~~Table~~Securities ofand ~~Contents~~Exchange Commission

~~Securities and Exchange Commission~~ Washington, DC 20549

REPORT ON FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~January 31~~April 30, 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)

(Exact name of registrant as specified in its charter)

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

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

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

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

~~Indicate by check mark whether the registrant~~ (1949) ~~has~~ ~~filed~~852-1000 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~~(Registrant’s ~~number~~telephone ~~of shares of Common Stock~~number, ~~$.01~~including ~~par~~area ~~value, outstanding~~code) ~~on March 1, 2002 was 16,023,633.~~

~~TABLE~~(Former OFname, ~~CONTENTS~~former address and former fiscal year, if changed since last report.)

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

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 ¨

~~Table~~The number of ~~Contents~~shares of Common Stock, $.01 par value, outstanding on June 12, 2002 was 16,023,633.

PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART 1 — FINANCIAL INFORMATION

			PAGE	~~PAGE~~
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of January 31, 2002 and July 31, 2001		2
	Condensed Consolidated Balance Sheets as of April 30, 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 Operations for the three and nine month periods ended April 30, 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 Shareholders’ Equity for the nine month period ended April 30, 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
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended April 30, 2002 and 2001		5
	Notes to Condensed Consolidated Financial Statements	~~Notes to Condensed Consolidated Financial Statements~~	6	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21	21
PART II — OTHER INFORMATION
SIGNATURES
Item 4.	Submission of Matters to Vote of Security Holders			23
SIGNATURES

~~Table~~PART ofI ~~Contents~~

~~PART~~FINANCIAL ~~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

CONDENSED CONSOLIDATED BALANCE SHEETS

~~The~~(UNAUDITED) ~~accompanying notes are an integral part of these condensed consolidated financial statements.~~

	APRIL 30, 2002			JULY 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	11,141,000		$	25,419,000
Accounts receivable, less allowances for doubtful accounts and sales returns of $11,793,000 and $6,412,000, respectively		7,565,000			11,979,000
Inventories		9,372,000			6,292,000
Income tax receivable and deferred income taxes		4,437,000			—
Prepaid expenses		1,463,000			1,184,000
Other current assets		276,000			310,000

Total current assets		34,254,000			45,184,000
Property and equipment, net		16,830,000			17,766,000
Other assets		1,917,000			2,259,000

Total assets	$	53,001,000		$	65,209,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	84,000		$	8,000
Current portion of long-term debt		172,000			—
Accounts payable		3,535,000			4,151,000
Flooring line obligation		496,000			531,000
Accrued expenses and other current liabilities		2,549,000			2,052,000
Accrued compensation		824,000			1,194,000
Deferred service revenues		717,000			447,000
Income taxes payable		—			33,000
Convertible debenture		—			9,726,000

Total current liabilities		8,377,000			18,142,000
Long-term debt, net of current portion		8,520,000			—

Total liabilities		16,897,000			18,142,000

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		58,700,000			58,575,000
Accumulated deficit		(22,603,000	)		(11,343,000	)
Accumulated other comprehensive loss		(153,000	)		(325,000	)

Total shareholders’ equity		36,104,000			47,067,000

Total liabilities and shareholders’ equity	$	53,001,000			65,209,000

~~Table~~See ofnotes ~~Contents~~to condensed consolidated financial statements.

~~PROCOM~~2 ~~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

PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~STATEMENTS ~~are~~OF anOPERATIONS ~~integral part of these condensed consolidated financial statements.~~

3 (UNAUDITED)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	APRIL 30, 2002			APRIL 30, 2001			APRIL 30, 2002			APRIL 30, 2001
Net sales	$	4,356,000		$	8,002,000		$	20,443,000		$	32,988,000
Cost of sales		2,599,000			4,829,000			11,286,000			20,319,000

Gross profit		1,757,000			3,173,000			9,157,000			12,669,000
Selling, general and administrative expenses		5,782,000			4,385,000			19,457,000			13,352,000
Research and development expenses		1,462,000			1,472,000			4,697,000			4,925,000
In-process research and development		—			—			—			4,262,000

Total operating expenses		7,244,000			5,857,000			24,154,000			22,539,000

Operating loss		(5,487,000	)		(2,684,000	)		(14,997,000	)		(9,870,000	)

Interest income		83,000			139,000			418,000			597,000
Interest expense		(203,000	)		(434,000	)		(1,154,000	)		(1,005,000	)

Loss before income taxes		(5,607,000	)		(2,979,000	)		(15,733,000	)		(10,278,000	)

Income tax provision (benefit)		(4,473,000	)		61,000			(4,473,000	)		(279,000	)

Net loss	$	(1,134,000	)	$	(3,040,000	)	$	(11,260,000	)	$	(9,999,000	)


Net loss per common share:
Basic and diluted	$	(0.07	)	$	(0.25	)	$	(0.70	)	$	(0.84	)


Weighted average number of common shares:
Basic and diluted		16,024,000			12,139,000			16,009,000			11,835,000

~~PROCOM~~See ~~TECHNOLOGY,~~notes ~~INC.~~to ~~AND~~condensed ~~SUBSIDIARIES CONDENSED~~consolidated ~~CONSOLIDATED~~financial ~~STATEMENTS~~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~~PROCOM ~~accompanying~~TECHNOLOGY, ~~notes~~INC. ~~are~~AND anSUBSIDIARIES ~~integral part of these condensed consolidated financial statements.~~

4 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

~~Table~~(UNAUDITED) ~~of Contents~~

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

	COMMON STOCK			ADDITIONAL PAID IN CAPITAL			RETAINED EARNINGS (ACCUMULATED DEFICIT)			ACC. OTHER COMPREHENSIVE GAIN (LOSS)			TOTAL
	SHARES	AMOUNT		ADDITIONAL PAID IN CAPITAL			RETAINED EARNINGS (ACCUMULATED DEFICIT)			ACC. OTHER COMPREHENSIVE 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	—		—		—			(11,260,000	)		—			(11,260,000	)
Foreign currency translation adjustment	—		—		—			—			172,000			172,000

Comprehensive loss	—		—		—			—			—			(11,088,000	)
Additional issuance costs relating to common stock public offering in fiscal 2001	—		—		(23,000	)		—			—			(23,000	)
Compensatory stock options	—		—		55,000			—			—			55,000
Issuance of stock to employees	25,569		—		70,000			—			—			70,000
Exercise of employee stock options	4,500		—		23,000			—			—			23,000


BALANCE AT APRIL 30, 2002	16,023,633	$	160,000	$	58,700,000		$	(22,603,000	)	$	(153,000	)	$	36,104,000

				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

See notes to condensed consolidated financial statements.

~~The~~4 ~~accompanying notes are an integral part of these condensed consolidated financial statements.~~

5 PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

~~Table~~CONDENSED ofCONSOLIDATED ~~Contents~~STATEMENTS OF CASH FLOWS

~~PROCOM~~(UNAUDITED) ~~TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 1. GENERAL.

	NINE MONTHS ENDED APRIL 30,
	2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,260,000	)	$	(9,999,000	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization		1,451,000			1,014,000
Amortization of debt issuance costs related to stock warrant		274,000			95,000
Compensatory stock options		55,000			30,000
In-process research and development		—			4,262,000
Deferred income taxes		—			(310,000	)
Changes in operating accounts:
Accounts receivable		4,414,000			(6,838,000	)
Inventories		(3,080,000	)		(1,358,000	)
Income tax receivable and deferred income taxes		(4,470,000	)		2,673,000
Prepaid expenses		(279,000	)		(1,289,000	)
Other current assets		34,000			(71,000	)
Other assets		(19,000	)		64,000
Accounts payable		(616,000	)		(3,125,000	)
Accrued expenses and compensation		127,000			460,000
Deferred service revenues		270,000			(58,000	)
Income taxes payable		—			115,000

Net cash used in operating activities		(13,099,000	)		(14,335,000	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(154,000	)		(1,860,000	)
Acquisition of business, net of cash acquired		—			(250,000	)

Net cash used in investing activities		(154,000	)		(2,110,000	)

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		8,692,000			(10,750,000	)
Net borrowings on lines of credit		76,000			3,980,000
Flooring line obligation		(35,000	)		(364,000	)
Proceeds from exercise of stock options		23,000			671,000
Common stock issuance costs		(23,000	)		—
Issuance of common stock to employees		70,000			145,000

Net cash provided by (used in) financing activities		(1,197,000	)		8,682,000
Effect of exchange rate changes		172,000			(67,000	)

Decrease in cash and cash equivalents		(14,278,000	)		(7,830,000	)
Cash and cash equivalents at beginning of period		25,419,000			15,515,000

Cash and cash equivalents at end of period	$	11,141,000		$	7,685,000

Supplemental disclosures of cash flow information:
CASH PAID (RECEIVED) DURING THE PERIOD:
Interest	$	694,000		$	235,000
Income taxes	$	—		$	(2,759,000	)
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Common stock warrant issued to convertible debenture investor	$	—		$	562,000

~~The~~See ~~accompanying~~notes ~~financial information is unaudited, but in the opinion of management, reflects all adjustments (which include only normal recurring adjustments) necessary~~ to ~~present~~condensed ~~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~~5 ~~2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES.~~

~~The~~PROCOM ~~preparation of the condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets~~TECHNOLOGY, ~~liabilities, revenues and expenses, and related disclosure of contingent liabilities~~INC. OnAND anSUBSIDIARIES 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~~NOTES ~~Company~~TO ~~believes~~CONDENSED ~~the~~CONSOLIDATED ~~following~~FINANCIAL ~~critical~~STATEMENTS ~~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~~NOTE ~~and resellers~~1. ~~Revenue is generally recorded upon product shipment~~ GENERAL. 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~~accompanying ~~maintains~~financial ~~allowances~~information ~~for~~is ~~doubtful~~unaudited, ~~accounts~~but ~~for~~in ~~estimated~~the opinion of ~~losses~~management, ~~resulting~~reflects ~~from~~all adjustments (which include only normal recurring adjustments) necessary to present fairly the ~~inability~~financial position of Procom Technology, Inc. and its ~~customers~~consolidated tosubsidiaries ~~make~~(the ~~required~~“Company”) ~~payments.~~as of the dates Ifindicated and the results of operations and cash flows for the periods then ended. Certain information and footnote disclosures normally included in financial ~~condition~~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’s ~~customers~~believes ~~were~~that the disclosures are adequate to ~~deteriorate~~make the information presented not misleading, ~~resulting~~the financial information should be read in anconjunction ~~impairment~~with ofthe ~~their~~audited ~~ability~~financial tostatements ~~make~~and ~~payments,~~notes orthereto ifincluded in the Company’s ~~receivable~~Report ~~aging~~on ~~continues~~Form to10-K ~~lengthen~~for fiscal 2001. Results for ~~some~~the ofinterim ~~our~~periods ~~European~~presented are not necessarily ~~customers,~~indicative ~~additional~~of ~~allowances~~the ~~may~~results befor ~~required~~the entire year.

~~The~~NOTE 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 conditions2. CRITICAL IfACCOUNTING ~~actual market~~POLICIES ~~conditions~~AND ~~are less favorable than those projected by management, additional inventory write-downs may be required~~ESTIMATES.

~~NOTE~~The 3preparation 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. ~~INVENTORIES~~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.

~~Inventories~~The ~~are~~Company ~~summarized~~believes asthe ~~follows:~~following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

	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

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.

6The 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, additional allowances may be required.

~~Table~~The Company writes down its inventory for estimated obsolescence equal to the difference between the cost of ~~Contents~~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 43. ~~NET LOSS PER SHARE~~ INVENTORIES.

~~Basic~~Inventories ~~net~~are ~~loss~~summarized 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~~follows: ~~effect would have been antidilutive.~~

NOTE 5. COMPREHENSIVE LOSS.

	April 30, 2002		July 31, 2001
Raw materials	$	3,587,000	$	2,472,000
Work in process		872,000		283,000
Finished goods		4,913,000		3,537,000

Total	$	9,372,000	$	6,292,000

~~For~~6 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 64. NET ~~BUSINESS~~LOSS ~~SEGMENT~~PER ~~INFORMATION~~SHARE.

~~The~~Basic ~~Company~~net ~~operates~~loss inper ~~one~~share ~~industry~~is ~~segment:~~computed ~~The~~using ~~design,~~the ~~manufacture~~weighted ~~and marketing~~average number of ~~data~~shares ~~storage~~of ~~devices.~~common ~~The~~stock ~~Company~~outstanding ~~has~~during ~~two~~the ~~major~~period. ~~distinct product~~Diluted ~~families:~~net ~~network~~loss ~~attached~~per ~~storage~~share ~~products~~is ~~(“NAS”)~~computed ~~and~~using ~~other~~the ~~data~~weighted ~~storage products~~average ~~(“Legacy”),~~number ~~which~~of ~~includes~~shares ~~disk~~of ~~drive~~common ~~storage~~stock ~~upgrade~~outstanding ~~systems, CD/DVD-ROM~~and ~~servers~~potentially ~~and~~dilutive ~~arrays~~common ~~and~~shares ~~tape~~outstanding ~~backup~~during ~~products~~the period. ~~Net~~Potentially ~~sales~~dilutive common shares consist of ~~NAS~~stock options and warrants. ~~products~~For ~~represented~~the ~~83%~~periods presented, basic and ~~76%~~diluted net loss per share was based on the weighted average number of ~~total~~shares ~~product~~of ~~net~~common ~~sales~~stock ~~for~~outstanding during the ~~three months~~period. ~~ended~~As ~~January 31~~of April 30, 2002 and 2001, ~~respectively,~~stock options and ~~83%~~warrants to purchase 2,048,569 shares and ~~67%~~1,000,871 shares, respectively of ~~total net~~common ~~sales~~stock ~~for~~were ~~the~~outstanding. ~~six~~The ~~months~~dilutive ~~ended~~effect ~~January 31,~~of ~~2002~~these stock options and ~~2001,~~warrants ~~respectively~~were not included in the computation of net loss per share as the effect would have been antidilutive.

~~International~~NOTE 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, respectively5. ~~International~~ COMPREHENSIVE ~~sales were primarily to European customers~~LOSS. ~~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~~nine months ended ~~January 31~~April 30, 2002 and 2001, ~~four~~the ~~customers~~only ~~accounted~~differences ~~for 24%~~between ofreported net ~~sales,~~loss ~~while~~and ~~one~~comprehensive ~~customer~~loss ~~accounted~~was ~~for~~a ~~20%~~foreign currency translation adjustment of ~~net~~$172,000 ~~sales~~and ~~for~~$(67,000), respectively. For the ~~six~~ three months ended ~~January 31~~April 30, 2002 and 2001, the only differences between reported net loss and comprehensive loss was a foreign currency translation adjustment of $147,000 and $(29,000), respectively.

NOTE 76. BUSINESS ~~LINES~~SEGMENT ~~OF CREDIT, CONVERTIBLE DEBENTURE AND LONG-TERM DEBT~~INFORMATION.

OnThe ~~October 10, 2000, the~~ Company ~~entered~~operates ~~into~~in aone ~~term~~industry ~~loan~~segment: ~~agreement and a three-year working capital line of credit with~~ The ~~CIT Group/Business Credit (“CIT”). A term loan of $4.0 million~~design, ~~due~~manufacture and ~~payable~~marketing ~~upon the Company’s finalization~~ of adata ~~long-term~~storage ~~mortgage on its corporate headquarters or paid in 12 monthly installments commencing April 1, 2001, was fully repaid in May 2001~~devices. An ~~initial term loan of $1.0 million, due and payable in 90 days, was fully repaid on November 1, 2000.~~ The ~~term~~Company ~~loans~~has ~~under~~two ~~the~~major ~~agreement~~distinct ~~incurred interest~~product atfamilies: ~~the~~network ~~lender’s~~attached ~~prime~~storage ~~rate, plus .5%, with increases if the~~products ~~outstanding~~(“NAS”) ~~principal~~and ~~was~~other ~~not~~data ~~reduced~~storage ~~according~~products ~~to a fixed amortization. The working capital line of credit allows for the Company to borrow~~(“Legacy”), onwhich aincludes ~~revolving basis,~~disk ~~for~~drive astorage ~~period~~upgrade ~~of three years~~systems, aCD/DVD-ROM ~~specified~~servers ~~percentage~~and ofarrays ~~its~~and ~~eligible accounts~~tape ~~receivable~~backup ~~(approximately $2~~products.~~3 million~~ atNet ~~January 31,~~sales ~~2002), up to a limit~~ of ~~$5.0 million.~~NAS ~~Amounts~~products ~~outstanding~~represented ~~under the working capital line bear interest at the lender’s prime rate plus~~ 73.252%. Atand ~~January 31, 2002, no amounts were outstanding under the various credit arrangements~~72.5% ~~The~~of ~~lender~~total ~~charged~~product ~~approximately~~net ~~$130,000~~sales for the ~~credit~~three ~~facility~~months ~~which~~ended isApril ~~being~~30, ~~amortized~~2002 ~~as interest~~and ~~expense~~2001, ~~over the term of the credit agreement. The line of credit accrues various monthly maintenance~~respectively, ~~minimum usage~~ and ~~early termination fees~~80. ~~The~~5% ~~line~~and ~~of credit is collateralized by certain assets of the Company~~67.1% ~~The line~~ of ~~credit~~total ~~requires~~net ~~certain~~sales ~~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~~nine ~~period~~months ended onApril ~~January 31~~30, 2002, ~~the Company~~and ~~was~~2001, ~~not in compliance with the minimum EBITDA requirement~~respectively. ~~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.~~

InInternational ~~addition~~sales toas ~~the~~a ~~CIT~~percentage ~~line~~ of ~~credit~~net ~~noted~~sales ~~above,~~amounted ~~the Company has a flooring line with IBM Credit, which has committed~~ to ~~make $2~~3.~~5 million~~3% ~~in flooring~~and ~~inventory~~50.0% ~~commitments~~for ~~available to~~ the ~~Company.~~three Asmonths ofended ~~January 31~~April 30, 2002 and ~~July 31,~~ 2001, ~~we owed $946~~respectively,~~000~~ and ~~$531,000,~~39.0% ~~respectively,~~and ~~under the flooring line~~59.1% ~~The~~for ~~flooring line is collateralized by~~ the ~~specific inventory~~ ~~purchased~~nine ~~pursuant~~months toended ~~the~~April ~~flooring~~30, ~~commitments.~~2002 ~~CIT~~ and ~~IBM~~2001, ~~Credit~~respectively. ~~have~~International ~~entered into~~sales anwere ~~intercreditor~~primarily ~~agreement~~to ~~which~~European ~~determines the level of priority of either lender’s security interest~~customers. ~~The~~Identifiable ~~flooring~~assets ~~line~~used ~~requires~~in ~~the~~connection ~~maintenance by~~with the Company’s offoreign aoperations ~~minimum~~were ~~net worth of~~ $163.0 million. ~~The Company was in compliance with the terms of the flooring line~~ at ~~January 31~~April 30, 2002. ~~The flooring~~and ~~line~~$8.5 ~~also requires the Company not to be in default of any covenants~~million inat ~~the~~July ~~CIT agreement. IBM Credit has waived compliance with that requirement at January~~ 31, ~~2002~~2001.

OnFor ~~October 31, 2000,~~ the ~~Company~~nine ~~issued~~months aended ~~$15.0 million~~April ~~convertible unsecured~~30, ~~debenture~~2002, tono asingle ~~private~~customers ~~investor.~~accounted ~~The~~for ~~debenture~~more ~~carried~~than ~~interest at 6~~10.0% ~~per~~of net ~~annum~~sales, ~~and~~while ~~was~~two ~~repayable~~customers inaccounted ~~full~~for on13.4% ~~October 31,~~of ~~2003,~~net ~~unless~~sales ~~otherwise converted~~for ~~into~~ the ~~common~~nine ~~stock~~months ofended ~~the~~April ~~Company~~30, 2001. InAt ~~connection~~April ~~with~~30, ~~the issuance of the debenture~~2002, ~~the~~one ~~Company~~Italian ~~issued~~reseller toaccounted ~~the~~for ~~investor~~approximately a11.4% ~~5-year warrant to purchase up to 32,916 shares~~ of ~~its~~total ~~common~~accounts ~~stock at an initial exercise price of $32~~receivable.55 ~~per share, with the number of shares for~~

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

~~Table~~On October 10, 2000, the Company entered into a term loan agreement and a three-year working capital line of ~~Contents~~credit with The CIT Group/Business Credit (“CIT”). The first 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. Another 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 schedule. 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 $2.8 million at April 30, 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 April 30, 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 April 30, 2002, the Company was not in compliance with the minimum EBITDA requirement. The lender has not waived the Company’s non-compliance with this covenant for this period and does not intend to make advances under the line.

~~which~~In addition to the ~~warrant~~CIT isline ~~exercisable~~of ~~and~~credit noted above, the ~~exercise~~Company ~~price~~has ~~subject~~a flooring line with IBM Credit, which has committed to ~~antidilution~~ ~~adjustments~~make $2.0 ~~The~~million ~~value~~in offlooring inventory commitments available to the ~~warrant~~Company. As of ~~$562~~April 30,~~000~~ ~~was~~2002 ~~computed using~~and ~~the~~July ~~Black-Scholes~~31, ~~model~~2001, ~~with~~ the ~~following~~Company ~~assumptions:~~owed ~~Expected~~$496,000 ~~life~~and ~~— 5 years~~$531,000, ~~Risk~~respectively, ~~free~~under ~~interest~~the ~~rate~~flooring line. —The ~~6%,~~flooring ~~and~~line ~~Volatility~~is —collateralized ~~1.20.~~by Onthe ~~October 31, 2001,~~specific inventory purchased pursuant to the ~~debenture~~flooring ~~amount~~commitments. ~~repayable~~CIT ~~was~~and ~~$10,000,000~~IBM ~~with~~Credit have entered into an ~~unamortized warrant~~intercreditor ~~value~~agreement which determines the level of ~~$121,000,~~priority ~~for~~of either lender’s security interest. The flooring line requires the maintenance by the Company of a minimum net ~~debenture~~worth ~~value~~ of $~~9,879,000~~16.0 Inmillion. The Company was in compliance with the ~~second~~ ~~quarter~~terms of ~~fiscal~~the ~~2002~~flooring line at April 30, ~~the~~2002. ~~Company~~The ~~paid~~flooring ~~the~~line ~~investor~~also requires the ~~remaining~~Company ~~$10,000,000~~not ~~principal~~to ~~amount~~be ofin ~~the~~default ~~debentures~~of ~~and~~any ~~expensed~~covenants in the ~~remaining unamortized~~CIT ~~debt~~agreement. ~~issuance~~IBM ~~and~~Credit ~~warrant~~has ~~costs~~waived ofcompliance ~~$260,000~~with tothat ~~interest~~requirement ~~expense~~at April 30, 2002.

~~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.

InOn ~~December~~October ~~2001~~31, 2000, the Company ~~borrowed~~issued a $815.75 0 million ~~under~~convertible ~~a financing~~unsecured ~~arrangement~~debenture ~~secured~~to bya ~~the~~private ~~Company’s corporate headquarters~~investor. The ~~principal amount~~debenture ~~outstanding~~carried ~~bears~~ interest at ~~prime plus 1~~6.0% per annum, ~~but~~and ~~not~~was ~~less than~~repayable ~~7.0%~~in ~~per~~full ~~annum.~~on ~~Under~~October ~~certain~~31, ~~conditions~~2003, ~~the~~unless ~~Company~~otherwise ~~has~~converted into the ~~right~~common ~~to request~~stock ~~that portions~~ of the ~~principal~~Company. ~~amount~~In ~~outstanding~~connection ~~under~~with the ~~note~~issuance ~~shall bear~~of ~~interest~~the atdebenture, athe Company ~~LIBOR~~issued ~~based~~to ~~rate,~~the ~~but~~investor ~~not~~a ~~less~~5-year ~~than~~warrant ~~7.0%.~~to Aspurchase ofup ~~January 31~~to 32, ~~2002,~~916 ~~the~~shares ~~interest~~of ~~rate~~its oncommon ~~the~~stock ~~loan~~at ~~was~~an ~~7.0%.~~initial ~~Principal~~exercise ~~reduction~~price ~~payments~~ of $~~14,400~~32.55 ~~plus~~per ~~accrued~~share, ~~interest~~with ~~are~~the ~~due~~number ~~each~~of ~~month~~shares ~~beginning~~for ~~February 1,~~which ~~2002 with~~ the ~~remaining~~warrant ~~principal~~is ~~balance~~exercisable and ~~unpaid~~the ~~interest~~exercise ~~due~~price atsubject ~~the maturity~~to ~~date~~antidilution ofadjustments. ~~January 1,~~The ~~2007.~~value ~~Debt~~of ~~issuance~~the ~~costs~~warrant ~~totaled~~of $~~201~~562,~~800~~000 ~~and~~was ~~are~~computed ~~being amortized~~using ~~over~~ the ~~term~~Black-Scholes ofmodel, with the ~~loan.~~following Upassumptions: toExpected anlife ~~additional~~— ~~$1.0 million~~5 ~~may~~years, ~~be borrowed~~Risk ~~under~~free ~~this~~interest ~~financing~~rate ~~arrangement~~— to6%, ~~cover~~and ~~leasing~~Volatility ~~costs~~— ~~and~~1.20. ~~tenant~~In the second ~~improvements~~quarter onof ~~the~~fiscal ~~vacant~~2002, ~~unimproved~~the ~~space~~Company ~~within~~paid the ~~corporate~~investor ~~headquarters. As~~the ofremaining ~~January 31~~$10, ~~2002~~000,000 ~~the outstanding~~ principal ~~balance~~amount of the ~~loan~~debentures ~~totaled~~ and expensed the remaining unamortized debt issuance and warrant costs of $8274,000 to interest expense.~~75 million.~~

In ~~addition~~June to2001, the ~~line~~Company completed the sale of ~~credit~~3,800,000 ~~our~~shares ~~foreign~~of ~~subsidiaries~~common instock ~~Germany,~~raising gross proceeds of approximately $34.2 million ~~Italy~~before ~~and~~offering ~~Switzerland~~costs ~~have~~of ~~lines~~$2.7 million. As a result of ~~credit~~this ~~with~~offering, ~~banks~~the inexercise ~~their~~price ~~respective countries~~of ~~that~~the ~~are~~warrant ~~utilized~~was ~~primarily~~adjusted ~~for~~to ~~overdraft~~$27.95 and ~~short-term~~the ~~cash~~number ~~needs. At~~of ~~January 31,~~shares ~~2002,~~issuable upon exercise of the ~~amount~~warrant ~~outstanding~~pursuant ~~under~~to ~~these~~anti-dilution ~~lines~~provisions ~~was~~of ~~$39~~the warrant were adjusted to 38,~~000~~333.

~~NOTE~~In December 2001, the Company borrowed $8.75 ~~RECENT~~million ~~ACCOUNTING~~under ~~PRONOUNCEMENTS~~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 April 30, 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 April 30, 2002, the outstanding principal balance of the loan totaled $8.69 million.

In ~~July~~addition ~~2001,~~to the ~~Financial~~line ~~Accounting~~of ~~Standards Board (FASB) issued SFAS No. 141~~credit, ~~“Business~~our ~~Combinations,”~~foreign ~~and~~subsidiaries ~~SFAS~~in ~~No. 142~~Germany, ~~“Goodwill~~Italy and ~~Other Intangible~~Switzerland ~~Assets.”~~have ~~Under SFAS No. 141, all business combinations initiated~~lines ~~after~~of ~~June 30,~~credit ~~2001 must be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets~~ with ~~indefinite~~banks ~~lives~~in ~~are~~their norespective ~~longer amortized~~countries ~~but~~that are ~~reviewed~~utilized ~~annually~~primarily for ~~impairment~~overdraft ~~(or~~and ~~more~~short-term ~~frequently~~cash ~~if indicators of impairment arise)~~needs. ~~Separable~~At ~~intangible~~April 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~~2002, ~~2001,~~ the ~~Company~~ isamount ~~required~~outstanding tounder ~~adopt~~these ~~SFAS~~lines ~~No. 142~~was ~~effective August 1~~$84, ~~2002~~000.

AsNOTE 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 1428. RECENT ~~Amortization~~ACCOUNTING ~~expense related to goodwill was $241,000 and $102,000 for the six months ended January 31, 2002 and 2001, respectively~~PRONOUNCEMENTS. 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~~July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. ~~144~~ 141, “~~Accounting~~Business ~~for~~Combinations,” ~~Impairment or~~and ~~Disposal~~SFAS ofNo. ~~Long-Lived~~142, “Goodwill and Other Intangible Assets.” ~~SFAS~~Under ~~144 supersedes~~ SFAS No. ~~121~~ 141, all business ~~“Accounting~~combinations ~~for~~initiated ~~the~~after ~~Impairment~~June of30, ~~Long-Lived~~2001 ~~Assets~~must ~~and~~be accounted for ~~Long-Lived~~using ~~Assets to~~the Bepurchase ~~Disposed~~method. OfUnder SFAS No. 142,” goodwill and ~~addresses~~intangible ~~financial~~assets ~~accounting~~with ~~and~~indefinite ~~reporting~~lives are no longer amortized but are reviewed annually for ~~the~~ impairment (or ~~disposal~~more frequently if indicators of ~~long-lived~~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). ~~This~~The ~~statement~~amortization isprovisions ~~effective~~of ~~for~~SFAS No. 142 apply to ~~fiscal~~goodwill ~~years~~and ~~beginning~~intangible assets acquired after ~~December 15~~June 30, 2001. ~~Adoption~~With ofrespect ~~this~~to ~~statement will~~goodwill ~~not~~and ~~have~~intangible aassets ~~material~~acquired ~~impact~~prior onto July 1, 2001, the Company’s ~~consolidated~~is ~~financial position~~required orto ~~results~~adopt ofSFAS ~~operations~~No. 142 effective August 1, 2002.

~~ITEM~~As 2of 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 $630,000, all of which will be subject to the transition provisions of SFAS 141 and 142. ~~MANAGEMENT’S~~Amortization ~~DISCUSSION~~expense ~~AND~~related ~~ANALYSIS~~to OFgoodwill ~~FINANCIAL~~was ~~CONDITION~~$ ~~AND~~361,000 ~~RESULTS~~and OF$ ~~OPERATIONS~~221,000 for the nine months ended April 30, 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.

WeIn ~~develop~~October 2001, ~~manufacture~~the ~~and~~FASB ~~market~~issued ~~NAS~~SFAS ~~appliances~~No. ~~and~~144, ~~other~~“Accounting ~~storage devices~~ for aImpairment ~~wide~~or ~~range~~Disposal of ~~computer networks and operating systems. Our NAS appliances, which consist of our DataFORCE and NetFORCE product lines, provide end~~Long-~~users~~Lived ~~with faster access to data at a lower overall cost than other storage alternatives~~Assets.” WeSFAS ~~refer~~144 tosupersedes ~~these~~SFAS ~~products collectively as our NAS appliances~~No. ~~In addition~~121, we“Accounting ~~sell~~for ~~disk~~the ~~drive~~Impairment ~~storage upgrade systems, CD/DVD~~of Long-~~ROM~~Lived ~~servers~~Assets and ~~arrays~~ ~~and~~for ~~tape~~Long-Lived ~~backup~~Assets ~~products, which we refer~~ to ~~collectively~~Be asDisposed ~~our Legacy products. Over the last four years~~Of,” weand ~~have~~addresses ~~significantly~~financial ~~increased~~accounting ~~our~~and ~~focus on~~reporting for the ~~development~~impairment ~~and~~or ~~sale~~disposal of ~~NAS~~long-lived ~~appliances~~assets. WeThis ~~continue~~statement tois ~~develop~~effective ~~more advanced~~for ~~NAS~~fiscal ~~appliances~~years ~~and~~beginning ~~expect~~after ~~this~~December ~~business to be our principal business~~15, ~~in the future~~2001. WeAdoption ~~are currently analyzing the market demands and opportunities for all~~ of ~~our~~this ~~Legacy~~statement ~~products,~~is ~~and~~not weexpected ~~hope~~ to ~~transition~~have ~~users~~a ofmaterial ~~these products~~impact toon ~~our~~the ~~growing~~Company’s ~~line~~consolidated offinancial ~~more~~position ~~robust,~~or ~~generally~~results ~~higher~~of ~~margin NAS solutions~~operations.

8 NOTE 9. SUBSEQUENT EVENTS

~~Table~~The Job Creation and Worker’s Assistance Act of ~~Contents~~2002, signed by the President in February 2002, permits the Company to carry back certain of its previously recorded losses for 5 years instead of only 2 years. The Company previously had not believed it would be able to recover a tax benefit related to its prior year losses. As a result of the legislation, in April 2002, the Company filed amended tax returns for prior year losses, and in June 2002, the Company received a tax refund of $2.9 million. In addition, the Company anticipates that it will be able to recover approximately $2.3 million in additional tax refunds when it files its fiscal 2002 tax return, and carries expected fiscal 2002 operating losses back to previous periods. The Company has recorded in the current

~~Changing~~8 ~~Business Mix.~~

Wequarter ~~have experienced significantly reduced demand, revenues and gross margins for our Legacy products and, as~~ a ~~result,~~tax ~~have~~benefit ~~discontinued some~~ of ~~these~~ ~~Legacy products~~$2.9 ~~The~~million ~~demand~~plus ~~for~~a ~~our~~proportionate CDshare ~~servers~~of 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~~anticipated ofadditional ~~products~~refunds werelated 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~~fiscal ~~as a percentage of total sales, we expect our overall gross margins to be positively affected~~2002.

~~Our~~In ~~revenues~~May 2002, the employment of three executives of the Company was terminated. Pursuant to agreements executed between the Company and ~~gross~~the ~~margins~~executives ~~have~~at ~~been~~the time of termination, each executive will receive payments of $18,750 for 36 months, and ~~may~~each ~~continue~~will be entitled to beparticipate ~~affected~~in the Company’s employee benefit, health and other insurance plans for the 36 month byperiod. The Company anticipates that it will record a ~~variety~~charge for the severance obligations of ~~factors~~approximately ~~including:~~ $2.3 million in the quarter ended July 31, 2002.

•ITEM ~~new~~2. MANAGMENT’S ~~product~~DISCUSSION ~~introductions~~AND ~~and~~ANALYSIS ~~enhancements;~~OF •FINANCIAL ~~competition;~~CONDITION •AND ~~direct~~RESULTS ~~versus~~OF ~~indirect sales; • the mix and average selling prices of products; and • the cost of labor and components~~OPERATIONS.

~~Revenue~~We develop, manufacture and ~~Revenue~~market ~~Recognition~~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.

WeChanging ~~sell~~Business ~~NAS appliances primarily through direct sales channels and resellers~~Mix. 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~~have experienced significantly reduced demand, revenues and gross margins for our Legacy products ~~primarily~~and, ~~through~~as ~~distributors.~~a ~~Revenue~~result, ~~is recorded~~have ~~from~~discontinued some of these Legacy ~~sales~~products. The ~~when~~demand ~~the~~for ~~distributor~~our ~~receives~~CD ~~the~~servers ~~product.~~and ~~Our agreements~~arrays ~~with~~has declined and we have experienced increased pricing pressures on our ~~distributors~~disk ~~allow~~drive ~~limited~~storage ~~product~~upgrade ~~returns~~systems, ~~including~~resulting ~~stock balancing~~in ~~and~~lower ~~price~~overall ~~protection~~revenues ~~privileges~~and gross margins. WeOur ~~maintain~~gross ~~reserves,~~margins ~~which~~vary ~~are~~significantly by ~~adjusted~~product atline, ~~each~~and, ~~financial~~therefore, ~~reporting~~our ~~date,~~overall togross ~~estimate~~margin ~~anticipated~~varies ~~returns, including~~with ~~stock~~the ~~balancing~~mix ~~and~~of ~~price~~products ~~protection~~we ~~claims~~sell. For example, ~~relating~~our tosales ~~each reporting~~of ~~period.~~CD ~~The~~servers ~~reserves~~and ~~are~~arrays ~~based~~have onhistorically ~~historical~~generated ~~rates~~higher gross margins than those of ~~sales~~our tape back-up and disk drive products. ~~returns~~In future periods, ~~including~~as ~~price~~sales ~~protection~~of ~~and~~our ~~stock~~higher ~~balancing~~margin ~~claims,~~NAS ~~and~~appliances ~~the~~continue ~~level~~ to increase as a percentage of ~~our~~total ~~product~~sales, ~~held~~we byexpect our ~~customers~~overall ingross ~~their~~margins ~~inventory~~to be positively affected.

InOur ~~addition,~~revenues ~~under a product evaluation program established by us, our indirect channel partners~~ and ~~end-users~~gross ~~generally~~margins ~~are~~have ~~able~~been ~~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~~continue ~~if the customer needs additional time~~ to ~~evaluate~~be ~~the~~affected ~~product~~by ~~within the customer’s particular operating environment. The value of evaluation units at customer sites at~~ a ~~financial~~variety 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~~factors ~~of these~~including: 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~~• ofnew ~~Sales.~~ product introductions and enhancements;

~~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. competition;

~~Selling,~~• ~~General~~direct ~~and~~versus ~~Administrative~~indirect ~~Expenses.~~ sales;

~~Selling~~• ~~expenses consist primarily of costs directly associated with~~ the ~~selling~~ ~~process~~mix ~~such as salaries~~ and ~~commissions~~average ofselling ~~sales~~prices 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~~products; ~~costs are expensed as incurred.~~ and

~~Research~~• ~~and~~the ~~Development~~cost ~~Expenses~~of labor and components.

~~Research~~Revenue and ~~development~~Revenue ~~expenses consist of the costs associated with software and hardware development~~Recognition. 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.

9We 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.

~~Table~~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 ~~Contents~~sales and returns, including price protection and stock balancing claims, and the level of our product held by our customers in their inventory.

~~The~~In ~~following~~addition, ~~table~~under ~~sets~~a ~~forth~~product ~~consolidated~~evaluation ~~statement~~program ofestablished ~~operations~~by ~~data~~us, our asindirect channel partners and end-users generally are able to receive appliances on a ~~percentage~~trial ofbasis ~~net~~and ~~sales~~return ~~for~~the ~~each~~appliances ofwithin a specified period, generally 30-60 days, if they are not satisfied. The period may be extended if the ~~periods~~customer ~~indicated:~~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

			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~~finished ~~ACCOUNTING~~goods. ~~POLICIES~~At ~~AND~~April ~~ESTIMATES~~30, 2002 and July 31, 2001, inventory related to evaluation units was approximately $2.7 million and $2.2 million, respectively. We do not record evaluation units as sales until the customer has notified us of acceptance of these units.

~~The~~Cost ~~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 StatesSales. 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.

WeOur ~~believe~~cost of sales consists primarily of the ~~following~~cost ~~critical~~of ~~accounting~~components ~~policies~~produced ~~affect~~by our ~~more~~suppliers, such as disk drives, ~~significant~~cabinets, ~~judgments~~power supplies, controllers and ~~estimates~~CPUs, ~~used~~our indirect ~~the~~and ~~preparation~~indirect labor expenses and related overhead costs such as rent, utilities and manufacturing supplies and other expenses. In addition, cost of ~~our~~sales ~~condensed~~includes third party license fees, ~~consolidated~~warranty ~~financial~~expenses ~~statements~~and reserves for excess and obsolete inventory.

~~We sell NAS appliances primarily through direct sales channels and resellers. Revenue is generally recorded upon product shipment. We maintain reserves~~Selling, ~~which~~General 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~~Administrative ~~each financial reporting date, to estimate anticipated returns, including stock balancing and price protection claims, relating to each reporting period~~Expenses. 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.

WeSelling ~~maintain~~expenses ~~allowances~~consist ~~for~~primarily ~~doubtful~~of ~~accounts~~costs ~~for~~directly ~~estimated~~associated ~~losses resulting~~with ~~from~~ the ~~inability~~selling process such as salaries and commissions of ~~its~~sales personnel, ~~customers~~marketing, todirect ~~make~~and ~~required~~cooperative ~~payments~~advertising and travel expenses. IfGeneral ~~the financial~~and ~~condition~~administrative ofexpenses include our ~~customers~~general ~~were~~corporate ~~to deteriorate~~expenses, ~~resulting~~such inas ~~an impairment~~salaries ofand ~~their~~benefits, ~~ability~~rent, toutilities, ~~make~~bad ~~payments~~debt expense, orlegal ifand ~~our~~other ~~receivable aging~~professional ~~continues~~fees toand ~~lengthen~~expenses, ~~for~~depreciation ~~some~~and amortization of ~~our~~goodwill. ~~European~~These ~~customers,~~costs ~~additional~~are ~~allowances may~~expensed beas ~~required~~incurred.

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

~~COMPARISON~~Research OFand ~~THREE~~development ~~AND~~expenses ~~SIX~~consist ~~MONTHS~~of ~~ENDED~~the ~~JANUARY~~costs 31associated with software and hardware development. Specifically, these ~~2002~~costs ~~AND~~include ~~2001~~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.

~~Net~~The ~~sales~~following ~~decreased~~table bysets ~~33.3%~~forth toconsolidated ~~$7.8 million~~statement ~~for~~of ~~the~~operations ~~three~~data ~~months~~as ~~ended January 31, 2002, from $11.7 million for the three months ended January 31, 2001. The decrease resulted from~~ a ~~decrease~~percentage ~~in sales~~ of ~~our NAS and~~ ~~Legacy~~net ~~products. Net~~ sales ~~decreased 35.6% to $16.1 million~~ for ~~the~~ ~~six~~each ~~months~~of ~~ended January 31, 2002, from $25.0 million in~~ the ~~comparable period~~periods ofindicated: 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.

	THREE MONTHS ENDED APRIL 30,				NINE MONTHS ENDED APRIL 30,
	2002		2001		2002		2001
STATEMENT OF OPERATIONS

Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	59.7		60.3		55.2		61.6

Gross profit	40.3		39.7		44.8		38.4
Operating expenses:
Selling, general and administrative	132.7		54.8		95.2		40.5
Research and development	33.6		18.4		23.0		14.9
In-process research and development	—		—		—		12.9

Total operating expenses	166.3		73.2		118.2		68.3

Operating loss	(126.0	)	(33.5	)	(73.4	)	(29.9	)
Interest expense, net	(2.7	)	(3.7	)	(3.6	)	(1.2	)

Loss before income taxes	(128.7	)	(37.2	)	(77.0	)	(31.1	)
Provision (benefit) for income taxes	(102.7	)	0.8		(21.9	)	(0.8	)

Net loss	(26.0	)%	(38.0	)%	(55.1	)%	(30.3	)%

~~Table~~CRITICAL ofACCOUNTING ~~Contents~~POLICIES AND ESTIMATES.

~~Net~~The ~~sales~~discussion and analysis of our ~~NAS~~financial ~~products~~condition ~~decreased~~and ~~23.5%~~results toof ~~$6.5 million~~operations ~~for~~are ~~the three~~based ~~months~~upon ~~ended~~our ~~January 31,~~condensed ~~2002~~consolidated financial statements, ~~from~~which ~~$8.5 million~~have ~~for~~been ~~the~~prepared ~~comparable period~~in accordance with accounting principles generally accepted in ~~fiscal~~the ~~2001~~United States. ~~Net~~The ~~sales~~preparation of ~~our~~these ~~NAS~~financial ~~products~~statements ~~decreased~~requires ~~18.9%~~us to ~~$13.3 million~~make ~~for~~estimates ~~the~~and ~~six~~judgments ~~months~~that ~~ended~~affect ~~January 31~~the reported amounts of assets, ~~2002~~liabilities, ~~from~~revenues ~~$16.4 million~~and ~~for~~expenses, ~~the prior~~and ~~year.~~related ~~Excluding~~disclosure ~~sales~~ of $5contingent liabilities.~~0 million~~ toOn aan ~~European~~on-going ~~storage~~basis, ~~service provider~~we inevaluate ~~fiscal~~our ~~2001~~estimates, ~~that~~including ~~were~~those ~~not~~related ~~repeated~~to inproduct ~~fiscal 2002~~returns, ~~NAS~~bad ~~sales increased~~debts, ~~$1.9 million~~inventories, orand 16contingencies.~~7%,~~ ~~for~~We ~~the~~base ~~six~~our estimates ~~months~~on ~~ended~~historical ~~January 31,~~experience ~~2002 compared~~and toon ~~the~~various ~~same~~other ~~period~~assumptions inthat ~~fiscal~~are ~~2001.~~believed Asto abe ~~percentage~~reasonable ofunder ~~total~~the ~~net sales~~circumstances, ~~NAS~~the ~~product~~results ~~sales~~of ~~increased~~which toform ~~82.8%~~the ~~from~~basis ~~76.2%~~for making judgments about the carrying values of assets and toliabilities ~~82.5%~~that are not readily apparent from 66other sources.~~6% for~~ ~~the~~Actual ~~three~~results ~~and~~may ~~six~~differ ~~months~~from ~~ended~~these ~~January 31,~~estimates ~~2002~~under ~~and~~different ~~2001,~~assumptions ~~respectively~~or conditions.

~~International~~We ~~sales~~believe ~~were $4.2 million, or 53.7% of our net sales, for~~ the ~~three~~ ~~months~~following ~~ended~~critical ~~January 31,~~accounting ~~2002,~~policies ~~compared~~affect ~~to $7.4 million, or 62.8% of~~ our ~~net~~ ~~sales,~~more ~~for~~significant ~~the~~judgments ~~three~~and ~~months~~estimates ~~ended~~used ~~January 31,~~in ~~2001. International sales were $8.3 million, or 51.5% of our net sales, for~~ the ~~six~~preparation ~~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~~condensed ~~experience~~consolidated ~~improves~~financial ~~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~~statements.

~~Gross~~We ~~profit~~sell ~~decreased~~NAS ~~23.9%~~appliances toprimarily ~~$3.5 million~~through ~~for~~direct ~~the~~sales ~~three~~channels ~~months~~and ~~ended January 31,~~resellers. ~~2002,~~Revenue ~~from~~is ~~$4.6 million~~generally ~~for~~recorded ~~the~~upon ~~three~~product ~~months~~shipment. ~~ended~~We maintain ~~January 31~~reserves, ~~2001.~~ ~~Gross~~which ~~profit~~are ~~for~~adjusted ~~the~~at ~~six~~each ~~month~~reporting ~~period ended January 31~~date, ~~2002 decreased 22.1%~~ to ~~$7.4 million~~estimate ~~from~~anticipated ~~$9.5 million~~returns ~~for~~based ~~the~~on ~~same~~historical ~~period~~rates ~~the~~of ~~prior~~sales ~~fiscal year~~returns. ~~The~~In ~~decrease~~addition, inwe ~~gross~~sell ~~profit~~service contracts for ~~both~~certain ~~periods~~of ~~was~~our ~~due~~appliances ~~primarily~~that toextend ~~lower overall~~for ~~sales.~~a ~~Gross~~specified ~~margins~~period ~~increased~~of time, tousually ~~44.9%~~one ~~and~~to 46three years.0% ofRevenue ~~net~~from ~~sales~~these ~~for~~service ~~the three~~contracts ~~and~~is ~~six~~recorded ~~months~~ratably ~~ended~~over ~~January 31,~~the ~~2002~~life ~~and~~of ~~2001,~~the ~~respectively,~~service ~~from 39~~agreement.~~4% and~~ ~~38.0%~~We ofsell ~~net~~our ~~sales~~Legacy ~~for~~products ~~the~~primarily ~~comparable~~through ~~three~~distributors. ~~and~~Revenue ~~six~~from ~~month~~these ~~periods~~Legacy insales ~~fiscal 2001.~~is ~~The~~recorded ~~increase~~when inthe distributor ~~gross~~receives ~~margin~~the ~~was~~product. ~~primarily~~The ~~the~~agreements ~~result~~with ofour ~~the~~distributors ~~higher percentage~~allow oflimited ~~NAS~~product ~~sales~~returns, ~~which~~including ~~have~~stock ~~higher~~balancing ~~margins~~and ~~than~~price ~~non-NAS~~protection ~~products.~~

~~Selling,~~10 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~~privileges.~~7 million~~ ~~from~~We ~~$9.0 million~~maintain ~~for the comparable period of fiscal 2001. In the first six months of fiscal 2002~~reserves, ~~we increased~~which ~~our~~are ~~accounts~~adjusted ~~receivable~~at ~~reserves~~each ~~by $3.8 million due to the~~ financial ~~instability~~ ofreporting ~~three~~date, ~~of our international customers and~~ to ~~reflect~~estimate ~~the~~anticipated ~~aging~~returns, ofincluding stock ~~accounts~~balancing ~~receivable from the Swiss~~ and ~~Italian~~price ~~customers~~protection ~~referred to above. Beginning in the third quarter of fiscal 2002~~claims, werelating ~~implemented numerous initiatives~~ to ~~improve~~each ~~our~~reporting ~~international~~period. ~~credit~~The ~~and~~reserves ~~collection~~are ~~efforts, including~~based ~~the~~on ~~implementation~~historical rates of ~~more~~sales ~~stringent credit policies~~ and ~~procedures.~~ ~~However~~returns, noincluding ~~assurance~~stock ~~can~~balancing ~~be given that any improvements to the credit~~ and ~~collection~~price ~~policies~~protection ~~and procedures will result in better collections in the future. Excluding the additional provision for accounts receivable~~claims, ~~selling,~~ ~~general~~ and ~~administrative expenses for~~ the ~~six~~level ~~months~~of ~~ended~~our ~~January 31,~~product ~~2002~~held ~~increased~~ by ~~$0.9 million~~our ~~from~~customers in their ~~levels~~inventory. ~~for~~If ~~the~~we ~~comparable~~were ~~period of fiscal 2001, due primarily~~ to ~~increased~~experience ~~sales~~a ~~and~~significant ~~administrative~~increase ~~salaries and commissions~~ in ~~support~~product ~~of NAS~~ sales returns, ~~increased~~incremental ~~general~~sales ~~administrative expenses~~reserves ~~and~~may ~~currency~~be ~~translation losses as the U~~required.S. ~~dollar strengthened against both the Euro and Swiss Franc during this six month period.~~

~~Research~~We ~~and~~maintain ~~development~~allowances ~~expenses~~for ~~decreased~~doubtful ~~5.8%~~accounts tofor ~~$1.6 million,~~estimated orlosses ~~20.3% of~~resulting ~~net~~from ~~sales in~~ the ~~second~~inability ~~quarter~~ of ~~fiscal~~its ~~2002~~customers ~~from~~to ~~$1.7 million,~~make orrequired 14payments.~~3% of~~ ~~net~~If ~~sales, for~~ the ~~comparable~~financial ~~period~~condition of ~~fiscal~~our ~~2001.~~customers ~~For~~were ~~the~~to ~~six months ended January 31~~deteriorate, ~~2002,~~resulting ~~research~~in ~~and development expenses decreased 6.3% to~~an ~~$3.2 million,~~impairment ~~or 20.1%~~ of ~~net~~their ~~sales,~~ability ~~from~~to ~~$3.5 million,~~make ~~or 13.8% of net sales~~payments, 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~~allowances ~~software~~may ~~programmers~~be ~~and hardware developers~~required.

~~In-process~~We ~~research~~write ~~and~~down ~~development.~~our Ininventory for ~~December~~estimated ~~2000,~~obsolescence weequal ~~acquired~~to the ~~outstanding~~ ~~shares~~difference ofbetween ~~Scofima Srl, an Italian company engaged in software development. We employed an appraiser to value~~ the ~~assets~~cost of ~~Scofima,~~inventory and the ~~appraiser~~ ~~assigned~~estimated amarket value ofbased ~~approximately~~upon ~~$4.3 million~~assumptions ~~for~~about ~~the~~future ~~research~~demand and ~~development~~ ~~expenses~~market ~~relating~~conditions. toIf ~~software~~actual ~~being~~market ~~developed~~conditions byare ~~Scofima~~less ~~which~~favorable ~~has not~~than ~~yet~~those ~~reached~~projected ~~technological feasibility~~by management, ~~and~~additional ~~for~~inventory ~~which~~write-downs nomay ~~alternative~~be ~~future use is available~~required. ~~We incurred this charge in the second quarter of fiscal 2001.~~

~~Interest~~COMPARISON ~~income~~OF ~~decreased~~THREE ~~39.0%~~AND toNINE ~~$144,000~~MONTHS ~~for~~ENDED ~~the~~APRIL ~~three months ended January 31~~30, 2002, ~~from~~AND ~~$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.

11Net sales decreased by 45.0% to $4.4 million for the three months ended April 30, 2002, from $8.0 million for the three months ended April 30, 2001. The decrease resulted from a decline in product sales in international markets for our NAS and Legacy products partially offset by a 47% increase in domestic NAS product sales in fiscal 2002. Net sales decreased 38.1% to $20.4 million for the nine months ended April 30, 2002, from $33.0 million in the comparable period of fiscal 2001. The decrease was due to lower international sales of our NAS and Legacy products partially offset by an increase in domestic NAS product sales in fiscal 2002.

~~Table~~Net sales of ~~Contents~~our NAS products decreased 44.8% to $3.2 million for the three months ended April 30, 2002, from $5.8 million for the comparable period in fiscal 2001. Net sales of our NAS products decreased 25.3% to $16.5 million for the nine months ended April 30, 2002, from $22.1 million for the prior year. The decrease was due primarily to a decline in international NAS product sales partially offset by an increase in domestic NAS sales of 47% and 25% for the three and nine months ended April 30, 2002, respectively, compared to the comparable periods in fiscal 2001. As a percentage of total net sales, NAS product sales increased to 73.1% from 72.4% and to 80.5% from 68.0% for the three and nine months ended April 30, 2002 and 2001, respectively.

~~Interest~~International ~~expense~~sales ~~increased~~were $0.14 million, or 3.53% toof ~~$437~~our net sales,~~000~~ for the three months ended ~~January 31~~ April 30, 2002, ~~from~~compared to $~~423~~4.0 million,~~000~~ or 50.0% of our net sales, for the ~~comparable~~three ~~period~~months ofended ~~fiscal~~April 30, 2001. ~~For~~ International sales were $8.0 million, or 39.0% of our net sales, for the ~~six~~nine months ended ~~January 31~~April 30, 2002, ~~interest~~compared ~~expense~~to ~~increased~~$19.4 66million, or 58.69% ~~to $951,000~~of ~~from~~net ~~$571~~sales,~~000~~ for the comparable period of fiscal 2001. The ~~increase~~ decrease was due primarily to ~~the~~lower ~~issuance~~overall sales of ~~the~~NAS ~~$15.0 million~~and ~~convertible~~Legacy ~~debenture~~products ~~on October 31~~to international customers, ~~2000~~primarily ~~and~~in ~~the~~Asia ~~amortization~~and ofEurope, ~~debt~~in ~~issuance~~fiscal ~~costs~~2002.

~~Income~~Gross ~~tax~~profit ~~provision~~decreased ~~(benefit)~~43.7% ~~For~~to ~~the~~$1.8 ~~three~~million ~~and~~for ~~six~~the three months ended ~~January 31~~ April 30, 2002, wefrom ~~recorded~~$3.2 nomillion ~~tax~~for ~~benefit~~the asthree wemonths ~~recorded~~ended aApril ~~valuation~~30, 2001. Gross profit for the ~~allowance~~nine ~~equal~~month period ended April 30, 2002 decreased 27.5% to $9.2 million from $12.7 million for the ~~deferred~~same ~~tax~~period ~~asset~~the prior fiscal year. The ~~realization~~decrease in gross profit for both periods was due primarily to lower overall sales. Gross margins increased to 40.3% and 44.8% of net sales for the ~~tax~~three ~~benefits relating~~and tonine ~~our~~months ended April 30, 2002 and for the comparable three and nine month periods in fiscal 2001, from 39.7% and 38.4% of net ~~deferred~~sales. ~~tax~~The ~~asset~~increase ~~will~~in begross ~~dependent~~margin onwas ~~our~~primarily ~~ability~~the toresult of the ~~return~~higher topercentage ~~profitability~~of NAS sales, which have higher margins than non-NAS products.

~~LIQUIDITY~~Selling, ~~AND~~general ~~CAPITAL~~and administrative ~~RESOURCES~~expenses increased 31.8% to $5.8 million for the three months ended April 30, 2002, from $4.4 million for the three months ended April 30, 2001, and increased as a percentage of net sales to 132.7% from 54.8%. In the third quarter of fiscal 2002, we increased our accounts receivable reserves $1.1 million to reflect the aging of certain accounts receivable from customers in Europe and Asia. Excluding this additional provision, selling, general and administrative expenses for the third quarter of fiscal 2002 increased by $0.3 million over their levels for the third quarter of fiscal 2001 due primarily to increased sales and administrative salaries and commissions in support of NAS sales, increased general administrative expenses partially offset by currency translation gains as the Euro and Swiss Franc strengthened against the U.S. dollar during the third quarter of fiscal 2002.

AsFor ofthe ~~January 31~~nine months ended April 30, 2002, selling, general and administrative expenses increased to $19.5 million from $13.4 million or 45.5% for the comparable period of fiscal 2001. In the first nine months of fiscal 2002, we ~~had~~increased ~~cash~~our ~~and~~accounts ~~cash~~receivable ~~equivalents~~reserves ~~totaling~~by $164.6 9 million due to the financial instability of three of our international customers and to reflect the aging of certain accounts receivable from customers in Europe and Asia referred to above. Excluding the additional provision for accounts receivable, selling, general and administrative expenses for the nine months ended April 30, 2002 increased by $1.2 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 partially offset by reduced advertising and marketing costs during

~~Net~~11 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~~this ~~cash~~nine ~~used~~month ~~in investing activities of $0~~period.~~1 million~~ ~~for~~In ~~the six months ended January 31~~addition, ~~2002~~until ~~was~~our ~~the~~collection ~~result~~experience ofimproves, ~~purchases~~beginning ~~of property and equipment. Net cash used~~ in ~~investing activities of $2.0 million for~~ the ~~six~~second ~~months~~quarter ~~ended January 31, 2001 was primarily the result~~ of ~~expenditures~~fiscal of2002 ~~$1.5 million~~we toare recording ~~complete~~revenue ~~our~~from ~~corporate~~certain ~~headquarters~~European ~~and~~countries ~~$0.3 million~~on ~~for~~a ~~other~~cash ~~property and equipment~~basis.

~~Net~~Research ~~cash~~and ~~used~~development byexpenses ~~financing~~remained ~~activities~~the ofsame at $01.~~7 million~~5 ~~for the six months ended January 31~~million, ~~2002~~or ~~was~~33.5% ~~primarily the result~~ of anet ~~$10.0 million~~sales ~~repayment~~in of the ~~convertible~~third ~~debenture,~~quarter ~~long-term borrowings~~ of ~~$8.8 million~~fiscal ~~under~~2002 ~~a financing arrangement secured by our corporate headquarters~~ and ~~an increase in our flooring line of $0~~18.4 ~~million.~~% ~~Net~~of ~~cash~~net ~~provided~~sales, byfor ~~financing~~the ~~activities~~comparable period of $8 fiscal 2001.~~4 million~~ ~~for~~For the ~~six~~nine months ended ~~January 31~~April 30, ~~2001~~2002, ~~was~~research ~~the~~and ~~result~~development ofexpenses ~~the issuance~~decreased of4.0% ato $154.~~0 million~~7 ~~convertible debenture~~million, ~~borrowings~~or 23.0% of ~~approximately $3.5 million~~net ~~under~~sales, ~~the~~from ~~term~~$4.9 ~~loan~~million, ~~line~~or 14.9% of ~~credit~~net ~~agreement~~sales, ~~with~~in ~~The~~the ~~CIT Group/Business~~same ~~Credit~~period ~~and~~in ~~approximately~~fiscal $02001.~~7 million~~ inThe ~~stock~~dollar ~~option~~decrease ~~exercises and~~was ~~employee~~due ~~stock~~primarily ~~purchases,~~to reduced byexpenses ~~the~~for ~~repayment~~outside ofprogrammers ~~approximately~~slightly ~~$10.8 million~~offset inby ~~loans~~increased ~~previously~~compensation ~~secured~~expense byfor ~~our~~additional ~~commercial~~NAS software ~~paper~~programmers ~~portfolio~~and hardware developers.

OnIn-process ~~October 10,~~research ~~2000, we entered into a term loan agreement~~ and ~~a three-year~~development ~~working~~relates ~~capital~~to ~~line~~our ofDecember ~~credit with The CIT Group/Business Credit~~2000 ~~(“CIT”).~~acquisition ~~A term loan~~ of ~~$4.0 million, due and payable upon~~ the ~~finalization~~outstanding shares of a ~~long-term~~Scofima ~~mortgage~~Srl onan ~~our~~Italian ~~corporate~~company ~~headquarters~~engaged ~~or paid~~ in ~~12 monthly installments~~software ~~commencing~~development. ~~April 1,~~We ~~2001,~~employed ~~was~~an ~~fully~~appraiser ~~repaid~~to invalue ~~May~~the ~~2001.~~assets ~~An initial term loan~~ of ~~$1.0 million~~Scofima, ~~due~~ and ~~payable in 90 days, was fully repaid on November 1, 2000. The term loans under~~ the ~~agreement~~appraiser ~~incurred~~assigned ~~interest at the lender’s prime rate, plus .5%, with increases if the outstanding principal was not reduced according to~~ a ~~fixed~~value ~~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 $24.3 ~~million~~ ~~at January 31, 2002), up to a limit of $5.0~~ million. ~~Amounts outstanding~~for ~~under~~ the ~~working~~research ~~capital line bear interest at the lender’s prime~~and ~~rate~~development ~~plus~~expenses ~~.25%.~~relating Atto ~~January 31,~~software ~~2002,~~being nodeveloped ~~amounts~~by ~~were outstanding~~Scofima ~~under the various credit arrangements. The lender charged approximately $130,000 for the credit facility,~~ which ishas ~~being~~not ~~amortized~~yet ~~as interest~~reached ~~expense~~technological ~~over the term of the credit agreement. The line of credit accrues various monthly maintenance~~feasibility, ~~minimum usage~~ and ~~early~~for ~~termination~~which ~~fees. The~~no ~~line~~alternative offuture ~~credit~~use is ~~collateralized by certain of our assets~~available. ~~The~~We ~~line~~incurred ~~of credit~~this ~~requires~~charge ~~certain~~in ~~financial and other covenants, including~~ the ~~maintenance~~ ofsecond ~~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~~fiscal ~~under the line of credit~~2001.

InInterest ~~addition~~income todecreased ~~the~~40.2% ~~CIT line of credit noted above, we have a flooring line of credit with IBM Credit, which has committed~~ to ~~make~~ $~~2.5 million~~83,000 infor ~~flooring inventory~~the ~~commitments~~three ~~available~~months toended ~~us.~~April ~~As of January 31~~30, 2002, wefrom ~~owed~~ $~~946~~139,000 ~~under~~for the ~~flooring line. The flooring line is collateralized by the~~ ~~specific~~comparable ~~inventory~~period ~~purchased~~of ~~pursuant~~fiscal ~~to the flooring commitments~~2001. ~~CIT~~For ~~and IBM Credit have entered into an intercreditor agreement which determines~~ the ~~level of~~nine ~~priority~~months ofended ~~either~~April ~~lender’s~~30, ~~security~~2002, interest. ~~The~~income ~~flooring~~decreased ~~line~~29.9% ~~requires the~~to ~~maintenance~~$418,000 offrom ~~a minimum net worth of~~ $~~16.0 million~~597,000 ~~and~~for wethe ~~were~~comparable ~~in compliance~~period ~~with~~of ~~this~~fiscal ~~covenant at January 31, 2002~~2001. The ~~flooring~~decrease ~~line~~for ~~also requires~~both usperiods ~~not~~was attributable to bea indecline ~~default of any covenants~~ in the ~~CIT agreement. IBM~~ ~~Credit~~average ~~has~~interest ~~waived~~rates ~~compliance~~earned ~~with~~on ~~that~~our ~~requirement~~invested atcash ~~January 31, 2002~~balance.

12Interest expense decreased 53.4% to $203,000 for the three months ended April 30, 2002, from $434,000 for the comparable period of fiscal 2001. For the nine months ended April 30, 2002, interest expense increased 20% to $1.2 million from $1.0 million 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.

~~Table~~Income tax provision (benefit). In the third quarter of ~~Contents~~fiscal 2002, we recorded a $4.5 million income tax benefit relating to recent changes in the tax laws. These changes allowed us to carry back net operating losses generated in fiscal 2001 and and will allow us to carry back net operating losses generated in fiscal 2002 for five years, as opposed to the two years allowed under the tax law previously in effect.

OnLIQUIDITY ~~October 31,~~AND ~~2000,~~CAPITAL weRESOURCES 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.

InAs ~~June~~of ~~2001~~April 30, ~~we completed the sale of 3~~2002,~~800,000~~ ~~shares~~we ofhad ~~common~~cash ~~stock raising~~and ~~gross~~cash ~~proceeds~~equivalents oftotaling ~~approximately~~ $3411.~~2 million~~1 ~~before offering costs of $2.7~~ million. AsOur acash ~~result~~and ofcash ~~this~~equivalents ~~offering,~~decreased ~~the~~by ~~exercise price of the warrant was adjusted to~~ $2714.953 ~~and~~million ~~the~~during ~~number of shares issuable upon exercise of~~ the ~~warrant~~ ~~pursuant~~nine tomonths ~~anti-dilution~~ended ~~provisions~~April ~~of the warrant were adjusted to 38~~30,~~333~~ 2002.

InNet ~~December~~cash ~~2001,~~used wein ~~borrowed~~operating activities was $813.75 1 million ~~under~~for athe ~~financing~~nine ~~arrangement secured~~months byended ~~our~~April ~~corporate~~30, ~~headquarters.~~2002 ~~The~~and ~~principal~~$14.3 million ~~amount~~for ~~outstanding~~the ~~bears~~nine ~~interest~~months atended ~~prime~~April ~~plus~~30, 12001.0% ~~per~~Net ~~annum,~~cash ~~but~~used ~~not~~in ~~less~~operating ~~than~~activities ~~7.0%~~in ~~per~~fiscal ~~annum.~~2002 ~~Under certain~~relates ~~conditions,~~primarily ~~we have the right~~ to ~~request~~our ~~that~~net ~~portions~~loss, ofan ~~the~~increase ~~principal amount~~in ~~outstanding~~our ~~under~~inventories ~~the~~and ~~note~~income ~~shall~~tax ~~bear~~receivable ~~interest~~and at a ~~LIBOR~~decrease ~~based~~in ~~rate, but~~our ~~not~~accounts ~~less than 7~~payable.~~0%.~~ AsThese uses of ~~January 31,~~cash ~~2002,~~were ~~the interest rate on the loan~~offset ~~was~~partially ~~7.0%.~~by ~~Principal~~a ~~reduction~~decrease ~~payments~~in ofour ~~$14,400~~accounts ~~plus~~receivable. ~~accrued~~Net ~~interest~~cash ~~are~~used ~~due each~~in ~~month~~operating ~~beginning~~activities ~~February 1,~~in ~~2002~~fiscal ~~with~~2001 ~~the~~relates ~~remaining~~primarily ~~principal~~to ~~balance~~our ~~and unpaid~~net ~~interest due at the maturity date of January 1~~loss, ~~2007.~~increases ~~Debt~~in ~~issuance costs~~our ~~totaled~~accounts ~~$201,800~~receivable and ~~are~~inventories ~~being~~and ~~amortized~~a ~~over~~decrease ~~the~~in ~~term~~our ofaccounts ~~the loan~~payable. UpThese ~~to an~~uses ~~additional $1.0 million may be borrowed under this financing arrangement to~~of ~~cover~~cash ~~leasing~~were ~~costs~~partially ~~and~~offset ~~tenant~~by ~~improvements~~a onreduction ~~the~~of ~~vacant,~~approximately ~~unimproved space within the corporate headquarters~~$2.7 Asmillion ofin ~~January 31,~~our ~~2002,~~income ~~the~~tax ~~outstanding principal~~refund ~~balance of the loan totaled $8~~receivable.~~75 million.~~

InNet cash ~~addition~~used toin ~~the~~investing ~~line~~activities of ~~credit,~~$0.15 ~~our~~million ~~foreign~~for ~~subsidiaries~~the innine ~~Germany~~months ended April 30, ~~Italy~~ ~~and~~2002 ~~Switzerland~~was ~~have~~the ~~lines~~result of ~~credit~~purchases ~~with~~of ~~banks~~property inand ~~their~~equipment. ~~respective countries~~Net ~~that~~cash ~~are~~used ~~utilized~~in ~~primarily~~investing activities of $2.1 million for ~~overdraft~~the ~~and~~nine ~~short-term~~months ~~cash~~ended ~~needs. At~~April ~~January 31~~30, ~~2002,~~2001 ~~amounts~~was primarily ~~outstanding~~the ~~under~~result ~~these~~of ~~lines~~expenditures ~~was~~of $~~39,000~~1. 5 million to complete our corporate headquarters and $0.4 million for other property and equipment.

WeNet ~~are~~cash ~~contingently~~used ~~liable~~by atfinancing ~~January 31,~~activities ~~2002~~of ~~under~~$1.2 ~~the~~million ~~terms~~for ~~of repurchase~~the ~~agreements~~nine ~~with~~months ~~several~~ended ~~financial~~April ~~institutions~~30, ~~providing~~2002 ~~inventory financing~~was ~~for~~primarily ~~dealers~~the result of ~~our~~a ~~products~~$10.0 ~~Under~~million ~~these~~repayment ~~agreements,~~of ~~dealers~~the ~~purchase our~~convertible ~~products~~debenture, ~~and~~long-term ~~the~~borrowings of ~~financial~~$8.7 ~~institutions~~million ~~agree~~under toa ~~pay~~financing usarrangement ~~for~~secured ~~those purchases,~~by ~~less~~our acorporate ~~pre-set~~headquarters. ~~financing~~Net ~~charge,~~cash ~~within~~provided anby ~~agreed~~financing ~~payment~~activities ~~term. Two~~ of ~~these~~$8.7 million ~~institutions,~~for ~~Finova~~the ~~and~~nine ~~IBM~~months ~~Credit~~ended ~~Corporation~~April 30, ~~have~~2001 ~~also~~was ~~provided~~the ~~us with~~result ~~vendor~~of ~~inventory~~the ~~financing.~~issuance ~~The~~of ~~contingent~~a ~~liability~~$15.0 ~~under these~~million ~~agreements~~convertible ~~approximates~~debenture, ~~the~~borrowings ~~amount~~of ~~financed,~~approximately ~~reduced~~$4.0 bymillion under the ~~resale~~term ~~value~~loan line of ~~any appliances~~credit ~~that~~agreement ~~may~~with beThe ~~repurchased,~~CIT ~~and~~Group/Business ~~the~~Credit ~~risk~~and ofapproximately ~~loss~~$0.8 ismillion ~~spread~~in ~~over~~stock ~~several dealers~~option exercises and ~~financial~~employee ~~institutions.~~stock ~~At January 31~~purchases, ~~2002,~~reduced weby ~~were contingently~~the ~~liable~~repayment ~~for~~of ~~purchases~~approximately ~~made~~$10.8 ~~under~~million ~~these~~in ~~agreements~~loans ofpreviously ~~approximately~~secured ~~$280,000~~by our commercial paper portfolio.

WeOn October ~~expect~~10, to2000, ~~have~~we ~~sufficient~~entered ~~cash~~into ~~generated~~a ~~from~~term ~~operations~~loan agreement and ~~from~~a ~~our recently~~three-year ~~completed~~working ~~common~~capital ~~stock~~line ~~offering~~of tocredit ~~meet~~with The CIT Group/Business Credit (“CIT”). The first term loan of $4.0 million, due and payable upon the finalization of a long-term mortgage on our ~~anticipated~~corporate ~~cash~~headquarters or paid in 12 monthly installments commencing April 1, 2001, was fully repaid in May 2001. Another term loan of $1.0 million, due and payable in 90 days, was fully repaid on November 1, 2000. The term loans ~~requirements~~under ~~for~~the agreement incurred interest at the ~~next~~lender’s ~~twelve~~prime ~~months~~rate, plus .5%, with increases if the outstanding principal was not reduced according to a fixed amortization schedule. The working capital line of credit allows us to borrow, on a revolving basis, for a period of three years, a

				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~~specified ~~ACCOUNTING~~percentage ~~STANDARDS~~of our eligible accounts receivable (approximately $2.8 million at April 30, 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 April 30, 2002, no amounts other than loan fees 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 periods ended on April 30, 2002, we were not in compliance with the minimum EBITDA requirement. The lender has not waived our non-compliance with this covenant for this period and does not intend to make advances under the line.

In ~~July~~addition ~~2001,~~to the ~~Financial~~CIT ~~Accounting~~line ~~Standards~~of ~~Board~~credit ~~(FASB) issued~~noted ~~SFAS No. 141~~above, ~~“Business~~we ~~Combinations,”~~have ~~and~~a ~~SFAS~~flooring ~~No. 142,~~line ~~“Goodwill~~of ~~and~~credit ~~Other Intangible~~with ~~Assets.”~~IBM ~~Under SFAS No. 141~~Credit, ~~all~~which ~~business combinations initiated~~has ~~after~~committed ~~June 30,~~to ~~2001~~make ~~must~~$2.0 bemillion ~~accounted~~in ~~for~~flooring ~~using~~inventory ~~the~~commitments ~~purchase~~available ~~method.~~to ~~Under SFAS No~~us. ~~142,~~ ~~goodwill~~As ~~and~~of ~~intangible~~April ~~assets~~30, ~~with~~2002, ~~indefinite~~we ~~lives~~owed ~~are~~$496,000 nounder ~~longer amortized~~the ~~but~~flooring ~~are~~line. ~~reviewed~~The ~~annually~~flooring ~~for~~line ~~impairment~~is ~~(or~~collateralized ~~more~~by ~~frequently~~the ~~if indicators~~specific ofinventory ~~impairment~~purchased ~~arise).~~pursuant ~~Separable~~to ~~intangible~~the ~~assets~~flooring commitments. ~~that~~CIT ~~are~~and ~~not deemed~~IBM toCredit have ~~indefinite~~entered ~~lives~~into ~~will~~an ~~continue~~intercreditor toagreement bewhich ~~amortized~~determines ~~over~~the ~~their~~level ~~useful lives~~of ~~(but~~priority ~~with~~of noeither ~~maximum~~lender’s ~~life)~~security interest. The ~~amortization~~flooring ~~provisions~~line requires the maintenance of ~~SFAS~~a Nominimum net worth of $16. ~~142~~0 million, and we ~~apply~~were toin ~~goodwill~~compliance ~~and~~with ~~intangible~~this ~~assets~~covenant ~~acquired~~at ~~after~~April ~~June~~ 30, ~~2001~~2002. ~~With respect~~The toflooring ~~goodwill~~line ~~and~~also ~~intangible~~requires ~~assets~~us ~~acquired~~not ~~prior~~ to ~~July 1,~~be ~~2001,~~in ~~the Company~~default isof ~~required~~any tocovenants ~~adopt~~in ~~SFAS~~the NoCIT agreement. ~~142~~ ~~effective~~IBM ~~August 1~~Credit has waived compliance with that requirement at April 30, 2002.

AsOn ofOctober ~~the~~31, ~~date~~2000, ofwe ~~adoption,~~issued ~~the~~a ~~Company~~$15.0 ~~expects~~million convertible unsecured debenture to ~~have~~a ~~unamortized~~private investor. The debenture carried ~~goodwill~~interest at 6.0% per annum, and was repayable in ~~the~~full ~~amount~~on ofOctober $131,~~140~~ 2003,~~000,~~ ~~and~~unless ~~unamortized~~otherwise ~~identifiable~~converted ~~intangible assets~~into inour common stock. In connection with the ~~amount~~issuance of ~~$630~~the debenture,~~000,~~ ~~all~~we ofissued ~~which~~to ~~will~~the beinvestor ~~subject~~a 5-year warrant to ~~the transition~~purchase ~~provisions~~up to 32,916 shares of ~~SFAS~~our ~~141~~common ~~and~~stock ~~142.~~at ~~Amortization~~an ~~expense~~initial ~~related~~exercise ~~to goodwill~~price ~~was~~of $~~241,000~~32.55 ~~and~~per ~~$102~~share,~~000~~ ~~for~~with the ~~six~~number ~~months~~of ~~ended~~shares ~~January 31,~~for ~~2002~~ which the warrant is exercisable and ~~2001,~~the ~~respectively~~exercise price subject to antidilution adjustments. ~~Because~~The value of the ~~extensive~~warrant ~~effort~~of ~~needed~~$562,000 towas ~~comply~~computed ~~with~~using ~~adopting~~the ~~SFAS~~Black-Scholes ~~141~~model, ~~and~~with ~~142,~~the itfollowing isassumptions: ~~not~~Expected ~~practicable~~life to— ~~reasonably~~5 ~~estimate~~years, ~~the impact~~Risk offree ~~adopting~~interest ~~these~~rate ~~statements~~— on6%, ~~the~~and ~~Company’s~~Volatility ~~financial~~— ~~statements~~1.20. at In the ~~date~~second quarter of ~~this~~fiscal ~~report~~2002, ~~including~~we ~~whether~~paid ~~any~~the ~~transitional~~investor ~~impairment~~the ~~losses~~remaining $10,000,000 principal ~~will~~amount beof ~~required~~the todebentures beand ~~recognized~~expensed asthe aremaining ~~cumulative~~unamortized ~~effect~~debt issuance and warrant costs of a$274,000 ~~change~~to ~~in accounting~~interest ~~principle~~expense.

13In 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.

~~Table~~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 ~~Contents~~the principal amount outstanding under the note shall bear interest at a LIBOR based rate, but not less than 7.0%. As of April 30, 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 April 30, 2002, the outstanding principal balance of the loan totaled $8.69 million.

In ~~October~~addition ~~2001,~~to the ~~FASB~~line ~~issued~~of ~~SFAS No. 144~~credit, ~~“Accounting~~our ~~for~~foreign ~~Impairment or~~subsidiaries ~~Disposal~~in ofGermany, ~~Long-Lived~~Italy ~~Assets.”~~and ~~SFAS~~Switzerland ~~144~~have ~~supersedes~~lines ~~SFAS No. 121, “Accounting for the Impairment~~ of ~~Long-Lived~~credit ~~Assets~~with ~~and~~banks ~~for~~in ~~Long-Lived~~their ~~Assets to~~respective Becountries ~~Disposed~~that ~~Of,”~~are ~~and~~utilized ~~addresses~~primarily ~~financial~~for ~~accounting~~overdraft and ~~reporting for the impairment or disposal of long~~short-~~lived~~term ~~assets~~cash needs. ~~This~~At ~~statement is effective for~~April ~~fiscal~~30, ~~years beginning after December 15~~2002, ~~2001.~~amounts ~~Adoption~~outstanding ofunder ~~this~~these ~~statement will~~lines ~~not~~was ~~have a material impact on our consolidated financial position or results of operations~~$84,000.

~~RISK~~We ~~FACTORS~~are contingently liable at April 30, 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 April 30, 2002, we were contingently liable for purchases made under these agreements of approximately $0.1 million.

~~Before~~The ~~investing~~Job inCreation ~~our~~and ~~common~~Worker’s ~~stock,~~Assistance ~~you~~Act ~~should~~of 2002 besigned ~~aware~~by ~~that~~the ~~there~~President ~~are risks~~in ~~inherent~~February in2002, permits us to carry back certain of our ~~business,~~previously ~~including~~recorded ~~those~~losses ~~indicated~~for ~~below.~~5 ~~Additional risks~~years ~~and~~instead ~~uncertainties~~of ~~not~~only ~~presently~~2 ~~known~~years. toWe uspreviously orhad ~~that~~not believed we ~~currently~~would ~~deem immaterial~~be ~~may~~able ~~also~~to ~~impair~~recover ~~our~~a ~~business~~tax ~~operations~~benefit related to prior year losses. IfAs ~~any~~a result of the ~~following risks~~legislation, ~~actually~~in ~~occurs~~April 2002, ~~our~~we ~~business~~filed ~~could~~amended betax ~~harmed~~returns for prior year losses, and in June 2002, received a tax refund of $2.9 million. In ~~that case~~addition, ~~the~~we ~~trading~~expect to be able to recover approximately $2.3 million in additional ~~price~~tax ofrefunds when we file our ~~common~~fiscal ~~stock~~2002 ~~could~~tax ~~decline~~return, and ~~you~~carry ~~might~~expected ~~lose~~fiscal ~~part~~2002 oroperating ~~all~~losses ofback ~~your investment~~to previous periods. ~~You~~We ~~should~~have ~~carefully~~recorded ~~consider~~a tax benefit in the ~~following~~current ~~risk~~quarter ~~factors~~of as$2.9 ~~well~~million ~~as the~~plus ~~other~~a ~~information~~proportionate inshare ~~this~~of ~~Report~~the onanticipated additional ~~Form 10-Q~~refunds related to fiscal 2002.

~~COMPETING~~13 ~~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~~In ~~market~~May ~~for data storage is rapidly evolving. There are other storage technologies in use~~2002, ~~including~~the ~~storage~~employment ~~area~~of ~~network~~three ~~technology,~~of ~~which~~our ~~provide an~~executives ~~alternative~~was ~~to network attached storage~~terminated. WeUnder ~~are not able to predict how~~ the ~~data~~agreements, ~~storage~~the ~~market~~executives will ~~evolve.~~receive ~~For~~payments ~~example, it is not clear whether usage~~ of a ~~number~~$18,750 offor ~~different~~36 ~~solutions~~months, ~~will grow~~ and ~~co-exist~~each ~~in the marketplace or whether one or a small number of solutions~~ will be ~~dominant~~entitled ~~and~~to ~~displace~~participate ~~the others.~~in Itour isemployee ~~also~~benefit, ~~not~~health ~~clear~~and ~~whether~~other ~~network~~insurance ~~attached~~plans ~~storage~~of ~~technology~~the ~~will emerge~~36 asmonth ~~a dominant or even prevalent solution~~period. ~~Whether~~We ~~NAS~~anticipate ~~becomes~~that ~~an accepted~~we ~~standard~~ will berecord ~~due to factors outside our control. If~~ a ~~solution other~~charge ~~than~~for ~~network attached storage emerges as~~ the severance ~~standard~~obligations inof ~~the~~approximately ~~data~~$2.3 ~~storage market,~~million ~~growth~~ in the ~~network~~quarter ~~attached~~ended ~~storage~~July ~~market may not meet our expectations. In such event~~31, ~~our growth and the price of our stock would suffer~~2002.

IFWe ~~GROWTH~~expect INto ~~THE~~have sufficient ~~NAS~~cash ~~MARKET~~generated ~~DOES~~from ~~NOT~~operations, ~~MEET~~our ~~OUR~~income ~~EXPECTATIONS~~tax refunds for fiscal 2001 and 2002, ~~OUR~~and, ~~FUTURE FINANCIAL~~if ~~PERFORMANCE~~necessary, ~~COULD~~the ~~SUFFER~~sale or refinancing of our headquarters building, to meet our anticipated cash requirements for the next twelve months. We cannot be, certain, however we would be able to sell or refinance our building, if necessary, or otherwise obtain any additional financing, on favorable or any terms.

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.

Contractual Cash Obligations:	Total		Less than 1 year		1 to 3 years		4 to 5 years		After 5 years
Long Term Debt	$	8,693,000	$	172,000	$	345,000	$	8,176,000	$	—
Operating Leases		716,000		281,000		227,000		94,000		114,000
Executive Severance		2,281,000		697,000		1,521,000		63,000		—

Total	$	11,690,000	$	1,150,000	$	2,093,000	$	8,333,000	$	114,000

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

~~NAS~~In ~~technology~~July is2001, ~~relatively~~the ~~recent~~Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations,” and ~~our~~SFAS ~~ability~~No. to142, be“Goodwill ~~successful~~and inOther Intangible ~~the~~Assets.” ~~NAS~~Under ~~market~~SFAS ~~may~~No. be141, ~~negatively~~all ~~affected~~business bycombinations ~~not~~initiated ~~only~~after aJune ~~lack~~30, of2001 ~~growth~~must ofbe accounted for using the ~~NAS~~ ~~market~~purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but ~~also~~are reviewed ~~the~~annually ~~lack~~for ofimpairment ~~market~~(or ~~acceptance~~more frequently if indicators of ~~our~~impairment ~~NAS~~arise). ~~products~~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 ~~Additionally,~~amortization weprovisions ~~may~~of beSFAS ~~unable~~No. 142 apply to ~~achieve~~goodwill ~~profitability~~and asintangible weassets ~~transition~~acquired after June 30, 2001. With respect to ~~a greater~~goodwill ~~emphasis~~and onintangible ~~NAS~~assets ~~products~~acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective August 1, 2002.

IFAs WEof ~~FAIL~~the TOdate ~~SUCCESSFULLY~~of ~~MANAGE~~adoption, ~~OUR~~the ~~TRANSITION~~Company TOexpects Ato ~~FOCUS~~have ONunamortized ~~NAS~~goodwill ~~PRODUCTS~~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 $361,000 and $262,000 for the nine ~~OUR~~months ~~BUSINESS~~ended ~~AND~~April ~~PROSPECTS~~30, ~~WOULD~~2002 BEand ~~HARMED~~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.

WeIn ~~began~~October ~~developing NAS products in 1997. Since then~~2001, wethe ~~have~~FASB ~~focused~~issued ~~our efforts~~SFAS ~~and~~No. ~~resources on our NAS business~~144, ~~and~~“Accounting wefor ~~intend~~Impairment toor ~~continue~~Disposal toof doLong-Lived soAssets. We” ~~expect~~SFAS to144 ~~continue~~supersedes toSFAS ~~wind down our Legacy product development and marketing efforts~~No. ~~In the interim~~121, ~~we expect to continue to rely in part upon sales of~~“Accounting ~~Legacy~~for ~~products~~the toImpairment ~~fund operating and development expenses. Net sales~~ of ~~our Legacy~~Long-Lived ~~products~~Assets ~~have been declining in amount~~ and asfor aLong-Lived ~~percentage~~Assets ofto ~~our overall~~Be ~~net~~Disposed ~~sales~~Of,” and weaddresses ~~expect~~financial ~~these~~accounting ~~declines~~and toreporting ~~continue.~~for If the ~~decline~~impairment ~~in net~~or ~~sales~~disposal of ~~our~~long-lived ~~Legacy~~assets. ~~products~~This ~~varies~~statement ~~significantly~~is ~~from~~effective ~~our~~for ~~expectations,~~fiscal oryears beginning ~~the~~after ~~decline~~December in15, ~~net~~2001. ~~sales~~Adoption of ~~our~~this ~~Legacy~~statement ~~products~~ is not ~~substantially~~expected ~~offset by increases in sales of our NAS products, we may not be able~~ to ~~generate sufficient~~have ~~cash~~a ~~flow~~material toimpact ~~fund~~on our ~~operations~~consolidated orfinancial toposition ~~develop~~or ~~our~~results ~~NAS~~of ~~business~~operations.

WeRISK ~~also~~FACTORS ~~expect our transition to a NAS-focused business to require us to continue:~~

•Before ~~engaging~~investing in ~~significant~~our ~~marketing~~common stock, you should be aware that there are risks inherent in our business, including those indicated below. Additional risks and ~~sales~~uncertainties ~~efforts~~not presently known to ~~achieve~~us ~~market~~or ~~awareness~~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 awell ~~NAS~~as the ~~vendor;~~other information in this Report on Form 10-Q.

14COMPETING 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.

~~Table~~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 ~~Contents~~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.

•14 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.

InIF ~~addition,~~GROWTH weIN ~~may~~THE ~~face unanticipated challenges in implementing our transition to a~~ NAS~~-focused~~ ~~company.~~MARKET WeDOES ~~may~~NOT ~~not~~MEET beOUR ~~successful in managing any anticipated or unanticipated challenges associated with this transition. Moreover~~EXPECTATIONS, weOUR ~~expect~~FUTURE toFINANCIAL ~~continue~~PERFORMANCE ~~to incur costs in addressing these challenges,~~COULD ~~and there is no assurance that we will be able to generate sufficient revenues to cover these costs~~SUFFER. ~~If we fail to successfully implement our transition to a NAS-focused company, our business and prospects would be harmed.~~

IFWe WEbelieve ~~ARE~~our ~~UNABLE~~future TOfinancial ~~MANAGE~~performance ~~OUR~~will ~~INTERNATIONAL~~depend ~~OPERATIONS~~in ~~EFFECTIVELY~~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, ~~OUR~~however, may not continue to grow. Long-term trends in storage technology remain unclear and some analysts have ~~OPERATING~~questioned ~~RESULTS~~whether ~~COULD~~competing BEtechnologies, ~~MATERIALLY~~such ~~ADVERSELY~~as ~~AFFECTED~~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.

~~Net~~THE ~~sales~~REVENUE toAND ~~our~~PROFIT ~~international~~POTENTIAL ~~customers,~~OF ~~including export sales from the~~NAS ~~United~~PRODUCTS ~~States,~~IS ~~accounted for approximately 33%~~UNPROVEN, ~~41%~~AND ~~and~~WE ~~56%~~MAY ofBE ~~our~~UNABLE ~~net~~TO ~~sales for~~ATTAIN ~~the~~REVENUE ~~years~~GROWTH ~~ended~~OR ~~July 31,~~PROFITABILITY ~~1999,~~FOR ~~2000,~~OUR ~~2001,~~NAS ~~respectively,~~PRODUCT ~~and approximately 52% of our net sales in the six months ended January 31, 2002~~LINES. 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:

•NAS ~~currency~~technology ~~exchange~~is ~~rate~~relatively ~~fluctuations~~recent, ~~particularly~~and ~~when we sell~~ our ~~products~~ability into ~~currencies~~be ~~other~~successful ~~than U.S. dollars; • difficulties~~ in ~~collecting~~the ~~accounts~~NAS ~~receivable~~market ~~and~~may ~~longer~~be ~~accounts~~negatively ~~receivable~~affected ~~payment~~by ~~cycles;~~not •only ~~reduced~~a ~~protection~~lack ~~for~~of ~~intellectual~~growth ~~property~~of ~~rights~~the inNAS ~~some~~market ~~countries,~~but ~~particularly~~also ~~in Asia; • legal uncertainties regarding tariffs, export controls and other trade barriers; •~~ the ~~burdens~~lack of ~~complying~~market ~~with~~acceptance aof ~~wide~~our ~~variety~~NAS ofproducts. Additionally, ~~foreign~~we ~~laws~~may ~~and~~be ~~regulations;~~unable ~~and~~to •achieve ~~seasonal~~profitability ~~fluctuations~~as inwe ~~purchasing~~transition ~~patterns~~to ina ~~other~~greater ~~countries,~~emphasis ~~particularly~~on inNAS ~~Europe~~products.

~~Any~~IF ofWE ~~these~~FAIL ~~factors could have an adverse impact on our existing~~TO ~~international~~SUCCESSFULLY ~~operations~~MANAGE ~~and~~OUR ~~business~~TRANSITION orTO ~~impair~~A ~~our~~FOCUS ~~ability~~ON toNAS ~~continue expanding into international markets. For example~~PRODUCTS, ~~our~~OUR ~~reported~~BUSINESS ~~sales~~AND ~~can~~PROSPECTS ~~be affected~~WOULD byBE ~~changes in the currency rates in effect during any particular period~~HARMED. 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.

InWe began ~~order~~developing toNAS ~~successfully~~products ~~expand~~in ~~our~~1997. ~~international~~Since ~~sales~~then, we ~~must strengthen~~have ~~foreign~~focused ~~operations~~our efforts and ~~recruit~~resources ~~additional~~on ~~international~~our ~~distributors~~ NAS business, and ~~resellers~~we intend to continue to do so. ~~Expanding~~We ~~internationally~~expect ~~and~~to ~~managing~~continue ~~the~~to ~~financial~~wind down our Legacy product development and marketing efforts. In the ~~business~~interim, ~~operations~~we ofexpect ~~our~~to ~~foreign~~continue ~~subsidiaries~~to ~~will~~rely ~~also~~in ~~require~~part ~~significant management~~upon ~~attention~~sales of Legacy products to fund operating and ~~financial~~development ~~resources~~expenses. ~~For~~Net ~~example,~~sales of our ~~foreign subsidiaries~~Legacy products have been declining in ~~Europe~~amount ~~have~~and ~~incurred~~as ~~operational~~a ~~losses.~~percentage Toof ~~the~~our ~~extent~~overall ~~that~~net sales, and we ~~are~~ ~~unable~~expect these declines to ~~address~~continue. ~~these~~If ~~concerns~~the decline in anet ~~timely~~sales ~~manner,~~of our ~~growth,~~Legacy ifproducts ~~any~~varies significantly from our expectations, or the decline in ~~international~~ net sales ~~will~~of beour ~~limited,~~Legacy ~~and~~products ~~our~~is ~~operating~~not ~~results~~substantially ~~could~~offset ~~be materially~~by ~~adversely~~increases ~~affected.~~in Insales ~~addition~~of our NAS products, we may not be able to ~~maintain~~generate ~~or increase~~sufficient ~~international~~cash ~~market~~flow ~~demand~~to ~~for~~fund our ~~products~~operations or to develop our NAS business.

IFWe ~~THE~~also ~~AGING OF OUR ACCOUNTS~~expect ~~RECEIVABLE~~our ~~CONTINUES~~transition TOto ~~INCREASE~~a ORNAS-focused IFbusiness ~~WE EXPERIENCE~~to Arequire ~~SIGNIFICANT~~us ~~INCREASE~~to INcontinue: ~~SALES RETURNS, WE MAY NEED TO RECORD ADDITIONAL RESERVES WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.~~

At• ~~January 31,~~engaging ~~2002,~~in ~~our~~significant ~~net~~marketing ~~accounts receivable totaled $11.2 million, which is net of reserves for bad debts of $8.1 million~~ and sales ~~returns~~efforts 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~~ toachieve ~~deteriorate,~~market ~~resulting~~awareness inas ana ~~impairment~~NAS 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. vendor;

~~Net~~• ~~sales~~reallocating ~~for~~resources ~~the~~in ~~six~~product ~~months~~development ~~ended January 31, 2002~~ and ~~2001~~service ~~were $16.1 million~~ and ~~$25.0 million,~~support ~~respectively.~~of Weour ~~recognize revenue on~~ NAS ~~product sales,~~appliances; ~~sold through direct sales channels~~ and ~~resellers, generally upon shipment of the product. In addition,~~

15 • modifying existing and entering into new channel partner relationships to include sales of our NAS appliances.

~~Table~~In ofaddition, ~~Contents~~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.

weIF ~~sell~~WE ~~service~~ARE ~~contracts~~UNABLE ~~for~~TO ~~certain~~MANAGE ofOUR ~~our~~INTERNATIONAL ~~appliances~~OPERATIONS ~~that require service for a specified period of time~~EFFECTIVELY, ~~usually~~OUR ~~one~~OPERATING toRESULTS ~~three~~COULD ~~years.~~BE ~~Revenue from~~MATERIALLY ~~these~~ADVERSELY ~~contracts is billed to customers at the time of sale, but earned ratably over the life of the service agreement~~AFFECTED. 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~~Net ~~RECENT~~sales ~~TERRORIST~~to ~~ATTACKS~~our ~~MAY~~international ~~HAVE~~customers, ANincluding ~~ADVERSE~~export ~~EFFECT~~sales ONfrom ~~OUR~~the ~~BUSINESS~~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 39.0% of our net sales in the nine months ended April 30, 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:

~~The~~• ~~terrorist~~currency ~~attacks~~exchange inrate ~~New York and Washington~~fluctuations, ~~D.C.~~particularly onwhen ~~September 11, 2001~~we ~~appear~~sell toour beproducts ~~having an adverse effect on business, financial and general economic conditions. These effects may,~~ in ~~turn,~~currencies ~~have~~other anthan ~~adverse effect on our business and results of operations~~U. ~~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~~S. dollars;

~~DUE~~• TOdifficulties ~~DETERIORATING~~in ~~U.S.~~collecting ~~AND~~accounts ~~WORLD~~receivable ~~ECONOMIC~~and ~~CONDITIONS,~~longer ~~INFORMATION~~accounts ~~TECHNOLOGY SPENDING~~receivable ONpayment ~~DATA STORAGE AND OTHER CAPITAL EQUIPMENT COULD DECLINE. IF TECHNOLOGY SPENDING IS REDUCED, OUR SALES AND OPERATING RESULTS COULD BE HARMED.~~ cycles;

~~Many~~• ofreduced ~~our~~protection ~~customers~~for ~~are~~intellectual ~~affected~~property byrights ~~economic conditions~~ in ~~the~~some 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 customerscountries, ~~our~~particularly ~~sales~~in 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. Asia;

IF• WElegal ~~FAIL~~uncertainties TOregarding ~~INCREASE THE NUMBER OF INDIRECT SALES CHANNELS FOR OUR NAS PRODUCTS~~tariffs, ~~OUR~~export ~~ABILITY~~controls TOand ~~INCREASE~~other ~~NET~~trade ~~SALES MAY BE LIMITED.~~ barriers;

In• ~~order~~the toburdens ~~grow~~of ~~our~~complying ~~business,~~with wea ~~will~~wide ~~need~~variety ~~to increase market awareness and sales~~ of ~~our~~foreign ~~NAS~~laws ~~products. To achieve these objectives, we plan to expand revenues from our indirect sales channels, including resellers~~ and ~~systems integrators.~~regulations; ~~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~~15 ~~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~~seasonal ~~generally~~fluctuations ~~offer~~in ~~products~~purchasing ofpatterns ~~several~~in ~~different~~other ~~companies~~countries, ~~including~~ ~~products~~particularly ofin ~~our competitors~~Europe. 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~~Any WEof ~~HAVE~~these ~~ONLY~~factors ~~APPROXIMATELY~~could ~~FOUR~~have ~~YEARS~~an OFadverse ~~OPERATING~~impact ~~HISTORY~~on INour ~~THE~~existing ~~NAS~~international operations and business or impair our ability to continue ~~MARKET~~expanding into international markets. For example, ~~WHICH~~our ISreported ~~NEW~~sales ~~AND~~can ~~RAPIDLY~~be ~~EVOLVING~~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 nine months of fiscal 2002. During this period, ~~OUR~~the ~~HISTORICAL~~Euro ~~FINANCIAL~~and ~~INFORMATION~~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 ISapproximately OF$54,000 ~~LIMITED~~in ~~VALUE~~fiscal IN2001 ~~PROJECTING~~and ~~OUR~~a ~~FUTURE~~foreign ~~OPERATING~~currency ~~RESULTS~~gain ORof ~~PROSPECTS~~$53,000 in the first nine 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 $3.5 million between the date of purchase and April 30, 2002, and if our subsidiaries continue to incur operational losses, our cash and liquidity would be negatively impacted.

WeIn ~~have~~order to ~~been~~successfully ~~manufacturing~~expand ~~and selling~~ our ~~NAS~~international ~~products~~sales, ~~for~~we ~~only approximately~~must ~~four~~strengthen ~~years.~~foreign ~~For~~operations ~~the~~and ~~years~~recruit ~~ended~~additional ~~July 31,~~international ~~1999,~~distributors ~~2000~~ and ~~2001, these~~resellers. ~~products~~Expanding ~~accounted~~internationally ~~for~~and ~~approximately~~managing ~~8%,~~the ~~28%~~financial and ~~68%~~business operations of our ~~total net~~foreign ~~sales,~~subsidiaries ~~respectively.~~will ~~For~~also ~~the~~require ~~six~~significant ~~months~~management ~~ended~~attention ~~January 31,~~and ~~2002,~~financial ~~these~~resources. ~~products accounted~~For ~~for~~example, ~~approximately 83% of~~ our ~~total~~foreign ~~net~~subsidiaries ~~sales.~~in WeEurope ~~expect~~have ~~sales~~incurred ofoperational ~~our NAS~~losses. ~~products~~To tothe ~~represent~~extent anthat ~~increasing~~we ~~percentage~~are ofunable ~~our~~to ~~net~~address ~~sales~~these inconcerns ~~the future. Because our operating history~~ in ~~the~~a ~~NAS~~timely ~~product market is only~~manner, ~~approximately~~our ~~four years~~growth, asif ~~well~~any, asin ~~the~~international ~~rapidly~~sales ~~evolving~~will ~~nature~~be ~~of the NAS market~~limited, itand isour ~~difficult~~operating toresults ~~evaluate~~could ~~our~~be ~~business~~materially oradversely ~~our prospects~~affected. In ~~particular~~ addition, ~~our~~we ~~historical~~may ~~financial~~not ~~information~~be isable ofto ~~limited~~maintain ~~value~~or ~~in projecting~~increase ~~our~~international ~~future~~market ~~operating~~demand ~~results~~for our products.

~~MARKETS~~IF ~~FOR~~THE ~~BOTH~~AGING ~~OUR~~OF ~~NAS APPLIANCES AND~~ OUR ~~LEGACY~~ACCOUNTS ~~PRODUCTS~~RECEIVABLE ~~ARE~~CONTINUE ~~INTENSELY COMPETITIVE,~~TO ~~AND~~INCREASE OR IF WE ~~ARE~~EXPERIENCE ~~UNABLE~~A TOSIGNIFICANT ~~COMPETE~~INCREASE ~~EFFECTIVELY~~IN SALES RETURNS, WE MAY ~~LOSE~~NEED ~~MARKET~~TO RECORD ~~SHARE~~ADDITIONAL ORRESERVES BEWHICH ~~REQUIRED~~WOULD TOADVERSELY ~~REDUCE~~AFFECT ~~PRICES~~OUR OPERATING RESULTS.

~~The~~At ~~markets~~April in30, 2002, our net accounts receivable totaled $7.6 million, which weis ~~operate~~net ~~are~~of ~~intensely~~reserves ~~competitive~~for bad debts of $9.2 million and ~~characterized~~ bysales ~~rapidly~~returns ~~changing~~of ~~technology~~$2.6 ~~Increased~~million. ~~competition~~Approximately ~~could result~~$1.5 inmillion, ~~price~~or ~~reductions~~20%, ~~reduced~~of ~~gross~~our ~~margins~~net oraccounts ~~loss~~receivable ofwere ~~market~~past ~~share,~~due ~~any~~greater than 90 days.Although management ofbelieves ~~which~~that ~~could~~these ~~harm~~accounts ~~our~~are ~~operating~~collectible, ~~results.~~if Wethe ~~compete~~financial ~~with~~condition ~~other~~of ~~NAS~~our ~~companies~~customers were to deteriorate, ~~direct-selling~~ ~~storage~~resulting ~~providers~~in ~~and~~an ~~smaller~~impairment ~~vendors~~of ~~that~~their ~~provide~~ability ~~storage solutions~~to make payments, or if our receivable aging continued to ~~end-users.~~lengthen Infor some of our ~~Legacy~~European and ~~markets~~any other customers, we ~~compete~~may ~~with~~be ~~computer manufacturers~~required ~~that~~to ~~provide~~record ~~storage~~additional ~~upgrades~~bad ~~for~~debt ~~their~~reserves ~~own~~which ~~products,~~ would adversely affect our operating results.

16Net sales for the nine months ended April 30, 2002 and 2001 were $20.4 million and $33.0 million, respectively. We recognize revenue on NAS product sales, sold through direct sales channels and resellers, generally upon shipment of the product. In addition, 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, incremental sales reserves may be required.

~~Table~~OUR ofSTOCK ~~Contents~~MAY BE DE-LISTED FROM NASDAQ

asThe ~~well~~closing asprice ~~with manufacturers~~ of ~~hard~~our ~~drives,~~common CDstock ~~servers~~on ~~and~~June ~~arrays~~13, ~~and storage~~2002 ~~upgrade~~was ~~products~~$0.86 ~~Many~~per ofshare. ~~our~~The ~~current~~NASDAQ ~~and~~National ~~potential~~Market ~~competitors~~generally ~~have longer~~requires ~~operating~~listed ~~histories,~~issuers ~~greater~~to ~~name~~maintain ~~recognition,~~a ~~larger~~minimum ~~customer~~bid ~~bases~~price ~~and~~of ~~greater financial~~$1.00, ~~technical, marketing~~ and ~~other resources than we do. As a result, they~~ may bedelist ~~able~~an toissuer ~~respond~~whose ~~more~~share ~~quickly~~price tofalls ~~new~~below orthat ~~emerging technologies~~threshold ~~and~~for ~~changes~~an inextended ~~customer~~period ~~requirements, devote greater resources to the development, promotion, sale and support~~ of ~~their~~time. ~~products,~~If ~~and~~we ~~reduce prices~~are unable to ~~increase~~meet ~~market~~the ~~share.~~minimum Inlisting ~~addition~~requirements, ~~current~~we ~~and potential competitors have established or~~ may ~~establish~~be ~~cooperative~~subject ~~relationships~~to ~~among~~delisting ~~themselves~~from ~~or with~~the ~~third~~NASDAQ ~~parties.~~National ~~Accordingly~~Market, itwhich iswill ~~possible~~have ~~that~~a material ~~new~~adverse ~~competitors~~effect ~~or alliances~~on ~~among~~our ~~competitors~~common ~~may~~stock ~~emerge~~ and ~~rapidly~~would ~~acquire~~severely ~~significant~~restrict ~~market share.~~our Weability ~~may not be able~~ to ~~compete~~raise ~~successfully~~additional ~~against current or future competitors~~capital. ~~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~~RECENT ~~AND SIZE~~TERRORIST OFATTACKS ~~THESE CUSTOMERS’ ORDERS~~ MAY ~~CAUSE~~HAVE ~~OUR~~AN ~~OPERATING~~ADVERSE ~~RESULTS~~EFFECT TOON ~~FLUCTUATE~~OUR BUSINESS.

~~For~~The ~~the~~terrorist ~~six~~attacks ~~months~~in ~~ended~~New ~~January 31,~~York ~~2002,~~and ~~four customers accounted for 24% of our net sales~~Washington, ~~while one customer accounted for 20% of our net sales for the six months ended January 31, 2001~~D.C. ~~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.~~September ~~In addition~~11, we2001 ~~may~~appear ~~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~~having ~~and~~an ~~significantly~~adverse ~~dependent~~effect on ~~one~~business, orfinancial ~~only~~and ageneral ~~few~~economic ~~customers~~conditions. IfThese ~~we lose~~effects amay, ~~major~~in ~~customer~~turn, orhave ifan ~~one~~adverse ofeffect on our ~~customers~~business ~~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~~. InAt ~~fiscal~~this ~~2001~~time, however, we ~~sold~~are ~~our~~not ~~Legacy~~able ~~products principally~~ to ~~distributors.~~predict Wethe ~~cannot~~nature, beextent ~~certain~~and ~~that~~duration ~~customers~~of ~~that~~these ~~have~~effects ~~accounted~~on ~~for significant~~overall ~~revenues~~economic inconditions ~~past~~or ~~periods~~on ~~will continue to purchase~~ our ~~products~~business ~~or fully~~and ~~pay~~operating ~~for products they purchase in future periods~~results.

~~OUR~~DUE TO ~~GROSS~~DETERIORATING ~~MARGINS~~U.S. OFAND ~~OUR~~WORLD ~~VARIOUS~~ECONOMIC ~~PRODUCT~~CONDITIONS, ~~LINES~~INFORMATION ~~HAVE~~TECHNOLOGY ~~FLUCTUATED~~SPENDING ~~SIGNIFICANTLY~~ON ~~IN THE~~DATA ~~PAST~~STORAGE AND ~~MAY~~OTHER ~~CONTINUE~~CAPITAL TOEQUIPMENT ~~FLUCTUATE~~HAS ~~SIGNIFICANTLY~~DECLINED. ~~FOR~~IF ~~EXAMPLE,~~TECHNOLOGY WESPENDING ~~MAY~~CONTINUES ~~NOT EXPERIENCE~~TO ~~INCREASED~~DECLINE, OUR SALES OFAND ~~OUR~~OPERATING ~~NAS~~RESULTS ~~APPLIANCES~~COULD BE HARMED.

~~Historically,~~Many of our ~~gross~~customers ~~margins~~are ~~have~~affected ~~fluctuated significantly. Our gross margins vary significantly~~ by ~~product~~economic ~~line~~conditions ~~and~~in ~~distribution channel, and, therefore, our overall gross margin varies with~~ the ~~mix~~United ofStates ~~products we sell. Our markets are characterized by intense competition~~ and ~~declining~~throughout ~~average unit selling prices over~~ the ~~course of the relatively short life cycles of individual products~~world. ~~For example, we derive a significant portion of our sales~~Many ~~from~~companies ~~NAS~~have ~~products.~~announced ~~The~~that ~~market~~they ~~for~~will ~~these~~reduce ~~products~~their isspending ~~highly~~on ~~competitive~~data storage and ~~subject~~ toother ~~intense~~capital ~~pricing pressures~~equipment. If wespending ~~fail~~on todata ~~increase~~storage ~~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~~16 ~~gross margins have been and may continue to be affected by a variety of other factors, including:~~

•technology ~~new~~products ~~product~~is ~~introductions~~reduced ~~and~~further ~~enhancements;~~by •customers ~~competition;~~and •potential ~~changes~~customers, inour ~~the~~sales ~~distribution~~could ~~channels~~be harmed, and we ~~use;~~may •experience ~~the~~greater ~~mix~~pressures ~~and~~on ~~average~~our ~~selling~~gross ~~prices~~margins. ofIf ~~products;~~economic ~~and~~conditions •do ~~the~~not ~~cost~~improve, ~~and~~or ~~availability~~if ofour ~~components~~customers continue to reduce their overall information technology purchases, our sales, gross profits and ~~manufacturing~~operating ~~labor~~results may be reduced.

IF WE ~~ARE~~FAIL ~~UNABLE~~ TO ~~TIMELY~~INCREASE ~~INTRODUCE~~THE ~~COST-EFFECTIVE~~NUMBER ~~HARDWARE~~OF ORINDIRECT ~~SOFTWARE SOLUTIONS~~SALES CHANNELS FOR OUR NAS ~~ENVIRONMENTS~~PRODUCTS, ~~OR IF~~ OUR ~~PRODUCTS~~ABILITY ~~FAIL~~ TO ~~KEEP~~INCREASE ~~PACE~~NET ~~WITH TECHNOLOGICAL~~SALES ~~CHANGES~~MAY ~~IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD~~ BE ~~MATERIALLY ADVERSELY AFFECTED~~LIMITED.

~~Our~~In ~~future~~order ~~growth~~to ~~will~~grow ~~depend~~our inbusiness, ~~large~~we ~~part~~will ~~upon~~need ~~our ability~~ to ~~successfully~~ ~~develop~~increase ~~and~~market ~~introduce~~awareness ~~new hardware~~ and ~~software~~sales ~~for~~of ~~the~~our NAS ~~market~~products. ~~Due~~To toachieve ~~the~~these ~~complexity of products such as ours~~objectives, we ~~face~~plan ~~significant challenges~~to inexpand ~~developing~~revenues ~~and~~from ~~introducing~~our ~~new~~indirect ~~products.~~sales ~~The~~channels, ~~development~~including ofresellers ~~new products~~and ~~requires~~systems ~~significant~~integrators. ~~research~~To ~~and~~do ~~development~~this, ~~expense~~we ~~and~~will ~~effort.~~need ~~We may~~to ~~not~~modify ~~have~~and ~~the~~expand ~~financial~~our ~~resources~~existing torelationships ~~fund~~with ~~the~~these ~~research~~indirect ~~and development~~channel ~~efforts~~partners, ~~necessary~~as towell ~~develop~~as ~~new~~enter ~~NAS~~into ~~products,~~new ~~and~~indirect wesales ~~may~~channel berelationships. ~~unable~~We ~~to introduce~~may ~~new~~not ~~products~~be onsuccessful ain ~~timely~~accomplishing ~~basis~~these ~~or at all~~objectives. If we are unable to ~~introduce~~ ~~new~~expand ~~products~~our indirect aor ~~timely~~indirect ~~manner~~sales channels, our ~~operating~~ability ~~results~~to ~~could~~increase revenues may be ~~harmed~~ limited.

~~Even~~BECAUSE ifWE weDO ~~are~~NOT ~~successful~~HAVE inEXCLUSIVE ~~introducing~~RELATIONSHIPS ~~new~~WITH ~~products,~~OUR weDISTRIBUTORS ~~may~~FOR beOUR ~~unable~~LEGACY ~~to keep~~PRODUCTS, ~~pace~~THESE ~~with~~CUSTOMERS ~~technological~~MAY ~~changes~~GIVE ~~in our markets and our products may not~~HIGHER ~~gain~~PRIORITY ~~any~~TO ~~meaningful~~PRODUCTS ~~market~~OF ~~acceptance. The markets we serve are characterized by rapid technological change~~COMPETITORS, ~~evolving~~WHICH ~~industry~~COULD ~~standards,~~HARM ~~and~~OUR ~~frequent~~OPERATING ~~new product introductions and enhancements that could render our products obsolete and less competitive~~RESULTS. ~~As a result, our position in these markets could erode rapidly due to changes in features and functions~~

17Our 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.

~~Table~~BECAUSE ofWE ~~Contents~~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.

ofWe ~~competing~~have been manufacturing and selling our NAS products orfor ~~price~~only ~~reductions~~approximately byfour years. For the years ended July 31, 1999, 2000 and 2001, these products accounted for approximately 8%, 28% and 68% of our ~~competitors~~total net sales, respectively. InFor ~~order~~the tonine months ~~avoid~~ended ~~product~~April ~~obsolescence~~30, we2002, ~~will~~these ~~have~~products toaccounted ~~keep~~for ~~pace~~approximately ~~with~~39% ~~rapid~~of ~~technological developments~~our ~~and~~total ~~emerging~~net ~~industry standards~~sales. We ~~may~~expect ~~not~~sales ~~have~~of ~~the~~our ~~financial resources~~NAS products to dorepresent soan orincreasing ~~otherwise~~percentage beof ~~successful~~our net sales in ~~doing~~the ~~so,~~future. ~~and~~Because ifour weoperating ~~fail~~history in the NAS product ~~this~~market ~~regard~~is only approximately four years, ~~our~~as ~~operating~~well ~~results~~as ~~could~~the berapidly ~~harmed~~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.

WEMARKETS ~~RELY UPON A LIMITED NUMBER OF SUPPLIERS~~ FOR ~~SEVERAL~~BOTH ~~KEY COMPONENTS USED IN~~ OUR ~~PRODUCTS,~~NAS ~~INCLUDING~~APPLIANCES ~~DISK~~AND ~~DRIVES,~~OUR ~~COMPUTER~~LEGACY ~~BOARDS,~~PRODUCTS ~~POWER~~ARE ~~SUPPLIES, MICROPROCESSORS~~INTENSELY ~~AND OTHER COMPONENTS~~COMPETITIVE, AND ~~ANY~~IF ~~DISRUPTION~~WE ORARE ~~TERMINATION OF~~UNABLE ~~THESE~~TO ~~SUPPLY~~COMPETE ~~ARRANGEMENTS~~EFFECTIVELY, ~~COULD~~WE ~~DELAY~~MAY ~~SHIPMENT~~LOSE OFMARKET ~~OUR~~SHARE ~~PRODUCTS~~OR ~~AND~~BE ~~HARM~~REQUIRED ~~OUR OPERATING~~TO ~~RESULTS~~REDUCE PRICES.

WeThe ~~rely~~markets ~~upon~~in awhich ~~limited~~we operate ~~number~~are ofintensely ~~suppliers~~competitive ofand ~~several~~characterized ~~key~~by ~~components~~rapidly ~~used in~~changing ~~our~~technology. ~~products,~~Increased ~~including~~competition ~~disk~~could ~~drives,~~result ~~computer~~in ~~boards~~price reductions, ~~power~~reduced ~~supplies~~gross ~~and microprocessors.~~margins Inor ~~the~~loss ~~past~~of market share, weany ~~have~~of ~~experienced~~which ~~periodic~~could ~~shortages,~~harm ~~selective supply~~our ~~allocations~~operating ~~and~~results. ~~increased~~We ~~prices~~compete ~~for~~with other ~~these~~NAS ~~and~~companies, ~~other~~direct-selling ~~components.~~storage Weproviders ~~may experience~~and ~~similar~~smaller ~~supply~~vendors ~~issues~~that inprovide ~~the~~storage ~~future~~solutions to end-users. ~~Even~~In ifour Legacy markets, we ~~are~~compete ~~able~~with tocomputer ~~obtain component~~manufacturers ~~supplies,~~that ~~the~~provide ~~quality~~storage ofupgrades ~~these~~for ~~components~~their ~~may~~own ~~not~~products, ~~meet~~as ~~our~~well as ~~requirements.~~with ~~For~~manufacturers ~~example~~of hard drives, inCD ~~order~~servers toand ~~meet~~arrays ~~our~~and ~~product~~storage ~~performance requirements,~~upgrade weproducts. ~~must~~Many ~~obtain~~of ~~disk~~our ~~drives~~current ofand ~~extremely~~potential ~~high~~competitors ~~quality~~have ~~and capacity.~~longer ~~Even~~operating ahistories, ~~small~~greater ~~deviation~~name ~~from~~recognition, ~~our~~larger ~~requirements~~customer ~~could~~bases ~~render~~and ~~any~~greater offinancial, ~~the~~technical, ~~disk~~marketing ~~drives~~and weother ~~receive~~resources ~~unusable~~than bywe usdo. InAs ~~the~~a ~~event~~result, ofthey amay ~~reduction~~be ~~or interruption~~able into ~~the~~respond ~~supply~~more orquickly ato ~~degradation~~new inor ~~quality~~emerging oftechnologies ~~any~~and ofchanges ~~our components,~~in wecustomer ~~may~~requirements, ~~not~~devote begreater ~~able~~resources to ~~complete~~ the ~~assembly~~development, ofpromotion, ~~our~~sale ~~products~~and onsupport aof their ~~timely~~products, ~~basis~~and orreduce atprices ~~all,~~to ~~which~~increase ~~could~~market ~~force~~share. usIn toaddition, ~~delay~~current orand ~~reduce~~potential ~~shipments~~competitors ~~of our~~have ~~products.~~established Ifor wemay ~~were~~establish ~~forced~~cooperative torelationships ~~delay~~among themselves or ~~reduce~~with ~~product~~third ~~shipments~~parties. Accordingly, ~~our~~it is possible that new competitors ~~operating~~or ~~results~~alliances ~~could~~among becompetitors ~~harmed.~~may Inemerge ~~addition,~~and ~~product~~rapidly ~~shipment~~acquire ~~delays~~significant ~~could adversely~~market ~~affect~~share. ~~our~~We ~~relationships~~may ~~with~~not ~~our~~be ~~channel~~able ~~partners~~to ~~and~~compete successfully against current or future ~~end-users~~competitors. In addition, new technologies may increase competitive pressures.

~~UNDETECTED~~WE ~~DEFECTS~~DEPEND ORON ~~ERRORS~~A ~~FOUND~~FEW ~~IN OUR PRODUCTS~~CUSTOMERS, ORINCLUDING ~~THE~~DISTRIBUTORS ~~FAILURE~~AND OFSPECIALIZED ~~OUR PRODUCTS~~END-USERS, TOFOR ~~PROPERLY~~A ~~INTERFACE~~SUBSTANTIAL ~~WITH~~PORTION ~~THE PRODUCTS~~ OF ~~OTHER~~OUR ~~VENDORS,~~NET ~~MAY RESULT IN DELAYS~~SALES, ~~INCREASED~~AND ~~COSTS~~CHANGES ORIN ~~FAILURE~~THE TIMING TOAND ~~ACHIEVE~~SIZE ~~MARKET~~OF ~~ACCEPTANCE,~~THESE ~~WHICH~~CUSTOMERS’ ~~COULD MATERIALLY~~ORDERS ~~ADVERSELY~~MAY ~~AFFECT~~CAUSE OUR OPERATING RESULTS TO FLUCTUATE.

~~Complex~~For ~~products~~the ~~such~~nine months asended ~~those~~April we30, ~~develop~~2002, no single customer accounted for more than 10.0% of our net sales, while two customers accounted for 13.4% of our net sales for the nine months ended April 30, 2001. Unless and ~~offer~~until ~~may~~we ~~contain~~diversify ~~defects~~and orexpand our customer ~~errors~~base for NAS products, orour ~~may~~future ~~fail~~success will depend to ~~properly~~a ~~interface~~large ~~with~~extent on the ~~products~~timing and size of ~~other~~future ~~vendors~~purchase orders, if any, from these customers. In addition, we may receive from single site purchasers of large installations of our NAS ~~when~~products ~~first~~large ~~introduced~~volume orpurchases asof ~~new~~our ~~versions~~NAS ~~are~~products ~~released~~over relatively short periods of time. ~~Despite~~This ~~internal~~may ~~testing~~ cause our sales to be highly concentrated and ~~testing~~significantly bydependent ~~our~~on ~~customers~~one or ~~potential~~only a few customers,. If we dolose a major customer, ~~from~~or ~~time~~if toone ~~time,~~of our ~~and~~customers ~~may~~significantly inreduces ~~the~~its ~~future~~purchasing ~~encounter~~volume ~~these~~or ~~problems~~experiences infinancial ~~our~~difficulties ~~existing~~and is unable to or ~~future products.~~does ~~Any~~not ofpay ~~these~~amounts ~~problems~~owed ~~may:~~ to us,

•17 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.

Inour ~~addition,~~results weof ~~may~~operations ~~not~~would ~~find~~be ~~errors~~adversely oraffected. ~~failures~~In infiscal ~~our~~2001, ~~products~~we ~~until after~~sold ~~commencement~~our ofLegacy ~~commercial~~products principally ~~shipments,~~to ~~resulting~~distributors. inWe ~~loss~~cannot ofbe orcertain ~~delay~~that ~~in market~~customers ~~acceptance,~~that ~~which~~have ~~could~~accounted ~~significantly~~for ~~harm~~significant ~~our~~revenues ~~operating~~in ~~results.~~past ~~Our current~~periods orwill ~~potential~~continue ~~customers~~to ~~might~~purchase ~~seek~~our products or ~~succeed~~fully inpay ~~recovering~~for ~~from~~products usthey ~~any losses~~purchase ~~resulting from errors or failures~~ in ~~our~~future ~~products~~periods.

OUR ~~PROPRIETARY~~GROSS ~~SOFTWARE~~MARGINS ~~RELIES~~OF ON OUR ~~INTELLECTUAL~~VARIOUS ~~PROPERTY,~~PRODUCT ~~AND~~LINES ~~ANY~~HAVE ~~FAILURE BY~~FLUCTUATED USSIGNIFICANTLY TOIN ~~PROTECT~~THE ~~OUR~~PAST ~~INTELLECTUAL~~AND ~~PROPERTY~~MAY ~~COULD~~CONTINUE ~~ENABLE OUR COMPETITORS~~ TO ~~MARKET~~ ~~PRODUCTS~~FLUCTUATE ~~WITH~~SIGNIFICANTLY. ~~SIMILAR~~FOR ~~FEATURES~~EXAMPLE, ~~THAT~~WE MAY ~~REDUCE DEMAND FOR OUR PRODUCTS,~~NOT ~~WHICH~~EXPERIENCE ~~WOULD~~INCREASED ~~ADVERSELY~~SALES ~~AFFECT~~OF OUR ~~NET~~NAS ~~SALES~~APPLIANCES.

~~Despite our efforts to protect our proprietary rights~~Historically, ~~unauthorized parties may attempt to copy or otherwise obtain and use~~ our ~~proprietary software~~gross ormargins ~~technology.~~have ~~We believe the protection of our proprietary technology~~fluctuated ~~is important to our business~~significantly. IfOur wegross ~~are~~margins ~~unable~~vary tosignificantly ~~protect~~by ~~our~~product ~~intellectual property~~line ~~rights, our business could be materially adversely affected. We currently rely on a combination of copyright~~ and ~~trademark~~distribution ~~laws~~channel, and, ~~trade secrets~~therefore, ~~to protect~~ our ~~proprietary~~overall ~~rights.~~gross Inmargin ~~addition,~~varies ~~we generally enter into confidentiality agreements~~ with ~~our~~the ~~employees~~mix ~~and~~of ~~license~~products ~~agreements~~we ~~with end-users~~sell. ~~and~~Our ~~control~~markets ~~access~~are tocharacterized ~~our~~by ~~source~~intense ~~code~~competition and ~~other intellectual~~declining ~~property.~~average Weunit ~~have~~selling ~~applied~~prices ~~for~~over the ~~registration~~course of ~~some,~~the ~~but~~relatively ~~not~~short ~~all,~~life cycles of ~~our trademarks.~~individual ~~We have applied for U~~products.S. ~~patents~~For ~~with~~example, ~~respect~~we toderive ~~the~~a ~~design~~significant ~~and operation~~portion of our ~~NetFORCE~~sales ~~product,~~from ~~and~~NAS weproducts. ~~anticipate~~The ~~that~~market ~~we may apply~~ for ~~additional~~ ~~patents.~~these Itproducts is ~~possible~~highly ~~that~~competitive ~~no patents will issue from our currently pending applications. New patent applications may not result in issued patents~~ and ~~may~~subject ~~not provide us with any competitive advantages over, or~~to ~~may~~intense bepricing ~~challenged by, third parties~~pressures. ~~Despite~~If ~~our~~we ~~efforts~~fail to ~~protect~~increase ~~our proprietary~~sales ~~rights, unauthorized parties may attempt to copy aspects~~ of our ~~products~~ orNAS ~~to obtain and use information that we regard as proprietary. In addition~~appliances, ~~the~~or ~~laws~~if ~~of some foreign countries~~demand, ~~and~~sales ~~the~~or ~~enforcement~~gross ofmargins ~~those laws,~~for ~~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~~Legacy ofproducts ~~protecting~~decline ~~our proprietary~~rapidly, ~~rights~~we ~~will~~believe ~~be adequate or that~~ our ~~competitors~~overall ~~will~~gross ~~not independently~~margins ~~develop~~may ~~similar~~continue ~~technology, duplicate our products or design around any patent issued~~ to ~~us or other intellectual property rights of ours~~decline.

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

~~Table~~• ofnew ~~Contents~~product introductions and enhancements;

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. competition;

WE• ~~MAY~~changes ~~FROM~~in ~~TIME~~the TOdistribution ~~TIME~~channels BEwe 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. use;

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~~mix ~~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 weaverage ~~have~~selling ~~had~~prices ~~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~~the ~~SALES~~cost ~~AND~~and ~~OPERATING~~availability ~~RESULTS~~of ~~MAY~~components ~~FLUCTUATE~~and ~~SIGNIFICANTLY,~~manufacturing ~~AND ANY FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE~~labor.

WeIF ~~have~~WE ~~experienced~~ARE ~~significant~~UNABLE ~~declines~~TO inTIMELY ~~net~~INTRODUCE ~~sales~~COST-EFFECTIVE ~~and~~HARDWARE ~~gross~~OR ~~profit~~SOFTWARE ~~and incurred~~SOLUTIONS ~~operating~~FOR ~~losses,~~NAS ~~causing our quarterly operating results to vary significantly. If we fail to meet the expectations of investors or securities analysts~~ENVIRONMENTS, asOR ~~well~~IF asOUR ~~our~~PRODUCTS ~~internal~~FAIL ~~operating~~TO ~~goals,~~KEEP asPACE aWITH ~~result~~TECHNOLOGICAL ofCHANGES ~~any~~IN ~~future fluctuations~~THE inMARKETS ~~our~~WE ~~quarterly operating results~~SERVE, ~~the market price of our common~~OUR ~~stock~~OPERATING ~~could~~RESULTS ~~decline~~COULD ~~significantly.~~BE ~~Our~~MATERIALLY ~~net~~ADVERSELY ~~sales and quarterly operating results are likely to fluctuate significantly in the future due to a number of factors~~AFFECTED. ~~These factors include:~~

•Our ~~market~~future ~~acceptance~~growth ofwill ~~our~~depend ~~new~~in ~~products~~large ~~and~~part ~~product~~upon our ~~enhancements~~ability orto ~~those~~successfully ofdevelop ~~our~~and ~~competitors;~~introduce •new ~~the~~hardware ~~level~~and ofsoftware ~~competition~~for inthe ~~our~~NAS ~~target~~market. ~~product~~Due ~~markets;~~to •the ~~delays~~complexity inof ~~our~~products ~~introduction~~such ofas ~~new~~ours, ~~products;~~we •face ~~changes~~significant challenges in ~~sales~~developing ~~volumes~~and ~~through~~introducing ~~our~~new ~~reseller~~products. ~~and~~The ~~distribution~~development ~~channels,~~of ~~which~~new products ~~have~~requires ~~varying~~significant ~~commission~~research and ~~sales~~development ~~discount~~expense ~~structures;~~and •effort. ~~changing~~We ~~technological~~may ~~needs~~not ~~within~~have ~~our~~the ~~target~~financial ~~product~~resources ~~markets;~~to •fund the ~~impact~~research ofand ~~price~~development ~~competition~~efforts onnecessary ~~the~~to ~~selling~~develop ~~prices~~new ~~for~~NAS ~~our~~ products;, ~~• the availability~~ and ~~pricing~~we ofmay ~~our~~be ~~product~~unable ~~components;~~to •introduce ~~our~~new ~~expenditures~~products on a ~~research~~timely ~~and~~basis ~~development~~or ~~and~~at ~~the~~all. ~~cost~~If towe ~~expand~~are ~~our~~unable ~~sales~~to ~~and~~introduce ~~marketing~~new ~~programs;~~products ~~and~~in •a ~~the~~timely ~~volume~~manner, ~~mix~~our ~~and~~operating ~~timing~~results ofcould ~~orders~~be ~~received~~harmed.

~~Due~~Even toif ~~these~~we ~~factors~~are successful in introducing new products, we ~~believe~~may ~~that~~be ~~period-~~unable to~~-period~~ ~~comparisons~~keep ofpace ~~our results~~with oftechnological ~~operations~~changes ~~are~~in ~~not~~our ~~necessarily~~markets ~~meaningful~~ and ~~should~~our ~~not~~products bemay ~~relied upon~~not asgain ~~indicators~~any ofmeaningful ~~future~~market ~~performance~~acceptance. InThe ~~addition,~~markets itwe isserve ~~difficult~~are ~~for~~characterized usby torapid ~~forecast~~technological ~~accurately~~change, ~~our~~evolving ~~future~~industry ~~net~~standards, ~~sales.~~and ~~This~~frequent ~~difficulty~~new ~~results~~product ~~from~~introductions and enhancements that could render our ~~limited~~ ~~operating~~products ~~history~~obsolete inand ~~the~~less ~~emerging~~competitive. ~~NAS~~As ~~market~~a result, asour ~~well~~position asin ~~the~~these ~~fact~~markets ~~that product~~could ~~sales~~erode rapidly due to changes in ~~any~~features ~~quarter~~and ~~are~~functions ~~generally~~of ~~booked~~competing ~~and~~products ~~shipped~~or inprice ~~that~~reductions ~~quarter~~by our competitors. ~~Because~~ weIn ~~incur~~order ~~expenses~~to avoid product obsolescence, ~~many~~we ofwill ~~which~~have ~~are~~to ~~fixed,~~keep ~~based~~pace inwith ~~part~~rapid ontechnological ~~our~~developments and emerging industry standards. We may not have ~~expectations~~the offinancial ~~future~~resources ~~sales,~~to ~~our~~do ~~operating~~so ~~results~~or ~~may~~otherwise be ~~disproportionately affected~~successful in doing so, and if ~~sales~~we ~~levels~~fail ~~are~~in ~~below~~this regard, our ~~expectations~~operating results could be harmed.

~~Our~~WE ~~revenues~~RELY inUPON ~~any~~A ~~quarter~~LIMITED ~~may~~NUMBER ~~also~~OF beSUPPLIERS ~~affected~~FOR bySEVERAL ~~product~~KEY ~~returns~~COMPONENTS ~~and any~~USED ~~warranty~~IN ~~obligations~~OUR inPRODUCTS, ~~that~~INCLUDING ~~quarter.~~DISK ~~Many~~DRIVES, ofCOMPUTER ~~our~~BOARDS, ~~distributors~~POWER ~~have~~SUPPLIES, ~~limited product~~MICROPROCESSORS ~~return~~AND ~~rights.~~OTHER ~~In addition~~COMPONENTS, weAND ~~generally~~ANY ~~extend~~DISRUPTION ~~warranties~~OR toTERMINATION ~~our customers~~OF ~~that correspond to the warranties provided by our suppliers. If~~THESE ~~returns~~SUPPLY ~~exceed~~ARRANGEMENTS ~~applicable~~COULD ~~reserves~~DELAY orSHIPMENT ifOF aOUR ~~supplier~~PRODUCTS ~~were~~AND toHARM ~~fail~~OUR toOPERATING ~~meet its warranty obligations, we could incur significant losses~~RESULTS. ~~In the first six months of fiscal 2002 and 2001, we experienced product return rates of~~

19We 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.

~~Table~~18 ~~of Contents~~

~~approximately~~UNDETECTED 11DEFECTS %OR ~~and~~ERRORS ~~12%~~FOUND IN OUR PRODUCTS, ~~respectively.~~OR ~~This~~THE ~~rate~~FAILURE ~~may~~OF ~~vary~~OUR ~~significantly~~PRODUCTS TO PROPERLY inINTERFACE ~~the~~WITH ~~future~~THE PRODUCTS OF OTHER VENDORS, ~~and~~MAY weRESULT ~~cannot~~IN ~~assure~~DELAYS, ~~you~~INCREASED ~~that~~COSTS ~~our~~OR ~~reserves~~FAILURE ~~for~~TO ~~product~~ACHIEVE ~~returns will~~MARKET beACCEPTANCE, ~~adequate~~WHICH inCOULD ~~any~~MATERIALLY ~~future~~ADVERSELY ~~period~~AFFECT OUR OPERATING RESULTS.

IFComplex WEproducts ~~ARE~~such ~~UNABLE~~as TOthose ~~ATTRACT~~we ~~QUALIFIED~~develop ~~PERSONNEL~~and ORoffer ~~RETAIN~~may ~~OUR~~contain ~~EXECUTIVE~~defects or errors, or may fail to properly interface with the products of other vendors, when first ~~OFFICERS~~introduced ~~AND~~or ~~OTHER~~as ~~KEY~~new ~~PERSONNEL~~versions are released. Despite internal testing and testing by our customers or potential customers, WEwe ~~MAY~~do, ~~NOT~~from BEtime ~~ABLE~~to TOtime, ~~COMPETE~~and ~~SUCCESSFULLY~~may in the future encounter these problems in our existing or future products. Any of these problems may:

~~Our~~• ~~continued~~cause ~~success~~delays ~~depends,~~ in ~~part,~~product onintroductions ~~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. shipments;

We• ~~believe~~result ~~that~~in ~~our~~increased ~~success~~costs ~~will depend on the continued services of our executive officers~~ and ~~other~~diversion ~~key employees. The loss~~ of ~~any~~development ~~of these key executive officers or other key employees could harm our business.~~ resources;

WE• ~~MAY~~require ~~NOT~~design BEmodifications; ~~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.~~ or

In• ~~recent~~decrease ~~periods,~~market weacceptance ~~have~~or ~~experienced~~customer ~~significant~~satisfaction ~~declines~~with 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, wewhich ~~will~~could ~~have~~result ~~to seek additional financing~~ in ~~the~~product ~~future, which may not be available to us on favorable or any terms~~returns.

~~CONTROL~~In BYaddition, ~~OUR~~we ~~EXISTING~~may ~~SHAREHOLDERS~~not ~~COULD~~find ~~DISCOURAGE~~errors ~~POTENTIAL~~or ~~ACQUISITIONS~~failures OFin our products until after commencement of commercial shipments, resulting in loss of or ~~OUR~~delay ~~BUSINESS~~in ~~THAT~~market ~~OTHER~~acceptance, ~~SHAREHOLDERS~~which ~~MAY~~could ~~CONSIDER~~significantly ~~FAVORABLE~~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.

AsOUR ofPROPRIETARY ~~January~~SOFTWARE ~~2002,~~RELIES ~~our~~ON ~~executive~~OUR ~~officers~~INTELLECTUAL ~~and directors beneficially owned approximately 5~~PROPERTY,~~970,000~~ ~~shares,~~AND orANY ~~approximately~~FAILURE ~~37%~~BY ofUS ~~the~~TO ~~outstanding shares~~PROTECT ofOUR ~~common~~INTELLECTUAL ~~stock.~~PROPERTY ~~Acting~~COULD ~~together,~~ENABLE ~~these~~OUR ~~shareholders~~COMPETITORS ~~would be able to~~TO ~~exert~~MARKET ~~substantial~~PRODUCTS ~~influence~~WITH onSIMILAR ~~matters~~FEATURES ~~requiring~~THAT ~~approval~~MAY byREDUCE ~~shareholders, including~~DEMAND ~~the~~FOR ~~election~~OUR 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 usPRODUCTS, ~~which~~ ~~could~~WHICH inWOULD ~~turn~~ADVERSELY ~~have~~AFFECT anOUR ~~adverse~~NET ~~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~~SALES.

~~THE~~Despite ~~MARKET~~our ~~PRICE~~efforts ~~FOR~~to ~~OUR~~protect ~~COMMON~~our ~~STOCK~~proprietary ~~HAS~~rights, ~~FLUCTUATED~~unauthorized ~~SIGNIFICANTLY~~parties INmay ~~THE~~attempt ~~PAST~~to copy or otherwise obtain and use our proprietary software or technology. We believe the protection of our proprietary technology is important ~~AND~~to ~~WILL~~our ~~LIKELY~~business. ~~CONTINUE~~If TOwe DOare SOunable INto ~~THE~~protect ~~FUTURE~~our intellectual property rights, ~~WHICH~~our ~~COULD~~business ~~RESULT~~could INbe Amaterially adversely affected. We currently rely on a combination of copyright and trademark laws and trade secrets to protect our proprietary ~~DECLINE~~rights. INIn ~~YOUR~~addition, ~~INVESTMENT’~~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. ~~VALUE~~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.

~~The~~In ~~market~~addition, ~~price~~we ~~for~~may ~~our~~initiate ~~common~~claims ~~stock~~or litigation ~~has~~against ~~been~~third ~~volatile~~parties infor ~~the~~infringement ~~past,~~of ~~and particularly~~our ~~volatile~~proprietary inrights ~~the~~to ~~last~~establish ~~twelve~~the ~~months,~~validity ~~and~~of ~~may~~our ~~continue~~proprietary torights. ~~fluctuate substantially~~This inlitigation, ~~the~~whether ~~future.~~or ~~The~~not ~~value~~it ofis ~~your~~resolved ~~investment~~ in our ~~common~~favor, ~~stock~~ could ~~decline~~result ~~due~~in tosignificant ~~the~~expense ~~impact~~to ofus ~~any~~and ofdivert the efforts ~~above or~~ of ~~the~~our ~~following~~technical ~~factors upon~~and ~~the~~management ~~market~~personnel. ~~price of our common stock:~~

•WE ~~fluctuations~~MAY inFROM ~~our~~TIME ~~operating~~TO ~~results;~~TIME •BE ~~fluctuations~~SUBJECT inTO ~~the~~CLAIMS ~~valuation~~OF ofINFRINGEMENT ~~companies~~OF ~~perceived by investors to be comparable to us; • a shortfall in net sales or operating results compared to securities analysts~~OTHER PARTIES’ ~~expectations;~~PROPRIETARY •RIGHTS ~~changes~~OR inCLAIMS ~~analysts’~~THAT ~~recommendations~~OUR orOWN ~~projections; • announcements of new products~~TRADEMARKS, ~~applications~~PATENTS orOR ~~product~~OTHER ~~enhancements~~INTELLECTUAL byPROPERTY usRIGHTS orARE ~~our~~INVALID, ~~competitors;~~AND ~~and~~IF •WE ~~changes~~WERE inTO ~~our~~SUBSEQUENTLY ~~relationships~~LOSE ~~with~~OUR ~~our~~INTELLECTUAL ~~suppliers~~PROPERTY ~~or customers~~RIGHTS, ~~including~~OUR ~~failures~~BUSINESS byWOULD ~~customers~~BE toMATERIALLY ~~pay~~ADVERSELY ~~amounts owed to us~~AFFECTED.

~~THE~~We ~~PAYMENT~~may TOfrom ~~BRIGHTON~~time ~~CAPITAL~~to time receive claims that we are infringing third parties’ intellectual property rights or claims that our own trademarks, ~~LTD~~patents or other intellectual property rights are invalid. INFor ~~CONNECTION~~example, ~~WITH~~we ~~OUR~~have ~~SALE~~been OFnotified ~~OUR~~by Intel Corporation that our products may infringe some of the intellectual property rights of Intel. In its ~~CONVERTIBLE~~notification, ~~DEBENTURES~~Intel ~~MAY~~offered BEus ~~INCONSISTENT~~a ~~WITH~~non-exclusive ~~THE~~license ~~PROVISIONS~~for OFpatents ~~SECTION~~in 15their OFportfolio. 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 ~~THE~~infringe ~~SECURITIES~~the ~~EXCHANGE~~patents ~~ACT~~of ~~AND~~Intel, ~~MAY~~but ~~ENABLE~~our ~~THE~~discussions ~~INVESTOR~~and TOour ~~RESCIND~~investigation ~~ITS~~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 ~~INVESTMENT~~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

20 19

~~Table~~agreements, any of ~~Contents~~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.

WeOUR ~~paid~~NET ~~Brighton~~SALES ~~Capital, Ltd. $375,000 for its introduction to us of the~~AND ~~investor~~OPERATING inRESULTS ~~our~~MAY 6%FLUCTUATE ~~convertible~~SIGNIFICANTLY, ~~debentures.~~AND ~~The~~ANY ~~Staff~~FLUCTUATIONS ofCOULD ~~the~~CAUSE ~~Securities~~THE ~~and Exchange~~MARKET ~~Commission~~PRICE ~~has~~OF ~~informed~~OUR usCOMMON ~~that~~STOCK ~~the~~TO ~~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~~DECLINE. ~~If this payment were determined to be inconsistent with Section 15, then, under Section 29 of the Securities Exchange Act:~~

•We ~~Montrose~~have ~~Investments~~experienced ~~L.P.,~~significant ~~the~~declines ~~purchaser~~in ofnet ~~our~~sales ~~debentures~~and gross profit and incurred operating losses, ~~might~~causing ~~have~~our ~~the~~quarterly ~~right~~operating results to ~~rescind~~vary ~~its~~significantly. ~~purchase~~If we fail to meet the expectations of ~~these~~investors or securities analysts, ~~which~~as ~~would~~well ~~require~~as usour tointernal ~~repay~~operating togoals, ~~Montrose~~as ~~Investments~~a ~~L.P.~~result ~~the~~of ~~$15.0~~any ~~million~~future ~~that~~fluctuations ~~it invested~~ in ~~us;~~our •quarterly Weoperating ~~might~~results, bethe ~~subject~~market toprice ~~regulatory~~of ~~action;~~our ~~and~~common •stock Wecould ~~might~~decline besignificantly. ~~able~~Our tonet ~~recover~~sales ~~the~~and ~~$375,000~~quarterly ~~fee~~operating ~~that~~results are welikely ~~paid~~ to ~~Brighton~~fluctuate ~~Capital~~significantly in ~~connection~~the ~~with~~future ~~the~~due ~~transaction~~to a number of factors. These factors include:

WE• ~~MAY~~market ~~ISSUE~~acceptance ~~ADDITIONAL~~of ~~SHARES,~~our ~~WHICH~~new ~~WOULD~~products ~~REDUCE~~and ~~YOUR~~product ~~OWNERSHIP~~enhancements ~~PERCENTAGE AND~~or ~~DILUTE~~those ~~THE~~of ~~VALUE~~our ~~OF YOUR SHARES.~~ competitors;

~~Events~~• ~~over which you have no control could result in~~ the ~~issuance~~level of ~~additional~~ ~~shares~~competition ~~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~~target ~~stock~~product 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. markets;

~~SPECIAL~~• ~~NOTE~~delays ~~REGARDING~~in ~~FORWARD~~our ~~LOOKING~~introduction ~~STATEMENTS.~~ of new products;

~~This~~• ~~Report~~changes onin ~~Form 10-Q~~sales ~~contains~~volumes ~~“forward-looking”~~through ~~statements,~~our ~~including, without~~reseller ~~limitation, the statements under the captions “Risk Factors,”~~ and ~~“Management’s~~ ~~Discussion~~distribution ~~and Analysis of Financial Condition and Results of Operations~~channels,” ~~You~~which ~~can~~have ~~identify~~varying ~~these~~commission statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue,” and ~~variations~~ ofsales ~~these~~discount 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. structures;

~~ITEM~~• 3.changing ~~QUANTITATIVE~~technological ~~AND~~needs ~~QUALITATIVE~~within ~~DISCLOSURE~~our ~~ABOUT~~target ~~MARKET~~product ~~RISKS~~ markets;

~~INTEREST~~• ~~RATE~~the ~~RISK~~ impact of price competition on the selling prices for our products;

~~Our~~• ~~exposure to market risk for changes in interest rates relates primarily to~~ the ~~increase~~availability 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, bypricing ~~policy, we limit the amount~~ of ~~credit exposure to any one issuer. As stated in~~ our ~~policy,~~product 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. components;

~~Since~~• ~~October 31,~~our ~~2000,~~expenditures weon ~~have~~research ~~entered~~and ~~into~~development ~~a line of credit~~ and ~~term loan agreements pursuant to which amounts outstanding bear interest at~~ the ~~lender’s~~ ~~prime~~cost ~~rate plus up~~ to ~~.50%.~~expand ~~Accordingly,~~our ifsales weand ~~were~~marketing toprograms; ~~borrow funds under such agreements, we expect that we will experience interest rate risk on our debt.~~ and

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~~volume, wemix ~~would~~and ~~experience~~timing ~~interest rate~~of ~~risk~~orders ~~on our debt~~received.

~~FOREIGN~~Due ~~CURRENCY~~to ~~EXCHANGE~~these ~~RATE~~factors, ~~RISK~~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.

WeOur ~~transact~~revenues ~~business~~ in ~~various~~any ~~foreign~~quarter ~~countries,~~may ~~but~~also webe ~~only~~affected ~~have significant~~by ~~assets~~product ~~deployed~~returns ~~outside~~and ~~the~~any ~~United~~warranty ~~States~~obligations in ~~Europe~~that quarter. WeMany ~~have~~of our ~~effected~~distributors ~~intercompany~~have ~~advances~~limited ~~and~~product ~~sold~~return ~~goods~~rights. toIn ~~our~~addition, ~~German~~we ~~subsidiary,~~generally asextend ~~well as~~warranties to our ~~subsidiaries~~customers inthat ~~Italy~~correspond ~~and~~to ~~Switzerland,~~the ~~denominated~~warranties inprovided Uby our suppliers.S. ~~dollars,~~If ~~and those~~returns ~~amounts~~exceed ~~are~~applicable ~~subject~~reserves toor ~~currency~~if ~~fluctuation~~a ~~and~~supplier ~~require~~were ~~constant~~to fail to meet ~~revaluation~~its onwarranty ~~our~~obligations, ~~financial~~we ~~statements~~could incur significant losses. In the ~~six~~first nine months ~~ended~~of ~~January 31,~~ fiscal 2002 and 2001, we ~~incurred~~experienced ~~foreign~~product ~~currency~~return ~~losses~~rates of ~~$63,000~~approximately 16.7% and ~~$59~~14.0%,~~000,~~ respectively. ~~which~~This ~~are~~rate ~~included~~may vary significantly in ~~our~~the ~~selling~~future, ~~general~~ and ~~administrative~~we ~~expenses.~~cannot Weassure doyou ~~not~~that ~~operate~~our areserves ~~hedging~~for ~~program~~ product returns will be adequate in any future period.

21IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.

~~Table~~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 ~~Contents~~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.

toWe ~~mitigate~~believe ~~the~~that ~~effect~~our ofsuccess awill ~~significant~~depend ~~rapid change in the value of the~~on ~~Euro or~~ the ~~Swiss~~continued ~~franc~~services ~~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~~executive ~~at the~~officers ~~average rate in effect during a financial reporting period. At January 31, 2002, approximately $10.8 million in current intercompany advances~~ and ~~accounts receivable~~other ~~from~~key ~~our foreign subsidiaries were outstanding~~employees. WeThe ~~can not assure you that we will not sustain a significant~~ loss ifof aany ~~rapid~~of orthese ~~unpredicted change~~key inexecutive ~~value~~officers ~~of the Euro~~ or ~~related~~other ~~European~~key ~~currencies~~employees ~~should~~could ~~occur.~~harm ~~We can not assure you that such a loss would not have an adverse material effect on~~ our ~~results of operations or financial condition~~business.

22WE 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.

~~Table~~20 ~~of Contents~~

~~PART~~In IIrecent periods, we have experienced significant declines in net sales and ~~OTHER~~gross ~~INFORMATION~~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 $15.7 million for the nine months ended April 30, 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 may have to seek additional financing in the future, which may not be available to us on favorable or any terms.

~~Item 4.~~CONTROL ~~Submission~~BY ofOUR ~~Matters~~EXISTING toSHAREHOLDERS aCOULD ~~Vote~~DISCOURAGE ofPOTENTIAL ~~Security~~ACQUISITIONS ~~Holders.~~OF OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE.

~~The~~As ~~annual~~of ~~meeting~~April of30, ~~shareholders~~2002, ~~was~~our ~~held~~executive onofficers ~~February~~ and directors beneficially owned approximately 5,970,000 ~~2002~~shares, or approximately 37.0% ~~The~~of the outstanding shares of common stock. Acting together, these shareholders would be able to exert substantial influence on matters requiring approval by shareholders, ~~elected~~including the ~~following~~election ~~seven~~of directors. toThis ~~hold~~concentration ~~office~~of ~~until~~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 ~~next~~could ~~annual~~in ~~meeting~~turn ~~and~~have ~~until~~an ~~their~~adverse ~~successors~~effect ~~are~~on ~~elected~~the ~~and~~market ~~qualified~~price of our common stock or prevent our shareholders from realizing a premium over the market price for their shares of common stock.

	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

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.

InThe ~~addition~~market price for our common stock has been volatile in the past, and particularly volatile in the last ~~shareholders~~twelve ~~approved~~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 ~~proposal:~~factors upon the market price of our common stock:

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

•

fluctuations in our operating results;

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

~~Table~~• ofa ~~Contents~~shortfall in net sales or operating results compared to securities analysts’ expectations;

~~SIGNATURES~~ • changes in analysts’ recommendations or projections;

~~Pursuant~~• toannouncements ~~the requirements~~ of ~~the~~new ~~Securities Exchange Act of 1934~~products, ~~as amended,~~applications ~~the~~or ~~Registrant~~product ~~has~~enhancements ~~duly caused this report to be signed on its behalf~~ by ~~the~~us ~~undersigned,~~or ~~thereunto~~our ~~duly~~competitors; ~~authorized, in the City of Irvine, County of Orange, State of California, on the 18th of March, 2002.~~ and

~~PROCOM~~• ~~TECHNOLOGY,~~changes ~~INC.~~in ~~By:~~our ~~/s/~~relationships ~~Alex~~with ~~Razmjoo~~our ~~Alex~~suppliers ~~Razmjoo~~or ~~Chairman~~customers, ~~President~~including ~~and~~failures ~~Chief~~by ~~Executive~~customers ~~Officer~~to pay amounts owed to us.

~~Pursuant~~WE toMAY ~~the~~ISSUE ~~requirements~~ADDITIONAL ~~of the Securities Exchange Act of 1934~~SHARES, ~~as amended,~~WHICH ~~this~~WOULD ~~Report~~REDUCE onYOUR ~~Form 10-Q~~OWNERSHIP ~~has~~PERCENTAGE ~~been~~AND ~~signed~~DILUTE ~~below~~THE byVALUE ~~the~~OF ~~following persons~~YOUR ~~in the capacities and on the dates indicated~~SHARES.

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

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.

24 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.

~~Table~~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 ~~Contents~~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.

~~INDEX~~ITEM TO3. QUANTITATIVE ~~EXHIBITS~~AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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 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%, although at a minimum of 7%. Accordingly, if the prime rate were to fluctuate above 6%, 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 nine months ended April 30, 2002 and 2001, we incurred a foreign currency gain of $53,000 and a loss of $38,000 respectively which are included in our selling, general and administrative expenses. We do not operate a hedging program 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 April 30, 2002, approximately $11.2 million in current intercompany advances and accounts receivable from our foreign subsidiaries were outstanding. We can not assure you that we will not sustain a significant loss if a rapid or unpredicted change in value of the Euro or related European currencies should occur. We can not assure you that such a loss would not have an adverse material effect on our results of operations or financial condition.

PART II

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 14th of June, 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 Razmjoo	Chairman of the Board, President	June 14, 2002
	and Chief Executive Officer
Alex Razmjoo	(Principal Executive Officer)

/s/ Edward Kirnbauer Edward Kirnbauer	Controller and acting Chief Financial Officer	June 14, 2002

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

10.2		Agreement dated May 24, 2002 between the Registrant and Alex Aydin

10.3		Agreement dated May 24, 2002 between the Registrant and Nick Shahrestany

10.4		Agreement dated May 24, 2002 between the Registrant and Frank Alaghband

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