<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-K

        FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934

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

        FOR THE FISCAL YEAR ENDED JULY 31, 1999

                         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.)

   1821 East Dyer Road, Santa Ana, CA                     92705
 (Address of principal executive office)               (Zip Code)

                                 (949) 852-1000
              (Registrant's telephone number, including area code)

                              HTTP://WWW.PROCOM.COM

                             (Registrant's Web Site)

              (Former name, former address and former fiscal year,
                         if changed since last report.)

        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

                                (Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. [ ]

        As of October 15, 1999, the aggregate market value of the voting stock
of the Registrant held by non-affiliates of the Registrant was approximately
$34.1 million.

        The number of shares of Common Stock, $.01 par value, outstanding on
October 15, 1999, was 11,234,701.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Information required by Part III is incorporated by reference to
portions of the Registrant's Proxy Statement for the Year 2000 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1999 fiscal year.



<PAGE>   2

                             PROCOM TECHNOLOGY, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED JULY 31, 1999

                               PART I

<TABLE>
<S>        <C>                                                    <C>
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 7A.   Quantitative and Qualitative Disclosures
            About Market Risk....................................
Item 8.    Financial Statements and Supple-
            mentary 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>

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 the fiscal year ended July 31, 1997, 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 1821 East Dyer
Road, Santa Ana, California, 92705; its telephone number is (949) 852-1000 X
4257 and its web site is HTTP://WWW.PROCOM.COM.



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<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

GENERAL

        Procom Technology, Inc. ("Procom"), and its wholly owned subsidiaries,
Megabyte Computerhandels AG ("Megabyte")(a German corporation), Invincible
Technologies Acquisition Corporation ("Invincible"), Gigatek SRL ("Gigatek")(an
Italian company), Pera AG ("Pera")(a Swiss corporation) and Procom FSC, all
referred to herein as 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. During the year ended July 31, 1999, the Company completed the
acquisitions of Pera, a small Swiss based distributor/reseller of high end
networking solutions, and Gigatek, an Italian based distributor/reseller of high
capacity, fault tolerant network storage solutions. See "Acquisitions."

        The Company has become a leading provider of network attached storage
("NAS") devices such as high capacity disk drive storage systems as well as
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 nearly all of its products to a wide
variety of end users, including Fortune 500 corporations, governmental agencies
and financial and educational institutions, while a small amount of higher
capacity storage products are sold directly to end-users.

        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's CD FORCE server 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 DataFORCE
products, which provide access to up to 75 Gigabytes of information on CD-ROM to
users at disk drive access times.

        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.

        During the fiscal year ended July 31, 1999, the Company focused a
significant amount of resources and efforts into developing higher performance
NAS products to provide cross-connectivity, high availability and symmetric
fault tolerance for end-users with large data warehouses who need the
performance, availability and reliability necessary in today's data storage
environments. The Company has only recently introduced its NetFORCE 2000/2200
and NetFORCE 2500/2600 products, and it has committed significant resources to
both expanding the existing product line while enhancing existing product
features. The Company believes that the NAS product development, combined with
its established distribution network, will contribute to future revenues and
gross profits.

        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; (iv) making selected acquisitions to expand or strengthen the
Company's product offerings or distribution abilities, and (v) delivering timely
storage solutions compatible with all major operating systems and network
topologies.



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<PAGE>   4

        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 Compucom Systems, Inacom,
Ingram Micro and Tech Data, and end users include most Fortune 1000 enterprises
and federal, state and local governments.

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 98, 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, faster 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,
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.



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<PAGE>   5

        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.

        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. The growth
of the internet and the need for efficient caching and transfer of data over the
world wide web is becoming increasingly important. These and other 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 data appliances for the network store huge volumes
of data with protections against failure while allowing file sharing between
UNIX and Windows environments. These NAS products offer non-stop performance for
entities that require optimum file sharing capabilities. 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 use of CD-ROM as a cost-effective
medium for the distribution of large amounts of information.

        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
"Intelligent 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 DataFORCE 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'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 Company's NetFORCE NAS products provide high performance, scalable,
symmetrically fault tolerant, high availability high capacity storage systems
that need data integrity, cross platform file sharing and reliability.

        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
DataForce products, a CD-ROM and hard disk combination, which the Company
believes has the fastest CD-ROM access time and data transfer rates available,
as well as the NetFORCE solutions for storage network applications needing high
capacity fault tolerant storage appliances. 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.

        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. The products are modular and can be
linked together to accommodate a customer's expanding data storage and
information access requirements.



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<PAGE>   6

        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 DataFORCE server
contains a graphical user interface that facilitates end user access to
information contained on CD-ROMs, while the Company's NetFORCE products feature
ease of appliance management and special monitoring features.

        Reduced Cost of Ownership. The Company 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 drives
that allow users to repair a damaged drive without interrupting the operation of
the network. The Company's DataFORCE, NetFORCE and RAID products include
features that reduce administrative costs for network administrators by
providing remote management 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 98, 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 Attached Storage Products. The Company is
focused on developing NetFORCE 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 DataFORCE
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 NAS 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. See "Risk Factors -Rapid Technological Change;
Short Product Life Cycles".

        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. In the future, the Company's higher
capacity storage systems may be sold directly to end-users, and the Company
intends to market its mid-range storage solutions on an OEM basis to various
computer system and peripheral manufacturers. See "Risk Factors-Customer
Concentration; Distribution Strategy; Inventory Protection".

        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 has recently employed a similar strategy with
regard to the sale of its NetFORCE solutions by targeting its marketing efforts
to end users with large information storage and access requirements. Many of
these companies have recently migrated from mainframe computer systems to
personal computer networks. Target customers for the NetFORCE include
video-on-demand providers, internet service providers, web servers, search
engines, e-mail servers, CAD and



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electronic imaging developers, data warehouses other storage intensive
applications. The Company intends to continue to target these vertical markets
in the future. In addition, the Company has sales and support personnel in
Washington, DC, New York, Boston, Dallas, Chicago and Atlanta and intends to
hire sales representatives for 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, IBM and Toshiba, CPU and hardware
manufacturers such as Intel Corporation and network software operating system
developers such as Novell and Microsoft. 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. Finally, the Company also
maintains informal relationships with certain end users of its products that
enable the Company to 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. See "Risk Factors-Substantial
Competition; Risk Factors-Rapid Technological Change; Short Product Life
Cycles".

        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. At the
same time, while product introduction times for disk drive upgrade solutions has
remained generally constant, the Company has seen introduction times lengthen on
higher capacity storage solutions as it develops products with increasing
sophistication and complexity.

PRODUCTS AND TECHNOLOGY


        The Company's principal product lines are the Network Attached Storage
Products, which include the Company's NetFORCE and DataFORCE products, and other
products such as standalone CD arrays, various RAID and tape backup products and
disk drive upgrade subsystems. These NAS products comprised approximately 25% of
the Company's net sales for fiscal 1999. Prior to the development of the NAS
product line, the Company reported sales for its Intelligent Network Storage
Products, such as CD servers and arrays (including DVD servers and arrays) and
RAID and tape backup subsystems, and reported separately for its disk drive
upgrade products. These product lines accounted for approximately 47% and 53%,
respectively, of the Company's net sales in fiscal 1997 and approximately 52%
and 48%, respectively, of the Company's net sales in fiscal 1998. 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."


Network Attached Storage Products-NetFORCE products

        The Company's NetFORCE product line includes data appliances for large
and small networks. NAS appliances can free up application servers, by attaching
data files directly to the network. This will usually speed processing time and
network efficiency. The NetFORCE 100 can offer plug and play storage
capabilities for medium sized computer workgroups, allowing for file sharing and
client-centric data storage while providing a low cost of ownership. It offers
30-150 gigabytes of storage with various fault tolerance and redundancy
protections. The NetFORCE 2000/2200 products can offer NAS appliances for
networks that need cross-connectivity and high availability. The 2000 is
configured with one 10-drive module for a maximum storage capacity of 180
gigabytes, while the 2200 can supply 5 10-drive modules, storing up to 900
gigabytes of data. The NetFORCE 2000/2200 features high availability fast
failover technology, redundant components, high data integrity and
cross-platform file sharing solutions. The NetFORCE 2500/2600 products provide a
symmetric fault tolerant solution, cross-connectivity and web-based centralized
monitoring system. A fully configured 2500 can support 900 gigabytes of storage,
while the 2600 will handle 1,800 gigabytes of data.

Network Attached 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 32x
or 40x CD-ROM drives. In addition, the Company's DATAForce products, a CD-ROM
and hard disk combination, allow access to information on 10 or 20 CD-ROMs to be
available to users at disk



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<PAGE>   8

drive access times. 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 98, Windows 95, Windows 3.1,
and Macintosh OS. The Company's 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. 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.

        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 notebook disk drive upgrade ATOM products constituted 30% of net sales
in fiscal 1998 and 24% in fiscal 1999.

        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 proprietary software as a value-added component of the
Company's complete storage solutions for Network Attached Storage Products. The
Company is continuing to enhance its DataFORCE and NetFORCE 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. DataFORCE and NetFORCE solutions are being designed to provide
cost-effective storage management solutions that support heterogeneous
client/server computing environments, is scalable to support networks and allows
clients using multiple operating systems to access simultaneously a single
storage system. The Company has invested heavily in developing its NetFORCE
products during fiscal 1999, and expects to continue to increase its level of
research and development spending in order to develop leading edge products. 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 1997 and fiscal 1998, one customer accounted for approximately 12%
and 9% of net sales, respectively, while no customer



                                       8
<PAGE>   9

accounted for more than 10% of net sales in fiscal 1999. In addition, the
Company's top three customers accounted for approximately 36% and 42% of total
accounts receivable on July 31, 1998 and July 31, 1999, 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 1000 corporations,
government agencies and financial and educational 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 who operate as both
aggregators and distributors, such as MicroAge, whose distribution arm recently
changed its name to Pinacor, and Inacom, 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 GE Information Services, EDS 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 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 utilizes Megabyte as a European distribution,
sales and support facility. During fiscal 1999, the Company acquired two
additional European distribution companies, Pera, in Switzerland, and Gigatek,
in Milan Italy. These three companies work to sell the Company's products into
the European market.

        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 NetForce products and CD servers 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 1998 and fiscal 1999,
approximately 33% and 45%, respectively, 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, 1999 consisted of 127 people, approximately 90 of whom were located at
the Company's principal offices in Santa Ana, California. The Company's sales
are made to computer resellers, VARs and distributors



                                       9
<PAGE>   10

through telemarketing efforts by sales representatives. The Company employs U.S.
field sales representatives in Texas, Florida, Washington, DC, Boston and
Atlanta, and is considering the hiring of a field sales force in various cities
throughout the U.S. In addition, the Company has recently added independent
sales representatives in Canada and France. 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 acquisition of Megabyte in fiscal 1998
and Pera and Gigatek in fiscal 1999, who together sell primarily to German,
Swiss, Italian as well as other European and Middle Eastern customers, increased
the percentage of products sold by the Company to international customers for
fiscal 1998 and fiscal 1999 compared to fiscal 1997 and 1996. For fiscal 1997,
1998 and 1999, international sales represented approximately 7%, 17% and 33%,
respectively, of the Company's net sales. See "Risk Factors -- Risks of
International Sales and Operations."

        The Company's marketing group is engaged in a number of activities
designed to help the Company achieve better market recognition and 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 ISP/CON 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, 1999
consisted of approximately 32 people, 21 located in Santa Ana, California and 8
at Megabyte and 3 at Gigatek. 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. 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 48 employees as of July 31, 1999
which includes software and hardware engineers and software quality assurance
technicians. Research and development expenses, primarily consisting of
personnel expenses, were $3.9 million, $4.8 million and $5.5 million in fiscal
1997, 1998, and 1999, respectively, constituting 3.6%, 4.3% and 5.4% of net
sales, respectively. (Expenses for fiscal 1998 do not include a one-time
write-off of $1.7 million of in-process research and development costs related
to the Company's acquisition in June 1998 of Invincible Technologies
Corporation.) A primary factor for the increase in the expenses for fiscal 1999
was the increased use by the Company of software programmers and software design
engineers, including both new employees and outside consultants hired by the
Company. 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. The Company intends to continue to develop network attached
storage products, including the NetFORCE products that incorporate the



                                       10
<PAGE>   11

technology developed by the Company and Invincible, including servers that
support not only hard disk drive and magnetic tape storage media, but also data
stored on CD-ROM. 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. See "Risk Factors - 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, 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, sixteen, twenty-four, and now
thirty-two and forty speed CD-ROMs in less than three years. 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 network attached storage products, 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, are conducted at the
Company's headquarters in Santa Ana, California. These activities 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 and network attached storage products 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



                                       11
<PAGE>   12

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 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, IBM, Quantum
and Western Digital, and manufacturers of CD-ROM drives, such as Toshiba, NEC
and Plextor, 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. Such competitors have substantially
greater financial and other resources than the Company and their competition
with the Company could have a material adverse effect on the Company's business,
results of operations and financial condition.

        The Company's primary competitors in the CD server and array market
consist of (i) CD array manufacturers such as Meridian Data, recently acquired
by Quantum, and Hewlett Packard, which often 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 Gateway. 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.



                                       12
<PAGE>   13

        The Company's primary competitors in the network attached storage
product markets are (i) computer manufacturers, such as IBM, Compaq, Dell and
Hewlett-Packard, which generally focus on providing storage upgrades for their
products, (ii) companies which have focused on developing NAS products, such as
Network Appliance and Auspex and (iii) companies that sell storage solutions
directly to end users, such as EMC and Storage Technology. 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 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 primary competitors in the disk drive upgrade market are
(i) computer manufacturers that also market and sell storage upgrades, such as
IBM, Compaq and Hewlett-Packard, (ii) companies that specialize in reselling
replacement or increased capacity storage disk drives, and (iii) various
national distributors of third party upgrade drives such as Ingram Micro,
Merisel and Tech Data. 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 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 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 attached storage solutions market 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.



                                       13
<PAGE>   14

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. See "Risk
Factors -- Intellectual Property Rights."

EMPLOYEES

        As of July 31, 1999, the Company had 306 full-time employees, 59 of whom
were engaged in manufacturing (including testing, quality assurance and
materials functions), 47 in engineering and product development, 127 in sales
and marketing, 32 in customer service and technical support, and 41 in finance
and administration, 244 of which are in the United States, 49 in Germany, 11 in
Italy and 2 in other countries in Europe. 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."



                                       14
<PAGE>   15

ITEM 2. PROPERTIES

        The Company leases approximately 56,000 square feet of space in Santa
Ana, California for its corporate offices and operations. The property is leased
by the Company under a lease which expires in July 2000. The Company also leases
property to house operations of its subsidiaries in Munich, Germany, Milan,
Italy and Zurich, Switzerland. The Company has also leased office space for
outside sales representatives in Canada, Washington, D.C., Boston and Dallas.
The Company purchased an 8.5 acre parcel of land in Irvine, California, in March
1999, where it plans to develop a corporate headquarters facility at a total
cost of approximately $15.0 million, which the Company expects could be ready
for occupancy in the year 2000.

ITEM 3. LEGAL PROCEEDINGS.

        The Company and one of its officers were named as defendants in an
action filed in Orange County Superior Court by Miradco International
Corporation, a private company based in Newport Beach, California, consisting of
two principals ("Miradco"), which alleged that the Company breached an alleged
oral contract with Miradco. In June 1999, a jury found that no contract existed
between Miradco and the Company. Miradco made several post-trial motions seeking
to overturn the jury verdict, all of which were rejected in August 1999. The
Company believes that Miradco has no further appeal rights.

        The Company is from time to time involved in other litigation related to
its ordinary operations, such as collection actions and vendor disputes. The
Company does not believe that the resolution of any such other 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 1999.

                                     PART II

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

        The Common Stock of Procom 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, 1999 was 89 and the number of
beneficial owners is believed to be in excess of 2,000. Procom'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 range of high and low sales prices of the Company's common stock, as
reported by the Nasdaq National Market System, for each quarter of fiscal 1998
and 1999:

<TABLE>
<CAPTION>
Fiscal 1999               First Quarter         Second Quarter         Third Quarter          Fourth Quarter
                          -------------         --------------         -------------          --------------
<S>                           <C>                    <C>                    <C>                    <C>
High .......................  $ 6.50                 $12.63                 $ 9.56                 $ 9.75
Low ........................  $ 4.25                 $ 5.94                 $ 4.00                 $ 3.81

FISCAL 1998

High .......................  $18.63                 $17.75                 $10.75                 $ 8.25
Low ........................  $10.31                 $ 7.81                 $ 7.13                 $ 5.25
</TABLE>



                                       15
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA.

FINANCIAL HIGHLIGHTS

YEARS ENDED(1)


<TABLE>
<CAPTION>
                                             JULY 28,         JULY 26,         JULY 31,         JULY 31,         JULY 31,
                                               1995             1996             1997             1998             1999
                                            ---------        ---------        ---------        ---------        ---------
<S>                                         <C>              <C>              <C>              <C>              <C>
Net sales                                   $  44,660        $  73,456        $ 109,332        $ 111,886        $ 101,290
Gross profit                                   11,802           21,967           36,648           36,359           28,287
Income (loss) before taxes                      1,137            4,649           13,899            8,850           (3,933)
Net income (loss)                           $     723        $   2,849        $   8,447        $   5,376        $  (2,875)
Net income (loss) per share(2):
    Basic                                   $    0.08        $    0.31        $    0.83        $    0.48        $   (0.26)
    Diluted                                 $    0.08        $    0.31        $    0.81        $    0.48        $   (0.26)
Weighted average number of shares(2)
    Basic                                       9,000            9,000           10,205           11,114           11,241
    Diluted                                     9,172            9,172           10,374           11,252           11,241
Cash and marketable securities              $     212        $     793        $  18,777        $  23,362        $  22,433
Working capital                                 1,868            4,632           29,220           32,873           31,245
Total assets                                   11,011           21,112           43,274           54,439           57,088
Line of credit                                  1,484            4,185               --              210              254
Long-term obligations                              34               --               --               --            7,500

Total shareholders' equity                  $   2,287        $   5,136        $  30,067        $  36,732        $  34,286
</TABLE>



(1) During fiscal years 1995-1996, 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.

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

        This Report on Form 10-K 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 Affecting the Company and/or its Industries."

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,
and in fiscal 1994 began to manufacture and market CD-ROM servers and arrays,
which allow network users to simultaneously access information contained on
CD-ROM.

        During fiscal 1997, the Company aggregated sales of Intelligent Network
Storage Products by combining sales of CD servers and arrays together with sales
of RAID and tape backup systems. During fiscal 1997 sales of Intelligent Network
Storage Products increased 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, represented approximately
47% of net sales, while sales of hard disk drive upgrade products represented
53% of net sales. During fiscal 1998, the Company experienced a reduction in the
sales of CD servers and arrays, a reduction in the sales of commodity disk drive
upgrade storage subsystems, and an increase in the sales of disk drive upgrade
storage systems for notebook computers. In addition, in fiscal 1998, the Company
acquired



                                       16
<PAGE>   17

the operations of Megabyte and Invincible (see above) and recorded their sales
from the dates of their respective acquisition by the Company. While the sales
of Megabyte and Invincible were of higher capacity storage subsystems, their
sales did not fully offset the slowing growth of CD servers and arrays, and as a
result, approximately 52% and 48% of the Company's fiscal 1998 net sales were of
Intelligent Network Storage Products and disk drive upgrade subsystems,
respectively. In fiscal 1999, reflecting the Company's increasing focus on
Network Attached Storage Products, the Company chose to combine its NAS CD
Servers with its NetFORCE products, which totaled approximately 25% of net
sales, while sales of all other CD-ROM, non NAS storage and disk drive upgrades
for notebook computers totaled approximately 75% of net sales. 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 1998 and 1999, customer returns and price protection
charges represented approximately 13% and 12% 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 majority (approximately 80%) of the Company's sales are denominated
in U.S. dollars (although most sales of Megabyte are denominated in German marks
and Pera and Gigatek bill in francs and lira, respectively). 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. However, the Company
could experience a loss on the intercom any account balances maintained by its
subsidiaries in the event of a rapid or sustained reduction in value of any of
the deutschmark, lira or Swiss franc.

        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, sales of low capacity disk drive commodity
storage subsystems, generally result in lower gross margins than sales of CD
servers and arrays, disk drive storage upgrade subsystems for notebook computers
and RAID products. As sales of higher margin products have become a larger
percentage of the Company's total sales, the Company has experienced a
corresponding increase in its overall gross margins. However, the Company's
gross margins were negatively impacted in fiscal 1999 by the inclusion of sales
of Megabyte and Gigatek, which had experienced gross margins of approximately
18% and 26%, respectively, during such period, well below the Company's other
products' average gross margins.

        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
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."



                                       17
<PAGE>   18

RESULTS OF OPERATIONS

        During fiscal years 1995-1996, 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.

        COMPARISON OF YEARS ENDED JULY 31, 1997, JULY 31, 1998 AND JULY 31, 1999

        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 31,       JULY 31,       JULY 31,
                                                     1997           1998           1999
                                                   --------       --------       --------
<S>                                                <C>            <C>            <C>
Net sales .......................................    100.0%         100.0%         100.0%
Cost of sales ...................................     66.5           67.5           72.1
                                                    ------         ------         ------
 Gross profit ...................................     33.5           32.5           27.9
Selling, general and administrative expenses ....     17.5           19.9           26.0
Research and development expenses ...............      3.6            4.3            5.4
Inprocess R&D charge ............................       --            1.5            0.0
Impairment and restructuring charge .............       --             --            1.6
                                                    ------         ------         ------
      Operating income (loss) ...................     12.4            6.8           (5.1)
Interest income .................................      0.3            1.1            1.2
                                                    ------         ------         ------
      Income (loss) before income taxes .........     12.7            7.9           (3.9)
Provision (benefit) for income taxes ............      5.0            3.1           (1.1)
                                                    ------         ------         ------
      Net income (loss) .........................      7.7%           4.8%          (2.8%)
                                                    ======         ======         ======
</TABLE>

        Net Sales


        Net sales increased 2% from $109.3 million in fiscal 1997 to $111.9
million in fiscal 1998 and decreased 9% to $101.3 million in fiscal 1999. Net
sales increased from fiscal 1997 to fiscal 1998 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, and the inclusion of sales of
Megabyte and Invincible from the respective dates of acquisition. Net sales
decreased from fiscal 1998 to fiscal 1999 primarily as the Company experienced
reduced demand for the Company's CD servers and arrays, along with increased
pricing pressures on the Company's disk drive product lines, resulting in lower
revenues. For fiscal 1999, sales recorded by the Company's newly acquired
European subsidiaries of approximately $28.9 million somewhat offset the reduced
CD server and array sales and the effects of price erosion plus increased
allowances for anticipated sales returns and price protection charges as the
Company increased the percentage of its net sales sold to customers who have
contractual return and price protection rights. The Company expects that it
will continue to experience declines in its sales of CD servers and arrays in
the future, and that erosion of average selling prices will continue to impact
net sales in the future.

        International sales, primarily to European customers and secondarily to
Middle Eastern, Latin American and Pacific Rim customers, were $8.2 million,
$19.0 million and $33.7 million, and accounted for approximately 7%, 17% and 33%
of net sales for fiscal 1997, 1998 and 1999, respectively. International sales
increased in absolute dollars in fiscal 1998 and fiscal 1999 as a result of the
acquisitions of Megabyte, Pera and Gigatek, all of which were made to
international customers, primarily those in Europe and the Middle East. See
"Risk Factors -- Risks of International Sales and Operations."

        Gross Profit

        The Company's gross profit totaled $36.6 million, $36.4 and $28.3
million during fiscal 1997, 1998 and 1999, respectively. The Company's gross
margin decreased from 33.5% in fiscal 1997 to approximately 32.5% in fiscal 1998
due primarily to a continuing shift in product mix with fewer higher margin CD
servers and arrays, and, to a lesser extent, the lower margins experienced by
Megabyte for sales in the last half of fiscal 1998 following its acquisition by
the Company. Gross margins decreased to 27.9% in fiscal 1999



                                       18
<PAGE>   19


due primarily to the inclusion of Megabyte sales, which were made at
significantly lower gross margins, combined with the effect of increasing
competition and pricing pressures on the Company's disk drive upgrade subsystems
for notebook computers, and the reduced demand for the Company's CD servers and
arrays, which typically generate better selling margins. Gross profit was also
impacted by the Company's increase in its reserve for obsolete inventory due to
the increased pricing pressures on products in the disk drive industry. The
Company expects that gross margins on CD servers and arrays, and notebook
upgrade products will continue to be impacted by reduced demand and average
selling price erosion.


        Selling, General and Administrative Expenses


        Selling, general and administrative expenses were $ 19.1 million in
fiscal 1997 and further increased 16% to $22.3 million in fiscal 1998 and
further increased 18% to $26.3 million in fiscal 1999. These expenses
represented 18%, 20% and 26% of net sales in fiscal 1997, 1998 and 1999,
respectively. The increase from fiscal 1997 to fiscal 1998 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 operations. The
increase in fiscal 1999 was due primarily to continued increases in rent,
depreciation and administration expenses, costs to support the international
infrastructure of the Company, and additional salaries and payroll related costs
for sales and administration personnel. In addition, the Company expended
approximately $550,000 in successfully defending the Miradco action described in
"Litigation" above. The Company reduced certain marketing and advertising costs
and together with marketing, including co-op advertising costs, and direct mail
and advertising, combined with increases in other expenses to support the
Company's operations. The Company paid officer bonuses of $400,000 for fiscal
1998 and $0 in fiscal 1999. The Company expects that it will continue to incur
significant selling, general and administrative expenses to develop and
maintain a sales infrastructure capable of marketing and selling network
attached storage products.


        Research and Development Expenses and One-Time Write Off of In Process
Research and Development Costs

        Research and development expenses, consisting primarily of personnel
expenses, increased from $3.9 million in fiscal 1997 to $4.8 million in fiscal
1998 and further increased to $5.5 million in fiscal 1999. These expenses
represented 3.6%, 4.3% and 5.4% of net sales in fiscal 1997, 1998 and 1999,
respectively. The increase from fiscal 1997 to fiscal 1998 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 1999, research and
development expenses increased by 15% over fiscal 1998, as the Company continued
to hire additional engineering staff, and increased expenditures for test
prototypes and supplies. The Company expects that its research and development
expenses will continue to increase both in absolute dollars and as a percentage
of net sales as it further develops increasingly complicated network attached
storage solutions for high capacity storage applications.

        In connection with the acquisition of Invincible, the Company identified
and valued the cost of technology which had not, at the date of the acquisition,
reached the stage of technological feasibility, and for which no alternative
future use was foreseeable. The Company determined that approximately $1.7
million of the total purchase price of approximately $2.5 million would be
expensed in the fourth quarter of fiscal 1998. The remaining net purchase price
in excess of the net assets acquired was allocated to various components of
goodwill. See "Acquisitions", below.

        Impairment and Restructuring Charge

        As a result of changes to the Company's business operations, as well as
significant operating losses of Invincible after its acquisition, the Company
reviewed the long-lived assets purchased in the Invincible acquisitions. After
comparing the carrying value of the assets to the future undiscounted estimated
cash flows from the assets, the Company determined that the values of most of
the assets were impaired. The Company wrote off the goodwill remaining from the
transaction of approximately $.8 million, and wrote down the carrying value of
certain Invincible fixed assets by $.6 million. In addition, the Company
determined that it would restructure much of the Invincible operations, and
recorded a restructuring charge comprised of approximately $.2 million for lease
termination and employee severance costs (for approximately 10 employees)
relating to the Invincible operations. At July 31, 1999, approximately $.2
million of the restructuring charge remains accrued to be paid subsequent to
year end. In addition, the Company recorded, in cost of sales, additional
reserves of approximately $.8 million to reserve for the ultimate disposal of
much of the Invincible inventory.

        Interest Income and Expense

        Historically, the Company had utilized a line of credit until its
December 1996 initial public offering, after which it has not borrowed
significant amounts under the line. In fiscal 1997, the Company incurred
$131,000 in interest expense, while during fiscal 1998 and 1999, the Company
incurred $15,000 and $26,000 in interest expense in connection with small
credit lines of its European subsidiaries. After completing the public offering,
the Company has invested its available



                                       19
<PAGE>   20

cash, in various investment grade commercial papers with maturities of less than
90 days and realized approximately $1.2 million in interest income for each of
fiscal 1998 and 1999.

        Income Taxes

        The Company's effective tax provision (and benefit) rates were 39.2%,
39.3% and (26.9%) for fiscal 1997, 1998 and 1999, respectively. For fiscal 1997
and 1998, the Company's effective tax rate approximated federal and state
statutory rates, with moderate reductions due to the Company's use of its
foreign sales corporation ("FSC"). In addition, the Company has qualified for
increasing research and development credits as it increases its research and
development efforts. For fiscal 1998, 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 sales by Procom to international customers. For fiscal 1999, the Company
saw a reduced benefit compared to statutory rates as it incurred losses in
European jurisdictions where no benefit exists, and lower effective benefits
resulted from the inability of the Company to fully utilize state losses in
California.

    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 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 previous 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 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.
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 cash flows from operations, supplemented
by periodic borrowings of funds under its working capital line of credit and
increases in accounts payable and accrued expenses, and the cash it raised when
it completed its initial public offering in December 1996. Net cash provided by
operating activities was $6.3 million in fiscal 1997 and $8.3 million in fiscal
1998 and $1.2 million in fiscal 1999. 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 1998, net cash provided by operating activities resulted from the
Company's net income, enhanced slightly by the Company's efforts to minimize
accounts receivable and inventories. In fiscal 1999, net cash was provided by
the Company's significant reduction in net accounts receivables, offset by the
Company's net loss for the period. In fiscal 1997 and 1998, the Company's
investing activities consisted primarily of purchases of property and equipment,
including, in fiscal 1998, acquisitions of the net assets of Megabyte and
Invincible made in



                                       20
<PAGE>   21


connection with the Company's acquisitions of each of those companies. Property
and equipment expenditures totaled $588,000 and $787,000 for fiscal 1997 and
1998. Property and equipment expenditures increased to $9.1 million in fiscal
1999, as the Company purchased land for its Irvine, California headquarters, and
made significant expenditures to upgrade its existing computer systems, as well
as a significant increase in engineering prototypes and test supplies. The
Company expects to expend a total of approximately $13-15 million ($7.6 million
of which was expended at July 31, 1999) to develop its corporate headquarters
in Irvine, California.


        During the first half of fiscal 1997, the Company borrowed and repaid
funds periodically under its line of credit to finance its growth and
operations. In fiscal 1997, the Company reduced its borrowings by $4.2 million
after completing its initial public offering. In fiscal 1999, the Company
borrowed $7.5 million from an investment bank to finance the purchase of the
land for its Irvine, California headquarters. The loan bears interest at 6.125%,
with interest payable quarterly, and has a term of 18 months, expiring in
September 2000. The Company has pledged its commercial paper account with the
investment bank as security for repayment of the loan. The Company intends to
capitalize the interest expense and other related carrying costs until the
building is completed and put into service.


        In November 1994, the Company instituted a revolving line of credit with
Finova Capital Corporation ("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 amounts at the lender's prime rate (8.0% at July 31, 1999) plus
1.0%. 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, 1998 and 1999, there was no balance outstanding under the credit facility,
and $2.3 million and $1.8 million outstanding under the flooring arrangements,
respectively included in accounts payable. 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, 1999, the
Company was in 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, 1998, 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 6 of Notes
to Consolidated Financial Statements. In addition to the Finova line of credit,
Megabyte has two lines of credit, utilized primarily for overdraft and
short-term cash needs, with two German banks. The lines allow Megabyte to borrow
up to 1,000,000 German marks (approximately US$550,000), with interest
at approximately 7.75%, and are not guaranteed by Procom. At July 31, 1998, and
1999, there was 375,000 DM (approximately US$210,000) and 435,000 DM
(approximately US$240,000) outstanding under the lines. Also, Gigatek
maintains a short-term line of credit of 180 million lira (approximately
US$100,000), bearing interest at 10% per annum. No amounts were outstanding
under the line at year end.



        Subsequent to July 31, 1998, the Company's Board of Directors approved a
stock open market repurchase program. Pursuant to the program, the Company is
authorized to effect repurchases of up to $2 million in shares of its common
stock. The Company expects that it will make such repurchases from time to time,
when it determines that such repurchases are the best available use of the
Company's available cash, given the price of the Company's stock and the
interest income the Company would otherwise earn on the Company's available
cash. During fiscal 1999, the Company repurchased 77,845 shares for $401,000. In
March 1999, the Company purchased an 8.5 acre parcel of land in Irvine,
California, where it will develop a corporate headquarters facility, which the
Company expects will be ready for occupancy in the year 2000. To finance the
land purchase, the Company has borrowed $7.5 million from an investment bank for
18 months, at a rate of 6.125%. Approximately $10 million of the Company's
commercial paper portfolio is pledged as collateral for the loan. The cost of
the land, together with the currently estimated cost to construct the facility,
would approximate $13-15 million. The Company is considering various development
and financing options, and believes that it will have the capital resources
available to it to finance and complete the building during the next two years.


        At July 31, 1999, the Company had cash and marketable securities
totaling $22.4 million and additional availability under its unused line of
credit. The Company believes that these 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 31,1999, the
Company had no material commitments for capital expenditures except for the
commitment to develop its corporate headquarters. The Company will continue to
acquire fixed assets and make expenditures to support its growth. In addition,
in fiscal 1999, the Company completed two acquisitions utilizing its own cash
and common stock. The Company has funded losses of the entities acquired during
fiscal 1998 and fiscal 1999 of approximately $4.7 million. 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 additional businesses in the future. There can
be no assurance that any such potential acquisitions could or will be completed.



                                       21
<PAGE>   22

In the event the Company's plans, including the development of the corporate
headquarters or the funds expended in the stock buyback program, 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.

ACQUISITIONS

        During fiscal 1998, the Company completed two acquisitions. In February
1998, the Company purchased 100% of the outstanding shares of Megabyte, a German
distributor of high-end networking solutions. The transaction was accounted for
as a purchase and was effected by the Company's issuance of 104,144 shares of
the Company's common stock valued at $900,000. The Company recorded the assets
and liabilities of Megabyte at their fair values on the date of acquisition. The
purchase price in excess of the fair values of the net assets acquired was
approximately $713,000, which has been recorded as goodwill, and will be
expensed on a straight line basis over 7 years.

        In June 1998, the Company completed the acquisition of substantially all
the assets and liabilities of Invincible, a Massachusetts-based developer and
reseller of high capacity, fault tolerant network storage solutions. The
transaction was accounted for as a purchase of assets. The purchase price paid
consisted of cash of approximately $1.0 million, and the Company assumed
liabilities in excess of net assets acquired of approximately $1.6 million, for
a total purchase price of approximately $2.6 million. Invincible had experienced
significant losses in its fiscal year ended March 31, 1998. The Company employed
an appraiser to identify the values of the assets acquired, including, among
other assets, certain in-process research and development costs. The Company has
determined that, among other assets, $1.7 million of the purchase price was
related to Invincible's research and development efforts which had not attained
technological feasibility, and for which no alternative future use was expected.
Accordingly, the Company has expensed the value of the research and development
as of the date of the acquisition of Invincible and has capitalized the fair
value of the other assets acquired as determined by the appraiser, including the
value of Invincible's assembled work force and goodwill of approximately
$923,000, which will be expensed on a straight line basis over 7 years. The
Company will include the results of operations and balance sheets of Megabyte
and Invincible for periods subsequent to the date of the respective
acquisitions. Prior periods have not been restated.


        As a result of changes to the Company's business operations, as well as
significant operating losses of Invincible after its acquisition, the Company
reviewed the long-lived assets purchased in the Invincible acquisitions. After
comparing the carrying value of the assets to the future undiscounted estimated
cash flows from the assets, the Company determined that the values of most of
the assets were impaired. The Company wrote off the goodwill remaining from the
transaction of approximately $.8 million, and wrote down the carrying value of
certain Invincible fixed assets by $.6 million. In addition, the Company
determined that it would restructure much of the Invincible operations, and
recorded a restructuring charge comprised of approximately $.2 million for lease
termination and employee severance costs (for approximately 10 employees)
relating to the Invincible operations, nearly all of which was accrued at July
31, 1999 and to be paid subsequent to year end. In addition, the
Company recorded, in cost of sales, additional reserves of approximately $.8
million to reserve for the ultimate disposal of much of the Invincible
inventory.


        During fiscal 1999, the Company completed the acquisitions of Pera and
Gigatek. In November 1998, the Company acquired all of the outstanding stock of
Pera in exchange for 28,500 shares of stock and $22,000 in cash. Pera is a
relatively small distributor of computer storage peripherals in Switzerland, and
has been a customer of the Company for more than five years. The Company treated
the acquisition of Pera as a purchase, and recorded goodwill in the purchase of
approximately $168,000, which will be amortized over 7 years. In January 1999,
the Company acquired all of the outstanding stock of Gigatek in exchange for
51,100 shares of stock and $50,000 in cash. Gigatek is also a relatively small
distributor of higher end computer storage peripherals in Milan, Italy. The
Company treated the acquisition of Gigatek as a purchase, and recorded goodwill
in the purchase of approximately $286,000, which will be amortized over 7 years.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and has been adopted by the Company for its fiscal 1999
reports.

        Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting
Standards No. 14 and changes the way public companies report segment
information. SFAS 131 is effective for fiscal years beginning after December 15,
1997 and has been adopted by the Company for its fiscal 1999 which commenced
August 1, 1998.

YEAR 2000 PREPAREDNESS INFORMATION

        The Year 2000 issue is the result of computer programs, microprocessors,
and embedded date reliant systems using two digits rather than four to define
the applicable year. If such programs



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<PAGE>   23

are not corrected, date data concerning the Year 2000 could cause many systems
to fail, lock up or generate erroneous results. The Company considers a product
to be "Year 2000 compliant" if the product's performance and functionality are
unaffected by processing of dates prior to, during and after the Year 2000, but
only if all products (for example hardware, software and firmware) used with the
product properly exchange accurate date data with it. The Company believes that
as data storage devices, its hard drive products are transparent to Year 2000
requirements, and rely primarily on software found in operating systems and
applications to function properly. After significant testing, the Company
believes its current hard drive and CD-ROM products are Year 2000 compliant,
although other products previously sold by the Company may not be Year 2000
compliant. In September 1998, the Company began to offer a Limited Year 2000
Warranty on products sold by the Company after that date. Previous to September
1998, the Company did not offer any such warranty on any of its products. The
Company anticipates that litigation may be brought against vendors, including
the Company, of all component products of systems that are unable to properly
manage data related to the Year 2000. The Company's agreements with customers
and end users, both for products sold before and after September 1998, typically
contain provisions designed to limit the Company's liability for such claims. It
is possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions. Any such claims, with or
without merit, could result in a material adverse effect on the Company's
business, financial condition and results of operations, customer satisfaction
issues and potential lawsuits.

        The Company has identified Year 2000 dependencies in its primary
accounting software, and other systems, equipment, and processes and is
implementing changes to such systems, updating or replacing such equipment, and
modifying such processes to make them Year 2000 compliant. The Company has
expended a significant sum to purchase Year 2000 compliant accounting software
package upgrades, as well as to upgrade the computers used by Company personnel
to also insure Year 2000 compliance. The Company has assessed its internal Year
2000 issues and is in the process of remediation of the critical systems. The
Company has also initiated formal communications with many of its significant
suppliers and financial institutions to evaluate their Year 2000 compliance
plans and state of readiness and to determine whether any Year 2000 issues will
impede the ability of such suppliers to continue to provide goods and services
to the Company. As a general matter, the Company is vulnerable to any failure by
its key suppliers or financial institutions to remedy their own Year 2000
issues, which could delay shipments of essential components, thereby disrupting
or halting the Company's manufacturing operations. Further, the Company also
relies, both domestically and internationally, upon governmental agencies,
utility companies, telecommunication service companies and other service
providers outside of the Company's control. There is no assurance that such
suppliers, governmental agencies, financial institutions, or other third parties
will not suffer business disruption caused by a Year 2000 issue, and there is
little practical opportunity for the Company to test or require Year 2000
compliance from many of those large agencies, companies or providers. Such
failures could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, the Company is in
the process of communicating with its large customers to determine the extent to
which the Company is vulnerable to those third parties' failure to remedy their
own Year 2000 issues.

        The Company anticipates that its internal systems, equipment and
processes will be substantially Year 2000 compliant by the end of October 1999.
A formal budget has not been established, and the cost to the Company of
achieving Year 2000 compliance is evolving; however, the cost associated with
achieving Year 2000 compliance is not currently expected to have a material
effect on the Company's financial condition or results of operations. While the
Company currently expects that the Year 2000 issue will not pose significant
internal operational problems, delays in the Company's remediation efforts, or a
failure to fully identify all Year 2000 dependencies in the systems, equipment
or processes of the Company or its vendors, customers or financial institutions
could have material adverse consequences, including delays in the manufacture,
delivery or sale of products. Therefore, the Company is developing contingency
plans along with its remediation efforts for continuing operations in the event
such problems arise. The Company believes that the most reasonably likely
worst-case scenario would be that one or more of its major customers were not
prepared adequately for Year 2000, and that the accounting, order management
and/or cash disbursement systems of one or more such major customers failed to
function properly. This possibility could materially impact the orders, order
flows, cash flows and results of operations of 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 network attached storage
products, 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 previous 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 changes in revenues, operating income and
net income during previous years represent a consistent reliable trend that can
be expected to continue in the future



                                       23
<PAGE>   24

because, among other reasons, the industries in which the Company competes are
very competitive, challenging and cyclical.

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 network attached storage, 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 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."

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 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



                                       24
<PAGE>   25

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. 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, IBM, Quantum
and Western Digital and manufacturers of CD-ROM drives, such as Toshiba and NEC,
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 network attached storage
product market are (i) computer manufacturers, such as IBM, Compaq and
Hewlett-Packard, which generally focus on providing storage upgrades for their
products, (ii) companies that have focused on network attached storage based
products, such as Network Appliance and Auspex, 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 that provide and sell unique solutions to various computer users.



                                       25
<PAGE>   26

        The Company's primary competitors in the CD server and array market
consist of (i) CD array manufacturers such as Meridian Data and Hewlett Packard,
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 and Hewlett-Packard, (ii) companies that specialize in reselling
replacement or increased capacity storage disk drives, and (iii) various
national distributors of third party upgrade drives such as Ingram Micro,
Merisel and Tech Data.

        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."

DEPENDENCE ON CD SERVERS AND ARRAYS AND NOTEBOOK UPGRADES

        Sales of CD servers and arrays, including individual CD-ROM drives,
recordable CD-ROMs, modules and other related components accounted for
approximately 44%, 36% and 23% of the Company's net sales for fiscal 1997,
fiscal 1998 and fiscal 1999, respectively. The widespread use of CD-ROM as a
data storage and information access medium is relatively recent, and it appears
to be losing popularity rather rapidly as other alternatives for information
distribution such as the internet or inexpensive data storage become more
accepted. 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.

        In addition to the Company's reliance on CD servers arrays, the Company
also has relied rather heavily on sales of notebook upgrade disk drive
subsystems. The Company believes that with the growth of the notebook computer
market worldwide, many end users will opt to upgrade their storage systems as
they either become too slow, or too limited, given the number of rather storage
intensive programs that exist today. During the fiscal year ended July 31, 1999,
sales of notebook computer upgrade subsystems comprised approximately 23% of the
Company's net sales, and such sales have generally been in excess of the
Company's average gross margins. These sales, however, have declined from
previous periods, due primarily to average selling price erosion, and the rapid
expansion of capacity of notebook upgrade disk drives being sold in new notebook
computers. Because the number of applications requiring data storage is not
expanding as rapidly as the technology to build higher capacity disk drives, the
demand for replacement or upgrade disk drive subsystems will likely continue to
decrease. There can be no assurance that the Company will be able to maintain
the current sales and gross profit rate, as competitors and computer
manufacturers decide whether to enter the market, thereby certainly causing
pricing pressure on such products.

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.



                                       26
<PAGE>   27

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. While in
fiscal 1998, one customer accounted for 9% of the Company's total net sales, in
fiscal 1999, another customer accounted for nearly 9% of the Company's total net
sales in that year. Nevertheless, three customers accounted for approximately
36% and 42% of the Company's total accounts receivable on July 31, 1998 and July
31, 1999, 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. During the past fiscal year, two
of the Company's most successful resellers were acquired by their competitors,
and sales to the combined entities after the acquisition are much less than
sales to the two entities. This reduction in sales to the Company's key
customers has had and 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, 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 and Ingram
Micro, 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



                                       27
<PAGE>   28

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.

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 246 at the beginning of fiscal 1997 to 306 at the
end of fiscal 1999, and has also recently increased the breadth of its CD server
and array product line and its network attached storage products development
team, 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 opened remote sales and support offices
and intends to open and staff additional field sales and support offices. In
addition, the Company completed two acquisitions during fiscal 1998 and two more
in fiscal 1999. Each of these acquisitions present special opportunities and
pose risks of not only managing change, but also the



                                       28
<PAGE>   29

implementation and coordination of companywide strategies to manage the
Company's human and capital resources. 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 the two existing, and
any potential, acquisitions successfully. The Company's management has not had
previous experience in integrating acquisitions, and there can be no assurance
that the Company will properly manage the acquisitions, or these other
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.

RISKS OF INTERNATIONAL SALES AND OPERATIONS

        The Company's international sales accounted for approximately 7%, 17%
and 33% of the Company's net sales for fiscal 1997, fiscal 1998 and fiscal 1999,
respectively. During fiscal 1996, the Company added independent sales
representatives in Canada and France, in fiscal 1997, in Dubai, and it plans to
add additional foreign sales representatives in the future. For fiscal 1998, the
Company acquired the operations of Megabyte, which sells its products primarily
to German, European and Middle Eastern customers. Then, in fiscal 1999, the
Company recognized additional sales through not only Megabyte, but also Pera and
Gigatek. As a result, the Company saw the percentage of products sold to
international customers increase significantly for fiscal 1999 and fiscal 1998
compared to fiscal 1997. 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 the majority of
the Company's sales are denominated in U.S. dollars (Megabyte sales are
denominated in German marks), 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. In
addition, foreign currency exchange rate fluctuations create risks of exchange
rate losses on intercompany account balances or outside debt, and the assets of
the Company in Germany could be devalued with little or no notice to the
Company. The Company has considered, but does not currently have, a plan to
hedge the currency transaction loss, and could therefore experience a
significant loss on an intercompany account settlement. 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. In the past, the Company has had return rates of its
products ranging from 10-18%, and in fiscal 1999, the Company experienced return
rates of approximately 12%. 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



                                       29
<PAGE>   30

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
Company's available cash, bank lines of credit and cash from operations will be
sufficient to satisfy the Company's anticipated cash requirements for the next
twelve months, and beyond. 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 materially adversely affected.

FUTURE ACQUISITIONS

        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 only recent experience in managing acquisitions, and the Company
has incurred significant operating losses at the subsidiaries acquired by the
Company. There can be no assurance that any acquisition would result in
long-term benefits to the Company or that management would be able to
effectively manage the acquired business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

FACILITIES

        As noted above in "Facilities", the Company is planning to develop its
own corporate headquarters in Irvine, California. Its current lease terminates
on June 30, 2000, and may not be renewable on a month to month basis after that
date. The Company believes it can complete the construction of its facility
prior to June 30, 2000, but if the Company or its contractor experience material
shortages, delays due to weather or other problems, the Company could be forced
to vacate its current facility prior to the completion date of the new facility.
If the Company is required to vacate the Santa Ana facility before suitable
alternative facilities are available for the Company, the operations of the
Company conducted there, including manufacturing, marketing, sales and corporate
administration, would be seriously interrupted and this interruption would have
a material adverse affect on the Company's results of operations and financial
condition. In any event, the Company expects that it will incur significant
relocation expenses during the first six months of fiscal 2001 and increased
occupancy expenses on its new facility.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

INTEREST RATE RISK

        The Company's exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
the Company can earn on its investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. As stated in its policy, the Company ensures
the safety and preservation of its invested principal funds by limiting default
risk, market risk and reinvestment risk. The Company mitigates default risk by
investing in safe and high-credit quality securities and by constantly
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer, guarantor or depository. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity.

        As discussed elsewhere in this Report on Form 10-K, the Company is
developing its headquarters in Irvine, California and expects to expend $13-15
million to complete the facility. The Company will likely be seeking long-term
mortgage financing for all or some of the facility cost during the next fiscal
year. The Company has not "locked" in a commitment, and may therefor find such
financing to be much more expensive as a result. Because the Company has not
needed to borrow funds under its existing lines of credit and because other
long-term debt currently outstanding is at a fixed rate of interest, it does not
believe it has significant interest rate risk on its debt.


FOREIGN CURRENCY EXCHANGE RISK

        The Company transacts business in various foreign countries, but only
has significant assets deployed outside the United States in Germany. The
Company has effected intercompany advances and sold goods to Megabyte
denominated in U.S. dollars, and those amounts are subject to currency
fluctuation, and require constant revaluation on the Company's financial
statements. The Company does not operate a hedging program to mitigate the
effect of a significant rapid change in the value of the German mark compared to
the U.S. dollar. If such a change did occur, the Company would have to take into
account a currency exchange gain or loss in the amount of the change in the U.S.
dollar



                                       30
<PAGE>   31

denominated balance of the amounts outstanding at the time of such change. There
can be no assurance that such a loss would not have an adverse material effect
on the Company's results of operations or financial condition.



                                       31
<PAGE>   32

                                   MANAGEMENT

EXECUTIVE OFFICERS

        The executive officers of the Company as of July 31, 1999 were as
follows:

<TABLE>
<CAPTION>
NAME                    AGE                          POSITION
----                    ---                          --------
<S>                     <C>  <C>
Alex Razmjoo            37   Chairman of the Board, President and Chief Executive Officer
Frank Alaghband         37   Executive Vice President, Operations, and Director
Alex Aydin              37   Executive Vice President, Finance and Administration, and
                              Director
Nick Shahrestany        36   Executive Vice President, Chief Information Officer, and Director
Frederick Judd          41   Vice President, Finance and General Counsel
</TABLE>

----------

        All directors hold office until the next annual meeting of shareholders
or until their successors have been elected and qualified. 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 of 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.



                                       32
<PAGE>   33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
Independent Auditors' Reports ............................................. 34
Consolidated Financial Statements:
Consolidated Balance Sheets................................................ 36
Consolidated Statements of Operations...................................... 37
Consolidated Statements of Shareholders' Equity............................ 38
Consolidated Statements of Cash Flows...................................... 39
Notes to Consolidated Financial Statements................................. 40
Financial Statement Schedules on Report on Form 10-K ...................... 53
</TABLE>




                                       33
<PAGE>   34

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Procom Technology, Inc.:


We have audited the accompanying consolidated balance sheet of Procom
Technology, Inc. and its subsidiaries (the "Company") as of July 31, 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we have also audited the consolidated financial statement
schedule as of and for the year ended July 31, 1999. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audit.


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


In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Procom Technology, Inc. and its
subsidiaries as of July 31, 1999, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

                    KPMG LLP

Orange County, California
September 24, 1999



                                       34
<PAGE>   35

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
Procom Technology, Inc.:

We have audited the accompanying consolidated balance sheet of Procom
Technology, Inc. (a California corporation) and its subsidiaries (the "Company")
as of July 31, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended July 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the schedule 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 its
subsidiaries as of and July 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended July 31, 1998 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
October 8, 1998



                                       35
<PAGE>   36

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS

<TABLE>
<CAPTION>
                                                                JULY 31,            JULY 31,
                                                                  1998                1999
                                                              ------------        ------------
<S>                                                           <C>                 <C>
Current assets:
  Cash ....................................................   $    577,000        $    227,000
  Short-term marketable securities, held to maturity ......     22,785,000          22,206,000
  Accounts receivable, less allowance
    for doubtful accounts and sales
    returns of $1,552,000 and $2,461,000, respectively ....     15,050,000           8,648,000
  Inventories, net ........................................      9,147,000           9,973,000
  Income tax receivable....................................             --           2,859,000
  Deferred income taxes ...................................      1,852,000           1,833,000
  Prepaid expenses ........................................        748,000             515,000
  Other current assets ....................................        223,000             286,000
                                                              ------------        ------------
          Total current assets ............................     50,382,000          46,547,000
Property and equipment, net ...............................      2,211,000           9,473,000
Other assets ..............................................      1,846,000           1,068,000
                                                              ------------        ------------
          Total assets ....................................   $ 54,439,000        $ 57,088,000
                                                              ============        ============

                             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Lines of credit .........................................   $    210,000        $    254,000
  Accounts payable ........................................     11,540,000          10,812,000
  Accrued expenses and other current liabilities ..........      2,949,000           2,162,000
  Accrued compensation ....................................      1,321,000           1,212,000
  Deferred service revenues ...............................        931,000             844,000
  Income taxes payable ....................................        756,000              18,000
                                                              ------------        ------------
          Total current liabilities .......................     17,707,000          15,302,000
                                                              ------------        ------------
  Loan payable ............................................             --           7,500,000
                                                              ------------        ------------
          Total liabilities ...............................     17,707,000          22,802,000
                                                              ------------        ------------

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,
     11,178,742 and 11,227,041 shares
     issued and outstanding, respectively .................        112,000             112,000
  Additional paid in capital ..............................     17,751,000          18,198,000
  Retained earnings .......................................     18,866,000          15,991,000
  Accumulated other comprehensive income (loss)............          3,000             (15,000)
                                                              ------------        ------------
          Total shareholders' equity ......................     36,732,000          34,286,000
                                                              ------------        ------------

Total liabilities and shareholders' equity ................   $ 54,439,000        $ 57,088,000
                                                              ============        ============
</TABLE>

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






                                       36
<PAGE>   37

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                         YEARS ENDED
                                                    ---------------------------------------------------------
                                                      JULY 31,              JULY 31,              JULY 31,
                                                        1997                  1998                  1999
                                                    -------------         -------------         -------------
<S>                                                 <C>                   <C>                   <C>
Net sales .......................................   $ 109,332,000         $ 111,886,000         $ 101,290,000
Cost of sales ...................................      72,684,000            75,527,000            73,003,000
                                                    -------------         -------------         -------------
     Gross profit ...............................      36,648,000            36,359,000            28,287,000
Selling, general and administrative expenses ....      19,155,000            22,257,000            26,314,000
Research and development expenses ...............       3,922,000             4,788,000             5,502,000
Acquired research and development ...............              --             1,693,000                    --
Impairment and restructuring charge .............              --                    --             1,626,000
                                                    -------------         -------------         -------------
     Operating income (loss) ....................      13,571,000             7,621,000            (5,155,000)
Interest income .................................         459,000             1,244,000             1,248,000
Interest expense ................................        (131,000)              (15,000)              (26,000)
                                                    -------------         -------------         -------------
     Income (loss) before income taxes ..........      13,899,000             8,850,000            (3,933,000)
Provision (benefit) for income taxes ............       5,452,000             3,474,000            (1,058,000)
                                                    -------------         -------------         -------------
Net income (loss) ...............................   $   8,447,000         $   5,376,000         $  (2,875,000)
                                                    =============         =============         =============

Net income (loss) per common share:
Basic ...........................................   $        0.83         $        0.48         $       (0.26)
                                                    =============         =============         =============
Diluted .........................................   $        0.81         $        0.48         $       (0.26)
                                                    =============         =============         =============

Weighted average number of
  common shares:
Basic ...........................................      10,205,000            11,114,000            11,241,000
                                                    =============         =============         =============
Diluted .........................................      10,374,000            11,252,000            11,241,000
                                                    =============         =============         =============
</TABLE>



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



                                       37
<PAGE>   38

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   COMMON STOCK                                         ACCUMULATED
                                            -------------------------     PAID IN         RETAINED     COMPREHENSIVE
                                              SHARES        AMOUNT        CAPITAL         EARNINGS     INCOME (LOSS)       TOTAL
                                            ----------    -----------   ------------    ------------   -------------   ------------
<S>                                         <C>           <C>           <C>             <C>            <C>             <C>
Balance at July 26, 1996 .................   9,000,000    $     3,000             --       5,133,000    $        --    $  5,136,000
Comprehensive income:
Net income ...............................          --             --             --       8,447,000                      8,447,000
                                                                                                                       ------------
Comprehensive income .....................                                                 8,447,000             --       8,447,000
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 options expense .............          --             --         35,000              --             --          35,000
Exercise of employee stock options .......      24,562             --         62,000              --             --          62,000
Tax benefit from stock options exercise ..          --             --        201,000              --             --         201,000
                                            ----------    -----------   ------------    ------------    -----------    ------------
Balance at July 31, 1997 .................  11,024,562        110,000     16,467,000      13,490,000             --      30,067,000
                                            ----------    -----------   ------------    ------------    -----------    ------------
Comprehensive loss:
Net income ...............................          --             --             --       5,376,000             --       5,376,000
Foreign currency translation .............          --             --             --                          3,000           3,000
                                                                                                                       ------------
Comprehensive loss: ......................                                                        --                      5,379,000

Exercise of employee stock options .......      50,036          1,000        143,000              --             --         144,000
Tax benefit from stock options exercise ..          --             --        242,000              --             --         242,000
Acquisition of Megabyte ..................     104,144          1,000        899,000              --             --         900,000
                                            ----------    -----------   ------------    ------------    -----------    ------------
Balance at July 31, 1998 .................  11,178,742        112,000     17,751,000      18,866,000          3,000      36,732,000
                                            ----------    -----------   ------------    ------------    -----------    ------------
Comprehensive loss:
Net loss .................................          --             --             --      (2,875,000)            --      (2,875,000)
Foreign currency adjustment ..............          --             --             --              --        (18,000)        (18,000)
                                                                                                                       ------------
Comprehensive loss........................                                                                               (2,893,000)

Exercise of employee stock options .......      41,013             --        152,000              --             --         152,000
Issuance of stock to employees ...........       5,531             --         39,000              --             --          39,000
Tax benefit from option exercises ........          --             --         71,000              --             --          71,000
Stock repurchases ........................     (77,845)        (1,000)      (400,000)                                      (401,000)
Acquisitions .............................      79,600          1,000        585,000              --             --         586,000
                                            ----------    -----------   ------------    ------------    -----------    ------------
Balance at
 July 31, 1999 .........................    11,227,041    $   112,000   $ 18,198,000    $ 15,991,000    $   (15,000)   $ 34,286,000
                                            ==========    ===========   ============    ============    ===========    ============
</TABLE>

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

                                          38
<PAGE>   39

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                  YEARS ENDED
                                                                  --------------------------------------------
                                                                    JULY 31,        JULY 31,        JULY 31,
                                                                      1997            1998            1999
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss) ...........................................   $  8,447,000    $  5,376,000    $ (2,875,000)
    Adjustments to reconcile net
      income to net cash provided
      by operating activities:
      Depreciation and amortization ...........................        248,000         605,000       1,506,000
    Acquired research and development .........................             --       1,693,000              --
    Impairment and restructuring charge .......................             --              --       1,408,000
    Changes in assets and liabilities,
      net of effects of acquisitions:
         Accounts receivable ..................................     (3,311,000)        270,000       7,883,000
         Inventories ..........................................        697,000       2,097,000        (530,000)
         Income tax receivable ................................             --              --      (2,859,000)
         Deferred income taxes ................................       (800,000)       (405,000)         19,000
         Prepaid expenses .....................................       (384,000)        175,000         289,000
         Other current assets .................................        (37,000)        (23,000)        (54,000)
         Other assets .........................................         (3,000)        (20,000)        187,000
         Accounts payable .....................................      2,264,000      (2,524,000)     (1,872,000)
         Accrued expenses and compensation ....................       (841,000)        638,000      (1,041,000)
         Deferred service revenue .............................             --         175,000         (87,000)
         Income taxes payable .................................         (2,000)        255,000        (768,000)
                                                                  ------------    ------------    ------------
             Net cash provided by operating activities ........      6,278,000       8,312,000       1,206,000
                                                                  ------------    ------------    ------------
Cash flows from investing activities:
  Purchase of property and equipment ..........................       (588,000)       (787,000)     (9,055,000)
  Investments in short-term marketable securities..............             --              --      (9,008,000)
  Acquisitions, net of cash acquired ..........................             --        (633,000)         30,000
                                                                  ------------    ------------    ------------
             Net cash used in investing activities ............       (588,000)     (1,420,000)    (18,033,000)
                                                                  ------------    ------------    ------------
Cash flows from financing activities:
  Long-term loan ..............................................             --              --       7,500,000
  Principal payments for capital lease obligations ............         (5,000)        (29,000)             --
  Borrowings on lines of credit ...............................     38,500,000         210,000          44,000
  Payments made on lines of credit ............................    (42,685,000)     (2,877,000)       (497,000)
  Public offering of common stock .............................     16,186,000              --              --
  Issuance of common stock to employees .......................             --              --          39,000
  Repurchase of common stock ..................................             --              --        (401,000)
  Stock options, exercises and related tax benefits ...........        298,000         386,000         223,000
                                                                  ------------    ------------    ------------
             Net cash provided by (used in
                Financing activities ..........................     12,294,000      (2,310,000)      6,908,000
    Effect of exchange rate changes ...........................             --           3,000         (18,000)
                                                                  ------------    ------------    ------------
    Increase (decrease) in cash ...............................     17,984,000       4,585,000      (9,937,000)
Cash and cash equivalents at beginning of period ..............        793,000      18,777,000      23,362,000
                                                                  ------------    ------------    ------------
Cash and cash equivalents at end of period ....................   $ 18,777,000    $ 23,362,000    $ 13,425,000
                                                                  ============    ============    ============

Supplemental disclosures of cash flow information:
 Cash paid during the year for:
    Interest ..................................................   $    165,000    $     15,000    $     25,000
    Income taxes ..............................................      5,947,000       3,312,000       2,275,000
</TABLE>




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






                                       39

<PAGE>   40

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                   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 subsidiaries, Megabyte Computerhandels,
AG, a German corporation, Invincible Technologies Acquisition Corporation, a
Massachusetts corporation, Gigatek SRL ("Gigatek")(an Italian company), Pera AG
("Pera")(a Swiss corporation) and Procom Technology FSC, a foreign sales
corporation. All significant intercompany transactions have been eliminated in
consolidation. The functional currency of the European subsidiaries are those
of their respective country. The Company follows the provisions of FASB 52 when
translating assets and results of operations for each period presented.

    Fiscal Year

        For fiscal 1996, the Company's fiscal year ended on the Friday of, or
nearest to, July 31. Fiscal 1996 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.

    Fair Value of Financial Instruments - Cash and short-term marketable
    securities, held to maturity


        The carrying amount of cash and cash equivalents approximates fair value
for all periods presented because of the short-term maturities (less than 90
days) of these financial instruments. Short-term marketable securities are held
at adjusted cost which approximates market value. Management has the intention
and ability to hold the securities until maturity. At July 31, 1999, the
Company had short-term marketable securities with original maturities greater
than 90 days of $9,008,000.


    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. Although the Company
believes it has the continued ability to reasonably estimate the allowance for
doubtful accounts and sales returns, 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.

    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



                                       40
<PAGE>   41

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

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

    Revenue Recognition

        The Company recognizes revenue from product sales upon shipment, or in
the case of certain distributors, their receipt of the goods shipped. A
substantial majority of the Company sales are denominated in either U.S. dollars
or German marks. The Company has established a program that, under specified
conditions, enables distributors and resellers to return products to the Company
for credit against additional purchases or, in the event the Company reduces its
selling prices, to receive credits for the reduction in selling price. The
amount of potential product returns, including costs and returns under the
Company's warranty program, and credits for selling price reductions are
estimated and provided for in the period of the sale. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts estimated. Under an evaluation program, products may be shipped to
customers on a trial basis and returned within a specified period if the
customers are not satisfied. Evaluation units shipped are not recorded as sales
until the customer has paid for such units.

    Deferred Service Revenue

        The Company markets and sells service contracts for certain of its
products which require the Company to service previously sold products for a
specified period of time, usually one to three years. Revenue from such
contracts are billed to customers at the time of sale, but earned ratably over
the life of the service agreement. A corresponding liability reflecting the
unearned revenue is recorded as a current liability, since the portion of the
unearned revenue relating to service after twelve months is not material.

    Research and Development Costs

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

    Concentration of Credit Risk

        Three customers accounted for approximately 36% and 42% of the Company's
total accounts receivable on July 31, 1998 and July 31, 1999, respectively, and
one customer accounted for approximately 9% of the Company's net sales for each
of fiscal 1998 and 1999. The loss of any one of the Company's significant
customers could have an adverse effect on the Company's business.

    Net income per Common Share

        In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The adoption of
SFAS 128 did not have a material impact on the Company's earnings per share. For
the periods presented, basic net income (loss) per share was based on the
weighted average number of shares of common stock outstanding during the period.
For the same periods, diluted net income per share further included the effect
of stock options outstanding during the period. Due to the net loss in fiscal
1999, no effect is given to the potential dilution of outstanding stock
options. Had such effect been given, approximately 367,000 shares would have
been included in the computation of weighted average shares outstanding.

        Weighted average number of shares for basic and diluted earnings per
share are calculated as follows:



                                       41
<PAGE>   42

<TABLE>
<CAPTION>
                                                           FISCAL YEAR
                                               ------------------------------------
                                                  1997         1998         1999
                                               ----------   ----------   ----------
<S>                                            <C>          <C>          <C>
Weighted average common shares
   outstanding during the period ...........   10,205,000   11,114,000   11,241,000
Potential dilution .........................      169,000      138,000           --
                                               ----------   ----------   ----------
                                               10,374,000   11,252,000   11,241,000
                                               ==========   ==========   ==========
</TABLE>

Stock Based Compensation

        In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies APB Opinion No. 25 and related
interpretations to account for its employee stock option plan. Note 9 of the
Consolidated Financial Statements contains a summary of the pro forma effects to
reported net income (loss) per share as if the Company had elected to recognize
compensation expense based on the fair value of the options granted at grant
date as prescribed by SFAS No. 123.


Segment Information

        The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprise's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
131. The Company operates in one industry segment, the data storage device
industry, and in accordance with SFAS 131, only enterprise-wide disclosures
have been provided. See Note 10.


    Impact of Recent Accounting Pronouncements

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and was adopted by the Company for its 1999 fiscal year
which commenced August 1, 1998.



2.      INVENTORIES

        A summary of inventories is as follows:

<TABLE>
<CAPTION>
                                         JULY 31,     JULY 31,
                                           1998         1999
                                        ----------   ----------
<S>                                     <C>          <C>
Raw materials .......................   $3,643,000   $4,253,000
Work-in-process .....................      430,000      315,000
Finished goods ......................    5,074,000    5,405,000
                                        ----------   ----------
                                        $9,147,000   $9,973,000
                                        ==========   ==========
</TABLE>

3.      PROPERTY AND EQUIPMENT

        A summary of property and equipment is as follows:

<TABLE>
<CAPTION>
                                       JULY 31,             JULY 31,
                                         1998                 1999
                                     ------------         ------------
<S>                                  <C>                  <C>
Computer equipment ................  $  1,884,000         $  2,343,000
Furniture and fixtures ............       955,000            1,039,000
Office equipment ..................     1,079,000            1,105,000
Vehicles ..........................        20,000              107,000
Leasehold improvements ............       128,000              278,000
Land ..............................            --            7,568,000
Construction in progress ..........            --               52,000
                                     ------------         ------------
                                        4,066,000           12,492,000
</TABLE>



                                       42
<PAGE>   43

<TABLE>
<S>                                  <C>                  <C>
Less accumulated depreciation .....    (1,855,000)          (3,019,000)
                                     ------------         ------------
          Total ...................  $  2,211,000         $      9,473
                                     ============         ============
</TABLE>


        Depreciation expense for fiscal 1997, 1998 and 1999 totaled $248,000,
$543,000 and $1,261,000, respectively.

4.      INCOME TAXES

Income (loss) before taxes on income consisted of the following:


<TABLE>
<CAPTION>
                                                        FISCAL YEAR
                                   ---------------------------------------------------
                                       1997                1998                1999
                                   -----------         -----------         -----------
<S>                                <C>                 <C>                 <C>
Pretax income (loss):
  United States                     $13,899,000        $8,957,000          ($3,054,000)
  Foreign                                   --           (107,000)            (879,000)
                                    -----------        ----------          -----------
                                    $13,899,000        $8,850,000          ($3,933,000)
                                    ===========        ==========          ===========
</TABLE>


        The components of the provision (benefit) for income taxes for fiscal
1997, 1998 and 1999 are summarized as follows:


<TABLE>
<CAPTION>
                                                        FISCAL YEAR
                                   ---------------------------------------------------
                                       1997                1998                1999
                                   -----------         -----------         -----------
<S>                                <C>                 <C>                 <C>
Current:
   Federal .....................   $ 5,006,000         $ 3,151,000         ($1,077,000)
   State .......................     1,246,000             770,000                   0
                                   -----------         -----------         -----------
                                     6,252,000           3,921,000          (1,077,000)
                                   -----------         -----------         -----------
 Deferred:
   Federal .....................      (670,000)           (436,000)            (64,000)
   State .......................      (130,000)            (11,000)             45,000
                                   -----------         -----------         -----------
                                      (800,000)           (447,000)             19,000
                                   -----------         -----------         -----------
 Provision (benefit) for income
    taxes ......................   $ 5,452,000         $ 3,474,000         ($1,058,000)
                                   ===========         ===========         ===========
</TABLE>



                                       43
<PAGE>   44

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

<TABLE>
<CAPTION>
                                                                     FISCAL YEAR
                                                   -----------------------------------------------
                                                      1997              1998               1999
                                                   ----------        ----------        -----------
<S>                                                <C>               <C>               <C>
  Federal statutory income tax rate.............         34.0%             34.0%             (34.0%)
  State income taxes, net of federal benefit....          6.1               5.8               (1.8%)
  Foreign sales benefit.........................         (0.3)             (0.3)                --
  Nondeductible amortization....................           --               3.1                 --
  Research and development tax credit...........         (1.8)             (5.6)              (4.8%)
  State tax rate change.........................           --                --                2.3%
  Foreign tax rate differential.................           --                --               (3.5%)
  Valuation allowance on foreign NOLs...........           --                --               10.9%
  Other.........................................          1.2               2.3                4.0%
                                                   ----------        ----------        -----------
     Effective tax rate.........................         39.2%             39.3%             (26.9%)
                                                   ==========        ==========        ===========
</TABLE>

Deferred tax assets are summarized below:


<TABLE>
<CAPTION>
                                               1997              1998               1999
                                            ----------        ----------        -----------
<S>                                         <C>               <C>               <C>
Deferred tax assets:
  State tax payments ...................... $  338,000        $  175,000        $  (146,000)
  Depreciation ............................     26,000            11,000             66,000
  Inventory reserves ......................    225,000           230,000            338,000
  Reserves for bad debts and returns ......    496,000           695,000            614,000
  Stock option exercises ..................    201,000                --             36,000
  Amortization of intangibles .............         --           570,000                 --
  Deferred service revenue sales ..........         --           138,000            325,000
  Research and development tax credit......         --                --            157,000
  Accrued expenses.........................         --                --            362,000
  Net operating loss carryforward-state....         --                --             67,000
  Net operating loss carryforward-foreign..                                         430,000
  Other ...................................    119,000            33,000             14,000
                                            ----------        ----------        -----------
     Total Deferred income taxes........... $1,405,000        $1,852,000        $ 2,263,000
  Valuation Allowance......................         --                --           (430,000)
                                            ----------        ----------        -----------
  Net Deferred income taxes................ $1,405,000        $1,852,000        $ 1,833,000
                                            ==========        ==========        ===========
</TABLE>


        A valuation allowance has been provided for deferred tax assets related
to certain foreign net operating loss carryforwards. The Company claimed no
benefit in the current provision for some $880,000 in operating losses at its
foreign subsidiaries. If those subsidiaries generate taxable income in future
periods, the company may realize a tax benefit for such operating losses.
Current year stock option exercises resulting in a tax benefit of $71,000 in the
current year were credited to paid-in capital.


5.      OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>
                                           JULY 31,             JULY 31,
                                             1998                 1999
                                          -----------         -----------
<S>                                       <C>                 <C>
Goodwill ..............................   $ 1,636,000         $ 1,167,000
Accumulated amortization ..............       (62,000)           (204,000)
Other assets ..........................       272,000             105,000
                                          -----------         -----------
                                          $ 1,846,000         $ 1,068,000
                                          ===========         ===========
</TABLE>

        Goodwill relates to two acquisitions completed by the Company in fiscal
1998 and two acquisitions completed in fiscal 1999. Goodwill will be amortized
on a straight line basis over 7 years. In fiscal 1998 and fiscal 1999,
amortization of goodwill was $62,000 and $245,000, respectively.

6.      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 no fees, and interest on
outstanding amounts at the lender's prime rate (8.0% at July 31, 1999) plus
1.0%. The initial term of the line of credit expired 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 31, 1998 and July 31,
1999, the Company owed $0 and $0 under the line of credit and $2,300,000 and
$1,790,000, which is included in accounts payable, under the flooring
agreements, respectively (see Note 7). In addition to the line of credit, the
Company's foreign subsidiaries have small lines of credit, utilized primarily
for overdraft and short-term cash needs, with two German banks. The lines allow
Megabyte to borrow up to 1,000,000 German marks (approximately US$550,000), with
interest at approximately 7.75%, and is not guaranteed by Procom. At July 31,
1998, and 1999, there was 375,000 DM (approximately US$210,000) and 435,000 DM
(approximately US$254,000) outstanding under the lines. Also, Gigatek maintains
a short-term line of credit of 180 million lira (approximately US$100,000),
bearing interest at 10% per annum. No amounts were outstanding under the line at
year end.


        The Company has borrowed $7.5 million from an investment bank for 18
months, maturing in September 2000, at a rate of 6.125%. Approximately $10
million of the Company's commercial paper portfolio is pledged as collateral for
repayment of the loan.

                                       44




<PAGE>   45

7.      COMMITMENTS AND CONTINGENCIES

    Lease Commitments

        The Company leases facilities under noncancellable operating leases for
its facilities in Santa Ana, California, Munich, Germany, and Milan, Italy. The
lease on the Company's primary facility expires in July 2000. In addition, the
Company has various operating leases for certain office equipment and vehicles.

        Future minimum lease payments at July 31, 1999, under these leases were
as follows:

<TABLE>
<CAPTION>
                                                         OPERATING
                                                           LEASES
                                                         ----------
<S>                                                      <C>
Fiscal year ending:
 2000 ................................................   $1,553,000
 2001 ................................................      582,000
 2002 ................................................      494,000
 2003 ................................................      332,000
 Thereafter ..........................................      295,000
                                                         ----------
 Total minimum lease payments ........................   $3,256,000
                                                         ==========
</TABLE>

        Rent expense was $447,000, $525,000 and $ 1,439,000 for fiscal 1997,
1998 and 1999, respectively.

    Flooring Agreements

        As is customary in the computer reseller industry, the Company is
contingently liable at July 31, 1999 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 and one of its officers were named as defendants in an
action filed in Orange County Superior Court by Miradco International
Corporation, a private company based in Newport Beach, California, consisting of
two principals ("Miradco"), which alleged that the Company breached an alleged
oral contract with Miradco. In June 1999, a jury found that no contract existed
between Miradco and the Company. Miradco made several post-trial motions seeking
to overturn the jury verdict, all of which were rejected in August 1999. The
Company believes that Miradco has no further appeal rights.

        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 other 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.

8.      RETIREMENT PLAN

        The Company has a defined contribution plan covering substantially all
full-time employees with more than one year of service. 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 1997, 1998 and 1999,
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
1997, 1998 and 1999 was $72,000, $95,000, and $106,000, respectively.

9.      STOCK OPTION PLAN



                                       45
<PAGE>   46


        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. In fiscal 1998, the Board approved, and the Company's
shareholders approved, the reservation of an additional 450,000 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 expire ten years from
the date of the grant and generally vest over a period of four years. In
September 1998, the Board authorized the repricing of 374,950 previously
granted options priced in excess of $4.50 per share. The new price was $4.50 per
share, the fair value of the Company's stock on the date of such repricing.
Repriced options are included in the granted and cancelled amounts below.


        The following table is a summary of stock option activity for the three
years ended July 31, 1999:

<TABLE>
<CAPTION>
                                                                                Year ended July 31,
                                                  -------------------------------------------------------------------------------
                                                            1997                        1998                     1999
                                                  ------------------------    ------------------------  -------------------------
                                                             Weighted-Avg.               Weighted-Avg.              Weighted-Avg.
                                                  Shares    Exercise Price    Shares    Exercise Price  Shares     Exercise Price
                                                  ------    --------------    ------    --------------  ------     --------------
<S>                                               <C>       <C>               <C>       <C>             <C>        <C>
Outstanding at beginning of year ..............   227,700       $2.68         247,013       $4.19         502,277       $6.53
     Granted ..................................    87,750       $8.55         351,800       $9.64       1,653,890       $4.50
     Exercised ................................   (24,562)      $2.53         (50,036)      $2.83         (41,013)      $3.72
     Cancelled ................................   (43,875)      $5.26         (46,500)      $7.38        (711,705)      $6.44
                                                 --------       -----        --------       -----      ----------       -----
     Outstanding at end of year ...............   247,013       $4.19         502,277       $6.53       1,403,449       $4.37
                                                 ========       =====        ========       =====      ==========       =====
     Exercisable end of year ..................    36,338       $2.76          47,090       $4.06          99,265       $3.43
                                                 ========       =====        ========       =====      ==========       =====
     Weighted fair value per option granted ...                 $6.13                       $4.77                       $4.11
</TABLE>


<TABLE>
<CAPTION>
                                                      July 31, 1999
                           --------------------------------------------------------------------------
                                    Options Outstanding                       Options Exercisable
                           --------------------------------------------------------------------------
                                      Weighted-Average     Weighted-                     Weighted-
          Range of                        Remaining         Average                       Average
      Exercise Prices      Number           Years        Exercise Price     Number     Exercise Price
      ---------------      ------     ----------------   --------------     ------     --------------
<S>                      <C>          <C>                <C>                <C>        <C>
        $ 2.50-3.00         90,189           6.14           $  2.52         53,627        $  2.53
        $ 4.50           1,313,260           9.39           $  4.50         45,638        $  4.50
        $ 2.50-4.50      1,403,449           9.18           $  4.37         99,265        $  3.43
</TABLE>

        During the years ended July 31, 1998 and July 31, 1999, the Company
realized tax benefits of $ 242,000 and $ 71,000, respectively, 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.

        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:



                                       46
<PAGE>   47

<TABLE>
<CAPTION>
                                                      STOCK OPTION
                                                      PLAN SHARES
                                            ---------------------------------
                                                 1998                1999
                                            -------------       -------------
<S>                                         <C>                 <C>
Expected life (in years) ................         4.0                 4.0
Risk-free interest rate .................         6.0%                6.0%
Volatility ..............................         .79                 .99
</TABLE>

        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>
                                                 1998                1999
                                            -------------       -------------
<S>                                         <C>                 <C>
Pro forma net income (loss) .............   $   5,197,000       ($  3,042,000)
Pro forma diluted net income (loss)
     per share ..........................   $         .46       $        (.27)
</TABLE>

10.     REVENUE BY PRODUCT AREA AND GEOGRAPHIC AREA

        Revenues by Product Families

        The Company designs and markets two major distinct product families
within one industry segment: network attached storage products and other data
storage products such as standalone CD arrays, various RAID and tape backup
products and disk drive upgrade subsystems.

<TABLE>
<CAPTION>
                                     1997           1998           1999
                                 ------------   ------------   ------------
<S>                              <C>            <C>            <C>
Net revenues:
    Network attached
      storage products           $ 23,209,000   $ 28,428,000   $ 26,910,000
    Other data storage
      products                     86,123,000     83,458,000     74,380,000
                                 ------------   ------------   ------------
          Total net revenues     $109,332,000   $111,886,000   $101,290,000
                                 ============   ============   ============
</TABLE>


        Geographic Information

        Export sales as a percentage of net sales amounted to 7%, 17% and 33%
for fiscal years 1997, 1998 and 1999, 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 31,      JULY 31,       JULY 31,
                                    1997          1998           1999
                                  --------      --------      ---------
<S>                               <C>           <C>           <C>
Net sales
     United States .............  $101,147      $ 92,928      $  67,549
     Foreign ...................     8,185        18,958         33,741
                                  --------      --------      ---------
          Total ................  $109,332      $111,886      $ 101,290
                                  ========      ========      =========
Gross profit
     United States .............  $ 34,409      $ 32,968      $  21,695
     Foreign ...................     2,239         3,391          7,017
                                  --------      --------      ---------
          Total ................  $ 36,648      $ 36,359      $  28,712
                                  ========      ========      =========
Operating income
     United States .............  $ 12,405      $  7,366      ($  4,455)
     Foreign ...................     1,166           255           (700)
                                  --------      --------      ---------
          Total ................  $ 13,571      $  7,621      ($  5,155)
                                  ========      ========      =========
</TABLE>

        International sales were primarily to European customers and secondarily
to Middle Eastern, Latin American and Pacific Rim customers. During fiscal 1997,
the Company had no material identifiable assets used in connection with the
Company's foreign operations. As a result of the Company's February 1998
acquisition of the outstanding stock of Megabyte, and the subsequent
acquisitions of Pera and Gigatek, at July 31, 1998 and July 31, 1999, the
Company had identifiable assets used in connection with its foreign operations
of approximately $4,844,000 and $7,054,000, respectively.

11.     ACQUISITIONS

        During fiscal 1998, the Company completed two acquisitions. In February
1998, the Company purchased 100% of the outstanding shares of Megabyte
Computerhandels AG, a German distributor of high-end networking solutions. The
transaction was accounted for as a purchase, and was effected by the Company's
issuance of 104,144 shares of the Company's common stock valued at $900,000. The
Company recorded the assets and liabilities of Megabyte at their fair values on
the date of acquisition. The purchase price in excess of the fair values of the
net assets acquired was approximately $713,000, which has been recorded as
goodwill, and will be expensed on a straight line



                                       47
<PAGE>   48

basis over 7 years. In June 1998, the Company completed the acquisition of
substantially all the assets and liabilities of Invincible Technologies
Corporation ("ITC"), a Massachusetts based developer and reseller of high
capacity, fault tolerant network storage solutions. The transaction was
accounted for as a purchase of assets. The purchase price paid consisted of cash
of approximately $1.0 million, and the Company assumed liabilities in excess of
net assets acquired of approximately $1.6 million, for a total purchase price of
approximately $2.6 million. ITC had experienced significant losses in its fiscal
year ended March 31, 1998. The Company employed an appraiser to identify the
values of the assets acquired, including, among other assets, certain in-process
research and development costs. The amount of purchase price allocated to
in-process research and development was determined by estimating the stage of
development of Invincible's research and development projects, estimating future
cash flows from future projected revenues, and discounting those cash flows to
present value. Invincible had been primarily developing a software cluster
management system to extend the capability of UNIX clustering. In determining
the appropriate value, the Company considered the prior losses of Invincible,
the investment of Invincible toward the development of the outstanding software
system, as well as the estimated completion costs which the Company expects to
incur to complete the outstanding research and development projects. The Company
further estimated the future revenues and cash flows attainable from the
research and development projects, and discounted those revenues significantly
to take into account Invincible's lack of financing to attain the projections.
The Company has determined that $1.7 million of the purchase price was related
to the Company's research and development efforts which had not attained
technological feasibility, and for which no alternative future use was expected.
The Company has expensed the value of the research and development as of the
date of the acquisition of Invincible and has capitalized the fair value of the
other assets acquired as determined by the appraiser, including the value of
Invincible's assembled work force and goodwill of approximately $913,000, which
will be expensed on a straight line basis over 7 years. The Company will include
the results of operations and balance sheets of Megabyte and Invincible for
periods subsequent to the date of the respective acquisitions. Prior periods
have not been restated. See Note 13 for a discussion of the impairment and
restructuring charge related to the Invincible acquisition.

        The following is a summary of the net fair value of the assets acquired,
the goodwill on the date of acquisition, and the total consideration paid for
the acquisitions made during fiscal 1998:

<TABLE>
<CAPTION>
                                                      Megabyte        Invincible           Total
                                                    -----------       -----------       ------------
<S>                                                 <C>               <C>               <C>
Fair value of noncash assets acquired               $ 4,755,000       $ 5,431,000       $ 10,186,000
Liabilities assumed, including lines of credit       (4,008,000)       (4,643,000)        (8,651,000)
Common stock issued                                    (902,000)               --           (902,000)

                                                    -----------       -----------       ------------
Cash consideration paid, net of cash acquired       $  (155,000)      $   788,000       $    633,000
                                                    ===========       ===========       ============
</TABLE>

        During fiscal 1999, the Company completed the acquisitions of Pera AG
and Gigatek SRL. In November 1998, the Company acquired all of the outstanding
stock of Pera in exchange for 28,500 shares of stock and $22,000 in cash. Pera
is a relatively small distributor of computer storage peripherals in
Switzerland, and has been a customer of the Company for more than five years.
The Company treated the acquisition of Pera as a purchase, and recorded goodwill
in the purchase of approximately $168,000, which will be amortized over 7 years.
In January 1999, the Company acquired all of the outstanding stock of Gigatek in
exchange for 51,100 shares of stock and $50,000 in cash. Gigatek is also a
relatively small distributor of higher end computer storage peripherals in
Milan, Italy. The Company's acquisition of Gigatek, which was initially treated
as a pooling-of-interests, has been changed to reflect the purchase accounting
method. As a result of this change, revenue and net income for the second
quarter of fiscal 1999 were reduced by approximately $3.1 million and $0.1
million, respectively, from that which was initially reported. The Company
recorded goodwill in the purchase of approximately $286,000, which will be
amortized over 7 years.


The following is a summary of the net fair value of the assets acquired, the
goodwill on the date of acquisition, and the total consideration paid for the
acquisitions made during fiscal 1999:

<TABLE>
<CAPTION>
                                                      Gigatek           Pera             Total
                                                    -----------       ---------       -----------
<S>                                                 <C>               <C>             <C>
Fair value of noncash assets acquired               $ 2,094,000       $ 280,000       $ 2,374,000
Liabilities assumed, including lines of credit       (1,692,000)       (126,000)       (1,818,000)
Common stock issued                                    (436,000)       (150,000)         (586,000)
                                                    -----------       ---------       -----------
Cash consideration paid, net of cash acquired       $   (34,000)      $   4,000       $   (30,000)
                                                    ===========       =========       ===========
</TABLE>

        The following unaudited pro forma information has been prepared assuming
that the acquisitions of Megabyte, Invincible, Pera and Gigatek had taken place
at the beginning of the respective periods presented. The pro forma financial
information is not necessarily indicative of the combined results that would



                                       48
<PAGE>   49

have occurred had the acquisitions taken place at the beginning of the period,
nor is it necessarily indicative of results that may occur in the future.

<TABLE>
<CAPTION>
                                                 (UNAUDITED)
                                        PRO FORMA FOR THE YEARS ENDED
                                      July 31, 1998        July 31, 1999
                                      -------------        -------------
                                     (in thousands, except per share data)
<S>                                      <C>                 <C>
Revenues                                 $140,381            $ 104,514
Operating income                         $  5,255            $  (5,025)
Net income                               $  3,646            $  (2,841)
Net income per share--diluted            $    .32            $    (.25)
</TABLE>

12.     CHANGE IN PAR VALUE

        The Company's amended and restated articles of incorporation, filed on
November 13, 1996, as discussed above in Note 10, 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.

13.     IMPAIRMENT AND RESTRUCTURING CHARGE

        As a result of changes to the Company's business operations, as well as
significant operating losses of Invincible after its acquisition, the Company
reviewed the long-lived assets purchased in the Invincible acquisition. After
comparing the carrying value of the assets to the future undiscounted estimated
cash flows from the assets, the Company determined that the values of most of
the assets were impaired. The Company wrote off the goodwill remaining from the
transaction of approximately $.8 million, and wrote down the carrying value of
certain Invincible fixed assets by $.6 million. In addition, the Company
determined that it would restructure much of the Invincible operations, and
recorded a restructuring charge comprised of approximately $.2 million for lease
termination and employee severance costs for approximately 10 employees relating
to the Invincible operations. At July 31, 1999, approximately $.2 million of the
restructuring and impairment charge remains accrued to be paid during the first
half of fiscal 1999. In addition, the Company recorded, in cost of sales,
additional reserves of approximately $.8 million to reserve for the ultimate
disposal of much of the Invincible inventory.

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

        On June 1, 1999, Arthur Andersen LLP resigned as the Company's
independent accountant. Arthur Andersen LLP had served as the Company's
principal independent accountant for the three fiscal years ended July 31, 1998
and through June 1, 1999. The reports of Arthur Andersen LLP for the two fiscal
years ended July 31, 1998 did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified in any way. The Board of Directors of the
Company did not recommend or approve the change in accountants. During the two
years ended July 31, 1998, there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Arthur Andersen LLP, would have caused it to
make reference to the subject matter of the disagreement(s) in connection with
its reports. During the time that Arthur Andersen LLP served as the Company's
independent accountant, none of the situations described in Paragraph (a)(1)(v)
of Item 304 of Regulation S-K occurred.

        On July 13, 1999, the Company engaged KPMG LLP to serve as its
independent accountant, replacing Arthur Andersen LLP. The appointment of KPMG
LLP as the Company's independent accountant was approved unanimously by the
Company's Board of Directors. During the two years prior to the engagement of
KPMG LLP, the Company did not consult KPMG LLP on any accounting principle, the
type of opinion that KPMG LLP might render, and no report, written or oral, was
provided that KPMG LLP concluded was an important factor considered by the
Company in reaching a decision as to such accounting, auditing or financial
reporting issue.

                                    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 1999 Annual Meeting
of Shareholders under the captions "Management," "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance,"



                                       49
<PAGE>   50

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, 1999.

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 1999 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, 1999.

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 1999 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, 1999.

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 1999 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, 1999.

                                     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.

        (b)     REPORTS ON FORM 8-K:

                A current report on Form 8-K was filed by the Company on June 7,
        1999 to report the resignation of Arthur Andersen LLP as the Company's
        independent auditors. The Company also filed a current report on Form
        8-K on July 13, 1999 to reflect the Company's engagement of KPMG LLP as
        the Company's independent accountants.



                                       50
<PAGE>   51

                (3)     EXHIBITS

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
       EXHIBIT                                                                              NUMBERED
       NUMBER                            DESCRIPTION                                         PAGE
      --------                           -----------                                     ------------
<S>             <C>
        1.1+    Form of Underwriting Agreement..................................................

        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 ....................................................................

        10.2+   Form of Procom Technology, Inc. 1999 Employee Stock Purchase
                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+   Loan and Security Agreement, dated November 18, 1994, by and
                between the Company and FINOVA Capital Corporation, as amended .................

        10.9+   Amendment to FINVOVA Loan and Security Agreement dated July 30,
                1997 ...........................................................................

        10.10+  Asset Purchase Agreement, dated June 24, 1998, among Invincible
                Technologies Acquisition Corporation, Invincible Technologies
                Corporation, and certain stockholders of Invincible Technologies
                Corporation named therein ......................................................

        11.1+   Statement re: Computation of Earnings Per Share ................................

        21.1    List of Subsidiaries ...........................................................

        23.1    Consent of KPMG LLP ............................................................

        23.2    Consent of Arthur Andersen LLP .................................................

        27.1    Financial Data Schedule ........................................................
</TABLE>

----------

+       Previously filed

                                       51

<PAGE>   52

                                   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
Irvine, California, on the 29th day of October, 1999.


                                        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, 1999
------------------------------  Chief Executive Officer (Principal
          Alex Razmjoo          Executive Officer)

    /s/   Alex Aydin            Executive Vice President, Finance and            October 29, 1999
------------------------------  Administration (Principal Financial
          Alex Aydin            Officer)

    /s/   Frederick Judd        Vice President, Finance and General              October 29, 1999
------------------------------  Counsel (Principal Accounting Officer)
          Frederick Judd

    /s/   Frank Alaghband       Director                                         October 29, 1999
------------------------------
          Frank Alaghband

    /s/   Nick Shahrestany      Director                                         October 29, 1999
------------------------------
          Nick Shahrestany

                                Director
------------------------------
          Dom Genovese

                                Director
------------------------------
          David Blake
</TABLE>




                                       52
<PAGE>   53

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

Year ended July 31, 1998:
  Allowance for sales returns ...................  $  672,000      $  372,000            --         $        --       $1,044,000
  Allowance for doubtful accounts ...............     320,000          53,000       225,000(a)          (90,000)         508,000
  Allowance for excess and obsolete inventory ...     190,000         454,000       213,000(a)         (432,000)         425,000

Year ended July 31, 1999:
  Allowance for sales returns ...................  $1,044,000      $  895,000      $     --                  --      $ 1,939,000
  Allowance for doubtful accounts ...............     508,000          10,000        54,000(a)          (50,000)         522,000
  Allowance for excess and obsolete inventory ...     425,000       2,155,000        32,000(a)       (1,413,000)       1,199,000
</TABLE>

        (a) Represents the allowances of entities acquired by the Company during
fiscal 1998 and fiscal 1999.




                                       53
<PAGE>   54

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
       EXHIBIT                                                                              NUMBERED
       NUMBER                            DESCRIPTION                                         PAGE
      --------                           -----------                                     ------------
<S>             <C>
        1.1+    Form of Underwriting Agreement..................................................

        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 ....................................................................

        10.2+   Form of Procom Technology, Inc. 1999 Employee Stock Purchase
                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+   Loan and Security Agreement, dated November 18, 1994, by and
                between the Company and FINOVA Capital Corporation, as amended .................

        10.9+   Amendment to FINVOVA Loan and Security Agreement dated July 30,
                1997 ...........................................................................

        10.10+  Asset Purchase Agreement, dated June 24, 1998, among Invincible
                Technologies Acquisition Corporation, Invincible Technologies
                Corporation, and certain stockholders of Invincible Technologies
                Corporation named therein ......................................................

        11.1+   Statement re: Computation of Earnings Per Share ................................

        21.1    List of Subsidiaries ...........................................................

        23.1    Consent of KPMG LLP ............................................................

        23.2    Consent of Arthur Andersen LLP .................................................

        27.1    Financial Data Schedule ........................................................
</TABLE>

----------

+       Previously filed