
portion of the Company's sales directed to the financial services and
telecommunications industries, sales to a limited number of customers accounting
for a material percentage of the Company's annual revenues, and the
concentration of sales to the UNIX marketplace.

SALES AND MARKETING

The Company's marketing strategy emphasizes direct sales to high-end users
of its storage and backup products. Prior to 1995, the Company conducted its
sales exclusively from its facility in New York City. The Company recently
launched an expansion program to penetrate new markets outside the northeastern
region of the United States. The Company intends to add new sales
representatives and applications engineers in various cities in the United
States and Canada. In 1996, the Company established a sales location in the
greater Washington, D.C. metropolitan area and, in 1997, commenced hiring
personnel in San Diego, San Francisco and Ottawa, Canada. The Company also
intends to

31
<PAGE> 32

augment its traditional direct sales strategy by selling to select OEM customers
where market dynamics are such that the Company would not otherwise have access
to these markets. In addition, the Company's team of applications engineers,
generally highly qualified storage experts, complements the sales force by
providing pre-sales and pre-deployment consulting, installation services and
support.

The Company's international marketing strategy has been to use distributors
located outside of the United States. The Company's foreign activities have
principally been conducted through distributors in the United Kingdom, Japan and
Hong Kong. Since 1996, the Company has embarked on a program of international
expansion, engaging distributors in Korea, Singapore, Taiwan, Italy and Ireland.
The Company provides marketing and technical support services in connection with
European and Pacific Rim sales. The Company intends to continue international
expansion by developing distributor relationships in France, Germany,
Scandinavia and the Benelux countries. Sales to international distributors
located outside the United States represented approximately 17%, 16%, 18% and
15% of the Company's net revenues for 1994, 1995, 1996 and for the six months
ended June 30, 1997, respectively.

For a discussion of the risks associated with expansion, see "Risk
Factors -- Difficulties in Managing Growth" and "-- Risks Associated with
International Operations."

ENGINEERING AND PRODUCT DEVELOPMENT

The Company's research, engineering and development efforts are focused on
developing innovative solutions to the storage needs of the high end of the Open
Systems market. The Company has expertise in UNIX and Windows NT driver and
system software, data storage system design and integration, high-speed
interface design for SCSI, Ultra SCSI and Fibre Channel and design,
qualification and integration of disk drives, tape drives, robotics and other
storage components. For example, the Company was among the first to develop and
successfully commercialize a hot-swappable SCSI Disk Array and a RAID storage
system for the UNIX environment. More recently, the Company was among the first
to introduce a Fibre Channel storage system and is finalizing development of
what it believes will be the first Fibre Channel storage system activating RAID
functionality on the disk drives.

The Company generally designs its products to have a modular architecture
that can be readily modified to respond to technological developments and
paradigm shifts in the Open Systems computing environment. This flexibility
allows the Company to focus research and development resources on specific
product innovations and advancements. The modular architecture of the products
meets customer needs with solutions tailored to their applications and products
that can be adapted to changes in technology and in their computing
environments.

The Company is currently focusing considerable development efforts on Fibre
Channel storage systems. Projects include improvements to the features,
functions and performance of the Fibre Box(R) and the Fibre Box Array
Explorer(TM), and the development of the X/ORaid(TM) Module, a future component
of the Fibre Box(R) product line. The Company intends to capitalize on Fibre
Channel technology and components by adding systems software to create products
for high-availability storage systems and future-envisioned SAN environments.
See "Risk Factors -- Rapid Technological Change; Dependence on New Products;
Introduction of Fibre Channel Product Line" and "-- Limited Protection of
Proprietary Technology; Risk of Third-Party Claims of Infringement" for
discussions of the risks associated with the development of new products and
protection of technological developments.

The Company's engineering design teams work cross-functionally with
marketing managers, applications, technical and production engineers and
customers to develop products and product enhancements. The Company employs a
full staff of applications engineers to assist customers in making appropriate
and effective storage system purchases and in addressing, analyzing and solving
complex pre-deployment storage problems. The Company's technical support
engineering team and production engineering team also contribute to the quality,
manufacturability and usability of products from design to deployment. This
value-added capability fosters customer loyalty and allows the Company to
identify emerging customer requirements for future data storage products.

32
<PAGE> 33

Engineering and product development expenses of the Company (which do not
include compensation expenses for applications and technical support engineers,
which are recorded as sales and marketing expenses) for fiscal years 1994, 1995
and 1996 were $1.4 million, $1.6 million and $2.1 million, respectively. As of
June 30, 1997, the Company had 19 full-time employees engaged in research and
development activities and, in addition, had 14 full-time applications and
technical support engineers.

CUSTOMER SERVICE AND SUPPORT

Recognizing that the provision of comprehensive, proactive and responsive
support is an essential element in establishing new customer accounts and
securing repeat business from existing customers, Box Hill is committed to
providing the highest levels of customer service and support aimed at
simplifying installation, reducing field failures, minimizing system downtime
and streamlining administration.

Service revenues have not comprised a significant portion of the Company's
revenues. In certain geographical regions, and for an annual or quarterly fee,
the Company maintains a staff of on-call technical personnel who are available
to visit the customer's site within a few hours. In other geographical regions,
the Company indirectly provides the same level of support by using third-party
service companies. In all cases, Box Hill technical support engineers are
available by phone on a seven day, 24 hour basis.

The Company provides standard warranties with all products sold which are
set forth in various documents and agreements which are delivered to customers
with each product. As a general policy, the Company ships replacement hardware
components to customers in advance of receiving returns of defective components
under a standard warranty, which runs from one to five years. The Company
occasionally issues credit in lieu of replacing a piece of equipment. A customer
may also contract for an extended warranty or on site maintenance support from
the Company on all products. See "Risk Factors -- Warranty Exposure."

MANUFACTURING

Box Hill's manufacturing operations consist of assembly and integration of
components and subassemblies into the Company's products with certain of those
subassemblies manufactured by independent contractors. The units are assembled
to order and are subjected to a systems-level test and to firmware revision
controls to ensure performance to specification in the anticipated end-user
computing environment. Test results are identified by individual product serial
numbers and are logged to aid in technical support. The Company strives to
develop close relationships with its suppliers, exchanging critical information
and implementing joint corrective action programs to maximize the quality of its
components, reduce costs and reduce inventory investments.

33
<PAGE> 34

and accompanying software were made to accommodate the introduction of
alternative suppliers' components. The Company has experienced a shortage of DLT
tape drives in the past, and there can be no assurance that the Company will not
experience shortages of these or other components in the future. Although
hardware RAID controllers are available from other sources, the Company
estimates that replacing CMD's hardware RAID controllers with those of another
supplier would involve several months of hardware and software modification. See
"Risk Factors -- Dependence on Limited Number of Suppliers of Key Components"
for a discussion of the risks associated with the Company's reliance on a
limited number of suppliers for key components.

COMPETITION

The market for Open Systems storage is growing and it is intensely
competitive. The Company competes primarily with traditional suppliers of
computer systems such as Compaq Computer Corporation, Hewlett-Packard, Sun
Microsystems, IBM, Data General Corporation and Digital Equipment Corporation,
which market storage systems as well as other computer products. The Company
also competes against independent storage system suppliers to the high-end Open
Systems market, including EMC Corporation, Network Appliance, Inc., Ciprico Inc.
and MTI. In the area of tape backup, the Company competes with suppliers of
tape-based storage systems such as Datalink Corporation, MTI and numerous
resellers.

Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of products than the Company, or to
deliver competitive products at a lower end-user price. The Company also expects
that competition will increase as a result of industry consolidations. Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, operating results or financial condition. See "Risk
Factors -- Competition."

PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

Box Hill's success depends significantly upon its proprietary technology.
The Company has no patent protection for its products and has attempted to
protect its intellectual property rights through copyrights, trade secrets and
other measures. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. The Company has registered its Box Hill(R) and Fibre Box(R)
trademarks and is claiming common law protection for and may seek to register
its RAID Box 5300 Turbo(TM), Mod Box 5000(TM), X/ORaid(TM) Module and Fibre Box
Array Explorer(TM) trademarks and other trademarks and logos as it deems
appropriate. The Company generally enters into confidentiality agreements with
its employees and with key vendors and suppliers. See "Risk Factors -- Limited
Protection of Proprietary Technology; Risk of Third-Party Claims of
Infringement" for a discussion of risks associated with attempting to secure and
maintain protection of proprietary rights and avoid claims of infringement of
the proprietary rights of others.

The Company licenses certain Fibre Channel driver software under a
royalty-free license for use in connection with host bus adapters purchased by
the Company from the licensor. The license is irrevocable, non-transferable and
non-exclusive, and continues as long as the Company continues to use the
licensor's drivers or unless the Company terminates it or either party
materially breaches its obligations.

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<PAGE> 35

EMPLOYEES

As of June 30, 1997, Box Hill had a total of 135 employees, (substantially
all of whom are full-time), of whom 19 were engaged in engineering, research and
development; 14 in applications and technical support engineering; 48 in
marketing, sales and customer support; 35 in manufacturing; 19 in general
management and administration; and three shareholder officers.

The Company has experienced no work stoppages and believes that its
employee relations are good. The Company's future performance depends in
significant part upon the continued service of its key technical and senior
management personnel. The Company provides incentives such as salary and
benefits, and will make stock option grants to attract and retain qualified
employees. See "Risk Factors -- Dependence on Key Personnel" and
"-- Difficulties in Managing Growth."

FACILITIES

Box Hill's manufacturing, research and development and principal sales and
marketing operations are conducted from, and its administrative staff are
located in New York City at, a 44,000-square-foot leased facility, of which
approximately 10,000 square feet was added in 1997, occupied under a long term
lease, as amended, expiring in 2007. The Company also leases an office in
Vienna, Virginia, under a lease that expires in May 1998, to facilitate sales
efforts in the greater Washington, D.C. metropolitan area. The rent for the year
ended December 31, 1996 for the two facilities aggregated approximately
$350,000. The Company believes that its existing facilities are adequate for its
current needs.

LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings.

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<PAGE> 36

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information concerning the Company's
directors, executive officers, and certain key employees, and their ages as of
September 16, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -------------------------------------------------
<S> <C> <C>
Philip Black.............. 42 Chief Executive Officer and Director
Benjamin Monderer......... 39 Chairman of the Board, President and Chief
Technical Officer
Carol Turchin............. 35 Executive Vice President and Director
Mark A. Mays.............. 34 Vice President, Secretary and Director
Warren J. Fisher.......... 40 Vice President -- Sales
Adam T. Temple............ 39 Vice President -- Operations
Kenneth Pitz.............. 45 Vice President -- Materials Management
R. Robert Rebmann, Jr..... 32 Chief Financial Officer and Treasurer
Finis F. Conner........... 54 Director
Robert C. Miller.......... 53 Director
Mischa Schwartz........... 71 Director
</TABLE>

- ---------------
Philip Black has been Chief Executive Officer and a Director of the Company
since May 1995. From 1976 to 1991 Mr. Black held a number of positions,
including Vice President, President, Chief Executive Officer and Vice Chairman
of the Board at Tekelec, Inc., a publicly traded company, of which he was the
founder, engaged in the design, manufacturing and marketing of diagnostics
systems and network switching solutions. From March 1990 until August 1991 Mr.
Black served as Managing Director of Echelon Europe, of which he was a
co-founder. In September 1991 Mr. Black became the Chief Executive Officer and
Treasurer of Avalon Control Technologies, a company specializing in products and
services related to Echelon's LONWorks technology, and served in those
capacities until June 1994. In April 1994 Mr. Black became President and Chief
Executive Officer of Chevry, a backup software company, and served in those
capacities until he joined the Company.

Benjamin Monderer, Eng.Sc.D., a co-founder of the Company, has been
President and a Director of the Company since its incorporation in 1988 and
became Chairman of the Board in July 1997. He is also Chief Technical Officer
and has served as Manager of Operations of the Company. Dr. Monderer had been a
member of the technical staff at Hewlett-Packard in 1980 and 1981 and was a
Research Scientist at Columbia University from 1986 to 1989. Dr. Monderer holds
a Bachelor of Science in Electrical Engineering degree from Princeton University
and a Master of Science degree in Electrical Engineering and a Doctor of
Engineering Science from Columbia University. Dr. Monderer is married to Carol
Turchin.

Carol Turchin, a co-founder of the Company, has been an executive officer
and a Director of the Company since its incorporation in 1988 and, in July 1997,
became Executive Vice President of the Company. She has also served as the
Company's Vice President of Sales and Vice President of Marketing. Ms. Turchin
holds a Bachelor of Arts degree from Vassar College. Ms. Turchin is married to
Benjamin Monderer.

Mark A. Mays, a co-founder of the Company, has been Vice President,
Technical Consultant and a Director of the Company since its incorporation in
1988 and was appointed Secretary of the Company in July 1997. From 1985 to 1988,
Mr. Mays served as Associate Research Scientist at Columbia University. Mr. Mays
holds a Bachelor of Science degree and a Master of Science degree in Electrical
Engineering from Columbia University.

Warren J. Fisher has served as Vice President -- Sales of the Company since
January 1996. From November 1992 to December 1995, Mr. Fisher was the Vice
President -- Sales of QStar Technologies, Inc., a software development company.
From April 1991 to November 1992, he served as Regional Sales

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<PAGE> 37

Manager at Altos Computer Systems, a computer manufacturer, and from June 1984
until April 1991, served as Chief Executive Officer of a computer systems
integration division of George S. May International Company, a consulting
company. Mr. Fisher holds a Bachelor of Science degree in Industrial Engineering
and Management Science from Northwestern University and a Master of Business
Administration from Northwestern University's J.L. Kellogg Graduate School of
Management.

Adam T. Temple has served as Vice President -- Operations of the Company
since 1996. Mr. Temple joined the Company in 1991 and became Head of Operations
in 1992. Prior to joining the Company, Mr. Temple served as Advisory Engineer
for IBM at the T.J. Watson Research Center from 1990 to 1991, as a member of the
Research Staff at Columbia University's Center for Telecommunications Research
from 1985 to 1990, and as an engineer at Raytheon Company's Submarine Signal
Division from 1979 to 1985. Mr. Temple holds a Bachelor of Science degree in
Engineering and Applied Science from Yale University and a Master of Science in
Electrical Engineering from Columbia University.

Kenneth Pitz has served as Vice President -- Materials Management of the
Company since 1996. Mr. Pitz has served in various management capacities since
he joined the Company in 1992. Prior to joining the Company, Mr. Pitz served in
various capacities of increasing responsibility at Lex Electronics (formerly
Schweber Electronics, which was purchased in 1991 by Arrow Electronics, Inc.)
from 1976 to 1992, including Product Line Manager, Operations Manager of a sales
office, Director of a division and, ultimately, Director of Customer Services
for the company.

R. Robert Rebmann, Jr. has been Chief Financial Officer of the Company
since joining the Company in January 1997 and became Treasurer of the Company in
July 1997. Prior to joining the Company, Mr. Rebmann served as Audit Manager for
Perelson Weiner (formerly Weiner Associates), a mid-sized regional public
accounting firm. Mr. Rebmann held various positions of increasing responsibility
at Perelson Weiner from 1986 until December 1996. Mr. Rebmann holds a Bachelor
of Science degree in Accounting from the State University of New York at
Binghamton and is a Certified Public Accountant.

Finis F. Conner was elected a Director of the Company in July 1997. Mr.
Conner was until 1996 Chairman of the Board and Chief Executive Officer of
Conner Peripherals, Inc. which he founded in 1986. A leading manufacturer of
3 1/2" Winchester disk drives used in personal computers, Conner Peripherals was
merged with Seagate in February 1996. Mr. Conner was a co-founder of Seagate,
and served as its Vice-Chairman from 1979 to 1985. From 1996 to the present, Mr.
Conner has been Chairman of the Board of Golf Media, Inc., a company engaged in
the design of internet web sites for the promotion of golf products, and since
February 1996, Mr. Conner has been a principal of the Conner Group, an
independent consulting organization.

Robert C. Miller was elected a Director of the Company in August 1997. Mr.
Miller has been Chairman of the Board and Chief Executive Officer of NeTpower,
which is engaged in the development and manufacture of systems for the Windows
NT market, since he founded the company in February 1993. Prior thereto, he was
Chairman, President and Chief Executive Officer of MIPS Technologies Inc., since
its acquisition by Silicon Graphics Inc. in June 1992 and during the five-year
period prior to such acquisition. Mr. Miller had been Senior Vice President of
the Information Systems Group of Data General and had held several positions
with IBM, the last of which was Director of IBM's Boulder, Colorado laboratory.
A senior member of the Institute of Electrical and Electronic Engineers ("IEEE")
Society, Mr. Miller holds six United States patents and has authorized a number
of publications related to computer architecture. He holds a Bachelor's degree
in Mechanical Engineering from Bucknell University, an M.S. in Thermodynamics
from Stanford University and is a registered Professional Engineer.

Mischa Schwartz, Ph.D. was elected a Director in July 1997. Dr. Schwartz is
the Charles Batchelor Professor Emeritus of Electrical Engineering at Columbia
University. He was Professor of Electrical Engineering and Computer Science at
Columbia University from 1974 until retirement in July 1996. Prior to 1974, he
served as Professor of Electrical Engineering at the Polytechnic Institute of
Brooklyn for 24 years, during a portion of which period he served as Head of the
Electrical Engineering Department. During his tenure at Columbia University he
served, in 1980 as a Visiting Scientist with IBM Research, from 1985 to 1988 as
Director of the Columbia University Center for Telecommunications, one of the
six

37
<PAGE> 38

National Engineering Research Centers established in 1985 under major grants of
the National Science Foundation, and during 1986 as a Resident Consultant with
NYNEX Science and Technology. He has also served as a part time consultant on
wireless communication systems for IBM Research during 1994 and for AT&T Bell
Laboratories during 1995. Dr. Schwartz, the author or co-author of nine books
and more than 150 technical publications on communication theory, systems signal
processing and computer communication networks, is a member of the National
Academy of Engineering, a Fellow and former Director of the IEEE and former
Chairman of its Information Theory Group and Past President of the
Communications Society. He serves on the editorial board of several
communication journals including Networks and Telecommunication Systems. In
1984, he was cited by IEEE as one of the ten all-time outstanding Electrical
Engineering educators.

DIRECTORS' COMPENSATION

In July 1997, the Company adopted a compensation policy for its
non-employee directors. The policy provides that such directors shall receive an
annual fee of $25,000 payable in quarterly installments, and shall be reimbursed
for out-of-pocket expenses incurred in connection with attending meetings of the
Board of Directors or committees thereof. Directors who are employees of the
Company do not receive additional compensation for serving as directors.

The Company granted, under its Incentive Program, in connection with their
elections as Directors of the Company, options to (i) Mr. Conner in July 1997 to
purchase 346,500 shares of its Common Stock at a price of $12.73 per share, and
(ii) to Mr. Miller and Dr. Schwartz in August 1997 to purchase 173,250 and
10,000 shares, respectively, of its Common Stock at the initial public offering
price per share. The five-year options vest ratably over sixteen quarters
commencing on October 1, 1997.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1996 for (i) the Company's Chief Executive Officer and
(ii) the Company's four most highly compensated other executive officers whose
salary, bonus and other compensation for such year exceeded $100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------------------- LONG-TERM
OTHER COMPENSATION
NAME AND PRINCIPAL ANNUAL AWARDS ALL OTHER
POSITION* SALARY BONUS COMPENSATION (# OF OPTIONS) COMPENSATION
- --------------------------- -------- ---------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Philip Black............... $282,289 $ 72,630 -- -- --
Chief Executive Officer
Benjamin Monderer.......... 281,910 2,603,375 -- -- --
Chairman of the Board;
President; Chief
Technical Officer
Carol Turchin.............. 278,489 2,603,375 -- -- --
Executive Vice President
Mark A. Mays............... 278,489 295,250 -- -- --
Vice President, Secretary
Warren J. Fisher........... 101,392 -- $ 135,415(2) 13,530 $ 50,000(3)
Vice President -- Sales
</TABLE>

- ---------------
* Reflects the position or positions of such officers as of September 16,
1997.

(1) Represents amounts paid in 1996.

(2) Represents commissions paid in 1996.

(3) Represents moving expenses paid in 1996.

38
<PAGE> 39

EMPLOYMENT AND COMPENSATION AGREEMENTS

The Company has entered into employment agreements with Dr. Monderer, Ms.
Turchin and Mr. Mays. The agreements are for a term commencing with the date of
this Prospectus and ending December 31, 2000 and provide for annual base
compensation of $500,000, $425,000 and $350,000, respectively, for Dr. Monderer,
Ms. Turchin and Mr. Mays, for the period ending December 31, 1998 with the
compensation for the remaining two years to be not less than the prior year's
base compensation, adjusted for increases in the Consumer Price Index. The
agreements also provide for an annual bonus of (i) 0.5% of the net revenues in
excess of $100,000,000 for each of Dr. Monderer and Ms. Turchin and (ii) 4.0%,
2.5% and 1.5% of the net pre-tax income above $20,000,000, respectively, for Dr.
Monderer, Ms. Turchin and Mr. Mays, for any year ending during the term of the
agreements. The employment agreements with Dr. Monderer and Ms. Turchin provide
that the Company is to secure term life insurance on the life of each of them in
the amount of at least $1,000,000 for the benefit of his or her spouse. Each of
their employment agreements also provides that in the event of the employee's
death, the Company will pay the employee's spouse the employee's base
compensation for twelve months following such death at the rate payable
immediately prior to such death, plus the amount of any bonus which would have
been earned during the following 12 months, and that in event of termination due
to disability as defined in the agreement, the Company will pay his or her base
compensation for the twelve-month period following such termination at the rate
payable immediately prior to such termination.

In May 1995, the Company entered into a Compensation Plan and Agreement
(the "Compensation Plan") with Mr. Philip Black. The Compensation Plan provides
that Mr. Black's employment with the Company is at will. The agreement provides
for an annual base salary of $275,000, plus a bonus, based on the Company's net
revenues and pre-tax income for the immediately prior calendar year, of: (i)
0.05% of the net revenues up to $100,000,000 plus 0.5% of the net revenues in
excess of $100,000,000 for the period and (ii) 1.12% of the pre-tax income, as
defined, up to $20,000,000, plus 4.0% of the pre-tax income above $20,000,000
for the period.

The Compensation Plan may be terminated at the option of either the Company
or Mr. Black for convenience and without cause at any time upon 30 days prior
written notice. If so terminated by the Company, Mr. Black is entitled to a
severance payment equal to his annual salary and aggregate bonus for the
calendar year prior to the termination, but not more than $600,000 in the
aggregate. The employment agreements and the Compensation Plan contain a
non-competition covenant for a one-year period following termination of
employment.

STOCK OPTIONS

To date, there has been no exercise of stock options granted by the
Company. The only executive officer named in the Summary Compensation Table who
was granted stock options during the year ended December 31, 1996 was Mr. Fisher
who received, on January 8, 1996, an option to purchase 13,530 shares of Common
Stock at a price of $.75 per share.

The following table sets forth information concerning the value of
unexercised options held by Mr. Fisher and Mr. Black, the only executive
officers named in the Summary Compensation Table who held options as of December
31, 1996. None of those options is exercisable prior to consummation of the
Offering.

FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
---------------------------------------- -------------------------- ---------------------
<S> <C> <C>
Philip Black............................ 521,054 $ 2,282,217
Warren J. Fisher........................ 13,530 57,773
</TABLE>

- ---------------
(1) Based on the fair market value of the Common Stock as of December 31, 1996
of $5.02 as determined by the Company.

39
<PAGE> 40

INCENTIVE PROGRAM

The Company's 1995 Incentive Program (the "Incentive Program"), adopted in
May 1995 and as amended in July 1997, permits the grant during the ten-year
period ending in May 2005 to officers, directors and employees of the Company
and its direct and indirect subsidiaries and to certain consultants and advisors
of the Company of options to purchase up to 2,392,500 shares of the Company's
Common Stock, subject to adjustment. As of August 31, 1997, there were
outstanding options to purchase an aggregate of 1,645,797 shares of Common Stock
of the Company. None of the options is exercisable prior to the date of this
Prospectus.

The Incentive Program authorizes the grant of incentive stock options
("ISO"), which may only be granted to employees of the Company or any subsidiary
or parent of the Company and non-qualified stock options ("Non-qualified
Options").

The Incentive Program is administered and interpreted by the Board of
Directors or by one or more committees appointed by the Board of Directors (the
"Plan Administrator").

The Board of Directors may, from time to time, amend, alter, suspend or
discontinue the Incentive Program, subject to required shareholder approval with
respect to amendments that would (1) increase the maximum number of shares of
Common Stock available for issuance under the Incentive Program, (2) reduce the
minimum option price, (3) effect any change inconsistent with Section 422 of the
Code or (4) extend the term of the Incentive Program.

To qualify as an ISO, the option price at which the Common Stock may be
purchased will be the Fair Market Value (or, if the grantee is a 10%
shareholder, 110% of the fair market value) of the Common Stock at the time of
the grant. Upon exercise of any ISO or Non-qualified Option, the grantee may pay
the option price (a) in cash, (b) by delivering shares of Common Stock held by
the grantee for at least six months which have a Fair Market Value equal to the
option price on the exercise date, (c) by surrender of options with respect to
shares having a value equal to the amount by which the fair market value exceeds
the purchase price or (d) by delivering a combination of the foregoing with a
combined Fair Market Value equal to the option price.

In the event of a change in control, merger, consolidation, combination or
other transaction in which shareholders of the Company will receive cash or
securities (other than Common Stock), or if such shareholders are offered cash
or securities in exchange for their Common Stock and such offer, if accepted,
would result in the offeror becoming the owner of (a) at least 50% of the
outstanding shares of Common Stock of the Company or (b) such lesser percentage
of the Common Stock as the Plan Administrator determines will materially and
adversely affect the market value of the Common Stock after such offer, the Plan
Administrator shall have the right (i) to accelerate the vesting of all options
such that they become fully exercisable immediately and/or (ii) adjust the
options by substituting the common stock of the surviving corporation, parent or
offeror.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan, which was adopted in August
1997, provides an opportunity for eligible employees of the Company to purchase
shares of Common Stock, at a discount, through regular period salary reductions.
A maximum of 250,000 shares of Common Stock may be issued under the Stock
Purchase Plan.

The first offering under the Stock Purchase Plan will begin on the
commencement of this Offering and end on March 31, 1998. Unless otherwise
determined by the Board of Directors or the Compensation Committee, subsequent
offerings will commence on the first business day occurring on or after each
April 1 thereafter and will end on the last business day occurring on or before
the following March 31. The Board of Directors or the Compensation Committee
may, in its discretion, select a different offering period for any offering,
provided that the duration of the offering is not more than one year. All
employees who are customarily employed by the Company or a subsidiary designated
by the Board of Directors or the Compensation Committee for more than twenty
hours per week and have been so employed for at least

40
<PAGE> 41

six months as of the first day of the applicable offering period are eligible to
participate in the Stock Purchase Plan.

The maximum number of shares which may be purchased by a participating
employee of the Company during an offering will be determined by the Board of
Directors or the Compensation Committee. An employee may purchase shares under
the Stock Purchase Plan by authorizing payroll deductions of up to 10% of his
regular pay during this offering period. Unless the employee has previously
withdrawn from the offering, his accumulated payroll deductions will be used to
purchase Common Stock on the last business day of the period at a price equal to
85% of the price of the Common Stock on the offering date or the exercise date,
whichever is lower. Under applicable tax rules, an employee may purchase no more
than $25,000 of the fair market value worth of Common Stock in any calendar year
(determined on the first day of the offering period(s) in which such stock is
purchased); certain other tax limitations may apply.

The Stock Purchase Plan will be administered by the Board of Directors or
the Compensation Committee. The Board of Directors or the Compensation Committee
may at any time amend the Stock Purchase Plan, subject to the approval of the
Company's stockholders if and to the extent required to comply with Rule 16b-3
under the Exchange Act or to preserve the favorable tax treatment of
participants, or discontinue the Stock Purchase Plan.

The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" as defined in Section 423 of the Code, which provides that an
employee will not have income for federal income tax purposes at the start of an
offering or upon the purchase of shares of Common Stock at the end of an
offering, but generally will recognize ordinary income, in addition to capital
gain or loss, when the employee sells the shares.

THE 401(k) PLAN

In August 1995 the Company adopted a salary deferral plan, the Box Hill
Systems Corp. 401(k) Plan (the "401(k) Plan"), which is intended to qualify
under Section 401(a) and 401(k) of the Code. Company employees are eligible to
participate in the plan if they were employed as of August 1, 1995 or when they
attain the age of 21. Participants may make elective salary reduction
contributions to the 401(k) Plan of not less than 1% nor more than 15% of their
annual compensation, subject to a dollar limit established by law (which limit
was $9,500 in 1996). In addition, the Company may make a discretionary matching
contribution equal to a percentage of the employee's elected deferred amount and
may make one or both of two additional types of discretionary contributions,
neither of which is required, and each of which is to be determined annually by
the Company. To date, the Company has made no matching or other contributions
under the 401(k) Plan.

Participants are fully vested at all times in the amounts they contribute
to the Plan and are always 100% vested upon early or normal retirement. The
Company's matching contributions are to vest at a rate of 20% in the first year
of service; the vested percentage then increases by 20 percentage points for
each successive year of service and participants are 100% vested by the end of
their fifth year. Participants are always fully vested in special and additional
discretionary contributions made by the Company to the Plan. Benefits under the
Plan generally are distributable after the age of 59 1/2 or become payable upon
separation from service, retirement, death or disability.

41
<PAGE> 42

CERTAIN TRANSACTIONS

Dr. Benjamin Monderer and Ms. Carol Turchin, officers, Directors and
shareholders of the Company, from time to time during the period from December
31, 1993 through December 31, 1994 made loans to the Company for working capital
purposes. The largest outstanding balance of such loans, which bore interest
rates from 8% to 10% per annum, was $3,401,000 as of December 31, 1994. The
loans were repaid in 1995, the last repayment, in the amount of $1,901,000,
having been made in June 1995. The related interest expense to the Company in
connection with such advances for the years ended December 31, 1994 and 1995 was
$135,000 and $116,000, respectively.

Dr. Monderer, Ms. Turchin and Mr. Mark Mays are the sole shareholders of
Box Hill Systems Europe, Ltd. ("Box Hill Europe"), which they formed in 1995 to
provide marketing and technical support services to the Company in connection
with European sales. They, along with Mr. Philip Black, are its directors. The
Company pays the operating expenses of Box Hill Europe's operations, which
consist solely of salaries for its employees and related expenses, plus a fee of
10% of total operating expenses, which fee is principally used to pay applicable
United Kingdom taxes. No sales of the Company's products or services are
effected through Box Hill Europe. None of Box Hill Europe's employees is an
officer or director or an affiliate of an officer or director of the Company.
For the years ended December 31, 1995 and 1996, and the six months ended June
30, 1996 and 1997, the Company expensed $99,000, $316,000, $157,000 and
$160,000, respectively, in connection with such operation. In addition, the
Company had accounts payable to Box Hill Europe of $55,000 and $65,000 as of
December 31, 1996 and June 30, 1997, respectively. The Company expects that Box
Hill Europe will continue to operate as a separate independent company after the
Offering.

42
<PAGE> 43

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information with respect to beneficial
ownership of the Common Stock of the Company, after giving effect to the
Offering, by (i) each person known by the Company to be the beneficial owner of
5% or more thereof, (ii) each director, (iii) each named Executive Officer and
(iv) all officers and directors as a group. All persons listed have sole voting
and investment power with respect to their shares unless otherwise indicated. As
indicated elsewhere in this Prospectus, each Selling Shareholder has held and
continues to hold certain positions with the Company. See "Management."

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP AMOUNT AND NATURE
OF COMMON STOCK OF BENEFICIAL OWNERSHIP
BEFORE THIS OFFERING AFTER THIS OFFERING
---------------------------- NUMBER OF -------------------------
PERCENTAGE OF SHARES PERCENTAGE OF
NUMBER OF OUTSTANDING BEING NUMBER OF OUTSTANDING
NAME SHARES SHARES OFFERED SHARES SHARES
- ------------------------------- ---------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Benjamin Monderer(1)(2)........ 9,900,000 100.0% 825,000 7,700,000 58.3%
Carol Turchin(1)(2)............ 9,900,000 100.0 825,000 7,700,000 58.3
Mark A. Mays(1)(3)............. 9,900,000 100.0 550,000 7,700,000 58.3
Philip Black(4)................ 234,475 2.3 -- 234,475
Finis F. Conner(4)............. 21,656 * -- 21,656 *
Warren J. Fisher(4)............ 4,736 * -- 4,736 *
Robert C. Miller(4)............ 10,828 * -- 10,828 *
Mischa Schwartz(4)............. 625 * -- 625 *
Directors and Executive
Officers as a group (11
persons)(5).................. 10,190,433 100.0% 2,200,000 7,990,433 59.2%
</TABLE>

- ---------------
* Less than one percent.

(1) The address of such person is c/o Box Hill Systems Corp., 161 Avenue of the
Americas, New York, NY 10013.

(2) Beneficial ownership includes, before the Offering, 3,300,000 shares owned
by such individual's spouse and 3,300,000 shares owned by Mr. Mays, and
after the Offering 2,475,000 shares owned by such individual's spouse and
2,750,000 shares owned by Mr. Mays, all of which shares are subject to the
voting agreement described below, as to which shares such individual
disclaims beneficial ownership.

(3) Beneficial ownership includes, before the Offering, an aggregate of
6,600,000 shares owned by Dr. Monderer and Ms. Turchin, and after the
Offering 2,475,000 shares owned by each thereof, all of which are subject to
a voting agreement, described below, as to which shares Mr. Mays disclaims
beneficial ownership.

(4) Beneficial ownership represents shares issuable upon exercise of options
exercisable within 60 days of the date of this Prospectus.

(5) Beneficial ownership includes 290,433 shares issuable upon exercise of
options exercisable within 60 days of the date of this Prospectus by all
directors and executive officers as a group and by the wife of an officer
who is also an employee of the Company.

On July 31, 1997, Dr. Monderer, Ms. Turchin and Mr. Mays entered into a
voting agreement with respect to the shares each owns, effective with the
consummation of the Offering. Pursuant to the agreement, such shareholders have
agreed to vote their respective shares for the election of each thereof as a
Director of the Company and will vote their shares in accordance with the
determination of the holders of a majority of their shares as to any proposal to
merge, consolidate, liquidate or sell substantially all the assets of the
Company. The agreement, which is to terminate on December 31, 2009, or upon the
deaths of Dr. Monderer and Ms. Turchin, prohibits the transfer of their shares
other than (i) to a member of the transferor's family who agrees to be bound by
the agreement, (ii) pursuant to a sale exempt from registration pursuant to Rule
144 under the Securities Act or (iii) in a merger, consolidation or sale of
substantially all the assets of the Company.

43
<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 40,000,000 shares of the
Common Stock, par value $.01 per share. After the closing of the Offering,
13,200,000 shares of the Common Stock will be issued and outstanding, assuming
no exercise of the Underwriters' over-allotment option. Concurrent with the
Company's conversion to C Corporation status immediately prior to consummation
of the Offering, the Company will amend its Certificate of Incorporation to
authorize a class of Preferred Stock, par value $.01 per share. Upon closing of
the Offering, no shares of Preferred Stock will be issued and outstanding. The
following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Company's Certificate of Incorporation and By-laws, which have been filed as
exhibits to the Company's registration statement, of which this Prospectus is a
part, and applicable law.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of shareholders. There are no cumulative voting rights for
the election of directors. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor, subject to preferences that may be applicable to any
outstanding Preferred Stock. In the event of a dissolution of the Company,
whether voluntary or involuntary, after distribution to the holders of Preferred
Stock, if any, of amounts to which they may be preferentially entitled, the
holders of Common Stock are entitled to share ratably in the assets of the
Company legally available for distribution to its shareholders. None of the
holders of Common Stock has any preemptive, subscription, liquidation,
conversion or redemption rights, and no holders of Common Stock are subject to
further calls or assessments or rights of redemption by the Company. No sinking
funds are available to the holders of Common Stock. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
nonassessable.

PREFERRED STOCK

Upon amendment of the Company's Certificate of Incorporation concurrent
with the Offering to authorize the class of Preferred Stock, the Company's Board
of Directors will have the authority to issue 5,000,000 shares of Preferred
Stock in one or more series and to fix the powers, designations, rights,
preferences and restrictions thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and the number
of shares constituting each such series, without any further vote or action by
the Company's shareholders. The issuance of a series of Preferred Stock in
certain circumstances, based on the terms of the series, may delay, deter or
prevent a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price of, and the voting and other rights of
the holders of, the Common Stock. The Company currently has no plans to issue
any Preferred Stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's By-laws provide that the Company will indemnify its directors
and executive officers for their reasonable expenses, including attorneys' fees,
actually and necessarily incurred by him or her in connection with his or her
defense of any action (except an action by the Company in its own right) to
which he or she becomes a party by reason of the fact that such individual
served as an officer or director of the Company or of any corporation in which
he or she served at the request of the Company, other than in connection with
acts committed in bad faith or resulting from active and deliberate dishonesty,
or in connection with which he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled. The
Company's employment agreements with Dr. Monderer, Ms. Turchin

44
<PAGE> 45

and Mr. Mays, its Compensation Agreement with Mr. Black and its agreement with
Mr. Conner in connection with his appointment as a director contain
indemnification provisions consistent with the foregoing.

The foregoing indemnification provisions do not eliminate a director's duty
of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available. They
also do not affect a director's responsibilities under any other laws, such as
the federal securities laws or state or federal environmental laws.

CERTAIN PROVISIONS OF NEW YORK LAW

Section 912 of the NYBCL regulates "business combinations," a term covering
a broad range of transactions between "resident domestic corporations" (as
defined, which term would include the Company) and an interested shareholder,
which is defined as any person beneficially owning 20% or more of the
outstanding voting stock of the resident domestic corporation or any affiliate
or associate of that owner. Under the statute, a resident domestic corporation
may not engage in any business combination with any interested shareholder,
unless (a) if the business combination is to occur within five years of the date
the shareholder acquired 20% or more ownership, either the business combination
or the stock acquisition was previously approved by the Board of Directors, or
(b) the business combination is approved by a majority of outstanding voting
stock (not including shares owned by the interested shareholder), which approval
may not be effectively given until approximately five years after the interested
shareholder first attained 20% ownership (the "Stock Acquisition Date"), or (c)
the business combination occurs after five years after the interested
shareholder's Stock Acquisition Date and the consideration paid to the
non-interested shareholders meets certain stringent conditions imposed by
section 912. The restrictions imposed by section 912 will not apply to a
corporation that amends its by-laws by the affirmative vote of a majority of its
outstanding voting stock (not including shares owned by the interested
shareholder) to "opt out" of section 912; however, an amendment will not be
effective for 18 months after the vote and will not apply to any business
combination where the Stock Acquisition Date precedes the amendment.

At this time, the Company will not seek to "opt out" of section 912 and,
therefore, the restrictions imposed by section 912 will apply to the Company.

Section 912 of the NYBCL may discourage other persons from making a tender
offer for, or acquisitions of, a number of shares of the Common Stock. This
could have the incidental effect of inhibiting changes in management and also
may prevent temporary fluctuations in the market price of the Common Stock that
often result from actual or rumored takeover attempts. In addition, the limited
liability provisions in the Company's Certificate of Incorporation with respect
to directors and the indemnification provisions in the Company's by-laws may
discourage shareholders from bringing a lawsuit against directors for breach of
their fiduciary duty and also may have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefited the Company and its
shareholders. Furthermore, a shareholder's investment in the Company may be
adversely affected to the extent the Company pays the costs of settlement and
damage awards against the Company's directors and officers pursuant to the
indemnification provisions in the Company's by-laws.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.

45
<PAGE> 46

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common
Stock, and any sales of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby.

Upon completion of the Offering, there will be an aggregate of 13,200,000
shares of Common Stock outstanding assuming (i) no exercise of the Underwriters'
over-allotment option and (ii) no exercise of outstanding options to purchase
Common Stock. Of these shares, the 5,500,000 shares of Common Stock sold in this
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless such shares are held by "affiliates" of the
Company, as that term is defined under the Securities Act and the regulations
promulgated thereunder. The remaining 7,700,000 shares of Common Stock (the
"Restricted Shares") are held by the Selling Shareholders. The Restricted Shares
were sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted" securities within the
meaning of Rule 144 under the Securities Act.

The Company and each of its directors and officers including the Selling
Shareholders, have agreed that, for a period of 180 days (270 days in the case
of the Selling Shareholders) after the date of this Prospectus, they will not
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock
(without the prior consent of Salomon Brothers Inc) provided that the Company
may issue and sell shares of Common Stock pursuant to the Incentive Program and
the Employee Stock Purchase Plan.

Upon expiration of a period of 270 days from the date of this Prospectus,
all of the Restricted Shares will become eligible for sale subject to the
provisions of Rule 144 under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year, is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (132,000 shares immediately after the Offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale, subject to the filing of a Form 144 with respect to such sale and certain
other limitations and restrictions. In addition, a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years would be entitled to sell such shares under Rule 144(k) without regard
to the requirements described above.

The Company intends to file registration statements under the Securities
Act to register shares of Common Stock reserved for issuance under its Incentive
Program and the Employee Stock Purchase Plan, thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. Such registration statements will become effective immediately
upon filing. As of August 31, 1997, options to purchase 1,645,797 shares of
Common Stock at a weighted average exercise price of $4.96 per share were
outstanding under the Company's Incentive Program.

46
<PAGE> 47

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to the Underwriters,
and each of the Underwriters, for whom Salomon Brothers Inc and Montgomery
Securities are acting as representatives (the "Representatives"), has severally
agreed to purchase from the Company and the Selling Shareholders the number of
shares set forth opposite its name below.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------ ----------------
<S> <C>
Salomon Brothers Inc ....................................... 2,148,000
Montgomery Securities ...................................... 1,432,000
BT Alex.Brown Incorporated.................................. 240,000
Credit Suisse First Boston Corporation...................... 240,000
Hambrecht & Quist LLC....................................... 240,000
Lehman Brothers Inc......................................... 240,000
Smith Barney Inc............................................ 240,000
Adams, Harkness & Hill, Inc................................. 120,000
Cruttenden Roth Incorporated................................ 120,000
Dain Bosworth Incorporated.................................. 120,000
Needham & Company, Inc...................................... 120,000
Pacific Growth Equities, Inc................................ 120,000
Unterberg Harris............................................ 120,000
-------
Total............................................. 5,500,000
=======
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares of Common Stock are
purchased. In the event of a default by any Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated. The Company and the Selling Shareholders have been advised by the
Representatives that the several Underwriters propose initially to offer such
shares of Common Stock at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not in
excess of $.63 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to other dealers. After
the initial offering, the public offering price and such concessions may be
changed.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 825,000
additional shares of Common Stock, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock that the Underwriters have agreed to purchase. To
the extent that the Underwriters exercise such option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase a number of
option shares proportionate to such Underwriter's initial commitment.

The Selling Shareholders have agreed that they will not, without prior
written consent of Salomon Brothers Inc, offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce an offering of, any
shares of Common Stock beneficially owned upon consummation of the Offering by
such person or any securities convertible into, or exchangeable for, shares of
Common Stock during the period of 270 days after the date of this Prospectus,
other than shares of Common Stock disposed of as bona fide gifts. The Company
and its officers and directors other than the Selling Shareholders have agreed
that they will not, without the prior written consent of Salomon Brothers Inc,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offer of any shares of Common Stock, options or any
securities convertible into, or exchangeable for, shares of Common Stock during
the period of 180 days after the date of this Prospectus; provided, however,
that the Company may issue and sell

47
<PAGE> 48

Common Stock pursuant to the Incentive Program and the Employee Stock Purchase
Plan and the Company may issue Common Stock issuable upon the exercise of
securities outstanding on the date of this Prospectus. Salomon Brothers Inc in
its sole discretion may release any of the shares subject to the lock-up at any
time without notice.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.

The Representatives, on behalf of the Underwriters, may engage in
stabilizing transactions, syndicate covering transactions and penalty bids in
accordance with Rule 104 under the Securities Exchange Act of 1934, as amended.
Stabilizing transactions permit bids to purchase the Common Stock so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market following
completion of this Offering to cover all or a portion of a syndicate short
position created by the Underwriters selling more shares of Common Stock in
connection with this Offering than they are committed to purchase from the
Company and the Selling Shareholders. In addition, the Representatives, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements between the Underwriters whereby they may reclaim from an
Underwriter (or a dealer participating in the Offering), for the account of the
Underwriters, the selling concession with respect to shares of Common Stock that
are distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Such stabilizing transactions, syndicate
covering transactions and penalty bids may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required and, if any are undertaken, they may be discontinued at any time.

The Representatives have informed the Company and the Selling Shareholders
that they do not intend to confirm sales to any account over which they exercise
discretionary authority.

Prior to this Offering there has been no public market for the Common
Stock. The price to the public for the Shares has been determined through
negotiations between the Company and the Selling Shareholders and the
Representatives and was based on, among other things, the Company's financial
and operating history and condition, the prospects of the Company and its
industry in general, the management of the Company and the market prices of
securities of companies engaged in businesses similar to those of the Company.
There can, however, be no assurance that the prices at which the Shares will
sell in the public market after this Offering will not be lower than the price
at which they are sold by the Underwriters.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Brock, Fensterstock, Silverstein,
McAuliffe & Wade, LLC, New York, NY. Certain legal matters in connection with
this Offering will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, NY.

EXPERTS

The financial statements and schedule as of December 31, 1996 and for the
year then ended included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports. The financial statements and schedule as of December 31, 1995 and
for the years ended December 31, 1994 and 1995 included in this Prospectus have
been audited by Perelson Weiner, independent auditors, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

48
<PAGE> 49

CHANGE IN ACCOUNTANTS

On January 6, 1997, the Company engaged Arthur Andersen LLP as its
independent public accountants to audit the financial statements as of December
31, 1996 and for the year then ended. The decision to change accountants was
approved by the Board of Directors. The auditor's report of Perelson Weiner as
of December 31, 1995 and for the years ended December 31, 1994 and 1995,
included elsewhere herein, does not contain an adverse opinion or a disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with the audits of the company's financial
statements for the years ended December 31, 1994 and 1995 and in the subsequent
interim period prior to the change, there were no disagreements with the former
auditors on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures which, if not resolved to
the former auditor's satisfaction, would have caused them to make reference to
the subject matter in their report. Prior to retaining Arthur Andersen LLP, the
Company did not consult with Arthur Andersen LLP regarding the application of
accounting principles to a specified transaction, the type of audit opinion that
might be rendered on the Company's financial statements, or any other matter.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all the information contained in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected, without charge, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, IL 60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or
on the Internet at http://www.sec.gov. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, NW, Washington, D.C. 20549, at prescribed rates.

The Company intends to furnish its shareholders with annual reports
containing financial statements for each fiscal year audited by an independent
public accounting firm and quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.

49
<PAGE> 50

GLOSSARY

ANSI....................... American National Standards Institute.

clustering software........ Clustering software allows a client software
application to interact with a cluster of host
servers, as if the cluster were a single host.
Clustering software is designed to increase both
availability (by providing alternative processing
capacity in the event of a host failure) and
scalability (by sharing resources among a number
hosts in the cluster).

CPU........................ Central Processing Unit. Refers to a
microprocessing chip in a host computer.

Disk Array................. A storage system comprising a variable number of
disk drives externally attached by means of an
interface to a computer system.

DLT........................ Digital Linear Tape. A proprietary tape drive
product line designed and built by Quantum.

failover................... A high-availability and data protection feature
that automatically transfers functions from a
failed device to a redundant device.

fault tolerance............ The capability of a system to withstand a degree of
failure and continue to perform its functions.

Fibre Channel.............. The name given to a new interface standard
developed by ANSI.

GB......................... Gigabyte. 1,024 megabytes.

high availability.......... The capability of a system to perform its functions
with minimal downtime.

hot-swappable.............. The ability of components of a storage system, such
as disks, power supplies and fans, to be exchanged
while the system remains powered on.

MB......................... Megabyte. 1,048,576 bytes, a unit of measurement
for data storage.

Open Systems............... Computing environments incorporating computers that
act as servers interconnected over a network to
client workstations and a variety of other system
components and peripherals based on a series of
published or open interface specifications.

RAID....................... Redundant Array of Inexpensive/Independent Disks. A
Disk Array storage system with fault tolerant
capabilities.

SCSI....................... Small Computer Systems Interface. The name given to
a commonly used interface standard developed by
ANSI.

TB......................... Terabyte. 1,024 gigabytes.

Ultra SCSI................. An advanced form of SCSI with increased performance
capabilities.

UNIX....................... A popular multi-user computer operating system
commonly used in Open Systems.

Windows NT................. A Microsoft computer operating system commonly used
in Open Systems.

50
<PAGE> 51

BOX HILL SYSTEMS CORP.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants -- Arthur Andersen LLP....................... F-2
Independent Auditors' Report -- Perelson Weiner....................................... F-3
Balance Sheets........................................................................ F-4
Statements of Income.................................................................. F-5
Statements of Shareholders' Equity.................................................... F-6
Statements of Cash Flows.............................................................. F-7
Notes to Financial Statements......................................................... F-8
</TABLE>

F-1
<PAGE> 52

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Box Hill Systems Corp.:

We have audited the accompanying balance sheet of Box Hill Systems Corp. (a
New York Corporation) as of December 31, 1996, and the related statements of
income, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Box Hill Systems Corp. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Philadelphia, Pa.
March 21, 1997 (except with
respect to the matter discussed
in Note 9 as to which the
date is September 16, 1997)

F-2
<PAGE> 53

INDEPENDENT AUDITORS' REPORT

Board of Directors
Box Hill Systems Corp.

We have audited the accompanying balance sheet of Box Hill Systems Corp.,
an S corporation, as of December 31, 1995 and the statements of income, changes
in shareholders' equity and cash flows for the years ended December 31, 1994 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits 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 disclosure 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 financial position of Box Hill Systems Corp. as of
December 31, 1995 and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 in conformity with generally accepted
accounting principles.

PERELSON WEINER

New York, NY
January 30, 1997 (except with respect
to the matters discussed in Note 9
as to which the date is September 16, 1997)

F-3
<PAGE> 54

BOX HILL SYSTEMS CORP.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, ---------------------
------------------- PRO FORMA
1995 1996 ACTUAL (NOTE 2)
------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 3,478 $ 994 $ 6,536 $ 6,536
Accounts receivable, net of allowance of $162,
$206 and $206................................ 5,294 9,238 10,877 10,877
Inventories..................................... 4,224 6,114 8,022 8,022
Prepaid expenses and other...................... 121 215 227 227
Deferred income taxes........................... -- -- -- 614
------- ------- ------- -------
Total current assets.................... 13,117 16,561 25,662 26,276
Property and equipment, net....................... 828 855 821 821
Deferred income taxes............................. -- -- -- 74
------- ------- ------- -------
$13,945 $17,416 $26,483 $27,171
======= ======= ======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................ $ 4,062 $ 5,152 $ 7,611 $ 7,611
Accrued expenses................................ 567 1,111 6,013 6,013
Customer deposits............................... 795 1,346 2,126 2,126
Deferred revenues............................... 424 883 1,227 1,227
Distribution payable to shareholders............ -- -- -- 10,500
------- ------- ------- -------
Total current liabilities............... 5,848 8,492 16,977 27,477
------- ------- ------- -------
Deferred rent..................................... 154 155 168 168
------- ------- ------- -------
Commitments and contingencies (Note 8)

Shareholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000
shares authorized. None issued............... -- -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 9,900,000 shares issued and
outstanding.................................. 99 99 99 99
Retained earnings (accumulated deficit)......... 7,844 8,670 9,239 (573)
------- ------- ------- -------
Total shareholders' equity (deficit).... 7,943 8,769 9,338 (474)
------- ------- ------- -------
$13,945 $17,416 $26,483 $27,171
======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 55

BOX HILL SYSTEMS CORP.

STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $55,232 $40,225 $50,027 $23,144 $32,228
Cost of goods sold.......................... 33,568 24,067 33,028 15,234 20,828
------- ------- ------- ------- -------
Gross profit...................... 21,664 16,158 16,999 7,910 11,400
------- ------- ------- ------- -------
Operating expenses:
Shareholder officers' compensation........ 15,174 9,067 6,347 2,914 4,908
Engineering and product development....... 1,420 1,634 2,071 1,036 1,082
Sales and marketing....................... 2,405 3,150 5,325 2,479 3,285
General and administrative................ 1,351 1,931 2,348 1,065 1,418
------- ------- ------- ------- -------
20,350 15,782 16,091 7,494 10,693
------- ------- ------- ------- -------
Operating income.................. 1,314 376 908 416 707
Interest income............................. 73 83 144 43 22
Interest expense............................ (135) (116) -- -- --
------- ------- ------- ------- -------
Income before income taxes........ 1,252 343 1,052 459 729
Income taxes................................ 426 311 226 103 160
------- ------- ------- ------- -------
Net income.................................. $ 826 $ 32 $ 826 $ 356 $ 569
======= ======= ======= ======= =======
Pro forma data (unaudited) (Note 2):
Pro forma income before income taxes...... $ 6,124 $ 2,735 $ 4,999
Pro forma income taxes.................... 2,358 1,053 1,925
------- ------- -------
Pro forma net income...................... $ 3,766 $ 1,682 $ 3,074
======= ======= =======
Pro forma net income per share............ $ .32 $ .14 $ .26
======= ======= =======
Shares used in computing pro forma net
income per share....................... 11,737 11,727 11,746
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 56

BOX HILL SYSTEMS CORP.

STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------ -------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................. 9,900,000 $ 99 $6,986 $ 7,085
Net income............................... -- -- 826 826
--------- ---- ------ ------
Balance, December 31, 1994................. 9,900,000 99 7,812 7,911
Net income............................... -- -- 32 32
--------- ---- ------ ------
Balance, December 31, 1995................. 9,900,000 99 7,844 7,943
Net income............................... -- -- 826 826
--------- ---- ------ ------
Balance, December 31, 1996................. 9,900,000 99 8,670 8,769
Net income (unaudited)................... -- -- 569 569
--------- ---- ------ ------
Balance, June 30, 1997 (unaudited)......... 9,900,000 $ 99 $9,239 $ 9,338
========= ==== ====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 57

BOX HILL SYSTEMS CORP.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income.......................... $ 826 $ 32 $ 826 $ 356 $ 569
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
--
Depreciation and
amortization................ 174 210 257 124 126
Other.......................... 21 21 45 -- 13
Changes in operating assets and
liabilities --
Accounts receivable....... (421) 3,074 (3,989) (2,361) (1,639)
Inventories............... (1,680) 318 (1,890) 240 (1,908)
Prepaid expenses and
other.................. (44) (50) (94) (134) (12)
Accounts payable.......... (680) 934 1,090 (842) 2,459
Accrued expenses.......... 50 102 545 2,635 4,902
Customer deposits......... 717 (73) 551 232 780
Deferred revenues......... -- 424 459 505 344
------ ------ ------ ------ ------
Net cash provided by (used
in) operating
activities............. (1,037) 4,992 (2,200) 755 5,634
------ ------ ------ ------ ------
Investing Activities:
Purchases of property and
equipment........................ (519) (375) (284) (146) (92)
Other............................... (225) 225 -- -- --
------ ------ ------ ------ ------
Net cash used in investing
activities............. (744) (150) (284) (146) (92)
------ ------ ------ ------ ------
Financing Activities:
Advances from (repayments to)
shareholders..................... 401 (3,401) -- -- --
------ ------ ------ ------ ------
Net increase (decrease) in
cash and cash
equivalents............ (1,380) 1,441 (2,484) 609 5,542
Cash and cash equivalents, beginning
of period........................... 3,417 2,037 3,478 3,478 994
------ ------ ------ ------ ------
Cash and cash equivalents, end of
period.............................. $2,037 $3,478 $ 994 $4,087 $6,536
====== ====== ====== ====== ======
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE> 58

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE INFORMATION)

(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Background

Box Hill Systems Corp. (the "Company"), designs, manufactures, markets and
supports high performance data storage systems for the Open Systems computing
environment. The Company employs a direct marketing strategy aimed at
data-intensive industries which, to date, include financial services,
telecommunications, health care, government/defense and academia. The Company's
manufacturing operations consist primarily of assembly and integration of
components and subassemblies into the Company's products. The Company's
manufacturing, research and development and principal sales and marketing
operations are conducted from a single, leased facility in New York City.

Interim Financial Statements

The financial statements as of June 30, 1997, and for the six months ended
June 30, 1996 and 1997, are unaudited. In the opinion of management, this
financial information includes all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial information set forth.
The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results to be expected for the full year.

Use of Accounting Estimates

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

Revenue Recognition and Product Warranty

The Company recognizes revenue on product sales when products are shipped.
Revenues are presented net of sales discounts and returns and allowances.
Revenues from maintenance contracts are deferred and recognized on a
straight-line basis over the contract term, generally twelve months. The Company
generally extends to its customers the warranties provided to the Company by its
suppliers. The Company provides for the estimated cost that may be incurred for
product warranties in the period the related revenue is recognized. To date, the
Company's suppliers have covered the majority of the Company's warranty costs.
There can be no assurance that such suppliers will continue to cover such costs
in the future, which could have a material adverse effect on the Company's
financial position and results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments purchased with
an original maturity of three months or less. Cash equivalents consist
principally of money market mutual funds.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market
and consist principally of purchased components used as raw materials.

F-8
<PAGE> 59

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment

Property and equipment are recorded at cost. Equipment and furniture are
depreciated using accelerated methods over their estimated useful lives (5 to 7
years). Leasehold improvements are amortized on a straight-line basis over the
life of the lease. Significant improvements are capitalized and expenditures for
maintenance and repairs are charged to expense as incurred. Upon the sale or
retirement of these assets, the applicable cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
the statements of income.

Advertising Costs

The Company expenses advertising costs as incurred. For the years ended
December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and
1997, advertising expense was $343, $383, $520, $221 and $249, respectively.

Product Development

Research and development costs are expensed as incurred. In conjunction
with the development of its products, the Company incurs certain software
development costs. No costs have been capitalized pursuant to SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," since the period between achieving technological feasibility and
completion of such software is relatively short and software development costs
qualifying for capitalization have been insignificant.

Income Taxes

The Company has elected to be taxed as a Subchapter "S" Corporation under
the Internal Revenue Code and the New York State Tax Code. Accordingly, no
provision has been made for federal or state income taxes since the Company's
shareholders' are taxed directly on their proportionate share of the Company's
taxable income. Income taxes consist of New York City taxes and state franchise
taxes.

Concurrent with the Company's proposed initial public offering (see Note
9), the Company's S Corporation status will terminate and it will become subject
to federal and state income taxes. Upon such termination, the Company will
record a tax benefit for the recognition of a net deferred tax asset, estimated
at $688 as of June 30, 1997 (see Note 2).

Supplemental Cash Flow Disclosures

Cash paid for interest was $135 and $116, for the years ended December 31,
1994 and 1995. Cash paid for income taxes for the years ended December 31, 1994,
1995 and 1996, and for the six months ended June 30, 1996 and 1997, was $485,
$355, $256, $113 and $95, respectively.

New Accounting Pronouncements

In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes financial accounting and reporting
standards for stock-based compensation plans. This statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
and services from nonemployees. The Company adopted the disclosure requirements
of SFAS No. 123 relative to its employee stock compensation plan (see Note 5).

In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement is effective for fiscal years ending after
December 15, 1997 and, when adopted, will

F-9
<PAGE> 60

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

require restatement of prior years' earnings per share. The adoption of SFAS No.
128 will not have a material effect on the pro forma net income per share
reported in the accompanying financial statements.

2. PRO FORMA DATA (UNAUDITED)

Pro Forma Balance Sheet Data

The pro forma balance sheet of the Company as of June 30, 1997 reflects (i)
a distribution payable to the shareholders of the Company of all previously
taxed, but undistributed, S Corporation earnings (estimated at $10,500 had the
termination occurred on June 30, 1997), and (ii) a net deferred tax asset which
will be recorded by the Company upon the termination of its S Corporation status
as a result of the Offering (estimated at $688 as of June 30, 1997). The
deferred income tax asset will represent the tax effect of the cumulative
differences between the financial reporting and income tax bases of certain
assets and liabilities as of the termination of S Corporation status, and will
be recorded as an income tax benefit in the quarter in which the Offering is
completed. The actual deferred tax asset recorded will be adjusted to reflect
the effect of operations from July 1, 1997 through the termination of the S
Corporation status. In addition, the actual amount of the distribution will be
adjusted to reflect the S Corporation's pro rata portion of the Company's 1997
taxable income and any shareholder distributions from July 1, 1997 through the
termination of the S Corporation Status.

The significant items comprising the Company's pro forma net deferred tax
asset as of June 30, 1997, are as follows:

<TABLE>
<S> <C>
Allowance for doubtful accounts.................................... $ 79
Inventory reserves................................................. 228
Accrued expenses and other......................................... 304
Deferred rent...................................................... 68
Depreciation....................................................... 9
----
$ 688
====
</TABLE>

Pro Forma Income Statement Data

In connection with the proposed Offering, the Company entered into
employment agreements with three of its officers, who are the current
shareholders, which provide for a combined minimum annual base compensation of
$1,275, in addition to provisions for benefits, termination and certain
incentive compensation based on future revenues and earnings (see Note 9). For
informational purposes, pro forma income before income taxes for the year ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 has been
presented to reflect the elimination of historical shareholder officers'
compensation expense in excess of the base salary amounts included in employment
agreements.

Additionally, concurrent with the Offering, the Company will terminate its
status as an S Corporation and will be subject to federal and state income
taxes. Accordingly, for informational purposes, the accompanying statements of
income for the year ended December 31, 1996, and the six months ended June 30,
1996 and 1997 include a pro forma adjustment for the income taxes which would
have been recorded if the Company had been a C Corporation, based on the tax
laws in effect during the respective periods. The pro forma adjustment for
income taxes does not include a one-time income tax benefit related to the
recognition of a net deferred tax asset which will be recorded by the Company
upon terminating its S Corporation status (estimated at $688 as of June 30,
1997).

F-10
<PAGE> 61

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the federal statutory income tax rate and the pro
forma effective income tax rate for the year ended December 31, 1996 is as
follows:

<TABLE>
<S> <C>
Federal statutory rate............................................. 34.0%
State and local income taxes, net of federal benefit............... 6.2
Other.............................................................. (1.7)
-----
38.5%
=====
</TABLE>

Pro Forma Net Income Per Share

Pro forma net income per share is computed by dividing pro forma net income
by the weighted average number of shares outstanding for the respective periods,
adjusted for the effect of dilutive common stock options, and after giving
effect to the estimated number of shares that would be required to be sold at
the initial public offering price after deducting the underwriting discount to
fund a distribution to the current shareholders of all previously taxed, but
undistributed, S Corporation earnings, estimated at $10,500 had the termination
occurred on June 30, 1997. Pursuant to the requirements of the Securities and
Exchange Commission, common stock equivalents issued by the Company during the
12 months immediately preceding the Offering have been included in the
calculation of the shares used in computing pro forma net income per share as if
they were outstanding for all periods presented using the treasury stock method.

3. RISKS AND UNCERTAINTIES

The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on new products, dependence on a limited number of
suppliers of key components, reliance on a limited number of principal
customers, concentration of customers in targeted industries, difficulties in
managing growth, competition, competitive pricing, dependence on key personnel,
enforcement of the Company's intellectual property rights, dependence on a
single production facility, and an uneven pattern of quarterly results.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company does not require collateral or other securities to support customer
receivables. The majority of the Company's net revenues are derived from sales
to customers in the financial services and telecommunications industries and a
significant amount of the Company's net revenues are derived from sales to
customers located in the New York City area. For the year ended December 31,
1994, two principal customers accounted for 12.8% and 10.4%, respectively, of
the Company's net revenues. For the year ended December 31, 1995, one of those
customers and a different principal customer accounted for 13.4% and 10.1%,
respectively, of the Company's net revenues. In 1996, and for the six months
ended June 30, 1997, no single customer accounted for greater than 10% of the
Company's net revenues.

F-11
<PAGE> 62

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Export Sales

The following table summarizes export sales by geographical region:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------- ENDED JUNE 30,
1994 1995 1996 1997
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Asia...................................... 8.4% 10.3% 9.1% 5.5%
Europe.................................... 7.6 4.7 8.3 8.7
Other..................................... 0.6 0.8 0.6 0.5
---- ---- ---- ----
16.6% 15.8% 18.0% 14.7%
==== ==== ==== ====
</TABLE>

Dependence on Suppliers

The Company purchases substantially all of its disk drives, a critical
component of its storage products, from one supplier. Approximately 51.1%,
35.6%, 52.7% and 39.4% of the Company's total component purchases were made from
this supplier for the years ended December 31, 1994, 1995 and 1996 and for the
six months ended June 30, 1997, respectively. Additionally, the Company
purchases all of its DLT tape drives from another supplier, which is the only
source for such tape drives. Approximately 13.8%, 16.5% and 9.7% of the
Company's total component purchases were from this supplier for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997,
respectively. There are a limited number of suppliers for certain of the
Company's other components and management believes that other suppliers could
provide certain similar products on comparable terms. Any shortage of key
components and any delay or other difficulty in obtaining such components from
other suppliers and integrating them into the Company's products or lack of
supply from sole source suppliers could have a material adverse effect on the
Company's financial position and results of operations.

4. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Equipment and furniture............................. $1,064 $1,325 $ 1,385
Leasehold improvements.............................. 405 428 460
------ ------ ------
1,469 1,753 1,845
Less -- Accumulated depreciation.................... (641) (898) (1,024)
------ ------ ------
$ 828 $ 855 $ 821
====== ====== ======
</TABLE>

Depreciation expense was $174, $210, $257, $124 and $126 for the years
ended December 31, 1994, 1995 and 1996 and for the six months ended June 30,
1996 and 1997, respectively.

5. STOCK INCENTIVE PLAN

The Company's stock incentive plan ("the Plan"), adopted in May 1995 and as
amended in July 1997, provides for the granting of incentive and nonqualified
stock options to employees, non-employee directors, and consultants. The Company
has currently reserved 2,392,500 shares of Common Stock for issuance pursuant to
the Plan. The terms and conditions of grants of stock options are determined by
the Board of Directors in accordance with the terms of the Plan.

F-12
<PAGE> 63

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Information with respect to the options under the Plan is as follows:

<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1994........... -- $ -- $ --
Grants............................... 1,043,833 .64- .75 .69
--------- --------- ----
Balance, December 31, 1995........... 1,043,833 .64- .75 .69
Grants............................... 68,947 .83- 5.02 1.93
--------- --------- ----
Balance, December 31, 1996........... 1,112,780 .64- 5.02 .77
Grants............................... 23,100 5.03-10.61 8.22
Forfeitures.......................... (19,833) .75- 5.02 1.66
--------- --------- ----
Balance, June 30, 1997............... 1,116,047 $ .64-10.61 $ .91
========= ========= ====
</TABLE>

At June 30, 1997, no options were exercisable and 1,276,453 options were
available for future grant. The options are exercisable 10 years from the date
of the grant, or vest ratably over five years from the grant date upon a sale of
the Company or a public offering of the Company's Common Stock, as defined (see
Note 9).

In July 1997, the Company issued an option to a new director to purchase
346,500 shares of the Company's Common Stock at an exercise price of $12.73 per
share. In August 1997, the Company issued options to two new directors to
purchase an aggregate of 183,250 shares of Common Stock at the initial public
offering price per share. These options vest ratably over four years, beginning
in October 1997, and are exercisable through July 2002.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and the related interpretations in accounting
for its stock option plan. The disclosure requirements of SFAS No. 123 were
adopted by the Company in 1996. Had compensation cost for the Plan been
determined based upon the fair value of the options at the date of grant, as
prescribed by SFAS No. 123, the Company's pro forma net income and pro forma net
income per share would have been reduced to the following amounts:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
Pro forma net income, as reported..................... $ 3,766 $ 3,074
Pro forma net income, as adjusted..................... 3,661 3,010
Pro forma net income per share, as reported........... .32 .26
Pro forma net income per share, as adjusted........... .31 .26
</TABLE>

The weighted average fair value of each stock option granted during the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997 was $.46, $1.86 and $5.43, respectively. As of June 30, 1997, the weighted
average remaining contractual life of each stock option outstanding was 8.3
years. The weighted average remaining contractual life of each stock option
granted during the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997 was 7.6, 8.9 and 9.8

F-13
<PAGE> 64

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

years, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................. 6.1% 6.0% 6.1%
Expected dividend yield............................. -- -- --
Expected life....................................... 7 years 7 years 7 years
Expected volatility................................. 60% 60% 60%
</TABLE>

Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.

6. RELATED PARTY TRANSACTIONS

In connection with working capital needs, two shareholders made certain
advances to the Company which were repaid in 1995. The advances bore interest at
rates ranging from 8% to 10% per annum. The Company recorded interest expense of
$135 and $116 for the years ended December 31, 1994 and 1995, respectively,
related to such advances.

During 1995, the Company's shareholders formed an affiliated Company, Box
Hill Systems Europe Ltd. ("Box Hill Europe"), to provide marketing and technical
support services to the Company. For the years ended December 31, 1995 and 1996,
and for the six months ended June 30, 1996 and 1997, the Company expensed $99,
$316, $157 and $160, respectively, related to operating costs of Box Hill
Europe. The Company had a payable to Box Hill Europe of $55 and $65 as of
December 31, 1996 and June 30, 1997, respectively. The Company expects Box Hill
Europe to operate as a separate independent company after the Offering.

7. EMPLOYEE BENEFIT PLANS

Retirement Savings Plan

Effective August 1, 1995, the Company established a retirement savings plan
under the provisions of Section 401(k) of the Internal Revenue Code. The plan
covers all employees who were employed on the effective date of the plan or upon
the attainment of age 21. The Company can make discretionary contributions to
the plan. No contributions were made to the Plan for the years ended December
31, 1994, 1995 and 1996 and for the six months ended June 30, 1997.

Employee Stock Purchase Plan

In August 1997, the Company adopted an employee stock purchase plan under
the provisions of Section 423 of the Internal Revenue Code. The plan provides
eligible employees of the Company with an opportunity to purchase shares of the
Company's Common Stock at 85% of fair market value, as defined. The Company has
reserved 250,000 shares of Common Stock for issuance pursuant to this plan and
no shares have been issued.

8. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its primary operating facility under a noncancelable
operating lease which expires in September 2007. The lease provides for a rent
abatement which is being amortized over the

F-14
<PAGE> 65

BOX HILL SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

life of the lease. Rent expense for the years ended December 31, 1994, 1995 and
1996 and for the six months ended June 30, 1996 and 1997, was $135, $366, $369,
$179 and $201, respectively.

Future minimum lease payments, on a cash basis, under all noncancelable
operating leases at December 31, 1996, are as follows:

<TABLE>
<S> <C>
1997........................................ $ 347
1998........................................ 337
1999........................................ 337
2000........................................ 356
2001........................................ 370
Thereafter.................................. 1,464
------
$ 3,211
======
</TABLE>

Employment Agreements

The Company has an employment contract with its Chief Executive Officer
("CEO") which provides for base annual compensation, incentive bonus, benefits
and termination. Either the Company or the CEO may terminate the agreement at
any time with or without cause. However, if the Company terminates the agreement
without cause, the Company must continue to pay the CEO for a one-year period
subsequent to the termination. The agreement contains a non-competition covenant
for a one-year period following termination of employment.

On July 15, 1997, the Company entered into employment agreements with its
three shareholder officers, which commence on the closing date of the Company's
initial public offering (see Note 9). The agreements provide for combined
minimum annual base compensation of $1,275, benefits termination,
non-competition and death benefits. The agreements extend through December 31,
2000. In addition, the shareholder officers are eligible for a combined annual
bonus equal to (i) 1.0% of the consolidated net revenues of the Company in
excess of $100 million, plus (ii) 8.0% of the Company's income before income
taxes in excess of $20 million, for any fiscal year during the agreement term.

Litigation

The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that the outcome of such
litigation and claims will not have a material adverse effect on the Company's
financial position or results of operations.

9. RECAPITALIZATION:

The Company is contemplating an initial public offering of 5,500,000 shares
of its Common Stock, of which 2,200,000 will be sold by current shareholders. In
connection therewith, on July 3, 1997, the Company's Board of Directors and
shareholders approved an amendment to the Company's Certificate of Incorporation
to be filed prior to the Offering authorizing 5,000,000 shares of $.01 par value
Preferred stock and authorized a 3.3-for-1 split of its Common Stock to be
effected prior to the Offering. The authorized Preferred Stock and the stock
split have been retroactively reflected in the accompanying financial
statements.

F-15
<PAGE> 66

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 16
Termination of S Corporation Status
and Dividend Policy................. 16
Capitalization........................ 17
Dilution.............................. 18
Selected Historical and Pro Forma
Financial Data...................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Management............................ 36
Certain Transactions.................. 42
Principal and Selling Shareholders.... 43
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 46
Underwriting.......................... 47
Legal Matters......................... 48
Experts............................... 48
Change in Accountants................. 49
Additional Information................ 49
Glossary.............................. 50
Index to Financial Statements......... F-1
</TABLE>

------------------------
UNTIL OCTOBER 11, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

5,500,000 SHARES

BOX HILL SYSTEMS CORP.

COMMON STOCK
($.01 PAR VALUE)
BOXHILL LOGO
SALOMON BROTHERS INC

MONTGOMERY SECURITIES

PROSPECTUS

DATED SEPTEMBER 16, 1997