Net revenues for the 1998 fourth quarter decreased 25.5% to $14.9 million, compared to $20.0
million for the corresponding period in 1997. The fourth quarter revenue decline was the result of a
decrease in volume from sales to all market segments served by the Company, coupled with price
reductions. Gross profit for the fourth quarter of 1998 was $4.7 million, a decrease of 33.8% from
$7.1 million for the fourth quarter of 1997. The gross margin for the quarter decreased from 35.2%
to 31.7%, principally as a result of increased competition, a different product mix and the level of the
fixed cost component of operations within cost of goods sold. Net income in the fourth quarter of
1998 decreased to $0.3 million, or $0.02 per share on a diluted basis, from pro forma net income of
$2.4 million, or $0.16 per share on a diluted basis in the fourth quarter of 1997.

The number of shares used to compute diluted net income per share was 15.0 million for the 1998
fourth quarter versus 15.1 million for the same period of 1997. For the three months ended
December 31, 1997, net income, basic net income per share and diluted net income per share have
been presented on a pro forma basis as if the Company had been subject to federal and state income
taxes.

Comments from Management

''1998 was a year of both successes and challenges for Box Hill,'' said Philip Black, CEO of Box
Hill. ''While the Company achieved record revenue levels, revenue and profits were nevertheless
below expectations. While the latter part of the year saw significant spending cuts by many of Box
Hill's main customer bases, including the financial services industry, the Company still was profitable
every quarter. Major highlights of 1998 included the hiring of Elizabeth Strong as Executive Vice
President of Sales in April, and Elizabeth's subsequent recruitment of a seasoned sales team to cover
the Western Region of the United States. Fibre Channel was recognized as an established technology
in 1998 and gave rise to the Storage Area Network, or ''SAN,'' which itself seems on its way to
becoming an established technology. Box Hill bolstered its strategic partnerships with StorageTek and
Legato to provide innovative, high-end total storage solutions, particularly in the SAN arena.

''While Box Hill's Fibre Box® received critical acclaim during 1998, certain segments of the market
were slow to accept the software-based RAID paradigm. Delays of Microsoft's® Windows® 2000
Professional (formerly known as Windows NT® Workstation 5.0) also may have added to delayed
customer demand for the Fibre Box®. In response, Box Hill is actively considering Fibre
Channel-based hardware RAID solutions.

''As the Company reported at the start of January, fourth quarter revenues and earnings were below
expectations. We believe this was due, in part, to overall economic uncertainty, particularly evident in
the financial services industry which accounted for more than 45% of Box Hill's revenues in 1998.
Revenues from sales of our legacy disk and RAID products accounted for 54% of net revenues for
the fourth quarter. Sales of our Fibre Channel-based products, at approximately $0.9 million, were
comparable to such sales during the previous quarter. Back up products accounted for 30% of
revenues for the fourth quarter.

''People have asked what is in store for Box Hill in 1999. According to a 1998 report released by
International Data Corporation, the market growth rate, from 1998 to 1999, for Unix-based disk
storage systems is expected to be about 9% and the market growth rate for Windows NT-based
systems is expected to be about 30%, for an overall, weighted average market growth of about 16%.
From 1997 to 1998, Box Hill's growth was below its market's estimated growth rate. In 1999, the
Company's goal is to better track that rate. Numerous circumstances could affect our ability to reach
this goal including Y2K issues. Recently, a number of Box Hill customers have indicated that they
expect to reduce the number of new IT projects during the second half of 1999 due to Y2K issues.
There is no way to know now, however, what effect any future circumstance may have on Box Hill's
1999 revenues and profits, and these comments should not be taken as an assurance of things to
come.

''Financially, Box Hill remains strong. The Company has approximately $58 million in the bank and
more than $83 million in total assets -- a very healthy balance sheet. Box Hill plans to continue its
strategy of becoming a leading SAN 'total solutions' provider and believes it is well positioned to take
advantage of any future wave of demand for SANs, both in terms of Box Hill's products and
expertise.''

Year End Results

Net revenues for the year ended December 31, 1998 rose to $72.5 million, a 3.1% increase versus
$70.3 million for the corresponding period of 1997. The revenue growth resulted from an increase in
volume, which was partially offset by price reductions. Gross profit for the year ended December 31,
1998 rose 1.2% to $25.1 million, from $24.8 million for 1997. As a percentage of net revenues,
gross margin for the year ended December 31, 1998 decreased slightly from 35.3% to 34.6%,
principally as a result of a different product mix. Net income for the year ended December 31, 1998
was $5.9 million, or $0.39 per share on a diluted basis, versus pro forma net income of $7.2 million,
or $0.57 per share on a diluted basis, in 1997.

The number of shares used to compute diluted net income per share was 15.1 million for the year
ended December 31, 1998 versus 12.7 million for 1997, reflecting the successful completion of the
initial public offering in September, 1997. For the year ended December 31, 1997 net income, basic
net income per share and diluted net income per share have been presented on a pro forma basis as if
the Company had been subject to federal and state income taxes, and as if all shareholder officers
had received compensation pursuant to post-IPO employment contracts. Shares used in computing
basic and diluted pro forma net income per share for the year ended December 31, 1997 include, as
outstanding, the weighted average number of shares required to be sold at the IPO price to fund
$10.5 million of distributions to the Company's prior S Corporation shareholders in September,
1997.