<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
 
                                       OR
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                         FOR THE TRANSITION PERIOD FROM
                               --------------- TO
                                ---------------.
 
                         COMMISSION FILE NUMBER 0-22015
                            ------------------------
 
                            STORAGE DIMENSIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                          <C>
                          DELAWARE                                              77-0324887
              (STATE OR OTHER JURISDICTION OF                                (I.R.S. EMPLOYER
               INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)
 
           1656 MCCARTHY BOULEVARD, MILPITAS, CA                                  95035
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                              (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 945-0710
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.005
                                   par value
                                (TITLE OF CLASS)
 
                            ------------------------
 
     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 or
any amendment to this Form 10-K.  [X]
 
     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 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 [ ]
 
     The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 23, 1998 was $11,020,128 based upon the last sales price
reported for such date on the Nasdaq National Market. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors of
the registrant, have been excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
 
     At February 23, 1998 registrant had outstanding 8,022,430 shares of Common
Stock.
                            ------------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     No documents are incorporated herein by reference.
 
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
                          STORAGE DIMENSIONS BUSINESS
 
     The discussion in this Annual Report on Form 10-K contains forward-looking
statements which involve risks and uncertainties. Storage Dimensions' actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Operating Results" as well as those
discussed elsewhere in this Annual Report on Form 10-K.
 
     Storage Dimensions, Inc. (the "Company" or "Storage Dimensions") designs,
manufactures, markets and supports high-performance data storage systems for
open systems network applications. Open systems networks are comprised of
equipment that conforms to industry standards of interoperability. Storage
Dimensions currently focuses on the PC-LAN market by developing and marketing a
broad family of disk and tape storage systems that are designed to satisfy the
high-performance, fault-tolerance and high-availability (minimum downtime)
requirements of its customers while at the same time reducing life-cycle cost of
ownership (consisting of the purchase price of the equipment plus the cost of
operating this equipment over its life span). Storage Dimensions' products
combine its proprietary software with industry-standard hardware, such as disk
drives, tape drives and RAID controllers, which allows Storage Dimensions to
leverage the product development and manufacturing capabilities and efficiencies
of industry OEM manufacturers and to offer its customers products that take
advantage of what Storage Dimensions believes to be the best technology
available. Storage Dimensions' products have won numerous industry awards in
product comparisons and editorial reviews. As the leading independent supplier
of high capacity RAID storage systems for the PC-LAN market, Storage Dimensions
believes that it is well-positioned to take advantage of new opportunities being
created by the projected growth in the PC-LAN market, in particular the market
for systems utilizing Windows NT and NetWare.
 
     On December 22, 1997 the Company entered into an agreement and Plan of
Merger and Reorganization with Artecon, Inc. ("Artecon") setting forth the terms
of a merger between the Company and Artecon (the "Merger"). Under the terms of
the Merger, each share of Artecon Common Stock would be converted into the right
to receive approximately 2.16 shares of Storage Dimensions Common Stock and each
share of Artecon Preferred Stock would be converted into the right to receive
one share of Storage Dimensions Preferred Stock, and Artecon would become a
wholly owned subsidiary of Storage Dimensions. For accounting purposes, the
Merger would be treated as a purchase of Storage Dimensions by Artecon since
former holders of Artecon equity securities would hold and have voting power
with respect to approximately 62.5% of the total issued and outstanding voting
capital stock of the combined company, giving effect to the conversion of the
Storage Dimensions Preferred Stock to be issued in the Merger and the exercise
of outstanding Storage Dimensions stock options with an exercise price of less
than $3.9375 per share.
 
INDUSTRY BACKGROUND
 
     The increased use of network computing to support business-critical
enterprise applications is fueling rapid demand growth for network disk storage
systems incorporating high performance, fault tolerance and high availability.
In addition, capacity requirements for network storage are accelerating, due to
the deployment of data-intensive new applications, such as relational databases,
decision support systems, the Internet and intranets, video/multimedia and
document management. Storage Dimensions believes that these factors will also
increase the demand for high-speed network tape backup, which provides
additional protection against data loss in the event of various system
malfunctions.
 
     RAID technology has facilitated this rapid expansion of network storage.
Traditionally, storage fault-tolerance was achieved using a technique called
mirroring, which involves the recording of duplicate data records on redundant
disks. Although effective, mirroring is an expensive means to protect against
data loss. In 1987, a team of researchers at the University of California at
Berkeley defined the concept of RAID, which
                                        1
<PAGE>   3
 
utilizes parity algorithms to achieve data redundancy at a significantly lower
cost than mirroring. The subsequent widespread implementation of RAID technology
has removed a major barrier to the proliferation of network computing by
providing a cost-effective method for achieving high storage reliability in
enterprise network applications.
 
     Historically, enterprise computing products have been categorized into
three general markets: (1) proprietary/mainframe systems; (2) RISC-based UNIX
multiuser systems; and (3) Intel-based local area networks ("PC-LAN market"). In
each of these markets, independent third-party suppliers have emerged to offer
advanced storage systems as alternatives to the storage systems offered by the
computer manufacturers themselves. To maximize their probability for success,
these independent storage system suppliers have generally focused on
opportunities within one of the three specific markets and tailored their
business, marketing and sales strategies accordingly. As a result, the markets
for storage systems are not monolithic in nature, but, rather, each of the three
markets is unique with its own principal competitors. Moreover, it is often
difficult for an industry participant to move from one market to another without
implementing major changes in business strategy that can undermine its
competitiveness in its original target market.
 
     Among the three principal enterprise computing markets, the PC-LAN market
is experiencing the fastest growth, according to IDC. The PC-LAN market emerged
in the late 1980s with the proliferation of desktop PCs and the development of
network operating systems (such as NetWare) that could efficiently tie PC's
together for resource and information sharing. This expansion is now being
fueled by the deployment of Intel-based servers using Pentium and Pentium Pro
microprocessors, which offer the computing power of RISC-based architectures at
a significantly lower cost. IDC projects that the U.S. market for PC-LAN storage
systems employing RAID technology will grow from $1.4 billion in 1995 to $6.0
billion in 2000, a compound annual growth rate of 34%. These trends are further
reinforced by the rapid adoption of the Windows NT operating system, which is
increasingly being used in mid-range database and application servers instead of
UNIX operating systems. IDC further projects that the U.S. market for PC-LAN
RAID storage systems running on Windows NT servers will grow from $0.3 billion
in 1995 to $2.1 billion in 2000, a compound annual growth rate of 50%.
 
     One of the key issues facing end-users of PC-LAN networks is the ongoing
cost of network maintenance and administration. For example, the Gartner Group
has estimated that the purchase price of hardware and software comprises only
20% of the three-year cost of network ownership. The remaining 80% of a
network's life-cycle cost of ownership consists of other associated expenses,
such as downtime, troubleshooting, repair, administration, training and user
support. With respect to network storage, there are many opportunities for the
storage system software to assist the enduser in lowering the life-cycle cost of
ownership, by providing useful functionality such as ease of installation, ease
of reconfiguration, robust management of failure conditions, remote monitoring
and alerting, diagnostic and troubleshooting support and ease of repair.
 
     Moreover, as enterprises adopt the latest generation networking
technologies to achieve higher levels of performance and reliability, complex
issues can arise surrounding integration of new system components into the
existing environment. For example, storage systems provided by server
manufacturers oftentimes are mounted internally to the server, are not
compatible with other manufacturers' servers, and cannot be readily migrated to
new servers or operating systems as requirements change. In such cases, the
adoption of new technologies, such as Pentium Pro-based servers and Windows NT,
can result in the premature, technological obsolescence of existing network
storage investments. On the other hand, these costs can be significantly reduced
by utilizing a server-independent storage system that is designed for use in a
heterogenous environment, supporting a range of servers and operating systems.
 
     Therefore, to achieve the objective of minimizing the life-cycle cost of
network storage, end-users need comprehensive storage solutions that incorporate
a number of features in addition to RAID fault-tolerance including: (1) high
availability with minimum system downtime (planned and unplanned); (2)
complementary high-performance tape backup solutions; (3) easy network storage
management and administration; (4) cross-platform support for heterogeneous
network hardware and environments; and (5) a comprehensive customer service and
support program. Many suppliers today offer only a portion of these features.
 
                                        2
<PAGE>   4
 
THE STORAGE DIMENSIONS SOLUTION
 
     Storage Dimensions currently focuses on the PC-LAN storage system market by
developing and marketing a comprehensive family of disk and tape storage systems
that are designed to satisfy the high-performance, fault-tolerance and
high-availability requirements of its customers while at the same time reducing
life-cycle cost of ownership. Storage Dimensions' solution combines its
proprietary software with industry-standard hardware, such as disk drives, tape
drives and RAID controllers, which allows Storage Dimensions to leverage the
product development and manufacturing capabilities and efficiencies of industry
OEM manufacturers and to offer its customers products that take advantage of
what Storage Dimensions believes to be the best technology available. Storage
Dimensions provides a complete, integrated solution for the PC-LAN storage
system market by offering the following features:
 
     High availability with minimum system downtime. Storage Dimensions'
SuperFlex and RAIDPRO disk storage products are engineered to provide redundancy
and fault-tolerance for critical components such as disk drives, power supplies
and cooling systems. Redundant components are easily serviced and hot-swappable,
to allow replacement by end-user service personnel while the system remains
online. Moreover, the storage management software is designed to provide robust
management of failure conditions, remote monitoring, automatic notification of
failure events and online diagnostic and troubleshooting support.
 
     Complementary high-performance tape back-up solutions. To complement its
disk products, Storage Dimensions has engineered a family of high-speed,
high-reliability MEGAFLEX tape backup systems that are designed to address the
challenges of backing up increasing amounts of data in ever-shortening time
periods. These tape products are developed and tested to be easily integrated
and fully compatible with Storage Dimensions' storage systems. In addition,
these products are marketed on a stand-alone basis for use with other
manufacturers' disk storage systems.
 
     Easy network storage management and administration. Storage Dimensions
engineers its integration software to make its disk storage systems easy to
install, use, reconfigure, troubleshoot and administer. In addition, for the
NetWare and Windows NT environments, Storage Dimensions has developed
VantagePoint network storage management software that provides remote
monitoring, problem alerting, configuration documentation and performance
measurement of multiple storage systems from a single network console.
 
     Cross-platform support for heterogeneous network hardware. Storage
Dimensions designs external storage systems that are easily integrated with the
computer systems from a broad range of manufacturers. This cross-platform
capability affords significant economic advantages to end-users who have
heterogeneous and dynamic network environments by letting them standardize on a
single external storage system that can be easily reconfigured and redeployed as
requirements change, as compared to internal storage which is dedicated to a
specific manufacturer's server. Thus, as application needs evolve over time and
new generation servers are procured, Storage Dimensions' storage systems can be
readily migrated and resized to meet changing circumstances instead of being
prematurely obsoleted. In particular, Storage Dimensions' products are
engineered to support a seamless transition to Windows NT, without the need to
prematurely retire storage systems originally purchased to support NetWare or
other network operating systems. This provides important investment protection
in the network environment, where the capital expenditures on storage systems
are often equal to or greater than those spent on servers.
 
     A comprehensive customer service and support program. Storage Dimensions
also provides a complementary suite of service and support programs targeted at
lowering the maintenance cost of its storage systems, including an artificial
intelligence knowledge base that helps Storage Dimensions provide fast and
accurate diagnosis of technical problems, 24-hour access to technical support
and replacement parts, overnight replacement of failed components and
comprehensive site agreements.
 
STORAGE DIMENSIONS STRATEGY
 
     Storage Dimensions' objective is to leverage its position as the leading
independent supplier of PC-LAN storage systems to capitalize on opportunities
presented by the projected growth in this market. Storage Dimensions believes it
is in a unique position to capitalize on the significant growth projected for
RAID
 
                                        3
<PAGE>   5
 
network storage for PC-LAN servers, and in particular, networks using Windows NT
for fileservers, database servers, the Internet and intranet communications
servers and dedicated applications servers. Key elements of Storage Dimensions'
strategy include the following:
 
     Focus on products for PC-LAN storage systems market. Storage Dimensions
intends to continue to concentrate its engineering and development efforts on
designing storage system products that are compatible with both NetWare, the
current leading LAN operating system, and Windows NT, a newly emerging industry
standard that is expected to become widely accepted by the year 2000. Storage
Dimensions strives to leverage its existing customer base of major corporations,
institutions and government agencies, many of whom are expected to expand their
PC-LAN implementations, particularly through the adoption of Windows NT, within
the next five years.
 
     Support customers' transition to Windows NT. Storage Dimensions intends to
continue to design products that can be used in heterogeneous and dynamic
network environments, thus allowing its customers to standardize on a single
storage system that can be easily reconfigured and redeployed as requirements
change. In particular, Storage Dimensions will continue to focus its product
development efforts on providing an easy, seamless transition to Windows NT,
without the need to obsolete or retire prior investments in Storage Dimensions'
disk and tape storage systems.
 
     Leverage proprietary systems integration software. Storage Dimensions has
developed an extensive, objectoriented software library which it uses to quickly
integrate new hardware products into its storage systems. Storage Dimensions'
strategy is to continue to expand its software library by adding new features
and functionality in an incremental manner, building on its earlier investments,
and to leverage this library to bring new products and features to market
quickly.
 
     Incorporate leading edge hardware in new products. Storage Dimensions
intends to continue to combine leading edge hardware with its proprietary
software to produce state-of-the-art storage solutions for the PC-LAN storage
systems market. Storage Dimensions also strives to develop and maintain close
relationships with key suppliers of storage system components and technologies,
such as American Megatrends, Cheyenne Software, Inc. ("Cheyenne"), Mylex,
Seagate, The Qualix Group, Inc. ("Qualix") and Quantum, which Storage Dimensions
believes enables it to quickly introduce new products that incorporate the
latest technological advances.
 
     Differentiate through proprietary storage management software. Storage
Dimensions has developed VantagePoint, a network storage management software
program that allows remote monitoring and oversight of multiple storage systems
on the network from a single central console. Storage Dimensions believes that
efficient network management differentiates its products from those of its
competitors and intends to continue to enhance its network management product
offerings.
 
     Differentiate through customer service and support. Storage Dimensions
believes that comprehensive, proactive and responsive customer service and
support are essential to be a market leader in the PC-LAN storage system market,
and it intends to continue to enhance its service and support programs. Storage
Dimensions has already made, and intends to continue to make in the future,
major investments in customer service and support, in order to offer a wide
range of service and support options to its customers.
 
     Leverage field sales and channel investments. Storage Dimensions utilizes a
direct sales force to penetrate major new accounts, to create demand for its
products and to secure repeat business from existing customers. Storage
Dimensions also maintains reseller distribution channels that facilitate
procurement of Storage Dimensions' products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales and promotional
efforts. With its basic field sales organization and distribution channels in
place, Storage Dimensions believes that it can generate additional sales at a
lower incremental selling cost, and intends to expand its field sales operations
to further leverage its current investment.
 
PRODUCTS
 
     Storage Dimensions develops and markets a broad and integrated family of
disk and tape storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability requirements of its
                                        4
<PAGE>   6
 
customers while at the same time reducing life-cycle cost of ownership. Storage
Dimensions' SuperFlex RAIDPRO disk storage products are designed and engineered
to incorporate leading edge features and capabilities relative to the storage
products offered by computer and server manufacturers, to minimize system
downtime and to support easy integration with a broad range of server platforms
and operating systems. While Storage Dimensions' products are generally
developed for use with Windows NT and NetWare operating systems, certain of
Storage Dimensions' products are also compatible with other operating systems,
including Sun Solaris, IBM AIX and IBM OS/2 operating systems.
 
     To complement its disk products, Storage Dimensions has engineered a family
of high-speed, high-reliability MEGAFLEX tape backup systems that are designed
to address the challenges of backing up increasing amounts of data in
ever-shortening time periods. These tape products are developed and tested to be
easily integrated and fully compatible with Storage Dimensions' disk storage
systems. In addition, Storage Dimensions offers tape backup products as
stand-alone products to back up data maintained on other manufacturers' disk
storage systems. To facilitate easy network administration, Storage Dimensions
has developed VantagePoint, a network storage management software program that
allows remote monitoring and oversight of multiple storage systems on the
network from a single central console. Storage Dimensions believes that its
products are differentiated from competitive products based on functionality,
performance, ease of use and lower life-cycle cost of ownership.
 
     Current Products. The following table summarizes Storage Dimensions'
current product offerings:
 
<TABLE>
<CAPTION>
                                                                                       TYPICAL
                                        OPERATING                        DATE OF      CAPACITY         END USER
                                         SYSTEMS         DATE OF         LATEST         RANGE            LIST
   PRODUCT         DESCRIPTION          SUPPORTED      INTRODUCTION    GENERATION    (GIGABYTES)       PRICE(1)
   -------         -----------       ---------------  --------------  -------------  -----------   -----------------
<S>            <C>                   <C>              <C>             <C>            <C>           <C>
                                     DISK PRODUCTS
SuperFlex      Host-based RAID with  NetWare, NT,     May 1996        July 1997          6-378       $8,523 - 78,394
3000           Dynamic Growth and    OS/2
with DGR Disk  Reconfiguration
Array
SuperFlex      RAID applications     NetWare, NT,     September 1994  April 1997         6-256       $9,662 - 54,315
4000           using embedded        OS/2, Solaris,
Disk Array     bridge controller     AIX
SuperFlex      Dual redundant RAID   NetWare, NT,     October 1996    November 1996      6-126      $14,427 - 34,706
5000           controllers           OS/2, Solaris
Disk Array     (embedded)
RAIDPRO VL,    Entry level RAID      NetWare, NT      May 1997        October 1997       6-108       $4,741 - 25,745
XL
                                     TAPE PRODUCTS
SuperFlex DAT  7 DAT Tape Drives     NetWare, NT,     September 1994  February 1997     24-168       $8,016 - 18,845
TapeArray      with parallel data    Solaris, AIX
               streaming
MegaFlex DLT   4 DLT Tape Drives     NetWare, NT,     May 1995        April 1997        30-140      $11,125 - 44,628
TapeArray      with parallel         Solaris, AIX
               streaming and data
               redundancy
4700 DLT Tape  Single drive, seven   NetWare, NT,     December 1995   N/A                  280               $11,788
Library        cartridge tape        Solaris, AIX
               library
DLT Tape       Stand-alone DLT Tape  NetWare, NT,     October 1995    June 1996          15-35        $3,315 - 9,385
Backup         Subsystem             Solaris, AIX
ATL Library    High end DLT Tape     NetWare, NT,     December 1997   N/A               40-140      $25,640 - 67,724
               Library               Solaris, AIX
                                     OTHER
VantagePoint   Network Storage       NetWare, NT      December 1995   July 1996            N/A       $1,057 - 21,484
               Management Software
XStor Tape     For document input    SCO UNIX         August 1992     N/A                    5                   N/A
Storage        to Xerox Docutech
System         Printing System
(OEM product)
</TABLE>
 
---------------
(1) The list prices set forth above represent the per unit list prices to
    corporate customers for volume purchases. Actual prices paid by customers
    vary depending on the source and the volume of units purchased.
 
(2) Larger systems can be readily constructed by integrating multiple units into
    a single system.
 
                                        5
<PAGE>   7
 
     Storage Dimensions has developed, and will continue to enhance, its
existing extensive proprietary objectoriented software library. This library
enables Storage Dimensions to quickly integrate new hardware technologies to
bring new products to market in a rapid and cost-effective manner. Storage
Dimensions' software library supports a range of operating systems with a
minimum of additional software investment. For example, the advanced SuperFlex
4000 and 5000 products incorporate Storage Dimensions' proprietary RAIDFlex disk
array management software, which was specifically engineered to facilitate
cross-platform support and to require only a minimal portion of the underlying
code to be rewritten to adapt it to a new operating system. Similarly, Storage
Dimensions can adapt RAIDFlex software to manage a new generation RAID
controller by modifying only the section of the code that deals with
controller-specific algorithms and instruction sets. Storage Dimensions has a
U.S. patent application pending associated with the object-oriented, layered
architecture of its RAIDFlex array management software.
 
     Storage Dimensions' products utilize its proprietary software to
incorporate leading edge hardware features and capabilities relative to the
storage products offered by computer and server manufacturers, with design
features specifically engineered to minimize system downtime and to support easy
integration and administration. For example, in May 1996, Storage Dimensions
introduced the SuperFlex 3000 with DGR. The DGR feature provides the ability to
both expand and reconfigure a RAID array without taking the system off-line,
therefore significantly reducing the time, effort and cost of managing RAID
storage in typical corporate network environments. SuperFlex with DGR won LAN
Times' "Best of LAN Times" (1997) and PC Week's "Analyst's Choice" (1996)
awards. In addition, Storage Dimensions became one of the first suppliers of
network storage systems to incorporate the new generation 9 gigabyte disk drives
in their products when it began shipping the first of such products in September
1996.
 
     Storage Dimensions' products have won numerous other awards, including:
INFOWorld's "Hot Products" (1997); LAN Times' "Best of LAN Times" (1996);
Computer Technology Review's "Editor's Choice" (1995); LAN Magazine's "Disk
Array Product of the Year" (1995); and Networld+Interop's "Best of Show" (1995).
 
PRODUCTS UNDER DEVELOPMENT
 
     Storage Dimensions intends to continue to design its mainstream products to
be compatible with both Windows NT and NetWare and selected products to be
compatible with Sun Solaris, IBM AIX and IBM OS/2 operating systems. In
particular, Storage Dimensions has focused, and expects to continue to focus,
its product development efforts on providing an easy, seamless transition to
Windows NT, without the need to obsolete or retire its prior investments in
Storage Dimensions' disk storage systems. As a result of Storage Dimensions'
efforts, most of Storage Dimensions' current disk and tape systems can be, and
Storage Dimensions intends that its future products will be able to be, migrated
between NetWare and Windows NT by simply installing Storage Dimensions' software
upgrade. This greatly simplifies the purchasing decision for customers in the
process of migrating to Windows NT and for those considering such a change in
the future.
 
     Storage Dimensions is currently completing the development of a clustered
storage system (SuperFlex 5500) that is expected to provide shared storage for a
cluster of network servers using a common operating system, with support for
automatic server failover and integrated tape backup. Storage Dimensions
believes that this clustering technology will be the basis for most storage
system architectures in the future and may provide significant differentiation
of Storage Dimensions in the market. Storage Dimensions is in Beta test with
several customers and expects to release this product in the second quarter of
1998. Storage Dimensions is also in Beta test on RAIDScape, its latest storage
management software program. RAIDScape will add new features and functionality
to the company's hardware products and provide customers an easy to use
graphical interface for managing their data storage devices. RAIDScape software
is a second generation software design based on over three years of development
and is written in a new "JAVA" based programming language. RAIDScape software
will be one of the key differentiating features for most of future Storage
Dimensions products.
 
     If Storage Dimensions is unable, for technological or other reasons, to
develop and introduce new products, in particular those for use with Windows NT,
in a timely manner in response to changing market
 
                                        6
<PAGE>   8
 
conditions or customer requirements, Storage Dimensions' business, operating
results and financial condition will be materially and adversely affected. In
addition, there can also be no assurance that Storage Dimensions will be
successful in developing and marketing any other products that respond to
technological changes or evolving industry standards, that Storage Dimensions
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products, or that its new
products will adequately meet the requirements of the marketplace and achieve
market acceptance. See "Research and Development."
 
CUSTOMERS AND APPLICATIONS
 
     Storage Dimensions markets its products primarily to large corporations,
institutions and government agencies for use in business-critical network server
applications that require high-reliability and non-stop operation. Storage
Dimensions has successfully placed major installations in a broad cross-section
of enterprises, encompassing a range of mainstream computing applications. In
1997, the Sun Financial Group accounted for approximately 10% of net sales. In
1996, Xerox Corporation accounted for approximately 13% of total net sales. In
1995, Xerox accounted for approximately 11% of net sales and TechData accounted
for approximately 15% of net sales.
 
SALES AND MARKETING
 
     Storage Dimensions has implemented both a direct sales force and reseller
distribution channels in order to provide broad market penetration for its
products. Historically, Storage Dimensions marketed its products to end-users
through indirect reseller channels, including distributors, national computer
dealers, system integrators and VARs. In 1994, Storage Dimensions recruited and
deployed a direct field sales organization in order to more effectively pursue
large corporate and institutional sales opportunities in the United States. As
of December 31, 1997, the U.S. field sales organization consisted of 33 sales
professionals located in 15 geographical markets, including Boston, New York,
Washington D.C., Atlanta, Detroit, Chicago, Minneapolis, Dallas, Los Angeles,
Seattle, Tampa and the San Francisco Bay Area. Storage Dimensions utilizes its
direct sales force to penetrate major new accounts, to create demand for its
products and to secure repeat business from existing customers.
 
     Storage Dimensions also maintains indirect reseller channels to facilitate
procurement of Storage Dimensions' products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales, and promotional
efforts that would otherwise be lost. In addition, certain large customers
prefer to source through the reseller channels as part of their overall network
equipment sourcing and integration strategy. Storage Dimensions has developed
pricing structures and field sales commission plans that are designed to
minimize sales channel conflicts and, as a result, is able to benefit from
significantly higher revenues than if only a direct sales model were deployed.
Storage Dimensions believes that this two-pronged sales strategy provides
meaningful competitive advantage over competitors who only provide products
directly to end-user customers. In a recent survey by LAN Magazine of the
largest 100 LAN resellers in the United States, Storage Dimensions was the
independent storage systems supplier mentioned most often as the preferred
provider of both disk array and tape backup products.
 
     With its domestic field sales organization and reseller distribution
channels in place, Storage Dimensions plans to generate additional sales at a
lower incremental cost by systematically expanding its field sales operation in
terms of both staffing and geographical presence. Internationally, Storage
Dimensions relies primarily on local distributors and maintains a sales and
service office in London, England to support its European distributors.
 
     To support its field sales organization, in 1995 Storage Dimensions
established a telemarketing department located in its Milpitas headquarters
location for processing new leads, qualifying new prospects, identifying active
projects and initiating appointments for field sales personnel to visit new
customers. Specifically, the telemarketing department focuses on identifying
large new sales opportunities and on facilitating a smooth hand-off of these
opportunities to the field sales personnel. The telemarketing department
 
                                        7
<PAGE>   9
 
also works closely with the marketing communications department to identify lead
sources and develop promotional programs that are most effective in developing
target opportunities.
 
     In 1995, Storage Dimensions implemented a trade-in program called
FlexCredit, which provides a significant trade-in credit on used disk and tape
drives, from both Storage Dimensions and other selected manufacturers, toward
the purchase of new products from Storage Dimensions. FlexCredit is another
example of Storage Dimensions' strategy to lower the cost of ownership of
network storage, and Storage Dimensions believes the program has been
instrumental in both retaining existing customers and capturing new ones.
Storage Dimensions maintains an active presence in the used storage equipment
market such that FlexCredit trade-ins can be recycled at nominal economic cost
to Storage Dimensions.
 
     After expanding its field sales force throughout 1997, Storage Dimensions
reevaluated the effectiveness of its field sales force strategy in early 1998.
As a result, five single-person sales offices in smaller geographic markets were
closed in order to focus resources in the major metropolitan areas where larger
sales offices are already established, and certain management positions in the
sales organization were eliminated. Storage Dimensions intends to use its
independent resellers to more efficiently serve the smaller geographic markets.
Storage Dimensions believes that this new structure will allow for future sales
growth while helping to control costs. Storage Dimensions intends to support and
expand as appropriate its direct sales force in key markets while seeking to
expand its reach into smaller markets through enhanced reseller arrangements.
Storage Dimensions believes it can continue to generate additional sales at
lower incremental selling costs. Storage Dimensions is prepared to expand its
field sales operations in these major areas to further leverage its current
investment.
 
CUSTOMER SERVICE AND SUPPORT
 
     Storage Dimensions believes that its ability to provide comprehensive,
proactive and responsive support is an important element in penetrating new
customer accounts and in securing repeat business from existing customers.
Storage Dimensions is committed to providing superior customer service and
support aimed at simplifying installation, reducing field failures, minimizing
system downtime and streamlining administration. For example, beginning in 1992,
Storage Dimensions undertook a major investment in an "artificial intelligence"
knowledge base, called TechConnect, to facilitate the timely and accurate
diagnosis of customer field problems and to enable Storage Dimensions to
recommend solutions with the highest probability of success, with reporting
capabilities to provide feedback on the most common problems experienced by
end-users of Storage Dimensions' products. Although accessed primarily by
Storage Dimensions technical support personnel, the TechConnect system is also
accessible by Storage Dimensions' customers 24 hours a day, through the
Internet, in the event any customer wishes to access solution documents
directly.
 
     Historically, service revenues have not comprised a significant portion of
Storage Dimensions' sales. In 1996, Storage Dimensions began an aggressive
program to develop value-added service contracts designed to achieve a lower
lifecycle cost of ownership for its customers. The following represent Storage
Dimensions' primary service programs currently available:
 
     7x24 Priority Service and Parts. For an annual site fee, Storage Dimensions
provides priority access to technical support personnel during business hours
and access within 20 minutes via a pager after hours. In addition, Storage
Dimensions provides replacement of failed parts 24 hours-a-day by
counter-to-counter air freight with courier delivery.
 
     Tape Maintenance. For an annual fee per tape drive, Storage Dimensions will
provide for overnight shipment of a replacement unit for drives that fail and
are not covered by Storage Dimensions' or manufacturer's standard warranty.
 
     TechAssist Emergency Off-Hours Support. For a one-time fee, Storage
Dimensions provides access to technical support personnel after hours to
customers who need emergency help, but have not contracted for the 7x24 Priority
Service.
 
     FlexGuard Premium Site Support. FlexGuard bundles optional services into
comprehensive site service and support arrangements to meet the special needs of
large organizations.
                                        8
<PAGE>   10
 
     In addition to the above services, Storage Dimensions provides telephone
support during business hours free of charge.
 
     Storage Dimensions supports and administers the pass-through of standard
warranties from its OEM component vendors which run from one to five years. In
addition, Storage Dimensions provides a three year warranty on the system as a
whole. A customer may also contract for an extended warranty from Storage
Dimensions on components whose factory warranty has expired. In the United
States, defective components are replaced overnight, in advance of the receipt
of the failed part, as a standard practice. Although to date Storage Dimensions'
suppliers of hardware components have covered the warranty costs associated with
such components, there can be no assurance that such manufacturers will continue
to be willing or able to cover such costs, and their failure to do so would
result in such costs being borne by Storage Dimensions. There can be no
assurance that warranty costs to Storage Dimensions will not be significant in
the future, which could have a material adverse effect on Storage Dimensions'
business, operating results or financial condition.
 
RESEARCH AND DEVELOPMENT
 
     To date, Storage Dimensions has made substantial investments in research
and development, particularly in the areas of fault-tolerant RAID systems
integration and storage management software. Storage Dimensions' solution
combines its proprietary software and industry-standard hardware to produce
integrated RAID fault-tolerant storage solutions, with companion
high-performance tape backup. Storage Dimensions has developed an extensive,
object-oriented software library which it uses to quickly integrate new hardware
products into its storage systems. Storage Dimensions' strategy is to continue
to expand its software library by adding new features and functionality in an
incremental manner, building on its earlier investments, and to leverage this
library to bring new products and features to market quickly.
 
     Storage Dimensions' engineering design teams work cross-functionally with
marketing managers, applications engineers and customers to develop products and
product enhancements. Computer input/output standards are maintained and an
extensive disk drive and controller board qualification program monitors
industry-standard components to ensure the quality and performance when
integrated into Storage Dimensions' storage system products. Storage Dimensions
also strives to develop and maintain close relationships with key suppliers of
storage system components and technologies, such as American Megatrends, Western
Digital, Fujitu, ATL, Exabyte, Cheyenne, Mylex, Seagate, Qualix and Quantum,
which Storage Dimensions believes enables it to quickly introduce new products
that incorporate the latest technological advances.
 
     Storage Dimensions' expenses for research and development for fiscal years
1995, 1996 and 1997 were $5.4 million, $5.9 million and $6.3 million,
respectively. As of December 31, 1997, Storage Dimensions had 37 regular
full-time employees engaged in research and development activities, of which 16
were specifically focused on software development, test and qualification.
 
     The network storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities and the emergence of new industry standards could
render Storage Dimensions' existing products obsolete and unmarketable. Storage
Dimensions' future success will depend upon its ability to develop and to
introduce new products with increasing storage capabilities (including new
software releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that Storage Dimensions will be successful in developing and marketing any new
products that respond to technological changes or evolving industry standards,
that Storage Dimensions will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products,
or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. In addition, network storage system
products like those offered by Storage Dimensions may contain undetected
software errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by Storage Dimensions
and by current and potential customers, errors will not be found in new products
after commencement of commercial
 
                                        9
<PAGE>   11
 
shipments, resulting in a loss of or delay in market acceptance, which could
have a material adverse effect on Storage Dimensions' business, operating
results or financial condition.
 
MANUFACTURING
 
     Storage Dimensions' manufacturing operations, located in Milpitas,
California, consist primarily of assembly and integration of Storage Dimensions'
proprietary software and enclosures with industry-standard components, such as
disk drives, tape drives, and RAID controllers, from its suppliers. The
assembled units are then subjected to a systems-level test to ensure performance
to specification in the anticipated end-user computing environment. Storage
Dimensions' manufacturing operations have been ISO 9002 certified, an
international quality standard. Storage Dimensions strives to develop close
relationships with its suppliers, exchanging critical information and
implementing joint corrective action programs to maximize the quality of its
components, to reduce costs and inventory investments and to create flexibility
for rapid capacity expansion when required. Storage Dimensions believes that its
current facilities and capital equipment will be adequate to meet its
manufacturing needs in the foreseeable future.
 
     Storage Dimensions relies upon a limited number of suppliers of several key
components utilized in the assembly of Storage Dimensions' products. For
example, Storage Dimensions purchases disk drives primarily from Seagate, DLT
tape drives exclusively from Quantum and DGR RAID controllers exclusively from
American Megatrends. Storage Dimensions' reliance on its suppliers involves
several risks, including: an inadequate supply of required components; price
increases; late deliveries; and poor component quality. These risks are
particularly significant with respect to suppliers of disk drives because, in
order to meet product performance requirements, Storage Dimensions must obtain
disk drives with extremely high quality and capacity. In addition, there is
currently a significant market demand for disk drives, tape drives and RAID
controllers, and from time to time Storage Dimensions may experience component
shortages, selective supply allocations and increased prices of such components.
Although to date Storage Dimensions has been able to purchase its requirements
of such components, there can be no assurance that Storage Dimensions will be
able to obtain its full requirements of such components in the future or that
prices of such components will not increase. In addition, there can be no
assurance that problems with respect to yield and quality of such components and
timeliness of deliveries will not occur. Disruption or termination of the supply
of these components could delay shipments of Storage Dimensions' products and
could have a material adverse effect on Storage Dimensions' business, operating
results or financial condition. Such delays could also damage relationships with
current and prospective customers. In addition, in the past, due to Storage
Dimensions' quality requirements, Storage Dimensions has experienced delays in
the shipments of its new products principally due to an inability to qualify
component parts from disk drive manufacturers and other suppliers, resulting in
delay or loss of product sales. Storage Dimensions has currently qualified disk
drives manufactured by Seagate, tape drives from Quantum, and RAID controllers
from Mylex and American Megatrends. Although these delays in the past have not
had a material adverse effect upon Storage Dimensions' business, operating
results or financial condition, there can be no assurance that in the future any
such delays would not have such a material adverse effect.
 
COMPETITION
 
     The network storage system market is intensely competitive. Storage
Dimensions competes primarily in the PC-LAN storage systems market and
experiences the greatest competition from traditional suppliers of PC-LAN
network servers, such as Compaq, Hewlett-Packard and IBM, who market storage
systems as part of their complete computer systems. Storage Dimensions also
competes against independent storage system suppliers to the PC-LAN server
market, including DEC Storage Works, MTI Technology, Procom Technology, Inc. and
StreamLogic Corporation. In addition, providers of storage for the mainframe or
UNIX-based markets, such as Auspex Systems, Inc., Data General Corporation, EMC
Corporation, Network Appliance, Inc., Storage Computer, Inc. and Symbios Logic,
Inc. could develop and market products that address the PC-LAN storage systems
market, and in particular Windows NT applications. Many of Storage Dimensions'
current and potential competitors have significantly greater financial,
technical, marketing, purchasing and other resources than Storage Dimensions,
and as a result, may be able to respond more quickly
 
                                       10
<PAGE>   12
 
to new or emerging technologies and changes in customer requirements, to devote
greater resources to the development, promotion and sale of products than can
Storage Dimensions, or to deliver competitive products at a lower end-user
price. Storage Dimensions also expects that competition will increase as a
result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
Storage Dimensions' prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on Storage Dimensions' business, operating
results or financial condition.
 
     Storage Dimensions believes that the principal competitive factors
affecting its market include: fault-tolerant reliability, performance, ease of
use, scalability, configurability, price and customer service and support. There
can be no assurance that Storage Dimensions will be able to successfully
incorporate these factors into its products and to compete against current or
future competitors or that competitive pressures faced by Storage Dimensions
will not materially and adversely affect its business, operating results or
financial condition.
 
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
 
     Storage Dimensions' success depends significantly upon its proprietary
technology. Storage Dimensions currently relies on a combination of copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. Storage Dimensions seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Storage
Dimensions has registered its Storage Dimensions and LANStor trademarks and will
continue to evaluate the registration of additional trademarks as appropriate.
Storage Dimensions generally enters into confidentiality agreements with its
employees and with key vendors and suppliers. Storage Dimensions currently has
one U.S. patent application pending associated with the object-oriented layered
architecture of its RAIDFlex array management software. There can be no
assurance that this patent will eventually be issued, that Storage Dimensions
will develop proprietary products or technologies that are patentable, that any
patent issued in the future will provide Storage Dimensions with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have a material adverse effect on Storage Dimensions' ability to
do business. Storage Dimensions believes that the rapidly changing technology in
the computer storage industry makes Storage Dimensions' success dependent more
on the technical competence and creative skills of its personnel than on any
patents it may be able to obtain.
 
     There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect Storage Dimensions' proprietary technology. Storage Dimensions has from
time to time received claims that it is infringing third parties' intellectual
property rights, and there can be no assurance that third parties will not in
the future claim infringement by Storage Dimensions with respect to current or
future products, trademarks or other proprietary rights. Storage Dimensions
expects that companies in the storage system market will increasingly be subject
to infringement claims as the number of products and competitors in Storage
Dimensions' target markets grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require Storage
Dimensions to redesign its products or require Storage Dimensions to enter into
royalty or licensing agreements, any of which could have a material adverse
effect on Storage Dimensions' business, operating results or financial
condition. Despite Storage Dimensions' efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of Storage Dimensions'
products or to obtain and use information that Storage Dimensions regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that Storage Dimensions' means of protecting its
proprietary rights will be adequate or that Storage Dimensions' competitors will
not independently develop similar technology, duplicate Storage Dimensions'
products or design around patents issued to Storage Dimensions or other
intellectual property rights of Storage Dimensions.
 
                                       11
<PAGE>   13
 
EMPLOYEES
 
     As of December 31, 1997, Storage Dimensions had a total of 219 regular
full-time employees, of which 37 were engaged in engineering, research and
development; 102 in marketing, sales, and customer support; 51 in manufacturing;
and 29 in general management and administration. In addition, Storage Dimensions
had a total of 5 part-time and 12 temporary employees as of December 31, 1997.
None of Storage Dimensions' employees is represented by a labor union.
 
     Storage Dimensions' future performance depends in significant part upon the
continued service of its key technical and senior management personnel. Storage
Dimensions provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of Storage
Dimensions' officers or other key employees could have a material adverse effect
on Storage Dimensions' business, operating results or financial condition.
Storage Dimensions' future success also depends on its continuing ability to
attract and retain highly qualified technical and management personnel.
Competition for such personnel is intense, and there can be no assurance that
Storage Dimensions can retain its key technical and management employees or that
it can attract, assimilate or retain other highly qualified technical and
management personnel in the future.
 
ITEM 2. PROPERTIES
 
     Storage Dimensions' principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
80,000 square feet of space in Milpitas, California. This facility is leased
through December 6, 1998. Storage Dimensions leases other sales offices
throughout the U.S., as well as a European operations site in London, U.K.
Storage Dimensions believes that its existing facilities are adequate for its
current needs.
 
ITEM 3. LEGAL PROCEEDINGS
 
     No material legal proceedings were pending against the Company at December
31, 1997 or at the date of filing of this Form 10-K.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to stockholders during the fourth quarter of
1997.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     (a) Price Range of Common Stock
 
     Storage Dimensions Common Stock is listed on the Nasdaq National Market
under the symbol "STDM." There are currently no outstanding shares of Storage
Dimensions Preferred Stock.
 
     The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sales prices of Storage Dimensions Common Stock on the
Nasdaq National Market.
 
<TABLE>
<CAPTION>
                PRICE RANGE OF COMMON STOCK                    HIGH     LOW
                ---------------------------                   ------   -----
<S>                                                           <C>      <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter (from March 11, 1997).........................  $ 7.25   $6.50
Second Quarter..............................................  $14.50   $5.38
Third Quarter...............................................  $ 8.38   $4.50
Fourth Quarter..............................................  $ 6.38   $3.50
</TABLE>
 
                                       12
<PAGE>   14
 
     The Company has never paid any cash dividends in the past, and currently
intends to retain future earnings, if any, to fund the development and growth of
its business and does not intend to pay any cash dividends in the foreseeable
future.
 
     (b) Sales of Unregistered Securities
 
     The Registrant has not issued and sold any unregistered equity securities
during the period covered by this Annual Report on Form 10-K.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected historical consolidated financial information of
Storage Dimensions has been derived from their respective historical
consolidated financial statements, and should be read in conjunction with such
consolidated financial statements and the notes thereto, which are included in
this Annual Report on Form 10-K.
 
     STORAGE DIMENSIONS SELECTED HISTORICAL FINANCIAL INFORMATION. The selected
historical financial information of Storage Dimensions as of and for the years
ended December 31, 1995, 1996 and 1997 has been derived from the consolidated
financial statements audited by Price Waterhouse LLP, independent accountants,
included elsewhere in this Annual Report on Form 10-K. The selected historical
financial information of Storage Dimensions as of and for the years ended
December 31, 1993 and 1994 has been derived from the consolidated financial
statements audited by Price Waterhouse LLP, independent accountants, not
included in this Annual Report on Form 10-K.
 
                                       13
<PAGE>   15
 
             SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
                               STORAGE DIMENSIONS
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------------------
                                                        1993      1994      1995      1996        1997
                                                       -------   -------   -------   -------   -----------
<S>                                                    <C>       <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
  Enterprise and OEM................................   $22,706   $40,088   $52,475   $69,873     $70,966
  Desktop...........................................    42,662    21,136     7,683     2,437         366
                                                       -------   -------   -------   -------     -------
         Total net sales............................    65,368    61,224    60,158    72,310      71,332
Cost of sales.......................................    48,240    41,998    37,170    45,327      45,723
                                                       -------   -------   -------   -------     -------
Gross profit........................................    17,128    19,226    22,988    26,983      25,609
                                                       -------   -------   -------   -------     -------
Operating expenses:
  Sales and marketing...............................    10,108    10,662    13,344    14,081      17,491
  Research and development..........................     3,623     4,339     5,377     5,872       6,250
  General and administrative........................     6,986     3,293     3,390     3,819       4,231
  Advisory fee(1)...................................       340       362       360       729          --
                                                       -------   -------   -------   -------     -------
         Total operating expenses...................    21,057    18,656    22,471    24,501      27,972
                                                       -------   -------   -------   -------     -------
Income (loss) from operations.......................    (3,929)      570       517     2,482      (2,363)
Other expense, net..................................      (997)     (983)   (1,123)   (1,155)        (68)
                                                       -------   -------   -------   -------     -------
Income (loss) before provision for income taxes.....    (4,926)     (413)     (606)    1,327      (2,431)
Provision for income taxes..........................       601        24        30       132         130
                                                       -------   -------   -------   -------     -------
Net income (loss)...................................   $(5,527)  $  (437)  $  (636)  $ 1,195     $(2,561)
                                                       =======   =======   =======   =======     =======
Basic net income (loss) per share(2)................   $ (3.45)  $  (.27)  $  (.40)  $  0.73     $ (0.39)
                                                       =======   =======   =======   =======     =======
Weighted average shares used to calculate basic net
  income (loss) per share...........................     1,600     1,600     1,604     1,641       6,651
                                                       =======   =======   =======   =======     =======
Diluted net income (loss) per share(2)..............   $ (3.45)  $  (.27)  $  (.40)  $  0.22     $ (0.39)
                                                       =======   =======   =======   =======     =======
Weighted average shares used to calculate diluted
  net income (loss) per share.......................     1,600     1,600     1,604     5,529       6,651
                                                       =======   =======   =======   =======     =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                       ---------------------------------------------------
                                                        1993      1994      1995      1996        1997
                                                       -------   -------   -------   -------   -----------
<S>                                                    <C>       <C>       <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...........................   $   502   $   470   $   363   $ 1,682     $ 7,094
Working capital.....................................     1,952     2,680       543     2,513      17,297
Total assets........................................    18,332    18,001    19,751    22,898      27,432
Short-term borrowings...............................     5,103     4,858     7,837     9,629          86
Long-term debt, less current portion................     2,667     2,800        --        --          --
Total stockholders' equity..........................     3,580     3,331     2,862     4,628      19,119
</TABLE>
 
---------------
 
(1) Represents an advisory fee paid to Capital Partners pursuant to an advisory
    agreement. The advisory agreement was terminated in December 1996. The 1996
    amount includes a one-time termination payment of $360,000. See "CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS."
 
(2) See Note 1 of Notes to Consolidated Financial Statements of Storage
    Dimensions for an explanation of shares used in computing basic and diluted
    net income (loss) per share.
 
                                       14
<PAGE>   16
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of Storage Dimensions should be read in conjunction with the
consolidated financial statements and the related notes thereto included herein.
The discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. Storage Dimensions' actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section and the section entitled
"Storage Dimensions Business," as well as those discussed elsewhere in this
Annual Report on Form 10-K.
 
OVERVIEW
 
     Storage Dimensions was formed in late 1992 to acquire the assets of the
"Storage Dimensions" subsidiary of Maxtor (the "Predecessor") for an aggregate
of $21.4 million (the "Storage Acquisition"). The Storage Acquisition, which was
completed in December 1992, was financed through equity investments in Storage
Dimensions made by the Capital Partners Group by certain members of management
and by Maxtor. A portion of the purchase price was also funded through bank
borrowings and through a subordinated term loan in the principal amount of $4
million payable to Maxtor. The note payable to Maxtor was originally due
December 31, 1995 but the maturity date was extended to the earlier to occur of
the completion of Storage Dimension's initial public offering or May 10, 1997. A
portion of the proceeds from Storage Dimension's initial public offering was
used to repay the remaining balance due to Maxtor.
 
     Prior to the Storage Acquisition, the Predecessor was primarily engaged in
designing, manufacturing and selling high volume storage products that attached
to PCs and Macintosh computers and low-end servers. These desktop products
generally incorporated Maxtor disk drives. As part of its strategy to develop a
business that could successfully operate independently from Maxtor and would
generate higher gross margins, during 1992 the Predecessor began to sell RAID
products targeted at the enterprise storage markets. For the nine months ended
December 31, 1992, desktop and enterprise/OEM product sales represented 85.9%
and 14.1%, respectively, of total net sales. In furtherance of its long-term
strategy, the transition was accelerated following the Storage Acquisition such
that, in 1994 enterprise/OEM product sales represented a majority of total net
sales and, for the year ended December 31, 1997, enterprise/OEM product sales
represented substantially all of Storage Dimensions net sales. As the mix
shifted from desktop products to enterprise/OEM products, the gross margins
improved from 26.2% in 1993 to 37.3% in 1996, but declined to 35.9% in 1997.
Storage Dimensions does not expect sales of desktop products to represent a
material portion of its net sales in future periods.
 
     The transition from desktop storage to enterprise RAID storage products
required a significant investment in research and development, sales and
marketing, and operations. To implement this transition, Storage Dimensions
significantly enhanced its infrastructure and employee expertise during 1995,
1996 and 1997, and operating expenses increased from 30.4% of sales in 1994 to
39.2% in 1997. The largest single expense associated with this transition was
the staffing of a direct end-user sales organization starting in the third
quarter of 1994.
 
     The absorption of fixed manufacturing overhead suffered during the
transition from desktop to enterprise/OEM products as manufacturing volume
decreased and RAID systems required more sophisticated and time consuming
integration and test processes. The sale of the Storage Dimensions' Macintosh
product line in 1994 further reduced volume and exacerbated the unfavorable
overhead absorption situation. By the end of 1995 and continuing through 1996,
the higher manufacturing volumes of the Storage Dimensions' RAID enterprise/OEM
products resulted in greater overhead absorption and reductions in the per-unit
manufacturing costs of such products. Gains from this effect leveled off in
1997, so that at the end of 1997 Storage Dimensions still had significant excess
manufacturing capacity remaining. As a result, if manufacturing volumes were to
increase, the Storage Dimensions would expect to achieve further economies of
scale and lower per-unit manufacturing costs.
 
                                       15
<PAGE>   17
 
     Revenue from product sales is recognized upon shipment. Net sales reflect
the invoiced amount for goods shipped less reserves for estimated returns.
Storage Dimensions provides price protection to its distributors such that, if
Storage Dimensions reduces the price of its products, distributors are entitled
to a credit for the difference between the new, reduced price and the price they
previously paid for products which are held in the distributor's inventory at
the time of the price reduction. As a result, price reductions could have a
material adverse effect on results of operations, depending upon distributor
inventory levels at the time of the price reduction. In 1994, 1995, 1996 and
1997, Storage Dimensions issued approximately $161,000, $550,000, $840,000 and
$485,000, respectively, of credits in connection with such price protection.
 
     Storage Dimensions utilizes a direct sales force to penetrate major new
accounts, to create demand for its products, and to secure repeat business from
existing customers. Storage Dimensions also maintains reseller distribution
channels that facilitate procurement of Storage Dimensions' products by small
and medium-sized end-users, producing incremental revenues from its marketing,
sales and promotional efforts. In addition, certain large customers prefer to
source through the reseller channels as part of their overall network equipment
sourcing and integration strategy. Therefore, Storage Dimensions' resellers also
fulfill some large customer orders that were generated by Storage Dimensions'
direct sales force.
 
     After expanding its field sales force throughout 1997, Storage Dimensions
reevaluated the effectiveness of its field sales force strategy in early 1998.
As a result, five single-person sales offices in smaller geographic markets were
closed in order to focus resources in the major metropolitan areas where larger
sales offices are already established, and certain management positions in the
sales organization were eliminated. Storage Dimensions intends to use its
independent resellers to more efficiently serve the smaller geographic markets.
Storage Dimensions believes that this new structure will allow for future sales
growth while helping to control costs. Storage Dimensions intends to support and
expand as appropriate its direct sales force in key markets while seeking to
expand its reach into smaller markets through enhanced reseller arrangements.
Storage Dimensions believes it can continue to generate additional sales at
lower incremental selling costs. Storage Dimensions is prepared to expand its
field sales operations in these major areas to further leverage its current
investment.
 
     Storage Dimensions currently expects its revenues for the fiscal quarter
ending March 31, 1998 to be significantly less than its results of operations
for the fourth quarter of 1997 and for the first quarter of 1997. Storage
Dimensions attributes the decline to a combination of uncertainty in the
marketplace resulting from Storage Dimensions' announcement of the Merger and
continued sales force productivity issues.
 
     The following discussion and analysis has been prepared without giving
effect to the Merger. Should the Merger be completed, the business of Storage
Dimensions and Artecon will be combined and, accordingly, the historical
liquidity and results of operations of Storage Dimensions would not be
indicative of the combined company's future liquidity or operating results.
 
                                       16
<PAGE>   18
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain items from Storage Dimensions'
consolidated statement of operations as a percentage of net sales for the
periods indicated:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                    --------------------------------------------
                                                    1994        1995        1996        1997
                                                    -----       -----       -----    -----------
<S>                                                 <C>         <C>         <C>      <C>
Net sales:
  Enterprise and OEM..............................   65.5%       87.2%       96.6%       99.5%
  Desktop.........................................   34.5        12.8         3.4         0.5
                                                    -----       -----       -----       -----
          Total net sales.........................  100.0%      100.0%      100.0%      100.0%
                                                    =====       =====       =====       =====
Cost of sales.....................................   68.6        61.8        62.7        64.1
                                                    -----       -----       -----       -----
Gross profit......................................   31.4        38.2        37.3        35.9
                                                    -----       -----       -----       -----
Operating expenses:
  Sales and marketing.............................   17.4        22.2        19.5        24.5
  Research and development........................    7.1         8.9         8.1         8.8
  General and administrative......................    5.4         5.6         5.3         5.9
  Advisory fee....................................    0.6         0.6         1.0          --
                                                    -----       -----       -----       -----
          Total operating expenses................   30.5        37.3        33.9        39.2
                                                    -----       -----       -----       -----
Income (loss) from operations.....................    0.9         0.9         3.4        (3.3)
Other income (expense), net.......................   (1.6)       (1.9)       (1.6)       (0.1)
                                                    -----       -----       -----       -----
Income (loss) before provision for income taxes...   (0.7)       (1.0)        1.8        (3.4)
Provision for income taxes........................     --          --         0.2         0.2
                                                    -----       -----       -----       -----
Net income (loss).................................    0.7%       (1.0)%       1.6%       (3.6)%
                                                    =====       =====       =====       =====
</TABLE>
 
     1997 COMPARED TO 1996
 
     Net Sales. Net sales decreased 1.4% to $71.3 million in 1997, compared to
$72.3 million during 1996. Sales of Enterprise/OEM products accounted for
virtually all of the 1997 revenue, as the shift away from older Desktop products
was completed. Revenues were essentially unchanged compared to the prior year
primarily due to pricing declines in the first half of 1997, slow growth in
sales force productivity throughout the year and a drop in revenue from sales to
Xerox, Storage Dimensions' primary OEM customer. Revenue from Xerox decreased
from approximately 13% of net revenue in 1996 to approximately 6% of net revenue
in 1997. The continued penetration into the emerging Windows-NT marketplace was
offset by declines in the Novell NetWare arena due to Novell's loss of market
share to Microsoft's Windows NT. Products first introduced in 1997 did not
account for significant growth.
 
     Gross Profit. Gross profit for 1997 was $25.6 million, or 35.9% of net
sales, compared to $27.0 million, or 37.3% of net sales in 1996. The decrease in
gross profit as a percentage of net sales in 1997 was primarily attributable to
inventory write downs brought about by rapid declines in the cost of disk drives
in the second quarter, and increased pricing pressure from competition. The
adverse effects of pricing pressures were partially offset by reductions in
material costs and a decline in the volume of relatively low margin OEM
business. Storage Dimensions' gross margin has been and will continue to be
affected by a variety of factors, including: competition; product configuration;
the mix of direct versus indirect sales; the mix of enterprise, OEM and desktop
products sold in any given period; the availability of new products and product
enhancements which tend to carry higher gross margins than older products; and
the cost and availability of components.
 
     Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional costs and customer service
and support expenses. Sales and marketing expenses for 1997 totaled $17.5
million, or 24.5% of net sales, compared to $14.1 million, or 19.5% of net sales
in 1996. The increase in absolute amount was caused largely by the expenses of
expanding the direct sales force and to a lesser extent from the costs of new
product introductions. The increase in sales and marketing expense as a
 
                                       17
<PAGE>   19
 
percentage of net sales in 1997 resulted from the slow increase in productivity
of the new sales representatives and the decline in OEM revenue. There can be no
assurance that an increase in these expenses will result in a proportional
increase in net sales and the sales and marketing expense as a percentage
revenue is expected to fluctuate in future periods.
 
     Research and Development. Research and development expenses consist
primarily of employee compensation, prototype expenses and fees paid to outside
consultants. To date no software development costs have been capitalized.
Research and development expenses for 1997 totaled $6.3 million, or 8.8% of net
sales, compared to $5.9 million, or 8.1% of net sales in 1996. The increase in
research and development spending in absolute amount during 1997 was primarily a
result of increased staffing levels necessary to support continued development
of RAID products, primarily for the RAIDPro product and clustering solutions.
The increase as a percentage of net sales was a result of the increase in the
level of research and engineering spending. Storage Dimensions believes that
significant investments in research and development will continue to be required
to remain competitive and expects that these expenditures will increase in
absolute dollars and fluctuate as a percentage of net sales in future periods.
 
     General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing the Storage
Dimension's administrative functions. General and administrative expenses for
1997 totaled $4.2 million, or 5.9% of net sales, compared to $3.8 million, or
5.3% of net sales in 1996. General and administrative expenses increased in
absolute amount primarily as a result of the additional costs associated with
operating as a public company and increased consulting costs.
 
     Advisory Fee. The advisory fees formerly consisted of amounts payable to
Capital Partners pursuant to the Advisory Agreement that was terminated in 1996.
Consequently, there were no fees in 1997 compared to fees of $729,000 in 1996.
The 1996 fees included a one-time payment of $360,000 made in connection with
the termination of the Advisory Agreement.
 
     Other Income (Expense), Net. Other income (expense), net consists primarily
of interest income on investments offset by interest payments on outstanding
debt. Other income (expense), net was a net expense of $68,000 in 1997 compared
to a net expense of $1,155,000 in 1996. The drop in the interest expense comes
from the investment of the proceeds from Storage Dimensions public offering in
the second quarter. Some interest expense continues to be recorded from the
expenses associated with maintaining Storage Dimensions' current but unused line
of credit.
 
     Income Taxes. Income tax expenses incurred in 1996 and 1997 consist of
federal alternative minimum taxes and California minimum franchise taxes for
state taxes and taxes paid outside the United States. In determining likelihood
of future realization of deferred tax assets, management considered various
factors including Storage Dimensions's past history of losses and variability in
quarterly results, and the significant competitive pressures in the industry in
which Storage Dimensions operates. See "History of Operating Losses of Storage
Dimensions; Potential Fluctuations in Quarterly Results." In the opinion of
management, based on these factors, as of December 31, 1997, it was considered
more likely then not that the gross deferred tax assets would not be realized.
Accordingly, at December 31, 1997, Storage Dimensions recorded a full valuation
allowance for these deferred tax assets. A future change in Storage Dimensions's
assessment of the likelihood of future realization of deferred tax assets could
result in a reduction of the valuation allowance, a corresponding reduction in
Storage Dimensions's income tax expense recorded for financial statement
purposes and a corresponding increase in net income. This would not, however,
result in a change in actual income taxes payable by Storage Dimensions in any
future period. See Note 5 of Notes to the Consolidated Financial Statements.
 
     1996 COMPARED TO 1995
 
     Net Sales. Net sales increased 20.2% to $72.3 million in 1996, compared to
$60.2 million during 1995. Sales increased primarily due to a 33.1% increase to
$69.9 million for Enterprise/OEM products, reflecting the continued shift in
Storage Dimensions's product strategy toward these newer products.
Enterprise/OEM products accounted for 96.6% of net sales, up from 87.2% in 1995.
 
                                       18
<PAGE>   20
 
     Gross Profit. Gross profit for 1996 was $27.0 million, or 37.3% of net
sales, compared to $23.0 million, or 38.2% of net sales in 1995. The decrease in
gross profit as a percentage of net sales in 1996 was primarily attributable to
pricing pressures in the market for products using 4 gigabyte disk drives during
the first half of 1996, as well as a relative increase in OEM sales which
generally carry lower gross profit margins than enterprise products. The adverse
effects of these factors were partially offset by the overall increase in sales
of enterprise products which tend to carry higher gross margins, manufacturing
efficiencies resulting from the higher level of sales of enterprise/OEM products
and the elimination from Storage Dimensions's desktop product line of certain
lower-margin, commodity-like products.
 
     Sales and Marketing. Sales and marketing expenses for 1996 totaled $14.1
million, or 19.5% of net sales, compared to $13.3 million, or 22.2% of net sales
in 1995. Sales and marketing expense in 1996 in absolute amount was relatively
flat compared to 1995, as Storage Dimensions did not significantly increase its
sales staff during most of 1996. The decrease in sales and marketing expense as
a percentage of net sales in 1996 resulted from increased productivity of the
sales and marketing organization.
 
     Research and Development. Research and development expenses for 1996
totaled $5.9 million, or 8.1% of net sales, compared to $5.4 million, or 8.9% of
net sales in 1995. The increase in research and development spending in absolute
amount during 1996 was primarily a result of increased staffing levels necessary
to support continued development of RAID products.
 
     General and Administrative. General and administrative expenses for 1996
totaled $3.8 million, or 5.3% of net sales, compared to $3.4 million, or 5.6% of
net sales in 1995. General and administrative expenses increased in absolute
amount primarily as a result of consulting costs associated with strategic
planning activities.
 
     Advisory Fee. Advisory fees totaled $729,000, or 1.0% of net sales in 1996,
compared to $360,000, or 0.6% of net sales in 1995. The 1996 amount includes a
one-time payment of $360,000 made in connection with termination of the Advisory
Agreement.
 
     Other Income (Expense), Net. Other income (expense), net was an expense of
$1.2 million in 1996, up from an expense of $1.1 million in 1995. The difference
primarily represents a one-time charge relating to the refinancing of Storage
Dimensions's revolving line of credit during 1996.
 
     Income Taxes. Income tax expenses incurred in 1995 and 1996 were minimal as
a result of operating losses incurred and the carry forward of prior period
losses. These carry forwards were virtually exhausted as of December 31, 1996.
Remaining gross deferred tax assets of $1,695,000 at December 31, 1996 are
primarily attributable to differences between the financial accounting and tax
deductibility of certain items including inventory reserves, depreciation and
amortization, research and development credits and compensation accruals. In the
opinion of management, as of December 31, 1996, it was considered more likely
than not that the gross deferred tax assets would not be realized. Accordingly,
at December 31, 1996, Storage Dimensions recorded a full valuation allowance for
these deferred tax assets. See Note 5 of Notes to the Storage Dimensions
Consolidated Financial Statements.
 
     1995 COMPARED TO 1994
 
     Net Sales. Net sales decreased 1.7% to $60.2 million in 1995, compared to
$61.2 million during 1994. Sales decreased primarily due to a 63% decrease in
sales of desktop products, partially offset by a 30% increase in sales of
enterprise/OEM products. Enterprise/OEM products accounted for 87.2% of the net
sales in 1995, up from 65.5% of net sales in 1994.
 
     Gross Profit. Gross profit for 1995 was $23.0 million, or 38.2% of net
sales, compared to $19.2 million, or 31.4% of net sales in 1994. The increase in
gross profit as a percentage of net sales in 1995 was primarily attributable to
a favorable sales mix of higher-end enterprise systems included in
enterprise/OEM product revenues partially offset by an unfavorable mix in sales
of lower margin desktop products included in desktop product revenues in the
period.
 
                                       19
<PAGE>   21
 
     Sales and Marketing. Sales and marketing expenses for 1995 totaled $13.3
million, or 22.2% of net sales, compared to $10.7 million, or 17.4% of net sales
in 1994. Sales and marketing expenses increased in absolute amount and as a
percent of net sales in 1995 primarily as a result of Storage Dimensions'
efforts to build its sales and marketing organization to support the transition
from indirect to direct sales efforts.
 
     Research and Development. Research and development expenses for 1995
totaled $5.4 million, or 8.9% of net sales, compared to $4.3 million, or 7.1% of
net sales in 1994. The increase in research and development spending in both
absolute amount and as a percentage of net sales during 1995 was primarily a
result of development activities related to Storage Dimensions' RAID products.
 
     General and Administrative. General and administrative expenses for 1995
totaled $3.4 million, or 5.65% of net sales, compared to $3.3 million, or 5.4%
of net sales in 1994. General and administrative expenses in both absolute
amount and as a percentage of net sales were relatively flat from 1994 to 1995
as management responded to flat overall sales levels.
 
     Advisory Fee. Advisory fees totaled $360,000 and $362,000 in 1995 and 1994,
respectively, and constituted 0.6% of net sales in both years.
 
     Other Income (Expense), Net. Other income (expense), net was an expense of
$1.1 million in 1995, up from an expense of $983,000 in 1994. The increase in
1995 was primarily attributable to higher average loan balances during the year
as well as an increased interest rate on the loan payable to Maxtor. See
"Certain Transactions."
 
     Income Taxes. Income tax expenses incurred in 1994 and 1995 were minimal as
a result of operating losses incurred. Gross deferred tax assets of $2,259,000
at December 31, 1995 are primarily attributable to operating loss carryforwards
and differences between the financial accounting and tax deductibility of
certain items including inventory reserves, depreciation and amortization,
research and development credits and compensation accruals. In the opinion of
management, as of December 31, 1995, is was considered more likely than not that
the net deferred tax assets would not be realized. Accordingly, at December 31,
1995, Storage Dimensions recorded a full valuation allowance for these deferred
tax assets. See Note 5 of Notes to the Storage Dimensions Consolidated Financial
Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     As of December 31, 1997, Storage Dimensions' working capital was $17.3
million, up from $2.5 million at December 31, 1996. The increase in working
capital was primarily attributable to the proceeds of Storage Dimensions'
initial public offering in 1997 offset by the repayment of short-term debt with
a portion of such proceeds and the effects of the operating losses in 1997. Net
accounts receivable increased slightly to $12.2 million at December 31, 1997,
compared to $11.9 million at December 31, 1996, as a result of slowness in
payments at year end. Inventories decreased to $5.6 million at December 31,
1997, from $6.3 million at December 31, 1996, primarily as a result of the
reduction in strategic supplies as the risk of shortages identified in late 1996
has abated. Accounts payable decreased to $4.0 million at December 31, 1997,
compared to $5.1 million at December 31, 1996 largely from the effects of
payment timing related to the increase of strategic inventories at the end of
1996.
 
     Storage Dimensions has an $11 million revolving line of credit expiring in
May 1998. The borrowings under the line of credit bear interest at the rate of
prime plus 0.75% (9.25% at December 31, 1997). Borrowings are secured by all
Storage Dimensions' assets. There were no borrowings outstanding under the line
of credit at December 31, 1997 and, as of such date, $11 million was available
for borrowings. There are no financial covenants in the line of credit.
 
     Storage Dimensions presently expects that current cash resources, together
with cash generated from operations should be sufficient to meet its operating
and capital requirements for the next twelve months. Storage Dimensions may,
however, need additional capital prior to that time. There can be no assurance
that additional capital will be available to Storage Dimensions on favorable
terms or at all.
 
                                       20
<PAGE>   22
 
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
 
     This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All forward-looking statements in this document are based on
information available to the Company on the date hereof and assumptions which
the Company believes are reasonable, and the Company assumes no obligation to
update any such forward-looking statements. These forward-looking statements
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this document.
 
     HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. While Storage Dimensions generated net income in 1996, it incurred
losses in 1993, 1994, 1995 and 1997. Storage Dimensions currently expects its
revenues for the fiscal quarter ending March 31, 1998 to be significantly less
than its results of operations for the fourth quarter of 1997 and for the first
quarter of 1997. Storage Dimensions attributes the decline to a combination of
uncertainty in the marketplace resulting from Storage Dimensions' announcement
of the Merger in late 1997 and continued sales force productivity issues. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis.
 
     Storage Dimensions' quarterly operating results have in the past varied and
may in the future vary significantly depending on a number of factors,
including: the level of competition; the size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the Company or its
competitors; the impact of price protection measures and return privileges
granted by the Company to its distributors and VARs; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis; hardware component costs and availability, particularly with
respect to hardware components obtained from sole sources; hardware supply
constraints; the Company's success in expanding its sales and marketing
programs; technological changes in the network storage system market, in
particular the PC-LAN and UNIX storage system markets; the mix of sales among
the Company's sales channels; levels of expenditures on research and
development; changes in the Company's strategy; personnel changes; and general
economic trends and other factors.
 
     Sales for any future quarter are not predictable with any significant
degree of certainty. Storage Dimensions generally operates with limited order
backlog because its products typically are shipped shortly after orders are
received. As a result, sales in any quarter are generally dependent on orders
booked and shipped in that quarter. Sales are also difficult to forecast because
the PC-LAN and UNIX storage system markets are rapidly evolving and Storage
Dimensions' sales cycles vary substantially from customer to customer. The
Company's customers generally have the right to cancel orders at any time and a
limited right to return products for a refund. The cancellation of orders
already placed and the return of products could have a material adverse effect
on operating results in any quarter. Due to the typical timing of customer
orders, the Company often ships products representing a significant portion of
its net sales for a quarter during the last month of that quarter. Any
significant deferral of these sales could have a material adverse effect on the
results of operations in any particular quarter. To the extent that the Company
completes significant sales earlier than expected, operating results for
subsequent quarters may be adversely affected. The Company's expense levels will
be based, in part, on its expectations as to future sales. As a result, if sales
levels are below expectations, net income may be disproportionately affected.
 
     Over the past several years, Storage Dimensions has transitioned its focus
from desktop subsystem products to enterprise RAID products for use primarily in
PC-LAN network applications. As a result, Storage Dimensions has become
increasingly dependent on the market for these products and on its ability to
compete successfully in this market. Although Storage Dimensions has experienced
growth in its net sales of enterprise and OEM products in prior periods, Storage
Dimensions' net sales from its desktop products have declined during the same
periods. In recent periods, the level of net sales growth generated from Storage
Dimensions' enterprise and OEM products has not sustained a consistent
quarter-over-quarter growth in total net sales.
 
                                       21
<PAGE>   23
 
There can be no assurance that Storage Dimensions will experience sales growth
with respect to its enterprise and OEM products in future periods. Due to all of
the foregoing factors, period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indicator of
future performance. It is possible that in some future quarter the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of Storage Dimensions' Common Stock would
likely be materially and adversely affected.
 
     RELIANCE ON KEY CUSTOMERS AND INDIRECT DISTRIBUTION CHANNELS. Storage
Dimensions sells its products through a direct sales force and through
multi-tiered distribution channels. In 1997, Storage Dimensions' top ten
customers, of which six were distributors or VARs, accounted for approximately
42% of Storage Dimensions' total net sales. In particular, The Sun Financial
Group, an end user, accounted for approximately 10% of Storage Dimensions' 1997
total net sales. In 1996, Storage Dimensions' top ten customers, of which six
were distributors or VARs, accounted for approximately 50% of its total net
sales, and Tech Data and Xerox accounted for approximately 8% and 13%,
respectively, of Storage Dimensions' total net sales. Storage Dimensions expects
that a high percentage of the Company's sales for the foreseeable future will be
through indirect channels and to a limited number of customers. There can be no
assurance that orders from existing customers will continue at their historical
levels, or that the Company will be able to obtain orders from new customers.
Storage Dimensions generally has not entered into long-term volume purchase
contracts with their customers, and customers generally have certain rights to
extend or to delay the shipment of their orders. Storage Dimensions provides
price protection to distributors such that, if the company reduces the price of
its products, distributors are entitled to a credit for the difference between
the new, reduced price and the price previously paid for products held in the
distributor's inventory at the time of the price reduction. As a result, price
reductions could have an immediate material adverse effect on the Company's
results of operations, depending upon distributor inventory levels at the time
of the price reduction. In 1995, 1996 and 1997, Storage Dimensions issued
approximately $550,000, $840,000, and $485,000, respectively, of credits in
connection with such price protection. Although Storage Dimensions believes that
it provides adequate allowances for product returns, there can be no assurance
that actual returns will not exceed recorded allowances which could have a
material adverse effect on the Company's operating results. In addition, there
can be no assurance that existing end-user customers will not purchase their
storage equipment from the manufacturer that provides their network computing
systems and, as a result, reduce or eliminate purchases from the Company. The
loss of one or more of the Company's current customers, particularly a principal
customer, or cancellation or rescheduling of orders already placed, could
materially and adversely affect the Company's business, operating results or
financial condition. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
 
     DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE. The storage system
market is characterized by rapid technological change, changing customer needs,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and increased storage
capacities by the Company's competitors and the emergence of new industry
standards could render the Company's products obsolete and unmarketable. The
Company's future success will depend upon its ability to develop and to
introduce new products with increasing storage capabilities (including new
software releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing any other
products that respond to technological changes or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products, or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce new products, in particular those for use with
Windows NT and UNIX systems, in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected.
 
     Storage system products like those offered by Storage Dimensions may
contain undetected software errors or failures when first introduced or as new
versions are released. There can be no assurance that, despite
 
                                       22
<PAGE>   24
 
testing, errors will not be found in new products after commencement of
commercial shipments, resulting in a loss of or delay in market acceptance,
which could have a material adverse effect on the Company's business, operating
results or financial condition. Storage Dimensions standard warranty provides
that if the system does not function to published specifications the Company
will repair or replace the defective component without charge. Although to date
Storage Dimensions' suppliers of hardware components have generally covered the
warranty costs associated with such components, there can be no assurance that
such manufacturers will continue to be willing or able to cover such costs, and
their failure to do so would result in such costs being borne by the Company.
There can be no assurance that the Company's warranty costs will not be
significant in the future. Significant warranty costs, particularly those that
exceed reserves, could have a material adverse effect on the Company's business,
operating results or financial condition.
 
     Storage Dimensions' agreements with customers typically contain provisions
intended to limit exposure to potential product liability claims. It is possible
that the limitation of liability provisions contained in Storage Dimensions'
agreements may not be effective. Although Storage Dimensions has not received
any product liability claims to date, the sale and support of products by the
Company and the incorporation of products from other companies may entail the
risk of such claims. A successful product liability claim against the Company
could have a material adverse effect on the Company's business, operating
results or financial condition.
 
     DEPENDENCE ON KEY PERSONNEL. The Company's future performance will depend
in significant part upon the continued service of its senior management and key
sales and technical personnel. The Company expects to provide incentives such as
salary, benefits and option grants (which are typically subject to vesting over
four years) to attract and retain qualified employees. In recent periods,
Storage Dimensions has experienced difficulties retaining existing and
attracting and training new, skilled personnel. Any inability to attract, train
and retain skilled sales personnel in future periods or the loss of the services
of one or more of the Company's officers or other key employees could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company's future success will also depend on its
ability to attract and retain highly qualified technical and management
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical and management employees
or that it can attract, assimilate or retain other highly qualified technical
and management personnel in the future.
 
     DEPENDENCE ON GROWTH IN THE PC-LAN MARKET. Most of Storage Dimensions'
products address the PC-LAN market, in particular NetWare and Windows NT
applications. The Company will likely continue to focus its development and
marketing efforts on storage system applications, including storage systems for
the UNIX market. The Company's future financial performance will depend in part
on continued growth in the storage systems market. There can be no assurance
that the storage systems market will grow at rates currently anticipated, or at
all. If the storage systems market fails to grow or grows more slowly than
anticipated, or if storage systems based on emerging standards other than
standards adopted by the Company become increasingly accepted by the market, the
Company's business, operating results and financial condition would be
materially and adversely affected. During recent years, segments of the computer
industry have experienced significant economic downturns characterized by
decreased product demand, production over capacity, price erosion, work
slowdowns and layoffs. The Company's operations may in the future experience
substantial fluctuations from period to period as a consequence of such industry
patterns, general economic conditions affecting the timing of orders from major
customers and other factors affecting capital spending. There can be no
assurance that such factors will not have a material adverse effect on the
Company's business, operating results or financial condition.
 
     COMPETITION. The storage system market is intensely competitive. Storage
Dimensions competes in the storage systems market and experiences the greatest
competition from traditional suppliers of storage systems, such as Compaq
Corporation ("Compaq"), Hewlett-Packard Company ("HP") and International
Business Machines Corporation ("IBM"), who market storage systems as part of
their complete computer systems. Storage Dimensions also competes against
independent storage system suppliers, including DEC Storage Works "DEC"), MTI
Technology ("MTI"), Procom Technology, Inc., Auspex Systems, Inc., Data General
Corporation, EMC Corporation, Network Appliance, Inc., Storage Computer, Inc.
and Symbios Logic, Inc. Such competitors could develop and market products that
address the storage systems market, and in particular Windows NT applications.
Many of Storage Dimensions' current and potential competitors have
                                       23
<PAGE>   25
 
significantly greater financial, technical, marketing, purchasing and other
resources than Storage Dimensions, and as a result, may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, to
devote greater resources to the development, promotion and sale of products than
can Storage Dimensions, or to deliver competitive products at a lower end-user
price. Storage Dimensions also expects that competition will increase as a
result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
Storage Dimensions' prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition.
 
     Storage Dimensions believes that the principal competitive factors
affecting their markets include: fault-tolerant reliability, performance, ease
of use, scalability, configurability, price and customer service and support.
There can be no assurance that the Company will be able to successfully
incorporate these factors into its products and to compete against current or
future competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results or financial
condition.
 
     DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS OF HIGH QUALITY
COMPONENTS. Storage Dimensions relies upon a limited number of suppliers of
several key components utilized in the assembly of Storage Dimensions' products.
For example, Storage Dimensions purchases disk drives primarily from Seagate
Technology, Inc. ("Seagate"), DLT tape drives exclusively from Quantum
Corporation ("Quantum") and DGR (Dynamic Growth and Reconfiguration) RAID
controllers exclusively from American Megatrends, Inc. Storage Dimensions'
reliance on its suppliers involves several risks, including: an inadequate
supply of required components; price increases; late deliveries; and poor
component quality. These risks are particularly significant with respect to
suppliers of disk drives because, in order to meet product performance
requirements, Storage Dimensions must obtain disk drives with extremely high
quality and capacity. In addition, there is currently a significant market
demand for disk drives, tape drives and RAID controllers, and from time to time
Storage Dimensions may experience component shortages, selective supply
allocations and increased prices of such components. Although to date Storage
Dimensions has not experienced shortages of such components, there can be no
assurance that the Company will be able to obtain its full requirements of such
components in the future or that prices of such components will not increase. In
addition, there can be no assurance that problems with respect to yield and
quality of such components and timeliness of deliveries will not occur.
Disruption or termination of the supply of these components could delay
shipments of the Company's products and could have a material adverse effect on
the Company's business, operating results or financial condition. Such delays
could also damage relationships with current and prospective customers.
 
     In the past, due to Storage Dimensions' quality requirements, Storage
Dimensions has experienced delays in the shipments of its new products
principally due to an inability to qualify component parts from disk drive
manufacturers and other suppliers, resulting in delay or loss of product sales.
Storage Dimensions has currently qualified disk drives manufactured by Seagate,
tape drives from Quantum, and RAID controllers from Mylex Corporation and
American Megatrends. Although these delays in the past have not had a material
adverse effect upon Storage Dimensions' business, operating results or financial
condition, there can be no assurance that in the future any such delays will not
have such a material adverse effect on the Company.
 
     INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. Storage Dimensions
believes that the continued growth and profitability of the Company will require
expansion of international operations, particularly in Europe and Japan.
Accordingly, Storage Dimensions intends to expand its international operations
and enter additional international markets, which will require significant
management attention and financial resources. In addition, the Company's
international operations are subject to a variety of risks associated with
conducting business internationally, including fluctuations in currency exchange
rates, longer payment cycles, difficulties in staffing and managing
international operations, problems in collecting accounts receivable, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, increases in tariffs, duties, price controls or other
restrictions on foreign currencies, and trade barriers imposed by foreign
countries, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
has only limited experience in developing localized
                                       24
<PAGE>   26
 
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully localize, market, sell and deliver its products internationally.
The inability of the Company to expand its international operations successfully
and in a timely manner could have a material adverse effect on the Company's
business, operating results and financial condition.
 
     DEPENDENCE ON PROPRIETARY TECHNOLOGY. Storage Dimensions' success depends
significantly upon their respective proprietary technology. Storage Dimensions
currently relies on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect their
proprietary rights and seek to protect their respective software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. Storage Dimensions has registered its Storage
Dimensions and LANStor trademarks and will continue to evaluate the registration
of additional trademarks as appropriate. Storage Dimensions generally enters
into confidentiality agreements with their employees and with key vendors and
suppliers. Storage Dimensions currently has one U.S. patent application pending
associated with the object-oriented layered architecture of its RAIDFlex array
management software. There can be no assurance that patents, if issued will
provide a meaningful competitive barrier or that any pending patents will ever
be issued, that the Company will develop proprietary products or technologies
that are patentable, that any patent issued in the future will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's ability to do business. Storage Dimensions believes that the
rapidly changing technology in the computer storage industry makes future
success dependent more on the technical competence and creative skills of its
personnel than on any patents it may be able to obtain.
 
     There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the combined company's proprietary technology. Storage Dimensions has
from time to time received claims that they are infringing third parties'
intellectual property rights, and there can be no assurance that third parties
will not in the future claim infringement by the Company with respect to current
or future products, trademarks or other proprietary rights. Storage Dimensions
expects that companies in the storage system market will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's target markets grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require the Company to
redesign its products or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse effect on the Company's
business, operating results or financial condition. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that
Storage Dimensions regards as proprietary. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology, duplicate the
Company's products or design around patents issued to the Company or other
intellectual property rights of the Company.
 
     EFFECT ON FUTURE STOCK SALES. An aggregate of approximately 4,500,623
shares of Storage Dimensions Common Stock beneficially owned by Capital Partners
and Maxtor Corporation have certain registration rights, including the right to
require registration of their shares under certain circumstances and subject to
certain conditions. The sale of a significant number of the foregoing shares at
one time pursuant to these registration rights may cause a reduction in the
market price of the Storage Dimensions Common Stock.
 
     YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The cost of making the Company's
products Year 2000 compliant is not expected to be material.
 
     Storage Dimensions believes that the purchasing patterns of customers and
potential customers may be affected by the Year 2000 issues in a variety of
ways. Many companies are expending significant resources to
 
                                       25
<PAGE>   27
 
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such as
those offered by the Company. Conversely, Year 2000 issues may cause other
companies to accelerate purchases, thereby causing an increase in short-term
demand and a consequent decrease in long-term demand for products. Additionally,
Year 2000 issues could cause a significant number of companies, including
current customers, to reevaluate their current information system needs, and as
a result consider switching to other systems or suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business, operating
results and financial condition.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The information required by this Item is incorporated by reference from
pages F-1 through F-15 of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The executive officers and directors of the Company, and their ages as of
December 31, 1997, were as follows:
 
<TABLE>
<CAPTION>
            NAME              AGE                            POSITION
            ----              ---                            --------
<S>                           <C>    <C>
David A. Eeg................  51     President, Chief Executive Officer and Director
Gene E. Bowles, Jr..........  50     Former Executive Vice President, Marketing & Customer
                                     Service and Former Director
Robert E. Bylin.............  55     Senior Vice President, Finance and Chief Financial
                                     Officer
Frederick J. Berkowitz......  40     Former Vice President, Systems Engineering
James M. Canter.............  34     Vice President, Software Engineering
Ted Chen....................  45     Vice President, Marketing
Ralph Ciarlanti III.........  38     Vice President, Operations
Kenneth D. Epstein..........  42     Former Vice President, North American Sales
Clarissa Gould Marshall.....  42     Vice President, Corporate Communications
Brian D. Fitzgerald.........  53     Chairman of the Board
A. George Gebauer...........  64     Vice Chairman of the Board
Dr. Chong Sup Park..........  49     Director
</TABLE>
 
     DAVID A. EEG, a founder of the Company, has served as President and Chief
Executive Officer of the Company since the Company's inception in December 1992
and served as a Director since January 1993. From December 1985 to December
1992, Mr. Eeg served as President and Chief Executive Officer of the
Predecessor, which was an independent company from its formation in December
1985 and was acquired by, and became a wholly-owned subsidiary of, Maxtor in
1987. Mr. Eeg's career spans more than 25 years in the computer peripherals
industry and includes executive level positions in firms ranging from start-ups
to large corporations including Atasi, a disk drive manufacturing company,
Shugart Associates, a disk storage company, and Control Data Corporation, a
computer manufacturing company.
 
     GENE E. BOWLES, JR., a founder of the Company, served the Company as an
Executive Vice President with various responsibilities from December 1992 until
December 1997, and was the Executive Vice
 
                                       26
<PAGE>   28
 
President, Marketing and Customer Service and served as Secretary and a Director
from January 1993 until December 1997. From December 1985 to December 1992, Mr.
Bowles served as an Executive Officer of the Predecessor. Mr. Bowles has also
been a member of the Advisory Committee to the Board of Directors of Qualix
since 1991. Prior management experience includes 15 years at companies such as
Atasi, a disk drive manufacturing company, Texas Instruments, an electronic
products company, and Caterpillar, Inc., a heavy machinery company. Mr. Bowles
holds a B.S.E. in Industrial Engineering from the University of Michigan, an
M.S. in Engineering Management from Northeastern University and an M.B.A. from
Stanford University, Graduate School of Business.
 
     ROBERT E. BYLIN has served as Senior Vice President, Finance and Chief
Financial Officer of the Company since August 1994, and from December 1992 to
August 1994, as the Company's Vice President, Finance and Chief Financial
Officer. Mr. Bylin also served as a Director of the Company from August 1994 to
January 1997. From March 1991 to December 1992, Mr. Bylin served as Vice
President, Finance and Chief Financial Officer of the Predecessor. In addition,
Mr. Bylin served as a Director for the Financial Executives Institute, Santa
Clara Valley Chapter, from 1993 to 1995, and as a Director of Technology Federal
Credit Union since 1986. Prior to joining the Predecessor, Mr. Bylin was Vice
President of Finance and Administration for Memorex Computer Supplies, a
computer media and peripherals company, from 1987 until March 1991. Mr. Bylin
holds a B.S. in Mathematics from Trinity College and an M.B.A. from the Harvard
Graduate School of Business.
 
     FREDERICK J. BERKOWITZ served as Vice President, Systems Engineering of the
Company from November 1996 until December 1997. From October 1990 to October
1996, Mr. Berkowitz served as the Director of Platform Development at Hal
Computer Systems, a network computer system company. Mr. Berkowitz holds a B.S.
in Electrical Engineering from Union College and an M.S. in Computer Information
and Control Engineering from the University of Michigan.
 
     JAMES M. CANTER has served as Vice President, Software Engineering of the
Company since March 1996, and has held various software engineering positions at
the Company since December 1992. From February 1988 to December 1992, Mr. Canter
held various software engineering positions at the Predecessor. From 1985 to
1988, Mr. Canter was Product Development Manager for TW Technologies, a supplier
of peripheral storage subsystems. Mr. Canter holds a B.S. in Microbiology from
Arizona State University.
 
     TED CHEN has served as Vice President, Marketing of the Company since July
1995, and from January 1995 to July 1995 as the Company's Vice President, Unix
Marketing. From January 1993 to January 1995, Mr. Chen was the Director,
Marketing at Lynx Real-Time Systems, a software development company, and from
July 1981 to December 1992 he held various marketing positions at
Hewlett-Packard Company, a computer company, most recently as Marketing Manager.
Mr. Chen holds a B.S. and M.S. in Electrical Engineering from Cornell University
and an M.B.A. from the Harvard Graduate School of Business.
 
     RALPH CIARLANTI III has served as Vice President, Operations of the Company
since November 1995, and, from December 1992 to October 1995, held various
manufacturing positions at the Company. From June 1992 to September 1992, Mr.
Ciarlanti was the Senior Quality Engineer of the Predecessor and from October
1992 to December 1992, Mr. Ciarlanti was the Manager of Quality Assurance of the
Predecessor. From July 1987 to June 1992, Mr. Ciarlanti served as the
Peripherals Supplier Quality Manager at Tandem Computers Incorporated, a
computer manufacturing company. Mr. Ciarlanti holds an A.S. in Computer
Technology from San Jose City College.
 
     KENNETH D. EPSTEIN served as Vice President, Sales of the Company from July
1996 until December 1997 and from December 1994 to June 1996, as the Company's
Director, OEM sales. From October 1993 to December 1994 Mr. Epstein was the Vice
President, Sales at Maximum Strategy, a computer storage system company, and the
Regional Director, Sales at QMS, Inc., a computer printer company, from February
1987 to September 1993. Mr. Epstein holds a B.S. in Business Administration from
the University of Colorado.
 
     CLARISSA GOULD MARSHALL has served as Vice President, Corporate
Communications of the Company since October 1997, and from 1992 to October 1997,
served as the Company's Director, Marketing Communications. From 1984 to 1992,
Ms. Marshall held senior product and corporate communications
 
                                       27
<PAGE>   29
 
management positions with voice messaging vendors Tigon and VMX and with
Spectradyne, a provider of interactive video products for the hotel industry.
Ms. Marshall holds a B.S. degree from Ithaca College.
 
     BRIAN D. FITZGERALD has served as Chairman of the Board since inception of
the Company in December 1992. Mr. Fitzgerald formed Capital Partners and Capital
Partners I, L.P., in 1982 and has since been the former's President and a
General Partner of the latter. Capital Partners acts as a diversified investment
holding and operating company. Capital Partners(R) is a registered trademark
that describes the overall group of Capital Partners(R) entities. Mr. Fitzgerald
and Mr. Gebauer formed Capital Partners II, L.P. in 1990. Capital Partners I,
Capital Partners II and related entities hold majority ownership positions and
various officer and director positions in seven other businesses in diversified
industries. From 1977 to 1982, Mr. Fitzgerald was a General Partner of
Industrial Capital Group and from 1974 to 1977 served as strategic planning
manager and corporate staff consultant at General Electric Company. Mr.
Fitzgerald was formerly a Director of Bryant Universal Roofing, Inc., a private
corporation which filed for bankruptcy in April 1996 under Chapter 11 of the
U.S. Bankruptcy Code. Mr. Fitzgerald is also the Chairman of the Board of
Security Capital Corporation, a public company, a position he has held since
July 1990, and is a director of a number of privately held companies. Mr.
Fitzgerald holds an A.B. degree from Princeton University and an M.B.A. from the
Harvard Graduate School of Business.
 
     A. GEORGE GEBAUER has served as Vice Chairman of the Board since inception
of the Company in December 1992. Mr. Gebauer joined Capital Partners in July
1986 and is currently its Vice President. From 1980 to 1986, Mr. Gebauer served
as Director of Corporate Development at Axel Johnson, Inc., a diversified
holding company. In addition, since 1990 Mr. Gebauer has served as the
President, Treasurer and a Director of Security Capital Corporation. Mr. Gebauer
was formerly a Director of Bryant Universal Roofing, Inc., a private corporation
which filed for bankruptcy in April 1996 under Chapter 11 of the U.S. Bankruptcy
Code. In addition, Mr. Gebauer was formerly a Director and Executive Officer of
Alpha Modular Systems, Inc., a privately-held California corporation which had
an involuntary petition under Chapter 7 of the U.S. Bankruptcy Code filed
against it in March 1994 by certain of its creditors in the United States
Bankruptcy Court for the Central District of California. Mr. Gebauer also serves
as Director of a number of privately held companies. Mr. Gebauer holds a B.A. in
Chemistry form Amherst College, an M.S. in Chemical Engineering from M.I.T. and
an M.B.A. from Rutgers University.
 
     CHONG SUP PARK has served as a Director of the Company since August 1996.
Dr. Park is the President of Hyundai Electronics America, an electronics
company, where he has been employed since September 1996, and, since July 1996,
has also served as the Vice Chairman of Maxtor Corporation, a disk drive
manufacturer. Dr. Park was the President of Maxtor Corporation from February
1995 to June 1996, the President of Axil Computer Inc., a workstation
manufacturing company, from July 1993 to January 1995, the Executive Vice
President at Ernst & Young Consulting, Inc., a public accounting firm, from
April 1992 to June 1993, and the Senior Vice President of Hyundai Electronics
Company Limited from January 1990 to March 1992. Dr. Park holds a B.A. in
Management from Yonsei University, an M.A. in Management from Seoul National
University, an M.B.A. from the University of Chicago and a Doctorate in
Management from Nova Southwestern University.
 
     All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Company's Board of Directors. There are no family
relationships between any of the directors or executive officers of the Company.
 
                                       28
<PAGE>   30
 
ITEM 11. EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
     The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to Storage Dimensions in all capacities during the
year ended December 31, 1997 for the (i) current Chief Executive Officer of
Storage Dimensions and (ii) the four most highly compensated Storage Dimensions
executive officers whose salary, bonus and other compensation for such year
exceeded $100,000 (the "Storage Dimensions Named Executive Officers").
 
<TABLE>
<CAPTION>
                                                                                 LONG TERM
                                                  ANNUAL COMPENSATION           COMPENSATION
                                          -----------------------------------   ------------
                                                                 OTHER ANNUAL    SECURITIES
                                                                 COMPENSATION    UNDERLYING
   NAME AND PRINCIPAL POSITION     YEAR   SALARY($)   BONUS($)      ($)(1)       OPTIONS(#)
   ---------------------------     ----   ---------   --------   ------------   ------------
<S>                                <C>    <C>         <C>        <C>            <C>
David A. Eeg.....................  1997   $291,303    $44,793      $ 8,923         100,000
  President and Chief              1996    282,068     16,753        8,315              --
  Executive Officer
Gene Bowles, Jr. ................  1997    242,662     34,818        8,693         100,000
  former Executive Vice
     President,
  Marketing & Customer Service     1996    220,237     13,615        7,398              --
Robert E. Bylin..................  1997    164,690     33,871        4,961          50,000
  Senior Vice President, Finance   1996    156,132     13,360        3,872              --
  and Chief Financial Officer
Ralph Ciarlanti III..............  1997    133,278     11,165        1,470          50,000
  Vice President, Operations       1996    112,853      9,387        3,737          12,500
Kenneth Epstein..................  1997    132,623    114,138        5,289          50,000
  former Vice President,           1996     92,292     68,000        4,050           9,375
  North American Sales
</TABLE>
 
---------------
 
(1) Includes car allowances, group life insurance and long-term disability
    insurance.
 
SEVERANCE AGREEMENTS
 
     In connection with the Merger, Storage Dimensions and each of David Eeg,
President and Chief Executive Officer, and Robert Bylin, Chief Financial Officer
of Storage Dimensions, amended the employment agreements of such persons to
provide certain severance benefits upon termination of their relationship with
Storage Dimensions.
 
OPTION GRANTS DURING 1997
 
     The following table sets forth for each of the Storage Dimensions Named
Executive Officers certain information concerning stock options granted during
the year ended December 31, 1997.
 
<TABLE>
<CAPTION>
                                                                   INDIVIDUAL GRANTS
                                               ---------------------------------------------------------
                                               NUMBER OF
                                               SECURITIES    PERCENT OF TOTAL
                                               UNDERLYING    OPTIONS GRANTED     EXERCISE
                                                OPTIONS      TO EMPLOYEES IN       PRICE      EXPIRATION
                    NAME                       GRANTED(1)          1997          PER SHARE     DATE(2)
                    ----                       ----------    ----------------    ---------    ----------
<S>                                            <C>           <C>                 <C>          <C>
David A. Eeg.................................   100,000            9.9%            $7.00        3/3/07
Gene Bowles, Jr. ............................   100,000            9.9%             7.00        3/3/07
Robert E. Bylin..............................    50,000            4.9%             7.00        3/3/07
Ralph Ciarlanti III..........................    50,000            4.9%             7.00        3/3/07
Kenneth Epstein..............................    50,000            4.9%             7.00        3/3/07
</TABLE>
 
---------------
 
(1) Options generally have a ten year term, and vest at the rate of 1/8 of the
    shares six months from the vesting start date and the balance monthly over
    the succeeding 42 months.
 
(2) Options may terminate before their expiration dates if the optionee's status
    as an employee or consultant is terminated or upon the optionee's death or
    disability prior to such date.
 
                                       29
<PAGE>   31
 
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
 
     The following table sets forth for each of the Storage Dimensions Named
Executive Officers certain information concerning options exercised during 1997
and the number of shares subject to both exercisable and unexercisable stock
options as of December 31, 1997. The following table also sets forth the value
of unexercised "in-the-money" options held at December 31, 1997.
 
<TABLE>
<CAPTION>
                                                                      NUMBER OF
                                          VALUE REALIZED        SECURITIES UNDERLYING         VALUE OF UNEXERCISED
                           NUMBER OF     (MARKET PRICE AT      UNEXERCISED OPTIONS AT        IN-THE-MONEY OPTIONS AT
                            SHARES        EXERCISE LESS           DECEMBER 31, 1997          DECEMBER 31, 1997($)(1)
                          ACQUIRED ON        EXERCISE        ---------------------------   ---------------------------
          NAME             EXERCISE         PRICE)($)        EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
          ----            -----------   ------------------   -----------   -------------   -----------   -------------
<S>                       <C>           <C>                  <C>           <C>             <C>           <C>
David A. Eeg............        --                --           81,250         81,250        $221,875             --
Gene Bowles, Jr. .......        --                --           81,250         81,250         221,875             --
Robert E. Bylin.........        --                --           17,292         42,865          28,105        $ 7,952
Ralph Ciarlanti III.....     9,791           $53,230           10,155         50,054           2,436         28,139
Kenneth Epstein.........        --                --           14,819             --          16,784             --
</TABLE>
 
---------------
 
(1) Calculated by determining the difference between the fair market value of
    the securities underlying the option at December 31, 1997 and the exercise
    price of such person's option.
 
(2) The value realized represents the estimated value of shares of Storage
    Dimensions Common Stock determined as of the date of exercise by reference
    to an independent appraisal of Storage Dimensions Common Stock, less the
    option exercise price.
 
EMPLOYEE STOCK PLANS
 
     1993 STOCK OPTION PLAN
 
     Storage Dimensions' 1993 Stock Option Plan (the "1993 Option Plan"), which
provides for the grant of 555,555 shares of Storage Dimensions Common Stock, was
approved by the Storage Dimensions Board and stockholders on June 11, 1993. As
of December 31, 1997, options to purchase 360,580 shares were outstanding under
the 1993 Option Plan and 71,188 shares of Storage Dimensions Common Stock
remained available for issuance under the 1993 Option Plan. The terms of the
1993 Option Plan are substantially similar to those of the 1996 Stock Option
Plan described below. Effective January 1998, the 1993 Option Plan was amended
to provide that all outstanding options granted under the 1993 Option Plan (but
not any options granted in the future) will become fully vested and exercisable
upon completion of the Merger.
 
     1996 STOCK OPTION PLAN
 
     Storage Dimensions' 1996 Stock Option Plan (the "1996 Option Plan")
provides for the granting to employees and consultants of nonstatutory stock
options. The 1996 Option Plan was approved by the Board of Directors in December
1996 and by the stockholders in January 1997. A total of 1,000,000 shares of
Storage Dimensions Common Stock was originally reserved for issuance pursuant to
the 1996 Option Plan. As of December 31, 1997, options to purchase 805,831
shares of Storage Dimensions Common Stock were outstanding under the 1996 Option
Plan and 194,169 shares of Storage Dimensions Common Stock remained available
for issuance under the 1996 Option Plan. At the Storage Dimensions Special
Meeting of Stockholders to be held on March 31, 1998, Storage Dimensions
stockholders will be asked to approve an amendment to the 1996 Option Plan in
order to increase the number of shares issuable thereunder to 3,000,000.
 
     1996 EMPLOYEE STOCK PURCHASE PLAN
 
     Storage Dimensions' 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was approved by the Storage Dimensions Board in December 1996 and by the
stockholders in January 1997. A total of 200,000 shares of Storage Dimensions
Common Stock was originally reserved for issuance under the Purchase Plan. As of
December 31, 1997, 47,253 shares of Storage Dimensions Common Stock had been
purchased
 
                                       30
<PAGE>   32
 
under the Purchase Plan and 152,747 shares of Storage Dimensions Common Stock
remained available for purchase under the Purchase Plan. At the Storage
Dimensions Special Meeting of Stockholders to be held on March 31, 1998, Storage
Dimensions stockholders will be asked to consider and approve an amendment to
the Purchase Plan to increase the number of shares of Storage Dimensions Common
Stock issuable thereunder to 400,000.
 
401(k) PLAN
 
     Storage Dimensions has a 401(k) Plan, pursuant to which eligible employees
may elect to reduce their current salary by up to the statutorily prescribed
annual limit ($10,000 in 1998) and have the amount of such reduction contributed
to the 401(k) Plan. Storage Dimensions matches employee contributions to the
401(k) Plan at the rate of 50% of the employee's contribution up to a specified
limit. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by participants to the 401(k) Plan, and income earned on plan
contributions, are not taxable to participants until withdrawn from the 401(k)
Plan.
 
DIRECTOR COMPENSATION
 
     Beginning January 1, 1997, nonemployee members of the Company's Board of
Directors receive an annual fee of $16,000 plus $1,000 for each board meeting
attended in person for their services as directors. Prior to that time,
directors did not receive compensation for services as directors. The Company's
1996 Stock Plan provides that options may be granted to nonemployee directors of
the Company. See "Employee Stock Plans -- 1996 Stock Option Plan."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee of the Board is comprised of directors A. George
Gebauer and C.S. Park. No interlocking relationship exists between the Company's
Board of Directors or Compensation Committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
 
                                       31
<PAGE>   33
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding the ownership
of Storage Dimensions Common Stock as of February 23, 1998 by: (i) each person
or entity who is known by Storage Dimensions to beneficially own five percent or
more of the outstanding Storage Dimensions Common Stock, (ii) each director of
Storage Dimensions; (iii) the Storage Dimensions Named Executive Officers; and
(iv) all directors and executive officers of Storage Dimensions set forth below
as a group.
 
<TABLE>
<CAPTION>
                                                              NUMBER OF   PERCENT OF COMMON
                      NAME AND ADDRESS                        SHARES(1)   STOCK OWNED(1)(2)
                      ----------------                        ---------   ------------------
<S>                                                           <C>         <C>
5% STOCKHOLDERS
  Capital Partners Group(3).................................  2,900,623          36.1%
  Maxtor Corporation........................................  1,600,000          19.9
OFFICERS & DIRECTORS
  David A. Eeg(4)...........................................    301,982           3.7
  Gene Bowles, Jr.(5).......................................    301,982           3.7
  Robert E. Bylin(6)........................................    131,638           1.6
  James M. Canter(7)........................................     79,748             *
  Ted Chen(8)...............................................     76,375             *
  Ralph Ciarlanti III(9)....................................     70,734             *
  Kenneth Epstein...........................................     17,805             *
  Clarissa Gould Marshall(10)...............................     41,212             *
  Brian D. Fitzgerald(3)(11)................................  2,920,623          36.3
  A. George Gebauer(3)(11)..................................     20,000             *
  Chong Sup Park(11)(12)....................................  1,620,000          20.1
  All executive officers and directors as a group (11
     persons)(13)...........................................  5,582,099          64.1%
</TABLE>
 
---------------
 
  *  Represents beneficial ownership of less than one percent.
 
 (1) This table is based upon information supplied by officers, directors and
     principal stockholders and Schedules 13D and 13G filed with the Commission.
     Unless otherwise indicated in the footnotes to this table and subject to
     community property laws where applicable, Storage Dimensions believes that
     each of the stockholders named in this table has sole voting and investment
     power with respect to the shares indicated as beneficially owned.
     Applicable percentages are based on 8,022,430 shares outstanding on
     February 23, 1998, adjusted as required by rules promulgated by the
     Commission.
 
 (2) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission. In computing the number of shares
     beneficially owned by a person and the percentage ownership of that person,
     shares of Storage Dimensions Common Stock subject to options held by that
     person that are currently exercisable or exercisable within 60 days of
     February 23, 1998 are deemed outstanding. Such shares, however, are not
     deemed outstanding for the purpose of computing the percentage ownership of
     each other person. Except as indicated in the footnotes to this table and
     pursuant to applicable community property laws, each stockholder named in
     the table has sole voting and investment power with respect to the shares
     set forth opposite such stockholder's name.
 
 (3) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
     shares held by CP Acquisition, L.P. No. 4B, 3,612 shares held by Capital
     Partners, Inc., and 293,781 shares held by FGS, Inc. The following
     affiliated entities are included in "Capital Partners Group"; (a) CP
     Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
     Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
     Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
     the sole stockholder, an officer and a director and A. George Gebauer is an
     officer; and (d) FGS, Inc., a
 
                                       32
<PAGE>   34
 
     Delaware corporation, of which Mr. Fitzgerald is the controlling
     stockholder, an officer and a director and Mr. Gebauer is an officer and a
     director. Mr. Fitzgerald may be deemed to beneficially own the shares held
     by the entities comprising the Capital Partners Group. Mr. Gebauer
     disclaims beneficial ownership of shares held by the entities comprising
     the Capital Partners Group.
 
 (4) Includes options to purchase 162,500 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
 (5) Includes options to purchase 162,500 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
 (6) Includes options to purchase 60,157 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
 (7) Includes options to purchase 75,000 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
 (8) Includes options to purchase 70,000 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
 (9) Includes options to purchase 60,209 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
(10) Includes options to purchase 40,000 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
(11) Includes options to purchase 20,000 shares of Storage Dimensions Common
     Stock exercisable at or within 60 days of February 23, 1998.
 
(12) Represents shares held by Maxtor Corporation. Dr. Park is President of
     Hyundai Electronics America, the parent of Maxtor Corporation and Vice
     Chairman of the Board of Maxtor Corporation.
 
(13) Includes shares held by the Capital Partners Group and Maxtor Corporation,
     as well as options to purchase an aggregate of 690,366 shares of Storage
     Dimensions Common Stock at or within 60 days of February 23, 1998. See
     notes 3 through 12 above.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Maxtor Promissory Note. In connection with the Storage Acquisition, Storage
Dimensions issued to Maxtor Corporation ("Maxtor") a promissory note in the
original principal amount of $4 million (the "Maxtor Note"). The Maxtor Note
bears interest at the rate of 8% per annum during the first year, 10% per annum
during the second year and 12% per annum for the remaining term. The Maxtor Note
was originally due on December 26, 1995 but the due date was subsequently
extended to the earlier to occur of the completion of Storage Dimensions'
initial public offering or May 10, 1997. During 1994, 1995 and 1996, Storage
Dimensions paid to Maxtor $400,000, $482,042 and $469,377, respectively, in
interest payments under the Maxtor Note. Storage Dimensions also paid $400,000
of principal in the third quarter of 1996 under the Maxtor Note. Storage
Dimensions paid the remaining outstanding principal together with unpaid
interest with a portion of the proceeds of its initial public offering. In
addition, during 1994 and 1995, Storage Dimensions purchased goods (principally
rigid magnetic and optical disk drives) from Maxtor and its affiliates totaling
$1.4 million and $69,000, respectively. Storage Dimensions did not purchase any
goods from Maxtor during 1996 or 1997.
 
     Capital Partners Agreements. In connection with the Storage Acquisition in
December 1992, Storage Dimensions entered into a certain advisory agreement with
Capital Partners. Capital Partners, together with its affiliates, is the holder
of a majority of Storage Dimensions' outstanding voting stock. Messrs.
Fitzgerald and Gebauer, current directors of Storage Dimensions, are also
officers of Capital Partners. During 1994, 1995 and 1996, Storage Dimensions
paid to Capital Partners $362,000, $360,000 and $729,000, respectively, pursuant
to such advisory agreement. The 1996 amount includes a one-time payment of
$360,000 paid by Storage Dimensions in connection with termination of the
advisory agreement by mutual agreement in December 1996.
 
                                       33
<PAGE>   35
 
     In addition, in connection with the proposed Merger Capital Partners has
entered into a standstill agreement with Storage Dimensions pursuant to which it
has agreed not to purchase additional shares of Storage Dimensions Common Stock,
with certain exceptions, until the earlier of five years from the closing of the
Merger or such time as Capital Partners no longer holds 5% of the outstanding
Storage Dimensions Common Stock.
 
     Executive Officer Loans. In 1996, Storage Dimensions loaned David Bultman,
its Senior Vice President of Engineering at the time, amounts totaling $90,000.
Mr. Bultman is no longer employed with Storage Dimensions. The remaining balance
of Mr. Bultman's loan was $21,284 at December 31, 1997.
 
     Severance Agreements. In connection with the Merger, Storage Dimensions and
each of David Eeg, President and Chief Executive Officer, and Robert Bylin,
Chief Financial Officer of Storage Dimensions, amended the employment agreements
of such persons to provide certain severance benefits upon termination of their
relationship with Storage Dimensions.
 
     With respect to Mr. Eeg, upon termination of his status as a full time
employee or consultant of Storage Dimensions at either his option or that of
Storage Dimensions, Mr. Eeg shall receive severance payments equal to 66 weeks
of his regular salary, which shall be paid over such period. In addition, Mr.
Eeg's stock options granted under Storage Dimensions stock option plans have
been amended to provide that such options may be exercised for a period of two
years from the date of termination of his status as a full-time employee or
consultant of Storage Dimensions.
 
     With respect to Mr. Bylin, upon termination of his status as a full time
employee or consultant of Storage Dimensions at either his option or the option
of Storage Dimensions, Mr. Bylin shall receive severance payments equal to 47
weeks of his regular salary, which shall be paid over such period. In addition,
Mr. Bylin's stock options granted under Storage Dimensions stock option plans
have been amended to provide that such stock options may be exercised for a
period of one year from the date of termination of his status as a full-time
employee or consultant of Storage Dimensions under certain circumstances.
 
     In addition, both of such employment agreements, as amended, provide that
neither Mr. Eeg nor Mr. Bylin will compete with Storage Dimensions for the
remaining period of service by Messrs. Eeg and Bylin and during the time
severance payments are being made to them by Storage Dimensions.
 
     All future transactions, including loans, between Storage Dimensions and
its officers, directors and principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors of the Board of Directors, and will be
on terms no less favorable to Storage Dimensions than could be obtained from
unaffiliated third parties.
 
                                       34
<PAGE>   36
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(A) DOCUMENTS FILED WITH REPORT
 
      1. FINANCIAL STATEMENTS
 
        The following Consolidated Financial Statements and Report of
        Independent Public Accountants are incorporated by reference to page F-1
        through F-15 of this Form 10-K.
 
        The consolidated balance sheets for the years ended December 31, 1996
        and 1997, and the consolidated statements of operations, statements of
        stockholders' equity and cash flows for each of the three years ended
        December 31, 1995, 1996, 1997, together with the notes thereto.
 
        The report of Price Waterhouse LLP, independent public accountants, at
        and for the years ended December 31, 1996 and 1997, dated January 16,
        1998.
 
      2. FINANCIAL STATEMENT SCHEDULES
 
        See Exhibit 27.1
 
      3. EXHIBITS
 
<TABLE>
<CAPTION>
    EXHIBIT
      NO.                             DESCRIPTION
    -------                           -----------
    <S>       <C>
     2.1      Agreement and Plan of Merger and Reorganization dated as of
              December 22, 1997, among the Registrant, Artecon, Inc. and
              Storage Acquisition Corp.(1)(3)
     3.1      Second Amended and Restated Certificate of Incorporation of
              Registrant.(2)
     3.2      Form of Certificate of Amendment of Registrant's Amended and
              Restated Certificate of Incorporation.(4)
     3.3      Bylaws of Registrant.(2)
     4.1      Form of Registrant's Common Stock Certificate.(2)
     4.2      Form of Registrant's Series A Preferred Stock
              Certificate.(4)
    10.1      Form of Voting Agreement, dated as of December 22, 1997,
              between Registrant and certain shareholders of Artecon,
              Inc.(3)
    10.2      Form of Voting Agreement, dated December 22, 1997, between
              Artecon, Inc. and certain stockholders of the Registrant as
              named therein.(3)
    10.3      Form of Indemnification Agreement entered into between the
              Registrant and its directors and officers.(2)
    10.4      Registrant's 1996 Stock Option Plan, as amended.(4)
    10.5      Registrant's 1996 Employee Stock Purchase Plan, as
              amended.(4)
    10.6      Stockholders Agreement, dated December 26, 1992, among the
              Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
              Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B,
              Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
              certain other management investors.(2)
    10.7      Loan and Security Agreement, dated May 16, 1996, between the
              Registrant and Congress Financial Corporation (Western).(2)
    10.8      Lease, dated October 8, 1993, between the Registrant and
              Callahan-Pentz Properties, McCarthy Four.(2)
    10.9      First Amendment to Lease, dated June 28, 1995, between the
              Registrant and Callahan-Pentz Properties, McCarthy Four.(2)
    10.10     Form of employment agreement between the Registrant and
              certain employees.(2)
</TABLE>
 
                                       35
<PAGE>   37
 
<TABLE>
<CAPTION>
    EXHIBIT
      NO.                             DESCRIPTION
    -------                           -----------
    <S>       <C>
    10.11     Standstill Agreement, dated December 22, 1997, between the
              Registrant, Artecon, Inc., CP Acquisition, L.P. No. 4A, CP
              Acquisition, L.P. No. 4B, Capital Partners, Inc., and FGS,
              Inc.(4)
    10.12     Form of Amendment No. 1 to the Employment Agreement between
              the Registrant and David Eeg.(4)
    10.13     Form of Amendment No. 1 to the Employment Agreement between
              the Registrant and Robert Bylin.(4)
    10.14     Form of employment agreement, between the Registrant and
              certain employees.(2)
    21.1      Subsidiaries of Registrant.(4)
    23.1      Consent of Price Waterhouse LLP, Independent Accountants.
    24.1      Power of Attorney. Reference is made to page 38.
    27.1      Financial Data Schedule
</TABLE>
 
---------------
 
(1) Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant
    undertakes to furnish such schedules to the Commission supplementally upon
    request.
 
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
    333-20045), as amended, and incorporated herein by reference.
 
(3) Filed as an exhibit to the Schedule 13D filed by Artecon, Inc. on December
    29, 1997, and incorporated herein by reference.
 
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-4 (No.
    333-47593), as amended, and incorporated herein by reference.
 
(b) Reports on Form 8-K
 
        On December 30, 1997, the Company filed a report on Form 8-K, which
        reported under Item 5 the Agreement and Plan of Merger and
        Reorganization, dated as of December 22, 1997 entered into by the
        Company, Storage Acquisition Corp. and Artecon, Inc.
 
(c) See response to Item 14(a)(3) above.
 
(d) See response to Item 14(a)(2) above.
 
                                       36
<PAGE>   38
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          STORAGE DIMENSIONS, INC.
 
                                          By:       /s/ DAVID A. EEG
                                            ------------------------------------
                                                        David A. Eeg
                                               President and Chief Executive
                                                           Officer
 
                                          Date: March 26, 1998
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David A. Eeg and Robert E. Bylin, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereto.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURES                                      TITLE                      DATE
                     ----------                                      -----                 --------------
<C>                                                      <S>                               <C>
 
                  /s/ DAVID A. EEG                       President and Chief Executive     March 26, 1998
-----------------------------------------------------    Officer (Principal Executive
                    David A. Eeg                         Officer)
 
                 /s/ ROBERT E. BYLIN                     Senior Vice President,            March 26, 1998
-----------------------------------------------------    Finance, and Chief Financial
                   Robert E. Bylin                       Officer (Principal Financial
                                                         and Accounting Officer
 
               /s/ BRIAN D. FITZGERALD                   Director                          March 26, 1998
-----------------------------------------------------
                 Brian D. Fitzgerald
 
                /s/ A. GEORGE GEBAUER                    Director                          March 26, 1998
-----------------------------------------------------
                  A. George Gebauer
 
                 /s/ CHONG SUP PARK                      Director                          March 26, 1998
-----------------------------------------------------
                   Chong Sup Park
</TABLE>
 
                                       37
<PAGE>   39
 
                         INDEX TO FINANCIAL STATEMENTS
 
                            STORAGE DIMENSIONS, INC.
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Consolidated Balance Sheet as of December 31, 1996 and
  1997......................................................  F-3
Consolidated Statement of Operations for the years ended
  December 31, 1995, 1996 and 1997..........................  F-4
Consolidated Statement of Stockholders' Equity for the years
  ended December 31, 1995, 1996
  and 1997..................................................  F-5
Consolidated Statement of Cash Flows for the years ended
  December 31, 1995, 1996 and 1997..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   40
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
Storage Dimensions, Inc.
 
     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Storage
Dimensions, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
 
PRICE WATERHOUSE LLP
San Jose, California
January 16, 1998
 
                                       F-2
<PAGE>   41
 
                            STORAGE DIMENSIONS, INC.
 
                           CONSOLIDATED BALANCE SHEET
                  (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1996       1997
                                                              -------    -------
<S>                                                           <C>        <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 1,682    $ 7,094
  Accounts receivable, net..................................   11,939     12,178
  Inventories...............................................    6,304      5,606
  Prepaid expenses and other assets.........................      858        732
                                                              -------    -------
          Total current assets..............................   20,783     25,610
Property and equipment, net.................................    2,115      1,822
                                                              -------    -------
          Total assets......................................  $22,898    $27,432
                                                              =======    =======
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 5,061    $ 4,016
  Accrued liabilities.......................................    3,580      4,211
  Short-term borrowings.....................................    6,029         86
  Short-term debt from stockholder..........................    3,600         --
                                                              -------    -------
          Total current liabilities.........................   18,270      8,313
                                                              -------    -------
Commitments (Note 10)
Stockholders' equity:
  Series A Convertible Preferred Stock, $0.005 par value,
     13,850 and 10,000 shares authorized; 13,850 and no
     shares issued and outstanding..........................       69         --
  Common Stock, $0.005 par value, 40,000 shares authorized;
     1,674 and 7,933 shares issued and outstanding..........        8         40
  Additional paid-in capital................................   10,442     27,396
  Deferred stock compensation...............................     (486)      (351)
  Accumulated deficit.......................................   (5,405)    (7,966)
                                                              -------    -------
          Total stockholders' equity........................    4,628     19,119
                                                              -------    -------
          Total liabilities and stockholders' equity........  $22,898    $27,432
                                                              =======    =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   42
 
                            STORAGE DIMENSIONS, INC.
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1995       1996       1997
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Net sales:
  Enterprise and OEM........................................  $52,475    $69,873    $70,966
  Desktop...................................................    7,683      2,437        366
                                                              -------    -------    -------
                                                               60,158     72,310     71,332
Cost of goods sold..........................................   37,170     45,327     45,723
                                                              -------    -------    -------
Gross profit................................................   22,988     26,983     25,609
                                                              -------    -------    -------
Operating expenses:
  Sales and marketing.......................................   13,344     14,081     17,491
  Research and development..................................    5,377      5,872      6,250
  General and administrative................................    3,390      3,819      4,231
  Advisory fee payable to related party.....................      360        729         --
                                                              -------    -------    -------
                                                               22,471     24,501     27,972
                                                              -------    -------    -------
Income (loss) from operations...............................      517      2,482     (2,363)
Interest expense............................................     (641)      (686)      (255)
Related party interest expense..............................     (482)      (469)       (90)
Interest income.............................................       --         --        277
                                                              -------    -------    -------
Income (loss) before provision for income taxes.............     (606)     1,327     (2,431)
Provision for income taxes..................................       30        132        130
                                                              -------    -------    -------
Net income (loss)...........................................  $  (636)   $ 1,195    $(2,561)
                                                              =======    =======    =======
Basic net income (loss) per share...........................  $ (0.40)   $  0.73    $ (0.39)
                                                              =======    =======    =======
Weighted average shares used to calculate basic net
  income (loss) per share...................................    1,604      1,641      6,651
                                                              =======    =======    =======
Diluted net income (loss) per share.........................  $ (0.40)   $  0.22    $ (0.39)
                                                              =======    =======    =======
Weighted average shares used to calculate diluted net
  income (loss) per share...................................    1,604      5,529      6,651
                                                              =======    =======    =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   43
 
                            STORAGE DIMENSIONS, INC.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                    SERIES A
                                   CONVERTIBLE
                                 PREFERRED STOCK      COMMON STOCK     ADDITIONAL     DEFERRED                       TOTAL
                                -----------------   ----------------    PAID-IN        STOCK       ACCUMULATED   STOCKHOLDERS'
                                SHARES    AMOUNTS   SHARES   AMOUNTS    CAPITAL     COMPENSATION     DEFICIT        EQUITY
                                -------   -------   ------   -------   ----------   ------------   -----------   -------------
<S>                             <C>       <C>       <C>      <C>       <C>          <C>            <C>           <C>
Balance at December 31,
  1994........................   13,453    $ 67     1,600      $ 8      $ 9,220        $  --         $(5,964)       $ 3,331
Issuance of Series A
  Convertible Preferred Stock
  to employees................      341       2        --       --          199           --              --            201
Redemption of Series A
  Convertible Preferred.......      (60)     --        --       --          (35)          --              --            (35)
Stock Common Stock options
  exercised...................       --      --         8       --            1           --              --              1
Net loss......................       --      --        --       --           --           --            (636)          (636)
                                -------    ----     -----      ---      -------        -----         -------        -------
Balance at December 31,
  1995........................   13,734      69     1,608        8        9,385           --          (6,600)         2,862
Issuance of Series A
  Convertible Preferred Stock
  to employees................      383       2        --       --          490           --              --            492
Redemption of Series A
  Convertible Preferred
  Stock.......................     (267)     (2)       --       --         (155)          --              --           (157)
Common Stock options
  exercised, net..............       --      --        66       --            7           --              --              7
Equity related to issuance of
  Common Stock options........       --      --        --       --          715         (540)             --            175
Amortization of deferred stock
  compensation................       --      --        --       --           --           54              --             54
Net income....................       --      --        --       --           --           --           1,195          1,195
                                -------    ----     -----      ---      -------        -----         -------        -------
Balance at December 31,
  1996........................   13,850      69     1,674        8       10,442         (486)         (5,405)         4,628
Preferred Stock converted into
  common shares...............  (13,850)    (69)    3,462       18           51           --              --             --
Common Stock issued pursuant
  to initial public offering,
  net of expenses.............       --      --     2,700       14       16,615           --              --         16,629
Common Stock issued under
  employee stock purchase
  plan........................       --      --        47       --          260           --              --            260
Common Stock options
  exercised, net..............       --      --        50       --           28           --              --             28
Amortization of deferred stock
  compensation................       --      --        --       --           --          135              --            135
Net loss......................       --      --        --       --           --           --          (2,561)        (2,561)
                                -------    ----     -----      ---      -------        -----         -------        -------
Balance at December 31,
  1997........................       --    $ --     7,933      $40      $27,396        $(351)        $$(7,966)      $19,119
                                =======    ====     =====      ===      =======        =====         =======        =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   44
 
                            STORAGE DIMENSIONS, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1995       1996       1997
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $  (636)   $ 1,195    $(2,561)
  Adjustments to reconcile net income (loss) to cash
     provided by operating activities:
     Depreciation and amortization..........................    2,495      1,147      1,238
     Compensation expense from stock and stock options......       --        434        135
     Changes in assets and liabilities:
       Accounts receivable..................................   (1,141)    (2,293)      (239)
       Inventory............................................   (2,106)       611        698
       Prepaid expenses and other assets....................      258       (350)       126
       Accounts payable.....................................    2,158     (1,180)    (1,045)
       Accrued liabilities..................................     (118)       769        631
                                                              -------    -------    -------
          Net cash provided by (used in) operating
            activities......................................      910        333     (1,017)
                                                              -------    -------    -------
Cash flows from investing activities:
  Acquisition of property and equipment.....................   (1,363)      (943)      (945)
                                                              -------    -------    -------
Cash flows from financing activities:
  Proceeds from initial public offering, net................       --         --     16,629
  Proceeds from sale of Series A Convertible Preferred Stock
     to employees...........................................      201        287         --
  Payments to repurchase Series A Convertible Preferred
     Stock..................................................      (35)      (157)        --
  Proceeds from exercise of Common Stock options, net.......        1          7         28
  Proceeds from employee stock purchase plan................       --         --        260
  Proceeds from (repayments of) from short-term
     borrowings.............................................      179      1,792     (9,543)
                                                              -------    -------    -------
          Net cash provided by financing activities.........      346      1,929      7,374
                                                              -------    -------    -------
Net increase (decrease) in cash and cash equivalents........     (107)     1,319      5,412
Cash and cash equivalents at beginning of year..............      470        363      1,682
                                                              -------    -------    -------
Cash and cash equivalents at end of year....................  $   363    $ 1,682    $ 7,094
                                                              =======    =======    =======
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest....................  $   929    $ 1,066    $   104
                                                              =======    =======    =======
  Cash paid during the year for income taxes................  $    14    $    25    $   451
                                                              =======    =======    =======
Supplemental schedule of noncash financing activities:
  Refinancing of short-term borrowings......................  $    --    $ 5,289    $    --
                                                              =======    =======    =======
  Issuance of Common Stock upon conversion of Preferred
     Stock..................................................  $    --    $    --    $    69
                                                              =======    =======    =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   45
 
                            STORAGE DIMENSIONS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
 
     Storage Dimensions, Inc. (the "Company") was incorporated in Delaware in
November 1992. The Company designs, manufactures, markets and supports high
performance data storage systems for open systems network applications.
 
     The Company was formed in order to effect a majority interest
management-led buy-out (the "MBO") of Storage Dimensions, Inc. (a wholly owned
subsidiary of Maxtor Corporation ("Maxtor") on December 26, 1992 by an investor
group comprised of members of management and Capital Partners, Inc.
 
     On December 22, 1997 the Company entered into an agreement and Plan of
Merger and Reorganization with Artecon, Inc. ("Artecon") setting forth the terms
of a merger between the Company and Artecon (the "Merger"). Under the terms of
the Merger, each share of Artecon Common Stock would be converted into the right
to receive approximately 2.16 shares of Storage Dimensions Common Stock and each
share of Artecon Preferred Stock would be converted into the right to receive
one share of Storage Dimensions Preferred Stock, and Artecon would become a
wholly owned subsidiary of Storage Dimensions. For accounting purposes, the
Merger would be treated as a purchase of Storage Dimensions by Artecon since
former holders of Artecon equity securities would hold and have voting power
with respect to approximately 62.5% of the total issued and outstanding voting
capital stock of the combined company, giving effect to the conversion of the
Storage Dimensions Preferred Stock to be issued in the Merger and the exercise
of outstanding Storage Dimensions stock with an exercise price of less than
$3.9375 per share.
 
BASIS OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions.
 
USE OF ESTIMATES
 
     The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
 
CASH AND CASH EQUIVALENTS
 
     Cash and cash equivalents consist of highly liquid investment instruments
with original maturities of three months or less.
 
INVENTORIES
 
     Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
 
PROPERTY AND EQUIPMENT
 
     Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining lease term.
 
REVENUE RECOGNITION AND PRODUCT WARRANTY
 
     Revenue from product sales is recognized upon shipment.
 
                                       F-7
<PAGE>   46
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Certain sales are made to distributors who have limited rights to return
products or obtain credits for pricing changes. The Company accrues for the
estimated costs of sales returns and allowances in the period the related
revenue is recognized.
 
     Also, the Company provides product warranties, generally for periods of
either three or five years from the date of product sale. The Company provides
for the estimated cost to repair or replace products under warranty arrangements
in the period the related revenue is recognized.
 
RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs are charged to operations as incurred.
 
SOFTWARE DEVELOPMENT COSTS
 
     To date, the period between achieving technological feasibility and
completion of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
 
ADVERTISING COSTS
 
     Advertising costs are charged to operations as incurred in accordance with
AICPA Statement of Position 93-7, "Reporting on Advertising Costs."
 
FISCAL YEAR
 
     The Company operates and reports financial results on a
fifty-two/fifty-three week fiscal year cycle ending on the Saturday nearest
December 31. The Company also follows a five-four-four week quarterly cycle. For
convenience, the Company presents its fiscal year as ending on December 31.
Fiscal 1995, 1996 and 1997 each contained 52 weeks.
 
ACCOUNTING FOR STOCK-BASED COMPENSATION
 
     The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
 
NET INCOME (LOSS) PER SHARE
 
     In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("FAS 128"), "Earnings per Share." All historical earnings per
share information has been restated as required by FAS 128.
 
     Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented and also gives
retroactive effect to the one-for-four reverse split of all shares of Common
Stock as described in Note 6.
 
     Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares of the Company's Series A
Convertible Preferred Stock into Common Stock. Per share amounts also give
retroactive effect to the one-for-four reverse split of all shares of Common
Stock (and an adjustment to the conversion price of the Series A Convertible
Preferred Stock) as described in Note 6.
 
                                       F-8
<PAGE>   47
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following is a reconciliation between the components of the basic and
diluted net income (loss) per share calculations (in thousands except per share
amounts):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                             -------------------------------------------------------------------------------
                                       1995                       1996                       1997
                             ------------------------   ------------------------   -------------------------
                                                PER                        PER                         PER
                                               SHARE                      SHARE                       SHARE
                             INCOME   SHARES   AMOUNT   INCOME   SHARES   AMOUNT   INCOME    SHARES   AMOUNT
                             ------   ------   ------   ------   ------   ------   -------   ------   ------
<S>                          <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>      <C>
Basic income (loss) per
  share....................
  Income available to
     common stockholders...  $(636)   1,604    $(0.40)  $1,195   1,641    $0.73    $(2,561)  6,651    $(0.39)
Effect of dilutive
  securities Options.......     --       --                 --     464                  --      --
  Preferred stock..........     --       --                 --   3,424                  --      --
                             -----    -----             ------   -----             -------   -----
Diluted net income (loss)
  per share................
  Income available to
     common stockholders
     plus assumed
     conversions...........  $(636)   1,604    $(0.40)  $1,195   5,529    $0.22    $(2,561)  6,651    $(0.39)
                             =====    =====             ======   =====             =======   =====
</TABLE>
 
2. RELATED PARTY TRANSACTIONS:
 
PURCHASES AND SALES
 
     During 1995, the Company purchased goods (principally rigid magnetic and
optical disk drives) from Maxtor Corporation and its affiliates totaling
$69,000. The Company did not purchase any goods from Maxtor during 1996 or 1997.
 
SUBORDINATED NOTE PAYABLE
 
     In December 1992, in conjunction with the MBO, the Company issued a
subordinated promissory note of $4 million to Maxtor (the "Maxtor Note").
Interest at 12% per annum was paid quarterly. During 1996, in accordance with
the terms of the Maxtor Note and in addition to interest payments, the Company
repaid $400,000 in principal. In 1997, the remaining principal balance of
$3,600,000 was repaid in March 1997 after the Company effected its initial
public offering.
 
ADVISORY FEE
 
     During 1995 and 1996, the Company paid advisory fees of $360,000 and
$729,000, respectively, to one of its investors in accordance with an Investment
Advisory Services Agreement (the "Advisory Agreement"). The Advisory Agreement
was terminated in December 1996.
 
                                       F-9
<PAGE>   48
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3. BALANCE SHEET COMPONENTS (IN THOUSANDS):
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1996       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Accounts receivable:
  Gross receivables......................................  $12,478    $12,861
  Less allowance for doubtful accounts...................     (539)      (683)
                                                           -------    -------
                                                           $11,939    $12,178
                                                           =======    =======
Inventory:
  Raw material and purchased components..................  $ 3,140    $ 3,145
  Work in progress.......................................    1,639      1,683
  Finished goods.........................................    2,156      1,763
                                                           -------    -------
                                                             6,935      6,591
  Less reserves..........................................     (631)      (985)
                                                           -------    -------
                                                           $ 6,304    $ 5,606
                                                           =======    =======
Property and equipment:
  Machinery and equipment................................  $ 6,992    $ 6,773
  Furniture and fixtures.................................      620        656
  Leasehold improvements.................................      539        548
                                                           -------    -------
                                                             8,151      7,977
  Less accumulated depreciation and amortization.........   (6,036)    (6,155)
                                                           -------    -------
                                                           $ 2,115    $ 1,822
                                                           =======    =======
Accrued liabilities:
  Accrued employee compensation..........................  $ 1,865    $ 2,078
  Accrued warranty expense...............................      404        652
  Deferred revenue.......................................      252        617
  Accrued sales tax......................................      431        356
  Other..................................................      628        508
                                                           -------    -------
                                                           $ 3,580    $ 4,211
                                                           =======    =======
</TABLE>
 
4. SHORT-TERM BORROWINGS:
 
     On May 17, 1996, the Company entered into a Loan and Security Agreement
(the "Agreement") with Congress Financial Corporation, which expires May 16,
1998. Under the revolving line of credit provisions of the Agreement, the
Company may borrow up to $11 million based upon eligible accounts receivable and
inventory. Under the terms of the Agreement, deposits from collections of
accounts receivable are restricted. The Agreement also allows the Company to
borrow up to $1 million for purchases of property and equipment under its
capital expenditure facility and up to $400,000 under its term loan provisions.
Such borrowings reduce the available borrowings under the revolving line of
credit. Borrowings bear interest at the rate of prime plus .75% (9.25% as of
December 31, 1997) and are secured by all of the Company's assets. Borrowings
outstanding under the line at December 31, 1996 and 1997 include $267,000 and
$67,000, respectively, representing borrowings under the term loan provisions.
 
                                      F-10
<PAGE>   49
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
5. INCOME TAXES:
 
     The provision for income taxes consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1995     1996     1997
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Current:
  Federal...................................................  $ --     $ 34     $ --
  State.....................................................     6       40       66
  Foreign...................................................    24       58       64
                                                              ----     ----     ----
                                                              $ 30     $132     $130
                                                              ====     ====     ====
</TABLE>
 
     Deferred tax assets consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1996       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Depreciation and amortization...............................  $   358    $   324
Reserves and accruals.......................................      889      1,121
Net operating loss carryforward.............................       50        479
Research and development credits............................      233        344
Other.......................................................      165        269
                                                              -------    -------
Gross deferred tax assets...................................    1,695      2,537
Deferred tax asset valuation allowance......................   (1,695)    (2,537)
                                                              -------    -------
Net deferred tax assets.....................................  $    --    $    --
                                                              =======    =======
</TABLE>
 
     The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence including the prior history
of losses, that some or all of the deferred tax assets will not be realized.
 
     At December 31, 1997 the Company had federal net operating loss
carryforwards of approximately $1,410,000 available to reduce future federal and
state taxable income. Its net operating loss carryforwards expire from 2009 to
2012. The tax benefit of the net operating loss and credit carryforwards may be
limited due to the impact of the Tax Reform Act of 1986. Events which may cause
the tax benefit to be limited include, but are not limited to, a cumulative
stock ownership change of more than 50%, as defined, over a three-year period
and the timing of utilization of various tax benefits carried forward. The
Company's net operating loss and credit carryforwards may be subject to such
limitations.
 
     A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate to income (loss) before income
taxes is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                             -----------------------
                                                             1995     1996     1997
                                                             -----    -----    -----
<S>                                                          <C>      <C>      <C>
Tax provision (benefit) at the U.S. federal statutory rate
  of 34%...................................................  $(206)   $ 451    $(827)
State income taxes, net of federal tax benefit.............      6       40       66
Change in valuation allowance..............................    184     (564)     842
Other, net.................................................     46      205       49
                                                             -----    -----    -----
                                                             $  30    $ 132    $ 130
                                                             =====    =====    =====
Effective tax rate.........................................     (5)%     10%      (5)%
                                                             =====    =====    =====
</TABLE>
 
                                      F-11
<PAGE>   50
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
6. SHAREHOLDERS' EQUITY:
 
     On March 11, 1997 the Company effected its initial public offering of
2,700,000 shares of Common Stock at an offering price of $7.00 per share (the
"Offering"). The net proceeds from the Offering were $16,629,000 after payment
of underwriting discounts and Offering expenses. Net proceeds were used to pay
down the Company's short-term line of credit and pay off the Company's
subordinated promissory note to Maxtor Corporation, a stockholder.
 
     In conjunction with the Offering, the Company effected a one-for-four
reverse stock split of all outstanding Common Stock and increased the authorized
Common Stock to 40,000,000 shares, par value $0.005. In addition, all
outstanding Preferred Stock were converted to Common Stock, and the Company
increased the authorized Preferred Stock to 10,000,000 shares of undesignated
Preferred Stock, par value $0.005. As of December 31, 1997, the Company had
7,933,451 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding .
 
7. EMPLOYEE STOCK PLANS:
 
1996 Employee Stock Purchase Plan
 
     The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and by the stockholders in
January 1997. A total of 200,000 shares of Storage Dimensions Common Stock was
originally reserved for issuance under the Purchase Plan. As of December 31,
1997, 47,253 shares of Common Stock had been purchased under the Purchase Plan
and 152,747 shares of Common Stock remained available for purchase under the
Purchase Plan.
 
1993 Stock Option Plan
 
     The 1993 Stock Option Plan (the "1993 Plan") provides for the granting of
nonstatutory stock options for the purchase of up to an aggregate of 555,555
shares of the Company's common stock by officers, employees, consultants and
directors of the Company. The Board of Directors is responsible for
administration of the 1993 Stock Option Plan. The Board of Directors determines
the term of each option, option exercise price, number of shares for which each
option is granted and the rate at which each option is exercisable. Options
granted under the 1993 Stock Option Plan generally vest over a four-year period.
 
1996 Stock Option Plan
 
     The 1996 Stock Option Plan (the "1996 Plan") provides for the granting to
employees and consultants of nonstatutory stock options. The 1996 Plan was
approved by the Board of Directors in December 1996 and was effective March 11,
1997, the date the initial public offering (see Note 6) of the Company's Common
stock was consummated. A total of 1,000,000 shares of Common Stock are currently
reserved for issuance pursuant to the 1996 Plan. As of December 31, 1996 and
1997, no and 978,016 options, respectively, have been granted under the 1996
Plan.
 
     Nonstatutory stock options may be granted at an exercise price per share of
not less than 100% of the fair value per common share on the date of the grant
(not less than 110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Options granted under the 1993 and 1996 Stock
Option Plans generally expire ten years from the date of the grant.
 
                                      F-12
<PAGE>   51
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Transactions under the 1993 and 1996 Stock Option Plans are summarized as
follows (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------------
                                                     1995                1996                1997
                                               -----------------   -----------------   -----------------
                                                        WEIGHTED            WEIGHTED            WEIGHTED
                                                        AVERAGE             AVERAGE             AVERAGE
                                                        EXERCISE            EXERCISE            EXERCISE
                                               SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                                               ------   --------   ------   --------   ------   --------
<S>                                            <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period...........    451     $0.20       457     $0.20        457    $0.57
  Granted....................................    167      0.20       185      1.12      1,038     6.41
  Exercised..................................     (8)     0.20       (70)     0.20        (50)    0.57
  Canceled...................................   (153)     0.20      (115)     0.21       (254)    5.09
                                                ----               -----               ------
Outstanding at period end....................    457      0.20       457      0.57      1,191     4.70
                                                ====               =====               ======
Options exercisable at period end............    233      0.20       224      0.21        475     3.07
                                                ====               =====               ======
Weighted average grant date fair value of
  options granted during the year............                      $3.48               $ 6.51
                                                                   =====               ======
Weighted average grant date fair value of
  options granted during the year at exercise
  prices below market prices.................                      $3.48               $ 7.00
                                                                   =====               ======
</TABLE>
 
     During the year ended December 31, 1996, the Company granted options to
purchase 185,125 shares of Common Stock to employees at exercise prices ranging
from $0.20 to $3.00 per share. Management is amortizing $540,000 of compensation
expense over the vesting period relating to these options, of which $54,000 and
$135,000 have been recorded during the years ended December 31, 1996 and 1997,
respectively.
 
     Upon consummation of the IPO, in accordance with a previous commitment, the
Company granted a nonqualified option to purchase 25,000 shares of Common Stock
at an exercise price of $0.20 per share in exchange for financial planning and
management services. The option became exercisable upon consummation of the
initial public offering of the Company's Stock (see Note 6). The Company
recorded $175,000 in estimated compensation expense in 1996 in connection with
this option.
 
     The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
 
<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                           -------------------------------------   -----------------------
                              NUMBER        AVERAGE                   NUMBER
                           OUTSTANDING     REMAINING    WEIGHTED   EXERCISABLE    WEIGHTED
          RANGE OF              AT        CONTRACTUAL   AVERAGE         AT        AVERAGE
          EXERCISE         DECEMBER 31,      LIFE       EXERCISE   DECEMBER 31,   EXERCISE
           PRICES              1997         (YEARS)      PRICE         1997        PRICE
    ---------------------  ------------   -----------   --------   ------------   --------
    <S>                    <C>            <C>           <C>        <C>            <C>
        $0.20 - $0.20           279           6.4        $0.20         246         $0.20
         1.00 -  5.88           206           9.3         3.58          31          1.54
         6.00 -  6.75           219           9.4         6.35          40          6.38
         7.00 -  7.69           487           9.2         7.01         158          7.00
                              -----                                    ---
                              1,191           8.6         4.70         475          3.07
                              =====                                    ===
</TABLE>
 
Fair value disclosures
 
     Had compensation cost for options granted in 1996 and 1997 under the
Company's option plan been determined based on the fair value at the grant
dates, as prescribed in FAS 123, the Company's net income
 
                                      F-13
<PAGE>   52
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
(loss) and pro forma net income (loss) per share would have been as follows (in
thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                            -----------------
                                                             1996      1997
                                                            ------    -------
    <S>                                                     <C>       <C>
    Net income (loss):
      As reported.........................................  $1,195    $(2,561)
      Pro forma...........................................   1,186     (3,300)
    Basic net income (loss) per share:
      As reported.........................................  $ 0.73    $  (.39)
      Pro forma...........................................    0.72       (.50)
    Diluted net income (loss) per share:
      As reported.........................................  $ 0.22    $  (.39)
      Pro forma...........................................    0.21       (.50)
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.36% to 6.60% for options granted during the year ended
December 31, 1996 and 5.80% to 6.76% for options granted during the year ended
December 31, 1997; no volatility factor was used due to the nonpublic entity
status for the year ended December 31, 1996 and an 0.80 volatility factor was
used for the year ended December 31, 1997; and a weighted average expected
option term of 5 years for both periods.
 
     Because the determination of the fair value of all options granted after
the Company became a public entity includes an expected volatility factor and
because additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of pro forma effects of reported
net income for future years.
 
8. EMPLOYEE BENEFIT PLANS:
 
Profit sharing
 
     Employees of the Company are entitled to receive compensation under a
profit sharing agreement that is based upon attaining specific profit goals.
Profit sharing expense totaled $20,000, $231,000 and $0 in 1995, 1996 and 1997,
respectively.
 
401(k) Plan
 
     The Company maintains a 401(k) Tax Deferred Savings Plan (the Plan) which
covers all full-time employees of the Company who are at least 21 years of age.
Under the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. The Company matches contributions under
 
                                      F-14
<PAGE>   53
                            STORAGE DIMENSIONS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
the Plan at the rate of 50% of the employee's contributions up to a specified
maximum. The Company's contributions to the Plan were $75,000, $94,000 and
$82,000 for 1995, 1996 and 1997, respectively.
 
9. EXPORT SALES AND CONCENTRATIONS OF CREDIT RISK:
 
     The Company markets its products both domestically and internationally.
Export sales are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   --------------------------
                                                    1995      1996      1997
                                                   ------    ------    ------
    <S>                                            <C>       <C>       <C>
    Europe.......................................  $4,597    $4,676    $3,322
    Other........................................   1,010       543       478
                                                   ------    ------    ------
                                                   $5,607    $5,219    $3,800
                                                   ======    ======    ======
</TABLE>
 
     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. Substantially all of the Company's cash is invested in high credit
quality financial institutions. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains an allowance for
uncollectible accounts receivable based upon expected write-offs. At December
31, 1997, one customer accounted for 11% gross accounts receivable. Revenues
from significant customers which represented 10% or more of total revenues for
the respective periods were as follows:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                -------------------------
                                                1995      1996      1997
                                                -----     -----     -----
<S>                                             <C>       <C>       <C>
Customer A....................................   11%       13%        6%
Customer B....................................   15%        8%        5%
</TABLE>
 
10. COMMITMENTS:
 
     The Company leases its offices and operating facilities under various
noncancelable renewable operating leases. The Company's future minimum
commitments at December 31, 1997 under all operating leases are as follows (in
thousands):
 
<TABLE>
<S>                                                           <C>
1998........................................................  $1,049
1999........................................................     178
2000........................................................      14
                                                              ------
                                                              $1,241
                                                              ======
</TABLE>
 
     Rental expense under noncancelable operating leases totaled $862,000,
$904,000, and $1,190,000 in 1995, 1996 and 1997, respectively.
 
                                      F-15
<PAGE>   54
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                             SEQUENTIALLY
    EXHIBIT                                                                    NUMBERED
    NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
    -------    ------------------------------------------------------------  ------------
    <S>        <C>                                                           <C>
     2.1       Agreement and Plan of Merger and Reorganization dated as of
               December 22, 1997, among the Registrant, Artecon, Inc. and
               Storage Acquisition Corp.(1)(3)
     3.1       Second Amended and Restated Certificate of Incorporation of
               Registrant.(2)
     3.2       Form of Certificate of Amendment of Registrant's Amended and
               Restated Certificate of Incorporation.(4)
     3.3       Bylaws of Registrant.(2)
     4.1       Form of Registrant's Common Stock Certificate.(2)
     4.2       Form of Registrant's Series A Preferred Stock
               Certificate.(4)
    10.1       Form of Voting Agreement, dated as of December 22, 1997,
               between Registrant and certain shareholders of Artecon,
               Inc.(3)
    10.2       Form of Voting Agreement, dated December 22, 1997, between
               Artecon, Inc. and certain stockholders of the Registrant as
               named therein.(3)
    10.3       Form of Indemnification Agreement entered into between the
               Registrant and its directors and officers.(2)
    10.4       Registrant's 1996 Stock Option Plan, as amended.(4)
    10.5       Registrant's 1996 Employee Stock Purchase Plan, as
               amended.(4)
    10.6       Stockholders Agreement, dated December 26, 1992, among the
               Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
               Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B,
               Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
               certain other management investors.(2)
    10.7       Loan and Security Agreement, dated May 16, 1996, between the
               Registrant and Congress Financial Corporation (Western).(2)
    10.8       Lease, dated October 8, 1993, between the Registrant and
               Callahan-Pentz Properties, McCarthy Four.(2)
    10.9       First Amendment to Lease, dated June 28, 1995, between the
               Registrant and Callahan-Pentz Properties, McCarthy Four.(2)
    10.10      Form of employment agreement between the Registrant and
               certain employees.(2)
    10.11      Standstill Agreement, dated December 22, 1997, between the
               Registrant, Artecon, Inc., CP Acquisition, L.P. No. 4A, CP
               Acquisition, L.P. No. 4B, Capital Partners, Inc., and FGS,
               Inc.(4)
    10.12      Form of Amendment No. 1 to the Employment Agreement between
               the Registrant and David Eeg.(4)
    10.13      Form of Amendment No. 1 to the Employment Agreement between
               the Registrant and Robert Bylin.(4)
    10.14      Form of employment agreement, between the Registrant and
               certain employees.(2)
    21.1       Subsidiaries of Registrant.(4)
    23.1       Consent of Price Waterhouse LLP, Independent Accountants.
    24.1       Power of Attorney. Reference is made to page 38.
    27.1       Financial Data Schedule
</TABLE>
 
---------------
 
(1) Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant
    undertakes to furnish such schedules to the Commission supplementally upon
    request.
 
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
    333-20045), as amended, and incorporated herein by reference.
 
(3) Filed as an exhibit to the Schedule 13D filed by Artecon, Inc. on December
    29, 1997, and incorporated herein by reference.
 
(4) Filed as an exhibit to Registrant's Registration Statement on Form S-4 (No.
    333-47593), as amended, and incorporated herein by reference.