##### Table of Contents



Securities and Exchange Commission
Washington, DC 20549

REPORT ON FORM 10-Q

(Mark One)

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

For the quarterly period ended January 31, 2002

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

For the transition period from _____________ to _______________

Commission file number 0-21053

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

|                                                                          |  |                                             
|------------------------------------------------------------------------- |  | --------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 33-0268063
(IRS Employer
Identification No.)
|                                                                         
|58 Discovery, Irvine California
(Address of principal executive office)   |  | 92618
(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 March 1, 2002 was 16,023,633.





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TABLE OF CONTENTS



|                              |                                                                                                |                                                           |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS.                                                                 
|                              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                    
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS          
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                              |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.                           
|PART II OTHER INFORMATION    
|                              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|SIGNATURES                   
|INDEX TO EXHIBITS            
|EXHIBIT 10.1                 



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##### Table of Contents



PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART 1  FINANCIAL INFORMATION

|                            |  |                                                                                       |                                                                                                                                            |    |   |  |  |     
|--------------------------- |  | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | -- | - |  |  | ----
|                            |  |                                                                                       |                                                                                                                                            |    |   |  |  | PAGE
|                            |  |                                                                                       |                                                                                                                                            |    |   |  |  |     
|Item 1.                     |  | Condensed Consolidated Financial Statements (Unaudited)                               |                                                                                                                                            |   
|                            |  |                                                                                       | Condensed Consolidated Balance Sheets as of January 31, 2002 and July 31, 2001                                                             |    | 2
|                            |  |                                                                                       | Condensed Consolidated Statements of Operations for the three and six month periods
ended January 31, 2002 and 2001                        |    | 3
|                            |  |                                                                                       | Condensed Consolidated Statements of Shareholders Equity for the six month period ended
January 31, 2002 and the year ended July 31, 2001 |    | 4
|                            |  |                                                                                       | Condensed Consolidated Statements of Cash Flows for the six month periods ended
January 31, 2002 and 2001                                  |    | 5
|                            |  |                                                                                       | Notes to Condensed Consolidated Financial Statements                                                                                       |    | 6
|Item 2.                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                            | 8 
|Item 3.                     |  | Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                                            | 21
|                           
|PART II  OTHER INFORMATION
|                           
|Item 4.                     |  | Submission of Matters to Vote of Security Holders                                     |                                                                                                                                            | 23
|                           
|SIGNATURES                  |  |                                                                                      

1



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##### Table of Contents






PART IFINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS.




PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |             |            |            | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | ----------- | ----------- | ---------- | ---------- | ----------- | ---------- | ---------- | 
|                                     |                                                                                                                                   |                                            |                   |             | JANUARY 31, |            | JULY 31,  
|                                     |                                                                                                                                   |                                            |                   |             | 2002        |            | 2001      
|                                     |                                                                                                                                   |                                            |                   |             |             |            |           
|ASSETS                               |                                                                                                                                   |                                            |                   |             |             |            |            |            
|Current assets:                      |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     | Cash and cash equivalents                                                                                                         |                                            | $                 | 16,552,000  |             |            | $          | 25,419,000  |           
|                                     | Accounts receivable, less allowances for doubtful accounts and sales
returns of $9,993,000 and $6,412,000, respectively           |                                            |                   | 11,209,000  |             |            |            | 11,979,000  |           
|                                     | Inventories                                                                                                                       |                                            |                   | 6,386,000   |             |            |            | 6,292,000   |           
|                                     | Income tax receivable                                                                                                             |                                            |                   | 13,000      |             |            |            | 18,000      |           
|                                     | Prepaid expenses                                                                                                                  |                                            |                   | 1,267,000   |             |            |            | 1,184,000   |           
|                                     | Other current assets                                                                                                              |                                            |                   | 275,000     |             |            |            | 310,000     |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   | Total current assets                       |                   |             | 35,702,000  |            |            |             | 45,202,000 |           
|Property and equipment, net          |                                                                                                                                   |                                            | 17,113,000        |             |             |            | 17,766,000 |            
|Other assets                         |                                                                                                                                   |                                            | 2,037,000         |             |             |            | 2,259,000  |            
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   | Total assets                               |                   | $           | 54,852,000  |            |            | $           | 65,227,000 |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                   |                                            |                   |             |             |            |            |            
|Current liabilities:                 |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     | Lines of credit                                                                                                                   |                                            | $                 | 39,000      |             |            | $          | 8,000       |           
|                                     | Current portion of long-term debt                                                                                                 |                                            |                   | 172,000     |             |            |            |            |           
|                                     | Accounts payable                                                                                                                  |                                            |                   | 3,923,000   |             |            |            | 4,151,000   |           
|                                     | Flooring line obligation                                                                                                          |                                            |                   | 946,000     |             |            |            | 531,000     |           
|                                     | Accrued expenses and other current liabilities                                                                                    |                                            |                   | 2,288,000   |             |            |            | 2,052,000   |           
|                                     | Accrued compensation                                                                                                              |                                            |                   | 1,219,000   |             |            |            | 1,194,000   |           
|                                     | Deferred service revenues                                                                                                         |                                            |                   | 608,000     |             |            |            | 447,000     |           
|                                     | Income taxes payable                                                                                                              |                                            |                   | 7,000       |             |            |            | 51,000      |           
|                                     | Convertible debenture                                                                                                             |                                            |                   |            |             |            |            | 9,726,000   |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   | Total current liabilities                  |                   |             | 9,202,000   |            |            |             | 18,160,000 |           
|                                     | Long-term debt, net of current portion                                                                                            |                                            |                   | 8,578,000   |             |            |            |            |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   |                                            | Total liabilities |             |             | 17,780,000 |            |             |            | 18,160,000 | 
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|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,
16,023,633 and 15,993,564 shares issued and outstanding,
respectively |                                            |                   | 160,000     |             |            |            | 160,000     |           
|                                     | Additional paid-in capital                                                                                                        |                                            |                   | 58,681,000  |             |            |            | 58,575,000  |           
|                                     | Accumulated deficit                                                                                                               |                                            |                   | (21,469,000 | )           |            |            | (11,343,000 | )         
|                                     | Accumulated other comprehensive loss                                                                                              |                                            |                   | (300,000    | )           |            |            | (325,000    | )         
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   | Total shareholders equity                 |                   |             | 37,072,000  |            |            |             | 47,067,000 |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            
|                                     |                                                                                                                                   | Total liabilities and shareholders equity |                   | $           | 54,852,000  |            |            | $           | 65,227,000 |           
|                                     |                                                                                                                                   |                                            |                   |             |             |            |            |            

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

2



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

|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |            |  
|-------------------------------------------- | ------------------------ | - | ------------------ | ---------- | ---------------- | - | ----------- | ---------- | ----------- | - | ---------- | ----------- | - | - | ---------- | ---------- | -
|                                             |                          |   | THREE MONTHS ENDED |            | SIX MONTHS ENDED
|                                             |                          |   |                    |            |                 
|                                             |                          |   | JANUARY 31,        |            | JANUARY 31,      |   | JANUARY 31, |            | JANUARY 31,
|                                             |                          |   | 2002               |            | 2001             |   | 2002        |            | 2001       
|                                             |                          |   |                    |            |                  |   |             |            |            
|Net sales                                    |                          | $ | 7,797,000          |            |                  | $ | 11,722,000  |            |             | $ | 16,087,000 |             |   | $ | 24,986,000 |           
|Cost of sales                                |                          |   | 4,293,000          |            |                  |   | 7,108,000   |            |             |   | 8,687,000  |             |   |   | 15,490,000 |           
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Gross profit             |   |                    | 3,504,000  |                  |   |             | 4,614,000  |             |   |            | 7,400,000   |   |   |            | 9,496,000  |  
|Selling, general and administrative expenses |                          |   | 6,441,000          |            |                  |   | 4,298,000   |            |             |   | 13,675,000 |             |   |   | 8,967,000  |           
|Research and development expenses            |                          |   | 1,584,000          |            |                  |   | 1,681,000   |            |             |   | 3,235,000  |             |   |   | 3,453,000  |           
|In-process research and development          |                          |   |                   |            |                  |   | 4,262,000   |            |             |   |           |             |   |   | 4,262,000  |           
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|Total operating expenses                     |                          |   | 8,025,000          |            |                  |   | 10,241,000  |            |             |   | 16,910,000 |             |   |   | 16,682,000 |           
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Operating loss           |   |                    | (4,521,000 | )                |   |             | (5,627,000 | )           |   |            | (9,510,000  | ) |   |            | (7,186,000 | )
|Interest income                              |                          |   | 144,000            |            |                  |   | 236,000     |            |             |   | 335,000    |             |   |   | 458,000    |           
|Interest expense                             |                          |   | (437,000           | )          |                  |   | (423,000    | )          |             |   | (951,000   | )           |   |   | (571,000   | )         
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Loss before income taxes |   |                    | (4,814,000 | )                |   |             | (5,814,000 | )           |   |            | (10,126,000 | ) |   |            | (7,299,000 | )
|Income tax provision (benefit)               |                          |   |                   |            |                  |   | 54,000      |            |             |   |           |             |   |   | (340,000   | )         
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Net loss                 |   | $                  | (4,814,000 | )                |   | $           | (5,868,000 | )           |   | $          | (10,126,000 | ) |   | $          | (6,959,000 | )
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|Net loss per common share:                   |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Basic and diluted        |   | $                  | (0.30      | )                |   | $           | (0.50      | )           |   | $          | (0.63       | ) |   | $          | (0.60      | )
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|Weighted average number of common shares:    |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           
|                                             | Basic and diluted        |   |                    | 16,007,000 |                  |   |             | 11,806,000 |             |   |            | 16,002,000  |   |   |            | 11,688,000 |  
|                                             |                          |   |                    |            |                  |   |             |            |             |   |            |             |   |   |            |           

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

3



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PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(UNAUDITED)

|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |             |  
|--------------------------------------------------------------------------------------- | ------------------ |  | ------------ |  | ---------- | - | --------------- |  | ------------- | - | ----------- | - | ----- | - | ----------- | - |  | - | -------- | - |  | - | ----------- | ----------- | -
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   | RETAINED   
|                                                                                        |                    |  | COMMON STOCK |  |            |   |                 |  | EARNINGS      |   | ACC. OTHER  |   |       |   |            
|                                                                                        |                    |  |              |  | ADDITIONAL |   | (ACCUMULATED    |  | COMPREHENSIVE |   |             |   |      
|                                                                                        |                    |  | SHARES       |  | AMOUNT     |   | PAID IN CAPITAL |  | DEFICIT)      |   | GAIN (LOSS) |   | TOTAL
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |      
|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                                                                                |                    |  |             |  |            |   |                |  |               |   |            |   |       |   | (19,350,000 | ) |  |   |         |   |  |   | (19,350,000 | )          
|Foreign currency translation adjustment                                                 |                    |  |             |  |            |   |                |  |               |   |            |   |       |   |            |   |  |   | (74,000  | ) |  |   | (74,000     | )          
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|                                                                                        | Comprehensive loss |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             | (19,424,000 | )
|Issuance of common stock through public
offering, net of issuance costs of $2.7
million |                    |  | 3,800,000    |  |            |   | 38,000          |  |               |   | 31,453,000  |   |       |   |            |   |  |   |         |   |  |   | 31,491,000  |            
|Acquisition of business                                                                 |                    |  | 480,000      |  |            |   | 5,000           |  |               |   | 5,755,000   |   |       |   |            |   |  |   |         |   |  |   | 5,760,000   |            
|Compensatory stock options                                                              |                    |  |             |  |            |   |                |  |               |   | 41,000      |   |       |   |            |   |  |   |         |   |  |   | 41,000      |            
|Exercise of employee stock options                                                      |                    |  | 157,401      |  |            |   | 2,000           |  |               |   | 845,000     |   |       |   |            |   |  |   |         |   |  |   | 847,000     |            
|Issuance of stock to employees                                                          |                    |  | 24,806       |  |            |   |                |  |               |   | 234,000     |   |       |   |            |   |  |   |         |   |  |   | 234,000     |            
|Issuance of stock warrant to investor                                                   |                    |  |             |  |            |   |                |  |               |   | 562,000     |   |       |   |            |   |  |   |         |   |  |   | 562,000     |            
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|BALANCE AT JULY 31, 2001                                                                |                    |  | 15,993,564   |  |            |   | 160,000         |  |               |   | 58,575,000  |   |       |   | (11,343,000 | ) |  |   | (325,000 | ) |  |   | 47,067,000  |            
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|Comprehensive loss:                                                                     |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|Net loss                                                                                |                    |  |             |  |            |   |                |  |               |   |            |   |       |   | (10,126,000 | ) |  |   |         |   |  |   | (10,126,000 | )          
|Foreign currency translation adjustment                                                 |                    |  |             |  |            |   |                |  |               |   |            |   |       |   |            |   |  |   | 25,000   |   |  |   | 25,000      |            
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|                                                                                        | Comprehensive loss |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             | (10,101,000 | )
|Additional issuance costs relating to common
stock public offering in fiscal 2001       |                    |  |             |  |            |   |                |  |               |   | (23,000     | ) |       |   |            |   |  |   |         |   |  |   | (23,000     | )          
|Compensatory stock options                                                              |                    |  |             |  |            |   |                |  |               |   | 36,000      |   |       |   |            |   |  |   |         |   |  |   | 36,000      |            
|Issuance of stock to employees                                                          |                    |  | 25,569       |  |            |   |                |  |               |   | 70,000      |   |       |   |            |   |  |   |         |   |  |   | 70,000      |            
|Exercise of employee stock options                                                      |                    |  | 4,500        |  |            |   |                |  |               |   | 23,000      |   |       |   |            |   |  |   |         |   |  |   | 23,000      |            
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            
|BALANCE AT JANUARY 31, 2002                                                             |                    |  | 16,023,633   |  |            | $ | 160,000         |  |               | $ | 58,681,000  |   |       | $ | (21,469,000 | ) |  | $ | (300,000 | ) |  | $ | 37,072,000  |            
|                                                                                        |                    |  |              |  |            |   |                 |  |               |   |             |   |       |   |             |   |  |   |          |   |  |   |             |            

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

4



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PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |             |            |            |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ----------- | ---------------------------- | ---------- | ---------- | ----------- | ---------- | ---------- | -
|                                                                            |                                                               |                                   |                                                     |             | SIX MONTHS ENDED JANUARY 31,
|                                                                            |                                                               |                                   |                                                     |             |                             
|                                                                            |                                                               |                                   |                                                     |             | 2002                         |            | 2001      
|                                                                            |                                                               |                                   |                                                     |             |                              |            |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |                                                               |                                   |                                                     |             |                              |            |            |            
|Net loss                                                                    |                                                               | $                                 | (10,126,000                                         | )           |                              | $          | (6,959,000 | )          
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            | Depreciation and amortization                                 |                                   |                                                     | 962,000     |                              |            |            | 670,000     |           
|                                                                            | Amortization of debt issuance costs related to stock warrant  |                                   |                                                     | 274,000     |                              |            |            |            |           
|                                                                            | Compensatory stock options                                    |                                   |                                                     | 36,000      |                              |            |            | 20,000      |           
|                                                                            | In-process research and development                           |                                   |                                                     |            |                              |            |            | 4,262,000   |           
|                                                                            | Deferred income taxes                                         |                                   |                                                     |            |                              |            |            | (327,000    | )         
|                                                                            | Changes in operating accounts:                                |                                   |                                                     |             |                              |            |            |             |           
|                                                                            |                                                               | Accounts receivable               |                                                     |             | 770,000                      |            |            |             | (4,560,000 | )         
|                                                                            |                                                               | Inventories                       |                                                     |             | (94,000                      | )          |            |             | (1,055,000 | )         
|                                                                            |                                                               | Income tax receivable             |                                                     |             | 5,000                        |            |            |             | 2,699,000  |           
|                                                                            |                                                               | Prepaid expenses                  |                                                     |             | (83,000                      | )          |            |             | (713,000   | )         
|                                                                            |                                                               | Other current assets              |                                                     |             | 35,000                       |            |            |             | (3,000     | )         
|                                                                            |                                                               | Other assets                      |                                                     |             | (19,000                      | )          |            |             | (273,000   | )         
|                                                                            |                                                               | Accounts payable                  |                                                     |             | (228,000                     | )          |            |             | (3,001,000 | )         
|                                                                            |                                                               | Accrued expenses and compensation |                                                     |             | 261,000                      |            |            |             | 870,000    |           
|                                                                            |                                                               | Deferred service revenues         |                                                     |             | 161,000                      |            |            |             | (43,000    | )         
|                                                                            |                                                               | Income taxes payable              |                                                     |             | (44,000                      | )          |            |             | 53,000     |           
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            |                                                               |                                   | Net cash used in operating activities               |             |                              | (8,090,000 | )          |             |            | (8,360,000 | )
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            | Purchase of property and equipment                            |                                   |                                                     | (68,000     | )                            |            |            | (1,770,000  | )         
|                                                                            | Acquisition of business, net of cash acquired                 |                                   |                                                     |            |                              |            |            | (250,000    | )         
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            |                                                               |                                   | Net cash used in investing activities               |             |                              | (68,000    | )          |             |            | (2,020,000 | )
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            | Issuance of convertible debenture                             |                                   |                                                     |            |                              |            |            | 15,000,000  |           
|                                                                            | Repayments of convertible debenture                           |                                   |                                                     | (10,000,000 | )                            |            |            |            |           
|                                                                            | Borrowings (repayments) of long term debt                     |                                   |                                                     | 8,750,000   |                              |            |            | (10,750,000 | )         
|                                                                            | Net borrowings on lines of credit                             |                                   |                                                     | 31,000      |                              |            |            | 3,508,000   |           
|                                                                            | Flooring line obligation                                      |                                   |                                                     | 415,000     |                              |            |            | (130,000    | )         
|                                                                            | Proceeds from exercise of stock options                       |                                   |                                                     | 23,000      |                              |            |            | 600,000     |           
|                                                                            | Common stock issuance costs                                   |                                   |                                                     | (23,000     | )                            |            |            |            |           
|                                                                            | Issuance of common stock to employees                         |                                   |                                                     | 70,000      |                              |            |            | 145,000     |           
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            |                                                               |                                   | Net cash provided by (used in) financing activities |             |                              | (734,000   | )          |             |            | 8,373,000  |  
|Effect of exchange rate changes                                             |                                                               |                                   | 25,000                                              |             |                              |            | (38,000    | )          
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|Decrease in cash and cash equivalents                                       |                                                               |                                   | (8,867,000                                          | )           |                              |            | (2,045,000 | )          
|Cash and cash equivalents at beginning of period                            |                                                               |                                   | 25,419,000                                          |             |                              |            | 15,515,000 |            
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|Cash and cash equivalents at end of period                                  |                                                               | $                                 | 16,552,000                                          |             |                              | $          | 13,470,000 |            
|                                                                            |                                                               |                                   |                                                     |             |                              |            |            |            
|Supplemental disclosures of cash flow information:                          |                                                               |                                   |                                                     |             |                              |            |            |            
|CASH PAID (RECEIVED) DURING THE PERIOD:                                     |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            | Interest                                                      |                                   | $                                                   | 370,000     |                              |            | $          | 112,000     |           
|                                                                            | Income taxes                                                  |                                   | $                                                   |            |                              |            | $          | (2,733,000  | )         
|SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:                    |                                                               |                                   |                                                     |             |                              |            |            |            
|                                                                            | Common stock warrant issued to convertible debenture
investor |                                   | $                                                   |            |                              |            | $          | 582,000     |           

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

5



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PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. GENERAL.

The accompanying financial information is unaudited, but in the opinion of
management, reflects all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of Procom
Technology, Inc. and its consolidated subsidiaries (the Company) as of the
dates indicated and the results of operations for the periods then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. While the
Company believes that the disclosures are adequate to make the information
presented not misleading, the financial information should be read in
conjunction with the audited financial statements and notes thereto included in
the Companys Report on Form 10-K for fiscal 2001. Results for the interim
periods presented are not necessarily indicative of the results for the entire
year.

NOTE 2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES.

The preparation of the condensed consolidated financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to product returns, bad debts, inventories,
and contingencies. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.

The Company sells NAS appliances primarily through direct sales channels
and resellers. Revenue is generally recorded upon product shipment. The Company
maintains reserves, which are adjusted at each reporting date, to estimate
anticipated returns based on historical rates of sales returns. In addition,
the Company sells service contracts for certain of its appliances that extend
for a specified period of time, usually one to three years. Revenue from these
service contracts is recorded ratably over the life of the service agreement.
The Company sells its Legacy products primarily through distributors. Revenue
is recorded from these Legacy sales when the distributor receives the product.
The agreements with the Companys distributors allow limited product returns,
including stock balancing and price protection privileges. The Company
maintains reserves, which are adjusted at each financial reporting date, to
estimate anticipated returns, including stock balancing and price protection
claims, relating to each reporting period. The reserves are based on historical
rates of sales and returns, including stock balancing and price protection
claims, and the level of the Companys product held by its customers in their
inventory. If the Company were to experience a significant increase in product
sales returns, additional sales reserves may be required. In addition, until the Company's collection experience
improves in certain European countries, the Company is recording
revenue from certain customers in European countries using the cost
recovery method beginning in the second quarter of fiscal 2002.

The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments, or if the
Companys receivable aging continues to lengthen for some of our European
customers, additional allowances may be required.

The Company writes down its inventory for estimated obsolescence equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

NOTE 3. INVENTORIES.

Inventories are summarized as follows:

|                |  |                  |           |               |  |   |           | 
|--------------- |  | ---------------- | --------- | ------------- |  | - | --------- | 
|                |  | January 31, 2002 |           | July 31, 2001
|                |  |                  |           |              
|Raw materials   |  | $                | 2,454,000 |               |  | $ | 2,472,000 | 
|Work in process |  |                  | 614,000   |               |  |   | 283,000   | 
|Finished goods  |  |                  | 3,318,000 |               |  |   | 3,537,000 | 
|                |  |                  |           |               |  |   |           | 
|Total           |  | $                | 6,386,000 |               |  | $ | 6,292,000 | 
|                |  |                  |           |               |  |   |           | 

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NOTE 4. 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. As of January 31, 2002 and 2001, stock options and warrants
to purchase 2,148,000 shares and 1,828,000 shares of common stock,
respectively, were outstanding. The dilutive effect of these stock options and warrants were
not included in the computation of net loss per share as the effect would have
been antidilutive.

NOTE 5. COMPREHENSIVE LOSS.

For the six months ended January 31, 2002 and 2001, the only differences
between reported net loss and comprehensive loss was a foreign currency
translation adjustment gain of $25,000 and a loss of $38,000, respectively.

NOTE 6. 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) and other data storage
products (Legacy), which includes disk drive storage upgrade systems,
CD/DVD-ROM servers and arrays and tape backup products. Net sales of NAS
products represented 83% and 76% of total product net sales for the three
months ended January 31, 2002 and 2001, respectively, and 83% and 67% of total
net sales for the six months ended January 31, 2002 and 2001, respectively.

International sales as a percentage of net sales amounted to 54% and 60%
for the three months ended January 31, 2002 and 2001, respectively, and 52% and
63% for the six months ended January 31, 2002 and 2001, respectively.
International sales were primarily to European customers. Identifiable assets
used in connection with the Companys foreign operations were $6.9 million at
January 31, 2002 and $8.5 million at July 31, 2001.

For the six months ended January 31, 2002, four customers accounted for
24% of net sales, while one customer accounted for 20% of net sales for the six
months ended January 31, 2001.

NOTE 7. LINES OF CREDIT, CONVERTIBLE DEBENTURE AND LONG-TERM DEBT.

On October 10, 2000, the Company entered into a term loan agreement and a
three-year working capital line of credit with The CIT Group/Business Credit
(CIT). A term loan of $4.0 million, due and payable upon the Companys
finalization of a long-term mortgage on its corporate headquarters or paid in
12 monthly installments commencing April 1, 2001, was fully repaid in May 2001.
An initial term loan of $1.0 million, due and payable in 90 days, was fully
repaid on November 1, 2000. The term loans under the agreement incurred
interest at the lenders prime rate, plus .5%, with increases if the
outstanding principal was 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 (approximately $2.3 million at January 31, 2002), up to a
limit of $5.0 million. Amounts outstanding under the working capital line bear
interest at the lenders prime rate plus .25%. At January 31, 2002, no amounts
were outstanding under the various credit arrangements. The lender charged
approximately $130,000 for the credit facility which is being amortized as
interest expense over the term of the credit agreement. The line of credit
accrues various monthly maintenance, minimum usage and early termination fees.
The line of credit is collateralized by certain assets of the Company. The line
of credit requires certain financial and other covenants, including the
maintenance of a minimum EBITDA requirement for rolling 12-month periods ending
on each fiscal quarter. For the 12-month period ended on January 31, 2002, the
Company was not in compliance with the minimum EBITDA requirement. The lender
has agreed that the Companys non-compliance with this covenant for this period
will not be deemed a default or constitute an event of default under the line
of credit.

In addition to the CIT line of credit noted above, the Company has a
flooring line with IBM Credit, which has committed to make $2.5 million in
flooring inventory commitments available to the Company. As of January 31,
2002 and July 31, 2001, we owed $946,000 and $531,000, respectively, under the
flooring line. The flooring line is collateralized by the specific inventory
purchased pursuant to the flooring commitments. CIT and IBM Credit have entered
into an intercreditor agreement which determines the level of priority of
either lenders security interest. The flooring line requires the maintenance
by the Company of a minimum net worth of $16.0 million. The Company was in
compliance with the terms of the flooring line at January 31, 2002. The
flooring line also requires the Company not to be in default of any covenants
in the CIT agreement. IBM Credit has waived compliance with that requirement at
January 31, 2002.

On October 31, 2000, the Company issued a $15.0 million convertible
unsecured debenture to a private investor. The debenture carried interest at
6.0% per annum, and was repayable in full on October 31, 2003, unless otherwise
converted into the common stock of the Company. 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 an initial exercise price
of $32.55 per share, with the number of shares for

7



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which the warrant is exercisable and the exercise price subject to
antidilution adjustments. The value of the warrant of $562,000 was computed
using the Black-Scholes model, with the following assumptions: Expected life 
5 years, Risk free interest rate  6%, and Volatility  1.20. On October 31,
2001, the debenture amount repayable was $10,000,000 with an unamortized
warrant value of $121,000, for a net debenture value of $9,879,000. In the
second quarter of fiscal 2002, the Company paid the investor the remaining
$10,000,000 principal amount of the debentures and expensed the remaining
unamortized debt issuance and warrant costs of $260,000 to interest expense.

In June 2001, the Company completed the sale of 3,800,000 shares of common
stock raising gross proceeds of approximately $34.2 million before offering
costs of $2.7 million. As a result of this offering, the exercise price of the
warrant was adjusted to $27.95 and the number of shares issuable upon exercise
of the warrant pursuant to anti-dilution provisions of the warrant were
adjusted to 38,333.

In December 2001, the Company borrowed $8.75 million under a financing
arrangement secured by the Companys corporate headquarters. The principal
amount outstanding bears interest at prime plus 1.0% per annum, but not less
than 7.0% per annum. Under certain conditions, the Company has the right to
request that portions of the principal amount outstanding under the note shall
bear interest at a LIBOR based rate, but not less than 7.0%. As of January 31,
2002, the interest rate on the loan was 7.0%. Principal reduction payments of
$14,400 plus accrued interest are due each month beginning February 1, 2002
with the remaining principal balance and unpaid interest due at the maturity
date of January 1, 2007. Debt issuance costs totaled $201,800 and are being
amortized over the term of the loan. Up to an additional $1.0 million may be
borrowed under this financing arrangement to cover leasing costs and tenant
improvements on the vacant, unimproved space within the corporate headquarters.
As of January 31, 2002, the outstanding principal balance of the loan totaled
$8.75 million.

In addition to the line of credit, our foreign subsidiaries in Germany,
Italy and Switzerland have lines of credit with banks in their respective
countries that are utilized primarily for overdraft and short-term cash needs.
At January 31, 2002, the amount outstanding under these lines was $39,000.

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 141, all business combinations initiated
after June 30, 2001 must be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment (or more frequently if
indicators of impairment arise). Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS No. 142 effective August 1, 2002.

As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $1,140,000, and unamortized identifiable intangible
assets in the amount of $630,000, all of which will be subject to the
transition provisions of SFAS 141 and 142. Amortization expense related to
goodwill was $241,000 and $102,000 for the six months ended January 31, 2002
and 2001, respectively. Because of the extensive effort needed to comply with
adopting SFAS 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these statements on the Companys financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as a cumulative effect of a change in
accounting principle.

In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001. Adoption of this statement
will not have a material impact on the Companys consolidated financial
position or results of operations.




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

We develop, manufacture and market 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 a 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 Legacy
products. Over the last four 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 Legacy products, and we hope to transition users of these
products to our growing line of more robust, generally higher margin NAS
solutions.

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Changing Business Mix.

We have experienced significantly reduced demand, revenues and gross
margins for our Legacy products and, as a result, have discontinued some of
these Legacy 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. In future periods, as sales
of our higher margin NAS appliances continue to increase as a percentage of
total sales, we expect our overall gross margins to be positively affected.

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



| |  |  | new product introductions and enhancements;        
| | - |  | ---------------------------------------------------
|
| |  |  | competition;                                       
|
| |  |  | direct versus indirect sales;                      
|
| |  |  | the mix and average selling prices of products; and
|
| |  |  | the cost of labor and components.                  

Revenue and Revenue Recognition.

We sell NAS appliances primarily through direct sales channels and
resellers. Revenue is generally recorded upon product shipment. We maintain
reserves, which are adjusted at each reporting date, to estimate anticipated
returns relating to each reporting period based on historical rates of sales
returns. In addition, we sell service contracts for certain of our appliances
that extend for a specified period of time, usually one to three years. Revenue
from these service contracts is recorded ratably over the life of the service
agreement.

We sell Legacy products primarily through distributors. Revenue is
recorded from these Legacy sales when the distributor receives the product. Our
agreements with our distributors allow limited product returns, including stock
balancing and price protection privileges. We maintain reserves, which are
adjusted at each financial reporting date, to estimate anticipated returns,
including stock balancing and price protection claims, relating to each
reporting period. The reserves are based on historical rates of sales and
returns, including price protection and stock balancing claims, and the level
of our product held by our customers in their inventory.

In addition, under a product evaluation program established by us, our
indirect channel partners and end-users generally are able to receive
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 January 31, 2002 and July 31, 2001, inventory related
to evaluation units was approximately $2.3 million. We do not record evaluation
units as sales until the customer has notified us of acceptance of
these units. In addition, until our collection experience improves in
certain European countries, we are recording revenue from certain
customers in European countries using the cost recovery method
beginning in the second quarter of fiscal 2002.

Cost of Sales.

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 excess and obsolete inventory.

Selling, General and Administrative Expenses.

Selling expenses consist primarily of 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.

Research and Development Expenses.

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



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##### Table of Contents



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 JANUARY 31, |       | SIX MONTHS ENDED JANUARY 31,
|                                     |                                     |                          |       |                                |       |                             
|STATEMENT OF OPERATIONS              |                                     | 2002                     |       | 2001                           |       | 2002                         |       | 2001
|                                     |                                     |                          |       |                                |       |                              |       |      |      | 
|Net sales                            |                                     |                          | 100.0 | %                              |       |                              | 100.0 | %    |      |  | 100.0 | %    |       |  | 100.0 | %   
|Cost of sales                        |                                     |                          | 55.1  |                                |       |                              | 60.6  |      |      |  | 54.0  |      |       |  | 62.0  |     
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|                                     | Gross profit                        |                          |       | 44.9                           |       |                              |       | 39.4 |      |  |       | 46.0 |       |  |       | 38.0 |     
|Operating expenses:                  |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|                                     | Selling, general and administrative |                          |       | 82.6                           |       |                              |       | 36.7 |      |  |       | 85.0 |       |  |       | 35.9 |     
|                                     | Research and development            |                          |       | 20.3                           |       |                              |       | 14.3 |      |  |       | 20.1 |       |  |       | 13.8 |     
|                                     | In-process research and development |                          |       |                               |       |                              |       | 36.4 |      |  |       |     |       |  |       | 17.1 |     
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|                                     |                                     | Total operating expenses |       |                                | 102.9 |                              |       |      | 87.4 |  |       |      | 105.1 |  |       |      | 66.8 | 
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|Operating loss                       |                                     |                          | (58.0 | )                              |       |                              | (48.0 | )    |      |  | (59.1 | )    |       |  | (28.8 | )   
|Interest expense, net                |                                     |                          | (3.8  | )                              |       |                              | (1.6  | )    |      |  | (3.8  | )    |       |  | (0.5  | )   
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|Loss before income taxes             |                                     |                          | (61.8 | )                              |       |                              | (49.6 | )    |      |  | (62.9 | )    |       |  | (29.3 | )   
|Provision (benefit) for income taxes |                                     |                          |      |                                |       |                              | 0.5   |      |      |  |      |      |       |  | (1.4  | )   
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     
|Net loss                             |                                     |                          | (61.8 | )%                             |       |                              | (50.1 | )%   |      |  | (62.9 | )%   |       |  | (27.9 | )%  
|                                     |                                     |                          |       |                                |       |                              |       |      |      |  |       |      |       |  |       |     

CRITICAL ACCOUNTING POLICIES AND ESTIMATES.

The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on-going basis, we evaluate our estimates,
including those related to product returns, bad debts, inventories, and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed
consolidated financial statements.

We sell NAS appliances primarily through direct sales channels and
resellers. Revenue is generally recorded upon product shipment. We maintain
reserves, which are adjusted at each reporting date, to estimate anticipated
returns based on historical rates of sales returns. In addition, we sell
service contracts for certain of our appliances that extend for a specified
period of time, usually one to three years. Revenue from these service
contracts is recorded ratably over the life of the service agreement. We sell
our Legacy products primarily through distributors. Revenue from these Legacy
sales is recorded when the distributor receives the product. The agreements
with our distributors allow limited product returns, including stock balancing
and price protection privileges. We maintain reserves, which are adjusted at
each financial reporting date, to estimate anticipated returns, including stock
balancing and price protection claims, relating to each reporting period. The
reserves are based on historical rates of sales and returns, including stock
balancing and price protection claims, and the level of our product held by our
customers in their inventory. If we were to experience a significant increase
in product sales returns, additional sales reserves may be required. In addition, until our collection experience improves in certain European countries, we are recording revenue from certain customers in European countries using the cost recovery method beginning in the second quarter of fiscal 2002.

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, or if our receivable aging
continues to lengthen for some of our European customers, additional allowances
may be required.

We write down our inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

COMPARISON OF THREE AND SIX MONTHS ENDED JANUARY 31, 2002 AND 2001

Net sales decreased by 33.3% to $7.8 million for the three months ended
January 31, 2002, from $11.7 million for the three months ended January 31,
2001. The decrease resulted from a decrease in sales of our NAS and
Legacy products. Net sales decreased 35.6% to $16.1 million for
the six months ended January 31, 2002, from $25.0 million in the comparable
period of fiscal 2001. The decrease was due primarily to lower sales of our
Legacy products and sales in fiscal 2001 of $5.0 million to a European storage service
provider that were not repeated in fiscal 2002.

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Net sales of our NAS products decreased 23.5% to $6.5 million for the
three months ended January 31, 2002, from $8.5 million for the comparable
period in fiscal 2001. Net sales of our NAS products decreased 18.9% to $13.3
million for the six months ended January 31, 2002, from $16.4 million for the
prior year. Excluding sales of $5.0 million to a European storage service
provider in fiscal 2001 that were not repeated in fiscal 2002, NAS sales
increased $1.9 million, or 16.7%, for the six months ended January 31, 2002
compared to the same period in fiscal 2001. As a percentage of total net
sales, NAS product sales increased to 82.8% from 76.2% and to 82.5% from 66.6%
for the three and six months ended January 31, 2002 and 2001, respectively.

International sales were $4.2 million, or 53.7% of our net sales, for the
three months ended January 31, 2002, compared to $7.4 million, or 62.8% of our
net sales, for the three months ended January 31, 2001. International sales
were $8.3 million, or 51.5% of our net sales, for the six months ended January
31, 2002, compared to $15.0 million, or 60.2% of net sales, for the comparable
period of fiscal 2001. The decrease was due primarily to lower overall sales
of NAS and Legacy products to international customers and sales of $5.0 million
to a European storage service provider in fiscal 2001 that were not repeated in
fiscal 2002. In
addition, until our collection experience improves in certain
European countries, we are recording revenue
from certain customers in European countries using the cost recovery method
beginning in the second quarter of fiscal 2002.

Gross profit decreased 23.9% to $3.5 million for the three months ended
January 31, 2002, from $4.6 million for the three months ended January 31,
2001. Gross profit for the six month period ended January 31, 2002 decreased
22.1% to $7.4 million from $9.5 million for the same period the prior fiscal
year. The decrease in gross profit for both periods was due primarily to lower
overall sales. Gross margins increased to 44.9% and 46.0% of net sales for the
three and six months ended January 31, 2002 and 2001, respectively, from 39.4%
and 38.0% of net sales for the comparable three and six month periods in fiscal
2001. The increase in gross margin was primarily the result of the higher
percentage of NAS sales, which have higher margins than non-NAS products.

Selling, general and administrative expenses increased 48.8% to $6.4
million for the three months ended January 31, 2002, from $4.3 million for the
three months ended January 31, 2001, and increased as a percentage of net sales
to 82.6% from 36.7%. In the second quarter of fiscal 2002, we increased our
accounts receivable reserves by $1.0 million to reflect the aging of certain
accounts receivable from customers in Switzerland and Italy. Excluding this
additional provision, selling, general and administrative expenses for the
second quarter of fiscal 2002 increased by $1.1 million over their levels for
the second quarter of fiscal 2001 due primarily to increased sales and
administrative salaries and commissions in support of NAS sales, increased
general administrative expenses and currency translation losses as the U.S.
dollar strengthened against both the Euro and Swiss Franc during the second
quarter of fiscal 2002.

For the six months ended January 31, 2002, selling, general and
administrative expenses increased to $13.7 million from $9.0 million for the
comparable period of fiscal 2001. In the first six months of fiscal 2002, we
increased our accounts receivable reserves by $3.8 million due to the financial
instability of three of our international customers and to reflect the aging of
accounts receivable from the Swiss and Italian customers referred to above.
Beginning in the third quarter of fiscal 2002, we implemented numerous
initiatives to improve our international credit and collection efforts,
including the implementation of more stringent credit policies and
procedures. However, no assurance can be given that any improvements to the
credit and collection policies and procedures will result in better collections
in the future. Excluding the additional provision for accounts receivable,
selling, general and administrative expenses for the six months ended January
31, 2002 increased by $0.9 million from their levels for the comparable period
of fiscal 2001, due primarily to increased sales and administrative salaries
and commissions in support of NAS sales, increased general administrative
expenses and currency translation losses as the U.S. dollar strengthened
against both the Euro and Swiss Franc during this six month period.

Research and development expenses decreased 5.8% to $1.6 million, or 20.3%
of net sales in the second quarter of fiscal 2002 from $1.7 million, or 14.3%
of net sales, for the comparable period of fiscal 2001. For the six months
ended January 31, 2002, research and development expenses decreased 6.3% to
$3.2 million, or 20.1% of net sales, from $3.5 million, or 13.8% of net sales,
in the same period in fiscal 2001. The dollar decrease for both periods was
due primarily to reduced expenses for outside programmers slightly offset by
increased compensation expense for additional NAS software programmers and
hardware developers.

In-process research and development. In December 2000, we acquired the
outstanding shares of Scofima Srl, an Italian company engaged in software
development. We employed an appraiser to value the assets of Scofima, and the
appraiser assigned a value of approximately $4.3 million for the research and
development expenses relating to software being developed by Scofima which has
not yet reached technological feasibility, and for which no alternative future
use is available. We incurred this charge in the second quarter of fiscal
2001.

Interest income decreased 39.0% to $144,000 for the three months ended
January 31, 2002, from $236,000 for the comparable period of fiscal 2001. For
the six months ended January 31, 2002, interest income decreased 26.9% to
$335,000 from $458,000 for the comparable period of fiscal 2001. The decrease
for both periods was attributable to a decline in the average interest rates
earned on our invested cash balance.

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Interest expense increased 3.5% to $437,000 for the three months ended
January 31, 2002, from $423,000 for the comparable period of fiscal 2001. For
the six months ended January 31, 2002, interest expense increased 66.6% to
$951,000 from $571,000 for the comparable period of fiscal 2001. The increase
was due primarily to the issuance of the $15.0 million convertible debenture on
October 31, 2000 and the amortization of debt issuance costs.

Income tax provision (benefit). For the three and six months ended
January 31, 2002, we recorded no tax benefit as we recorded a valuation
allowance equal to the deferred tax asset. The realization of the tax benefits
relating to our net deferred tax asset will be dependent on our ability to
return to profitability.

LIQUIDITY AND CAPITAL RESOURCES

As of January 31, 2002, we had cash and cash equivalents totaling $16.6
million.

Net cash used in operating activities was $8.1 million for the six months
ended January 31, 2002 and $8.4 million for the six months ended January 31,
2001. Net cash used in operating activities in fiscal 2002 relates primarily to
our net loss, a decrease in our accounts payable and an increase in prepaid
expenses and inventories. These uses of cash were offset partially by a
decrease in our accounts receivable. Net cash used in operating activities in
fiscal 2001 relates primarily to our net loss, increases in our accounts
receivable and inventories and decreases in accounts payable, partially offset
by a reduction of approximately $2.7 million in our income tax refund
receivable.

Net cash used in investing activities of $0.1 million for the six months
ended January 31, 2002 was the result of purchases of property and equipment.
Net cash used in investing activities of $2.0 million for the six months ended
January 31, 2001 was primarily the result of expenditures of $1.5 million to
complete our corporate headquarters and $0.3 million for other property and
equipment.

Net cash used by financing activities of $0.7 million for the six months
ended January 31, 2002 was primarily the result of a $10.0 million repayment of
the convertible debenture, long-term borrowings of $8.8 million under a
financing arrangement secured by our corporate headquarters and an increase in
our flooring line of $0.4 million. Net cash provided by financing activities of
$8.4 million for the six months ended January 31, 2001 was the result of the
issuance of a $15.0 million convertible debenture, borrowings of approximately
$3.5 million under the term loan line of credit agreement with The CIT
Group/Business Credit and approximately $0.7 million in stock option exercises
and employee stock purchases, reduced by the repayment of approximately $10.8
million in loans previously secured by our commercial paper portfolio.

On October 10, 2000, we entered into a term loan agreement and a
three-year working capital line of credit with The CIT Group/Business Credit
(CIT). A term loan of $4.0 million, due and payable upon the finalization of
a long-term mortgage on our corporate headquarters or paid in 12 monthly
installments commencing April 1, 2001, was fully repaid in May 2001. An initial
term loan of $1.0 million, due and payable in 90 days, was fully repaid on
November 1, 2000. The term loans under the agreement incurred interest at the
lenders prime rate, plus .5%, with increases if the outstanding principal was
not reduced according to a fixed amortization. The working capital line of
credit allows us to borrow, on a revolving basis, for a period of three years,
a specified percentage of our eligible accounts receivable (approximately $2.3
million at January 31, 2002), up to a limit of $5.0 million. Amounts
outstanding under the working capital line bear interest at the lenders prime
rate plus .25%. At January 31, 2002, no amounts were
outstanding under the various credit arrangements. The lender charged
approximately $130,000 for the credit facility, which is being amortized as
interest expense over the term of the credit agreement. The line of credit
accrues various monthly maintenance, minimum usage and early termination fees.
The line of credit is collateralized by certain of our assets. The line of
credit requires certain financial and other covenants, including the
maintenance of a minimum EBITDA requirement for rolling 12-month periods ending
on each fiscal quarter. For the 12-month period ended on January 31, 2002, we
were not in compliance with the minimum EBITDA requirement. The lender has
agreed that our non-compliance with this covenant for this period will not be
deemed a default or constitute an event of default under the line of credit.

In addition to the CIT line of credit noted above, we have a flooring line
of credit with IBM Credit, which has committed to make $2.5 million in flooring
inventory commitments available to us. As of January 31, 2002, we owed
$946,000 under the flooring line. The flooring line is collateralized by the
specific inventory purchased pursuant to the flooring commitments. CIT and IBM
Credit have entered into an intercreditor agreement which determines the level
of priority of either lenders security interest. The flooring line requires
the maintenance of a minimum net worth of $16.0 million, and we were in
compliance with this covenant at January 31, 2002. The flooring line also
requires us not to be in default of any covenants in the CIT agreement. IBM
Credit has waived compliance with that requirement at January 31, 2002.

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On October 31, 2000, we issued a $15.0 million convertible unsecured
debenture to a private investor. The debenture carried interest at 6.0% per
annum, and was repayable in full on October 31, 2003, unless otherwise
converted into our common stock. In connection with the issuance of the
debenture, we issued to the investor a 5-year warrant to purchase up to 32,916
shares of our common stock at an initial exercise price of $32.55 per share,
with the number of shares for which the warrant is exercisable and the exercise
price subject to antidilution adjustments. The value of the warrant of $562,000
was computed using the Black-Scholes model, with the following assumptions:
Expected life  5 years, Risk free interest rate  6%, and Volatility  1.20.
On October 31, 2001, the debenture amount repayable was $10,000,000 with an
unamortized warrant value of $121,000, for a net debenture value of $9,879,000.
In the second quarter of fiscal 2002, we paid the investor the remaining
$10,000,000 principal amount of the debentures and expensed the remaining
unamortized debt issuance and warrant costs of $260,000 to interest expense.

In June 2001, we completed the sale of 3,800,000 shares of common stock
raising gross proceeds of approximately $34.2 million before offering costs of
$2.7 million. As a result of this offering, the exercise price of the warrant
was adjusted to $27.95 and the number of shares issuable upon exercise of the
warrant pursuant to anti-dilution provisions of the warrant were adjusted to
38,333.

In December 2001, we borrowed $8.75 million under a financing arrangement
secured by our corporate headquarters. The principal amount outstanding bears
interest at prime plus 1.0% per annum, but not less than 7.0% per annum. Under
certain conditions, we have the right to request that portions of the principal
amount outstanding under the note shall bear interest at a LIBOR based rate,
but not less than 7.0%. As of January 31, 2002, the interest rate on the loan
was 7.0%. Principal reduction payments of $14,400 plus accrued interest are due
each month beginning February 1, 2002 with the remaining principal balance and
unpaid interest due at the maturity date of January 1, 2007. Debt issuance
costs totaled $201,800 and are being amortized over the term of the loan. Up to
an additional $1.0 million may be borrowed under this financing arrangement to
cover leasing costs and tenant improvements on the vacant, unimproved space
within the corporate headquarters. As of January 31, 2002, the outstanding
principal balance of the loan totaled $8.75 million.

In addition to the line of credit, our foreign subsidiaries in Germany,
Italy and Switzerland have lines of credit with banks in their respective
countries that are utilized primarily for overdraft and short-term cash needs.
At January 31, 2002, amounts outstanding under these lines was $39,000.

We are contingently liable at January 31, 2002 under the terms of
repurchase agreements with several financial institutions providing inventory
financing for dealers of our products. Under these agreements, dealers purchase
our products, and the financial institutions agree to pay us 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 us
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 January 31, 2002, we were contingently
liable for purchases made under these agreements of approximately $280,000.

We expect to have sufficient cash generated from operations and from our
recently completed common stock offering to meet our anticipated cash
requirements for the next twelve months.

|                              |       |       |           |           |  |              |           |              |  |         |         |         |  |   |           |           |       |   |         |         | 
|----------------------------- | ----- | ----- | --------- | --------- |  | ------------ | --------- | ------------ |  | ------- | ------- | ------- |  | - | --------- | --------- | ----- | - | ------- | ------- | 
|                              |       |       |           |           |  |              | Less than |              |  |         |         |         |  |   |           |           | After
|Contractual Cash Obligations: |       | Total |           | 1 year    |  | 1 to 3 years |           | 4 to 5 years |  | 5 years
|                              |       |       |           |           |  |              |           |              |  |         |        
|Long Term Debt                |       | $     | 8,750,000 |           |  | $            | 172,000   |              |  | $       | 345,000 |         |  | $ | 8,233,000 |           |       | $ |        |        
|Operating Leases              |       |       | 1,003,000 |           |  |              | 382,000   |              |  |         | 413,000 |         |  |   | 94,000    |           |       |   | 114,000 |        
|                              |       |       |           |           |  |              |           |              |  |         |         |         |  |   |           |           |       |   |         |        
|                              | Total |       | $         | 9,753,000 |  |              | $         | 554,000      |  |         | $       | 758,000 |  |   | $         | 8,327,000 |       |   | $       | 114,000 | 
|                              |       |       |           |           |  |              |           |              |  |         |         |         |  |   |           |           |       |   |         |        

NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 141, all business combinations initiated
after June 30, 2001 must be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment (or more frequently if
indicators of impairment arise). Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS No. 142 effective August 1, 2002.

As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $1,140,000, and unamortized identifiable intangible
assets in the amount of $630,000, all of which will be subject to the
transition provisions of SFAS 141 and 142. Amortization expense related to
goodwill was $241,000 and $102,000 for the six months ended January 31, 2002
and 2001, respectively. Because of the extensive effort needed to comply with
adopting SFAS 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these statements on the Companys financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as a cumulative effect of a change in
accounting principle.

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In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001. Adoption of this statement
will not have a material impact on our consolidated financial position or
results of operations.

RISK FACTORS

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

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

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

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

We believe our future financial performance will depend in large part upon
the future 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 Legacy product development and marketing
efforts. In the interim, we expect to continue to rely in part upon sales of
Legacy products to fund operating and development expenses. Net sales of our
Legacy 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 Legacy products varies significantly from our expectations, or
the decline in net sales of our Legacy 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:



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

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| |  |  | reallocating resources in product development and service and support of our NAS appliances; and              
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | modifying existing and entering into new channel partner relationships to include sales of our NAS appliances.

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.

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 33%, 41% and 56% of our net sales
for the years ended July 31, 1999, 2000, 2001, respectively, and approximately
52% of our net sales in the six months ended January 31, 2002. We have
committed significant operational resources to drive our international growth.
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:



| |  |  | currency exchange rate fluctuations, particularly when we sell our products in currencies other than U.S. dollars;
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties in collecting accounts receivable and longer accounts receivable payment cycles;                     
|
| |  |  | reduced protection for intellectual property rights in some countries, particularly in Asia;                      
|
| |  |  | legal uncertainties regarding tariffs, export controls and other trade barriers;                                  
|
| |  |  | the burdens of complying with a wide variety of foreign laws and regulations; and                                 
|
| |  |  | seasonal fluctuations in purchasing patterns in other countries, particularly in Europe.                          

Any of these factors could have an adverse impact on our existing
international operations and business or impair our ability to continue
expanding into international markets. For example, our reported sales can be
affected by changes in the currency rates in effect during any particular
period. The effects of currency fluctuations were evident in our results of
operations for the fiscal year 2001 and the first six months of fiscal 2002.
During this period, the Euro and two currencies whose values are pegged to the
Euro, fluctuated significantly against the U.S. dollar. As a result, we
incurred a foreign currency loss of approximately $54,000 in fiscal 2001 and a
foreign currency loss of $63,000 in the first six months of fiscal 2002. Also,
these currency fluctuations can cause us to report higher or lower sales by
virtue of the translation of the subsidiarys sales into U.S. dollars at an
average rate in effect throughout the fiscal year. In addition, we have funded
operational losses of our subsidiaries of approximately $1.1 million between
the date of purchase and January 31, 2002, and if our subsidiaries continue to
incur operational losses, our cash and liquidity would be negatively impacted.

In order to successfully expand our international sales, we must
strengthen foreign operations 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.

IF THE AGING OF OUR ACCOUNTS
RECEIVABLE CONTINUES TO INCREASE OR IF WE
EXPERIENCE A SIGNIFICANT INCREASE IN SALES RETURNS, WE MAY NEED TO RECORD
ADDITIONAL RESERVES WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.

At January 31, 2002, our net accounts receivable totaled $11.2 million,
which is net of reserves for bad debts of $8.1 million and sales returns of $1.9
million. Approximately $3.6 million, or 32.1%, of our net accounts receivable
were past due greater than 90 days. Although management is
pursuing the collection of these
accounts, if the financial condition of our customers were to
continue to deteriorate, resulting in an impairment of their ability to make payments, or
if our receivable aging continues to lengthen for some of our European
customers, we may be required to record additional bad debt reserves which
would adversely affect our operating results.

Net sales for the six months ended January 31, 2002 and 2001 were $16.1
million and $25.0 million, respectively. We recognize revenue on NAS product
sales, sold through direct sales channels and resellers, generally upon
shipment of the product. In addition,

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we sell service contracts for certain of our appliances that require
service for a specified period of time, usually one to three years. Revenue
from these contracts is billed to customers at the time of sale, but earned
ratably over the life of the service agreement. Revenue is recognized on sales
of our Legacy products, which are sold primarily through distributors, when the
distributor receives the product. We maintain sales reserves for estimated
reductions to revenue for anticipated returns, including stock balancing and
price protection claims, based on historical rates of sales returns. If we were
to experience a significant increase in product sales returns,
additional
sales reserves may be required. In addition, until our collection experience improves in certain
European countries, we are recording revenue from certain customers
in European countries using the cost recovery method beginning in the
second quarter of fiscal 2002.

THE RECENT TERRORIST ATTACKS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

The terrorist attacks in New York and Washington, D.C. on September 11,
2001 appear to be having an adverse effect on business, financial and general
economic conditions. These effects may, in turn, have an adverse effect on our
business and results of operations. At this time, however, we are not able to
predict the nature, extent and duration of these effects on overall economic
conditions or on our business and operating results.

DUE TO DETERIORATING U.S. AND WORLD ECONOMIC CONDITIONS, INFORMATION TECHNOLOGY
SPENDING ON DATA STORAGE AND OTHER CAPITAL EQUIPMENT COULD DECLINE. IF
TECHNOLOGY SPENDING IS REDUCED, OUR SALES AND OPERATING RESULTS COULD BE
HARMED.

Many of our customers are affected by economic conditions in the United
States and throughout the world. Many companies have announced that they will
reduce their spending on data storage and other capital equipment. If spending
on data storage technology products is reduced by customers and potential
customers, our sales could be harmed, and we may experience greater pressures
on our gross margins. If economic conditions do not improve, or if our
customers reduce their overall information technology purchases, our sales,
gross profits and operating results may be reduced.

IF WE FAIL TO INCREASE THE NUMBER OF 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 products. To achieve these objectives, we plan to expand
revenues from our indirect sales channels, including resellers 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 FOR OUR
LEGACY PRODUCTS, THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF
COMPETITORS, WHICH COULD HARM OUR OPERATING RESULTS.

Our distributors generally offer products of several different companies,
including products of our competitors. Accordingly, these distributors may give
higher priority to products of our competitors, which could harm our operating
results. In addition, our distributors 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 will
continue, or that these sales will be profitable.

BECAUSE WE HAVE ONLY APPROXIMATELY FOUR 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 four years. For the years ended July 31, 1999, 2000 and 2001,
these products accounted for approximately 8%, 28% and 68% of our total net
sales, respectively. For the six months ended January 31, 2002, these products
accounted for approximately 83% 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 four years, as well as the rapidly evolving nature of the NAS
market, it is difficult to evaluate our business or our prospects. In
particular, our historical financial information is of limited value in
projecting our future operating results.

MARKETS FOR BOTH OUR NAS APPLIANCES AND OUR LEGACY 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 Legacy markets, we compete with computer
manufacturers that provide storage upgrades for their own products,

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as well as with manufacturers of hard drives, CD servers and arrays and
storage upgrade products. Many of our current and potential competitors have
longer operating histories, greater name recognition, larger customer bases and
greater financial, technical, marketing and other resources than we do. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, devote greater resources to
the development, promotion, sale and support of their products, and reduce
prices to increase market share. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. We may not be able to compete successfully against current or future
competitors. In addition, new technologies may increase competitive pressures.

WE DEPEND ON A FEW CUSTOMERS, INCLUDING DISTRIBUTORS AND SPECIALIZED END-USERS,
FOR A SUBSTANTIAL PORTION OF OUR NET SALES, AND CHANGES IN THE TIMING AND SIZE
OF THESE CUSTOMERS ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.

For the six months ended January 31, 2002, four customers accounted for
24% of our net sales, while one customer accounted for 20% of our net sales for
the six months ended January 31, 2001. Unless and until we diversify and expand
our customer base for NAS products, our future success will depend to a large
extent on the timing and size of future purchase orders, if any, from these
customers. In addition, we may receive from single site purchasers of large
installations of our NAS products large volume purchases of our NAS products
over relatively short periods of time. This may cause our sales to be highly
concentrated and significantly dependent on one or only a few 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 or
does not pay amounts owed to us, our results of operations would be adversely
affected. In fiscal 2001, we sold our Legacy products principally to
distributors. We cannot be certain that customers that have accounted for
significant revenues in past periods will continue to purchase our products or
fully pay for products they purchase 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 NOT
EXPERIENCE INCREASED SALES OF OUR NAS APPLIANCES.

Historically, our gross margins have fluctuated significantly. Our gross
margins vary significantly by product line and distribution channel, and,
therefore, our overall gross margin varies with the mix of products we sell.
Our markets are characterized by intense competition and declining average unit
selling prices over the course of the relatively short life cycles of
individual products. For example, we derive a significant portion of our sales
from NAS products. The market for these products is highly competitive and
subject to intense pricing pressures. If we fail to increase sales of our NAS
appliances, or if demand, sales or gross margins for our Legacy products
decline rapidly, we believe our overall gross margins may continue to decline.

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



| |  |  | new product introductions and enhancements;                     
| | - |  | ----------------------------------------------------------------
|
| |  |  | competition;                                                    
|
| |  |  | changes in the distribution channels we use;                    
|
| |  |  | the mix and average selling prices of products; and             
|
| |  |  | the cost and availability of components and manufacturing labor.

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

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, we face significant
challenges in developing and introducing new products. The development of new
products requires significant research and development expense and effort. We
may not have the financial resources to fund the research and development
efforts necessary to develop new NAS products, and 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

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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 have the financial
resources to do so or otherwise be successful in doing so, and if we fail in
this regard, our operating results could be harmed.

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

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

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

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:



| |  |  | cause delays in product introductions and shipments;                                                           
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | result in increased costs and diversion of development resources;                                              
|
| |  |  | require design modifications; or                                                                               
|
| |  |  | 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.

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

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our proprietary
software or technology. We believe the protection of our proprietary technology
is important to our business. If we are unable to protect our intellectual
property rights, our business could be materially adversely affected. We
currently rely on a combination of copyright and trademark laws and trade
secrets to protect our proprietary rights. In addition, we generally enter into
confidentiality agreements with our employees and license agreements with
end-users and control access to our source code and other intellectual
property. We have applied for the registration of some, but not all, of our
trademarks. We have applied for U.S. patents with respect to the design and
operation of our NetFORCE product, and we anticipate that we may 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.

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

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

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:



| |  |  | market acceptance of our new products and product enhancements or those of our competitors;                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the level of competition in our target product markets;                                                                              
|
| |  |  | delays in our introduction of new products;                                                                                          
|
| |  |  | changes in sales volumes through our reseller and distribution
channels, which have varying commission and sales discount structures;
|
| |  |  | changing technological needs within our target product markets;                                                                      
|
| |  |  | the impact of price competition on the selling prices for our products;                                                              
|
| |  |  | the availability and pricing of our product components;                                                                              
|
| |  |  | our expenditures on research and development and the cost to expand our sales and marketing programs; and                            
|
| |  |  | 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 distributors have limited
product 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 the first six
months of fiscal 2002 and 2001, we experienced product return rates of

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approximately 11 % and 12%, respectively. 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. The loss of any of these key
executive officers or other key employees could harm our business.

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

In recent periods, we have experienced significant declines in net sales
and gross profit, and we have incurred operating losses. We incurred operating
losses of $5.2 million for fiscal 1999, $12.1 million for fiscal 2000, $16.6
million (including a charge for in-process research and development) in fiscal
year 2001 and $9.5 million for the six months ended January 31, 2002. We will
need to 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. 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.

As of January 2002, our executive officers and directors beneficially
owned approximately 5,970,000 shares, or approximately 37% of the outstanding
shares of common stock. Acting together, these shareholders would be able to
exert substantial influence on matters requiring approval by shareholders,
including the election of directors. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us,
which could in turn have an adverse effect on the market price of our common
stock or prevent our shareholders from realizing a premium over the market
price for their shares of common stock.

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

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



| |  |  | fluctuations in our operating results;                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuations in the valuation of companies perceived by investors to be comparable to us;                               
|
| |  |  | a shortfall in net sales or operating results compared to securities analysts expectations;                            
|
| |  |  | changes in analysts recommendations or projections;                                                                    
|
| |  |  | announcements of new products, applications or product enhancements by us or our competitors; and                       
|
| |  |  | changes in our relationships with our suppliers or customers, including failures by customers to pay amounts owed to us.

THE PAYMENT TO BRIGHTON CAPITAL, LTD. 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 INVESTOR TO RESCIND ITS
INVESTMENT.

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We paid Brighton Capital, Ltd. $375,000 for its introduction to us of the
investor in 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 were
determined to be inconsistent with Section 15, then, under Section 29 of the
Securities Exchange Act:



| |  |  | Montrose Investments L.P., the purchaser of our debentures, might
have the right to rescind its purchase of these securities, which would
require us to repay to Montrose Investments L.P. the $15.0 million that
it invested in us;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We might be subject to regulatory action; and                                                                                                                                                                                       
|
| |  |  | We might be able to recover the $375,000 fee that we paid to Brighton Capital in connection with the transaction.                                                                                                                   

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. Our issuance of 480,000 shares in connection with the acquisition
of Scofima Software S.r.l. is an example of an issuance of additional shares to
finance an acquisition that may dilute your ownership. Also in June 2001, we
completed the sale of 3.8 million shares of our common stock in an offering. In
the future, we may issue additional shares of common stock or preferred stock
to raise additional capital or finance acquisitions, upon the exercise or
conversion of outstanding options, warrants and shares of convertible preferred
stock, or in lieu of cash payment of dividends. Our issuance of additional
shares would dilute your shares.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.

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




ITEM 3. 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.

Since October 31, 2000, we have entered into a line of credit and term
loan agreements pursuant to which amounts outstanding bear interest at the
lenders prime rate plus up to .50%. Accordingly, if we were to borrow funds
under such agreements, we expect that we will experience interest rate risk on
our debt.

In December 2001, we borrowed $8.75 million under a financing arrangement.
The principal amount outstanding bears interest at prime plus 1.0%.
Accordingly, if the prime rate were to fluctuate, we would experience interest
rate risk on our debt.

FOREIGN CURRENCY EXCHANGE RATE RISK

We transact business in various foreign countries, but we only have
significant assets deployed outside the United States in Europe. We have
effected intercompany advances and sold goods to our German subsidiary, 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. In the six months ended January 31,
2002 and 2001, we incurred foreign currency losses of $63,000 and $59,000,
respectively which are included in our selling, general and administrative
expenses. We do not operate a hedging program

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to mitigate the effect of a significant rapid change in the value of the
Euro or the Swiss franc 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. Our net sales can also be affected by a
change in the exchange rate because we translate sales of our subsidiaries at
the average rate in effect during a financial reporting period. At January 31,
2002, approximately $10.8 million in current intercompany advances and accounts
receivable from our foreign subsidiaries were outstanding. We can not assure
you that we will not sustain a significant loss if a rapid or unpredicted
change in value of the Euro or related European currencies should occur. We can
not assure you that such a loss would not have an adverse material effect on
our results of operations or financial condition.

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PART II
OTHER INFORMATION




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

The annual meeting of shareholders was held on February 5, 2002. The
shareholders elected the following seven directors to hold office until the
next annual meeting and until their successors are elected and qualified.

|                 |  |                 |            |          |  |  |        | 
|---------------- |  | --------------- | ---------- | -------- |  |  | ------ | 
|                 |  | NUMBER OF VOTES
|                 |  |                
|                 |  | FOR             |            | WITHHELD
|                 |  |                 |            |         
|Alex Razmjoo     |  |                 | 13,713,230 |          |  |  | 16,883 | 
|Nick Shahrestany |  |                 | 13,713,230 |          |  |  | 16,883 | 
|Kevin Michaels   |  |                 | 13,713,230 |          |  |  | 16,883 | 
|Frank Alaghband  |  |                 | 13,713,230 |          |  |  | 16,883 | 
|Dom Genovese     |  |                 | 13,713,230 |          |  |  | 16,883 | 
|Alex Aydin       |  |                 | 13,713,230 |          |  |  | 16,883 | 
|David Blake      |  |                 | 13,713,230 |          |  |  | 16,883 | 

In addition, the shareholders approved the following proposal:

|                                                                                                                   |  |                  |            |         |  |         |        |  |  |  |       | 
|------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | ------- |  | ------- | ------ |  |  |  | ----- | 
|                                                                                                                   |  | NUMBERS OF VOTES
|                                                                                                                   |  |                 
|                                                                                                                   |  | FOR              |            | AGAINST |  | ABSTAIN
|                                                                                                                   |  |                  |            |         |  |        
|To ratify the appointment of KPMG LLP as the
independent auditors of the Company for the
year ending July 31, 2002 |  |                  | 13,705,160 |         |  |         | 15,723 |  |  |  | 9,230 | 

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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 18th of March, 2002.

| |                                                              |                 
| | ------------------------------------------------------------ | ----------------
| | PROCOM TECHNOLOGY, INC.                                     
|
| | By:                                                          | /s/ Alex Razmjoo
| |                                                             
| | Alex Razmjoo
Chairman, President and
Chief Executive Officer

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

|                                |  |                                                                                            |  |               
|------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------
|SIGNATURES                      |  | TITLE                                                                                      |  | DATE          
|                                |  |                                                                                            |  |               
|/s/  Alex RazmjooAlex Razmjoo   |  | Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer) |  | March 18, 2002
|                               
|/s/  Robert RankinRobert Rankin |  | Chief Financial Officer                                                                    |  | March 18, 2002

24



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                            
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                            
|3.1     |  | Amended and Restated Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 in the Form S-1A filed on 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 on 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 filed on November 22, 2000)                                                                       
|4.1.1   |  | Amendment to Convertible Debenture (incorporated by reference to Exhibit 4.1.1 in the Form
S-3 filed on April 25, 2001)                                                                                                                    
|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    |  | Loan Agreement dated November 28, 2001 by and between the Registrant and First Bank & Trust                                                                                                                                                

25