<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


(Mark One)

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

       For the fiscal year ended July 31, 1997

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

       For the transition period from _____________ to _______________

                         Commission file number 0-21053


                             PROCOM TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)

            California                                      33-0268063
  (State or other jurisdiction of                         (IRS Employer
  incorporation or organization)                         Identification No.)


     2181 Dupont Drive, Irvine, CA                            92612
 (Address of principal executive office)                    (Zip Code)

                                 (714) 852-1000
              (Registrant's telephone number, including area code)

                              HTTP://WWW.PROCOM.COM
                             (Registrant's Web Site)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock, $.01 par value

                     Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange  Act of 1934  during the  preceding  in 12 months (or for such
shorter  period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X]   No [ ]

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


<PAGE>   2

                     As of September 30, 1997, the aggregate market value of
voting Common Stock held by non-affiliates of the Registrant based on the
closing price reported on the National Association of Securities Dealers
Automated Quotation National Market System was approximately $66.8 million.

                     The number of shares of Common Stock, $.01 par value,
outstanding on September 30, 1997, was 11,038,049.


                      DOCUMENTS INCORPORATED BY REFERENCE

     Information required by Part III is incorporated by reference to portions
     of the Registrant's Proxy Statement for the 1997 Annual Meeting of
     Shareholders, which will be filed with the Securities and Exchange
     Commission within 120 days after the close of the 1997 fiscal year.




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                            PROCOM TECHNOLOGY, INC.
                      INDEX TO ANNUAL REPORT IN FORM 10-K
                    FOR THE FISCAL YEAR ENDED JULY 31, 1997


<TABLE>
<S>              <C>                                                                           <C>
                                     PART I
Item 1.          Business.......................................................................
Item 2.          Properties.....................................................................
Item 3.          Legal Proceedings..............................................................
Item 4.          Submission of Matters to a Vote of Security Holders............................

                                     PART II
Item 5.          Market for Registrant's Common Stock and Related Stockholder Matters....
Item 6.          Selected Financial Data........................................................
Item 7.          Management's Discussion and Analysis of Financial Condition and
                 Results of Operations..........................................................
Item 8.          Financial Statements and Supplementary Data....................................
Item 9.          Changes in and Disagreements With Accountants on Accounting and
                 Financial Disclosures..........................................................

                                    PART III

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

                                     PART IV
Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K ...............
</TABLE>























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THE INFORMATION CONTAINED IN THIS REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING
STATEMENTS.  WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FORECASTS," "PLANS," "FUTURE," "STRATEGY" OR WORDS OF
SIMILAR IMPORT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.  OTHER
STATEMENTS OF THE COMPANY'S PLANS AND OBJECTIVES MAY ALSO BE CONSIDERED TO BE
FORWARD LOOKING STATEMENTS.  SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN THE FORWARD-LOOKING STATEMENTS.  READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF.  THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLISH REVISED
FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.  READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY THE COMPANY TO ADVISE INTERESTED PARTIES OF CERTAIN
RISKS AND OTHER FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS AND OPERATING
RESULTS, INCLUDING THE DISCLOSURES MADE UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN
THIS REPORT, AS WELL AS THE COMPANY'S OTHER PERIODIC REPORTS ON FORM 10-K, 10-Q
AND 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

         Historically, the Company's fiscal year was a 52 or 53 week year
ending on the Saturday nearest July 31.  During this fiscal year, the Company
modified its accounting period so that each quarter and yearly accounting
period would end on the last day of each month.  Accordingly, the fiscal year
ended July 31, 1997 contains four additional days.  Unless otherwise indicated,
references herein to specific years and quarters are to the Company's fiscal
years and fiscal quarters.

         The Company's principal executive offices are located at 2181 Dupont
Drive, Irvine, California, 92612; its telephone number is (714) 852-1000 X 257
and its web site is HTTP://WWW.PROCOM.COM.





















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<PAGE>   5

                                     PART I
ITEM 1.  BUSINESS

GENERAL

  Procom Technology, Inc. ("Procom" or the "Company") designs, manufactures and
markets enterprise-wide data storage and information access solutions that are
compatible with all major hardware platforms, operating systems and network
protocols. The Company has become a leading provider of CD-ROM servers and
arrays as a result of its extensive distribution channels as well as the
scalability, performance, ease of use and multi-protocol support of its
products. The Company provides end users with disk drive upgrades for servers,
desktop and notebook computers and also provides high performance, fault
tolerant RAID solutions (Redundant Array of Independent Disks) and tape backup
subsystems. The Company utilizes computer resellers, value-added resellers
("VARs") and distributors to sell its products to a wide variety of end users,
including Fortune 500 corporations, governmental agencies and financial and
educational institutions.

  Recognizing the growing demand for fast and reliable access to large volumes
of information increasingly stored on CD-ROM media across enterprise-wide
networks, the Company introduced the first of its CD server and array products
in early 1994. These products enable a large number of network users to
simultaneously access computer data stored on multiple CD-ROMs. The Company has
recently introduced its CD FORCE server, which provides plug and play
compatibility with most popular operating systems and network topologies and
improves functionality by relieving the network operating system from the burden
of managing requests for access to information stored on CD-ROMs. The CD FORCE
server incorporates Procom's CD FORCE software, which manages network
connectivity and access to information contained on CD-ROMs. The Company has
continued to improve the capacity and performance of its product offerings,
which include the Company's Hyper CD-53x server, which is capable of providing
access to up to 40 gigabytes of information (63 CDs) with 53x data transfer
rates.  The Company has also recently introduced Digital Video Disc ("DVD")
Mixed ROM Servers to allow users to access either CD-ROM or DVD-ROM formats
across any popular operating systems.  The Company has experienced rapid growth
in sales of its CD servers and arrays to end users such as law and accounting
firms, educational and governmental entities and other companies and
organizations that require frequent access to large amounts of information
stored on CD-ROMs.

  The Company first developed its expertise in computer data storage products
by providing upgrade storage solutions for desktop computers.  Since that time,
the Company has expanded its product offerings to provide upgrade and
replacement disk drive products for notebook computers and servers, which have
become more popular in recent years as client/server computing has
proliferated. The Company's disk drive upgrades allow users to utilize their
existing hardware for longer periods of time, thereby extending the life of
their initial investment. The Company's RAID products provide high performance,
fault tolerant storage of over one terabyte of data for large network
information databases.

  The key elements of the Company's strategy include the following: (i)
developing additional network storage products incorporating the Company's
proprietary storage management software; (ii) accessing end users in key
vertical markets by leveraging relationships with computer resellers, VARs and
distributors; (iii) expanding relationships with key component suppliers in
order to enable the Company to anticipate and respond to technological
developments; and (iv) delivering timely storage solutions compatible with all
major operating systems and network topologies.

  The Company's CD servers and arrays can be configured for Unix, Novell
NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS,
while supporting different topologies such as Ethernet, FDDI, Fast Ethernet and
Token Ring. The Company's high-capacity storage subsystems will support varying
RAID levels to meet virtually any network or operating system storage
requirements. The Company's major customers include Vanstar Corporation, Entex
Information Services Inc., Inacom and Intelligent Electronics, and end users
include Microsoft, Ernst & Young, Federal Express, Prudential Insurance and
Bank One.









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BACKGROUND

  In recent years, there has been a significant migration to client/server and
network computing. Today's networks are much larger and more complex than early
networks, often consisting of multiple servers (application servers, file
servers, database servers and communications servers) and hundreds or even
thousands of desktop clients manufactured by a number of different vendors.
These servers and clients may utilize a number of different operating systems,
including Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows
3.1 and Macintosh OS.  The distributed nature of these networks, together with
the increased use of computers throughout organizations to create and store
files, has resulted in an increase in the amount and dispersion of critical
data across the clients and servers on these networks.

  As the size of networks and the amount of information used and stored on
those networks have increased, access to such data has become increasingly
important to end users. Users increasingly rely on the information resident on
networks and PCs, such as customer databases, inventory records, sales tracking
reports and research reference materials, for the effective accomplishment of
daily business activities. As a result, end users must have real-time access to
secure and reliable network data, regardless of the location of such data, and
the supporting operating system. These factors have made it complicated to
access information stored on networks.

  The increase in the size of networks has been accompanied by concurrent
increases in the size and complexity of computer data and files.  Application
software developers continue to introduce software packages that increasingly
incorporate features which require large amounts of storage, such as graphics,
video and sound. For example, a minute of uncompressed full motion video and
sound could require approximately 1,100 megabytes of storage. Similarly, the
size and complexity of images stored and manipulated using document imaging
systems have intensified network storage requirements. Further, the increasing
popularity of the Internet as a means of communication and a medium by which to
access and distribute information has contributed to the demand for increased
storage, as users download a wide variety of complex data from the Internet.

  Organizations evaluating alternatives for additional storage capacity must
consider a number of factors, including total cost of ownership, capacity,
access time, security, reliability and the ability to integrate such additional
storage into an existing network. The cost of ownership includes not only the
initial cost of a storage system but also the expenses associated with the
ongoing administration of the network. Administrative costs associated with
network data storage have increased as networks have grown more complex and
systems administrators have been required to monitor storage systems that
support multiple operating systems and multiple applications across numerous
clients.

  In response to increased demand for cost-effective storage of different types
of information, a variety of storage media have been developed, including hard
disk, magnetic tape and CD-ROM. Hard disk storage is a popular means of storing
and accessing large amounts of information that is continually changing. Hard
disk storage provides rapid access time but is a relatively expensive storage
medium and is easily erased.  Magnetic tape is the least expensive storage
medium, but has the slowest access times. Magnetic tape is therefore ideal for
backing up large amounts of information that is only expected to be accessed
infrequently.

  CD-ROM technology emerged in the early 1980s as a cost-effective method by
which to store and distribute large amounts of information. A single CD can
store approximately 650 megabytes of information, the same amount which could
be contained on over 100,000 pages of paper.   New DVD-ROMs can store more than
4,000 megabytes of information.   In addition, CD-ROMs and DVD-ROMs offer data
reliability and security, as they cannot be altered or erased, are not
susceptible to data loss when computer systems fail and have a life expectancy
of 50 to 100 years. Since CD-ROMs or DVD-ROMs cannot be erased or written over,
however, they are not suitable for storage situations in which information must
be continually updated and altered. However, for organizations that require
periodic distribution of written material, such as law reference books, parts
lists, catalogues or manuals, CD-ROMs and DVD-ROMs are much more cost-effective
and practical than paper-based documents. The proliferation of network
computing and the rapid increase in CD-ROMs as a means of information
distribution and storage have fueled demand for CD-ROM systems that provide
network wide access.

  RAID storage systems have developed in response to demand for increased data
storage, performance, security, reliability, fault tolerance and availability,
as well as for constant access. RAID is a method for allocating data across
several hard disk drives and allowing a server microprocessor to access those
drives simultaneously, thus increasing system storage and input/output
performance. In addition, lost data on any drive can be recreated using special
RAID algorithms, thus ensuring the immediate availability of RAID protected
data even in the event of a disk drive failure.














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<PAGE>   7
  The increase in the importance and volume of stored, complex data has
increased demand for secure and reliable methods of storage that allow for
efficient and cost-effective protection and management of such data. These
factors have also increased demand for total storage solutions that can quickly
and efficiently provide access to large volumes of data resident on a variety
of clients and servers running different operating environments, as well as
data generated by a wide range of applications. In addition, users are
increasingly demanding solutions comprised of not only hardware for
cost-effective storage of and access to large amounts of secure and reliable
information, but also software that manages information flow and reduces the
high costs of network storage administration.

PROCOM SOLUTION

  The Company provides a wide range of products designed to address the data
storage and information access requirements of client/server computing
environments. The Company's CD servers and arrays, disk drive upgrades and RAID
and tape backup subsystems are easy to install and use and have a relatively
low overall cost of ownership. Procom's CD servers and arrays address the
expanding use of CD-ROM, and more recently DVD-ROM as a distribution medium by
providing clients with simultaneous access to up to 63 CD-ROMs at effective
disk-drive access times.  The Company's RAID and tape backup subsystems provide
high performance, fault tolerant storage of over a terabyte of data for large
network information databases.  The Company's CD servers and arrays together
with the Company's RAID and tape product offerings are sometimes referred to as
the Company's "Intelleigent Network Storage Products". The Company's disk drive
upgrades allow users to utilize their existing hardware for longer periods of
time, thereby extending the life of their initial investment

  The Company's recently introduced CD FORCE CD-ROM network server incorporates
an embedded operating system that centralizes data access management services,
thereby reducing administrative costs. This embedded operating system is based
on the Company's managed enterprise storage architecture ("DATAFORCE").
DATAFORCE's operating system software is designed to provide non-intrusive plug
and play compatibility with most popular network operating systems, allowing
products incorporating the DATAFORCE architecture to be installed by simply
connecting one cable to the network. The central processing unit contained in
each DATAFORCE-equipped server is designed to allow the server to manage and
process data without burdening the network server. See " --  Products and
Technology -- Products Under Development."

   The core elements of the Company's solution include:

  Broad Product Line. The Company supplies a wide range of products with a
variety of prices, storage capacities, access times, storage media,
hardware/software combinations and levels of redundancy. The Company's products
are designed to meet a broad spectrum of end user data storage and information
access needs and range from disk drive storage upgrade products to the
Company's recently introduced Hyper CD-100x module, a CD-ROM and hard disk
combination, which the Company believes has the fastest CD-ROM access time and
data transfer rates available. The Company's broad range of products allows its
computer reseller and VAR customers to utilize Procom as a single source to
satisfy the storage requirements of a wide range of end users, thereby reducing
the need for multiple vendors. The Company has introduced, and will continue to
supply, DVD-ROM Servers and Arrays as the DVD standard becomes more popular.

  Modular and Scalable Design. The Company's products are designed to address
the evolving data storage and information access requirements of
enterprise-wide computing environments. Procom's products are modular and can
be linked together to accommodate a customer's expanding data storage and
information access requirements.

  Ease of Installation and Use. The Company's data storage and information
access solutions have been designed for ease of installation, configuration and
use in a variety of client/server networks. Many of the Company's CD servers
and arrays can be added to computer networks by simply attaching them as nodes
to existing network cabling. The Company's recently introduced CD FORCE server
contains a graphical user interface that facilitates end user access to
information contained on CD-ROMs.

  Reduced Cost of Ownership. Procom incorporates a number of features into its
products that reduce the costs associated with both the installation of its
products and the down-time of networks and storage systems. The Company's
products include numerous fault tolerant features, such as redundant and
hot-swappable power supplies and fans and hot-swappable disk and CD-ROM and
DVD-ROM drives that allow users to repair a damaged drive without interrupting
the operation of the network. The Company's CD-ROM and RAID products include
features that reduce administrative costs for network administrators by
providing remote management













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<PAGE>   8

and notification of actual or potential system or component failures, and its
RAID products also provide automatic reconstruction of data and easy adjustment
of RAID levels. In addition, the operating system software incorporated into
the Company's DATAFORCE architecture is designed to further reduce
administrative costs by centralizing network data storage management.

  Multi-platform, Multi-protocol Support. Procom's products are compatible with
a wide range of client networks and operating systems, including Unix, Novell
NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS.
In addition, the Company's products support multiple network topologies such as
Ethernet, FDDI, Fast Ethernet and Token Ring. This compatibility allows
customers to implement the Company's storage solutions in a broad range of
enterprise-wide computing environments.

BUSINESS STRATEGY

  The Company's objective is to provide products that fulfill customers'
evolving needs for data storage and information access products across all
major computers and operating systems. The key elements of the Company's
strategy to achieve this objective are as follows:

  Develop Additional Network Storage Products. The Company is focused on
developing server products that will enable networks to provide and manage
additional storage capacity more efficiently. These products will share many of
the design characteristics of the Company's current CD FORCE network server,
integrating a high performance central processing unit, network interface card
and Procom's proprietary embedded operating system software, and will be
designed to allow users on the network to store and access information more
quickly. The Company plans to develop additional Intelligent Network Storage
Products, such as storage management software and additional servers that will
utilize a variety of storage media, including hard disks (with RAID
functionality) and magnetic tape, which can be attached directly to and will be
compatible with a wide variety of network environments.

  Enhance Reseller and Distributor Relationships. The Company focuses its
marketing efforts on developing an awareness of the Company's data storage and
information access solutions with various computer resellers, VARs and
distributors of its products. These relationships provide the Company with
indirect access to and improved visibility among large corporations and other
institutional end users. The computer resellers, VARs and distributors also
function as a sales force for the Company, allowing the Company to reach a
large number of end users without incurring the significant expenditures
associated with a direct sales force, and provide ongoing service for the
Company's storage systems. The Company intends to sell a broader range of its
products and services to these existing customers.

  Target Vertical Markets and End-Users. The Company promotes higher levels of
sales of its CD servers and arrays through its channel partners by targeting a
portion of its marketing efforts to specific end users that require
enterprise-wide access to information published on CD-ROM, such as law and
accounting firms, educational organizations, medical service providers and
governmental agencies. The Company employs a similar strategy with regard to
the sale of its high capacity RAID solutions by targeting its marketing efforts
to end users with large information storage and access requirements, such as
companies that have recently migrated from mainframe computer systems to
personal computer networks, video-on-demand providers and companies developing
electronic imaging applications. The Company intends to continue to target
these vertical markets in the future.  In addition, the Company has opened
sales and support offices in Washington, DC and in New York, and intends to
continue to open additional sales offices in strategic locations to enhance the
Company's ability to market its products to, and meet with, potential
end-users.

  Expand Strategic Relationships. The Company seeks to expand its relationships
with the primary suppliers of components of its products, including drive
manufacturers such as Seagate Technology, Inc. and Toshiba and network software
operating system developers such as Novell, Inc. and  Microsoft Corporation.
These relationships have provided the Company with early access to information
regarding future product releases and technological developments that allow the
Company to anticipate and respond to market opportunities. The Company also
collaborates with manufacturers regarding the design of many components that
the Company ultimately incorporates into its data storage and information
access products. In addition, the Company maintains relationships with content
providers, such as legal publishers and video suppliers. These relationships
provide the Company with opportunities to receive free publicity and promotion
within niche end user markets when content providers utilize Procom data
storage and information access systems in conjunction with the display of their
own products at trade shows and other marketing events. Finally, the Company
also maintains informal relationships with certain end users of its products
that enable the Company to





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learn of and respond to changing end user needs. The Company intends to expand
its relationships with suppliers and manufacturers, content providers and end
users in the future.

  Deliver Timely Solutions. The Company believes that its focus on
cost-effective data storage and information access allows it to remain a
technology leader. The Company has focused on responding quickly to and
capitalizing on demands for specialized data storage and information access
products. The Company anticipates that additional market opportunities will
arise as demand for data storage and information access products continues to
increase, and the Company intends to maintain an organizational structure that
will allow it to quickly respond to these opportunities if they develop.

PRODUCTS AND TECHNOLOGY

  The Company's principal product lines are the Intelligent Network Storage
Products, such as CD servers and arrays (including DVD servers and arrays) and
RAID and tape backup subsystems, and disk drive upgrade products.   These
product lines accounted for approximately 37%, and 59%, respectively, of the
Company's net sales in fiscal 1995, approximately 53%, and 47%, respectively,
of the Company's net sales in fiscal 1996, and approximately 47% and 53%,
respectively, of the Company's net sales in fiscal 1997. Many of the Company's
products are offered in a variety of storage capacities and performance levels
and, as a result, are sold at varying prices. See "Risk Factors -- Dependence
on CD Servers and Arrays."

Intelligent Network Storage Products-CD Servers and Arrays

  The Company's CD servers and arrays provide an efficient method by which to
store and share large amounts of information across a network.  The Company's
CD servers and arrays are available in a variety of plug and play
configurations, from four to 63 CD drives, and can be configured with either
8x, 12x or 16x CD-ROM drives. In addition, the Company has  introduced its
Hyper CD-30x and 53x modules, a CD-ROM and hard disk combination, which allows
30x or 53x data transfer speeds and is based on proprietary technology obtained
by the Company pursuant to a marketing and integration arrangement with a third
party. Several CD arrays also are available as servers, configured at the
Company's factory with specified hardware and software. The Company provides
each CD server and array with optional software drivers for Unix, Novell
NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1, and Macintosh OS.
Many of the Company's CD servers and arrays contain the Company's built-in
"Smart SCSI CD" board, which maps up to seven CD drives to a single SCSI ID,
thereby allowing additional CD servers and arrays to be added to a network. The
Company's recently released CD FORCE Server incorporates the Company's
DATAFORCE architecture and is designed to (i) provide plug and play
compatibility with most popular network operating systems, (ii) function
without burdening the network server and (iii) provide cross/multi-platform
compatibility. The Company's internally developed CD-ROM network data access
management software is not presently available on all major hardware platforms,
and of the Company's CD servers and arrays shipped to date that contain network
data management software, substantially all included third-party software. See
"Risk Factors -- Dependence on CD Servers and Arrays." In addition, by working
with CD manufacturers and component suppliers, the Company has developed
special enclosures to provide security for the CDs and prevent their loss,
theft or damage.

  The Company also produces CD-ROM publishing and recording packages as part of
its strategy to capitalize on the use of CD-ROM as a popular information
storage medium for a number of industries. Procom's internal and external
CD-Recorders are designed to meet the archiving needs of desktop computer
users.

Intelligent Network Storage Products-RAID and Tape Backup Subsystems

  The Company's RAID products present a solution to the storage and
input/output ("I/O") speed, capacity and reliability challenges presented by
network computing. RAID is a method of distributing data in stripes across
several hard disk drives, allowing the microprocessor to access those drives
simultaneously, thus increasing storage system I/O performance. RAID solutions
generally reduce bottlenecks that occur in non-RAID environments when multiple
users access data simultaneously. In addition, RAID configurations can provide
a high degree of fault tolerance because they continuously calculate and store
a unique parity, using logic to accompany each data stripe. If any drive fails,
the remaining drives in the system may use the parity value to reconstruct the
data on the failed drive, thus ensuring the immediate availability of RAID
protected data even in the event of a disk drive failure.

  RAID is available in several levels that differ in the ways they allocate
data for storage and achieve fault tolerance. End users of





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RAID products select the appropriate RAID level depending on overall cost and
performance for their particular requirements. Often, the user's actual
application will dictate the appropriate level of data access, fault tolerance
and redundancy desired. For example, applications such as on-line processing of
financial transactions require instantaneous access to multiple disks, while
multimedia or video-on-demand applications generally require single-user
access, but at a significantly higher data transfer rate. The Company offers
RAID products for all commonly used RAID levels for most hardware platforms and
network environments. In addition, the Company also designs and sells tape
backup storage solutions for a variety of computing environments to provide an
additional level of protection for mission-critical data.

   Disk Drive Upgrades

  The Company remains committed to supplying products that enhance the
performance and capacity of notebook and desktop computers, as well as network
servers. The addition of a single high-capacity hard disk drive subsystem to a
network server adds several gigabytes of storage capacity and improves overall
speed and performance. A complete installation kit is included with each hard
disk drive for easy integration.  Several hard disk drives can be combined to
enable data to be spanned, striped or mirrored in a variety of configurations.
Due to the increase in the popularity of notebook computers, sales of the
Company's ATOM notebook upgrade drive kits constituted 14% of net sales in
fiscal 1996 and 23% of net sales in fiscal 1997.

  The Company also offers CD-ROM drives for stand-alone desktop applications
and a variety of other storage peripheral products.

  Products Under Development

  The Company's product development priorities are aimed at meeting the growing
market demand for complete storage solutions that are capable of addressing the
evolving needs and challenges associated with distributed network computing.
Current product development efforts focus on developing and integrating the
Company's own proprietary software as a value-added component of the Company's
complete storage solutions. The Company is continuing to enhance its DATAFORCE
family of products (previously referred to by the Company as "MESA"), to
address the growing complexity of network data storage management that has
resulted from increases in heterogeneous network computing environments and the
amount and complexity of data. The DATAFORCE client/server storage management
architecture incorporates an embedded operating system designed to centralize
data storage management services, and thereby reduce administrative costs
associated with data storage management. DATAFORCE's operating system software
furnishes it with non-intrusive plug and play compatibility with most popular
network operating systems, allowing products incorporating the DATAFORCE
architecture to be installed by simply connecting one cable to the network. The
multi-platform support provided by DATAFORCE will enable client workstations to
use their own operating systems and still benefit from the functionality of
DATAFORCE without any additional software. The central processing unit
contained in each DATAFORCE-equipped server is designed to allow the server to
manage and process data without burdening the network server. DATAFORCE is
being designed to provide a cost-effective storage management solution that
supports heterogenous client/server computing environments, is scalable to
support networks and allows clients using multiple operating systems to access
simultaneously a single storage system. DATAFORCE-equipped products enable
systems administrators to manage CD-ROM storage systems and are being designed
to manage other storage systems either locally or remotely and provide
administrators with the ability to monitor and restrict access by end users
within the network. The Company's recently released CD FORCE server
incorporates the Company's DATAFORCE architecture and is designed to centralize
data management storage services for information contained on CD-ROM. See " --
CD Servers and Arrays." No assurances can be given, however, that the Company
will be successful in any of its product development efforts or that, even if
successfully developed, the Company's products will achieve timely market
acceptance. See "Risk Factors -- Rapid Technological Change; Short Product Life
Cycles" and " --  Research and Development."

CUSTOMERS AND APPLICATIONS

  The Company sells its products principally to computer resellers, VARs and
distributors, which in turn sell to end users of the Company's products. During
fiscal 1996 and fiscal 1997, one customer accounted for approximately 9% and 12%
of net sales, respectively.  In addition, three customers accounted for
approximately 36% and 47% of total accounts receivable on July 26, 1996 and
July 31, 1997, respectively.  The loss or financial distress of any of these
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Customer
Concentration; Distribution Strategy Risks; Inventory Protection."

  End users of the Company's products include Fortune 500 corporations,
government agencies and financial and educational





                                       10
<PAGE>   11
institutions.

SALES AND MARKETING

  The Company's strategy is to deploy a comprehensive sales, marketing and
support infrastructure to meet the data storage and information access
requirements of users of complex client/server networks, both in the U.S. and
internationally. The Company uses multiple distribution channels to reach end
user customers. In the United States, the Company has agreements with and sells
its products through domestic computer aggregators such as MicroAge  and Inacom
Corporation, as well as smaller independent VARs and computer resellers. The
Company also sells its products to computer resellers that function as
corporate computer consultants to large corporations, educational institutions
and governmental agencies, and maintains sales agreements with many of these
consultants. These corporate computer consultants include AmeriData, Inc.,
Electronic Data Systems Corporation, Entex Information Services, Vanstar
Corporation and others. Often these entities, and many of the Company's other
customers, consult with end users of the Company's products in business and
government, and then incorporate the Company's products into larger overall
enterprise solutions. The Company also relies on computer distributors such as
Tech Data Corporation and Ingram Micro,  to sell the Company's products
nationally. Outside the United States, the Company's products are sold through
approximately 40 major distributors in a number of countries throughout the
world. See "Risk Factors -- Customer Concentration; Distribution Strategy
Risks; Inventory Protection."

  The Company has agreements with many of its computer resellers, VARs and
distributors relating to purchases of the Company's products. These agreements
do not provide the Company with any guaranteed levels of purchases. The Company
frequently grants limited rights to customers to return products purchased from
the Company, in some cases in exchange for new purchases, and also provides
price protection to its customers.  The short product life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors or other factors affecting the personal computer and upgrade
storage industries could result in significant product returns. In addition,
new product introductions by the Company's suppliers or its competitors or
other market factors may require the Company to reduce prices in a manner or at
a time that gives rise to significant price protection charges.  The Company
estimates returns and potential price protection charges based on historical
experience and accrues reserves therefor. However, these accruals may prove
insufficient, and future returns and price protection charges may have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly in light of the rapid product obsolescence
that often occurs during product transitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

  Historically, the Company enjoyed a relatively short sales cycle due to the
low cost of its disk drive upgrade products. The typical sales cycle, from the
time an end user contacted a reseller to the shipment by the Company of the
desired product, often took less than one week.  However, as the Company's
product mix has shifted to increasingly complex and higher priced data storage
and information access solutions, the Company's sales cycle has lengthened
significantly. Because Procom's CD servers and arrays and RAID storage and
access systems often represent a significant expenditure for end users, these
users frequently require the approval of several individuals within their
organization before placing purchase orders. In addition, the complexity of the
Company's storage and RAID storage access solutions often require the Company
to demonstrate its products for end users, further lengthening the sales cycle.
In response to increasing demand from end users, the Company has instituted an
evaluation program that provides for a specified period in which end users may
install and evaluate the Company's products.  Evaluation units are not booked
as revenue until the Company has received payment for such units. During fiscal
1997, approximately  52% of all evaluation units were purchased at the end of
their trial period.

  The Company maintains a sales, sales support and marketing staff that at July
31, 1997 consisted of 61 people, substantially all of whom were located at the
Company's principal offices in Irvine, California. The Company's sales are made
to computer resellers, VARs and distributors through telemarketing efforts by
sales representatives. The Company has recently hired U.S. field sales
representatives in Texas, Florida, Washington, DC and New York, and is
considering the implementation of a field sales force in various cities
throughout the U.S. In addition, the Company has recently added independent
sales representatives in Canada, France and Germany. The field sales
representatives provide, among other things, regional technical support for
customers, perform product demonstrations and, where desirable, accompany
computer resellers and VARs on sales calls with end users. The Company intends
to expand the number of its international sales representatives. The Company
also intends to add additional international distributors in targeted countries
and is developing joint marketing relationships with certain distributors. For
fiscal 1995, 1996 and 1997, international sales represented approximately 14%,
11% and  7%, respectively, of the Company's net sales. See "Risk Factors --
Risks of International Sales and Operations."





                                       11
<PAGE>   12

  The Company's marketing group, at July 31, 1997, consisted of  24 persons
engaged in a number of activities designed to help the Company achieve better
market recognition and ultimately increased sales. This group's
responsibilities include (i) advertising in magazines targeted to specific
markets, (ii) conducting various promotional programs with the Company's
computer resellers, VARs and distributors, including cooperative advertising
arrangements and special programs where employees of the Company's computer
resellers, VARs and distributors can earn cash awards for their efforts in
recommending or selling the Company's products to end users, (iii) coordinating
the Company's participation in various trade shows, including COMDEX and
specific vertical applications shows such as LegalTech and (iv) cooperating
with publishers and authors of industry magazines in the testing and review of
the Company's products since market acceptance of each new generation of
products is influenced significantly by reviews in leading computer industry
magazines and related awards.

CUSTOMER SERVICE AND SUPPORT

  The Company employs engineers and technicians who work closely with the
Company's sales personnel to assist computer resellers, VARs and distributors
and end users with pre- and post-sales support matters, as well as to provide
customers with technical support, education, training and consulting services.
The Company's customer service and technical support staff at July 31, 1997
consisted of approximately 16 people located in Irvine, California. Customer
service personnel provide customer service through software driver updates,
upgrade programs and warranty service. Technical support personnel assist end
users and distributors by telephone, facsimile and on-line services, including
24-hour bulletin board services and World Wide Web sites, in the installation,
configuration and use of the Company's products. The Company also relies on its
computer resellers, VARs and distributors to provide technical support and
service. During fiscal 1997, the Company signed an agreement with Unisys, a
national provider of computer technical services ("Unisys"), to provide on-site
installation and service to end users of its high capacity CD servers and
arrays. By contracting with  Unisys, which has many offices located throughout
the U.S., the Company believes it should be able to offer a rapid response to
end user technical problems throughout the country. The Company expects that
its return rates resulting from technical problems will decrease as Unisys
field representatives demonstrate effective installation and service methods at
customer sites. The Company offers warranties on its products ranging from one
to five years. The Company's primary warranty efforts consist of accepting
defective products from customers and either repairing them or returning the
defective component to the original manufacturer for repair or replacement
during the applicable warranty period. The Company generally protects itself by
extending to its customers a warranty that corresponds to the warranty provided
to the Company by its suppliers. However, if a supplier were to fail to meet
its warranty obligations, the Company would be forced to assume responsibility
for warranties on all components manufactured by that supplier. Such an event
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Warranty Exposure."

RESEARCH AND DEVELOPMENT

  The Company believes that continued investment in research and development is
critical to the Company's ability to continue to introduce, on a timely basis
and at competitive prices, new and enhanced products incorporating the latest
technology and addressing emerging market needs.  The Company's research and
development staff consisted of 46 employees as of July 31, 1997 which includes
software and hardware engineers and software quality assurance technicians.
Research and development expenses, primarily consisting of personnel expenses,
were $1.1 million, $1.6 million and $ 3.9 million in fiscal 1995, 1996, and
1997, respectively, constituting 2.5%, 2.2% and 3.6% of net sales,
respectively.  The Company anticipates that the dollar amount of its research
and development expenses will increase and that such expenses also may increase
as a percentage of net sales with the addition of dedicated engineering
resources to develop new product categories, to ensure that the Company's
products are compatible with a wide range of hardware platforms and network
topologies, and to develop additional software associated with the Company's
DATAFORCE architecture, allowing the Company to develop servers that support
not only CD-ROM and DVD-ROM, but also hard disk drive and magnetic tape storage
media. The Company's hardware and software engineers are engaged in ongoing
development of new storage subsystems that offer increasing storage capacity
and compatibility with an expanding base of computer networks and operating
systems. See " --  Products and Technology -- Products Under Development."
There can be no assurance that the Company's development efforts will be
successful, or that the Company will be able to introduce competitive new
products in a timely manner.

  The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. These factors typically
result in short product life cycles, historically ranging from six to twelve
months. For example, the data transfer rate of CD-ROM products has increased
rapidly, resulting in the introduction of four, eight, twelve, sixteen and
twenty-four





                                       12
<PAGE>   13
speed CD-ROMs. Similar technological advances have been made with regard to
disk drive storage capabilities and other performance standards.  Each new
product cycle presents new opportunities for current or prospective competitors
of the Company to gain market share. The Company must continually monitor
industry trends in selecting new technologies and features to incorporate into
its products. If the Company is unable to successfully introduce new products
on a timely basis, the Company's sales could be adversely affected. Any such
failure also could impair the Company's brand name and the Company's ability to
command the attention and loyalty of computer resellers, VARs and distributors
in future periods. Moreover, because short product life cycles are accompanied
by long lead times for many components of the Company's products, the Company
may be unable to reduce or increase production in response to unexpected
demand.

  The Company's ability to introduce new products in a timely manner is heavily
dependent on its ability to develop or purchase firmware and software drivers
for its CD-ROM and disk drive products. While the Company endeavors to work
with its component suppliers to plan for the timing of introduction of new
components and to develop the associated firmware and software, unforeseen
design issues or other factors that delay introduction of these products could
adversely affect the Company's ability to ship new products. In addition, third
party suppliers may not employ adequate testing and quality assurance
procedures, resulting in the receipt by the Company of defective components.
This could require the Company to find replacement components or wait for the
resolution of the problem, either of which could delay the Company's ability to
bring products to market and have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
also will be adversely affected if new disk drives, CD-ROM drives or other
components that it selects from among those offered by its various vendors do
not perform favorably on a cost or performance basis compared to competing
products. In addition, products and technologies developed by competitors may
render the Company's products and technologies noncompetitive or obsolete.
Finally, advances in network and on-line technology and development of new,
higher-capacity storage media such as DVD may result in a reduction or
replacement of CD-ROM as a data storage and information access medium. If the
Company is unable to adapt to these and other technological advances by
developing new products, the Company's financial performance would be
materially adversely affected. See "Risk Factors -- Substantial Competition"
and " --  Rapid Technological Change; Short Product Life Cycles."

MANUFACTURING

  The Company's primary manufacturing activities, located at the Company's
headquarters in Irvine, California, consist of testing, assembling and
integrating components to form data storage and information access subsystems.
The Company has historically operated without a material backlog. The Company
generally purchases the major components of such subsystems (hard disk drives,
CD-ROM drives or tape drives) based on historical requirements and forecasted
needs to provide it with two to three weeks of inventory. Some of the Company's
products require printed circuit boards, the assembly of which the Company
often subcontracts to third party vendors. The Company's CD servers and arrays
generally require a special housing of either metal or plastic, and the Company
contracts with third party vendors for the manufacture of those housing units.
The Company performs quality assurance testing on most of its products and
subjects third-party supplied components to testing and evaluation before
including such components in the Company's product offerings. The Company
packages the assembled hard disk drives, CD-ROM drives and tape backup drives
with software, manuals and additional hardware components, which it generally
purchases from third party suppliers. The Company relies on a network of
independent subcontractors to supply certain custom components manufactured to
the Company's specifications. This network consists of a number of small firms
with limited financial resources. While the Company utilizes several firms to
mitigate the risk of business interruption, it is possible that several vendors
could simultaneously experience problems with production or financial
stability, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

  The Company depends on sole or limited source suppliers for certain key
components used in its products, particularly disk and CD-ROM drives.  In
recent years, these components have been in short supply and frequently on
allocation by manufacturers, and the Company's size may place it at a
competitive disadvantage during such periods relative to larger competitors.
Although the Company maintains ongoing efforts to obtain adequate supplies of
components, there can be no assurances that the Company will obtain adequate
supplies or obtain such supplies at cost levels that would not adversely affect
the Company's gross margins. The Company has no guaranteed supply arrangements
with any of its sole or limited source suppliers and customarily purchases sole
or limited source components pursuant to purchase orders placed from time to
time in the ordinary course of business. Moreover, the Company's suppliers may,
from time to time, experience production shortfalls or interruptions that
impair the supply of components to the Company. Component shortages are likely
to continue, and there can be no assurance that such shortages will not
adversely affect the Company's business, financial condition and results of
operations. Conversely, in its attempt to counter actual or perceived component
shortages, the Company may overpurchase certain components, resulting in excess
inventory and reducing the





                                       13
<PAGE>   14

Company's liquidity or, in the event of inventory obsolescence or a decline in
the market value of such inventory, causing inventory write-offs that could
materially adversely affect the Company's business, financial condition and
results of operations.

  The Company relies on a small number of suppliers to continue to develop,
introduce and manufacture disk drives, CD-ROM drives and other components that
incorporate new technologies and features that compete favorably in
functionality and price with the offerings of other disk drive and CD-ROM
manufacturers, including competitors of the Company. The Company's dependence
on these sole or limited source suppliers, and the risks associated with any
delay or shortfall in supply, are exacerbated by the short life cycles that
characterize the Company's products.  Any delay in the introduction by or
availability of disk drives or CD-ROM drives from the Company's suppliers or
the failure of such suppliers to provide functionality and performance on a
cost effective basis could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, it is
possible that the technology of the components the Company uses in
manufacturing its products will be rendered undesirable or obsolete by the
components of other suppliers. The Company would then be forced to establish
relationships with new suppliers, which could delay or preclude the Company
from bringing competitive products to market and have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors -- Rapid Technological Change; Short Product Life Cycles" and "
--  Component Shortages; Reliance on Sole or Limited Source Suppliers."

COMPETITION

  The markets for the Company's products are intensely competitive. In each of
its primary product lines, the Company competes with a large number of disk
drive manufacturers, computer resellers, VARs and distributors. Some of the
Company's vendors also sell competing products to distributors, which then sell
these products to the Company's customers. Many of the Company's current and
potential competitors have significantly greater market presence, name
recognition and financial and technical resources than the Company, and many
have longstanding positions and established brand names in their respective
markets. In addition, certain of the Company's current and potential
competitors possess competitive cost advantages due to a number of factors,
including lower taxes and substantially lower costs of labor associated with
international operations. Finally, manufacturers of disk drives such as Seagate
Technology Inc., IBM, Quantum Corporation and Western Digital Corporation, and
manufacturers of CD-ROM drives, such as Toshiba, NEC Corporation and Plextor
Corporation, may in the future become more direct competitors of the Company to
the extent that such manufacturers elect to expand into the disk drive upgrade
market or the CD server and array market.

  The Company's primary competitors in the CD server and array market consist
of (i) CD array manufacturers such as Microtest, Inc., Meridian Data, Inc. and
Micro Design, Inc., which also furnish CD-ROM management software with their CD
array products, (ii) a number of hardware aggregators, computer resellers and
VARs that sell CD server products directly to end users, (iii) various CD
server and array manufacturers, and (iv) certain computer manufacturers who
have announced plans to sell CD servers and arrays to their resellers, such as
Compaq and Hewlett- Packard.  The Company believes that it competes effectively
in the CD server and array market by maintaining relationships with computer
resellers and VARs that possess key relationships with decision makers at end
users, while at the same time developing brand name identity through end user
marketing and advertisements.

  The Company's primary competitors in the disk drive upgrade market are (i)
computer manufacturers that also market and sell storage upgrades, such as IBM,
Compaq Computer Corporation ("Compaq") and Hewlett-Packard Company
("Hewlett-Packard"), (ii) companies that specialize in reselling replacement or
increased capacity storage disk drives, such as Storage Dimensions Inc. or
Ameriquest Technologies, Inc., and (iii) various national distributors of third
party upgrade drives such as Ingram Micro Inc., Merisel Inc. and Tech Data
Corporation. The Company believes it competes effectively against each of these
three classes of competitors in the disk drive upgrade market by offering a
broad range of reasonably priced storage upgrade products to its computer
resellers, VARs and distributors throughout the U.S. and worldwide.

  The Company's primary competitors in the RAID product market are (i) computer
manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally focus on
providing storage upgrades for their products and (iii) companies that sell
storage solutions directly to end users, such as EMC Corporation and Storage
Technology Corporation. These direct sales competitors historically have focused
their efforts on sales of high capacity storage products in the mainframe and
minicomputer environments. In addition, the Company competes with many smaller
enterprises such as Storage Dimensions, Inc. and others that provide and sell
unique solutions to various computer users. The Company believes that its
relationships with computer resellers, VARs and distributors provide it with a
competitive advantage over those manufacturers that have in the past sold high
capacity storage systems directly to end users.

  The Company's success depends to a great extent on its ability to continue to
develop products that incorporate new and rapidly evolving technologies to
provide network users cost-effective data storage and information access
solutions. However, to the extent





                                       14
<PAGE>   15

that disk drive storage or information access products become more of a
commodity, price competition among both computer manufacturers and suppliers of
disk drives and CD-ROM drives may result in the availability of such storage
and access at a low cost. These factors could create increased competition for
the Company's products which could cause the Company to experience reduced
gross profit margins on its products and could have a material adverse effect
on the Company's business, financial condition and result of operations. The
Company believes that the principal competitive factors in the Company's
markets are product reliability, price/value relationship, product features and
performance, brand name recognition, trade periodical reviews, time to market
with new features and products, industry relationships, ease of installation
and use, the quality of distribution channels, product quality, technical
support and customer service.

  The Company believes that its brand name recognition allows the Company to
remain competitive in the network storage solutions aftermarket and the CD
server and array markets, and that the Company generally competes effectively
with respect to the other competitive factors enumerated above. See "Risk
Factors -- Substantial Competition" and " --  Rapid Technological Change; Short
Product Life Cycles."

INTELLECTUAL PROPERTY

  The Company relies primarily on a combination of copyright and trade secret
protections and confidentiality agreements to establish and protect its
intellectual property rights. The Company has no patent protection for its
current product line. There can be no assurance that the Company's measures to
protect its intellectual property rights will deter or prevent unauthorized use
of the Company's technology. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent
as the laws of the United States. The Company's inability to protect its
proprietary rights in the United States or internationally may have a material
adverse effect on the Company's business, financial condition and results of
operations.

  Claims by third parties that the Company's current or future products,
procedures or processes infringe upon their intellectual property rights may
have a material adverse effect on the Company. The Company does not normally
perform any formal surveys or studies relating to whether its products or
processes infringe upon the intellectual property rights of others, and it
would be difficult to establish whether a given product or process infringes
upon the intellectual property rights of others. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. Any future litigation, regardless of outcome, may result
in substantial expense to the Company and significant diversion of the efforts
of the Company's management and technical personnel. An adverse determination
in any such litigation may subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from such parties, if
licenses to such rights could be obtained, or require the Company to cease
using such technology. There can be no assurance that if such licenses were
obtainable, they would be obtainable at costs reasonable to the Company. If
forced to cease using such technology, there can be no assurance that the
Company would be able to develop or obtain alternate technology. Accordingly,
an adverse determination in a judicial or administrative proceeding, changes in
patent or copyright laws or failure of the Company to obtain necessary licenses
may prevent the Company from manufacturing, using or selling certain of its
products or processes, which may have a material adverse effect on the
Company's financial condition and results of operations. In May 1995, Compaq
made certain infringement and other claims against the Company and obtained an
injunction prohibiting the Company's use of a small string of software code
contained in certain of the Company's disk drive products. Although the Company
has rewritten the infringing code and settled the lawsuit, the lawsuit required
substantial management time, significant expenditures for legal fees and costs
and a one-time settlement payment and ongoing royalty payments to Compaq for
these products. See "Risk Factors -- Intellectual Property Rights."

EMPLOYEES

         As of July 31, 1997,  the Company had 246 full-time employees, 65 of
whom were engaged in manufacturing (including testing, quality assurance and
materials functions), 46 in engineering and product development, 85 in sales
and marketing, 16 in customer service and technical support, and 34 in finance
and administration. The Company's employees are not represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good. The
Company's success depends to a significant extent upon the continued service of
its executive officers and other key management and technical personnel. See
"Risk Factors -- Dependence on Key Personnel."

EXECUTIVE OFFICERS

  The executive officers of the Company as of July 31, 1997 were as follows:

<TABLE>
<CAPTION>
NAME                AGE               POSITION
----                ---               --------
<S>                 <C>     <C>
Alex Razmjoo        35      Chairman of the Board, President, and Chief 
                            Executive Officer
Frank Alaghband     34      Executive Vice President, Operations, and Director
Alex Aydin          35      Executive Vice President, Finance and 
                            Administration, and Director
Nick Shahrestany    34      Executive Vice President, Marketing and Information 
                            Technology, and Director
Frederick Judd      38      Vice President, Finance and General Counsel
</TABLE>

-------------
Officers serve at the discretion of the Board of Directors (the "Board") and
are appointed annually, subject to the terms of their employment agreements.
There are no family relationships between the executive officers or directors
or the Company.

  Mr. Razmjoo is one of the Company founders and has served as its Chairman of
the Board, President and Chief Executive Officer since 1987. From 1984 to 1987,
Mr. Razmjoo served as Director of Engineering of CMS Enhancements, Inc. He
received a B.S. degree in Electrical Engineering in 1985 from the University of
California, Irvine.

  Mr. Alaghband is one of the Company founders and has served as its Executive
Vice President, Operations and as a director since 1987. From 1984 to 1987, Mr.
Alaghband served as a Systems Engineer in the Computer Systems Division of
McDonnell Douglas. He received a B.S. degree in Electrical Engineering in 1985
from the University of California, Irvine.

  Mr. Aydin is one of the Company founders and has served as the Company's
Executive Vice President, Finance and Administration and as a director since
1987. From December 1984 to August 1987, Mr. Aydin served as a Product
Development Engineer for Toshiba America, Inc. He received dual B.S. degrees in
Electrical Engineering and Biological Sciences in 1984 from the University of
California, Irvine and a M.S. degree in Biomedical Engineering in 1985 from
California State University, Long Beach.

  Mr. Shahrestany is one of the Company founders and has served as its
Executive Vice President, Marketing and Information Technology and as a
director since 1987. From 1985 to 1987, Mr. Shahrestany served as Regional
Sales Manager of CMS Enhancements, Inc. He received a B.S. degree in Biological
Sciences with a minor in Electrical Engineering in 1984 from the University of
California, Irvine.

  Mr. Judd has served as the Company's Vice President, Finance and General
Counsel since joining the Company in November 1993. Mr. Judd was General
Counsel for CMS Enhancements, Inc. from February 1992 to November 1993. From
April 1987 to February 1992, Mr. Judd served as the Chief Financial Officer and
Treasurer of CMS Enhancements, Inc. Mr. Judd received a B.S. degree in
Accounting in 1980 from Arizona State University and a J.D. degree in April
1985 from Brigham Young University. Mr. Judd is a certified public accountant
and is licensed to practice law in California and Arizona.

ITEM 2.  PROPERTIES

  The Company leases approximately 81,000 square feet of space in Irvine,
California for its corporate offices and operations. The property is leased by
the Company under a lease expiring in July 1998. The Company has an option to
extend the lease for an additional four months. The Company believes that its
existing facilities will be adequate to meet its facilities requirements through
July 1998.  The Company has also leased office space under short-term leases for
outside sales representatives in Canada, Washington, D.C., and beginning in
October 1997, New York.

                                       15
<PAGE>   16

ITEM 3.  LEGAL PROCEEDINGS.

     As previously disclosed in the Company's January 1997 Report on Form 10-Q,
the Company has been threatened with a claim by Miradco International
Corporation, a private company based in Newport Beach, California, consisting
of two principals ("Miradco"), regarding a purported breach of an alleged oral
contract between the Company and Miradco.  Miradco has asserted that it is
entitled to receive up to 280,000 shares of the Company's common stock as
payment for financial advisory services purportedly rendered to the Company by
Miradco.  The Company unequivocally denies the existence of any oral contract
with Miradco, and believes any oral contract claim of Miradco is entirely
without merit.  The Company intends to defend itself vigorously should Miradco
eventually file a lawsuit with respect to the oral contract claim and to assert
any and all rights the Company has related to such claim.  The Company does not
believe the Miradco claim, or any lawsuit filed in connection therewith, will
have a material adverse effect on the Company's business, results of operations
or financial condition.

     The Company is from time to time involved in litigation related to its
ordinary operations, such as collection actions and vendor disputes.  The
Company does not believe that the resolution of any existing claim or lawsuit
will have a material adverse affect on the Company's business, results of
operations or financial condition.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.


                                     PART II

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

     The Common Stock of Procom Technology, Inc. is listed on the NASDAQ
National Market System under the symbol "PRCM".  The approximate number of
holders of record of common stock of the Company as of September 30, 1997 was
41.  The Company's common stock was first listed on the date it commenced its
public offering of shares on December 18, 1996.

     The Company has not paid any cash dividends on its common stock and does
not intend to pay any cash dividends in the foreseeable future.  The Company's
line of credit agreement restricts the payment of cash dividends.

      The high and low sales prices of the Company's common stock, as reported
by the NASDAQ National Market System, for each quarter of fiscal 1997,
commencing with the Company's intital public offering in December 1996 are as
follows:


<TABLE>
<CAPTION>
FISCAL 1997                      First             Second           Third              Fourth
<S>                               <C>           <C>               <C>               <C>
           High .......            NA            $   17.88         $   20.13         $   14.50
           Low ........            NA            $    9.00         $    9.75         $    9.88
</TABLE>

      The Company completed an initial public offering of 2,000,000 shares of
its $.01 par value common stock during the fiscal year ended July 31, 1997. The
effective date of the Securities Act registration statement for which this use
of proceeds information is being disclosed was December 17, 1996 and the
Securities and Exchange Commission file number assigned to the registration
statement was 333-15109. The offering date was December 18, 1996, and all of the
2,000,000 shares offered by the Company were sold. In addition, selling
shareholders sold a total of 1,478,750 shares in the offering, 453,750 of which
were sold pursuant to an over-allotment option which closed in January 1997.
Montgomery Securities and Dain Bosworth Incorporated acted as the managing
underwriters of the offering.

      A total of 3,478,750 shares of common stock, $.01 par value, were
registered. The aggregate offering price, at $9 per share, was $31,308,750. As
stated above, all of the shares offered were sold, and the aggregate offering
price of the shares sold to date is $31,308,750 of which $18,000,000 was for the
account of the Company and $13,308,750 was for the account of the selling
shareholders.

      From the effective date of the registration statement until July 31, 1997,
the amount of expenses incurred for the issuer's account in connection with the
issuance and distribution of the securities registered was $1,814,000,
consisting of underwriting discounts and commissions of $1,260,000, and $554,000
for other expenses. None of the payments or expenses listed were direct or
indirect payments to directors, officers, general partners of the issuer or
their associates, nor to persons owning 10 percent or more of any class of
equity securities of the issuer, nor to affiliates of the issuer.

      The net offering proceeds to the issuer after deducting the total expenses
described above were $16,186,000. From the effective date of the registration
statement until July 31, 1997, approximately $285,000 of the net offering
proceeds to the issuer were used to purchase business machinery and equipment,
approximately $4,115,000 of the net offering proceeds were used to pay off the
outstanding balance under the Company's line of credit with Finova Capital
Corporation (the "Finova Line"), and the remaining proceeds of approximately
$11,786,000 have been applied to the Company's general working capital. None of
the payments or expenses listed were direct or indirect payments to directors,
officers, general partners of the issuer or their associates, nor to persons
owning 10 percent or more of any class of equity securities of the issuer, nor
to affiliates of the issuer (although four executive officers and selling
shareholders had previously personally guaranteed the repayment of any amounts
outstanding under the Finova Line).

ITEM 6.  SELECTED FINANCIAL DATA.

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
                                                                               YEARS ENDED(1)
                                                  -----------------------------------------------------------------------------
                                                  JULY 30,         JULY 29,          JULY 28,         JULY 26,         JULY 31,
                                                    1993             1994             1995              1996            1997
                                                  --------         --------          --------         --------         --------
<S>                                              <C>              <C>               <C>              <C>              <C>
     Net sales ..........................         $ 41,726         $ 34,502          $ 44,660         $ 73,456         $109,332
     Gross profit .......................            9,453            7,315            11,802           21,967           36,648
     Income (loss) before income taxes ..              906           (1,130)            1,137            4,649           13,899
     Net income (loss) ..................              609             (773)              723            2,849            8,447
     Net income (loss) per share(2) .....         $   0.07         $  (0.08)         $   0.08         $   0.31         $   0.81
     Weighted average number of shares(2)            9,172            9,172             9,172            9,172           10,374
</TABLE>

                                       16
<PAGE>   17

<TABLE>
<S>                                        <C>             <C>             <C>             <C>             <C>   
     Cash and marketable securities         $    57         $   211         $   212         $   793         $18,777
     Working capital ..............         $ 1,911         $ 1,274         $ 1,868         $ 4,632         $29,220
      Total assets ................         $ 9,072         $ 7,638         $11,011         $21,112         $43,274
      Line of credit ..............         $ 2,868         $ 1,679         $ 1,484         $ 4,185         $    --
      Long-term obligations .......         $    58         $    39         $    34         $     -         $    --
     
      Total shareholders' equity ..         $ 2,338         $ 1,564         $ 2,287         $ 5,136         $30,067
----------                                                                                                       
</TABLE>


(1) During fiscal years 1993-1996, each fiscal year ended on the Friday of, or
nearest to, July 31. During fiscal 1997, the Company modified its accounting
policies so that each fiscal year would end on July 31. As a result, fiscal 1997
included four additional days. No prior periods have been adjusted or restated.

(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of net income (loss) per share.



































                                       17
<PAGE>   18

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

  This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."

OVERVIEW

  The Company was formed in 1987. Its first product was a 5-1/4 inch floppy
disk drive for the IBM PS/2 personal computer. At the time, IBM was shipping
the PS/2 with only a 3-1/2 inch floppy disk drive, although the software and
data of most computer users were still stored on 5-1/4 inch formats. The
Company subsequently began producing aftermarket disk drive upgrade products
for computer products sold by other manufacturers, and such upgrade products
continue to be an important area of focus of the Company's business.

  In fiscal 1994, the Company introduced its CD server and array product line
while continuing to provide a broad line of disk drive upgrade products.
During fiscal 1995, the Company experienced rapid growth in sales of its CD
servers and arrays. Sales of hard disk drive upgrade products, CD servers and
arrays, and RAID and tape backup subsystem products represented 63%, 4% and 2%
of net sales in fiscal 1994, and 59%, 32% and 5% of net sales in fiscal 1995,
respectively. During fiscal 1996, sales of CD servers and arrays increased more
rapidly than sales of the Company's other product lines.  As a result, in
fiscal 1996, sales of CD servers and arrays represented 49% of net sales, while
sales of hard disk drive upgrade products and RAID and tape backup subsystem
products represented 47% and 4% of net sales, respectively.   During fiscal
1997, the Company determined to group sales of Intelligent Network Storage
Products, including sales of CD servers and arrays which increased, but at a
slower growth rate, while the Company also saw increased sales of disk drive
upgrade storage systems for notebook computers.  As a result, in fiscal 1997,
sales of Intelligent Network Storage Products, which include CD servers and
arrays and RAID and tape backup subsystems represented approximately 47% of net
sales, while sales of hard disk drive upgrade products represented 53% of net
sales, respectively.     See "Business -- Products and Technology."

  The Company generally records sales upon product shipment. The Company
presently maintains agreements with many of its computer resellers, VARs and
distributors that allow limited returns (including stock balancing) and price
protection privileges. The Company has in the past experienced high return
rates. During fiscal 1996 and 1997, customer returns and price protection
charges represented approximately 12% and 14% of gross sales, respectively. The
Company maintains reserves for anticipated returns (including stock balancing)
and price protection privileges.  These reserves are adjusted at each financial
reporting date to state fairly the anticipated returns (including stock
balancing) and price protection claims relating to each reporting period.
Generally, the reserves will increase as sales and corresponding returns
increase. In addition, under a product evaluation program established by the
Company, computer resellers, VARs, distributors and end users generally are
able to purchase products on a trial basis and return the products within a
specified period if they are not satisfied.  Evaluation units are not recorded
as sales until the customer has paid for such units.

  All of the Company's sales are denominated in U.S. dollars, and accordingly,
the Company does not believe that fluctuations in foreign exchange rates have
had or will have a material adverse effect on the Company's results of
operations or financial condition, except to the extent that such fluctuations
could cause the Company's products to become relatively more expensive to end
users in a particular country, leading to a reduction of sales in that country.

  Historically, the Company's gross margins have experienced significant
volatility. The Company's gross margins vary significantly by product line,
and, therefore, the Company's overall gross margin varies with the mix of
products sold by the Company. For example, low capacity disk drive subsystems
generally result in lower gross margins than CD servers and arrays. As sales of
CD servers and arrays have become a larger percentage of the Company's total
sales, the Company has experienced a corresponding increase in its overall
gross margins. From fiscal 1995 to fiscal 1997, sales of CD servers and arrays
grew from approximately 32% to 44% of net sales, contributing to an improvement
in the Company's gross margin from approximately 26.4% to 33.5%. The Company's
markets are also characterized by intense competition and declining average
unit selling prices as products mature over the course of the relatively short
life cycle of individual products, which have often ranged from six to twelve
months. In addition, the Company's gross margins may be adversely affected by
availability and price increases associated with key products and









                                       18
<PAGE>   19

components from the Company's suppliers, some of which have been in short
supply, and inventory obsolescence resulting from older generation products or
the unexpected discontinuance of third party components. Finally, the Company's
margins vary with the mix of its distribution channels and with general
economic conditions. For any of the foregoing reasons, the Company's overall
margin could decline in the future from the levels experienced in recent
quarters. See "Risk Factors -- Potential Fluctuations in Future Results of
Operations," " --  Component Shortages; Reliance on Sole or Limited Source
Suppliers" and " --  Rapid Technological Change; Short Product Life Cycles."

RESULTS OF OPERATIONS

  COMPARISON OF YEARS ENDED JULY 28, 1995, JULY 26, 1996 AND JULY 31, 1997

  The following table sets forth the Company's statement of operations data as
a percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                                          YEARS ENDED
                                               -----------------------------------
                                             JULY 28,        JULY 26,       JULY 31,
                                               1995            1996           1997   
                                               -----          -----          -----
<S>                                           <C>            <C>            <C>
      Net sales ....................           100.0%         100.0%         100.0%
      Cost of sales ................            73.6           70.1           66.5
                                               -----          -----          -----
            Gross profit ...........            26.4           29.9           33.5
      Selling, general and
        administrative expenses ....            20.9           21.0           17.5
      Research and development
        expenses ...................             2.5            2.2            3.6
                                               -----          -----          -----
            Operating income ......              3.0            6.7           12.4
      Interest expense ............              0.4            0.4           (0.3)
                                               -----          -----          -----
            Income before income
              taxes ................             2.6            6.3           12.7
      Provision for income taxes ...             1.0            2.4            5.0
                                               -----          -----          -----
            Net income .............             1.6%           3.9%           7.7%
                                               =====          =====          =====
</TABLE>

    Net Sales

  Net sales increased 64.5% from $44.7 million in fiscal 1995 to $73.5 million
in fiscal 1996 and increased an additional 48.8% to $109.3 million in fiscal
1997. Net sales increased from fiscal 1995 to fiscal 1996 primarily as a result
of increased sales of the Company's CD servers and arrays and increased sales
of its disk drive upgrade products and RAID products. Net sales increased from
fiscal 1996 to fiscal 1997 primarily as a result of increases in sales of hard
disk drive subsystem upgrade products, such as replacement disk drive subsystems
for notebook computers, and increased sales of CD servers and arrays (including
sales of higher performance CD servers).  For fiscal 1997, the increases in
sales were somewhat offset as the Company increased its allowance for
anticipated sales returns and price protection charges as it increased the
percentage of its net sales sold to customers who have contractual return and
price protection rights.

  International sales, primarily to European customers and secondarily to
Middle Eastern, Latin American and Pacific Rim customers, were $6.2 million,
$8.4 and $8.2 million, and accounted for approximately 19%, 14% and 7% of net
sales for fiscal 1995, 1996 and 1997, respectively.  International sales
increased by 35.6% from fiscal 1995 to fiscal 1996 primarily as a result of
increased sales of CD-ROM servers and arrays, but decreased in absolute dollars
slightly in fiscal 1997 as a result of a strengthened US dollar and reduced
sales of CD-ROM servers and arrays due to increased competition in
international markets.      See "Risk Factors -- Risks of International Sales
and Operations."

     Gross Profit

  The Company's gross profit totalled $11.8 million, $22.0  and $ 36.7 million
during fiscal 1995, 1996 and 1997, respectively. The Company's gross margin
increased from  26.4% in fiscal 1995 to approximately 29.9% in fiscal 1996 due
primarily to a continuing shift in product mix toward higher margin CD servers
and arrays as well as an increase in gross margins for the Company's CD servers
and arrays, and to a lesser extent from an increase in gross margins on the
Company's hard disk drive upgrade and RAID products.  Gross margins improved to
33.5% in fiscal 1997 due primarily to continuing increases in sales of  higher
margin CD servers and arrays and increased sales  of certain higher margin disk
drive upgrade subsystems for notebook computers increased.





                                       19
<PAGE>   20

     Selling, General and Administrative Expenses

  Selling, general and administrative expenses increased 35.6% from $9.4
million in fiscal 1995 and further increased 64.5% to $15.4 million in fiscal
1996 and further increased 24.4% to $19.2 million in fiscal 1997. These expenses
represented 20.9%, 21.0% and 17.5% of net sales in fiscal 1995, 1996 and 1997,
respectively.  The increase from fiscal 1995 to fiscal 1996 was due primarily
to increased marketing expenses associated with advertising, direct mail and
channel telemarketing, as well as increases in sales commissions and general
and administrative staffing necessary to support the Company's growth. The
increase in fiscal 1997 was due primarily to continued increases in marketing,
including co-op advertising costs, and direct mail and advertising, combined
with increases in other expenses to support the Company's growth, offset by
reduced officer bonuses of $2.9 million and $.4 million  for fiscal 1997 and
fiscal 1996, respectively.   For fiscal  1995, 1996 and 1997,  bad debt expense
was $322,000, $473,000 and $223,000, as the Company saw reduced losses on bad
debts in fiscal 1997.

     Research and Development Expenses

  Research and development expenses, consisting primarily of personnel
expenses, increased from $1.1 million in fiscal 1995 to $1.6 million in fiscal
1996 and further increased to $3.9 million in fiscal 1997. These expenses
represented 2.5%, 2.2% and 3.6% of net sales in fiscal 1995, 1996 and 1997,
respectively. The slight dollar increase from fiscal 1994 to fiscal 1995
resulted primarily from the Company's enhanced efforts to develop its CD server
and array product lines and RAID subsystems.  The increase from fiscal 1995 to
fiscal 1996 was due primarily to the Company's expanded efforts to develop new
CD servers and RAID products and to develop CD FORCE, a CD-ROM network server
incorporating Procom's proprietary software data access management system.
For fiscal 1997, research and development expenses increased by more than 140%
over fiscal 1996, as the Company more than doubled its personnel costs,
including the use of contract programmers, as it intensified its efforts to
further develop both hardware and software capabilities and applications for
its CD-FORCE and RAID products.

     Interest Income and Expense

  The Company maintains a working capital line of credit to support its
accounts receivable and inventory levels. Interest expense increased from
$195,000 in fiscal 1995 to $ 282,000 in fiscal 1996 as the Company's sales, and
resulting accounts receivable and inventory levels, increased.  Interest
expense decreased in fiscal 1997 to $131,000 as the Company utilized its
available credit lines to support further increases in accounts receivables and
inventory levels until December 1996, when the Company completed its initial
public offering  and reduced amounts outstanding under its credit lines.
During fiscal 1997, the Company invested the net proceeds of the initial public
offering, after repaying amounts owed under the line of credit, in various
investment grade commercial papers with maturities of less than 90 days and
realized approximately $ 459,000 in interest income.

     Income Taxes

  The Company's effective tax rates were 36.4%, 38.7% and 39.2% for fiscal
1995, 1996 and 1997, respectively.  For fiscal 1995 and 1996, the Company's
effective tax rate approximated federal and state statutory rates, with
moderate reductions due to the Company's use of its FSC.  For fiscal 1994 and
1995, the Company received benefits from a research and development credit,
while the fiscal 1996 benefit was significantly reduced due to legislation
which temporarily denied the credit. For fiscal 1997, the effective rate
continued to approximate the effective statutory rate as the Company received
increased research and development credit, offset somewhat by a reduced FSC
benefit due to reduced international sales.   See Note 4 of Notes to
Consolidated Financial Statements.

       General Comments

  The Company's results of operations have in the past varied significantly and
are likely in the future to vary significantly as a result of a number of
factors, including the mix of products sold, the volume and timing of orders
received during the period, the timing of new product introductions by the
Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability and
pricing of components for the Company's products, changes in





                                       20
<PAGE>   21

distribution channel mix and product returns or price protection charges from
customers. Many of these factors are beyond the Company's control. Although the
Company has experienced growth in sales in recent periods, there can be no
assurance that the Company will experience growth in the future or be
profitable on an operating basis in any future period. In addition, due to the
short product life cycles that characterize the Company's markets, a
significant percentage of the Company's sales each quarter may result from new
products or product enhancements introduced in that quarter. Since the Company
relies on new products and product enhancements for a significant percentage of
sales, failure to continue to develop and introduce new products and product
enhancements or failure of these products or product enhancements to achieve
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations.  Historically, as the
Company has planned and implemented new products, it has experienced unexpected
reductions in sales and gross profit of older generation products as customers
have anticipated new products. These reductions have in the past given and
could continue to give rise to charges for obsolete or excess inventory,
returns of older generation products by computer resellers, VARs and
distributors or substantial price protection charges. See "Risk Factors --
Rapid Technological Change; Short Product Life Cycles" and " --  Customer
Concentration; Distribution Strategy Risks; Inventory Protection."  From time
to time, the Company has experienced and may in the future experience inventory
obsolescence resulting from the unexpected discontinuance of third party
components, such as disk drives, included in the Company's products.  To the
extent the Company is unsuccessful in managing product transitions, it may have
a material adverse effect on the Company's business, financial condition and
results of operations.

  The Company also has historically capitalized on short-term market
opportunities for volume purchases of certain components at favorable prices.
For example, in the quarter ended July 26, 1996, the Company capitalized on a
one-time opportunity to sell a significant volume of high capacity disk drive
upgrade products purchased at below market prices in the prior quarter, which
resulted in a price advantage to the Company that enhanced the Company's sales
and results of operations for that quarter. There can be no assurance that the
Company will be able to capitalize on such opportunities in the future. In
addition, the Company's fiscal second quarter sales have historically remained
relatively flat due primarily to heavy reseller participation in trade shows
that detract from reseller selling efforts, end user budget constraints that
restrict end user purchases, and a higher than average number of holidays
during that quarter.

LIQUIDITY AND CAPITAL RESOURCES

   For the past three fiscal years, the Company has satisfied its operating cash
requirements principally through net income, supplemented by periodic borrowings
of funds under its working capital line of credit and increases in accounts
payable and accrued expenses. Net cash provided by operating activities was $0.4
million in fiscal 1995, and net cash used in operating activities was $1.7
million in fiscal 1996.  Net cash provided by operating activities was $ 6.3
million in fiscal 1997.  In fiscal 1995, net cash provided by operating
activities resulted primarily from an increase in accounts payable and accrued
expenses, together with the Company's net income, offset in large part by
increases in inventories and accounts receivable. In fiscal 1996, net cash used
in operating activities resulted primarily from increases in accounts receivable
due to increased sales during each of the periods and increases in inventories
due to both increased sales and the higher value added components of the
Company's products.  These increased uses of capital were offset in part by the
Company's net income and increases in accounts payable and accrued expenses. In
fiscal 1997, net cash provided by operating activities resulted from the
Company's net income, offset slightly by the combined net increases in accounts
receivable and accounts payable.  In fiscal 1996 and 1997, the Company's
investing activities consisted primarily of purchases of property and equipment.
Property and equipment expenditures totaled $179,000, $431,000, and $588,000 for
such periods, respectively.

   During fiscal 1995, 1996 and the first half of fiscal 1997, the Company
borrowed and repaid funds periodically under its line of credit to finance its
growth and operations.  During fiscal 1995, the Company reduced its line of
credit, net of such periodic borrowings, by $.2 million, while in fiscal 1996,
the Company $2.7 million, net of repayments, to finance operations and purchase
property and equipment.  During the first half of fiscal 1997, the Company
continued its periodic use of funds under its credit line.  In late December
1996, the Company completed its initial public offering of 2 million shares of
common stock, raising net proceeds of approximately $ 16.2 million.  After
completing the public offering, the Company paid off the amounts owed under the
line of credit, and invested the remaining net proceeds in various investment
grade commercial papers with maturities of less than 90 days and realized
approximately $ 459,000 in interest income.

  In November 1994, the Company instituted a revolving line of credit with
Finova Capital ("Finova"). The facility was amended in July  1997 to provide
the Company with up to $10.0 million in working capital loans, based upon the
Company's accounts receivable and inventory levels. The line of credit accrues
certain commitment fees, unused facility fees and interest on outstanding





                                       21
<PAGE>   22

amounts at the lender's prime rate (8.50% at July 31, 1997) plus 1.5%. Finova
also makes available to the Company various flooring commitments pursuant to
which the Company may finance the purchase of up to $15.0 million in inventory
(less any amounts outstanding in working capital loans) from certain of the
Company's vendors who have credit arrangements with Finova. As of July 31,
1997, there was no balance outstanding under the credit facility, and $3.8
million outstanding under the flooring arrangements. The agreement governing
the credit facility requires the Company to maintain certain financial
covenants (including the maintenance of working capital of at least
$20,000,000), minimum levels of tangible net worth and minimum levels of
liquidity. As of July 31, 1997, the Company was in material compliance with the
covenants of the Finova line of credit. The line is secured by substantially
all of the assets of the Company. The initial term of the line of credit
expires on November 29, 1997, but automatically renews for successive one year
periods unless terminated by either party within a specified period in advance
of the automatic renewal date. See Note 5 of Notes to Consolidated Financial
Statements.

  At July 31, 1997, the Company had cash and marketable securities totalling
$18.8 million and additional availability under its unused line of credit. The
Company believes that the cash proceeds from this offering, together with
existing cash balances and available credit under its existing line of credit,
will be sufficient to meet anticipated cash requirements for at least the next
twelve months. As of July 31,1997, the Company had no material commitments for
capital expenditures, but shall continue to acquire fixed assets and make
expenditures to support its growth.  In addition, the Company has had
discussions concerning potential acquisitions with various businesses which
have or offer products and technologies that are complementary to those of the
Company. The Company may acquire one or more of those businesses in the
future.  In the event the Company's plans require more capital than is
presently anticipated, the Company's remaining cash balances may be consumed
and additional sources of liquidity such as debt or equity financings may be
required to meet working capital needs. There can be no assurance that
additional capital beyond the amounts currently forecasted by the Company will
not be required nor that any such required additional capital will be available
on reasonable terms, if at all, at such time or times as required by the
Company.

RECENT ACCOUNTING PRONOUNCEMENTS

   In February 1997, the Financial Accounting Standards Board issued Statement
of financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128")
which is required to be adopted in the company's fiscal quarter ended January
31, 1998. At that time, the Company will be required to change the method
currently used to compute net income per share and to restate all prior
periods. Under the new requirements for calculating primary net income per
share, the dilutive effect of stock options will be excluded. If SFAS 128 had
been effective for 1997 and 1996 it would have resulted in an increase in
primary earnings per share of $.02 and $.01, respectively. 

   In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. The Company does not
believe that adoption of these standards will have a material effect on the
Company.

RISK FACTORS AFFECTING THE COMPANY AND/OR ITS INDUSTRIES

The Company's business is subject to a number of risks, trends and
uncertainties, some of which are related to the CD-ROM server, hard drive and
RAID industries in general and others related more specifically to the Company.
As a result of the risks and uncertainties described below as well as other
risks presented elsewhere in this report, there can be no assurance that the
Company will continue to be as successful as it was in the past few years or
maintain its current market position. Some of these factors have affected the
Company's operating results in the past, and all of these factors could affect
its future operating results. The Company does not expect that the percentage
increases in revenues, operating income and net income during the past few
years represent a consistent reliable trend that can be expected to continue in
the future.  The industries in which the Company competes are very competitive,
challenging and cyclical.  Potential Fluctuations in Future Results of
Operations

POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS

  The Company's results of operations have in the past varied significantly and
are likely in the future to vary significantly as a


                                       22
<PAGE>   23

result of a number of factors, including the mix of products sold, the volume
and timing of orders received during the period, the timing of new product
introductions by the Company and its competitors, product line maturation, the
impact of price competition on the Company's average selling prices, the
availability and pricing of components for the Company's products, changes in
distribution channel mix and product returns or price protection charges from
customers. Many of these factors are beyond the Company's control. Although the
Company has experienced growth in sales in recent periods, there can be no
assurance that the Company will experience growth in the future or be
profitable on an operating basis in any future period. In addition, due to the
short product life cycles that characterize the Company's markets, a
significant percentage of the Company's sales each quarter may result from new
products or product enhancements introduced in that quarter. Since the Company
relies on new products and product enhancements for a significant percentage of
sales, failure to continue to develop and introduce new products and product
enhancements or failure of these products or product enhancements to achieve
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also has
historically capitalized on short-term market opportunities for volume
purchases of certain components at favorable prices. For example, in the
quarter ended July 26, 1996, the Company capitalized on a one-time opportunity
to sell a significant volume of high capacity disk drive upgrade products
purchased at below market prices in the prior quarter, which resulted in a
price advantage to the Company that enhanced the Company's sales and results of
operations for that quarter. There can be no assurance that the Company will be
able to capitalize on such opportunities in the future. In addition, the
Company's fiscal second quarter sales have historically remained relatively
flat due primarily to heavy reseller participation in trade shows that detract
from reseller selling efforts, end user budget constraints that restrict end
user purchases, and a higher than average number of holidays during that
quarter.

  The volume and timing of orders received during a quarter are difficult to
forecast. Customers generally order on an as-needed basis and, accordingly, the
Company historically has operated with a relatively small backlog.
Notwithstanding the difficulty in forecasting future sales and the relatively
small level of backlog at any given time, the Company generally must plan
production, order components and undertake its development, sales and marketing
activities and other commitments months in advance. Accordingly, any shortfall
in sales in a given quarter may disproportionately affect the Company's results
of operations due to relatively fixed short-term expenses. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its results
are not necessarily meaningful and should not be relied upon as indicators of
future performance. Further, it is likely that in some future quarter or
quarters the Company's net sales or results of operations will be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock could be materially adversely affected.

  Historically, the Company's gross margins have experienced significant
volatility. The Company's gross margins vary significantly by product line,
and, therefore, the Company's overall gross margin varies with the mix of
products sold by the Company. The Company's markets are also characterized by
intense competition and declining average unit selling prices over the course
of the relatively short life cycles of individual products, which have often
ranged from six to twelve months. In addition, the Company's gross margins may
be adversely affected by availability and price increases associated with key
products and components from the Company's suppliers, some of which have been
in short supply, and inventory obsolescence resulting from older generation
products or the unexpected discontinuance of third party components.  Finally,
the Company's gross margins may vary with the mix of its distribution channels
and general economic conditions. Accordingly, the Company's margins may decline
in the future from the levels experienced in recent quarters. See "Risk Factors
-- Component Shortages; Reliance on Sole or Limited Source Suppliers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

SUBSTANTIAL COMPETITION

  The markets for the Company's products are intensely competitive. In each of
its primary product lines, the Company competes with a large number of disk
drive manufacturers, computer resellers, VARs and distributors. Some of the
Company's vendors also sell competing products to distributors, which then sell
these products to the Company's customers. Many of the Company's current and
potential competitors have significantly greater market presence, name
recognition and financial and technical resources than the Company, and many
have longstanding positions and established brand names in their respective
markets. In addition, certain of the Company's current and potential
competitors possess competitive cost advantages due to a number of factors,
including lower taxes and substantially lower costs of labor associated with
international operations. Finally, manufacturers of disk drives such as Seagate
Technology, Inc., IBM, Quantum Corporation and Western Digital Corporation, and
manufacturers of CD-ROM drives, such as Toshiba America Information Systems,
Inc. ("Toshiba"), NEC Corporation and Plextor Corporation, may in the future
become more direct competitors of the Company to the extent that such
manufacturers elect to expand into the disk drive upgrade market or the CD
server and array market.





                                       23
<PAGE>   24
  The Company's primary competitors in the CD server and array market consist
of (i) CD array manufacturers such as Microtest Inc., Meridian Data, Inc. and
Micro Design, Inc., which also furnish CD-ROM management software with their CD
array products, (ii) a number of hardware aggregators, computer resellers and
VARs that sell CD server products directly to end users and (iii) various CD
server and array manufacturers.

  The Company's primary competitors in the disk drive upgrade market are (i)
computer manufacturers that also market and sell storage upgrades, such as IBM,
Compaq Computer Corporation, ("Compaq") and Hewlett-Packard Company
("Hewlett-Packard"), (ii) companies that specialize in reselling replacement or
increased capacity storage disk drives, such as Storage Dimensions Inc. or
Ameriquest Technologies Inc. and (iii) various national distributors of third
party upgrade drives such as Ingram Micro Inc., Merisel Inc. and Tech Data
Corporation.

  The Company's primary competitors in the RAID product market are (i) computer
manufacturers, such as IBM, Compaq and Hewlett-Packard, which generally focus
on providing storage upgrades for their products and (ii) companies that sell
storage solutions directly to end users, such as EMC Corporation and Storage
Technology Corporation. These direct sales competitors historically have
focused their efforts on sales of high capacity storage products in the
mainframe and minicomputer environments. In addition, the Company competes with
many smaller enterprises that provide and sell unique solutions to various
computer users.

  The Company's success depends to a great extent on its ability to continue to
develop products that incorporate new and rapidly evolving technologies to
provide network users cost-effective data storage and information access
solutions. However, to the extent that disk drive storage or information access
products become more of a commodity, price competition among both computer
manufacturers and suppliers of disk drives and CD-ROM drives may result in the
availability of such storage and access at a low cost. These factors could
create increased competition for the Company's products, which could cause the
Company to experience reduced gross profit margins on its products and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that the principal competitive
factors in the Company's markets are product reliability, price/value
relationship, product features and performance, brand name recognition, trade
periodical reviews, time to market with new features and products, industry
relationships, ease of installation and use, the quality of distribution
channels, product quality, technical support and customer service. See
"Business -- Competition."

RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES

  The market for the Company's products is characterized by frequent new
product introductions and rapid product obsolescence. These factors typically
result in short product life cycles, which have often ranged from six to twelve
months. For example, the data transfer rate of CD-ROM products has increased
rapidly, resulting in the introduction of four, eight, ten and twelve speed
CD-ROMs. Similar technological advances have been made with regard to disk
drive storage capabilities and other performance standards. Each new product
cycle presents new opportunities for current or prospective competitors of the
Company to gain market share. The Company must continually monitor industry
trends in selecting new technologies and features to incorporate into its
products. If the Company is unable to introduce new products successfully on a
timely basis, the Company's sales could be adversely affected. Any such failure
also could impair the Company's brand name and the Company's ability to command
the attention and loyalty of computer resellers, VARs and distributors in
future periods. Moreover, because short product life cycles are accompanied by
long lead times for many components of the Company's products, the Company may
be unable to reduce or increase production in response to unexpected demand.

  The Company's ability to introduce new products in a timely manner is heavily
dependent on its ability to develop or purchase firmware and software drivers
for its CD-ROM and disk drive products. While the Company endeavors to work
with its component suppliers to plan for the timing of introduction of new
components and to develop the associated firmware and software, unforeseen
design issues or other factors that delay introduction of these products could
adversely affect the Company's ability to ship new products. In addition, third
party suppliers may not employ adequate testing and quality assurance
procedures, resulting in the receipt by the Company of defective components.
This could require the Company to find replacement components or wait for the
resolution of the problem, either of which could delay the Company's ability to
bring products to market and have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
also will be adversely affected if new disk drives, CD-ROM drives or other
components that it selects from among those offered by its various vendors do
not perform favorably on a cost or performance basis compared to competing
products. In addition, products and technologies developed by competitors may
render the Company's products and technologies noncompetitive or obsolete.
Finally, advances in network and on-line technology and development of new,
higher-capacity storage media such as Digital Video Disc ("DVD") may





                                       24
<PAGE>   25

result in a reduction or replacement of CD-ROM as a data storage and
information access medium. If the Company is unable to adapt to these and other
technological advances by developing new products, the Company's financial
performance would be materially adversely affected. See "Business -- Research
and Development."

  The Company has historically experienced steep declines in sales, prices and
gross profit toward the end of the life cycles of most of its products, the
precise timing of which is difficult to predict. Historically, as the Company
has planned and implemented new products, it has experienced unexpected
reductions in sales and gross profit of older generation products as customers
have anticipated new products. These reductions have in the past given and
could continue to give rise to charges for obsolete or excess inventory,
returns of older generation products by computer resellers, VARs and
distributors or substantial price protection charges. See " --  Customer
Concentration; Distribution Strategy Risks; Inventory Protection." For example,
in fiscal 1994, the Company incurred losses when it discontinued sales of
CD-ROM multimedia kits to mass merchants and distributors. From time to time,
the Company has experienced and may in the future experience inventory
obsolescence resulting from the unexpected discontinuance of third party
components, such as disk drives, included in the Company's products. To the
extent the Company is unsuccessful in managing product transitions, it may have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE ON CD SERVERS AND ARRAYS

  Sales of CD servers and arrays, including individual CD-ROM drives,
recordable CD-ROMs, modules and other related components ("CD servers and
arrays"), accounted for approximately 32%, 49% and 44% of the Company's net
sales for fiscal 1995, fiscal 1996 and fiscal 1997, respectively.  The
widespread use of CD-ROM as a data storage and information access medium is
relatively recent, and there can be no assurance that another technology will
not replace CD-ROM as a widely accepted data storage and information access
medium, or that there will be widespread acceptance or continuing growth of CD
servers and arrays in general, or of the Company's CD servers and arrays in
particular. In addition, if on-line services (such as Westlaw and Lexis/Nexis)
become more cost-effective and develop user friendly methods of accessing
information, they may have an adverse impact on the use of CD-ROM as an
information storage medium. Furthermore, the successful development and
marketing of DVD would enable end users to store significantly more data than
currently stored on a CD used with the Company's products. Accordingly, even if
the Company were able to adapt its products to incorporate DVD technology, the
number of servers and arrays required by end users may decline compared to
current levels. Finally, even if the CD server and array market continues to
grow, there can be no assurance that the Company will be able to maintain its
market share or its gross margins in that market.

  The Company currently incorporates software with many of its CD servers and
arrays, which allows a network to manage effectively direct access to
information contained on CD-ROMs by network users. The Company ships CD servers
and arrays both with CD-ROM network data access management software from third
party vendors and with recently introduced, internally developed CD-ROM network
data access management software.  The Company's internally developed software
is not presently available on all major hardware platforms, and of the
Company's CD servers and arrays shipped to date that contain CD-ROM network
data access management software, substantially all included third party
software. In addition, the Company historically has focused its efforts on
hardware development and does not have substantial experience in the
development, testing and marketing of CD-ROM network data access management
software. Given the high percentage of the Company's sales that are derived
from CD servers and arrays, the failure to secure from a third party effective
CD-ROM network data access management software, or the failure of the Company
to continue the development and marketing of its internally developed software,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Products and Technology."





                                       25
<PAGE>   26
COMPONENT SHORTAGES; RELIANCE ON SOLE OR LIMITED SOURCE SUPPLIERS

  The Company depends on sole or limited source suppliers for certain key
components used in its products, particularly disk and CD-ROM drives.  In
recent years, these components have been in short supply and frequently on
allocation by manufacturers, and the Company's size may place it at a
competitive disadvantage during such periods relative to larger competitors.
Although the Company maintains ongoing efforts to obtain adequate supplies of
components, there can be no assurances that the Company will obtain adequate
supplies or obtain such supplies at cost levels that would not adversely affect
the Company's gross margins. The Company has no guaranteed supply arrangements
with any of its sole or limited source suppliers and customarily purchases sole
or limited source components pursuant to purchase orders placed from time to
time in the ordinary course of business. Moreover, the Company's suppliers may,
from time to time, experience production shortfalls or interruptions that
impair the supply of components to the Company. Component shortages are likely
to continue, and there can be no assurance that such shortages will not
adversely affect the Company's business, financial condition and results of
operations. Conversely, in its attempt to counter actual or perceived component
shortages, the Company may overpurchase certain components, resulting in excess
inventory and reducing the Company's liquidity or, in the event of inventory
obsolescence or a decline in the market value of such inventory, causing
inventory write- offs that could materially adversely affect the Company's
business, financial condition and results of operations. See " --  Rapid
Technological Change; Short Product Life Cycles."

  The Company relies on a small number of suppliers to continue to develop,
introduce and manufacture disk drives, CD-ROM drives and other components that
incorporate new technologies and features that compete favorably in
functionality and price with the offerings of other disk drive and CD-ROM
manufacturers, including competitors of the Company. The Company's dependence
on these sole or limited source suppliers, and the risks associated with any
delay or shortfall in supply, are exacerbated by the short life cycles that
characterize the Company's products.  Any delay in the introduction by or
availability of disk drives or CD-ROM drives from the Company's suppliers or
the failure of such suppliers to provide functionality and performance on a
cost effective basis could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, it is
possible that the technology of the components the Company uses in
manufacturing its products will be rendered undesirable or obsolete by the
components of other suppliers. The Company would then be forced to establish
relationships with new suppliers, which could delay or preclude the Company
from bringing competitive products to market and have a material adverse effect
on the Company's business, financial condition and results of operations.

  The Company also relies on a network of independent subcontractors to supply
certain custom components manufactured to the Company's specifications. This
network consists of a number of small firms with limited financial resources.
While the Company utilizes several firms to mitigate the risk of business
interruption, it is possible that several vendors could simultaneously
experience problems with production or financial stability, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

CUSTOMER CONCENTRATION; DISTRIBUTION STRATEGY RISKS; INVENTORY PROTECTION

  The Company sells its products primarily to a domestic and international
network of computer resellers, VARs and distributors, and the Company's success
depends on the continued viability and financial stability of its customer
base. During the last two fiscal years, the Company has increased its reliance
on sales to large hardware aggregators, computer resellers and VARs (including
large corporate consultants) while reducing its use of mass merchants. During
fiscal 1996 and fiscal 1997, one customer accounted for approximately 9% and
12% of net sales, respectively, while three customers accounted for
approximately 36% and 47% of the Company's total accounts receivable on July
26, 1996 and July 31, 1997, respectively.  If the Company were to experience
difficulty in continuing to sell to these customers, or collecting these
accounts receivable, due to the failure of any of these customers or otherwise,
it could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, a loss of either or both of
these customers could materially and adversely affect the Company's net sales.

  The Company must continually develop and maintain relationships with its key
computer resellers, VARs and distributors. Due to the rapid changes in the
computer industry and the methods by which end users purchase computer
products, there can be no assurance that the Company will be successful in
developing and maintaining an effective distribution system. The computer
distribution and computer retail industries historically have been
characterized by rapid change, including periods of widespread financial
difficulties and consolidation and the emergence of alternative distribution
channels. The loss of, or reduction in sales to, the Company's key customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's computer resellers, VARs and
distributors generally offer products of several different companies,





                                       26
<PAGE>   27

including products competitive with the Company's products. Accordingly, there
is a risk that these computer resellers, VARs and distributors may give higher
priority to products of other suppliers and may reduce their efforts to sell
the Company's products. Although since fiscal 1994 the Company has relied on
computer resellers and VARs as its primary domestic sales channels, the Company
entered into agreements with Tech Data Corporation and Ingram Micro, Inc.,
computer products distributors, to sell the Company's products nationally. An
increased use of distributors to sell the Company's products, whether
domestically or through increased international sales (which are generally made
through distributors), could adversely affect the Company's gross margins as
sales to distributors are typically made at slightly lower average prices, and
often require additional post-sale marketing and support, than sales to
computer resellers and VARs.

  The Company frequently grants limited rights to customers to return products
purchased from the Company, in some cases in exchange for new purchases, and
also provides price protection to its customers. The short product life cycles
of the Company's products and the difficulty in predicting future sales
increase the risk that new product introductions, price reductions by the
Company or its competitors or other factors affecting the markets for the
Company's products could result in significant product returns. In addition,
new product introductions by the Company's suppliers or its competitors, or
other market factors, may require the Company to reduce prices in a manner or
at a time that gives rise to significant price protection charges. The Company
estimates product returns and potential price protection charges based on
historical experience and accrues reserves therefor. However, these accruals
may prove to be insufficient, and unanticipated future returns and price
protection charges could have a material adverse effect on the Company's
business, financial condition and results of operations, particularly in light
of the rapid product obsolescence that often occurs during product transitions.
See " --  Rapid Technological Change; Short Product Life Cycles," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."

INTELLECTUAL PROPERTY RIGHTS

  The Company relies primarily on a combination of copyright and trade secret
protections and confidentiality agreements to establish and protect its
intellectual property rights. The Company has no patent protection for its
current product lines. There can be no assurance that the Company's measures to
protect its intellectual property rights will deter or prevent unauthorized use
of the Company's technology. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent
as the laws of the United States. The Company's inability to protect its
proprietary rights in the United States or internationally may have a material
adverse effect on the Company's business, financial condition and results of
operations.

  Claims by third parties that the Company's current or future products,
procedures or processes infringe upon their intellectual property rights may
have a material adverse effect on the Company. The Company does not normally
perform any formal surveys or studies relating to whether its products or
processes infringe upon the intellectual property rights of others, and it
would be difficult to establish whether a given product or process infringes
upon the intellectual property rights of others. Intellectual property
litigation is complex and expensive, and the outcome of such litigation is
difficult to predict. Any future litigation, regardless of outcome, may result
in substantial expense to the Company and significant diversion of the efforts
of the Company's management and technical personnel. An adverse determination
in any such litigation may subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from such parties, if
licenses to such rights could be obtained, or require the Company to cease
using such technology. There can be no assurance that if such licenses were
obtainable, they would be obtainable at costs reasonable to the Company. If
forced to cease using such technology, there can be no assurance that the
Company would be able to develop or obtain alternate technology. Accordingly,
an adverse determination in a judicial or administrative proceeding, changes in
patent or copyright laws or failure of the Company to obtain necessary licenses
may prevent the Company from manufacturing, using or selling certain of its
products or processes, which may have a material adverse effect on the
Company's financial condition and results of operations. In May 1995, Compaq
made certain infringement and other claims against the Company and obtained an
injunction prohibiting the Company's use of a small string of software code
contained in certain of the Company's disk drive products. Although the Company
has rewritten the infringing code and settled the lawsuit, the lawsuit required
substantial management time, significant expenditures for legal fees and costs
and a one-time settlement payment and ongoing royalty payments to Compaq for
these products. See "Business -- Intellectual Property."

MANAGEMENT OF CHANGE

  In recent years, the Company has expanded the overall size of its business
and scope of its operations, including research and development, marketing,
technical support and sales and distribution. The Company increased its number
of employees from 126 at the beginning of fiscal 1996 to 246 at the end of
fiscal 1997, and has also recently increased the breadth of its CD server and
array





                                       27
<PAGE>   28

product line, enlarged the scope of its international operations and increased
its marketing and product development expenditures. The expansion of the
Company's business and product lines has required significant investments in
infrastructure and systems. Managing this change has presented numerous
challenges, including hiring and retaining key employees, integrating or
changing management information systems and coordinating suppliers. In
addition, the Company has recently opened a sales and support office in New
York, and currently intends to open and staff additional field sales and
support offices.  The Company's future success will depend in large measure on
its ability to implement sufficient operating, manufacturing and financial
procedures and controls successfully, to improve coordination among different
operating functions, to strengthen management information and
telecommunications systems and to continue to hire qualified personnel in all
areas, and to integrate the operations and personnel of any potential
acquisitions successfully. There can be no assurance that the Company will
manage these activities and implement these additional systems and controls
successfully, and any failure to do so could have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISKS OF INTERNATIONAL SALES AND OPERATIONS

  The Company's international sales accounted for approximately 14%, 11% and 7%
of the Company's net sales for fiscal 1995, fiscal 1996 and fiscal 1997,
respectively. During fiscal 1996, the Company added independent sales
representatives in Canada, France and Germany, and it plans to add additional
foreign sales representatives in the future. The Company's international sales
and operations are subject to a number of risks generally associated with
international operations, including export regulations, government imposed
restrictions on the purchase of technological equipment, import and export
duties and restrictions, the logistical difficulties of managing multinational
operations, potentially adverse tax consequences and lower gross margins
associated with the increased proportion of international sales made to
distributors. While all of the Company's sales are denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to end users in a particular country, leading
to a reduction of sales in that country.  The Company may also experience
competition specific to a given local market. In addition, the Company's
business may be adversely affected by seasonal sales declines in Europe, which
typically occur during the summer months.   Because the Company has operations
in different countries, the Company's management must address the difficulty of
merging geographically disparate operations as well as differences in
regulatory environments, cultures and time zones. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business --
Sales and Marketing."

WARRANTY EXPOSURE

  The Company's primary warranty efforts consist of accepting defective
products from customers and either repairing them or returning the defective
component to the original manufacturer for repair or replacement during the
applicable warranty period. The Company generally protects itself by extending
to its customers a warranty that corresponds to the warranty provided to the
Company by its suppliers. However, if a supplier were to fail to meet its
warranty obligations, the Company would be forced to assume responsibility for
warranties on all components manufactured by that supplier. Such an event could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."

DEPENDENCE ON KEY PERSONNEL

  The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel. In particular, the Company relies on the services of its four
founders, Messrs. Razmjoo, Alaghband, Aydin and Shahrestany (the "Founders").
The loss of any of these individuals or other management or technical personnel
may have a material adverse effect on the Company's operations, including the
ability to establish and strengthen strategic relationships, its ability to
open new offices successfully, its ability to adapt its products to changes in
technology and its ability to attract and retain technical personnel and other
employees, the competition for which is intense. The Company maintains
employment agreements with each of the Founders, but does not maintain
key-person life insurance policies on the lives of these individuals. See
"Business -- Employees" and "Management."

FUTURE CAPITAL REQUIREMENTS

  The Company's business plan will require significant amounts of working
capital. While the Company has funded its growth historically through working
capital loans and internally generated funds, there can be no assurance that
the proceeds of the





                                       28
<PAGE>   29

Company's December 1996 public offering, together with available cash, bank
lines of credit and cash from operations, will be sufficient to satisfy the
Company's anticipated cash requirements. If additional funds are required, the
Company's operations may need to be significantly curtailed or the Company
could be forced to obtain financing on terms that cause the Company's business,
financial condition and results of operations to be adversely affected.

  The Company may expand its product lines through the acquisition of
complementary businesses, products and technologies. Acquisitions involve
numerous risks, including difficulties in the assimilation of operations and
products, the ability to manage geographically remote units, the diversion of
management's attention from other business concerns, the risks of entering
markets in which the Company has little or no experience or expertise and the
potential loss of key employees of any acquired companies. In addition,
acquisitions may involve the expenditure of significant funds. The Company's
management has no prior experience in managing acquisitions. There can be no
assurance that any acquisition would result in long-term benefits to the
Company or that management would be able to manage effectively the acquired
business. See "Use of Proceeds," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."



                                       29
<PAGE>   30
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
 <S>                                                                      <C>
 Report of Independent Public Accountants  . . . . . . . . . . . . .       F-2
 Consolidated Financial Statements:
 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . .       F-3
 Consolidated Statements of Operations . . . . . . . . . . . . . . .       F-4
 Consolidated Statements of Shareholders' Equity . . . . . . . . . .       F-5
 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . .       F-6
 Notes to Consolidated Financial Statements  . . . . . . . . . . . .       F-7
</TABLE>
































                                      F-1
<PAGE>   31
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
Procom Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Procom
Technology, Inc. (a California corporation) and subsidiary (the "Company") as of
July 26, 1996 and July 31, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
ended July 31, 1997. 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 disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Procom Technology, Inc. and
subsidiary as of July 26, 1996 and July 31, 1997, and the results of their
operations and their cash flows for each of the three years ended July 31, 1997
in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.




                                                             ARTHUR ANDERSEN LLP

Orange County, California
September 16, 1997























                                      F-2

<PAGE>   32
                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                        JULY 26,             JULY 31,
                                                                          1996                 1997   
                                                                       -----------         -----------
<S>                                                                   <C>                 <C>
Current assets:
  Cash .......................................................         $   793,000         $   227,000
  Short-term marketable securities, held to maturity .........                --            18,550,000
  Accounts receivable, less allowance for doubtful accounts
     and sales returns of  $373,000 and $992,000, respectively           9,234,000          12,545,000
  Inventories, net ...........................................           9,760,000           9,063,000
  Deferred income taxes ......................................             605,000           1,405,000
  Prepaid expenses ...........................................             204,000             588,000
  Other current assets .......................................              12,000              49,000
                                                                       -----------         -----------
          Total current assets ...............................          20,608,000          42,427,000
Property and equipment, net ..................................             476,000             816,000
Other assets .................................................              28,000              31,000
                                                                       -----------         -----------
          Total assets .......................................         $21,112,000         $43,274,000
                                                                       ===========         ===========
                                                                           

                      LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:
  Line of credit .............................................         $ 4,185,000         $      --
  Accounts payable ...........................................           8,254,000          10,518,000
  Accrued expenses and other current liabilities .............             471,000             764,000
  Accrued compensation .......................................           2,596,000           1,462,000
  Capital lease obligations ..................................              34,000              29,000
  Income taxes payable .......................................             436,000             434,000
                                                                       -----------         -----------
          Total current liabilities ..........................          15,976,000          13,207,000
Capital lease obligations, less current portion ..............                --                  --   
                                                                       -----------         -----------
          Total liabilities ..................................          15,976,000          13,207,000
                                                                       -----------         -----------
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value; 10,000,000 shares
     authorized, no shares issued and outstanding ............                --                  --
  Common stock, $.01 par  value; 65,000,000 shares
     authorized, 9,000,000 and 11,024,562 shares issued and                                           
     outstanding at July 26, 1996 and July 31, 1997,
     respectively ............................................               3,000             110,000
  Additional paid in capital .................................                --            16,467,000
  Retained earnings ..........................................           5,133,000          13,490,000
                                                                       -----------         -----------
          Total shareholders' equity .........................           5,136,000          30,067,000
                                                                       -----------         -----------
Total liabilities and shareholders' equity ...................         $21,112,000         $43,274,000
                                                                       ===========         ===========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.












                                      F-3
<PAGE>   33

                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          YEARS ENDED            
                                   --------------------------------------------------------
                                      JULY 28,              JULY 26,              JULY 31,
                                       1995                  1996                  1997   
                                   ------------          ------------          ------------
 <S>                               <C>                   <C>                    <C>
Net sales ................         $ 44,660,000          $ 73,456,000          $109,332,000
Cost of sales ............           32,858,000            51,489,000            72,684,000
                                   ------------          ------------          ------------
     Gross profit ........           11,802,000            21,967,000            36,648,000
Selling, general and
  administrative expenses             9,362,000            15,401,000            19,155,000
Research and development
  expenses ...............            1,108,000             1,635,000             3,922,000
                                   ------------          ------------          ------------
     Operating income ....            1,332,000             4,931,000            13,571,000
Interest income ..........                 --                    --                 459,000
Interest (expense) .......             (195,000)             (282,000)             (131,000)
                                   ------------          ------------          ------------
     Income before income
       taxes .............            1,137,000             4,649,000            13,899,000
Provision for income
  taxes ..................              414,000             1,800,000             5,452,000
                                   ------------          ------------          ------------
     Net income ..........         $    723,000          $  2,849,000          $  8,447,000
                                   ============          ============          ============
Net income per share .....         $       0.08          $       0.31          $       0.81
                                   ============          ============          ============
Weighted average number of
  shares .................            9,172,000             9,172,000            10,374,000
                                   ============          ============          ============
</TABLE>


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















                                      F-4
<PAGE>   34
                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                      COMMON STOCK          
                                              -----------------------------      PAID IN          RETAINED
                                                  SHARES          AMOUNT          CAPITAL          EARNINGS           TOTAL
                                              ------------     ------------     ------------     ------------      ------------
<S>                                             <C>           <C>              <C>              <C>               <C>
Balance at July 30, 1994 ................        9,000,000     $      3,000     $       --       $  1,561,000      $  1,564,000
  Net income ............................             --               --               --            723,000           723,000
                                              ------------     ------------     ------------     ------------      ------------
Balance at July 28, 1995 ................        9,000,000            3,000             --          2,284,000         2,287,000
  Net income ............................             --               --               --          2,849,000         2,849,000
                                              ------------     ------------     ------------     ------------      ------------
Balance at July 26, 1996 ................        9,000,000            3,000             --          5,133,000         5,136,000
  Change in par value to $.01 per share .             --             87,000            3,000          (90,000)             --
  Public offering proceeds ..............        2,000,000           20,000       16,166,000             --          16,186,000
  Compensatory stock options ............             --               --             35,000             --              35,000
  Exercise of employee stock options ....           24,562             --             62,000             --              62,000
  Tax benefit from exercise of stock
    options .............................             --               --            201,000             --             201,000
  Net income ............................             --               --               --          8,447,000         8,447,000
                                              ------------     ------------     ------------     ------------      ------------
Balance at July 31, 1997 ................       11,024,562     $    110,000     $ 16,467,000     $ 13,490,000      $ 30,067,000
                                              ============     ============     ============     ============      ============
</TABLE>

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



























                                      F-5
<PAGE>   35
                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                               ------------      ------------      ------------
                                                 JULY 28,           JULY 26,         JULY 31,
                                                   1995               1996             1997
                                               ------------      ------------      ------------
<S>                                           <C>               <C>               <C>
Cash flows from operating activities:
  Net income .............................     $    723,000      $  2,849,000      $  8,447,000
    Adjustments to reconcile net
      income to net cash provided
      by (used in) operating activities:

      Depreciation and
         amortization ....................          235,000           194,000           248,000
    Changes in assets and
      liabilities:
         Accounts receivable .............       (1,457,000)       (3,727,000)       (3,311,000)
         Inventories .....................       (2,048,000)       (5,464,000)          697,000
         Deferred income taxes ...........          (18,000)         (246,000)         (800,000)
         Prepaid expenses ................         (128,000)          (38,000)         (384,000)
         Income tax refund
           receivable ....................          274,000              --                --
         Other current assets ............          129,000             6,000           (37,000)
         Other assets ....................         (180,000)          186,000            (3,000)
         Accounts payable ................        1,616,000         2,724,000         2,264,000
         Accrued expenses and accrued ....        1,175,000         1,469,000          (841,000)
           compensation ..................
         Income taxes payable ............           70,000           366,000            (2,000)
                                               ------------      ------------      ------------
             Net cash provided by
               (used in) operating
               activities ................          391,000        (1,681,000)        6,278,000
                                               ------------      ------------      ------------
Cash flows from investing activities:
  Purchase of property and
    equipment ............................         (179,000)         (431,000)         (588,000)
                                               ------------      ------------      ------------
Cash flows from financing activities:
  Principal payments for capital
    lease obligations ....................          (16,000)           (8,000)           (5,000)
  Borrowings on line of credit ...........       43,771,000        64,825,000        38,500,000
  Payments made on line of credit ........      (43,966,000)      (62,124,000)      (42,685,000)
  Net proceeds from public offering
    of common stock ......................             --                --          16,186,000
  Stock options, exercises and related tax
    benefits .............................             --                --             298,000
                                               ------------      ------------      ------------
             Net cash provided by
               (used in) financing
               activities ................         (211,000)        2,693,000        12,294,000
                                               ------------      ------------      ------------
    Increase (decrease) in cash ..........            1,000           581,000        17,984,000
Cash at beginning of period ..............          211,000           212,000           793,000
                                               ------------      ------------      ------------
Cash at end of period ....................     $    212,000      $    793,000      $ 18,777,000
                                               ============      ============      ============
Supplemental disclosures of cash flow
  information:
  Cash paid during the year for:
    Interest .............................     $    170,000      $    248,000      $    165,000
    Income taxes .........................          360,000         1,472,000         5,947,000
</TABLE>

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





                                      F-6
<PAGE>   36
                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Organization

  Procom Technology, Inc. (the "Company") was incorporated in California in
1987. The Company designs, manufactures and markets enterprise-wide data
storage and information access solutions that are compatible with all major
hardware platforms, network protocols and operating systems.

 Principles of Consolidation

  The consolidated financial statements include the accounts of Procom
Technology, Inc. and its wholly-owned subsidiary, Procom Technology FSC, a
foreign sales corporation. All significant intercompany transactions have been
eliminated in consolidation.

 Fiscal Year

  For fiscal 1995 and 1996, the Company's fiscal year ended on the Friday of,
or nearest to, July 31. Fiscal 1995 and 1996 each had 52 weeks.  In May 1997,
the Company modified its accounting periods so that the last day of its fiscal
quarter and fiscal year would end on the last day of the calendar month.  As a
result, the 1997 fiscal year contains four additional days.

 Use of Estimates

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

 Cash and Cash Equivalents

  The Company considers all highly liquid investments with a maturity date of 
three months or less when purchased, which includes all of the Company's
short-term marketable securities, to be cash equivalents.

 Accounts Receivable

  The allowance for doubtful accounts includes management's estimate of the
amount expected to be lost on specific accounts and for losses on other as yet
unidentified accounts included in accounts receivable. In estimating the
potential losses on specific accounts, management relies on in-house prepared
analyses and review of other available information. The allowance for sales
returns includes management's estimates of the anticipated sales returns
relating to each reporting period. In estimating the allowance for sales
returns, management relies on historical experience. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts assumed in arriving at the allowance for doubtful accounts and sales
returns in the accompanying financial statements.

 Inventories

  Inventories are valued at the lower of cost (on a first-in, first-out (FIFO)
basis) or market. Allowances for obsolete inventory are based on management's
estimate of the amount considered obsolete based on specific reviews of
inventory items. In estimating the allowance, management relies on its
knowledge of the industry (including technological and design changes) as well
as its current inventory levels. The amounts the Company will ultimately
realize could differ materially in the near term from amounts estimated by
management.





                                      F-7
<PAGE>   37
 Property and Equipment

  Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the respective estimated useful lives of the
assets, which range from three to seven years. Leasehold improvements and
assets under capital leases are amortized using the straight-line method over
the lesser of the lease term or the estimated useful life of the assets.

  Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs that do not extend the assets' lives are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation are removed from the Company's accounts and
any gain or loss is included in the statement of operations.

 Income Taxes

  Income taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"). In accordance
with SFAS 109, the Company reports certain expenses differently for financial
and tax reporting purposes and, accordingly, provides for the related deferred
income taxes. 

 Revenue Recognition

  The Company generally records sales upon product shipment. The Company
presently maintains agreements with many of its computer resellers. VARs and
distributors that allow limited returns (including stock balancing) and price
protection privileges. The Company has in the past experienced high return
rates. During fiscal 1996 and 1997, customer returns and price protection
charges represented approximately 12% and 14% of gross sales, respectively. The
Company maintains reserves for anticipated returns (including stock balancing)
and price protection privileges. These reserves are adjusted at each financial
reporting date to state fairly the anticipated returns (including stock
balancing) and price protection claims relating to each reporting period.
Generally, the reserves will increase as sales and corresponding returns
increase. In addition, under a product evaluation program established by the
Company, computer resellers, VARs, distributors and end users generally are able
to purchase products on a trial basis and return the products within a specified
period if they are not satisfied. Evaluation units are not recorded as sales
until the customer has paid for such units. The amounts the Company will
ultimately realize could differ materially in the near term from amounts
estimated by management.

 Research and Development Costs

  Costs and expenses that can be identified as research and
development, including software development costs, are expensed as incurred.

 Concentration of Credit Risk

  Three customers accounted for approximately 36% and 47% of the Company's
total accounts receivable on July 26, 1996 and July 31, 1997, respectively, and
one customer accounted for approximately 9% and 12% of the Company's net sales
for fiscal 1996 and 1997, respectively. The loss of any one of the Company's
significant customers could have an adverse effect on the Company's business.

 Net income per share

  Net income per share has been computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
periods presented. Common stock equivalents consist of dilutive stock options.
Pursuant to the requirements of the Securities and Exchange Commission, options
granted under the Company's stock option plan (see Note 9) twelve months prior
to the Company's initial public offering at prices below the expected initial
public offering price have been included in the Company's net income per share
calculation. Such shares are included as if they had been outstanding for all
periods presented prior to the public offering (using the treasury stock method
and utilizing an initial public offering price of $10 per share).  For fiscal
1997, options are included in the Company's net income per share calculation
using the treasury stock method and the actual trading price of the Company's
stock.  Weighted average number of shares are calculated as follows:

<TABLE>
<CAPTION>
                                                    FISCAL YEAR
                                      ----------------------------------------
                                         1995           1996           1997
                                      ----------     ----------     ----------
<S>                                   <C>            <C>           <C>
    Weighted average shares issued
       and outstanding during
       during the period ........      9,000,000      9,000,000     10,205,000
    Dilution from stock options .        172,000        172,000        169,000
                                      ----------     ----------     ----------
                                       9,172,000      9,172,000     10,374,000
                                      ==========     ==========     ==========
</TABLE>




                                       F-8
<PAGE>   38

Impact of Recent Accounting Pronouncements

  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128")
which is required to be adopted in the Company's fiscal quarter ended January
31, 1998.  At that time, the Company will be required to change the method
currently used to compute net income per share and to restate all prior
periods.  Under the new requirements for calculating basic net income per
share, the dilutive effect of stock options will be excluded.  If SFAS 128 had
been effective for 1997 and 1996 it would have resulted in an increase in
earnings per share of $.02 and $.01 respectively.

   In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997, with earlier adoption permitted. The Company does not
believe that adoption of these standards will have a material effect on the
Company.

2. INVENTORIES

   A summary of inventories is as follows:

<TABLE>
<CAPTION>
                                          JULY 26,       JULY 31,
                                            1996           1997 
                                         ----------     ----------
<S>                                      <C>           <C>
               Raw materials .......      6,960,000     $5,218,000
               Work-in-process .....        496,000        380,000
               Finished goods ......      2,304,000      3,465,000
                                         ----------     ----------
                                         $9,760,000     $9,063,000
                                         ==========     ==========
</TABLE>

3. PROPERTY AND EQUIPMENT

   A summary of property and equipment is as follows:

<TABLE>
<CAPTION>
                                         JULY 26,          JULY 31,
                                           1996             1997   
                                       -----------      -----------
<S>                                   <C>              <C>
           Computer equipment ....     $   552,000      $   819,000
           Furniture and fixtures          466,000          567,000
           Office equipment ......         490,000          710,000
           Vehicles ..............          82,000           82,000
           Leasehold improvements           77,000           77,000
                                       -----------      -----------
                                         1,667,000        2,255,000
           Less accumulated
           depreciation ..........      (1,191,000)      (1,439,000)
                                       -----------      -----------
                     Total .......     $   476,000      $   816,000
                                       ===========      ===========
</TABLE>

  Depreciation and amortization expense for fiscal 1995, 1996 and 1997 totaled
$ 235,000, $194,000 and $248,000, respectively.

4. INCOME TAXES

  The components of the provision for income taxes are summarized as follows:

<TABLE>
<CAPTION>
                                                       FISCAL YEAR           
                                         ---------------------------------------------
                                            1995             1996             1997
                                         -----------      -----------      -----------
<S>                                     <C>              <C>              <C>
Current:
  Federal ..........................     $   379,000      $ 1,612,000      $ 5,006,000
  State ............................          53,000          434,000        1,246,000
                                         -----------      -----------      -----------
                                             432,000        2,046,000        6,252,000
                                         -----------      -----------      -----------
Deferred:
  Federal ..........................         (15,000)        (223,000)        (670,000)
  State ............................          (3,000)         (23,000)        (130,000)
                                         -----------      -----------      -----------
                                             (18,000)        (246,000)        (800,000)
                                         -----------      -----------      -----------
Provision for income taxes               $   414,000      $ 1,800,000      $ 5,452,000
                                         ===========      ===========      ===========

</TABLE>

  Components of the Company's deferred income tax provision are presented
below:

<TABLE>
<CAPTION>
                                          FISCAL YEAR        
                            ---------------------------------------
                               1995          1996           1997
                            ---------      ---------      ---------
<S>                        <C>            <C>            <C>
State tax payments.....     $  (7,000)     $ 137,000      $ 241,000
Depreciation ..........        35,000         (3,000)       (40,000)
</TABLE>





                                       39
<PAGE>   39

<TABLE>
<S>                                    <C>            <C>            <C>
Inventory reserves ...............        18,000         36,000        14,000
Reserves for bad debts and returns       (41,000)       102,000       313,000
Stock option exercises ...........          --             --         140,000
Other ............................        13,000        (26,000)      132,000
                                       ---------      ---------     ---------
Deferred income tax benefit ......     $  18,000      $ 246,000     $ 800,000
                                       =========      =========     =========
</TABLE>                          

  The following table reconciles the federal statutory income tax rate to the
effective tax rate of the provision for income taxes.

<TABLE>
<CAPTION>
                                                            FISCAL YEAR     
                                                   ---------------------------
                                                    1995        1996       1997
                                                   -----      -----      -----
<S>                                                <C>        <C>        <C>
   Federal statutory income tax rate ........       34.0%       34.0%     34.0%
   State income taxes, net of federal benefit        6.3         6.1       6.1
   Foreign sales benefit ....................       (3.4)       (1.1)     (0.3)
   Research and development tax credit ......       (2.0)       (0.6)     (1.8)
   Other ....................................        1.5         0.3       1.2
                                                   -----       -----     -----
     Effective tax rate .....................       36.4%       38.7%     39.2%
                                                   =====       =====     =====
  </TABLE>

   Deferred tax assets are summarized below:

<TABLE>
<CAPTION>
                                           JULY 28,      JULY 26,       JULY 31,
                                            1995           1996           1997 
                                         ----------     ----------     ----------
<S>                                     <C>            <C>            <C>
Deferred tax assets:
  State tax payments ...............     $   34,000     $  171,000     $  338,000
  Depreciation .....................         71,000         68,000         26,000
  Inventory reserves ...............         85,000        121,000        225,000
  Reserves for bad debts and returns         99,000        201,000        496,000
  Stock option exercises ...........           --             --          201,000
  Other ............................         70,000         44,000        119,000
                                         ----------     ----------     ----------
     Deferred income taxes .........     $  359,000     $  605,000     $1,405,000
                                         ==========     ==========     ==========
</TABLE>

5. LINE OF CREDIT

  The Company has established a revolving line of credit with an institutional
lender. The line is based on a percentage of the Company's eligible accounts
receivable and inventory, up to a maximum of $10,000,000 in working capital
loans.

  The line of credit accrues certain commitment fees, unused facility fees, and
interest on outstanding amounts at the lender's prime rate (8.5% at July 31,
1997) plus 1.5%. The initial term of the line of credit expires on November 29,
1997, but automatically renews for successive one year periods unless
terminated by either party within a specified period in advance of the
automatic renewal date. The institutional lender also makes available to the
Company various flooring commitments pursuant to which the Company may finance
the purchase of up to $15.0 million in inventory (less any amounts outstanding
in working capital loans) from certain of the Company's vendors who have credit
arrangements with the institutional lender. The combined line of credit may not
exceed $20.0 million and contains restrictive covenants that, among other
provisions, require compliance with certain financial covenants, including the
maintenance of working capital of at least $20,000,000. The combined line of
credit is collateralized by all the assets of the Company. At July 26, 1996 and
July 31, 1997, the Company owed $4,185,000 and $0 under the line of credit and
$4,464,000 and $3,840,000, which is included in accounts payable, under the
flooring agreements, respectively (see Note 6).

6. COMMITMENTS AND CONTINGENCIES

 Lease Commitments

  The Company leases a facility under a noncancellable operating lease that
expires in fiscal 1998. The facility lease contains an option to extend the
lease under the same terms for four months.





                                       40
<PAGE>   40

  Future minimum lease payments at July 31, 1997, under this lease were as
follows:

<TABLE>
<CAPTION>
                                                                     CAPITAL      OPERATING
                                                                      LEASE        LEASES
                                                                     ------       --------
<S>                                                                 <C>          <C>
     Fiscal year ending:                                            
     1998.........................................................   $   --       $471,000
                                                                     ------       --------
     Total minimum lease payments ................................       --       $471,000
                                                                                  ========
     Less, amounts representing interest .........................       --   
                                                                     ------     
     Present value of future minimum capital lease obligations ...   $   --
                                                                     ======
</TABLE>                                                       
                                                      
  Rent expense was $425,000, $398,000 and $447,000 for fiscal 1995, 1996 and
1997, respectively.

 Flooring Agreements

  As is customary in the computer reseller industry, the Company is
contingently liable at July 31, 1997 under the terms of repurchase agreements
with several financial institutions providing inventory financing for dealers
of the Company's products. The contingent liability under these agreements
approximates the amount financed, reduced by the resale value of any products
that may be repurchased, and the risk of loss is spread over several dealers
and financial institutions. Losses under these agreements have been immaterial
in the past.

 Litigation

  The Company has been threatened with a claim by a private company based in
Newport Beach, California, regarding a purported breach of an alleged oral
contract between the Company and that party. The party has asserted that it is
entitled to receive up to 280,000 shares of the Company's common stock as
payment for financial advisory services purportedly rendered to the Company by
that party. The Company unequivocally denies the existence of any oral contract
with that party and believes any oral contract claim of that party is entirely
without merit. The Company intends to defend itself vigorously should that party
eventually file a lawsuit with respect to the oral contract claim and to assert
any and all rights the Company has related to such claim. The Company does not
believe the claim, or any lawsuit filed in connection therewith, will have a
material adverse effect on the Company's business, results of operations or
financial condition.

  The Company is involved in routine litigation arising in the ordinary course
of its business. While the outcome of litigation cannot be predicted with
certainty, the Company believes that none of the pending litigation will have a
material adverse effect on the Company's financial position or results of
operations.

 Employment Agreements

  The Company has employment agreements with the Company's President and three
Executive Vice Presidents. Each agreement is for a three year term with an
automatic renewal provision which provides that the agreement will perpetually
maintain a three-year term unless terminated. Each agreement contains severance
provisions that require the payment of 35 months of base salary in the event of
the termination of the covered executives. Should all four executives be
terminated, the aggregate commitment arising under the severance provisions
would be approximately $2.6 million and, in addition, the Company would be
obligated to pay a pro rata bonus for the year of termination and the
continuation for up to two years of all life insurance and medical benefits.

7. RELATED PARTY TRANSACTIONS

  The Company made product sales totaling $398,000 to an entity owned by a
relative of one of the Company's stockholders during fiscal 1995. At July 29,
1994, the Company had accounts receivable from this related party of $323,000.
As a result of an Executive Order issued by the President of the United States
in May 1995 related to transactions with Iranian companies, the Company
determined that amounts owed by this entity might not be collectible in the near
future and, accordingly, during fiscal 1995, wrote off the outstanding balances
owed the Company by this entity of approximately $251,000. There were no
transactions with this entity in fiscal 1996 and 1997.

  At July 28, 1995, the Company had a net receivable of $181,000, from an
entity 90 percent of which is owned by the Company's four shareholders. During
fiscal 1996, the Company made cash advances of approximately $93,000 to the
entity. In addition, during fiscal 1996, the Company sold products valued at
approximately $2,000 to the entity, and incurred other expenses of
approximately $25,000 on behalf of the entity. At July 26, 1996, the Company
had a net receivable of $301,000 from the entity, and due to the financial
position of the entity, the Company determined that the receivable was
uncollectible and wrote off the entire amount.  During fiscal 1997, the Company
collected $18,000 of the amount previously written off.

8. RETIREMENT PLAN

  The Company has a defined contribution plan covering substantially all
full-time employees with more than one year of service.





                                       41
<PAGE>   41

Each participant can elect to contribute up to 15% of his or her annual
compensation. While employer contributions to the plan are discretionary,
during fiscal 1995, 1996 and 1997, the Company elected to make matching
contributions equivalent to between 38% and 50% of the first 4% of the
employee's contribution. Total expense for fiscal 1995, 1996 and 1997 was
$21,000, $47,000 and $72,000, respectively.

9. COMMON STOCK AND STOCK OPTION PLAN

  In September 1995, the shareholders of the Company approved a stock split,
whereby each shareholder was issued 10,000 shares of common stock for each share
held. The Company filed amended and restated articles of incorporation in
November, 1996, which, among other things, effected an additional stock split
pursuant to which each shareholder was issued three shares of common stock for
each common share held. The amended and restated articles of incorporation also
effected a change in common stock from no par value to par value of $.01 per
share. In fiscal 1997, $89,700 was transferred from retained earnings to common
stock and paid-in-capital to reflect the change in par value. All share and per
share amounts have been restated to give retroactive effect to this stock split
as well as the September 1995 stock split.

  During fiscal 1996, the Company instituted the 1995 Stock Option Plan (the
"1995 Plan") for its key employees and reserved 540,000 shares for grant under
the 1995 Plan. Pursuant to the terms of the 1995 Plan, options to purchase the
Company's common stock may be granted with exercise prices equal to the fair
market value of the stock on the date of grant. Options granted vest over a
period of four years.

  The following table sets forth options authorized, granted and outstanding
under the 1995 Plan:

<TABLE>
<CAPTION>
                                           AUTHORIZED   OUTSTANDING       AVERAGE
                                            FOR GRANT     OPTIONS          PRICE  
                                            --------      --------      -----------
<S>                                         <C>          <C>           <C>
        Balances, July 26, 1995 .......         --            --               --
          Institution of the 1995 Plan       540,000          --               --
          Options granted .............     (235,050)      235,050      $2.50-$4.50
          Options cancelled ...........        7,350        (7,350)     $      2.50
                                            --------      --------      -----------
        Balances, July 31, 1996 .......      312,300       227,700      $2.50-$4.50
        
          Options granted .............      (87,750)       87,750      $5.17-$9.38
          Options cancelled ...........       43,875       (43,875)     $2.50-$8.33
          Options exercised ...........         --         (24,562)     $2.50-$3.00
                                            --------      --------      -----------
        Balances, July 31, 1997 .......      268,425       247,013      $2.50-$9.38
                                            ========      ========      ===========
</TABLE>

  During the year ended July 31, 1997, the Company amended option agreements for
two employees to allow for accelerated vesting of their options, resulting in
approximately $67,000 in compensation expense, $35,000 of which was charged in
fiscal 1997.  During the year ended July 31, 1997 the Company realized a tax
benefit of $201,000 from the gains resulting from exercises by employees of
non-qualified stock options.  The tax benefit is recorded as an increase in
paid-in-capital.

  In October 1995, the Financial Accounting Standards Board released Statement
of  Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").  SFAS 123 provides an alternative to APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and requires additional
disclosures.  The Company has elected to follow APB 25 in accounting for stock
options granted (including shares issued under the Stock Purchase Plans,
collectively called "stock options").  Under APB 25 the Company generally
recognized no compensation expense with respect to such options.

  Pro forma information regarding net income and earnings per share is required
by SFAS 123 for stock options granted after June 30, 1996 as if the Company had
accounted for its stock options under the fair value method of SFAS 123.  The
fair value of the Company's stock options was estimated using the Black-Scholes
option valuation model.  The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable.  In addition, the Black-Scholes model
requires the input of highly subjective assumptions, including the expected
stock volatility.  Because the Company's stock options granted to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options granted to employees.  The fair value of the Company's stock options
granted to employees was estimated assuming no expected dividends and the
following weighted average assumptions:





                                       42
<PAGE>   42

<TABLE>
<CAPTION>
                                                     STOCK OPTION
                                                     PLAN SHARES
                                                 -------------------
                                                 1996           1997 
                                                 ----           ----
<S>                                              <C>            <C>
             Expected life (in years)            4.0            4.0
                                                 ----           ----
             Risk-free interest rate             6.0 %          6.0 %
             Volatility .............             .67            .91
</TABLE>

  The weighted average exercise price and weighted average fair value of stock
options granted in 1997 under the Company's Stock Option Plans was $9.17 and
$6.13 per share, respectively.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period.  The Company's pro forma
information follows:

<TABLE>
<CAPTION>
                                            1996                  1997
                                         -----------          -----------
<S>                                     <C>                    <C>
   Pro forma net income .......          $ 2,813,000          $ 8,325,000
   Pro forma primary net income
      per share ...............          $       .31          $       .81
</TABLE>

  The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.


10. GEOGRAPHIC

  Export sales as a percentage of net sales amounted to 14%, 11% and 7% for
fiscal years 1995, 1996 and 1997, respectively. A summary of the Company's net
sales and gross profit by geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
                                                YEAR ENDED
                                --------------------------------------------
                                JULY 28,          JULY 26,           JULY 31,
                                  1995              1996              1997   
                                --------          --------          --------
<S>                            <C>               <C>               <C>
   Net sales
        United States           $ 38,478          $ 65,072          $101,147
        Foreign ......             6,182             8,384             8,185
                                --------          --------          --------
             Total ...          $ 44,660          $ 73,456          $109,332
                                ========          ========          ========
   Gross profit
        United States           $ 10,812          $ 20,004          $ 34,409
        Foreign ......               990             1,963             2,239
                                --------          --------          --------
             Total ...          $ 11,802          $ 21,967          $ 36,648
                                ========          ========          ========
</TABLE>

The Company has no material identifiable assets used in connection with the
Company's foreign operations.






                                       43
<PAGE>   43


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                      PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of
the fiscal year ended July 31, 1997.

ITEM 11. EXECUTIVE COMPENSATION

     There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the captions "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Stock Performance Graph,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended July 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the caption "Security Ownership of Beneficial Owners," which
will be filed with the Securities and Exchange Commission no later than 120
days after the close of the fiscal year ended July 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related
Transactions," which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended July 31, 1997.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) DOCUMENTS FILED AS A PART OF THIS REPORT:

         (1) INDEX TO FINANCIAL STATEMENTS
             The financial statements included in Part II, Item 8 of this
document are filed as part of this Report.

         (2) FINANCIAL STATEMENT SCHEDULES
             The financial statement schedule included in Part II, Item 8 of
this document is filed as part of this Report.

     All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.





                                       44
<PAGE>   44

     Separate financial statements of the Company have been omitted as the
Company is primarily an operating company and its subsidiaries are wholly owned
and do not have minority equity interests and/or indebtedness to any person
other than the Company in amounts which together exceed 5% of the total
consolidated assets as shown by the most recent year-end consolidated balance
sheet.

     During the fourth quarter of fiscal 1997, the Company filed a Report on
Form 8-K reporting, under Item 5, a change in its fiscal year end from the last
Friday in July to July 31. The date of such Report was June 2, 1997. There were
no financial statements filed with the Report.






























                                       45
<PAGE>   45

(3) EXHIBITS
                                                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                                      SEQUENTIALLY
  EXHIBIT                                                                                                NUMBER
   NUMBER                              DESCRIPTION                                                         PAGE   
 --------                              -----------                                                      ----------
 <S>         <C>
  3.1+       Amended and Restated Articles of Incorporation of the Company . . . . . . . . . . . . . . . . .
  3.2+       Amended and Restated Bylaws of the Company  . . . . . . . . . . . . . . . . . . . . . . . . . .
 10.1+       Form of Indemnity Agreement between the Company and each of its executive
             officers and directors  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 10.2+       Form of Amended and Restated Procom Technology, Inc. 1995 Stock Option
             Plan  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 10.3+       Amended and Restated Executive Employment Agreement, dated as of October
             28, 1996, between the Company and Alex Razmjoo  . . . . . . . . . . . . . . . . . . . . . . . .
 10.4+       Amended and Restated Executive Employment Agreement, dated as of October
             28, 1996, between the Company and Frank Alaghband . . . . . . . . . . . . . . . . . . . . . . .
 10.5+       Amended and Restated Executive Employment Agreement, dated as of October
             28, 1996, between the Company and Alex Aydin  . . . . . . . . . . . . . . . . . . . . . . . . .
 10.6+       Amended and Restated Executive Employment Agreement, dated as of October
             28, 1996, between the Company and Nick Shahrestany  . . . . . . . . . . . . . . . . . . . . . .
 10.7+       Form of Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 10.8+       Lease, dated February 10, 1992, between 2181 Dupont Associates and the
             Company, as amended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 10.9.1+     Loan and Security Agreement, dated November 18, 1994, by and between the
             Company and FINOVA Capital Corporation, as amended  . . . . . . . . . . . . . . . . . . . . . .
 10.9.2      Amendment to FINVOVA Loan and Security Agreement dated July 30, 1997
 16.1+       Letter re Change in Certifying Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . .
 21.1+       List of Subsidiaries  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 23.1        Consent of Arthur Andersen LLP  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 27.1        Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>

__________

+  Previously filed





                                       46
<PAGE>   46

                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Irvine, County of Orange, State of California, on the 29th day of
October, 1997.

                                          PROCOM TECHNOLOGY, INC.


                                          By: /s/   Alex Razmjoo
                                             ---------------------------------
                                              Alex Razmjoo
                                              Chairman, President and
                                              Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                TITLE                                   DATE
                ---------                                -----                                   ----
<S>                                      <C>                                              <C>
    /s/       Alex Razmjoo                Chairman of the Board, President and             October 29, 1997
 ---------------------------------------  Chief Executive Officer (Principal
              Alex Razmjoo                Executive Officer)
                                          

    /s/        Alex Aydin                 Executive Vice President, Finance and            October 29, 1997
 ---------------------------------------  Administration (Principal Financial
               Alex Aydin                 Officer)
                                         

    /s/      Frederick Judd               Vice President, Finance and General              October 29, 1997
 ---------------------------------------  Counsel (Principal Accounting Officer)
             Frederick Judd             

    /s/     Frank Alaghband               Director                                         October 29, 1997
 ---------------------------------------                                                                     
            Frank Alaghband

    /s/     Nick Shahrestany              Director                                         October 29, 1997
 ---------------------------------------                                                                     
            Nick Shahrestany

                                          Director                                         October ____, 1997
 ---------------------------------------                                                                     
              Dom Genovese

                                          Director                                         October ____, 1997
 ---------------------------------------                                                                     
              David Blake
</TABLE>


                                       47
<PAGE>   47
                                  SCHEDULE II

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
              COL. A                    COL. B                    COL. C                  COL. D              COL. E
-------------------------------        ---------          ----------------------         ---------           ---------
                                                                ADDITIONS
                                                          ----------------------    
                                      BALANCE AT         CHARGED TO    CHARGED TO                             BALANCE
                                      BEGINNING OF       COSTS AND       OTHER                                AT END
           DESCRIPTION                  PERIOD           EXPENSES       ACCOUNTS        DEDUCTIONS           OF PERIOD
-------------------------------        ---------          ----------------------         ---------           ---------
<S>                                   <C>                <C>            <C>             <C>                 <C>
Year ended July 28, 1995:
  Allowance for sales returns          $ 125,000          $    --            --          $ (52,000)          $  73,000
  Allowance for doubtful ....            135,000            322,000          --           (351,000)            106,000
     accounts ...............
  Allowance for excess and
     obsolete inventory .....             80,000            467,000          --           (477,000)             70,000

Year ended July 26, 1996:
  Allowance for sales returns          $  73,000          $ 130,000          --          $    --             $ 203,000
  Allowance for doubtful ....            106,000            473,000          --           (409,000)            170,000
     accounts ...............
  Allowance for excess and
     obsolete inventory .....             70,000            284,000          --           (199,000)            155,000

Year ended July 31, 1997:
  Allowance for sales returns          $ 203,000          $ 469,000          --          $    --             $ 672,000
  Allowance for doubtful ....            170,000            277,000          --           (127,000)            320,000
     accounts ...............
  Allowance for excess and
     obsolete inventory .....            155,000            341,000          --           (306,000)            190,000
</TABLE>


                                       48