<PAGE>   1
                       Securities and Exchange Commission
                              Washington, DC 20549


                               REPORT ON FORM 10-Q


     (Mark One)

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

        For the quarterly period ended JANUARY 31, 2001

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

        For the transition period from _____________ to _______________

        Commission file number 0-21053

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

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


                      58 Discovery, Irvine California 92618
               (Address of principal executive office) (Zip Code)

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


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


        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 number of shares of Common Stock, $.01 par value, outstanding on
February 9, 2001, was 12,136,860.



<PAGE>   2


                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. Financial Statements.

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                              January 31,          July 31,
                                                                  2001               2000
                                                              ------------       ------------
<S>                                                           <C>                <C>
ASSETS

Current assets:
  Cash .................................................      $  1,085,000       $  1,450,000
  Short-term marketable securities, held to maturity ...        12,385,000         14,065,000
  Accounts receivable, less allowance for doubtful
    accounts and sales returns of $3,006,000 and
    $2,752,000, respectively ...........................        11,270,000          6,699,000
  Inventories, net .....................................         9,485,000          8,430,000
  Income tax receivable ................................                --          2,699,000
  Deferred income taxes ................................         2,160,000          1,833,000
  Prepaid expenses .....................................         1,085,000            372,000
  Other current assets .................................           299,000            296,000
                                                              ------------       ------------
      Total current assets .............................        37,769,000         35,844,000
Property and equipment, net ............................        17,388,000         16,034,000
Other assets ...........................................         2,831,000            918,000
                                                              ------------       ------------
      Total assets .....................................      $ 57,988,000       $ 52,796,000
                                                              ============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Lines of credit ......................................      $  4,118,000       $    610,000
  Loan payable .........................................                --         10,750,000
  Convertible debenture ................................        14,486,000                 --
  Flooring line obligation .............................         1,641,000          1,511,000
  Accounts payable .....................................         5,736,000          8,888,000
  Accrued expenses and other current liabilities .......         2,708,000          1,837,000
  Accrued compensation .................................         1,212,000          1,213,000
  Deferred service revenues ............................           388,000            431,000
  Income taxes payable .................................            53,000                 --
                                                              ------------       ------------
      Total current liabilities ........................        30,342,000         25,240,000

Commitments and contingencies

Shareholders' equity:
  Preferred stock, no par value; 10,000,000 shares
    authorized, no shares issued and outstanding .......                --                 --
  Common stock, $.01 par value; 65,000,000 shares
    authorized, 12,136,010 and 11,531,357 shares
    issued and outstanding, respectively ...............           121,000            115,000
  Additional paid-in capital ...........................        26,766,000         19,685,000
  Retained earnings ....................................         1,048,000          8,007,000
  Accumulated other comprehensive loss .................          (289,000)          (251,000)
                                                              ------------       ------------
      Total shareholders' equity .......................        27,646,000         27,556,000
                                                              ------------       ------------
Total liabilities and shareholders' equity .............      $ 57,988,000       $ 52,796,000
                                                              ============       ============
</TABLE>

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


<PAGE>   3

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                         QUARTERS ENDED                      SIX MONTHS ENDED
                                                         --------------                      ----------------
                                                 JANUARY 31,        JANUARY 31,        JANUARY 31,        JANUARY 31,
                                                    2001               2000               2001               2000
                                                ------------       ------------       ------------       ------------
<S>                                             <C>                <C>                <C>                <C>
Net sales                                       $ 11,722,000       $ 16,327,000       $ 24,986,000       $ 35,236,000
Cost of sales                                      7,108,000         12,521,000         15,490,000         26,189,000
                                                ------------       ------------       ------------       ------------
    Gross profit                                   4,614,000          3,806,000          9,496,000          9,047,000
Selling, general and administrative
  expenses                                         4,298,000          6,209,000          8,967,000         12,260,000
Research and development expenses                  1,681,000          1,742,000          3,453,000          3,387,000
In-process research and development                4,262,000                 --          4,262,000                 --
                                                ------------       ------------       ------------       ------------
    Operating loss                                (5,627,000)        (4,145,000)        (7,186,000)        (6,600,000)
Interest income                                      236,000            280,000            458,000            566,000
Interest expense                                    (423,000)            (7,000)          (571,000)            (8,000)
                                                ------------       ------------       ------------       ------------
  Loss before income taxes                        (5,814,000)        (3,872,000)        (7,299,000)        (6,042,000)
  Provision (benefit) for income taxes                54,000         (1,191,000)          (340,000)        (1,785,000)
                                                ------------       ------------       ------------       ------------
Net loss                                        $ (5,868,000)      $ (2,681,000)      $ (6,959,000)      $ (4,257,000)
                                                ============       ============       ============       ============
Net loss per common share:
     Basic                                      $      (0.50)      $      (0.24)      $      (0.60)      $      (0.38)
                                                ============       ============       ============       ============
     Diluted                                    $      (0.50)      $      (0.24)      $      (0.60)      $      (0.38)
                                                ============       ============       ============       ============
Weighted average number of common shares:
     Basic                                        11,806,000         11,295,000         11,688,000         11,262,000
                                                ============       ============       ============       ============
     Diluted                                      11,806,000         11,295,000         11,688,000         11,262,000
                                                ============       ============       ============       ============
</TABLE>


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


<PAGE>   4

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

<TABLE>
<CAPTION>


                                           COMMON STOCK                                             ACC. OTHER
                                     ----------------------------     ADDITIONAL       RETAINED    COMPREHENSIVE
                                        SHARES          AMOUNT      PAID IN CAPITAL    EARNINGS     INCOME (LOSS)        TOTAL
                                     ------------    ------------   ---------------  ------------   -------------    ------------
<S>                                  <C>             <C>            <C>              <C>            <C>              <C>
BALANCE AT JULY 31, 1998               11,178,742    $    112,000    $ 17,751,000    $ 18,866,000    $      3,000    $ 36,732,000
Comprehensive loss:
Net loss                                                                               (2,875,000)                     (2,875,000)
Foreign currency translation
  adjustment                                   --              --              --              --         (18,000)        (18,000)
                                                                                                                     ------------
Comprehensive loss                                                                                                     (2,893,000)
Exercise of employee stock options         41,013              --         152,000              --              --         152,000
Issuance of stock to employees              5,531              --          39,000              --              --          39,000
Tax benefit from stock option
  exercises                                    --              --          71,000              --              --          71,000
Stock repurchases                         (77,845)         (1,000)       (400,000)             --              --        (401,000)
Acquisitions                               79,600           1,000         585,000              --              --         586,000
                                     ------------    ------------    ------------    ------------    ------------    ------------
BALANCE AT JULY 31, 1999               11,227,041         112,000      18,198,000      15,991,000         (15,000)     34,286,000
Comprehensive loss:
Net loss                                       --              --              --      (7,984,000)             --      (7,984,000)
Foreign currency translation
  adjustment                                   --              --              --              --        (236,000)       (236,000)
                                                                                                                     ------------
Comprehensive loss                                                                                                     (8,220,000)
Compensatory stock options                     --              --          62,000              --              --          62,000
Exercise of employee stock options        278,587           3,000       1,112,000              --              --       1,115,000
Issuance of stock to employees             25,729              --         313,000              --              --         313,000
                                     ------------    ------------    ------------    ------------    ------------    ------------
BALANCE AT JULY 31, 2000               11,531,357         115,000      19,685,000       8,007,000        (251,000)     27,556,000
Comprehensive loss:
Net loss                                       --              --              --      (6,959,000)             --      (6,959,000)
Foreign currency translation
  adjustment                                   --              --              --              --         (38,000)        (38,000)
                                                                                                                     ------------
Comprehensive loss                                                                                                     (6,997,000)
Acquisition of Scofima                    480,000           5,000       5,755,000              --              --       5,760,000
Compensatory stock options                     --              --          20,000              --              --          20,000
Exercise of employee stock options        111,556           1,000         599,000              --              --         600,000
Issuance of stock to employees             13,097              --         145,000              --              --         145,000
Issuance of  stock warrant to
  investor                                     --              --         562,000              --              --         562,000
                                     ------------    ------------    ------------    ------------    ------------    ------------
BALANCE AT JANUARY 31, 2001            12,136,010    $    121,000    $ 26,766,000    $  1,048,000    $   (289,000)   $ 27,646,000
                                     ============    ============    ============    ============    ============    ============
</TABLE>

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



<PAGE>   5

                           PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

                       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                               SIX MONTHS ENDED JANUARY 31,
                                                              -------------------------------
                                                                  2001               2000
                                                              ------------       ------------
<S>                                                           <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...............................................      $ (6,959,000)      $ (4,257,000)
Adjustments to reconcile net loss to net
  cash used in operating activities:
    Depreciation and amortization, including
        amortization of debt issuance costs ............           670,000            449,000
    Compensatory stock options .........................            20,000                 --
    In-process research and development ................         4,262,000                 --
    Changes in assets and liabilities,
        net of effects of acquisitions:
      Accounts receivable ..............................        (4,560,000)         3,015,000
      Inventories ......................................        (1,055,000)          (336,000)
      Income tax receivable ............................         2,699,000                 --
      Deferred income taxes ............................          (327,000)          (745,000)
      Prepaid expenses .................................          (713,000)          (207,000)
      Other current assets .............................            (3,000)             3,000
      Other assets .....................................          (273,000)           (25,000)
      Accounts payable .................................        (3,001,000)        (1,745,000)
      Flooring line obligation .........................          (130,000)           305,000
      Accrued expenses and compensation ................           870,000            826,000
      Deferred service revenues ........................           (43,000)          (331,000)
      Income taxes payable .............................            53,000            (18,000)
                                                              ------------       ------------
         Net cash used in operating activities .........        (8,490,000)        (3,066,000)
                                                              ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment .................        (1,770,000)        (1,107,000)
    Acquisition of business, net of cash acquired ......          (250,000)                --
                                                              ------------       ------------
         Net cash used in investing activities .........        (2,020,000)        (1,107,000)
                                                              ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of convertible debt .......................        15,000,000                 --
    Repayment of  loan .................................       (10,750,000)         1,000,000
    Net borrowings (repayments) on lines of credit .....         3,508,000           (115,000)
    Issuance of common stock ...........................           145,000            142,000
    Stock option exercises .............................           600,000            586,000
                                                              ------------       ------------
         Net cash provided by financing activities .....         8,503,000          1,613,000
      Effect of exchange rate changes ..................           (38,000)          (141,000)
                                                              ------------       ------------
      Decrease in cash .................................        (2,045,000)        (2,701,000)
Cash and cash equivalents at beginning of period .......        15,515,000         22,433,000
                                                              ------------       ------------
Cash and cash equivalents at end of period .............      $ 13,470,000       $ 19,732,000
                                                              ============       ============
Supplemental disclosures of cash flow information:
CASH  PAID (RECEIVED) DURING THE  PERIOD FOR:
    Interest ...........................................      $    112,000       $      8,000
    Income taxes .......................................      $ (2,733,000)      $ (1,097,000)
</TABLE>


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


<PAGE>   6


                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. GENERAL.

        The accompanying financial information is unaudited, but in the opinion
of management, reflects all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of Procom
Technology, Inc. and its consolidated subsidiaries (the "Company") as of the
dates indicated and the results of operations for the periods then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. While the
Company believes that the disclosures are adequate to make the information
presented not misleading, the financial information should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Report on Form 10-K for fiscal 2000. Results for the interim
periods presented are not necessarily indicative of the results for the entire
year.

NOTE 2. INVENTORIES.

        Inventories are summarized as follows:

<TABLE>
<CAPTION>

                                   January 31, 2001       July 31, 2000
                                   ----------------      ----------------
              <S>                  <C>                   <C>
              Raw materials        $      5,132,000      $      4,225,000
              Work-in process               628,000               255,000
              Finished goods              3,725,000             3,950,000
                                   ----------------      ----------------
                       Total       $      9,485,000      $      8,430,000
                                   ================      ================
</TABLE>


NOTE 3. NET LOSS PER SHARE.

       Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per share
is computed using the weighted average number of shares of common stock
outstanding and potentially dilutive common shares outstanding during the
period. Potentially dilutive common shares consist of stock options and
warrants. For the periods presented, basic and diluted net loss per share was
based on the weighted average number of shares of common stock outstanding
during the period. For the three months ended January 31, 2001 and 2000,
respectively, the dilutive effect of options and warrants to purchase 872,000
and 1,251,000 shares of common stock, and for the six months ended January 31,
2001 and 2000, respectively, the dilutive effect of options and warrants to
purchase 1,187,000 and 699,000 shares of common stock, respectively, were not
included in the computation of net loss per share as the effect would have been
antidilutive.

NOTE 4. COMPREHENSIVE LOSS.

        For the six months ended January 31, 2001 and 2000, the only differences
between reported net loss and comprehensive loss were foreign currency
translation adjustments of $(38,000) and $(141,000), respectively.

NOTE 5. BUSINESS SEGMENT INFORMATION.

<PAGE>   7

        The Company operates in one industry segment: The design, manufacture
and marketing of data storage devices. The Company has two major distinct
product families: network attached storage products ("NAS Products") and other
data storage and access products. Net sales of network attached storage (NAS)
products represented approximately 72% and 24% of total product net sales for
the three months ended January 31, 2001 and 2000, respectively, and 65% and 24%
of total net sales for the six months ended January 31, 2001 and 2000,
respectively.

        International sales as a percentage of net sales amounted to 63% and 48%
for the three months ended January 31, 2001 and 2000, respectively.
International sales for the second quarter of fiscal 2001 include sales of
approximately $1.7 million in sales to a European storage service provider
Storway. International sales were primarily to European customers, and,
secondarily to Middle Eastern, Latin American and Pacific Rim customers. Storway
accounted for approximately 20% of net sales for the first six months of fiscal
2001, and three customers, Storway, Ingram Micro and J-Dot Technology, accounted
for approximately 56% of total accounts receivable as of January 31, 2001.
Identifiable assets used in connection with the Company's foreign operations
were $7.6 million at July 31, 2000 and $8.2 million at January 31, 2001.


NOTE 6.  LINES OF CREDIT AND CONVERTIBLE DEBENTURE.

        On October 10, 2000, the Company entered into a term loan agreement and
a three-year working capital line of credit with CIT Business Credit. A term
loan of $4 million is due and payable upon the Company's finalization of a
long-term mortgage or sale-leaseback on its corporate headquarters, or it will
be repaid in 12 monthly installments commencing April 1, 2001, while an initial
term loan of $1 million was due and payable in 90 days, and was repaid on
November 1, 2000. The term loans bear interest at the lender's prime rate (9.5%
at January 31, 2001), plus .5%, with increases if the loan is not reduced
according to a fixed amortization. The working capital line of credit allows for
the Company to borrow, on a revolving basis, for a period of three years, a
specified percentage of its eligible accounts receivable and inventories
(approximately $2.9 million at January 31, 2001), up to a limit of $5 million.
Amounts outstanding under the working capital line bear interest at the lender's
prime rate plus .25%. At January 31, 2001, $4.0 million was outstanding under
the term loan while $.1 million was outstanding under the line of credit. The
lender charged approximately $130,000 for the credit facilities, which is being
amortized as interest expense over the term of the loan. The lines accrue
various monthly maintenance, minimum usage and early termination fees. The lines
require certain financial and other covenants, including the maintenance of a
minimum EBITDA requirement for each fiscal quarter beginning in the quarter
ending January 31, 2001. The Company was in compliance with all covenants of the
lines at January 31, 2001. The combined lines of credit are collateralized by
all the assets of the Company.

        In addition to the two lines noted above, the Company entered into a
flooring line with IBM Credit, which has committed to make $2.5 million in
flooring inventory commitments available to the Company. The flooring line is
collateralized by the specific inventory purchased by the Company pursuant to
the flooring commitments, and IBM Credit and CIT Business Credit have entered
into an intercreditor agreement which determines the level of priority of either
lender's security interest. The flooring line requires the maintenance by the
Company of a minimum net worth of $16,000,000, and the Company was in compliance
with the terms of the flooring line at January 31, 2001.

        On October 31, 2000, the Company issued a $15.0 million convertible
unsecured debenture to a private investor. The debenture bears interest at 6.0%
per annum, and is repayable in full on October 31, 2003, unless otherwise
converted into the common stock of the Company. The debenture is convertible
into the common stock of the Company at the investor's option at $22.79 per
share, and at the Company's option if the common stock of the Company trades at
more than $30.75 for at least 20 consecutive trading days. The investor has a
"put" right, which allows the investor to require the Company to either repay in
cash the face amount of the debenture put by the investor, plus any accrued but
unpaid interest through such time, or pay such amount by issuing its shares at
90% of the average closing price of the Company's common stock for the five-day
period preceding the time the investor makes such a demand. The investor may put
up to $5 million on the 6th month anniversary, $10 million on the 12-month
anniversary, and $15 million on the 18th, 24th and 30th month anniversaries of
October 31, 2000. If the Company were to issue shares at 90% of the trading
price as repayment of a put demand, the Company might incur a significant charge
to its income statement based on the difference between the issuance price of
the Company's common stock and the value of the common stock at October 31,
2000. In connection with the issuance of the debenture, the

<PAGE>   8

Company issued to the investor a 5-year warrant to purchase up to 32,916 shares
of the Company's common stock at $32.55 per share. The Company has valued the
warrant using a Black-Scholes model, with the following assumptions: Expected
life - 5 years, Risk free interest rate - 6%, and Volatility, 1.20. These
factors yield a value of $562,000, which will be amortized over the life of the
debt, or if conversion of the debenture occurs, the Company will reclass the
remaining value to interest expense.

         A majority of the debenture may be put to the Company within one year
from the date of the balance sheet and all of the debentures may be put to the
Company if the Company fails to register for resale on a timely basis with the
Securities and Exchange Commission the Common Stock into which the debentures
are convertible. The Company is required to have the registration statement be
declared effective by March 31, 2001 or upon 30 days notice thereafter the
Company would be in breach of its agreement. While the investor has provided
extensions in the past, the Company can not be certain that any future
extensions will be granted. Accordingly, the principal amount of the debentures
is classified as a current liability, net of the remaining unamortized warrant
value. At January 31, 2001, the debenture amount repayable was $15,000,000, the
unamortized warrant value was $514,000, for a net debenture value of $14,486,000
on the balance sheet. In addition to the warrant cost, costs of approximately
$700,000 were incurred in the debt transactions noted above, and the amounts
were classified as prepaid expenses, and are amortized as interest expense over
the life of the debt instruments.

NOTE 7.  ACQUISITION

         On December 28, 2000, the Company acquired all of the issued and
outstanding capital stock of Scofima Software S.r.l., a company organized under
the laws of Italy ("Scofima"), in exchange for 480,000 shares of the Company's
common stock. The Company has agreed to file a registration statement covering
the resale of shares issued to the shareholders of Scofima not later than March
28, 2001. Scofima had an option to acquire a software system designed as a
caching and content distribution solution. Immediately prior to the Company's
acquisition of Scofima, Scofima exercised its option, and acquired exclusive
rights to the software system which was being developed as discussed below. The
purpose of the software is to provide functionalities that are necessary for the
content delivery market of the internet. The software had been in development
for approximately 2-3 years, involving 5 programmers and system developers. The
software was not complete at the date of acquisition, and has yet to be
determined to be technologically feasible. The Company is currently completing
the software, but final release is not expected for several months. The Company
issued 480,000 shares valued at $12 per share and incurred approximately
$250,000 in acquisition costs in exchange for the outstanding shares of Scofima.
Scofima had net assets of approximately $500,000 at the date of acquisition. The
transaction was accounted for as a purchase of assets. The Company employed an
appraiser to identify the values of the assets acquired, including, among other
assets, certain in-process research and development costs. The amount of
purchase price allocated to in-process research and development was determined
by estimating the stage of development of the software, estimating future cash
flows from projected revenues, and discounting those cash flows to present
value. The discount rate applied was 25%. The incremental product sales
resulting from the products incorporating the software are estimated to be
approximately $44 million over the initial four years of sales with sales
growing from approximately $1.5 million in the initial year to $13.4 million in
the fourth year. The appraiser concluded, and the Company has determined that,
approximately $4.3 million of the purchase price was related to the in-process
research and development efforts that had not attained technological feasibility
and for which no future alternative use was expected. The Company has expensed
the value of the research and development as of the date of the acquisition of
Scofima and capitalized the fair value of the other assets acquired as
determined and allocated by the appraiser, including the value of the assembled
workforce of approximately $0.2 million and developer relationships valued at
$0.1 million which will be amortized over four years, with the remainder of $1.4
million assigned to goodwill, which will be amortized over four years. The
following is a summary of the net fair value of the assets acquired, the
liabilities assumed, and the total consideration paid for Scofima:

<TABLE>
<CAPTION>

               <S>                                           <C>
               Net fair value of assets acquired             $ 6,120,000
               Liabilities assumed                              (110,000)
               Shares issued                                  (5,760,000)
                                                             -----------
               Cash consideration, net of cash acquired      $   250,000
                                                             ===========
</TABLE>

         Proforma financial information has not been provided due to the limited
operations of Scofima. Revenue and net income were approximately $3,000 and
$100, respectively, for the ten months ended October 31, 2000 and were
approximately $6,000 and $800, respectively for the year ended December 31,
1999. Total assets were approximately $120,000 at both October 31, 2000 and
December 31, 1999.

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS


<PAGE>   9
        In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
138, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments including derivative instruments embedded in other contracts and for
hedging activities. Adoption of SFAS 133, effective August 1, 2000, did not have
a material impact on the Company's consolidated financial position, results of
operations or liquidity.

        In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition in
Financial Statements," as amended, which for the Company is effective no later
than the fourth quarter of fiscal 2001. SAB No. 101 summarizes certain of the
SEC staff's views regarding the appropriate recognition of revenue in financial
statements. The Company is currently reviewing SAB No. 101 and has not yet
determined the potential impact on its financial statements.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

RESULTS FOR THE QUARTER ENDED JANUARY 31, 2001

         The results for the quarter ended January 31, 2001 reported here are
slightly different from the numbers reported in our press release dated February
28, 2001. Net sales for the quarter reported in the press release were $11.9
million versus the $11.7 million reported here. Sales of our NAS products for
the quarter were revised from $8.6 million to $8.5 million reported here. Gross
margins reported in the press release were 40.1% versus 39.4% reported here and
the amount of our operating loss reported in the press release was $5.5 million
versus the $5.6 million reported here. No income tax expense for the quarter was
reported in the press release while a tax provision of $54,000 is reported here.
These changes related primarily to adjustments to the net sales, pretax income
and provision for tax expense of our foreign operations and as a result our net
loss and net loss per share were, as reported here, $5.9 million and ($0.50) per
share as compared to $5.7 million and ($0.48) per share reported in the press
release. The results reported for the six months ended January 31, 2001 are also
different than the results reported in our press release because of the changes
to the results for the second quarter.

OVERVIEW

         Procom develops, manufacturers and markets NAS appliances and other
storage devices for a wide range of computer networks and operating systems. Our
NAS appliances, which consist of our DataFORCE and NetFORCE product lines,
provide end-users with faster access to data at lower overall cost than other
storage alternatives. We refer to these products collectively as our NAS
appliances. In addition, we sell disk drive storage upgrade systems, CD/DVD-ROM
servers and arrays and tape backup products, which we refer to collectively as
our non-NAS products. In the last two years, we have significantly increased our
focus on the development and sale of NAS appliances. We continue to develop more
advanced NAS appliances and expect this business to be our principal business in
the future. We are currently analyzing the market demands and opportunities for
all of our non-NAS products, and hope to transition users of these products to
our growing line of more complex, generally higher margin NAS solutions.

         In December 1999, we executed an agreement with Hewlett-Packard, under
which we supplied a customized version of our mid-range NAS appliance hardware
and software to Hewlett-Packard for resale. The agreement, which has a five-year
term, has no minimum quantity commitments. We commenced shipments under the
agreement in limited quantities in April 2000. Sales to Hewlett-Packard in the
quarter ended January 31, 2001 were not significant. In February 2001, Hewlett-
Packard notified us that they do not anticipate they will purchase additional
NAS products from us in the future. While neither they nor we have formally
terminated the agreement, we do not anticipate that future sales to
Hewlett-Packard will be significant.

         Changing Business Mix. In recent periods, we have experienced
significantly reduced demand, revenues and gross margins for our non-NAS
products and we have discontinued some non-NAS products. The demand for our CD
servers and arrays has declined, and we have experienced increased pricing
pressures on our disk drive storage upgrade systems, resulting in lower overall
revenues and gross margins. Our gross margins vary significantly by product
line, and, therefore, our overall gross margin varies with the mix of products
we sell. For example, our sales of CD servers and arrays have historically
generated higher gross margins than those of our tape back-up and disk drive
products. Because recently we have sold, and expect to continue to sell, fewer
CD server and arrays, we expect our overall gross margins to be negatively
affected. This reduction may be offset as sales of our higher margin NAS
appliances increase as a percentage of total sales, in which case, we expect our
overall gross margins to be positively affected.

         Our revenues and gross margins have been and may continue to be
affected by a variety of factors including:

         -  new product introductions and enhancements;

         -  competition;


<PAGE>   10

         -  direct versus indirect sales;

         -  the mix and average selling prices of products; and

         -  the cost of labor and components.

         Revenue and Revenue Recognition. We generally record sales upon product
shipment. In the case of sales to most of our distributors, we record sales when
the distributor receives the products. We recognize our product service and
support revenues over the terms of their respective contractual periods. Our
agreements with many of our VARs, system integrators and distributors allow
limited product returns, including stock balancing, and price protection
privileges. We maintain reserves, which are adjusted at each financial reporting
date, to state fairly the anticipated returns, including stock balancing, and
price protection claims relating to each reporting period. We calculate the
reserves based on historical rates of sales and returns, including price
protection and stock balancing claims, our experience with our customers, our
contracts with them, and current information as to the level of our inventory
held by our customers.

         In addition, under a product evaluation program established by us, our
indirect channel partners and end users generally are able to purchase
appliances on a trial basis and return the appliances within a specified period,
generally 30-60 days, if they are not satisfied. The period may be extended if
the customer needs additional time to evaluate the product within the customer's
particular operating environment. The value of evaluation units at customer
sites at a financial reporting date are included in inventory as finished goods.
At July 31, 2000 and January 31, 2001, inventory related to evaluation units was
approximately $1.5 million and $1.7 million, respectively.

         Costs and Expenses. Our cost of sales consists primarily of the cost of
components produced by our suppliers, such as disk drives, cabinets, power
supplies, controllers and CPUs, our direct and indirect labor expenses and
related overhead costs such as rent, utilities and manufacturing supplies and
other expenses. In addition, cost of sales includes third-party license fees,
warranty expenses and reserves for obsolete inventory.

         Selling expenses include costs directly associated with the selling
process such as salaries and commissions of sales personnel, marketing, direct
and cooperative advertising and travel expenses. General and administrative
expenses include our general corporate expenses, such as salaries and benefits,
rent, utilities, bad debt expense, legal and other professional fees and
expenses, depreciation, and amortization of goodwill.

         Our research and development expenses consist of the costs associated
with software and hardware development. Specifically, these costs include
employee salaries and benefits, consulting fees for contract programmers, test
supplies, employee training for programmers and support staff and other related
expenses. The cost of developing new appliances and substantial enhancements to
existing appliances are expensed as incurred.

<PAGE>   11
The following table sets forth consolidated statement of operations data as a
percentage of net sales for each of the periods indicated:

<TABLE>
<CAPTION>

                                                        Three Months Ended                            Six Months Ended
                                                        -------------------                           ----------------
                                                January 31,            January 31,            January 31,            January 31,
                                                    2001                   2000                   2001                   2000
                                              ---------------        ---------------        ---------------        ---------------
                                                (unaudited)            (unaudited)            (unaudited)            (unaudited)
<S>                                           <C>                    <C>                    <C>                    <C>
Net sales ..............................                100.0%                 100.0%                 100.0%                 100.0%

Cost of sales ..........................                 60.6                   76.7                   62.0                   74.3
                                              ---------------        ---------------        ---------------        ---------------
Gross profit ...........................                 39.4                   23.3                   38.0                   25.7
Selling, general and
  administrative expenses ..............                 36.7                   38.0                   35.9                   34.8
Research and development expenses ......                 14.3                   10.7                   13.8                    9.6
Acquired research and development
  expenses .............................                 36.4                     --                   17.1                     --
                                              ---------------        ---------------        ---------------        ---------------
Operating income (loss) ................                (48.0)                 (25.4)                 (28.8)                 (18.7)
Interest income and (expense), net .....                 (1.6)                   1.7                   (0.5)                   1.6
                                              ---------------        ---------------        ---------------        ---------------
Income (loss) before income
  taxes ................................                (49.6)                 (23.7)                 (29.3)                 (17.1)
Provision (benefit) for income
  taxes ................................                  0.5                   (7.3)                   1.4                   (5.0)
                                              ---------------        ---------------        ---------------        ---------------
  Net income (loss) ....................                (50.1%)                (16.4%)                (27.9%)                (12.1%)
                                              ===============        ===============        ===============        ===============
</TABLE>


THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 2001 COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED JANUARY 31, 2001

         Net Sales. Net sales decreased by 28.2% to $11.7 million for the three
months ended January 31, 2001, from $16.3 million for the three months ended
January 31, 2000. This decrease resulted from a significant decrease in unit
sales of CD servers and arrays and disk drive storage upgrade systems, combined
with the effect of significant price erosion of the average selling price of
these products. In addition, sales were reduced due to lower sales of non-NAS
products by our German subsidiary. Net sales for the six months ended January
31, 2001 decreased 29.1% from sales for the same period in fiscal 2000. This
decline was caused by the same factors noted above, as well as our relocation to
our new corporate headquarters during the first three months of fiscal 2001,
which we believe caused us to lose sales during that period. We expect to see
continued weakness in the demand for our disk drive storage upgrade systems and
CD servers and arrays and non-NAS product sales throughout fiscal 2001, and we
may accelerate the discontinuance of our non-NAS products.

        Net sales related to our disk based NAS appliances increased 118% to
$8.5 million for the three months ended January 31, 2001, from $3.9 million for
the three months ended January 31, 2000. This increase was primarily the result
of increased unit sales of our NetFORCE NAS appliances, offset by decreased
sales of our DataFORCE and CDFORCE NAS appliances. Net sales related to our disk
based NAS appliances increased to $16.4 million for the six months ended January
31, 2001, from $8.6 million for the six months ended January 31, 2000.

         International sales were $7.4 million, or 63% of our net sales for the
three months ended January 31, 2001, compared to $7.9 million, or 48% of our net
sales in the three months ended January 31, 2000. The decrease in international
sales in absolute dollars is due primarily to reduced sales of non-NAS products
by our German subsidiary, while the increase as a percentage of our net sales
was primarily due to sales of our NAS products to customers in Europe and Asia.
International sales were $15.0 million, or 60% of our net sales for the six
months ended January 31, 2001, compared to $ 15.6 million, or 44% of our net
sales in the six months ended January 31, 2000. The decrease in international
sales in absolute dollars is due primarily to reduced sales of non-NAS products
by our German subsidiary, while the increase as a percentage of our net sales
was primarily due to sales of our NAS products to customers in Europe and


<PAGE>   12
Asia, including sales of approximately $5.0 million to a European storage
service provider, Storway, included in net sales for the first six months of
fiscal 2001, and other sales of NAS appliances by our German and Swiss
subsidiaries and reduced U.S. sales of our CD servers and arrays. Storway
accounted for approximately 20% of net sales for the first six months of fiscal
2001, and three customers, Storway, Ingram Micro and J-Dot Technology, accounted
for approximately 56% of total accounts receivable as of January 31, 2001. There
can be no assurance that the revenues derived from our NAS products will
continue to increase in any particular quarter or period, or that any specific
customers will continue to purchase our products in such period.

         Gross Profit. Gross profit increased to $4.6 million for the three
months ended January 31, 2001, from $3.8 million for the three months ended
January 31, 2000. Gross margin increased to 39.4% of net sales for the three
months ended January 31, 2001, from 23.3% of net sales for the three months
ended January 31, 2000. Gross margin increased from 25.7% for the six months
ended January 31, 2000 to 38.0% for the six months ended January 31, 2001. The
increase in gross margin for both periods was primarily the result of the higher
percentage of NAS revenues of our European subsidiaries, offset to a lesser
extent by a reduction in sales of CD servers and arrays, which have historically
experienced higher margins. In addition, we realized reduced margins on lower
sales of disk drive upgrade systems due to competition and price erosion in the
disk drive upgrade industry. We expect that gross margins may be impacted by
continuing reductions in sales of some of our higher margin non-NAS product
lines, such as CD servers and arrays, until sales of our NAS appliances
significantly increase both in absolute dollars, and as a percentage of our
total sales.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $4.3 million in the three months ended
January 31, 2001, from $6.2 million in the three months ended January 31, 2000,
and decreased as a percentage of net sales to 36.7% from 38.0%. Selling, general
and administrative expenses decreased to $9.0 million in the six months ended
January 31, 2001, from $12.3 million in the six months ended January 31, 2000.
The dollar decrease in selling, general and administrative expenses was
primarily the result of reduced sales and administrative salaries and
commissions, reduced cooperative advertising costs, and reduced expenses of our
German subsidiary, as well as net foreign currency gains of approximately
$219,000 in the second quarter of fiscal 2001 incurred as the Euro, and
therefore, the German mark and the Italian lira, strengthened during the
quarter, more than offsetting currency losses incurred in the first quarter of
fiscal 2001. In addition, we incurred reduced advertising, marketing and travel
costs, offset somewhat by increased legal fees and increases in the cost of
personnel necessary to support our NAS sales and marketing efforts. During the
three months ended January 31, 2001, we continued to identify and eliminate
certain positions and functions not related to our core NAS activities. As a
result, we experienced some reductions in selling, general and administrative
expenses in the past quarter. However, we expect overall selling, general and
administrative expense to increase in future periods as we plan to substantially
increase spending on efforts to market our NAS appliances and we expect
increased facilities costs, such as utilities, taxes and maintenance, as we
utilize our recently completed corporate headquarters.

         Research and Development Expenses. Research and development expenses
decreased slightly from $1.68 million, or 10.7% of net sales in the second
quarter of fiscal 2000 to $1.74 million, or 14.3% of net sales, for the three
months ended January 31, 2001. The decreases for the second quarter of fiscal
2001 is due primarily to reduced tools, beta units and engineering supplies,
offset by increases in expenses for outside programmers. Research and
development expenses increased from $3.4 million, or 9.6% of net sales in the
first six months of fiscal 2000 to $3.5 million, or 13.8% of net sales, for the
first half of fiscal 2001. The increase was primarily due to compensation
expense for additional NAS software programmers and hardware developers, offset
by reduced costs for evaluation units and supplies. We anticipate that our
research and development expenses will continue to increase, both in absolute
dollars and as a percentage of net sales, with the expected addition of
dedicated NAS engineering resources.

         In-process research and development. As discussed in Note 7 to the
Condensed Consolidated Financial Statements, we acquired the outstanding shares
of Scofima Software Srl, an Italian company. We employed an appraiser to value
the assets of Scofima, and the appraiser assigned a value of approximately $4.3
million to in-process research and development relating to software being
developed by Scofima, which has not yet reached technological feasibility and
for which no alternative future use is available. We incurred this charge in the
second quarter of fiscal 2001. The amount of purchase price allocated to
in-process research and development was determined by estimating the stage of
development of the software, estimating future cash flows from projected
revenues, and discounting those cash flows to present value. The discount rate
applied was 25%. The incremental product sales resulting from the products
incorporating the software are estimated to be approximately $44 million over
the initial four years of sales with sales growing from approximately $1.5
million in the initial year to $13.4 million in the fourth year. We anticipate
expending approximately $0.5 million to complete development of the software.

<PAGE>   13

         Interest Income (Expense). Interest income decreased 15.7% to $236,000
for the three months ended January 31, 2001, from $280,000 for the three months
ended January 31, 2000. During the first three months of fiscal year 2001, we
invested the majority of our available cash in investment-grade commercial paper
with maturities of less than 90 days. As a result of a decrease in our
investable cash position, interest income decreased in the first six months of
fiscal 2001. During the first quarter of fiscal 2001, our new corporate
headquarters was placed into service, and we began to incur interest expense on
the amount we have financed for our building. (Previously, interest expense had
been capitalized as part of the developmental cost of our headquarters.) We
expect that interest income will be reduced in the future and that interest
expense will increase significantly due to the financing of our corporate
headquarters, and our need to borrow additional amounts to finance our
operations. On October 31, 2000, we issued a $15 million 6% convertible
debenture, and interest expense in future periods will include interest charges
on the amount outstanding under the debenture agreement. Interest expense of
$423,000 was incurred in the second quarter of fiscal 2001 as we borrowed under
the convertible debenture, utilized our CIT term loan and expensed a pro rata
share of prepaid loan costs throughout the quarter.

         Benefit for Income Taxes. Our effective tax provision rate for the
three months ended January 31, 2001 was 0.9%, compared to an effective tax
benefit rate of (30.8%) for the same period in fiscal 2000. The fiscal 2001
provision is necessary due to a provision for earnings of our Italian
subsidiary, while we have taken no current benefit for our US and German losses.
The corresponding fiscal 2000 effective tax rate reflects the statutory rates
and unusable foreign losses, partially offset by research and development tax
credits. The net deferred tax asset recorded on the balance sheet as of January
31, 2001 is based on our expectation that we will more likely than not have
future taxable income against which we may apply certain tax attributes,
including our net operating loss deduction. We have considered other tax
planning strategies that, if implemented, would enable us to recover a portion
of the value of our deferred tax asset. We believe we can return to
profitability, and that it is more likely than not that future profitability
will be sufficient to recover the value of our net deferred tax asset at January
31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

         As of January 31, 2001, we had cash and short-term marketable
securities totaling $13.5 million.

         Net cash used in operating activities was $8.5 million in the first six
months of fiscal 2001 and $3.1 million in the first six months of fiscal 2000.
Net cash used in operating activities relates primarily to our net loss, and
increases in our accounts receivable as we granted extended terms to our foreign
customers. In addition, our inventories increased and accounts payable
decreased, as we paid off nearly all of the costs of our corporate headquarters,
which was completed in September 2001, and we utilized our IBM Credit flooring
line, which requires payments at certain required dates. These uses of cash were
offset by a reduction of approximately $2.7 million in our income tax refund
receivable, which we received in the first six months of fiscal 2001.

         Net cash used in investing activities was $2.0 million in the first six
months of fiscal 2001, while net cash used in investing activities was $1.1
million in the first six months of fiscal 2000. Net cash used in investing
activities in the first six months of fiscal 2001 was the result of payments of
$1.5 million to complete our corporate headquarters and $0.3 million of
purchases of other property and equipment. Net cash used in investing activities
in the first six months of fiscal 2000 resulted from the purchase of $1.1
million of property and equipment.

         Net cash provided by financing activities was $8.5 million in the first
six months of fiscal 2001, and $1.6 million in the first six months of fiscal
2000. Net cash provided by financing activities in the first six months of
fiscal 2001 resulted primarily from the issuance of a $15.0 million convertible
debenture, and the closing and funding of a term loan/line of credit agreement
with CIT Business Credit (see below) and approximately $0.7 million in stock
option exercises and employee stock purchases, reduced by the repayment of
approximately $10.8 million in loans previously secured by the Company's
commercial paper portfolio.

         At July 31, 2000, we had established a revolving line of credit with
Finova Capital Corporation. The line had been based on a percentage of our
eligible accounts receivable and inventory, up to a maximum of $10,000,000. We
paid off all amounts outstanding under the Finova flooring line in early October
2000.


<PAGE>   14
         On October 10, 2000, we entered into a term loan agreement and a
three-year working capital line of credit with CIT Business Credit. A term loan
of $4,000,000 is due and payable upon our finalization of a long-term mortgage
or sale-leaseback of our corporate headquarters, or it will be repaid in 12
monthly installments commencing April 1, 2001, while an initial term loan of $1
million was due and payable in 90 days and was repaid on November 1, 2000. The
term loans bear interest at the lender's prime rate (9.5% at January 31, 2001),
plus .5%, with increases if the loan is not reduced according to a fixed
amortization schedule. The working capital line of credit allows us to borrow,
on a revolving basis, for a period of three years, a specified percentage of
eligible accounts receivable and inventories (approximately $2.9 million at
January 31, 2001), up to a limit of $5,000,000. Amounts outstanding under the
working capital line bear interest at the lender's prime rate plus .25%. At
January 31, 2001, $4.1 million was outstanding under the various credit
arrangements. The lender charged approximately $130,000 for the credit
facilities, which is being charged as interest expense over the term of the
loan. The lines accrue various monthly maintenance, minimum usage and early
termination fees. The lines require certain financial and other covenants,
including the maintenance of a minimum EBITDA requirement for each fiscal
quarter beginning in the quarter ending January 31, 2001. We were in compliance
with all covenants of the lines at January 31, 2001. The combined lines of
credit are collateralized by all the our assets.

         In addition to the two lines noted above, we entered into a flooring
line with IBM Credit, which has committed to make $2.5 million in flooring
inventory commitments available to us. The flooring line is collateralized by
the specific inventory purchased pursuant to the flooring commitments, and IBM
Credit and CIT Business Credit have entered into an intercreditor agreement
which determines the level of priority of either lender's security interest. The
flooring line requires the maintenance by us of a minimum net worth of
$16,000,000, and we were in compliance with the terms of the flooring line at
January 31, 2001.

        On October 31, 2000, we issued a $15.0 million convertible unsecured
debenture to a private investor. The debenture bears interest at 6.0% per annum,
and is repayable in full on October 31, 2003, unless otherwise converted into
our common stock. The debenture is convertible into our common stock at the
investor's option at $22.79 per share, and at our option if our common stock
trades at more than $30.75 for at least 20 consecutive trading days. The
investor has a "put" right, which allows the investor to require us to either
repay in cash the face amount of the debenture put by the investor, plus any
accrued but unpaid interest through such time, or pay such amount by issuing our
shares at 90% of the average closing price of our common stock for the five-day
period preceding the time the investor makes such a demand. The investor may put
up to $5.0 million on the 6th month anniversary, $10.0 million on the 12 month
anniversary, and $15.0 million on the 18th, 24th and 30th month anniversaries of
October 31, 2000. If we were to issue shares at 90% of the trading price as
repayment of a put demand, we may incur a significant charge to our income
statement based on the difference between the issuance price of our common stock
and the value of the common stock at October 31, 2000. In connection with the
issuance of the debenture, we issued to the investor a 5-year warrant to
purchase up to 32,916 shares of its common stock at $32.55 per share. We have
valued the warrant using a Black-Scholes model, with the following assumptions:
Expected life - 5 years, Risk free interest rate - 6%, and Volatility, 1.20.
These factors yield a value of $562,000, which will be amortized over the life
of the debt, or if conversion of the debenture occurs, we will reclass the
remaining value to interest expense.

         The Company has determined that all of the principal amount of the
debentures will be recorded as a current liability. The Company has made this
determination based on the requirement that its registration statement
pertaining to the common stock underlying the convertible debentures must be
declared effective on or before March 31, 2001 or upon thirty days notice, the
Company will be in breach of its agreement with the investor and the investor
would, in such circumstances, be entitled to require the Company to
repurchase the convertible debentures. While the investor has provided the
Company with extensions of the deadline for registration and may continue to do
so, the Company can not be certain that the registration statement will be
effective by the deadline or that additional extensions will be obtained. At
January 31, 2001, the debenture amount repayable was $15,000,000, the
unamortized warrant value was $ 514,000, for a net debenture value of
$14,486,000 on the balance sheet. In addition to the warrant cost,


<PAGE>   15
costs of approximately $700,000 were incurred in the debt transactions noted
above, and the amounts were classified as prepaid expenses, and are amortized as
interest expense over the life of the debt instruments.

         In addition to the lines of credit, our foreign subsidiaries have lines
of credit with two German banks, utilized primarily for overdraft and short-term
cash needs. The lines allow Megabyte to borrow up to 1,000,000 German marks
(approximately US$550,000), with interest at approximately 7.45%, and are not
guaranteed by Procom. At January 31, 2001, there was no amount outstanding under
the lines. Also, Procom Technology, SPA maintains two short-term lines of credit
totaling 300 million lira (approximately US$145,000), bearing interest at 13%
per annum. No amounts were outstanding under this line at January 31, 2001.

         In March 1999, we purchased an 8.3 acre parcel of land for $7.3 million
in Irvine, California, for development as our corporate headquarters facility.
Construction commenced in late 1999 and was completed in September 2000. The
cost of the land together with the cost of constructing the facility, including
capitalized interest and other carrying costs, is approximately $15.9 million
including $0.7 million in capitalized interest costs. In addition, we may need
to spend about $0.8 million to build out the remaining portion of the building
if we sublease it. We have attempted to lease 47,000 square feet of the building
and we are currently considering financing options including a long-term
mortgage or sale/leaseback. We will be attempting to complete a sale-leaseback
transaction in the next 90 days. There can be no assurance, however, that we
will be successful in completing a sublease, long-term mortgage or
sale/leaseback on favorable terms, if at all.

         On September 14, 1998, our board of directors approved an open market
stock repurchase program. We were authorized to effect repurchases of up to $2.0
million in shares of our common stock. We have repurchased a total of 77,845
shares at an average cost of $5.15 per share. No repurchases were made in the
six months ended January 31, 2001. In September 2000, our Board terminated the
repurchase program.

          As is customary in the computer reseller industry, the Company is
contingently liable at July 31, 2000 under the terms of repurchase agreements
with several financial institutions providing inventory financing for dealers of
the Company's appliances. Under these agreements, dealers purchase the Company's
appliances, and the financial institutions agree to pay the Company for those
purchases, less a pre-set financing charge, within an agreed payment term. Two
of these institutions, Finova and IBM Credit Corporation, have also provided the
Company with vendor inventory financing. The contingent liability under these
agreements approximates the amount financed, reduced by the resale value of any
appliances that may be repurchased, and the risk of loss is spread over several
dealers and financial institutions. At July 31, 2000, and January 31, 2001 the
Company was contingently liable for purchases made under these agreements of
approximately $560,000 and $178,000, respectively. During the three years ended
July 31, 2000, and through the six months ended January 31, 2001, the Company
was not required to repurchase any previously sold inventory pursuant to the
flooring agreements.

         At January 31, 2001, we had recorded a net deferred tax asset of
approximately $2.2 million, comprised of gross deferred tax assets of
approximately $4.2 million, less a valuation allowance of approximately $2.0
million. The realization of the benefit of the net deferred tax asset will be
dependent on our returning to profitability, thereby allowing us to utilize our
net operating loss carryforward and other tax attributes, such as the difference
between the book and tax basis of our reserves or depreciation against future
taxable income. We believe that our current losses are primarily the result of
our determination to transition from our CD-Tower and disk drive upgrade
subsystems product lines (driven in part by reducing demand for those products)
to more complex network attached storage products which have required
significant research and development and longer market acceptance period. We
have considered other tax planning strategies that, if implemented, would enable
us to recover a portion of the value of our deferred tax asset. We believe we
can return to profitability, and that it is more likely than not that future
profitability will be sufficient to recover the value of our net deferred tax
asset at January 31, 2001.

         On December 28, 2000, the Company acquired all of the issued and
outstanding capital stock of Scofima Software S.r.l., a company organized under
the laws of Italy ("Scofima"), in exchange for 480,000


<PAGE>   16

shares, valued at $12 per share, of the Company's common stock. The Company has
agreed to file a registration statement covering the shares issued to the
shareholders of Scofima not later than March 28, 2001. Scofima had an option to
acquire a software system designed as a caching and content distribution
solution. Immediately prior to the Company's acquisition of Scofima, Scofima
exercised its option, and acquired the exclusive rights to the software system,
which it had been developing as discussed below. The purpose of the software is
to provide functionalities that are necessary for the content delivery market of
the internet. The software had been in development for approximately 2-3 years,
involving 5 programmers and system developers. The software was not complete at
the date of acquisition, and has yet to be determined to be technologically
feasible. The Company is currently completing the software, but final release is
not expected for several months. The Company issued 480,000 shares valued at $12
per share and incurred approximately $250,000 in acquisition costs in exchange
for the outstanding shares of Scofima. Scofima had net assets of approximately
$500,000 at the date of acquisition. The transaction was accounted for as a
purchase of assets. The Company has employed an appraiser to identify the values
of the assets acquired, including, among other assets, certain in-process
research and development costs. The amount of purchase price allocated to
in-process research and development was determined by estimating the stage of
development of the software, estimating future cash flows from projected
revenues, and discounting those cash flows to present value. The appraiser
concluded, and the Company has determined that approximately $4.3 million of the
purchase price was related to in-process research and development efforts that
had not attained technological feasibility and for which no future alternative
use was expected. The Company has expensed the value of the research and
development as of the date of the acquisition of Scofima and capitalized the
fair value of the other assets acquired as determined and allocated by the
appraiser, including the value of the assembled workforce of approximately $0.2
million and developer relationships valued at $0.1 million which will be
amortized over 4 years, with the remainder of $1.4 million assigned to goodwill,
which will be amortized over 4 years.

        We transact business in various foreign countries, but we only have
significant assets deployed outside the United States in Germany, Italy and
Switzerland. We have effected intercompany advances and sold goods to Megabyte
as well as our subsidiaries in Italy and Switzerland denominated in U.S.
dollars, and those amounts are subject to currency fluctuation, and require
constant revaluation on our financial statements. While a significant reduction
in valuation of various currencies such as the Euro (to which the value of the
German mark and the Italian lira are pegged) and the Swiss franc could lead to
lower sales as our products then become more expensive for foreign customers, we
do not believe that the currency fluctuations have had a material impact on our
liquidity. Our reported sales can be affected by changes in the currency rates
in effect in any particular period. For example, in the quarter ended October
31, 2000, the Euro, and two currencies whose values are pegged to the Euro,
declined in value significantly, and then increased in value significantly in
the quarter ended January 31, 2001. As a result, we incurred a foreign currency
loss of $160,000 in the quarter ended October 31, 2000 while we realized a gain
of $219,000 in the quarter ended January 31, 2001. Also, these fluctuation gains
can cause us to report more or less in sales by virtue of the translation of the
subsidiary's sales into US dollars at an average rate in effect throughout the
quarter. Also, we have funded operational losses of our subsidiaries of
approximately $2.8 million since we purchased them, and if our subsidiaries
continue to incur operational losses, our cash and liquidity would be negatively
impacted.

         In January 2001, we filed a Registration Statement on Form S-3 with
Merrill Lynch acting as a Placement Agent to effect, on a best efforts basis,
the sale of approximately 2,000,000 shares of common stock. We are currently
discussing the sale with various parties, but have not effected any sales. Given
the current state of the stock market, we can not assure you that we can
complete the offering.

         We expect to have sufficient cash generated from operations, through
availability under lines of credit and through other sources, such as a
long-term mortgage or a sale-leaseback of our facility, to meet our anticipated
cash requirements for the next twelve months.



<PAGE>   17

                                  RISK FACTORS

Before investing in our common stock, you should be aware that there are risks
inherent in our business, including those indicated below. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks actually
occurs, our business could be harmed. In that case, the trading price of our
common stock could decline, and you might lose part or all of your investment.
You should carefully consider the following risk factors as well as the other
information in this Report on Form 10-Q.

COMPETING DATA STORAGE TECHNOLOGIES MAY EMERGE AS A STANDARD FOR DATA STORAGE
SOLUTIONS, WHICH COULD CAUSE GROWTH IN THE NAS MARKET NOT TO MEET OUR
EXPECTATIONS AND DEPRESS OUR STOCK PRICE.

The market for data storage is rapidly evolving. There are other storage
technologies in use, including storage area network technology, which provide an
alternative to network attached storage. We are not able to predict how the data
storage market will evolve. For example, it is not clear whether usage of a
number of different solutions will grow and co-exist in the marketplace or
whether one or a small number of solutions will be dominant and displace the
others. It is also not clear whether network attached storage technology will
emerge as a dominant or even prevalent solution. Whether NAS becomes an accepted
standard will be due to factors outside our control. If a solution other than
network attached storage emerges as the standard in the data storage market,
growth in the network attached storage market may not meet our expectations. In
such event, our growth and the price of our stock would suffer.

IF GROWTH IN THE NAS MARKET DOES NOT MEET OUR EXPECTATIONS, OUR FUTURE FINANCIAL
PERFORMANCE COULD SUFFER.

We believe our future financial performance will depend in large part upon the
continued growth in the NAS market and on emerging standards in this market. We
intend for NAS products to be our primary business. The market for NAS products,
however, may not continue to grow. Long-term trends in storage technology remain
unclear and some analysts have questioned whether competing technologies, such
as storage area networks, may emerge as the preferred storage solution. If the
NAS market grows more slowly than anticipated, or if NAS products based on
emerging standards other than those adopted by us become increasingly accepted
by the market, our operating results could be harmed.

THE REVENUE AND PROFIT POTENTIAL OF NAS PRODUCTS IS UNPROVEN, AND WE MAY BE
UNABLE TO ATTAIN REVENUE GROWTH OR PROFITABILITY FOR OUR NAS PRODUCT LINES.

NAS technology is relatively recent, and our ability to be successful in the NAS
market may be negatively affected by not only a lack of growth of the NAS market
but also the lack of market acceptance of our NAS products. Additionally, we may
be unable to achieve profitability as we transition to a greater emphasis on NAS
products.
<PAGE>   18

IF WE FAIL TO SUCCESSFULLY MANAGE OUR TRANSITION TO A FOCUS ON NAS PRODUCTS, OUR
BUSINESS AND PROSPECTS WOULD BE HARMED.

We began developing NAS products in 1997. Since then, we have focused our
efforts and resources on our NAS business, and we intend to continue to do so.
We expect to continue to wind down our non-NAS product development and marketing
efforts. In the interim, we expect to continue to rely in large part upon sales
of our non-NAS products to fund operating and development expenses. Net sales of
our non-NAS products have been declining in amount and as a percentage of our
overall net sales, and we expect these declines to continue. If the decline in
net sales of our non-NAS products varies significantly from our expectations, or
the decline in net sales of our non-NAS products is not substantially offset by
increases in sales of our NAS products, we may not be able to generate
sufficient cash flow to fund our operations or to develop our NAS business.

We also expect our transition to a NAS-focused business to require us to
continue:

           (a) engaging in significant marketing and sales efforts to achieve
               market awareness as a NAS vendor;

           (b) reallocating resources in product development and service and
               support of our NAS appliances;

           (c) modifying existing and entering into new channel partner
               relationships to include sales of our NAS appliances; and

           (d) expanding and reconfiguring manufacturing operations.

In addition, we may face unanticipated challenges in implementing our transition
to a NAS-focused company. We may not be successful in managing any anticipated
or unanticipated challenges associated with this transition. Moreover, we expect
to continue to incur costs in addressing these challenges, and there is no
assurance that we will be able to generate sufficient revenues to cover these
costs. If we fail to successfully implement our transition to a NAS-focused
company, our business and prospects would be harmed.

OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY MAY NOT GENERATE SIGNIFICANT NET
SALES.

We believe our relationship with Hewlett-Packard Company helped us accomplish
our strategy to increase penetration in the NAS market. However, there is no
minimum purchase commitment under our agreement with Hewlett-Packard. We do not
currently, and may never, generate significant net sales under this agreement.
The Hewlett-Packard agreement has a five-year term, and there is no assurance
that the agreement can or will be renewed. We commenced shipments under the
agreement in limited quantities in April 2000 and sales to Hewlett-Packard for
the three months ended January 31, 2001 were not significant. In February 2001,
Hewlett-Packard notified us that they do not anticipate they will purchase
additional NAS products from us in the future. While neither they nor we have
formally terminated the agreement, we do not anticipate that future sales to
Hewlett-Packard will be significant.

<PAGE>   19

IF WE FAIL TO INCREASE THE NUMBER OF DIRECT AND INDIRECT SALES CHANNELS FOR OUR
NAS PRODUCTS, OUR ABILITY TO INCREASE NET SALES MAY BE LIMITED.

In order to grow our business, we will need to increase market awareness and
sales of our NAS appliances. To achieve these objectives, we believe it will be
necessary to increase the number of our direct and indirect sales channels. We
plan to significantly increase the number of our direct sales personnel.
However, there is intense competition for these professionals, and we may not be
able to attract and retain sufficient new sales personnel.

We also plan to expand revenues from our indirect sales channels, including
distributors, VARs, OEMs and systems integrators. To do this, we will need to
modify and expand our existing relationships with these indirect channel
partners, as well as enter into new indirect sales channel relationships. We may
not be successful in accomplishing these objectives. If we are unable to expand
our direct or indirect sales channels, our ability to increase revenues may be
limited.

BECAUSE WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS OR
RESELLERS, SUCH AS INGRAM MICRO, TECH DATA, COMPUCOM, CUSTOM EDGE, AND OTHERS,
THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF COMPETITORS, WHICH COULD
HARM OUR OPERATING RESULTS.

Our distributors and resellers generally offer products of several different
companies, including products of our competitors. Accordingly, these
distributors and resellers, such as Ingram Micro, Tech Data, Compucom, Custom
Edge (formerly Inacom) may give higher priority to products of our competitors,
which could harm our operating results. In addition, our distributors and
resellers often demand additional significant selling concessions and inventory
rights, such as limited return rights and price protection. We cannot assure you
that sales to our distributors or resellers will continue, or that these sales
will be profitable.

BECAUSE WE HAVE ONLY APPROXIMATELY THREE YEARS OF OPERATING HISTORY IN THE NAS
MARKET, WHICH IS NEW AND RAPIDLY EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION
IS OF LIMITED VALUE IN PROJECTING OUR FUTURE OPERATING RESULTS OR PROSPECTS.

We have been manufacturing and selling our NAS products for only approximately
three years. For the year ended July 31, 2000 and the first six months of the
current fiscal year 2001, these products accounted for less than 41% and 66%,
respectively, of our total net sales. We expect sales of our NAS products to
represent an increasing percentage of our net sales in the future. Because of
our operating history in the NAS product market is only approximately three
years, as well as the rapidly evolving nature of the NAS market, it is difficult
to evaluate our business or our prospects. In particular, our historical
financial information is of limited value in projecting our future operating
results.
<PAGE>   20


MARKETS FOR BOTH OUR NAS APPLIANCES AND OUR NON-NAS PRODUCTS ARE INTENSELY
COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY LOSE MARKET
SHARE OR BE REQUIRED TO REDUCE PRICES.

The markets in which we operate are intensely competitive and characterized by
rapidly changing technology. Increased competition could result in price
reductions, reduced gross margins or loss of market share, any of which could
harm our operating results. We compete with other NAS companies, direct-selling
storage providers and smaller vendors that provide storage solutions to
end-users. In our non-NAS markets, we compete with computer manufacturers that
provide storage upgrades for their own products, as well as with manufacturers
of hard drives, CD servers and arrays and storage upgrade products. Many of our
current and potential competitors have longer operating histories, greater name
recognition, larger customer bases and greater financial, technical, marketing
and other resources than we do. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
devote greater resources to the development, promotion, sale and support of
their products, and reduce prices to increase market share. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We may not be able to compete
successfully against current or future competitors. In addition, new
technologies may increase competitive pressures.

WE DEPEND ON A FEW CUSTOMERS, INCLUDING DISTRIBUTORS SUCH AS INGRAM MICRO AND
TECH DATA, AS WELL AS SPECIALIZED END-USERS, FOR A SUBSTANTIAL PORTION OF OUR
NET SALES AND ACCOUNTS RECEIVABLE, AND CHANGES IN THE TIMING AND SIZE OF THESE
CUSTOMERS' ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.

Three customers accounted for approximately 42% and 45% of the Company's total
accounts receivable at July 31, 1999 and July 31, 2000, respectively, and one
individual customer accounted for approximately 9% and 7% of the Company's net
sales for fiscal 1999 and 2000. One customer, Storway, a European storage
service provider, accounted for approximately 20% of our net sales for the first
six months of the current fiscal year 2001, and three customers, Storway, Ingram
Micro and J-Dot Technology, accounted for approximately 56% of our total
accounts receivable at January 31, 2001. In fiscal 1999 and 2000, we sold our
non-NAS products principally to distributors and master resellers such as Ingram
Micro, Tech Data, Custom Edge (previously Inacom) and Compucom. Unless and until
we diversify and expand our customer base for NAS products, our future success
will depend to a large extent on the timing and size of future purchase orders,
if any, from these customers. In addition, we expect that single site purchasers
of large installations of our NAS products will purchase large volumes of our
NAS products over relatively short periods of time. This will cause both our
sales and our accounts receivables to be highly concentrated and significantly
dependent on one or only a few customers, as has occurred during this six month
period. If we lose a major customer, or
<PAGE>   21

if one of our customers significantly reduces its purchasing volume
or experiences financial difficulties and is unable to pay its debts, our
results of operations could be harmed. We cannot be certain that customers that
have accounted for significant revenues in past periods will continue to
purchase our products in future periods.

OUR GROSS MARGINS OF OUR VARIOUS PRODUCT LINES HAVE FLUCTUATED SIGNIFICANTLY IN
THE PAST AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY. FOR EXAMPLE, WE MAY SEE
REDUCED SALES OF HIGHER-MARGIN CD SERVICES OR NOTEBOOK UPGRADE PRODUCTS AND WE
MAY NOT SEE INCREASED SALES OF OUR NAS APPLIANCES.

Historically, our gross margins have fluctuated significantly. Our gross margins
vary significantly by product line and distribution channel, and, therefore, our
overall gross margin varies with the mix of products we sell. Our markets are
characterized by intense competition and declining average unit selling prices
over the course of the relatively short life cycles of individual products. For
example, in the past we have derived a significant portion of our sales from
disk drives, CD servers and arrays, and storage upgrade products. The market for
these products is highly competitive and subject to intense pricing pressures
and we have seen significant reduction in demand for these products during the
last two years. Some of these products, such as CD servers and arrays and some
laptop storage upgrade systems have historically generated high gross margins,
although we have experienced significant declines in sales of these products.
Sales of disk drive upgrade systems generally generate lower gross margins than
those of our NAS products. If we fail to increase sales of our NAS appliances,
or if demand, sales or gross margins for CD servers and arrays and our laptop
storage upgrade systems decline rapidly, we believe our overall gross margins
will continue to decline.

Our gross margins have been and may continue to be affected by a variety of
other factors, including:

           o new product introductions and enhancements;

           o competition;

           o changes in the distribution channels we use;

           o the mix and average selling prices of products; and

           o the cost and availability of components and manufacturing labor.

IF WE ARE UNABLE TO TIMELY INTRODUCE COST-EFFECTIVE HARDWARE OR SOFTWARE
SOLUTIONS FOR NAS ENVIRONMENTS, OR IF OUR PRODUCTS FAIL TO KEEP PACE WITH
TECHNOLOGICAL CHANGES IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD BE
MATERIALLY ADVERSELY AFFECTED.
<PAGE>   22

Our future growth will depend in large part upon our ability to successfully
develop and introduce new hardware and software for the NAS market. Due to the
complexity of products such as ours, and the difficulty in estimating the
engineering effort required to produce new products, we face significant
challenges in developing and introducing new products. We may be unable to
introduce new products on a timely basis or at all. If we are unable to
introduce new products in a timely manner, our operating results could be
harmed.

Even if we are successful in introducing new products, we may be unable to keep
pace with technological changes in our markets and our products may not gain any
meaningful market acceptance. The markets we serve are characterized by rapid
technological change, evolving industry standards, and frequent new product
introductions and enhancements that could render our products obsolete and less
competitive. As a result, our position in these markets could erode rapidly due
to changes in features and functions of competing products or price reductions
by our competitors. In order to avoid product obsolescence, we will have to keep
pace with rapid technological developments and emerging industry standards. We
may not be successful in doing so, and if we fail in this regard, our operating
results could be harmed.

WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SEVERAL KEY COMPONENTS USED IN
OUR PRODUCTS, INCLUDING DISK DRIVES, COMPUTER BOARDS, POWER SUPPLIES,
MICROPROCESSORS AND OTHER COMPONENTS, AND ANY DISRUPTION OR TERMINATION OF THESE
SUPPLY ARRANGEMENTS COULD DELAY SHIPMENT OF OUR PRODUCTS AND HARM OUR OPERATING
RESULTS.

We rely upon a limited number of suppliers of several key components used in our
products, including disk drives, computer boards, power supplies and
microprocessors. In the past, we have experienced periodic shortages, selective
supply allocations and increased prices for these and other components. We may
experience similar supply issues in the future. Even if we are able to obtain
component supplies, the quality of these components may not meet our
requirements. For example, in order to meet our product performance
requirements, we must obtain disk drives of extremely high quality and capacity.
Even a small deviation from our requirements could render any of the disk drives
we receive unusable by us. In the event of a reduction or interruption in the
supply or a degradation in quality of any of our components, we may not be able
to complete the assembly of our products on a timely basis or at all, which
could force us to delay or reduce shipments of our products. If we were forced
to delay or reduce product shipments, our operating results could be harmed. In
addition, product shipment delays could adversely affect our relationships with
our channel partners and current or future end-users.

UNDETECTED DEFECTS OR ERRORS FOUND IN OUR PRODUCTS, OR THE FAILURE OF OUR
PRODUCTS TO PROPERLY INTERFACE WITH THE PRODUCTS OF OTHER VENDORS, MAY RESULT IN
DELAYS, INCREASED COSTS OR FAILURE TO ACHIEVE MARKET ACCEPTANCE, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

<PAGE>   23

Complex products such as those we develop and offer may contain defects or
errors, or may fail to properly interface with the products of other vendors,
when first introduced or as new versions are released. Despite internal testing
and testing by our customers or potential customers, we do, from time to time,
and may in the future encounter these problems in our existing or future
products. Any of these problems may:

           o cause delays in product introductions and shipments;

           o result in increased costs and diversion of development resources;

           o require design modifications; or

           o decrease market acceptance or customer satisfaction with these

           o products, which could result in product returns.

In addition, we may not find errors or failures in our products until after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could significantly harm our operating results. Our current or
potential customers might seek or succeed in recovering from us any losses
resulting from errors or failures in our products.

IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.

Net sales to our international customers, including export sales from the United
States, accounted for approximately 60% of our net sales for the first six
months of the current fiscal year 2001 as compared to 44% of our net sales for
the first six months of the current fiscal year 2000, 41% of our net sales for
the year ended July 31, 2000 and approximately 33% of our net sales for the
fiscal year ended July 31, 1999. We believe that our growth and profitability
will require successful expansion of our international operations to which we
have committed significant resources. Our international operations will expose
us to operational challenges that we would not otherwise face if we conducted
our operations only in the United States. These include:

           o currency exchange rate fluctuations, particularly when we sell
             our products in denominations other than U.S. dollars;

           o difficulties in collecting accounts receivable and longer
             accounts receivable payment cycles;

           o reduced protection for intellectual property rights in some
             countries, particularly in Asia;

           o legal uncertainties regarding tariffs, export controls and other
             trade barriers;
<PAGE>   24

           o   the burdens of complying with a wide variety of foreign laws and
               regulations; and

           o   seasonal fluctuations in purchasing patterns in other countries,
               particularly in Europe.

Any of these factors could have an adverse impact on our existing international
operations and business or impair our ability to continue expanding into
international markets. For example, our reported sales can be affected by
changes in the currency rates in effect during any particular period. The
effects of currency fluctuations were evident in our results of operations for
the first six months of the current fiscal year 2001. For example, in the
quarter ended October 31, 2000, the Euro, and two currencies whose values are
pegged to the Euro, declined in value significantly, and then increased in value
significantly in the quarter ended January 31, 2001. As a result, we incurred a
foreign currency loss of $160,000 in the quarter ended October 31, 2000 while
we realized a gain of $219,000 in the quarter ended January 31, 2001. Also,
these fluctuation gains can cause us to report more or less in sales by virtue
of the translation of the subsidiary's sales into US dollars at an average rate
in effect throughout the quarter. Also, we have funded operational losses of our
subsidiaries of approximately $2.8 million since we purchased them, and if our
subsidiaries continue to incur operational losses, our cash and liquidity would
be negatively impacted.

      In order to successfully expand our international sales, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. Expanding internationally and managing
the financial and business operations of our foreign subsidiaries will also
require significant management attention and financial resources. For example,
our foreign subsidiaries in Europe have incurred operational losses. To the
extent that we are unable to address these concerns in a timely manner, our
growth, if any, in international sales will be limited, and our operating
results could be materially adversely affected. In addition, we may not be able
to maintain or increase international market demand for our products.

OUR PROPRIETARY SOFTWARE RELIES ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY
US TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET
PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS, WHICH
WOULD ADVERSELY AFFECT OUR NET SALES.

Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our proprietary software or
technology. We believe the protection of our proprietary technology is important
to our business. If we are unable to protect our intellectual property rights,
our business could be materially adversely affected. We currently rely on a
combination of copyright and trademark laws and trade secrets to protect our
proprietary rights. In addition, we generally enter into confidentiality
agreements with our employees and license agreements with end-users and
control access to our source code and other intellectual property. We have
applied
<PAGE>   25

for the registration of some, but not all, of our trademarks. We have applied
for one U.S. patent with respect to the design of our NetFORCE product, and we
anticipate that we will apply for additional patents. It is possible that no
patents will issue from our currently pending applications. New patent
applications may not result in issued patents and may not provide us with any
competitive advantages over, or may be challenged by, third parties. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries, and the
enforcement of those laws, do not protect proprietary rights to as great an
extent as do the laws of the United States. We cannot assure you that our means
of protecting our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our products or
design around any patent issued to us or other intellectual property rights of
ours.

In addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights to establish the validity of our
proprietary rights. This litigation, whether or not it is resolved in our favor,
could result in significant expense to us and divert the efforts of our
technical and management personnel.


<PAGE>   26

WE MAY FROM TIME TO TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS, PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE
OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.

We may from time to time receive claims that we are infringing third parties'
intellectual property rights or claims that our own trademarks, patents or other
intellectual property rights are invalid. For example, we have been recently
notified by Intel Corporation that our products may infringe some of the
intellectual property rights of Intel. In its notification, Intel offered us a
non-exclusive license for patents in their portfolio. We do not know how our
products may infringe the patents of Intel, but we have begun to investigate and
we have had discussions with Intel regarding this matter. We do not believe that
we infringe the patents of Intel, but our discussions and our investigation are
preliminary, and we expect we will continue discussions with Intel. We can not
assure you that Intel would not be successful in asserting a successful claim of
infringement, or if we were to seek a license from Intel regarding its patents,
that Intel would continue to offer us a non-exclusive license on any terms. We
expect that companies in our markets will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. The resolution of any claims of this nature, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays, require us to redesign our products or require us to enter into royalty
or licensing agreements, any of which could harm our operating results. Royalty
or licensing agreements, if required, might not be available on terms acceptable
to us or at all. The loss of access to any key intellectual property right could
harm our business.

OUR NET SALES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY
FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.

In recent periods, we have experienced significant declines in net sales and
gross profit and incurred operating losses, causing our quarterly operating
results to vary significantly. If we fail to meet the expectations of investors
or securities analysts, as well as our internal operating goals, as a result of
any future fluctuations in our quarterly operating results, the market price of
our common stock could decline significantly. Our net sales and quarterly
operating results are likely to fluctuate significantly in the future due to a
number of factors. These factors include:

            o    market acceptance of our new products and product enhancements
                 or those of our competitors;

            o    the level of competition in our target product markets;

            o    delays in our introduction of new products;
<PAGE>   27

            o    changes in sales volumes through our distribution channels,
                 which have varying commission and sales discount structures;

            o    changing technological needs within our target product markets;

            o    the impact of price competition on the selling prices for our
                 non-NAS products, which continue to represent a majority of our
                 net sales;

            o    the availability and pricing of our product components;

            o    our expenditures on research and development and the cost to
                 expand our sales and marketing programs; and

            o    the volume, mix and timing of orders received.

Due to these factors, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. In addition, it is difficult for us to
forecast accurately our future net sales. This difficulty results from our
limited operating history in the emerging NAS market, as well as the fact that
product sales in any quarter are generally booked and shipped in that quarter.
Because we incur expenses, many of which are fixed, based in part on our
expectations of future sales, our operating results may be disproportionately
affected if sales levels are below our expectations. Our revenues in any quarter
may also be affected by product returns and any warranty obligations in that
quarter. Many of our distribution and reseller customers have limited return
rights. In addition, we generally extend warranties to our customers that
correspond to the warranties provided by our suppliers. If returns exceed
applicable reserves or if a supplier were to fail to meet its warranty
obligations, we could incur significant losses. In fiscal 2000, we experienced a
14% product return rate. This rate may vary significantly in the future, and we
cannot assure you that our reserves for product returns will be adequate in any
future period.


IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.

Our continued success depends, in part, on our ability to identify, attract,
motivate and retain qualified technical and sales personnel. Competition for
qualified engineers and sales personnel, particularly in Orange County,
California, is intense, and we may not be able to compete effectively to retain
and attract qualified, experienced employees. Should we lose the services of a
significant number of our engineers or sales people, we may not be able to
compete successfully in our targeted markets and our business would be harmed.

We believe that our success will depend on the continued services of our
executive officers and other key employees. In particular, we rely on the
services of our four founders, Messrs. Razmjoo, Alaghband, Aydin and
Shahrestany. We maintain employment agreements with each of our founders. We do
not maintain key-person life

<PAGE>   28
insurance policies on these individuals. The loss of any of these executive
officers or other key employees could harm our business.

WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY, AND OUR FAILURE TO DO SO
COULD REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US
ON FAVORABLE OR ANY TERMS.

In recent periods, we have experienced significant declines in net sales and
gross profit, and we have incurred operating losses. We incurred operating
losses of $5.2 million for fiscal 1999, $12.1 million for fiscal 2000 and $5.6
million (including a charge for acquired research and development) for the first
six months of the current fiscal year 2001. We expect to continue to incur
operating losses through at least the third quarter of fiscal 2001. As part of
our strategy to focus on the NAS market, we plan to significantly increase our
direct sales force and to increase our investment in research and development
and marketing efforts. We will need to significantly increase our revenues from
our NAS products to achieve and maintain profitability. The revenue and profit
potential of these products is unproven. We may not be able to generate
significant or any revenues from our NAS products or achieve or sustain
profitability in the future. In addition, we have invested substantial cash in
our new corporate headquarters. If we are unable to achieve or sustain
profitability in the future, we will have to seek additional financing in the
future, which may not be available to us on favorable or any terms.

CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF
OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE.

Our executive officers, directors and 5% or greater shareholders and their
affiliates own 6,400,000 shares, or approximately 52% of the outstanding shares
of common stock. Acting together, these shareholders would be able to exert
substantial influence on matters requiring approval by shareholders, including
the election of directors. This concentration of ownership could have the effect
of delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which could in turn
have an adverse effect on the market price of our common stock or prevent our
shareholders from realizing a premium over the market price for their shares of
common stock.

THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD RESULT IN A DECLINE
IN YOUR INVESTMENT'S VALUE.

The market price for our common stock has been volatile in the past, and
particularly volatile in the last twelve months, and may continue to fluctuate
substantially in the future. The value of your investment in our common stock
could decline due to the impact of any of the above or of the following factors
upon the market price of our common stock:
<PAGE>   29

               o   fluctuations in our operating results;

               o   fluctuations in the valuation of companies perceived by
                   investors to be comparable to us;

               o   a shortfall in net sales or operating results compared to
                   securities analysts' expectations;

               o   changes in analysts' recommendations or projections;

               o   announcements of new products, applications or product
                   enhancements by us or our competitors; and

               o   changes in our relationships with our suppliers or
                   customers.

WE HAVE ISSUED CONVERTIBLE DEBENTURES, AND THE OBLIGATIONS OF THE DEBENTURES
POSE RISKS TO THE PRICE OF OUR COMMON STOCK AND OUR OPERATIONS.

On October 31, 2000, we issued 3-year $15 million convertible debentures to a
private investor. The debentures provide that in certain circumstances the
holder of the debentures may convert its position into our stock, or demand that
we repay amounts outstanding with cash or by issuing shares of our common stock.
The terms and conditions of the debentures pose unique and special risks to our
operations and the price of our common stock. Some of those risks are discussed
in more detail below.

OUR ISSUANCE OF STOCK UPON THE CONVERSION OR "PUT" OF THE DEBENTURES AND THE
EXERCISE OF THE WARRANTS, AS WELL AS ADDITIONAL SALES OF OUR COMMON STOCK BY THE
HOLDER OF THE DEBENTURES, MAY DEPRESS THE PRICE OF OUR COMMON STOCK AND
SUBSTANTIALLY DILUTE YOUR SHARES.

We are in the process of seeking to register for resale by the holder of our
debentures a total of 1,586,228 shares of our common stock issuable upon
conversion of the debentures and the exercise of the warrants issued to the
holder of our debentures. This number represents 200% of the number of shares of
our common stock issuable if the warrants are exercised in full and our
debentures remain outstanding until their stated maturity on October 31, 2003
and all interest on the debentures is paid in shares of our stock. The staff of
the Securities and Exchange Commission has advised us that we cannot register
for resale any shares of our common stock issuable upon exercise of the "put"
right under the debentures unless and until that put right is exercised and the
applicable shares are issued. While we are continuing to discuss this matter
with the Staff, if the Staff does not change its view, we expect to agree with
the holder of our debentures that we will register for resale the shares
issuable upon exercise of the put right at the time those shares are issued. The
issuance of all or any significant portion of the shares of our common stock
that we are currently in the process of registering together with any additional
shares that we have agreed to register for resale if the put right under the
debentures is exercised and the shares issuable upon exercise of this right are
issued,
<PAGE>   30

could result in substantial dilution to the interests of our other shareholders
and a decrease in the price of our stock. A decline in the price of our common
stock could encourage short sales of our stock, which could place further
downward pressure on the price of our stock.

THE INVESTOR HAS A RIGHT TO DEMAND REPAYMENT OF PART OR ALL OF THE DEBENTURES,
AND IF A DEMAND FOR REPAYMENT IS MADE, AND WE ARE UNABLE OR UNWILLING TO REPAY
THE DEBENTURES IN CASH, WE MAY HAVE TO ISSUE SHARES SUBSTANTIALLY IN EXCESS OF
THOSE ORIGINALLY CONTEMPLATED, AND THOSE ADDITIONAL SHARES WILL DILUTE YOUR
SHARES.

The debentures provide the investor with a "put" right, which is the right to
demand at specified times that we repay the debentures in cash or issue shares
at 90% of the then market price for shares of our common stock, but not more
than $22.79 per share. Accordingly, if an investor exercises its "put" right,
and we are either unwilling or unable to repay the cash, and the market price of
our shares is lower than $22.79, we will have to issue shares to satisfy the
"put" right of the investor. The number of shares that we may be required to
issue to satisfy the investor's exercise of the "put" right could be
substantial. For example, if the market price of our common stock were to
decline by 75% from the market price of $11.25 per share on December 20, 2000,
which represents the lowest closing price reached by our shares since the date
the debentures were issued, we would be required to issue the investor
approximately 5,926,000 shares, which would result in the investor owning nearly
33% of our outstanding stock.

IF OUR SHARES ARE ISSUED TO THE INVESTOR, THOSE SHARES MAY BE SOLD INTO THE
MARKET, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND ENCOURAGE SHORT SALES OF
OUR STOCK.

To the extent the debentures are converted or interest on the debentures is paid
in shares of our common stock rather than cash, a significant number of these
shares of our common stock may be sold into the market, which could decrease the
price of our common stock and encourage short sales. Short sales could place
further downward pressure on the price of our common stock. In that case, we
could be required to issue an increasingly greater number of shares of our
common stock upon future conversions of the debentures as a result of the
adjustments described above, sales of which could further depress the price of
our common stock.

THE DEBENTURES PROVIDE FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE
INVESTORS TO REQUIRE THE COMPANY TO REPAY THE ENTIRE AMOUNT OWED IN CASH WITHIN
THREE DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO IMMEDIATELY REPAY
THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR NO WORKING
CAPITAL IN OUR BUSINESS.

The debentures provide for various events of default, including the following:
<PAGE>   31

               o   the occurrence of an event of default under our loan
                   agreements with The CIT Group;

               o   our failure to pay the principal, interest or any liquidated
                   damages due under the debentures;

               o   our failure to make any payment on any indebtedness of $1
                   million or more to any third party if that failure results
                   in the acceleration of the maturity of that indebtedness;

               o   an acquisition after October 31, 2000 by any individual or
                   entity, other than the investor and its affiliates, of more
                   than 40% of our voting or equity securities;

               o   the replacement of more than 50% of the persons serving as
                   our directors as of October 31, 2000, unless the replacement
                   director or directors are approved by our directors as of
                   October 31, 2000 or by successors whose nominations they
                   have approved;

               o   a merger or consolidation of our company or a sale of more
                   than 50% of its assets unless the holders of our securities
                   immediately prior to such transaction continue to hold at
                   least a majority of the voting rights and equity interests
                   of the surviving entity or the acquirer of our assets;

               o   our entry into bankruptcy;

               o   our common stock fails to be listed or quoted for trading on
                   the New York Stock Exchange, the American Stock Exchange,
                   the Nasdaq National Market or the Nasdaq SmallCap Market;

               o   our completion of a "going private" transaction under SEC
                   Rule 13e-3;

               o   a holder of shares issuable under the debentures or the
                   warrant is not permitted to sell those securities under our
                   registration statement covering those shares for a period of
                   five or more trading days;

               o   if our registration statement covering the shares of our
                   common stock underlying the debentures and the warrant is not
                   declared effective by March 31, 2001, the investor thereafter
                   may give us 30 days notice and the Company would be in
                   default of our obligations at expiration of this period if
                   such registration was not effected.

               o   we fail to deliver certificates evidencing shares of our
                   common stock underlying the debentures or the warrant within
                   five days after the deadline specified in our transaction
                   documents with the investor;

               o   we fail to have a sufficient number of authorized but
                   unissued and otherwise unreserved shares of our common stock
                   available to issue such stock upon any exercise or
                   conversion of the warrant and the debentures;
<PAGE>   32

               o   the exercise or conversion rights of the investor under the
                   warrant or the debentures are suspended for any reason,
                   except as provided in the applicable transaction documents;

               o   we default on specified obligations under our registration
                   rights agreement with the investor and fail to cure any such
                   default within 60 days; and

               o   other than the specified defaults under the registration
                   rights agreement referred to above, we default in the timely
                   performance of any obligation under the transaction
                   documents with the investor and fail to cure any of these
                   defaults for 20 days after we are notified of the default.

If an event of default occurs, the investor can require us to repurchase all or
any portion of the principal amount of any outstanding debentures at a
repurchase price equal to the greater of 110% of such outstanding principal
amount, plus all accrued but unpaid interest on such outstanding debentures
through the date of payment, or the total value of all of our shares issuable
upon conversion of such outstanding debentures, valued based on the average
closing price of our common stock for the preceding five trading days, plus any
accrued but unpaid interest on such outstanding debentures. In addition, upon an
event of default under the debentures, the investor could also require us to
repurchase from the investor any of our shares of common stock issued to the
investor upon conversion of the debentures within the preceding 30 days, which
would be valued at the average closing price of our common stock over the
preceding five trading days. We would be required to complete these repurchases
no later than the third trading day following the date an event of default
notice is delivered to us.

If we were required to make a default payment at a time when all of the
debentures were outstanding, the payment required would be a minimum of $16.5
million and could be substantially greater depending upon the market price of
our common stock at the time. In addition, if we default in the timely
performance of specified obligations under our registration rights agreement
with the investor, we would also be obligated to pay as liquidated damages to
the investor an amount equal to $300,000 each month until any such default is
cured.

Some of the events of default include matters over which we may have some,
little or no control, such as various corporate transactions in which the
control of our company changes, or if our common stock ceases to be listed on a
trading market. If an event of default occurs, we may be unable to repay any
part or all of the entire amount in cash. Any such repayment could leave us with
little or no working capital for our business.

THE PAYMENT TO BRIGHTON CAPITAL IN CONNECTION WITH OUR SALE OF OUR CONVERTIBLE
DEBENTURES MAY BE INCONSISTENT WITH THE PROVISIONS OF SECTION 15 OF THE
SECURITIES EXCHANGE ACT AND MAY ENABLE THE SELLING SHAREHOLDER TO RESCIND ITS
INVESTMENT.

We paid Brighton Capital $375,000 for its introduction to us of the purchaser of
our 6% convertible debentures. The Staff of the Securities and Exchange
Commission has informed us that the receipt by Brighton Capital of this payment
may be inconsistent with the registration provisions of Section 15 of the
<PAGE>   33

Securities Exchange Act of 1934, as amended. If this payment is determined to be
inconsistent with Section 15, then, under Section 29 of the Securities Exchange
Act:

               o    Montrose Investments L.P., the purchaser of our debentures,
                    may have the right to rescind their purchase of these
                    securities, which would require us to repay to Montrose
                    Investments L.P. the $15.0 million that it invested in us;

               o    We may be subject to regulatory action; and

               o    We may be able to recover the $375,000 fee that we paid to
                    Brighton Capital in connection with the transaction.


<PAGE>   34

THE DEBENTURES RESTRICT OUR ABILITY TO RAISE ADDITIONAL EQUITY, WITHOUT THE
CONSENT OF THE INVESTOR, WHICH COULD HINDER OUR EFFORTS TO OBTAIN ADDITIONAL
NECESSARY FINANCING TO OPERATE OUR BUSINESS, OR TO REPAY THE DEBENTURE HOLDERS.

        The agreements we executed when we issued these debentures prohibit us
from obtaining additional equity or equity equivalent financing for a period of
90 trading days after the effective date of the registration statement covering
the resale of the shares issuable upon conversion of the debentures. We also
agreed that for a period of 180 trading days after the effective date of the
registration statement covering the resale of the shares issuable upon
conversion of the debentures, we would not, without the investor's consent,
obtain additional equity or equity equivalent financing unless we first offer
the investor the opportunity to provide such financing upon the terms and
conditions proposed. These restrictions have several exceptions, such as
issuances of options to employees and directors, strategic transactions and
acquisitions and bona fide public offerings with proceeds exceeding $20 million
in gross proceeds. However, the restrictions may make it extremely difficult to
raise additional equity capital during the 90-day and 180-day periods. We may
need to raise such additional capital, and if we are unable to do so, we may
have little or no working capital for our business, and the market price of our
stock may decline.

WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE DO NOT OBTAIN SHAREHOLDER
APPROVAL FOR ISSUANCE OF OUR COMMON STOCK, OR IF WE ARE UNABLE TO TIMELY
REGISTER THESE SHARES.

We are subject to National Association of Securities Dealers Rule 4460, which
generally requires shareholder approval of any transaction that would result in
the issuance of securities representing 20% or more of an issuer's outstanding
listed securities. Upon conversion or the payment of interest on debentures we
are not able to issue more than 2,322,150 shares, or 19.99% of our outstanding
common stock on October 30, 2000, the day prior to the date of issuance of the
debentures. The terms of the convertible debentures purchase agreement also
provide that the shareholder desiring to convert has the option of requiring us
either to seek shareholder approval within 75 days of the request or to pay the
converting holder the monetary value of the debentures that cannot be converted,
at a premium to the converting holder. If the shareholder chooses that we
convert the debentures into shares and we have not obtained the requisite
shareholder approval within 75 days, we would be obligated to pay the monetary
value to the purchaser as liquidated damages. Also, under the terms of the
Registration Rights Agreement, we will incur liquidated damages of approximately
$300,000 per month if we are unable to register the shares on or before March
31, 2001, or maintain the registration of the shares, of common stock issuable
upon the conversion of the debentures and the exercise of those warrants. We
currently have been informed by the Securities and Exchange Commission that we
may not be able to effect the registration of some of these shares. If the
debenture holder chose to enforce the agreement, we would incur the $300,000
monthly charge. However, the debenture holder has recently agreed with us that
they will not declare a default, nor attempt to assess the fee, except on a
30-day notice to us. We can not assure you that the debenture holder will
continue to extend or waive the default date.


<PAGE>   35


EVEN IF WE NEVER ISSUE OUR STOCK UPON EXERCISE OR PUT OF THE DEBENTURES OR UPON
EXERCISE OF THE INVESTOR'S WARRANTS, WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD
REDUCE YOUR OWNERSHIP PERCENTAGE AND DILUTE THE VALUE OF YOUR SHARES.

Other events over which you have no control could result in the issuance of
additional shares of our common stock, which would dilute your ownership
percentage in Procom. Our issuance of 480,000 shares in connection with the
acquisition of Scofima Software S.r.l. is an example of an issuance of
additional shares to finance an acquisition that may dilute your ownership. In
the future, we may issue additional shares of common stock or preferred stock:
to raise additional capital or finance acquisitions, upon the exercise or
conversion of outstanding options, warrants and shares of convertible preferred
stock, or in lieu of cash payment of dividends. Our issuance of additional
shares would dilute your shares. We have agreed to file a registration statement
covering the resale of the shares issued to shareholders of Scofima not later
than March 28, 2001. The sale of these shares could adversely affect the market
price of our stock.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.

         This Report on Form 10-Q contains "forward-looking" statements,
including, without limitation, the statements under the captions "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify these statements by the use of words like "may,"
"will," "could," "should," "project," "believe," "anticipate," "expect," "plan,"
"estimate," "forecast," "potential," "intend," "continue," and variations of
these words or comparable words. In addition, all of the non-historical
information in this Report on Form 10-Q is forward-looking. Forward-looking
statements do not guarantee future performance and involve risks and
uncertainties. Actual results may and probably will differ substantially from
the results that the forward-looking statements suggest for various reasons,
including those discussed under "Risk Factors". These forward-looking statements
are made only as of the date of this Report on Form 10-Q. We do not undertake to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise.

NEW ACCOUNTING STANDARDS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which defines derivatives,
requires that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. This statement is effective for the
first fiscal quarter of fiscal years beginning after June 15, 2000. Adoption of
this statement, effective August 1, 2000, did not have a material impact on our
consolidated financial position, results of operations or cash flows.

           In December 1999, the United States Securities and Exchange
Commission issued Staff Accounting Bulleting (SAB) No. 101, "Revenue Recognition
in Financial Statements," as amended, which for the Company is effective no
later than the fourth quarter of fiscal 2001. SAB No. 101 summarizes certain of
the SEC staff's views regarding the appropriate recognition of revenue in
financial statements. The Company is currently reviewing SAB No. 101 and has not
yet determined the potential impact on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

INTEREST RATE RISK

         Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio as well as the fluctuation in interest rates on
our various borrowing arrangements. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, we limit the amount of credit
<PAGE>   36

exposure to any one issuer. As stated in our policy, we ensure the safety and
preservation of our invested principal funds by limiting default risk, market
risk and reinvestment risk. We mitigate default risk by investing in safe and
high-credit quality securities and by constantly positioning our portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to help ensure
reasonable portfolio liquidity.

        As discussed elsewhere in this Report on Form 10-Q, we have developed
our headquarters in Irvine, California and we have spent approximately $15.9
million and we expect to spend $.8 million more to complete the facility. The
Company is seeking long-term mortgage financing for all or some of the facility
cost during the next fiscal year. The Company has not "locked" in a commitment,
and may therefore find such financing to be much more expensive as a result.
Since July 31, 2000, we have entered into a line of credit and term loan
agreements pursuant to which amounts outstanding bear interest at the lender's
prime rate plus .50%. Accordingly, since we anticipate that we will be borrowing
funds under such agreements, we expect that we will experience interest rate
risk on our debt.

        As we have discussed elsewhere in this Report on Form 10-Q, we have
issued a $15.0 million debenture which accrues interest at 6% annually. We do
not believe that we have much interest rate fluctuation risk on the debentures.

FOREIGN CURRENCY EXCHANGE RISK

        We transact business in various foreign countries, but we only have
significant assets deployed outside the United States in Germany. We have
effected intercompany advances and sold goods to Megabyte as well as our
subsidiaries in Italy and Switzerland denominated in U.S. dollars, and those
amounts are subject to currency fluctuation, and require constant revaluation on
our financial statements. During the six months ended January 31, 2001 and 2000,
we incurred approximately $59,000 and $25,000, respectively, in foreign currency
losses which are included in our selling, general and administrative costs. We
do not operate a hedging program to mitigate the effect of a significant rapid
change in the value of the Euro, the German mark, or the Italian lira compared
to the U.S. dollar. If such a change did occur, we would have to take into
account a currency exchange gain or loss in the amount of the change in the U.S.
dollar denominated balance of the amounts outstanding at the time of such
change. For example, after being weak for some months, during the quarter ended
January 31, 2001, the Euro strengthened, and we recorded a currency gain of
$219,000 in the quarter ended January 31, 2001 after recording a loss of
$160,000 in the quarter ending October 31, 2000. Our net sales can also be
effected by a change in the exchange rate because we translate sales of our
subsidiaries at the average rate in effect during a financial reporting period.
At January 31, 2001, approximately $2.9 million in current intercompany advances
and accounts receivable from our foreign subsidiaries were outstanding. We can
not assure you that we will not sustain a significant loss if a rapid or
unpredicted change in value of the Euro or related European currencies should
occur. We can not assure you that such a loss would not have an adverse material
effect on our results of operations or financial condition.

                                     PART II
                                OTHER INFORMATION

Item 1.  Legal Proceedings.

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

Item 2.  Changes in Securities and Use of Proceeds.

          Not applicable.

Item 3.  Defaults Upon Senior Securities.

          Not applicable.
<PAGE>   37

Item 4.  Submission of Matters to a Vote of Security Holders.

                The annual meeting of shareholders was held on February 5, 2001.
The shareholders elected the following six directors to hold office until the
next annual meeting and until their successors are elected and qualified:

<TABLE>
<CAPTION>

                                                       NUMBER OF VOTES
                                                 -------------------------
                                                   FOR             WITHHELD
                                                 ---------         --------

        <S>                                      <C>               <C>
        Alex Razmjoo............................ 10,816,137         59,308
        Nick Shahrestany........................ 10,816,537         58,908
        Frank Alaghband......................... 10,816,177         59,268
        Dom Genovese............................ 10,811,437         64,008
        Alex Aydin.............................. 10,816,677         58,768
        David Blake............................. 10,811,487         63,958
</TABLE>


        In addition, the shareholders approved the following proposals:

<TABLE>
<CAPTION>

                                                                                                      NUMBER OF VOTES
                                                                                    ---------------------------------------------
                                                                                        FOR        AGAINST    ABSTAIN     BROKER
                                                                                                                         NON-VOTES
                                                                                    ----------     -------    -------    ---------

        <S>                                                                         <C>            <C>        <C>        <C>
        An Amendment of the Company's 1995 Stock Option Plan to increase the
        number of shares reserved for issuance thereunder by 1,000,000 shares to
        an aggregate of 3,590,000 shares.
                                                                                     6,283,456     175,566     9,337    4,407,086

        To ratify the appointment of KPMG LLP as the independent auditors of the
        Company for the year ending July 31, 2001.                                  10,866,089       3,171     6,185

</TABLE>


Item 5.  Other Information.

          Not applicable.

Item 6.  Exhibits and Reports on Form 8-K.

          (a)  See Exhibit Index. No Statement re Computation of Per Share
               Earnings is included, because the computation can be clearly
               determined from material contained in this Report. See the
               Consolidated Statements of Operations, and the Notes thereto.

          (b)  Reports on Form 8-K. On January 12, 2001, we filed a Report on
               Form 8-K under Item 2 announcing the acquisition of Scofima
               Software Srl.

<PAGE>   38

                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Irvine, County of
Orange, State of California, on the 19th of March, 2001.

                                     PROCOM TECHNOLOGY, INC.


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

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-Q has been signed below by the following persons
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

          SIGNATURE                                            TITLE                                      DATE
          ---------                                            -----                                      ----
<S>                                                 <C>                                              <C>
    /s/   Alex Razmjoo                              Chairman of the Board, President                 March 19, 2001
-----------------------------------                 and Chief Executive Officer
          Alex Razmjoo                              (Principal Executive Officer)


    /s/   Alex Aydin                                Executive Vice President, Finance                March 19, 2001
-----------------------------------                 and Administration (Principal
          Alex Aydin                                Financial Officer)


    /s/   Frederick Judd                            Vice President, Finance and                      March 19, 2001
-----------------------------------                 General Counsel (Principal
          Frederick Judd                            Accounting Officer)
</TABLE>


<PAGE>   39

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
                                                                                 SEQUENTIALLY
    EXHIBIT                                                                        NUMBERED
    NUMBER                        DESCRIPTION                                        PAGE
   -------                        -----------                                    ------------
<S>            <C>                                                               <C>

     3.1+      Amended and Restated Articles of Incorporation of the Company
               (incorporated by reference to Exhibit 3.1 in the Report S-1A
               filed November 14, 1996)

     3.2+      Amended and Restated Bylaws of the Company (incorporated by
               reference to Exhibit 3.2 in the Report S-1A filed November 14,
               1996)

     4.1       Form of Convertible Debenture dated October 31, 2000
               (incorporated by reference to Exhibit 4.1 in the Registration
               Statement on Form S-3 of Procom filed on November 22, 2000)


     4.2       Form of Common Stock Purchase Warrant dated October 31, 2000
               (incorporated by reference to Exhibit 4.2 in the Report on Form
               8-K filed on November 3, 2000)

     4.3       Securities Purchase Agreement dated October 31, 2000
               (incorporated by reference to Exhibit 4.3 in the Report on Form
               8-K filed on November 3, 2000)

     4.4       Registration Rights Agreement dated October 31, 2000 by and
               between the Registrant and Montrose Investments, Ltd.
               (incorporated by reference to Exhibit 4.4 in the Report on Form
               8-K filed on November 3, 2000)

     4.5       Subordination Agreement dated October 31, 2000 by and between the
               Registrant, Montrose Investments, Ltd. and CIT Group/Business
               Credit, Inc. (incorporated by reference to Exhibit 4.5 in the
               Report on Form 8-K filed on November 3, 2000)

    10.1+      Form of Indemnity Agreement between the Company and each of its
               executive officers and directors (incorporated by reference to
               Exhibit 3.2 in the Report S-1A filed November 14, 1996)

    10.2       Form of Amended and Restated Procom Technology, Inc. 1995 Stock
               Option Plan (incorporated by reference to Exhibit 10.2 in the
               Report S-1A filed November 14, 1996)

    10.2.1     Form of Procom Technology, Inc. 1999 Employee Stock Purchase
               Plan (incorporated by reference to Exhibit 4 in the Form S-8
               filed on July 2, 1999)

    10.3       Amended and Restated Executive Employment Agreement, dated as of
               October 28, 1996, between the Company and Alex Razmjoo
               (incorporated by reference to Exhibit 10.3 in the Form S-1 filed
               October 30, 1996)

    10.4       Amended and Restated Executive Employment Agreement, dated as of
               October 28, 1996, between the Company and Frank Alaghband
               (incorporated by reference to Exhibit 10.4 in the Form S-1 filed
               October 30, 1996)

    10.5       Amended and Restated Executive Employment Agreement, dated as of
               October 28, 1996, between the Company and Alex Aydin
               (incorporated by reference to Exhibit 10.5 in the Form S-1 filed
               October 30, 1996)

    10.6       Amended and Restated Executive Employment Agreement, dated as of
               October 28, 1996, between the Company and Nick Shahrestany
               (incorporated by reference to Exhibit 10.6 in the Form S-1 filed
               October 30, 1996)

    10.7       Form of Registration Rights Agreement (incorporated by reference
               to Exhibit 10.7 in the Form S-1 filed October 30, 1996)

    10.8       Lease, dated February 10, 1992, between 2181 Dupont Associates
               and the Company, as amended (incorporated by reference to Exhibit
               10.8 in the Form S-1 dated October 30, 1996)

    10.9       Loan and Security Agreement, dated November 18, 1994, by and
               between the Company and FINOVA Capital Corporation, as amended
               (incorporated by reference to Exhibit 10.9 in the Form S-1A filed
               December 5, 1996)

    10.9.2     Amendment to FINVOVA Loan and Security Agreement dated July 30,
               1997 (incorporated by reference to Exhibit 10.9 in the Report on
               Form 10-K dated October 29, 1997)

    10.10      Asset Purchase Agreement, dated June 24, 1998, among Invincible
               Technologies Acquisition Corporation, Invincible Technologies
               Corporation, and certain stockholders of Invincible Technologies
               Corporation named therein (incorporated by reference to Exhibit
               10.10 in the Report on Form 8-K filed October 29, 1998)

    10.11      Standard Office Lease between the Company and Arden Realty, Inc.
               (incorporated by reference to Exhibit 10.11 on the Report on Form
               10-Q filed December 14, 1998)

    10.12      Agreement for Wholesale Financing (Security Agreement) between
               Procom Technology, Inc. and IBM Credit Corporation (incorporated
               by reference to Exhibit 10.1 to the Form S-3/A filed on January
               16, 2001).
</TABLE>

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+  Previously filed