<PAGE>   1

(Mark One)

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

    For the quarterly period ended OCTOBER 31, 2000

[ ] 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

                                  FORM 10-Q/A

                             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
December 1, 2000, was 11,618,022

<PAGE>   2

                                     PART I

                              FINANCIAL INFORMATION

ITEM 1. Financial Statements.

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             October 31,           July 31,
                                                                2000                 2000
                                                            ------------         ------------
<S>                                                         <C>                  <C>
ASSETS

Current assets:
  Cash .............................................        $  2,792,000         $  1,450,000
  Short-term marketable securities, held to maturity          16,780,000           14,065,000
  Accounts receivable, less allowance for doubtful
    accounts and sales returns of $2,663,000 and
    $2,752,000, respectively .......................           9,030,000            6,699,000
  Inventories, net .................................           9,319,000            8,430,000
  Income tax receivable ............................              21,000            2,699,000
  Deferred income taxes ............................           2,131,000            1,833,000
  Prepaid expenses .................................           1,186,000              372,000
  Other current assets .............................             176,000              296,000
                                                            ------------         ------------
      Total current assets .........................          41,435,000           35,844,000
Property and equipment, net ........................          17,357,000           16,034,000
Other assets .......................................             880,000              918,000
                                                            ------------         ------------
      Total assets .................................        $ 59,672,000         $ 52,796,000
                                                            ============         ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Lines of credit ..................................        $  5,597,000         $    610,000
  Loan payable .....................................                  --           10,750,000
  Accounts payable .................................           8,428,000           10,399,000
  Accrued expenses and other current liabilities ...           2,145,000            1,837,000
  Accrued compensation .............................           1,020,000            1,213,000
  Deferred service revenues ........................             711,000              431,000
  Income taxes payable .............................              19,000                   --
  Current portion of convertible debenture .........           9,625,000                   --
                                                            ------------         ------------
      Total current liabilities ....................          27,545,000           25,240,000

  Convertible debenture ............................           4,813,000                   --
                                                            ------------         ------------
      Total liabilities ............................          32,358,000           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, 11,612,307 and 11,531,357 shares
    issued and outstanding, respectively ...........             116,000              115,000
  Additional paid-in capital .......................          20,694,000           19,685,000
  Retained earnings ................................           6,916,000            8,007,000
  Accumulated other comprehensive loss .............            (412,000)            (251,000)
                                                            ------------         ------------
      Total shareholders' equity ...................          27,314,000           27,556,000
                                                            ------------         ------------
Total liabilities and shareholders' equity .........        $ 59,672,000         $ 52,796,000
                                                            ============         ============
</TABLE>

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


                                       2


<PAGE>   3

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                           OCTOBER 31
                                                 ------------------------------
                                                     2000               1999
                                                 ------------      ------------
<S>                                              <C>               <C>
Net sales ..................................     $ 13,264,000      $ 18,909,000
Cost of sales ..............................        8,382,000        13,668,000
                                                 ------------      ------------
    Gross profit ...........................        4,882,000         5,241,000

Selling, general and administrative expenses        4,669,000         6,051,000
Research and development expenses ..........        1,772,000         1,646,000
                                                 ------------      ------------
    Operating loss .........................       (1,559,000)       (2,456,000)
Interest income ............................          222,000           286,000
Interest expense ...........................         (148,000)               --
                                                 ------------      ------------
  Loss before income taxes .................       (1,485,000)       (2,170,000)
  Benefit for income taxes .................         (394,000)         (594,000)
                                                 ------------      ------------
Net loss ...................................     $ (1,091,000)     $ (1,576,000)
                                                 ============      ============
Net loss per common share:
     Basic .................................     $      (0.09)     $      (0.14)
                                                 ============      ============
     Diluted ...............................     $      (0.09)     $      (0.14)
                                                 ============      ============
Weighted average number of common shares:
     Basic .................................       11,570,000        11,238,000
                                                 ============      ============
     Diluted ...............................       11,570,000        11,238,000
                                                 ============      ============
</TABLE>

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


                                       3

<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 ..............................               --          --             --     (1,091,000)          --         (1,091,000)
Foreign currency translation adjustment               --          --             --             --     (161,000)          (161,000)
                                                                                                                      ------------
Comprehensive loss ....................                                                                                 (1,252,000)
Compensatory stock options ............               --          --          6,000             --           --              6,000
Exercise of employee stock options ....           80,950       1,000        441,000             --           --            442,000
Issuance of  stock warrant to investor                --          --        562,000             --           --            562,000
                                             -----------   ---------   ------------   ------------    ---------       ------------
BALANCE AT OCTOBER 31, 2000 ...........       11,612,307   $ 116,000   $ 20,694,000   $  6,916,000    $(412,000)      $ 27,314,000
                                             ===========   =========   ============   ============    =========       ============
</TABLE>


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


                                       4

<PAGE>   5

                    PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                     OCTOBER 31,
                                                           -------------------------------
                                                               2000               1999
                                                           ------------       ------------
<S>                                                        <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................      $ (1,091,000)      $ (1,576,000)
Adjustments to reconcile net loss to net
  cash used in operating activities:
    Depreciation and amortization ...................           215,000            226,000
    Compensatory stock options ......................             6,000                 --
    Changes in assets and liabilities,
      net of effects of acquisitions:
      Accounts receivable ...........................        (2,331,000)          (490,000)
      Inventories ...................................          (889,000)           190,000
      Income tax receivable .........................         2,678,000                 --
      Deferred income taxes .........................          (298,000)         1,097,000
      Prepaid expenses ..............................          (814,000)            24,000
      Other current assets ..........................           120,000              9,000
      Other assets ..................................            (2,000)             2,000
      Accounts payable ..............................        (1,971,000)          (783,000)
      Accrued expenses and compensation .............           115,000         (1,818,000)
      Deferred service revenues .....................           280,000            707,000
      Income taxes payable ..........................            19,000            (18,000)
                                                           ------------       ------------
         Net cash used in operating activities ......        (3,963,000)        (2,430,000)
                                                           ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment ..............        (1,498,000)          (241,000)
    Investments in short-term marketable securities .                --         (7,028,000)
                                                           ------------       ------------
         Net cash used in investing activities ......        (1,498,000)        (7,269,000)
                                                           ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of convertible debt.....................        15,000,000                 --
    Repayment of loan................................       (10,750,000)                --
    Net borrowings on lines of credit ...............         4,987,000                 --
    Stock option exercises ..........................           442,000             45,000
                                                           ------------       ------------
         Net cash provided by financing activities ..         9,679,000             45,000
      Effect of exchange rate changes ...............          (161,000)           (29,000)
                                                           ------------       ------------
      Increase (decrease) in cash ...................         4,057,000         (9,683,000)
Cash and cash equivalents at beginning of period ....        15,515,000         22,433,000
                                                           ------------       ------------
Cash and cash equivalents at end of period ..........      $ 19,572,000       $ 12,750,000
                                                           ============       ============
Supplemental disclosures of cash flow information:

CASH PAID (RECEIVED) DURING THE PERIOD FOR:
    Interest ........................................      $    117,000       $         --
    Income taxes ....................................      $ (2,732,000)      $ (1,097,000)
</TABLE>

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


                                       5


<PAGE>   6

                     PROCOM TECHNOLOGY, INC. AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           FOR THE THREE MONTHS ENDED
                      OCTOBER 31, 2000 AND OCTOBER 31, 1999

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:

                                  October 31, 2000    July 31, 2000
                                  ----------------    -------------

        Raw materials               $4,929,000         $4,225,000
        Work-in process                609,000            255,000
        Finished goods               3,781,000          3,950,000
                                    ----------         ----------
           Total                    $9,319,000         $8,430,000
                                    ==========         ==========

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. At October 31, 2000 and 1999, respectively, options and
warrants to purchase 1,394,000 and 779,000 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 quarters ended October 31, 2000 and 1999, the only differences
between reported net loss and comprehensive loss were foreign currency
translation adjustments of $(161,000) and $(29,000), respectively.


                                       6


<PAGE>   7

NOTE 5. BUSINESS SEGMENT INFORMATION.

        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 58.9% and 14.0% of total product net sales
for the three months ended October 31, 2000 and 1999.

        International sales as a percentage of net sales amounted to 58.0% and
40.9% for the three months ended October 31, 2000 and 1999. International sales
for the first quarter of fiscal 2001 include sales of approximately $3.3 million
in sales to an Italian internet service provider. International sales were
primarily to European customers and secondarily Middle Eastern, Latin American
and Pacific Rim customers. Identifiable assets used in connection with the
Company's foreign operations have not changed materially since July 31, 2000.

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 $4,000,000 is due and payable upon the Company's finalization of a
long-term mortgage on its corporate headquarters, or it will be repaid in 12
monthly installments commencing April 1, 2001, while a term loan of $1 million
is due and payable in 90 days. The term loans bear interest at the lender's
prime rate (9.0% at October 31, 2000), 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 $3.0 million at October 31, 2000), 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 October 31, 2000, $5.2 million was
outstanding under the various credit arrangements. The lender charged
approximately $130,000 for the credit facilities, some of which may be refunded
if the term loan is paid prior to maturity. 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 October
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 replaced the
Finova flooring line of credit with a flooring line with IBM Credit who 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 pursuant to the flooring commitments, and the two lenders 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 October 31, 2000. At October 31, 2000,
there was $1.0 million outstanding under the IBM flooring line of credit
included in accounts payable.

        On October 31, 2000, the Company issued a $15 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 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 may 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 Company 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 assumptions yield a fair value of $562,000, which
will be amortized over the life of the debt, or if conversion of the debenture
occurs, the remaining value will be reclassed to interest expense.


                                       7
<PAGE>   8

        Because $10 million of the debenture may be put to the Company within
one year from the date of the balance sheet, the principal amount of the
debentures are classified in both current and long-term liabilities, net of the
remaining warrant value. At October 31, 2000, the values were:

                                      Debenture      Warrant         Net
                                        amount        Value       Debenture
                                      repayable     Remaining       Value
                                     -----------    ---------    -----------
Current portion of long-term debt    $10,000,000    $(375,000)   $ 9,625,000
Long-term debt                         5,000,000     (187,000)     4,813,000
                                     -----------    ---------    -----------
         Total                       $15,000,000    $(562,000)   $14,438,000
                                     ===========    =========    ===========

In addition to the warrant cost, costs of approximately $700,000 were incurred
in the debt transactions noted above, and the amounts will be classified as
prepaid expenses, and amortized as interest expense over the life of the debt
instruments.

NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS.

        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.

        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 supply a customized version of our mid-range NAS appliance hardware and
software for Hewlett-Packard for resale. Under the agreement, which has a
five-year term, and which has no minimum quantity commitments, we expect that
Hewlett-Packard will market and support the NAS appliances through their
Distribution channels. We commenced shipments under the agreement in limited
quantities in April 2000.


                                       8

<PAGE>   9

        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:

        o   new product introductions and enhancements;

        o   competition;

        o   direct versus indirect sales;

        o   the mix and average selling prices of products; and

        o   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 with whom we have
contracts, 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 both July 31, 2000 and October 31, 2000, inventory related to evaluation
units was approximately $1.5 million. We do not record evaluation units as sales
until the customer has notified us of acceptance of these units.

        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, general and administrative 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.
These costs are expensed as incurred.

        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 and other related expenses. The cost of developing
new appliances and substantial enhancements to existing appliances are expensed
as incurred.


                                       9
<PAGE>   10

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

                                                   THREE MONTHS ENDED
                                                       OCTOBER 31,
                                                   ------------------
                                                   2000         1999
                                                   -----       -----
STATEMENT OF OPERATIONS

Net sales                                          100.0%      100.0%
Cost of sales                                       63.2        72.3
                                                  ------      ------
    Gross profit                                    36.8        27.7

Operating expenses:
    Selling, general and administrative             35.2        32.0
    Research and development                        13.4         8.7
                                                  ------      ------
    Total operating expenses                        48.6        40.7
                                                  ------      ------
Operating loss                                     (11.8)      (13.0)
                                                  ------      ------
Interest income, net                                 0.6         1.5
                                                  ------      ------
Loss before income taxes                           (11.2)      (11.5)
Benefit for income taxes                            (3.0)       (3.1)
                                                  ------      ------
Net loss                                            (8.2)%      (8.4)%
                                                  ======      ======

THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1999

        Net Sales. Net sales decreased by 29.9% to $13.3 million for the three
months ended October 31, 2000, from $18.9 million for the three months ended
October 31, 1999. 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 our German
subsidiary and the concurrent weakening of the European currencies. Also, during
the quarter, we relocated our corporate headquarters to Irvine, California, and
sales and operations were disrupted for a significant period during the quarter.
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 were $7.9 million for
the three months ended October 31, 2000, compared to $2.6 million for the three
months ended October 31, 1999. This increase was primarily the result of
increased unit sales of our NetFORCE NAS appliances, offset by decreased sales
of our DataFORCE NAS appliances. Sales of approximately $3.3 million in NAS
appliances to an Italian internet service provider are included in net sales for
the quarter ended October 31, 2000.

        International sales remained constant at $7.7 million, but increased to
58.0% of our net sales for the three months ended October 31, 2000, compared to
40.9% of our net sales in the three months ended October 31, 1999. The increase
in international sales as a percentage of our net sales was primarily due to
sales to an Italian internet service provider, of approximately $3.3 million,
included in net sales for the first quarter 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. There can be no assurance that our revenues of our
NAS products will continue to increase in any particular quarter or period.

        Gross Profit. Gross profit decreased 6.8% to $4.9 million, for the three
months ended October 31, 2000, from $5.2 million, for the three months ended
October 31, 1999. Gross margin increased to 36.8% of net sales for the three
months ended October 31, 2000, from 27.7% of net sales for the three months
ended October 31, 1999. The increase in gross margin was primarily the result of
the higher percentage of NAS


                                       10


<PAGE>   11

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 22.8% to $4.7 million in the three months
ended October 31, 2000, from $6.1 million in the three months ended October 31,
1999, and increased as a percentage of net sales to 35.2% from 32.0%. The dollar
decrease in selling, general and administrative expenses was primarily the
result of reduced sales commissions, offset partially by the direct costs of
approximately $100,000 to relocate our corporate headquarters to Irvine,
California and net foreign currency losses of approximately $160,000 incurred
due to the weakening of the Euro, and therefore, the German mark and the Italian
lira. In addition, we incurred reduced advertising and marketing costs, and
reduced legal fees, offset by increases in the cost of personnel necessary to
support our NAS sales and marketing efforts. During the three months ended
October 31, 2000, we continued to identify and eliminate certain positions and
functions not related to our core NAS activities. As a result, we experienced a
slight reduction 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
increased 7.7% to $1.8 million, or 13.4% of net sales, for the three months
ended October 31, 2000, from $1.6 million, or 8.7% of net sales, for the three
months ended October 31, 1999. These increases were primarily due to
compensation expense for additional NAS software programmers and hardware
developers. 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.

        Interest Income (Expense). Interest income decreased 22.4% to $222,000
for the three months ended October 31, 2000, from $286,000 for the three months
ended October 31, 1999. 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, partially offset by slightly increased interest rates,
interest income decreased in fiscal 2001. During the first quarter of fiscal
2001, our new corporate headquarters were 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.

        Benefit for Income Taxes. Our effective tax benefit rate for the three
months ended October 31, 2000 was (26.5%), compared to an effective tax benefit
rate of (27.4%) for the same period in fiscal 1999. The fiscal 2001 benefit
approximates the federal and state statutory rates applied to our U.S. operating
losses, reduced by unusable foreign operating losses, and adjusted for research
and development credits. 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 October 31, 2000 is based on the Company's expectation that
it will more likely than not have future taxable income against which it may
apply certain tax attributes, including the Company's net operating loss
deduction. If such future taxable income does not materialize, the Company may
have to reduce or eliminate the value of the tax asset in the future.


                                       11


<PAGE>   12

LIQUIDITY AND CAPITAL RESOURCES

        As of October 31, 2000, we had cash and short-term marketable securities
totaling $19.6 million.

        Net cash used in operating activities was $4.0 million in the first
quarter of fiscal 2001 and $ 2.4 million in the first quarter of fiscal 2000.
Net cash used in operating activities relates primarily to increases in our
accounts receivable and inventories and decreases in accounts payable, offset by
a reduction of approximately $2.7 million in our income tax refund receivable,
which we received in the first quarter of fiscal 2001.

        Net cash used in investing activities was $1.5 million in the first
quarter of fiscal 2001, while net cash used in investing activities was $ 7.3
million in the first quarter of fiscal 2000. Net cash used in investing
activities in the first quarter of fiscal 2001 was the result of purchases of $
1.3 million to complete our corporate headquarters and $0.2 million of other
property and equipment. Net cash used in investing activities in the first
quarter of fiscal 2000 resulted from the purchase of $ 7.0 million of short-term
marketable securities and purchases of approximately $0.2 million of property
and equipment.

        Net cash provided by financing activities was $ 9.7 million in the first
quarter of fiscal 2001. Net cash provided by financing activities in the first
quarter of fiscal 2001 resulted primarily from the issuance of a $15 million
convertible debenture, and the closing of a term loan/line of credit agreement
with CIT Business Credit (see below) and approximately $0.4 million in stock
option exercises, 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.

        In early October 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
on our corporate headquarters, or it will be repaid in 12 monthly installments
commencing April 1, 2001, while a second term loan of $1 million is due and
payable in 90 days. The term loans bear interest at the lender's prime rate
(9.0% at October 31, 2000), plus .5%, with increases if the loan is not reduced
according to a fixed amortization. The working capital line of credit allows for
us to borrow, on a revolving basis, for a period of three years, a specified
percentage of our eligible accounts receivable and inventories (which would have
been approximately $3.0 million at October 31, 2000), up to a limit of
$5,000,000. At October 31, 2000, there was $5 million outstanding under the term
loans, and approximately $0.2 million outstanding under the working capital line
of credit. Amounts outstanding under the working capital line bear interest at
the lender's prime rate plus .25%. The lender charged approximately $130,000 for
the credit facilities, some of which may be refunded if the term loan is paid
prior to maturity. 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 the quarter ending January 31, 2001. We were in
compliance with all covenants of the lines at October 31, 2001. The combined
lines of credit are collateralized by all our assets.

        In addition to the CIT lines noted above, we entered into a flooring
line with IBM Credit who 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 the
two lenders 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 the
Company was in compliance with the terms of the flooring line at October 31,
2000. At October 31, 2000, there was $1.0 million outstanding under the IBM
flooring line of credit included in accounts payable.

        In addition to the lines of credit, the Company's 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%,


                                       12


<PAGE>   13
and are not guaranteed by Procom. At October 31, 2000, there was 988,000 DM
(approximately US$425,000) 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 October 31, 2000.

        On October 31, 2000, the Company issued a $15 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 our shares of
common stock 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
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 may 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
Company issued to the investor a 5-year warrant to purchase up to 32,916 shares
of its common stock at $32.55 per share. The Company has valued the warrant
using a Black-Scholes model at approximately $562,000, and will amortize this
value over the life of the debt, or if conversion of the debenture occurs, the
Company will reclass the remaining value to interest expense.

        Because $10 million of the debentures may be put to the Company within
one year from the date of the balance sheet, the principal amount of the
debentures are classified in both current and long-term liabilities, net of the
remaining warrant value.

        We had also borrowed $10.75 million from an investment bank for 18
months, maturing in September 2000, at which time it can be renewed on a monthly
basis, at rates ranging from 6.125% to $7.4%. In September 2000, the loan was
renewed for an additional 6 months. We repaid the entire amount outstanding
under the loan on October 31, 2000. The interest expended under the line of
credit, through the date of completion of construction was capitalized as a cost
of construction of our new headquarters facility.

        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 substantially completed in September
2000. The cost of the land together with the cost of constructing the facility
total approximately $15.9 million including $0.7 million in capitalized interest
costs. We intend to lease 47,000 square feet of the building and we are
currently considering financing options including a long-term mortgage or
sale/leaseback. There can be no assurance, however, that we will be successful
in completing a lease, long-term mortgage or sale/leaseback on favorable terms,
if at all.

        As is customary in the computer reseller industry, the Company is
contingently liable at October 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 October 31, 2000 and July 31, 2000, the
Company was contingently liable for purchases made under these agreements of
approximately $263,000 and $560,000, respectively. During the three years ended
July 31, 2000 and through the three months ended October 31, 2000, the Company
was not required to repurchase any previously sold inventory pursuant to the
flooring agreements.

        At October 31, 2000, 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 a longer market acceptance period. We
have considered other tax planning strategies that, if implemented, would enable
us to recover 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 existing
at October 31, 2000.

        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
quarter ended October 31, 2000. In September 2000, the Company's Board
terminated the repurchase program.

        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. 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 during
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. Not only did this cause a foreign currency loss of approximately
$160,000, but it also caused us to report $240,000 less in sales than we would
have reported had we used the Euro rate in effect on July 31, 2000, instead of
the lower quarterly average rate used to translate sales of our European
subsidiaries made during the quarter ended October 31, 2000. Also, we have
funded operational losses of our subsidiaries of approximately $3.0 million
since we purchased them, and if our subsidiaries continue to incur operational
losses, our cash and liquidity would be negatively impacted.

        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.


                                       13

<PAGE>   14

                                  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 all or part of your
investment. You should carefully consider the following factors as well as the
other information in the reports we have filed with the Securities and Exchange
Commission.

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.

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:

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

        o   reallocating resources in product development and service and
            support of our NAS appliances;

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

        o   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.

                                       14
<PAGE>   15

OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY MAY NOT GENERATE SIGNIFICANT NET
SALES, AND WE MAY NOT BE ABLE TO ENTER INTO OTHER BUSINESS ALLIANCES IN THE
FUTURE.

        We believe our agreement with Hewlett-Packard Company is an important
element of our strategy to increase penetration in the NAS market. However,
Hewlett-Packard has not currently made significant purchase commitments for our
products, and there is no minimum purchase commitment under the agreement. We do
not currently, and may never, generate significant net sales under this
agreement. Finally, the Hewlett-Packard agreement has a five-year term, and
there is no assurance that the agreement can or will be renewed.

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) and other resellers 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 quarter
ended October 31, 2000, these products accounted for less than 41% and 59%,
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 our
operating history in the NAS product market is only approximately three years,
and due to 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.

                                       15
<PAGE>   16
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 CUSTOM EDGE, INGRAM MICRO AND TECH DATA,
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 storage service
provider, accounted for approximately 25% of our net sales for the quarter ended
October 31, 2000, and three customers, Storway, Ingram Micro and Tech Data,
accounted for approximately 61% of our total accounts receivable at October 31,
2000. 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.
If we lose a major customer, or 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 HISTORICALLY HIGHER-MARGIN CD SERVERS OR NOTEBOOK UPGRADE
PRODUCTS AND WE MAY NOT SEE INCREASED SALES OR GROSS MARGINS 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, we derive 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.
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.

                                       16
<PAGE>   17
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.

        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. ANY SHORTAGES, SUPPLY ALLOCATIONS OR RAPID
PRICE CHANGES FOR THESE PARTS, 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.

        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;


                                       17
<PAGE>   18

        o   require design modifications; or

        o   decrease market acceptance or customer satisfaction with these
            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 58% of our net sales for the
quarter ended October 31, 2000 as compared to 41% of our net sales for the
quarter ended October 31, 1999, 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;

        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. Our reported sales can be affected by
changes in the currency rates in effect during any particular period. For
example, the effects of currency fluctuations were evident in our results of
operations for the quarter ended October 31, 2000. During this quarter, the Euro
and two currencies whose values are pegged to the Euro, declined in value
significantly. Not only did this cause a foreign currency loss of approximately
$160,000, but it also caused us to report $240,000 less in sales than we would
have reported had we used the Euro rate in effect on July 31, 2000, instead of
the lower quarterly average rate used to translate sales of our European
subsidiaries made during the quarter ended October 31, 2000. If the Euro or the
Swiss franc weakened rapidly during a relatively short time period, we would
incur significant foreign currency transaction losses, foreign currency
translation losses and lower reported sales.

        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.

                                       18
<PAGE>   19

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, trade secrets and a patent 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 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.

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. 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;


                                       19


<PAGE>   20

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


                                       20


<PAGE>   21

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 $1.6
million for the quarter ended October 31, 2000. We expect to continue to incur
operating losses through 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 acquiror 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:

        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.

        In addition, the stock market has experienced substantial price and
volume volatility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating results of these companies. As a result,
any broad market fluctuations may adversely affect the market price of our
common stock.


                                       21


<PAGE>   22

SOME PROVISIONS OF CALIFORNIA LAW AND OF OUR ARTICLES OF INCORPORATION AND
BYLAWS MAY DISCOURAGE POTENTIAL THIRD-PARTY ACQUIRORS OR THOSE WHO MIGHT SEEK TO
CHANGE OUR MANAGEMENT.

        Some provisions of California law and of our articles of incorporation
and bylaws may discourage, delay or prevent a merger or acquisition even if a
change in the ownership of our company or changes in our management would be
beneficial to our shareholders. This may reduce the market price of our common
stock. A summary of these provisions in our articles and bylaws is included in
"Description of Capital Stock - Anti-Takeover Provisions."

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

        As we have described above in the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations, on October 31, 2000, we issued a 3-year $15 million
convertible debenture to a private investor. The debenture provides that in
certain circumstances the holder of the debenture 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 noted 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 SELLING SHAREHOLDER, MAY DEPRESS THE PRICE OF OUR COMMON STOCK AND
SUBSTANTIALLY DILUTE YOUR SHARES.

        We have agreed to register for potential resale by the investor a total
of 1,586,228 shares of our common stock. This number represents 200% of the
number of shares of our common stock issuable if the investor's warrant is
exercised in full and our debentures were to remain outstanding until their
stated maturity on October 31, 2003 and all interest on the debentures is paid
in shares of our stock. As is noted in the risk factor immediately below, if the
investor were to exercise its "put" right and we were to satisfy this right by
issuing shares of our common stock, we could be required to issue a
substantially greater number of our shares to the investor. The issuance of all
or any significant portion of these shares could result in substantial dilution
to the interests of our other shareholders and a decrease in the price of our
stock. Sales by the investor of our common stock received upon the exercise or
"put" of the debentures or upon exercise of the investor's warrant could also
cause our stock price to decline due to the additional supply of shares relative
to demand in the market. 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 debenture is converted or interest on the debenture 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 debenture as a result of the
adjustments described above, sales of which could further depress the price of
our common stock, and could cause the market price of our common stock to
decline.

                                       22


<PAGE>   23
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:

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

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

        -  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;

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

        -  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;

        -  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;

        -  our entry into bankruptcy;

        -  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;

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

        -  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;

        -  our registration statement covering the shares of our common stock
           underlying the debentures and the warrant is not declared effective
           by the Commission by the 120th day following October 31, 2000;

        -  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
           selling shareholder;

        -  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;

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

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

        -  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 selling
           shareholder 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.

        Our registration statement covering the shares of our common stock
underlying the debentures and warrants was not declared effective before
February 28, 2001 (120 days following October 31, 2000). This did not result in
an event of default, however, because prior to that date we received a waiver
from Montrose Investments, Ltd. of compliance with that deadline. The waiver
included an extension of this deadline to March 31, 2001. We are continuing to
work with the staff of the Securities and Exchange Commission to have our
registration statement relating to our shares underlying the debentures and
warrants declared effective. We cannot assure you that we will be able to
complete this process by the March 31, 2001 deadline. If we are unable to
achieve effectiveness of this registration statement by March 31, 2001, we would
be in default under our debentures unless Montrose were to further extend this
deadline, which cannot be assured.

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 INVESTORS.

        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 date we issued the debentures. We also agreed that for
a period of 180 trading days after the issuance 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.

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 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.

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, or maintain the registration of the shares, of common stock
issuable upon the conversion of the debentures and the exercise of those
warrants.
                                       23
<PAGE>   24
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.

        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. 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. The
issuance of any such shares would dilute your shares.

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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business". 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-K. 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 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 expect to spend a total of
approximately $16.6 million 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


                                       24


<PAGE>   25

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.

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 quarters ended October 31, 2000 and 1999,
we incurred approximately $160,000 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 German mark 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. At
October 31, 2000, approximately $2.9 million in current intercompany advances
and accounts receivable from our foreign subsidiaries were outstanding. There
can be no assurance 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 affect 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.

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

        Not applicable.

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) On November 3, 2000, the Company filed a Report on Form 8-K
            reporting the sale and issuance of a $15 million convertible
            debenture to a private investor. The terms and conditions of the
            debenture transaction are contained in the exhibits to the Report
            on Form 8-K.


                                       25


<PAGE>   26

                                   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 27th 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/A 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 27, 2001
----------------------------------- and Chief Executive Officer
          Alex Razmjoo              (Principal Executive Officer)


   /s/ Alex Aydin                   Director and Executive Vice              March 27, 2001
----------------------------------- President, Finance and
          Alex Aydin                Administration (Principal Financial
                                    and Accounting Officer)
</TABLE>


                                       26


<PAGE>   27
                              EXHIBITS TO FORM 10-Q

<TABLE>
<CAPTION>

    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 Form S-1A
               filed November 14, 1996)

     3.2       Amended and Restated Bylaws of the Company (incorporated by
               reference to Exhibit 3.2 in the Form 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 Form 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
               Form 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).

    27.1       Financial Data Schedule
</TABLE>