SecuritiesTable andof Exchange Commission Contents

~~Washington,~~United DCStates ~~20549~~

~~REPORT~~Securities ONand ~~FORM~~Exchange ~~10-Q~~Commission

~~(Mark~~Washington, ~~One)~~DC 20549

~~x QUARTERLY~~ REPORT ~~PURSUANT~~ON TOFORM ~~SECTION~~10-Q ~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~(Mark ~~the~~One) ~~quarterly period ended April 30, 2002~~

¨x ~~TRANSITION~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~transition~~quarterly period ~~from to~~ ended April 30, 2003

~~Commission~~¨ ~~file~~TRANSITION ~~number~~REPORT ~~0-21053~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~PROCOM TECHNOLOGY,~~For ~~INC.~~the transition period from to

~~(Exact~~Commission ~~name~~file ofnumber ~~registrant~~0-21653 ~~as specified in its charter)~~

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

PROCOM TECHNOLOGY, INC.

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

(Exact name of registrant as specified in its charter)

(949) 852-1000

California

33-0268063

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

~~(Registrant’s~~17571 ~~telephone~~Von ~~number~~Karman Avenue, ~~including~~Irvine ~~area~~California ~~code)~~92614

(~~Former~~Address ~~name,~~of ~~former~~principal ~~address~~executive ~~and~~office) ~~former~~(Zip ~~fiscal year, if changed since last report.~~Code)

~~Indicate by check mark whether the registrant~~ (1949) ~~has~~852-1000 filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

~~The~~(Registrant’s ~~number~~telephone ~~of shares of Common Stock~~number, ~~$.01~~including ~~par~~area ~~value,~~code) ~~outstanding on June 12, 2002 was 16,023,633.~~

~~PROCOM~~(Former ~~TECHNOLOGY~~name, ~~INC.~~former ~~AND~~address ~~SUBSIDIARIES~~and former fiscal year, if changed since last report.)

~~TABLE~~Indicate OFby ~~CONTENTS~~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 ¨ No x

~~PART~~Indicate ~~1—FINANCIAL~~by ~~INFORMATION~~check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

		PAGE
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of April 30, 2002 and July 31, 2001	2
	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 nine month period ended April 30, 2002 and the year ended July 31, 2001	4
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended April 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
SIGNATURES

The number of shares of Common Stock, $.01 par value, outstanding on June 30, 2004 was 16,198,248.

1Table of Contents

~~PART~~ PROCOM ITECHNOLOGY, INC. AND SUBSIDIARIES

~~FINANCIAL~~ TABLE ~~INFORMATION~~OF CONTENTS

~~ITEM~~The 1information set forth in this Quarterly Report on Form 10-Q is for, and as of, the quarter ended April 30, 2003. ~~FINANCIAL~~ ~~STATEMENTS~~This Quarterly Report on Form 10-Q does not reflect our current operations and financial condition.

PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES


		PAGE
	PART 1 — FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of April 30, 2003 and July 31, 2002	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2003 and 2002	3
	Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the Nine Months Ended April 30, 2003	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 6.	Exhibits and Reports on Form 8-K	20

SIGNATURES

~~CONDENSED~~1 ~~CONSOLIDATED BALANCE SHEETS~~

(UNAUDITED)Table of Contents

	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

PART I

~~See~~FINANCIAL ~~notes~~INFORMATION ~~to condensed consolidated financial statements.~~

2 ITEM 1. FINANCIAL STATEMENTS.

PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENTS~~BALANCE OFSHEETS ~~OPERATIONS~~

(UNAUDITED)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	APRIL 30,2003			JULY 31, 2002
	APRIL 30, 2002			APRIL 30, 2001			APRIL 30, 2002			APRIL 30, 2001
ASSETS
Net sales	$	4,356,000		$	8,002,000		$	20,443,000		$	32,988,000
Current assets:
Cost of sales		2,599,000			4,829,000			11,286,000			20,319,000
Cash and cash equivalents	$	7,707,000		$	10,845,000
Gross profit		1,757,000			3,173,000			9,157,000			12,669,000
Restricted cash		500,000			—
Selling, general and administrative expenses		5,782,000			4,385,000			19,457,000			13,352,000
Accounts receivable, less allowance for doubtful accounts and sales returns of $1,765,000 and $8,090,000 at April 30, 2003 and July 31, 2002, respectively		2,680,000			4,845,000
Research and development expenses		1,462,000			1,472,000			4,697,000			4,925,000
Inventories		4,402,000			6,764,000
In-process research and development		—			—			—			4,262,000
Income taxes receivable		254,000			2,282,000
Total operating expenses		7,244,000			5,857,000			24,154,000			22,539,000
Prepaid expenses		862,000			542,000
Operating loss		(5,487,000	)		(2,684,000	)		(14,997,000	)		(9,870,000	)
Other current assets		386,000			346,000
Interest income		83,000			139,000			418,000			597,000
Total current assets		16,791,000			25,624,000
Interest expense		(203,000	)		(434,000	)		(1,154,000	)		(1,005,000	)
Property and equipment, net		12,741,000			16,357,000
Loss before income taxes		(5,607,000	)		(2,979,000	)		(15,733,000	)		(10,278,000	)
Other assets		56,000			28,000
Income tax provision (benefit)		(4,473,000	)		61,000			(4,473,000	)		(279,000	)
Total assets	$	29,588,000		$	42,009,000
Net loss	$	(1,134,000	)	$	(3,040,000	)	$	(11,260,000	)	$	(9,999,000	)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Net loss per common share:
Current liabilities:
Basic and diluted	$	(0.07	)	$	(0.25	)	$	(0.70	)	$	(0.84	)
Line of credit	$	—		$	46,000
Weighted average number of common shares:
Flooring line obligation		147,000			251,000
Basic and diluted		16,024,000			12,139,000			16,009,000			11,835,000
Current portion of long-term debt		172,000			172,000
Accounts payable		2,242,000			2,837,000
Accrued compensation		804,000			752,000
Current portion of payable to related parties		662,000			1,632,000
Accrued expenses and other current liabilities		3,116,000			2,734,000
Deferred service revenues		482,000			548,000
Income taxes payable		—			56,000
Total current liabilities		7,625,000			9,028,000
Long-term debt, net of current portion		8,348,000			8,477,000
Payable to related parties, net of current portion		717,000			1,213,000
Total liabilities		16,690,000			18,718,000
Commitments, contingencies and subsequent events
Shareholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value; 65,000,000 shares authorized, 16,143,310 and 16,084,708 shares issued and outstanding, respectively		162,000			161,000
Additional paid-in capital		58,754,000			58,696,000
Accumulated deficit		(45,811,000	)		(35,703,000	)
Accumulated other comprehensive income (loss)		(207,000	)		137,000
Total shareholders’ equity		12,898,000			23,291,000
Total liabilities and shareholders’ equity	$	29,588,000		$	42,009,000

See ~~notes~~accompanying notes to condensed consolidated financial statements.

PROCOMTable TECHNOLOGY,of INC. AND SUBSIDIARIES Contents

~~CONDENSED~~ PROCOM ~~CONSOLIDATED~~TECHNOLOGY, ~~STATEMENTS~~INC. OFAND ~~SHAREHOLDERS’~~SUBSIDIARIES ~~EQUITY~~

~~(UNAUDITED)~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	COMMON STOCK			ADDITIONAL PAID IN CAPITAL			RETAINED EARNINGS (ACCUMULATED DEFICIT)			ACC. OTHER COMPREHENSIVE GAIN (LOSS)			TOTAL
	SHARES	AMOUNT
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

(UNAUDITED)

See notes to condensed consolidated financial statements.


	THREE MONTHS ENDED						NINE MONTHS ENDED
	APRIL 30, 2003			APRIL 30, 2002			APRIL 30, 2003			APRIL 30, 2002
Net sales	$	4,108,000		$	4,356,000		$	13,125,000		$	20,443,000
Cost of sales		2,594,000			2,599,000			7,909,000			11,286,000

Gross profit		1,514,000			1,757,000			5,216,000			9,157,000

Operating expenses:
Selling, general and administrative		2,089,000			5,782,000			8,800,000			19,457,000
Research and development		1,033,000			1,462,000			3,104,000			4,697,000
Asset impairment		2,884,000			—			2,884,000			—

Total operating expenses		6,006,000			7,244,000			14,788,000			24,154,000

Operating loss		(4,492,000	)		(5,487,000	)		(9,572,000	)		(14,997,000	)

Interest income		28,000			83,000			114,000			418,000
Interest expense		(188,000	)		(203,000	)		(609,000	)		(1,154,000	)

Loss before income taxes		(4,652,000	)		(5,607,000	)		(10,067,000	)		(15,733,000	)

Provision (benefit) for income taxes		—			(4,473,000	)		41,000			(4,473,000	)

Net loss	$	(4,652,000	)	$	(1,134,000	)	$	(10,108,000	)	$	(11,260,000	)

Net loss per common share:
Basic and diluted	$	(0.29	)	$	(0.07	)	$	(0.63	)	$	(0.70	)

Weighted average number of common shares:
Basic and diluted		16,143,000			16,024,000			16,110,000			16,009,000

4See accompanying notes to condensed consolidated financial statements.

~~PROCOM~~3 ~~TECHNOLOGY, INC. AND SUBSIDIARIES~~

CONDENSEDTable CONSOLIDATEDof STATEMENTS OF CASH FLOWS Contents

~~(UNAUDITED)~~ PROCOM TECHNOLOGY, INC. AND SUBSIDIARIES

	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

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

~~See~~(UNAUDITED) ~~notes to condensed consolidated financial statements.~~


									ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		ACCUMULATED DEFICIT
	SHARES	AMOUNT		ADDITIONAL PAID-IN CAPITAL		ACCUMULATED DEFICIT						TOTAL
BALANCE AT JULY 31, 2002	16,084,708	$	161,000	$	58,696,000	$	(35,703,000	)	$	137,000		$	23,291,000

Comprehensive loss:
Net loss	—		—		—		(10,108,000	)		—			(10,108,000	)
Foreign currency translation adjustment, net of a reclassification adjustment of $301,000 included in operations	—		—		—		—			(344,000	)		(344,000	)

Comprehensive loss													(10,452,000	)
Repricing of employee stock options	—		—		44,000		—			—			44,000
Issuance of stock to employees	58,602		1,000		14,000		—			—			15,000

BALANCE AT APRIL 30, 2003	16,143,310	$	162,000	$	58,754,000	$	(45,811,000	)	$	(207,000	)	$	12,898,000

~~PROCOM~~See ~~TECHNOLOGY,~~accompanying ~~INC.~~notes to ~~AND~~condensed ~~SUBSIDIARIES~~consolidated financial statements.

~~NOTES~~4 ~~TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 1. GENERAL.Table of Contents

~~The accompanying financial information is unaudited, but in the opinion of~~ ~~management,~~PROCOM ~~reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of Procom Technology~~TECHNOLOGY, ~~Inc~~INC. ~~and~~AND ~~its~~SUBSIDIARIES consolidated subsidiaries (the “Company”) as of the dates indicated and the results of operations and cash flows 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~~CONDENSED ~~2. CRITICAL~~CONSOLIDATED ~~ACCOUNTING~~STATEMENTS ~~POLICIES~~OF ~~AND~~CASH ~~ESTIMATES.~~ FLOWS

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

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


	NINE MONTHS ENDED APRIL 30,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,108,000	)	$	(11,260,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		779,000			1,451,000
Provision for bad debts and sales returns		(635,000	)		4,885,000
Provision for inventory obsolescence		(763,000	)		225,000
Asset impairment		2,884,000			—
Amortization of debt issuance costs		31,000			274,000
Compensatory stock options		44,000			55,000
Changes in operating accounts:
Accounts receivable		2,500,000			(471,000	)
Inventories		2,836,000			(3,305,000	)
Income taxes receivable		2,028,000			(4,470,000	)
Prepaid expenses		(351,000	)		(279,000	)
Other current assets		(52,000	)		34,000
Other assets		(38,000	)		(19,000	)
Accounts payable		(554,000	)		(616,000	)
Accrued compensation		52,000			(370,000	)
Payable to related parties		(1,466,000	)		—
Accrued expenses and other liabilities		556,000			497,000
Deferred service revenues		(66,000	)		270,000
Income taxes payable		(56,000	)		—

Net cash used in operating activities		(2,379,000	)		(13,099,000	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(47,000	)		(154,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of convertible debenture		—			(10,000,000	)
Borrowings (repayments) of long-term debt		(129,000	)		8,692,000
Net borrowings on foreign subsidiaries line of credit		49,000			76,000
Flooring line obligation		(104,000	)		(35,000	)
Cash deposits restricted for flooring line obligation		(500,000	)		—
Proceeds from exercise of stock options		—			23,000
Common stock issuance costs		—			(23,000	)
Issuance of common stock to employees		15,000			70,000

Net cash used in financing activities		(669,000	)		(1,197,000	)

Effect of exchange rate changes		(43,000	)		172,000

Decrease in cash and cash equivalents		(3,138,000	)		(14,278,000	)

Cash and cash equivalents at beginning of period		10,845,000			25,419,000

Cash and cash equivalents at end of period	$	7,707,000		$	11,141,000

Supplemental disclosures of cash flow information:
CASH PAID (RECEIVED) DURING THE PERIOD:
Interest	$	532,000		$	694,000
Income taxes	$	(2,042,000	)	$	—

~~The~~See ~~Company~~accompanying ~~sells NAS appliances primarily through direct sales channels and~~notes ~~resellers. Revenue is generally recorded upon product shipment. The Company maintains reserves, which are adjusted at each reporting date,~~ to ~~estimate~~condensed ~~anticipated~~consolidated 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~~statements. 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.

~~The~~5 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.

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

~~NOTE~~ PROCOM 3TECHNOLOGY, INC. ~~INVENTORIES.~~ AND SUBSIDIARIES

~~Inventories~~NOTES ~~are~~TO ~~summarized~~CONDENSED asCONSOLIDATED ~~follows:~~FINANCIAL STATEMENTS

	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

1. General

6The accompanying financial information is unaudited, but in the opinion of management, reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of Procom Technology, Inc. and its consolidated subsidiaries (the “Company”) as of the dates indicated and the results of operations and cash flows 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. Certain amounts from prior periods have been reclassified to conform to current period presentation. 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 Annual Report on Form 10-K for fiscal 2002. Results for the interim periods presented are not necessarily indicative of the results for the entire year.

~~NOTE~~The 4consolidated financial statements include the financial statements of Procom Technology, Inc. ~~NET~~ ~~LOSS~~and ~~PER~~its ~~SHARE~~wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of November 1, 2002, the Company sold its Swiss subsidiary, Procom Technology AG (see footnote 11).

~~Basic~~In ~~net~~December ~~loss~~2002, ~~per~~the ~~share~~FASB isissued ~~computed~~SFAS ~~using~~No. ~~the~~148, ~~weighted~~Accounting ~~average~~for ~~number~~Stock-Based ofCompensation ~~shares~~– ofTransition ~~common~~and Disclosure. ~~stock~~SFAS ~~outstanding~~No. ~~during~~148 amends the ~~period.~~disclosure ~~Diluted net~~requirements ~~loss~~in ~~per~~SFAS ~~share~~No. is123, ~~computed~~Accounting ~~using~~for ~~the~~Stock-Based ~~weighted~~Compensation, ~~average~~for ~~number~~annual ofperiods ~~shares~~ending ofafter ~~common~~December ~~stock~~15, ~~outstanding~~2002, and ~~potentially~~for ~~dilutive~~interim ~~common~~periods ~~shares~~beginning ~~outstanding~~after ~~during~~December ~~the~~15, ~~period~~2002. ~~Potentially~~The Company ~~dilutive~~adopted ~~common~~the ~~shares~~disclosure ~~consist~~provisions of ~~stock~~SFAS ~~options~~No. ~~and~~148 ~~warrants. For~~during the ~~periods~~three ~~presented~~months ended April 30, ~~basic~~2003. ~~and~~Effective ~~diluted~~for ~~net~~financial ~~loss~~statements ~~per~~for ~~share~~fiscal ~~was~~years ~~based~~ending onafter December 15, 2002, Statement 148 also provides three alternative transition methods for companies that choose to adopt the ~~weighted~~fair ~~average~~value ~~number~~measurement provisions of ~~shares~~SFAS ofNo. ~~common~~123. ~~stock~~Should ~~outstanding~~the ~~during~~Company be required to adopt the ~~period.~~fair Asvalue measurement provisions of ~~April~~SFAS ~~30,~~No. ~~2002~~123 and ~~2001~~SFAS No. 148, ~~stock~~it ~~options~~would ~~and~~have ~~warrants~~a tomaterial ~~purchase~~impact ~~2,048,569~~on ~~shares~~the ~~and~~Company’s ~~1,000,871~~results ~~shares~~of operations. However, ~~respectively~~the ofCompany ~~common~~has ~~stock~~no ~~were~~plans ~~outstanding.~~to ~~The~~adopt ~~dilutive~~the ~~effect~~fair value measurement provisions of ~~these~~SFAS ~~stock~~No. ~~options~~123 ~~and~~unless ~~warrants~~required ~~were~~to ~~not~~under ~~included~~new inaccounting standards and, as such, believes the ~~computation~~adoption of ~~net~~SFAS ~~loss~~No. ~~per~~148 ~~share~~will asnot have a material impact at this time on the ~~effect~~Company’s ~~would~~financial ~~have~~position ~~been~~or ~~antidilutive~~results of operations.

~~NOTE~~The 5Company applies Accounting Principles Board (“APB”) Opinion No. ~~COMPREHENSIVE~~ ~~LOSS~~25 and related Interpretations in accounting for its stock option plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement 123, the Company’s net loss would have been the pro forma amounts indicated below:

For the nine months ended April 30, 2002 and 2001, the only differences between reported net loss and comprehensive loss was a foreign currency translation adjustment of $172,000 and $(67,000), respectively. For the three months ended 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.


	THREE MONTHS ENDED APRIL 30,						NINE MONTHS ENDED APRIL 30,
	2003			2002			2003			2002
Net loss as reported	$	(4,652,000	)	$	(1,134,000	)	$	(10,108,000	)	$	(11,260,000	)
Add: Total stock-based compensation expense included in net loss as reported		44,000			18,000			44,000			55,000
Deduct: Total stock-based compensation expense determined under fair value method		(452,000	)		(748,000	)		(1,567,000	)		(2,381,000	)

Pro forma net loss	$	(5,060,000	)	$	(1,864,000	)	$	(11,631,000	)	$	(13,586,000	)

Loss per share:
Basic and diluted net loss per share as reported	$	(0.29	)	$	(0.07	)	$	(0.63	)	$	(0.70	)

Pro forma basic and diluted net loss per share	$	(0.31	)	$	(0.12	)	$	(0.72	)	$	(0.85	)

~~NOTE 6~~2. ~~BUSINESS~~ ~~SEGMENT~~Use ~~INFORMATION.~~of Estimates

The ~~Company~~preparation ~~operates~~of inthe ~~one~~condensed ~~industry~~consolidated ~~segment:~~financial ~~The~~statements requires ~~design,~~the ~~manufacture~~Company to make estimates and ~~marketing~~judgments that affect the reported amounts of ~~data~~assets, ~~storage~~liabilities, ~~devices.~~revenues ~~The~~and ~~Company~~expenses, ~~has~~and ~~two~~related ~~major~~disclosure ~~distinct~~of ~~product~~contingent ~~families:~~liabilities. ~~network~~On ~~attached~~an ~~storage~~on-going ~~products~~basis, the Company evaluates its estimates, ~~(“NAS”)~~including ~~and~~those ~~other~~related ~~data~~to ~~storage~~product ~~products~~returns, ~~(“Legacy”)~~bad debts, ~~which~~inventories, ~~includes~~and ~~disk~~contingencies. ~~drive~~The ~~storage~~Company ~~upgrade~~bases ~~systems,~~its ~~CD/DVD-ROM~~estimates ~~servers~~on ~~and~~historical ~~arrays~~experience and ~~tape~~on ~~backup~~various ~~products.~~other ~~Net~~assumptions ~~sales~~that ofare ~~NAS~~believed ~~products~~to ~~represented~~be ~~73.2%~~reasonable ~~and~~under ~~72.5%~~the ofcircumstances, ~~total~~the ~~product~~results ~~net~~of ~~sales~~which ~~for~~form the ~~three~~basis ~~months~~for ~~ended~~making ~~April~~judgments ~~30,~~about ~~2002~~the ~~and~~carrying ~~2001,~~values ~~respectively,~~of assets and ~~80.5%~~liabilities ~~and~~that ~~67.1%~~are ofnot ~~total~~readily ~~net~~apparent ~~sales~~from ~~for~~other ~~the~~sources. ~~nine~~Actual ~~months~~results ~~ended~~may ~~April~~differ ~~30,~~from ~~2002~~these ~~and~~estimates ~~2001,~~under ~~respectively~~different assumptions or conditions.

~~International~~6 sales as a percentage of net sales amounted to 3.3% and 50.0% for the three months ended April 30, 2002 and 2001, respectively, and 39.0% and 59.1% for the nine months ended April 30, 2002 and 2001, respectively. International sales were primarily to European customers. Identifiable assets used in connection with the Company’s foreign operations were $3.0 million at April 30, 2002 and $8.5 million at July 31, 2001.

ForTable the nine months ended April 30, 2002, no single customers accounted for more than 10.0% of net sales, while two customers accounted for 13.4% of net sales for the nine months ended April 30, 2001. At April 30, 2002, one Italian reseller accounted for approximately 11.4% of total accounts receivable. Contents

~~NOTE 7~~3. ~~LINES~~ OFSummary ~~CREDIT,~~of ~~CONVERTIBLE~~Significant ~~DEBENTURE~~Accounting ~~AND~~Policies ~~LONG-TERM DEBT.~~

OnRevenue ~~October~~recognition ~~10, 2000, the Company entered into a term loan agreement~~ and aallowances three-year working capital line of 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.

InThe ~~addition to the CIT line of credit noted above, the~~ Company’s ~~has~~Network ~~a flooring~~Attached ~~line~~Storage ~~with~~(“NAS”) ~~IBM~~products ~~Credit,~~include ~~which~~an ~~has~~operating ~~committed~~system tothat ~~make~~is ~~$2.0~~integral ~~million in flooring inventory commitments available~~ to the ~~Company. As of April 30, 2002 and July 31, 2001, the Company owed $496,000 and $531,000, respectively, under the flooring~~ ~~line.~~overall ~~The~~product ~~flooring line is collateralized by the specific inventory purchased pursuant to the flooring commitments. CIT~~ and ~~IBM~~its ~~Credit have entered into an intercreditor agreement which determines the level of priority of either lender’s security interest~~functionality. The ~~flooring line requires the maintenance by the~~ Company ofrecognizes arevenue ~~minimum~~for ~~net~~NAS ~~worth~~products ~~of $16.0 million. The Company was~~ in ~~compliance~~accordance with ~~the~~Statement ~~terms~~ of ~~the~~Position ~~flooring~~(“SOP”) ~~line~~97-2, at“Software ~~April~~Revenue 30Recognition”, ~~2002.~~as ~~The~~amended ~~flooring~~by ~~line~~SOP ~~also~~98-9, ~~requires~~“Software ~~the Company~~Revenue ~~not~~Recognition towith beRespect into ~~default~~Certain ~~of any covenants in the CIT agreement~~Arrangements.” ~~IBM~~The ~~Credit~~Company ~~has~~recognizes ~~waived~~revenue, ~~compliance~~net ~~with~~of ~~that~~estimated ~~requirement~~returns, atfor ~~April~~its ~~30,~~NAS ~~2002.~~products when:

7Persuasive Evidence of an Arrangement Exists. It is the Company’s customary practice to have a purchase order prior to recognizing revenue on an arrangement.

OnDelivery ~~October~~Has ~~31, 2000, the Company issued a $15~~Occurred.0 ~~million convertible unsecured debenture to a private investor.~~ The debenture carried interest at 6.0% per annum, and was repayable in full on October 31, 2003, unless otherwise converted into the common stock of the Company. In connection with the issuance of the debenture, the Company’s ~~issued~~product tois ~~the~~physically ~~investor~~delivered ~~a 5-year warrant~~ to ~~purchase~~its ~~up to 32~~customers,~~916~~ ~~shares~~generally ofwith ~~its~~standard ~~common~~transfer ~~stock~~terms atof anFOB ~~initial~~shipping ~~exercise price of $32~~point.55 ~~per~~The ~~share,~~core ~~with~~operating ~~the~~system ~~number~~software ofthat ~~shares for which~~ the ~~warrant~~customer purchases is ~~exercisable~~pre-installed and ~~the~~tested ~~exercise~~at ~~price~~the ~~subject~~Company’s tofacility ~~antidilution~~prior ~~adjustments.~~to ~~The~~shipment ~~value~~and ofdoes ~~the~~not ~~warrant~~require ofsignificant ~~$562~~production,~~000~~ ~~was computed using the Black-Scholes model~~modification, ~~with~~or ~~the~~customization ~~following~~at ~~assumptions: Expected life — 5 years, Risk free interest rate — 6%, and Volatility — 1.20. In~~ the ~~second quarter~~customer’s ofsite; ~~fiscal~~as ~~2002~~such, the ~~Company~~system ~~paid~~is ~~the~~functional ~~investor~~according ~~the~~to ~~remaining $10,000,000 principal amount of~~ the ~~debentures~~Company’s ~~and~~specifications ~~expensed~~at the ~~remaining~~time ~~unamortized debt issuance and warrant costs~~ of ~~$274,000 to interest expense~~shipment.

InThe ~~June~~Price ~~2001,~~Is ~~the~~Fixed ~~Company~~or ~~completed~~Determinable. ~~the~~Arrangements ~~sale~~with ofextended ~~3,800,000~~payment terms ~~shares~~are ofnot ~~common~~considered ~~stock~~to ~~raising~~be ~~gross~~fixed ~~proceeds~~or ~~of approximately $34~~determinable.2 ~~million before~~Revenue ~~offering~~from ~~costs~~such ofarrangements ~~$2.7~~is ~~million.~~recognized Asas ~~a result of this offering,~~ the ~~exercise~~fees ~~price~~become ofdue ~~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~~payable.

InCollection ~~December~~Is ~~2001,~~Probable. ~~the~~Probability ~~Company~~of ~~borrowed~~collection ~~$8.75~~is ~~million~~assessed ~~under~~on a ~~financing arrangement secured~~ customer-by ~~the~~-customer ~~Company’s corporate headquarters~~basis. ~~The~~Customers ~~principal~~are ~~amount~~subjected ~~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~~credit ~~based~~review ~~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~~process ~~beginning~~that ~~February~~evaluates ~~1, 2002 with~~ the ~~remaining~~customers’ ~~principal~~financial ~~balance~~position and ~~unpaid~~ultimately ~~interest~~their ~~due~~ability atto ~~the maturity date of January 1, 2007~~pay. ~~Debt~~If ~~issuance~~it ~~costs~~is ~~totaled~~determined ~~$201,800~~from ~~and are being amortized over~~ the ~~term~~outset of ~~the loan. Up to~~ an ~~additional $1.0 million may be borrowed under this financing~~ arrangement tothat ~~cover~~collection ~~leasing~~is ~~costs~~not ~~and~~probable ~~tenant~~based ~~improvements~~upon on the ~~vacant,~~review ~~unimproved space within the corporate headquarters. As of April 30~~process, ~~2002,~~revenue ~~the~~is ~~outstanding~~recognized ~~principal~~when ~~balance~~cash ~~of the loan totaled $8.69~~is ~~million~~collected.

InThe ~~addition~~Company torecognizes revenue on multiple element arrangements using the ~~line~~residual ofmethod. ~~credit~~Under the residual method, ~~our~~revenue ~~foreign~~is ~~subsidiaries~~recognized when Company-specific objective evidence of fair value exists for all of the undelivered elements in ~~Germany~~the arrangement, ~~Italy~~but ~~and~~does ~~Switzerland~~not ~~have~~exist ~~lines~~for one or more of the delivered elements in the arrangement. At the outset of ~~credit~~the arrangement with ~~banks~~the incustomer, ~~their~~the ~~respective~~Company ~~countries~~defers ~~that~~revenue ~~are~~for ~~utilized~~the ~~primarily~~fair ~~for~~value ~~overdraft~~of the undelivered elements such as consulting services and ~~short~~product maintenance, and recognizes the revenue for the remainder of the arrangement fee attributable to the elements initially delivered when the basic criteria in SOP 97-~~term~~2 ~~cash~~have ~~needs~~been met. AtRevenue ~~April~~from ~~30,~~consulting ~~2002,~~services is recognized as the ~~amount~~related ~~outstanding~~services ~~under~~are ~~these~~performed. ~~lines~~Revenue ~~was~~from ~~$84,000~~maintenance is recognized ratably over the term of the support period.

~~NOTE~~Revenue 8from sales of the Company’s non NAS products is recognized in accordance with Staff Accounting Bulletin (SAB) No. ~~RECENT~~ ~~ACCOUNTING~~101, ~~PRONOUNCEMENTS~~“Revenue Recognition in Financial Statements.” The revenue recognition criteria of SAB 101 are consistent with the NAS policies described above.

InThe Company’s ~~July~~product ~~2001,~~evaluation ~~the~~program ~~Financial~~enables ~~Accounting~~a ~~Standards~~customer ~~Board~~to ~~(FASB)~~receive ~~issued~~NAS ~~SFAS~~appliances ~~No.~~on ~~141,~~a ~~“Business~~trial ~~Combinations,”~~basis and ~~SFAS~~return ~~No.~~the ~~142,~~NAS ~~“Goodwill~~appliances ~~and~~within ~~Other~~a ~~Intangible~~specified ~~Assets.” Under SFAS No. 141~~period, ~~all~~generally ~~business combinations initiated after June~~ 30,-60 ~~2001 must be accounted for using the purchase method~~days. ~~Under~~The ~~SFAS~~period ~~No.~~may ~~142,~~be ~~goodwill~~extended ~~and intangible assets with indefinite lives are no longer amortized but are reviewed annually for impairment (or more frequently~~ if ~~indicators~~the ofcustomer ~~impairment~~needs ~~arise).~~additional ~~Separable intangible assets that are not deemed~~ time to ~~have~~evaluate ~~indefinite~~the ~~lives~~product ~~will~~within ~~continue~~the tocustomer’s beparticular ~~amortized~~operating ~~over their useful lives (but with no maximum life)~~environment. ~~The~~Revenue ~~amortization~~is ~~provisions~~not ofrecorded ~~SFAS~~for ~~No.~~evaluation ~~142~~units ~~apply~~until ~~to goodwill~~the ~~and~~customer ~~intangible~~has ~~assets~~agreed ~~acquired after June 30, 2001. With respect~~ to ~~goodwill~~purchase ~~and intangible assets acquired prior to July 1, 2001,~~ the ~~Company is required to adopt SFAS No~~products. ~~142 effective August 1, 2002.~~

AsValuation of ~~the~~accounts ~~date~~receivable of adoption, the Company expects to have unamortized goodwill in the amount of $1,140,000, and unamortized identifiable intangible assets in the amount of $630,000, all of which will be subject to the transition provisions of SFAS 141 and 142. Amortization expense related to goodwill was $ 361,000 and $ 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.

InThe ~~October~~Company ~~2001,~~maintains ~~the~~a ~~FASB~~separate ~~issued~~allowance ~~SFAS~~for ~~No.~~doubtful ~~144,~~accounts ~~“Accounting~~ for ~~Impairment~~estimated orlosses ~~Disposal~~resulting offrom ~~Long-Lived~~the ~~Assets.”~~inability ~~SFAS~~of ~~144~~its customers ~~supersedes~~to ~~SFAS~~make Norequired payments. ~~121,~~The ~~“Accounting~~Company ~~for~~analyzes ~~the~~accounts ~~Impairment~~receivable ~~of Long-Lived Assets~~ and ~~for~~historical ~~Long-Lived~~bad ~~Assets~~debts, tocustomer Beconcentrations, ~~Disposed~~customer Ofsolvency,” ~~and~~current ~~addresses~~economic ~~financial~~and ~~accounting~~geographic trends, and ~~reporting~~changes ~~for~~in ~~the~~customer ~~impairment~~payment orterms ~~disposal~~and ofpractices ~~long-lived~~when evaluating ~~assets.~~the ~~This~~adequacy ~~statement~~of isthe ~~effective~~allowance for ~~fiscal~~doubtful ~~years~~accounts. ~~beginning~~If ~~after~~the ~~December~~financial ~~15, 2001.~~condition ~~Adoption~~ of ~~this~~the ~~statement~~Company’s iscustomers ~~not~~deteriorates, ~~expected~~resulting toin ~~have~~an aimpairment ~~material~~of ~~impact~~their onability ~~the~~to ~~Company’s~~make ~~consolidated~~payments, ~~financial~~additional ~~position~~allowances ormay ~~results~~be ~~of operations~~required.

~~NOTE~~Valuation ~~9. SUBSEQUENT~~of ~~EVENTS~~inventory

The ~~Job~~Company ~~Creation~~writes ~~and Worker’s~~down ~~Assistance~~its ~~Act of 2002~~inventory, ~~signed~~including byestimated ~~the~~excess ~~President~~and obsolete ~~in February 2002~~inventory, ~~permits~~to the ~~Company~~estimated tonet ~~carry~~realizable ~~back~~value ~~certain~~based ofupon ~~its~~assumptions ~~previously~~about ~~recorded~~future ~~losses~~demand ~~for~~and 5market ~~years instead of only 2 years~~conditions. ~~The~~Although the Company ~~previously~~strives ~~had not believed it would be able~~ to ~~recover~~ensure athe ~~tax~~accuracy ~~benefit~~of ~~related to~~ its ~~prior~~forecasts ~~year losses. As a result~~ of ~~the~~future ~~legislation,~~product ~~in April 2002~~demand, ~~the~~any ~~Company~~significant ~~filed~~unanticipated changes ~~amended~~in ~~tax~~demand ~~returns~~or ~~for~~technological ~~prior~~developments ~~year~~could ~~losses,~~have ~~and~~a insignificant ~~June~~impact ~~2002,~~on the ~~Company~~value ~~received a tax refund~~ of ~~$2.9~~its ~~million. In addition~~inventory, ~~the~~ ~~Company~~and ~~anticipates~~its ~~that~~reported ~~it will be able to recover approximately $2~~results.3 ~~million~~If inactual ~~additional~~market ~~tax~~conditions ~~refunds~~are ~~when~~less itfavorable ~~files~~than ~~its~~those ~~fiscal 2002 tax return~~projected, ~~and~~additional ~~carries~~write-downs ~~expected~~against ~~fiscal 2002~~ operating results ~~losses~~may ~~back~~be ~~to previous periods~~required. ~~The Company has recorded in the current~~

8Accounting Standards Adopted

~~quarter~~In aJune ~~tax~~2001, ~~benefit~~the ofFinancial $2Accounting Standards Board (“FASB”) issued SFAS No.9 ~~million~~141, ~~plus~~“Business aCombinations,” ~~proportionate~~and ~~share~~SFAS ofNo. ~~the~~142, ~~anticipated~~“Goodwill ~~additional~~and ~~refunds~~Other ~~related~~Intangible toAssets.” ~~fiscal~~Under ~~2002~~SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives

In7 May 2002, the employment of three executives of the Company was terminated. Pursuant to agreements executed between the Company and the executives at the time of termination, each executive will receive payments of $18,750 for 36 months, and each will be entitled to participate in the Company’s employee benefit, health and other insurance plans for the 36 month period. The Company anticipates that it will record a charge for the severance obligations of approximately $2.3 million in the quarter ended July 31, 2002.

ITEMTable 2. MANAGMENT’Sof DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Contents

Weare ~~develop,~~no ~~manufacture~~longer ~~and~~amortized ~~market~~but ~~NAS~~are ~~appliances~~reviewed ~~and~~annually ~~other~~for ~~storage~~impairment ~~devices~~(or ~~for~~more afrequently ~~wide~~if ~~range~~indicators of ~~computer~~impairment ~~networks and operating systems~~arise). In ~~Our~~fiscal ~~NAS appliances~~2002, ~~which~~the ~~consist~~Company ofdetermined ~~our~~that ~~DataFORCE~~all ~~and~~of ~~NetFORCE product~~its ~~lines,~~existing ~~provide~~goodwill ~~end-users~~and ~~with faster access to data at a lower overall cost than~~ other ~~storage~~intangible ~~alternatives.~~assets Wewere ~~refer to these products collectively as our NAS appliances. In addition~~impaired, ~~we sell disk drive storage upgrade systems, CD/DVD-ROM servers~~ and ~~arrays~~the ~~and~~Company ~~tape~~recorded ~~backup~~an ~~products,~~impairment ~~which~~charge weof ~~refer~~approximately to$2.4 ~~collectively as our Legacy products~~million. ~~Over the last four years~~Accordingly, weupon ~~have~~adoption ~~significantly increased our focus on the development and sale~~ of ~~NAS~~SFAS ~~appliances~~No. We142 ~~continue~~on toAugust ~~develop more~~1, ~~advanced~~2002, ~~NAS appliances and expect this business to be our principal business in~~ the ~~future.~~Company Wedid ~~are~~not ~~currently~~have ~~analyzing~~any ~~the~~goodwill ~~market~~or ~~demands~~other ~~and~~intangible ~~opportunities for all of our Legacy products~~assets, and wetherefore, ~~hope~~the toadoption ~~transition users~~ of ~~these~~the ~~products~~statement todid ~~our growing~~not ~~line~~have ofan ~~more~~impact ~~robust,~~on ~~generally~~the ~~higher~~Company’s ~~margin~~financial ~~NAS solutions~~statements.

~~Changing~~In ~~Business~~October ~~Mix~~2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long- Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of.” The adoption of SFAS No. 144 is required for the Company’s fiscal year beginning August 1, 2002. The Company adopted SFAS No. 144 and under the provisions of the standard recorded an impairment charge of $2,884,000 during the three and nine months ended April 30, 2003 (see Note 7).

WeIn ~~have~~June ~~experienced significantly reduced demand~~2002, ~~revenues~~the ~~and~~FASB issued ~~gross~~SFAS ~~margins~~No. ~~for our Legacy products and~~146, asAccounting afor ~~result,~~Costs ~~have~~Associated ~~discontinued~~with ~~some~~Exit ofor ~~these~~Disposal ~~Legacy products~~Activities. ~~The~~ ~~demand~~SFAS ~~for~~No. ~~our~~146 CDaddresses ~~servers~~financial ~~and~~accounting ~~arrays has declined~~ and wereporting ~~have~~for ~~experienced~~costs ~~increased~~associated ~~pricing~~with ~~pressures~~exit onor ~~our~~disposal ~~disk~~activities ~~drive storage upgrade systems, resulting in lower overall revenues~~ and ~~gross~~nullifies ~~margins.~~Emerging ~~Our~~Issues ~~gross~~Task ~~margins vary significantly by~~Force ~~product~~(EITF) ~~line,~~Issue ~~and~~94-3, ~~therefore,~~Liability ~~our~~Recognition ~~overall~~for ~~gross~~Certain ~~margin~~Employee ~~varies~~Termination ~~with~~Benefits ~~the~~and ~~mix~~Other ofCosts ~~products~~to weExit ~~sell~~an Activity. ~~For~~The ~~example,~~provisions ~~our sales~~ of CDthis ~~servers~~Statement ~~and~~are ~~arrays~~effective ~~have~~for ~~historically~~exit ~~generated~~or ~~higher~~disposal ~~gross~~activities ~~margins~~that ~~than~~are ~~those~~initiated ofafter ~~our~~December ~~tape~~31, ~~back-up~~2002, with ~~and~~early ~~disk~~application ~~drive products~~encouraged. In ~~future~~The ~~periods,~~adoption ~~as sales~~ of ~~our~~SFAS ~~higher~~No. ~~margin~~146 ~~NAS~~did ~~appliances~~not ~~continue~~have ~~to increase as~~ a ~~percentage~~material ofeffect ~~total~~on ~~sales,~~the weCompany’s ~~expect~~financial ~~our~~position ~~overall~~or ~~gross~~results ~~margins~~of ~~to be positively affected~~operations.

~~Our~~In ~~revenues~~November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and ~~gross~~Disclosure ~~margins~~Requirements ~~have~~for Guarantees, ~~been~~Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and ~~may~~107 ~~continue~~and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be ~~affected~~made by a ~~variety~~guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of ~~factors~~a ~~including:~~guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on the Company’s financial position or results of operations.

•4. ~~new~~Inventories ~~product introductions and enhancements;~~

•Inventories ~~competition;~~are summarized as follows:

• direct versus indirect sales;


	April 30, 2003		July 31, 2002
Raw materials	$	1,174,000	$	3,087,000
Work in process		975,000		840,000
Finished goods		2,253,000		2,837,000

Total	$	4,402,000	$	6,764,000

•5. ~~the~~Net ~~mix~~Loss ~~and~~Per ~~average selling prices of products; and~~Share

•Basic net loss per share was computed using the ~~cost~~weighted average number of ~~labor~~shares of common shares outstanding during the period. Diluted net loss per share is computed using weighted average number of shares of common stock outstanding and ~~components~~potentially dilutive common shares outstanding during the period. 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 April 30, 2003 and 2002, stock options to purchase 1,551,000 shares and 2,010,000 shares of common stock were outstanding. The dilutive effect of these stock options were not included in the computation of net loss per share as the effect would have been antidilutive.

~~Revenue~~6. ~~and~~Comprehensive ~~Revenue~~Loss ~~Recognition.~~

WeFor ~~sell~~the ~~NAS~~nine ~~appliances~~months ~~primarily~~ended ~~through~~April ~~direct sales channels and resellers. Revenue is generally recorded upon product shipment. We maintain reserves~~30, ~~which are adjusted at each reporting date~~2003, tothe ~~estimate~~only ~~anticipated~~difference ~~returns~~between ~~relating~~reported tonet ~~each~~loss ~~reporting~~and ~~period~~comprehensive ~~based~~loss onwas ~~historical~~a ~~rates~~net offoreign ~~sales~~currency ~~returns. In~~translation ~~addition,~~adjustment weloss ~~sell service contracts for certain~~ of ~~our~~$344,000, ~~appliances~~which ~~that~~included ~~extend for~~ a ~~specified~~reclassification ~~period~~adjustment of ~~time~~$301,000 ~~usually~~for ~~one~~amounts toincluded ~~three~~in ~~years.~~operations ~~Revenue~~resulting from ~~these~~the ~~service~~sale ~~contracts~~of isa ~~recorded~~Company ~~ratably~~subsidiary ~~over~~in the ~~life~~second quarter of ~~the~~fiscal ~~service agreement~~2003.

~~We sell Legacy products primarily through distributors~~7. ~~Revenue~~Lines is recorded from these Legacy sales when the distributor receives the product. Our agreements with our distributors allow limited product returns, including stock balancing and price protection privileges. We maintain reserves, which are adjusted at each financial reporting date, to estimate anticipated returns, including stock balancing and price protection claims, relating to each reporting period. The reserves are based on historical rates of ~~sales~~Credit and ~~returns,~~Long-Term ~~including~~Debt ~~price protection and stock balancing claims, and the level of our product held by our customers in their inventory.~~

InOn ~~addition~~October 10, ~~under~~2000, athe ~~product~~Company ~~evaluation~~entered ~~program~~into ~~established~~a bythree-year ~~us,~~working ~~our~~capital ~~indirect~~line ~~channel~~of ~~partners~~credit ~~and~~with ~~end-users~~The ~~generally~~CIT ~~are~~Group/Business ~~able~~Credit to(“CIT”). ~~receive~~The ~~appliances~~working capital line of credit provides for borrowings, on a ~~trial~~revolving basis, ~~and~~for ~~return~~a ~~the~~period ~~appliances~~of ~~within~~three years, in an amount based upon a specified ~~period,~~percentage ~~generally~~of the Company’s eligible accounts receivable (approximately $1.0 million at April 30~~-60~~, ~~days~~2003), ifup ~~they~~to ~~are~~a ~~not~~limit ~~satisfied~~of $5.0 ~~The~~million. ~~period~~Amounts ~~may~~outstanding beunder ~~extended~~the ifworking capital line bear interest at the ~~customer~~lender’s ~~needs additional~~prime ~~time~~rate toplus ~~evaluate~~.25%. ~~the~~At ~~product~~April ~~within~~30, 2003, no amounts were outstanding under the ~~customer’s~~working ~~particular~~capital ~~operating~~line ~~environment~~of credit. The ~~value~~line of ~~evaluation~~credit ~~units~~accrues atvarious ~~customer~~monthly ~~sites~~maintenance, atminimum ausage and early termination fees. The line of credit is collateralized by certain assets of the Company. The line of credit requires certain financial ~~reporting~~and ~~date~~other ~~are~~covenants, ~~included~~including inthe ~~inventory~~maintenance asof a minimum EBITDA

finishedTable goods. At April 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. Contents

~~Cost~~requirement for rolling 12-month periods ending on each fiscal quarter. For the twelve month period ended on April 30, 2003, 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 the Company cannot borrow under the line. Effective September 2, 2003, the Company and CIT mutually agreed to terminate the outstanding working capital line of ~~Sales~~credit. No amounts were outstanding under the working capital line of credit at the date of termination.

~~Our~~In ~~cost~~November of2001, ~~sales~~the ~~consists~~Company ~~primarily~~borrowed of$8.75 ~~the~~million ~~cost~~under ofa ~~components~~financing arrangement ~~produced~~secured by ~~our~~the ~~suppliers~~Company’s corporate headquarters. The principal amount outstanding bears interest at prime plus 1.0% per annum, ~~such~~but asnot ~~disk~~less ~~drives~~than 7.0% per annum. Under certain conditions, the Company has the right to request that ~~cabinets~~portions of the principal amount outstanding under the note shall bear interest at a LIBOR based rate, ~~power~~but ~~supplies~~not less than 7.0%. As of April 30, ~~controllers~~2003, ~~and~~the ~~CPUs~~interest rate on the loan was 7.0%. Principal reduction payments of $14,400 ~~our~~plus ~~direct~~accrued interest ~~and~~are ~~indirect~~due ~~labor~~monthly ~~expenses~~with the remaining principal balance and ~~related~~unpaid ~~overhead~~interest ~~costs~~due ~~such~~at asthe ~~rent~~maturity date of January 1, ~~utilities~~2007. Up to an additional $1.0 million may be borrowed under this financing arrangement to cover leasing costs and ~~manufacturing~~tenant improvements ~~supplies~~on the vacant, unimproved space within the corporate headquarters upon finding a qualified tenant. At April 30, 2003, the outstanding principal balance of the loan totaled approximately $8.5 million. Under the terms of the loan agreement, the lender may immediately accelerate all amounts disbursed under the loan agreement and ~~other~~terminate ~~expenses~~any further obligation of the lender to disburse additional amounts under the financing arrangement if there exists any event or condition that the lender in good faith believes impairs (or is substantially likely to impair) the prospect of payment or performance by the Company of its obligations under the applicable loan documents. In ~~addition~~March 2004, ~~cost~~the Company signed a sale-leaseback agreement on the Company’s headquarters. In April 2004, the Company completed the transaction, receiving proceeds, net of ~~sales~~selling ~~includes~~costs ~~third~~and ~~party~~the ~~license~~payoff ~~fees~~of the associated building debt of $8.4 million, of approximately $3.8 million. In the ~~warranty~~quarter ~~expenses~~ended ~~and~~April ~~reserves~~30, ~~for~~2003, ~~excess~~based ~~and~~on ~~obsolete~~the ~~inventory~~final net sales price, the Company recorded an impairment loss on the building of approximately $2.9 million.

~~Selling~~The Company has a flooring line with IBM Credit, ~~General~~which at April 30, 2003 has committed to make $0.5 million in flooring inventory commitments available to the Company (the flooring line commitment was reduced from $2.0 million at July 31, 2002). In November 2002, the Company, at the request of IBM Credit, established an irrevocable letter of credit (“ILOC”) totaling $0.5 million to collateralize purchases under the flooring line. As of April 30, 2003 and ~~Administrative~~July 31, 2002, the Company owed $147,000 and $251,000, respectively, under the flooring line. The flooring line is also collateralized by the specific inventory purchased ~~Expenses~~pursuant to the flooring commitments. CIT and IBM Credit have entered into an inter-creditor agreement which determines the level of priority of each lender’s security interest. The flooring line requires the maintenance by the Company of a minimum net worth of $16.0 million and requires the Company not to be in default of any covenants in the CIT agreement. IBM Credit has modified the agreement and has waived any violations at April 30, 2003 as long as the ILOC is in place. In January 2004, at the Company’s request, the flooring line commitment and the ILOC were reduced to $250,000.

~~Selling~~The ~~expenses~~Company’s ~~consist~~foreign ~~primarily~~subsidiary ofin ~~costs~~Italy ~~directly~~has ~~associated~~a ~~with~~line ~~the~~of ~~selling~~credit ~~process~~with ~~such~~their asbank ~~salaries~~that ~~and~~is ~~commissions~~utilized offor ~~sales personnel,~~overdraft ~~marketing, direct~~ and ~~cooperative~~short-term ~~advertising~~cash ~~and travel expenses~~needs. ~~General~~At ~~and~~April ~~administrative expenses include our general corporate expenses~~30, ~~such as salaries and benefits, rent, utilities, bad debt expense, legal and other professional~~ ~~fees and expenses~~2003, ~~depreciation~~there ~~and~~were ~~amortization~~no ofamounts ~~goodwill.~~outstanding ~~These~~under ~~costs~~this ~~are expensed as incurred~~line.

~~Research~~8. NASDAQ Delisting and ~~Development~~Deregistation ~~Expenses.~~

~~Research~~In ~~and~~July ~~development~~2002, ~~expenses~~the ~~consist~~Company received a notice from Nasdaq stating that the Company did not, for a period of 30 consecutive days, meet the ~~costs~~$1 ~~associated~~minimum ~~with~~bid ~~software~~price ~~and~~per ~~hardware~~share ~~development~~requirement for continued listing on The Nasdaq National Market. ~~Specifically, these~~The ~~costs~~Notice ~~include~~further ~~employee~~stated ~~salaries~~that ~~and~~the ~~benefits~~Company had until October 21, ~~consulting~~2002 ~~fees~~to comply with the minimum bid price per share requirement for ~~contract~~continued ~~programmers~~listing. On October 18, ~~test~~2002, ~~supplies~~the Company applied to transfer the listing of the Company’s stock to The Nasdaq Small Cap Market. On March 3, 2003, ~~employee~~the ~~training~~Company’s ~~and~~transfer ~~other~~application ~~related~~to ~~expenses~~The Nasdaq Small Cap Market was approved by Nasdaq. The ~~cost~~Company retained the trading symbol “PRCM”. While the Company’s transfer application was pending, it had used the balance of ~~developing~~The Nasdaq ~~new~~Small ~~appliances~~Cap ~~and~~Market’s ~~substantial~~180 ~~enhancements~~calendar day grace period to ~~existing~~regain ~~appliances~~compliance ~~are~~with the minimum bid price requirement. Although the Company had not regained compliance with the minimum $1 bid price per share requirement, the Company met the ~~expensed~~initial ascore ~~incurred~~listing requirements for The Nasdaq Small Cap Market, specifically maintaining a minimum of $5.0 million in stockholders’ equity.

~~The~~On ~~following~~June ~~table~~24, ~~sets~~2003, ~~forth~~the ~~consolidated~~Company ~~statement~~received ofa ~~operations~~letter ~~data~~from the Nasdaq Listing Qualifications Staff indicating that, as a ~~percentage~~result of the Company’s failure to ~~net~~timely ~~sales~~file with the Securities and Exchange Commission (“SEC”) its Quarterly Report of Form 10-Q for ~~each~~the fiscal quarter ended April 30, 2003, the Company failed to comply with Nasdaq Marketplace Rule 4310 (c) (14) requiring the timely filing of periodic reports and that, accordingly, the ~~periods~~Company’s ~~indicated:~~securities would be delisted from The Nasdaq Stock Market at the opening of business of July 3, 2003 unless the Company requested a hearing in accordance with applicable Nasdaq Marketplace Rules. The Company had requested a hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff’s determination and the hearing was held on July 17, 2003. The Company was notified by Nasdaq that its plan for compliance was not accepted by Nasdaq, and the Company’s securities were delisted from The Nasdaq Small Cap Market on August 14, 2003. On August 26, 2003, the Company filed a Form 15 with the SEC to deregister the Company’s stock under the Securities Exchange Act of 1934, as amended.

	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	)%

CRITICALTable ACCOUNTINGof POLICIES AND ESTIMATES. Contents

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States9. ~~The~~Liquidity ~~preparation of these financial statements requires us to make estimates~~ and ~~judgments~~Capital ~~that~~Resources 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.

WeFor ~~believe~~the nine months ended April 30, 2003 and the ~~following~~fiscal ~~critical~~year ~~accounting~~ended ~~policies~~July ~~affect~~31, ~~our~~2002, ~~more~~the ~~significant~~Company ~~judgments~~incurred net losses of $10.1 million and ~~estimates~~$24.4 million, respectively. At April 30, 2003, the Company had working capital of $9.2 million and cash and cash equivalents of $8.2 million (including $0.5 million of restricted cash, see footnote 10). To reduce its cash used in operations, the ~~preparation~~Company put in place various cost containment initiatives, both domestically and internationally, during fiscal 2002 and 2003, including an additional reduction in headcount of ~~our~~approximately ~~condensed~~46 ~~consolidated~~employees ~~financial~~in ~~statements~~the first nine months of fiscal 2003. The Company’s plan to address its liquidity issues is primarily to generate cash flow from operations. These steps include generating additional sales from the Company’s existing inventory and sales of the Company’s new NetFORCE 4000 series product, enhancing the Company’s attention to soliciting and supporting Original Equipment Manufactures (“OEMs”) and system integrators, improving the profitability of the Company’s service and support organization. In addition, the Company will continue to seek to reduce its cost structure. There can be no assurance that the Company will be able to increase its sales or further reduce costs sufficiently to provide positive cash flows from operations. In March 2004, the Company signed a sale / leaseback agreement on the Company’s headquarters. In April 2004, the Company completed the transaction, receiving proceeds, net of selling costs and the payoff of the associated building debt of $8.4 million, of approximately $3.8 million. In the future, the Company will investigate other financing alternatives including equity private placements and bridge loans. There can be no assurance that any such transaction can or will be completed on attractive or any terms.

~~We sell NAS appliances primarily through direct sales channels and resellers~~10. ~~Revenue~~Restricted isCash generally recorded upon product shipment. We maintain reserves, which are adjusted at each reporting date, to estimate anticipated returns based on historical rates of sales returns. In addition, we sell service contracts for certain of our appliances that extend for a specified period of time, usually one to three years. Revenue from these service contracts is recorded ratably over the life of the service agreement. We sell our Legacy products primarily through distributors. Revenue from these Legacy sales is recorded when the distributor receives the product. The agreements with our distributors allow limited product returns, including stock balancing and price protection

10In December 2002, the Company, at the request of IBM Credit, established an irrevocable letter of credit totaling $0.5 million, restricted as to use, to collateralize purchases under the flooring line. At April 30, 2003, $0.5 million of the cash balance is disclosed on the balance sheet as restricted cash. In January 2004, at the Company’s request, the flooring line commitment and the ILOC were reduced to $250,000.

~~privileges~~11. WeSale maintain reserves, which are adjusted at each financial reporting date, to estimate anticipated returns, including stock balancing and price protection claims, relating to each reporting period. The reserves are based on historical rates of ~~sales~~Subsidiary 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, incremental sales reserves may be required.

WeThe ~~maintain~~Company ~~allowances~~decided ~~for~~to ~~doubtful~~discontinue ~~accounts~~sales ~~for~~and ~~estimated~~marketing ~~losses~~activities ~~resulting~~in ~~from~~Switzerland utilizing its subsidiary, Procom Technology AG and, effective November 1, 2002, the ~~inability~~Company sold 100% of ~~its~~the ~~customers~~outstanding capital stock in Procom Technology AG to ~~make~~Total ~~required~~Storage ~~payments.~~GmbH, Ifwhich is owned by Sergio Pessot, the ~~financial~~former ~~condition~~managing director of ~~our~~Procom ~~customers~~Technology ~~were~~AG, tofor ~~deteriorate~~$20,000. ~~resulting~~In inaddition, anas part of the transaction, the Company assumed certain potential tax liabilities and credit exposure relating to ~~impairment~~Procom Technology AG. The net assets including the potential liabilities, were sold for approximately net book value, and as such, no gain or loss was recorded on the transaction after consideration of ~~their~~the ~~ability~~reclassification of the cumulative translation adjustment related to ~~make~~Procom ~~payments~~Technology AG. In the quarter ended April 30, ~~additional~~2003, ~~allowances~~the ~~may~~Company behad ~~required~~not incurred any of the potential liabilities, and therefore, reversed the accrual of those liabilities and recorded a gain on the transaction of $242,000.

WeThe ~~write~~following ~~down~~assets ~~our inventory for estimated obsolescence equal to the difference between the cost of inventory~~ and ~~the~~liabilities ~~estimated~~were ~~market~~included ~~value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by~~in ~~management,~~the ~~additional~~sale: ~~inventory write-downs may be required.~~

COMPARISON OF THREE AND NINE MONTHS ENDED APRIL 30, 2002 AND 2001


Assets:
Accounts receivable	$	300,000
Inventories		289,000
Other current assets		12,000
Other assets		10,000

Total assets		611,000

Liabilities:
Line of credit		95,000
Accounts payable		41,000
Accrued expenses and other liabilities		416,000

Total liabilities		552,000

Net assets, excluding foreign currency translation adjustment		59,000

Reclassification of cumulative translation adjustment		(301,000	)

Gain on sale of subsidiary	$	242,000

~~Net sales decreased by 45~~12.0% toCommitments $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~~Contingencies 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.

~~Net~~The ~~sales~~Company ofis ~~our~~involved ~~NAS~~in ~~products~~routine ~~decreased~~litigation ~~44.8%~~arising ~~to $3.2~~in ~~million for~~ the ~~three~~ordinary ~~months~~course ~~ended~~of ~~April~~its ~~30,~~business. ~~2002~~Also, from ~~$5.8~~time ~~million~~to ~~for~~time, the ~~comparable~~Company ~~period~~receives inclaims ~~fiscal~~that ~~2001.~~it ~~Net~~is ~~sales~~infringing ofthird ~~our~~parties’ ~~NAS~~intellectual ~~products~~property ~~decreased 25~~rights.3% toThe ~~$16.5~~Company ~~million~~was ~~for~~notified ~~the~~in ~~nine~~fiscal ~~months~~2001 ~~ended~~that ~~April~~its ~~30,~~products ~~2002,~~may ~~from~~infringe ~~$22.1~~some ~~million~~of ~~for~~ the ~~prior~~ ~~year.~~intellectual ~~The~~property ~~decrease~~rights ~~was~~of ~~due~~Intel. ~~primarily~~Intel tohas aoffered ~~decline~~the inCompany ~~international~~a ~~NAS~~non-exclusive ~~product~~license ~~sales~~for ~~partially~~patents ~~offset by an increase~~ in ~~domestic~~the ~~NAS~~Intel ~~sales~~portfolio. ofThe ~~47%~~Company ~~and~~has ~~25%~~investigated ~~for~~ the ~~three~~Intel claims, and ~~nine~~has ~~months~~had ~~ended~~negotiations ~~April~~with ~~30,~~Intel. ~~2002,~~While ~~respectively,~~the ~~compared~~outcome toof ~~the comparable~~claim ~~periods~~resolution inor ~~fiscal~~litigation ~~2001.~~cannot Asbe apredicted ~~percentage~~with ofcertainty, ~~total~~the ~~net~~Company ~~sales,~~believes ~~NAS~~that ~~product~~none ~~sales~~of ~~increased~~these topending ~~73.1%~~ordinary ~~from~~course ~~72.4%~~claims ~~and~~or tolitigation ~~80.5%~~will ~~from~~have ~~68.0%~~a ~~for~~material ~~the~~adverse ~~three~~effect ~~and~~on ~~nine~~the ~~months~~Company’s ~~ended~~financial ~~April 30~~position, ~~2002~~results ~~and~~of ~~2001~~operations, ~~respectively~~or liquidity.

~~International~~10 sales were $0.14 million, or 3.3% of our net sales, for the three months ended April 30, 2002, compared to $4.0 million, or 50.0% of our net sales, for the three months ended April 30, 2001. International sales were $8.0 million, or 39.0% of our net sales, for the nine months ended April 30, 2002, compared to $19.4 million, or 58.9% 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, primarily in Asia and Europe, in fiscal 2002.

GrossTable profit decreased 43.7% to $1.8 million for the three months ended April 30, 2002, from $3.2 million for the three months ended April 30, 2001. Gross profit for the nine month period ended April 30, 2002 decreased 27.5% to $9.2 million from $12.7 million for the same period the prior fiscal year. The decrease in gross profit for both periods was due primarily to lower overall sales. Gross margins increased to 40.3% and 44.8% of net sales for the three and nine 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 sales. The increase in gross margin was primarily the result of the higher percentage of NAS sales, which have higher margins than non-NAS products. Contents

~~Selling~~In December 2000, ~~general~~the ~~and administrative~~Company ~~expenses~~acquired ~~increased~~Scofima 31Software, S.8%r.l., toan $5Italian company.8 ~~million~~One ~~for~~of the ~~three~~former shareholders ~~months~~of ~~ended~~Scofima ~~April~~Software ~~30,~~became ~~2002,~~the ~~from~~Managing ~~$4.4~~Director ~~million~~of European Sales for the ~~three~~Company. ~~months~~The ~~ended~~consideration ~~April~~issued ~~30,~~in ~~2001,~~the ~~and~~transaction ~~increased~~was as480,000 ashares ~~percentage~~ of ~~net~~the ~~sales~~Company’s toCommon ~~132.7%~~Stock ~~from 54.8%. In~~and the ~~third~~Company ~~quarter~~agreed, as part of ~~fiscal~~the ~~2002~~acquisition, weto register ~~increased~~the ~~our~~shares ~~accounts~~for ~~receivable~~resale ~~reserves~~under ~~$1.1~~the ~~million~~Securities toAct ~~reflect~~of ~~the~~1933. ~~aging~~The shares of ~~certain~~Common ~~accounts~~Stock ~~receivable~~issued ~~from~~in ~~customers~~the ~~in Europe~~transaction ~~and~~were ~~Asia.~~registered ~~Excluding~~for ~~this~~resale ~~additional~~but ~~provision~~the former Scofima Software shareholders alleged, ~~selling~~among other things, ~~general~~that ~~and~~delays ~~administrative~~in ~~expenses~~the registration ~~for~~of the ~~third~~shares ~~quarter~~caused ofthem ~~fiscal~~to incur substantial losses. On October 4, 2002, ~~increased~~the byCompany ~~$0.3~~entered ~~million~~into ~~over~~a ~~their~~settlement ~~levels~~agreement ~~for~~with the ~~third~~former ~~quarter~~Scofima ofSoftware ~~fiscal~~shareholders ~~2001~~under ~~due~~which ~~primarily~~these toindividuals ~~increased~~released ~~sales~~ any and ~~administrative~~all ~~salaries~~claims ~~and~~against the ~~commissions~~Company inarising ~~support~~from ofthe ~~NAS~~transaction ~~sales,~~in ~~increased~~return ~~general~~for ~~administrative~~a ~~expenses~~payment ~~partially~~of ~~offset~~$970,000, byof ~~currency~~which ~~translation~~$560,000 ~~gains~~was aspaid upon execution of the ~~Euro~~agreement and ~~Swiss~~the ~~Franc~~remaining ~~strengthened~~balance ~~against~~paid ~~the~~through UFebruary 2003.S. ~~dollar~~The ~~during~~settlement ~~the~~was ~~third~~charged ~~quarter~~to expense in the fourth quarter of fiscal 2002. At April 30, 2003, no amounts were outstanding.

~~For~~On ~~the~~September ~~nine months ended April 30~~20, 2002, ~~selling,~~a ~~general~~putative ~~and~~class ~~administrative~~action ~~expenses~~complaint ~~increased to~~styled ~~$19~~Albert Ree v.5 ~~million~~Alex ~~from~~Aydin, ~~$13.4~~Alex ~~million~~Razmjoo, orand 45Procom Technology, Inc.5% ~~for~~was ~~the~~filed ~~comparable~~in ~~period~~the ofUnited ~~fiscal~~States ~~2001.~~District InCourt for the ~~first~~Southern ~~nine~~District ~~months~~ of ~~fiscal~~New ~~2002~~York, weCase ~~increased~~No.02 ~~our~~CV 7613. ~~accounts~~Two ~~receivable~~weeks ~~reserves~~later, byon $October 4.9, ~~million~~2002, ~~due~~a toputative ~~the~~class ~~financial~~action ~~instability~~complaint ofstyled ~~three~~Gary ofSquires ~~our international~~v ~~customers~~Alex ~~and~~Aydin, toAlex ~~reflect~~Razmjoo, ~~the~~and ~~aging~~Procom ofTechnology, ~~certain~~Inc. ~~accounts~~was ~~receivable~~also ~~from~~filed ~~customers~~ in ~~Europe~~the ~~and~~United ~~Asia~~States ~~referred~~District toCourt ~~above.~~for ~~Excluding~~ the ~~additional~~Southern ~~provision~~District ~~for~~of ~~accounts~~New ~~receivable~~York, Case ~~selling,~~No.02 ~~general~~CV ~~and~~7952. ~~administrative~~The ~~expenses~~allegations ~~for~~of the ~~nine~~ ~~months~~two ~~ended~~complaints ~~April~~are 30identical, ~~2002~~and ~~increased~~the byactions $1were consolidated.2 ~~million~~On ~~from~~May ~~their~~28, ~~levels~~2003, ~~for~~plaintiffs in the ~~comparable~~consolidated ~~period~~action offiled ~~fiscal~~an ~~2001,~~Amended ~~due~~Consolidated ~~primarily~~Class toAction ~~increased~~Complaint. ~~sales~~The ~~and~~consolidated ~~administrative~~action, ~~salaries~~as amended, ~~and~~is ~~commissions~~purportedly inbrought ~~support~~on behalf of ~~NAS~~all ~~sales,~~public ~~increased~~investors ~~general administrative~~who ~~expenses~~purchased ~~partially~~the ~~offset~~Company’s bycommon ~~reduced~~stock ~~advertising~~from ~~and~~December ~~marketing~~9, ~~costs~~1999 ~~during~~to June 25, 2001.

11The amended complaint alleges violations of Section 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The amended complaint includes allegations that, during the period from December 9, 1999 to June 25, 2001, the Company falsely and recklessly overstated revenues in violation of generally accepted accounting principles. The Company believes that the allegations stated in the amended complaint are without merit. Nevertheless, due to the uncertainties of the litigation process and the continued business distractions, which have and would likely continue, the Company reached a tentative settlement agreement with the class plaintiffs by executing a memorandum of understanding (“MOU”) on December 16, 2003. The tentative settlement amount included in the MOU is $2.7 million ($2.3 million to be paid by the Company’s insurance carrier and $0.4 million to be paid by the Company). At April 30, 2003, the Company accrued $0.4 million, which is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheet. On September 10, 2004, the Court signed the Final Order of Settlement granting final approval of settlement.

~~this nine month period~~13. InProduct ~~addition, until our collection experience improves, beginning in the second quarter of fiscal 2002 we are recording~~Warranties ~~revenue from certain European countries on a cash basis.~~

~~Research~~The ~~and~~Company ~~development~~generally ~~expenses~~warrants ~~remained~~its ~~the~~products ~~same at~~against ~~$1.5~~certain ~~million,~~manufacturing orand 33other defects.5% ofThese ~~net~~product ~~sales~~warranties inare ~~the~~provided ~~third~~for ~~quarter~~specific periods of ~~fiscal~~time ~~2002~~ and/or ~~18.4%~~usage of ~~net~~the ~~sales,~~product ~~for~~depending on the ~~comparable~~nature ~~period~~of the product, the geographic location of ~~fiscal~~its ~~2001.~~sale ~~For~~and ~~the~~other ~~nine~~factors. ~~months~~As ~~ended~~of April 30, 2003 and July 31, 2002, ~~research~~the ~~and~~Company ~~development~~has ~~expenses~~accrued ~~decreased~~$100,000 ~~4.0%~~and to $~~4.7~~210,000, ~~million~~respectively, ~~or 23.0%~~for ofestimated ~~net~~product ~~sales,~~warranty ~~from $4~~claims.9 ~~million,~~The oraccrued ~~14.9%~~product ofwarranty ~~net~~costs ~~sales,~~are inbased ~~the~~primarily ~~same~~on ~~period~~historical inexperience ~~fiscal~~of ~~2001.~~actual ~~The~~warranty ~~dollar~~claims ~~decrease~~as ~~was~~well ~~due~~as ~~primarily~~current information toon ~~reduced~~repair ~~expenses~~costs. ~~for~~Warranty ~~outside~~claims ~~programmers~~expense ~~slightly~~(reversal) ~~offset~~for bythe ~~increased~~three ~~compensation~~and ~~expense~~nine ~~for~~months ~~additional~~ended ~~NAS software~~April ~~programmers~~30, 2003 was $(104,000) and ~~hardware~~$(64,000), ~~developers~~respectively.

~~In-process~~The ~~research~~following ~~and~~table ~~development~~provides ~~relates to our December 2000 acquisition of~~ the ~~outstanding~~changes ~~shares of Scofima Srl an Italian company engaged~~ in ~~software development. We employed an appraiser to value~~ the ~~assets~~Company’s ofproduct ~~Scofima,~~warranty ~~and~~accrual: the appraiser assigned a value of approximately $4.3 million for the research and development expenses relating to software being developed by Scofima which has not yet reached technological feasibility, and for which no alternative future use is available. We incurred this charge in the second quarter of fiscal 2001.

Interest income decreased 40.2% to $83,000 for the three months ended April 30, 2002, from $139,000 for the comparable period of fiscal 2001. For the nine months ended April 30, 2002, interest income decreased 29.9% to $418,000 from $597,000 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.


Accrual at July 31, 2002	$	210,000
Reduction of warranty accrual based on lower claims experience		(110,000	)
Liabilities accrued for warranties issued during the period		46,000
Warranty costs paid during the period		(46,000	)

Accrual at April 30, 2003	$	100,000

~~Interest expense decreased 53~~14.4% toStock ~~$203,000~~Option ~~for the~~Plan 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.

~~Income~~On ~~tax~~April ~~provision~~21, ~~(benefit).~~2003, In the ~~third~~Board ~~quarter~~authorized ofthe ~~fiscal~~re-pricing ~~2002~~of 1,219,754 westock ~~recorded~~options apreviously granted with exercise prices in excess of $40.526 ~~million~~per ~~income~~share. ~~tax~~The ~~benefit~~re-pricing ~~relating~~of these stock options to ~~recent~~$0.26 ~~changes~~per share resulted in ~~the~~a ~~tax~~$44,000 ~~laws.~~charge ~~These~~to ~~changes~~selling, ~~allowed~~general usand toadministrative ~~carry~~expense ~~back~~in ~~net~~the third quarter ~~operating~~of ~~losses~~2003. ~~generated~~As ina ~~fiscal~~result ~~2001~~of ~~and~~the ~~and~~repricing, ~~will~~these ~~allow~~stock usoptions torequire ~~carry~~variable ~~back~~plan ~~net~~accounting. ~~operating~~Changes, ~~losses~~either ~~generated~~increases or decreases, in ~~fiscal~~the ~~2002~~quoted ~~for~~market ~~five~~value ~~years,~~of asthe ~~opposed~~underlying tostock between the ~~two~~date ~~years~~of ~~allowed~~the ~~under~~repricing and the ~~tax~~final ~~law~~measurement ~~previously~~date will be recognized as compensation expense in ~~effect~~the period of change.

~~LIQUIDITY~~11 ~~AND CAPITAL RESOURCES~~

AsTable of April 30, 2002, we had cash and cash equivalents totaling $11.1 million. Our cash and cash equivalents decreased by $14.3 million during the nine months ended April 30, 2002. Contents

~~Net cash used in operating activities was $13~~15.1 ~~million~~Employment ~~for~~Agreements the nine months ended April 30, 2002 and $14.3 million for the nine months ended April 30, 2001. Net cash used in operating activities in fiscal 2002 relates primarily to our net loss, an increase in our inventories and income tax receivable and a decrease in our accounts payable. 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 a decrease in our accounts payable. These uses of cash were partially offset by a reduction of approximately $2.7 million in our income tax refund receivable.

~~Net cash~~In ~~used~~May in2002, ~~investing~~the ~~activities~~employment for three executives of $0the Company was terminated.15 ~~million~~Pursuant ~~for~~to agreements executed between the Company ~~nine~~and the executives, one of the executives will receive monthly payments of $18,750 for 36 months ~~ended~~following ~~April~~termination, 30one will receive monthly payments of $18,750 ~~2002~~for ~~was~~30 months following termination, and the ~~result~~third ofwill ~~purchases~~receive monthly payments of ~~property~~$18,750 for 30 months following termination and ~~equipment~~monthly payments of $37,500 for six months after the last such $18,750 monthly payment. ~~Net~~Each ~~cash~~former ~~used~~executive will be entitled to participate in ~~investing~~the ~~activities~~Company’s ofemployee $2benefit, health and other insurance plans for the 36 months following their termination. In fiscal 2002, the Company accrued approximately $1.9 million for the ~~nine~~present ~~months~~value ~~ended~~of the remaining unpaid severance and employee benefits. As of April 30, ~~2001~~2003, ~~was~~the ~~primarily~~remaining balance is $1.4 million and is included in payable to related parties in the ~~result~~condensed consolidated balance sheet. On May 1, 2003, the Company entered into employment agreements with two of ~~expenditures~~its executives providing that after a Change of Control, ~~$1.5~~as ~~million~~defined, the executives will be eligible to ~~complete~~receive, ~~our~~if ~~corporate~~terminated, ~~headquarters~~six months of severance payments, certain health and ~~$0.4~~dental ~~million~~benefit payments, in addition to providing for ~~other~~up ~~property~~to six months of stock option vesting credit and ~~equipment~~the possibility of extending the stock option exercise period to seven months after the Change of Control.

~~Net cash used by financing activities of $1~~16.2 ~~million~~License for the nine months ended April 30, 2002 was primarily the result of a $10.0 million repayment of the convertible debenture, long-term borrowings of $8.7 million under a financing arrangement secured by our corporate headquarters. Net cash provided by financing activities of $8.7 million for the nine months ended April 30, 2001 was the result of the issuance of a $15.0 million convertible debenture, borrowings of approximately $4.0 million under the term loan line of credit agreement with The CIT Group/Business Credit and ~~approximately~~Development ~~$0.8~~Agreements ~~million in stock option exercises and employee stock purchases, reduced by the repayment of approximately $10.8 million in loans previously secured by our commercial paper portfolio.~~

~~On October~~Effective 10May 1, ~~2000~~2003, wethe Company entered into aan ~~term loan~~ agreement ~~and~~with athe ~~three~~third-~~year~~party ~~working~~provider ~~capital~~of ~~line~~a portion of ~~credit~~the ~~with~~source ~~The~~code ~~CIT~~used ~~Group/Business~~in ~~Credit~~the ~~(“CIT”).~~Company’s ~~The~~NAS ~~first~~operating ~~term~~system ~~loan~~that ofamended ~~$4.0~~and ~~million~~restated a May 1, ~~due~~1998 Original ~~and~~Equipment ~~payable~~Manufacturer ~~upon~~Agreement, as amended, to provide the ~~finalization~~Company ofthe option to obtain a ~~long~~perpetual royalty-~~term mortgage~~free onlicense ~~our~~in ~~corporate~~exchange ~~headquarters~~for ora ~~paid~~one-time inlicenses 12fee ~~monthly~~of ~~installments~~$800,000, ~~commencing~~payable ~~April~~over 1,a ~~2001~~one year-period, ~~was~~and ~~fully~~to ~~repaid~~provide inthe ~~May~~Company ~~2001.~~the option ~~Another~~to ~~term~~acquire ~~loan~~joint-ownership of ~~$1.0~~such ~~million~~software and materials, ~~due~~subject ~~and~~to ~~payable~~confidentiality restrictions, in 90exchange ~~days,~~for ~~was~~a ~~fully~~one-time ~~repaid~~purchase onprice ~~November~~of 1$600, ~~2000~~000. ~~The~~In ~~term~~July ~~loans under~~2003, the agreement ~~incurred~~was ~~interest~~amended atto ~~the~~remove ~~lender’s~~these ~~prime~~confidentiality ~~rate, plus .5%,~~ restrictions with ~~increases~~regard ifto the ~~outstanding~~source ~~principal~~code ~~was~~of ~~not~~the ~~reduced~~software ~~according~~for to a ~~fixed~~one-time ~~amortization~~fee ~~schedule~~of $300,000. The ~~working~~Company ~~capital~~made ~~line~~payments oftotaling ~~credit~~$1,600,000 ~~allows~~(which usincluded toa ~~borrow~~prepayment discount of $100,000), onas ~~a revolving~~follows: ~~basis~~$400,000 ~~for~~in aJune ~~period~~2003, of$200,000 ~~three~~in ~~years~~November 2003 and $1,000,000 ain April 2004.

12In March 2004, the Company signed a software development and license agreement with Sun Microsystems, Inc. Under the agreement, in April 2004, the Company received $2,750,000 in prepaid royalties and $250,000 for an internal use source and object code license. Prior to the signing of this agreement, the Company received $750,000 in February 2004 for engineering development services under an Engineering Services Agreement. In addition, the Company issued warrants to Sun Microsystems, Inc. to purchase approximately 4.9% of the Company’s outstanding common stock at a price of $0.50 per share.

~~specified~~ Item ~~percentage 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~~Management’s ~~prime~~Discussion 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~~Analysis ~~termination fees. The line~~ of ~~credit~~Financial isCondition ~~collateralized by certain of our assets. The line of credit requires certain financial~~ and ~~other~~Results ~~covenants, including the maintenance~~ of aOperations 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.

InThe ~~addition~~information toset ~~the~~forth ~~CIT line of credit noted above, we have a flooring line of credit with IBM Credit, which has committed to make $2.0 million~~ in ~~flooring~~this ~~inventory~~Quarterly ~~commitments~~Report ~~available~~on toForm ~~us.~~10-Q Asis ~~of April 30~~for, ~~2002, we owed $496,000 under the flooring line. The flooring line is collateralized by the specific inventory purchased pursuant to the flooring commitments. CIT~~ and ~~IBM~~as ~~Credit have entered into an intercreditor agreement which determines the level~~ of, ~~priority of either lender’s security interest. The flooring line requires~~ the ~~maintenance~~quarter ofended ~~a minimum net worth of $16.0 million, and we were in compliance with this covenant at~~ April 30, ~~2002~~2003. ~~The~~This ~~flooring~~Quarterly ~~line~~Report ~~also~~on ~~requires~~Form 10-Q usdoes not toreflect beour incurrent ~~default~~operations ofand ~~any~~financial ~~covenants in the CIT agreement~~condition. ~~IBM Credit has waived compliance with that requirement at April 30, 2002.~~

OnThis ~~October~~Quarterly ~~31,~~Report ~~2000,~~on weForm ~~issued~~10-Q acontains ~~$15.0~~“forward-looking” ~~million~~statements, ~~convertible~~including, ~~unsecured~~without ~~debenture~~limitation, tothe astatements ~~private~~under ~~investor.~~the ~~The~~caption ~~debenture~~“Management’s ~~carried interest~~Discussion atand ~~6.0%~~Analysis ~~per~~of ~~annum,~~Financial Condition and ~~was~~Results ~~repayable~~of Operations.” inYou ~~full~~can onidentify ~~October~~these ~~31,~~statements ~~2003,~~by ~~unless~~the ~~otherwise~~use ~~converted~~of ~~into~~words ~~our~~like ~~common~~“may,” ~~stock.~~“will,” In“could,” ~~connection~~“should,” ~~with~~“project,” ~~the~~“believe,” ~~issuance~~“anticipate,” of“expect,” “plan,” ~~the~~“estimate,” ~~debenture~~“forecast,” we“potential,” ~~issued~~“intend,” to“continue,” ~~the~~and ~~investor~~variations aof ~~5-year~~these ~~warrant~~words toor ~~purchase~~comparable upwords. toIn 32addition,~~916~~ ~~shares~~ all of ~~our~~the ~~common~~non-historical ~~stock~~information atin anthis ~~initial~~Quarterly Report ~~exercise~~on ~~price~~Form of10-Q ~~$32~~is forward-looking.55 ~~per~~Forward-looking ~~share,~~statements ~~with~~do ~~the~~not ~~number~~guarantee offuture ~~shares~~performance ~~for~~and ~~which~~involve ~~the~~risks ~~warrant is exercisable~~ and ~~the~~uncertainties. ~~exercise~~Actual ~~price~~results ~~subject~~may toand ~~antidilution~~probably ~~adjustments.~~will ~~The~~differ ~~value~~substantially offrom the ~~warrant~~results ofthat ~~$562,000~~the ~~was~~forward-looking statements ~~computed~~suggest ~~using the~~for ~~Black-Scholes~~various ~~model~~reasons, ~~with~~including ~~the~~those ~~following~~discussed ~~assumptions:~~under ~~Expected~~the ~~life~~caption —“Risk 5Factors” ~~years,~~in ~~Risk~~our ~~free~~Annual ~~interest~~Report ~~rate~~on —Form ~~6%,~~10-K and ~~Volatility~~other —reports ~~1.20.~~we Inhave filed with the ~~second~~SEC. ~~quarter~~These offorward-looking ~~fiscal~~statements ~~2002,~~are wemade ~~paid~~only ~~the~~as ~~investor~~of the date ~~remaining~~of $this Quarterly Report on Form 10~~,000,000~~-Q. ~~principal amount~~We ofdo ~~the~~not ~~debentures~~undertake ~~and~~to ~~expensed~~update ~~the~~or ~~remaining~~revise ~~unamortized~~the ~~debt~~forward-looking ~~issuance~~statements, ~~and~~whether ~~warrant~~as ~~costs~~a result of ~~$274~~new information,~~000~~ tofuture ~~interest~~events ~~expense~~or otherwise.

InWe ~~June 2001~~develop, wemanufacture ~~completed~~and ~~the~~market ~~sale~~NAS ofappliances ~~3,800,000~~which ~~shares~~consist of ~~common~~our ~~stock~~DataFORCE ~~raising~~and ~~gross~~NetFORCE ~~proceeds~~product oflines ~~approximately~~and ~~$34.2~~other storage ~~million~~devices ~~before~~for ~~offering~~a ~~costs~~wide range of ~~$2.7~~computer ~~million~~networks and operating systems. AsIn aaddition, ~~result~~we ofsell ~~this~~disk ~~offering,~~drive ~~the~~storage ~~exercise~~upgrade ~~price~~systems, ofCD/DVD-ROM ~~the~~servers ~~warrant~~and ~~was adjusted~~arrays toand ~~$27.95~~tape and ~~the~~disk ~~number~~backup ofproducts, ~~shares~~which ~~issuable~~we ~~upon~~refer ~~exercise~~to ofcollectively as our Legacy products. Over the ~~warrant~~last ~~pursuant~~five toyears, ~~anti-dilution~~we ~~provisions~~have ofsignificantly focused on the ~~warrant~~development ~~were~~and ~~adjusted~~sale toof ~~38,333~~NAS appliances.

InCritical ~~December~~Accounting ~~2001,~~Policies we borrowed $8.75 million under a financing arrangement secured by our corporate headquarters. The principal amount outstanding bears interest at prime plus 1.0% per annum, but not less than 7.0% per annum. Under certain conditions, we have the right to request that portions of the principal amount outstanding under the note shall bear interest at a LIBOR based rate, but not less than 7.0%. As of 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.

InOur ~~addition~~discussion toand ~~the~~analysis ~~line~~of financial condition and results of ~~credit,~~operations is based upon our ~~foreign~~Condensed ~~subsidiaries~~Consolidated inFinancial ~~Germany~~Statements, ~~Italy~~which we have prepared in accordance with accounting principles generally accepted in the United States of America and ~~Switzerland~~the ~~have~~rules ~~lines~~and regulations of ~~credit~~the ~~with~~Securities ~~banks~~and inExchange ~~their~~Commission. ~~respective~~The ~~countries~~preparation of these Consolidated Financial Statements requires us to make estimates and judgments that ~~are~~affect ~~utilized~~the ~~primarily~~reported ~~for~~amounts ~~overdraft~~of assets, liabilities, revenues, and ~~short-term~~expenses, ~~cash~~and ~~needs~~related disclosure of contingent assets and liabilities. AtWe ~~April~~evaluate, on an ongoing basis, our estimates and judgments, including those 30related to sales returns, ~~2002~~bad debts, ~~amounts~~excess ~~outstanding~~inventory, income taxes, and contingencies. We base our estimates on historical experience and assumptions that we believe to be reasonable under ~~these~~the ~~lines~~circumstances. ~~was~~Actual ~~$84,000~~results may differ from these estimates.

We12 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.

TheTable Job Creation and Worker’s Assistance Act of 2002 signed by the President in February 2002, permits us to carry back certain of our previously recorded losses for 5 years instead of only 2 years. We previously had not believed we would be able to recover a tax benefit related to prior year losses. As a result of the legislation, in April 2002, we filed amended tax returns for prior year losses, and in June 2002, received a tax refund of $2.9 million. In addition, we expect to be able to recover approximately $2.3 million in additional tax refunds when we file our fiscal 2002 tax return, and carry expected fiscal 2002 operating losses back to previous periods. We have recorded a tax benefit in the current quarter of $2.9 million plus a proportionate share of the anticipated additional refunds related to fiscal 2002. Contents

13We believe the accounting policies described below, among others, are the ones that most frequently require us to make estimates and judgments, and therefore are critical to the understanding of our results of operations:

In• ~~May~~revenue ~~2002,~~recognition ~~the employment of three of our executives was terminated. Under the agreements, the executives will receive payments of $18,750 for 36 months,~~ and each will be entitled to participate in our employee benefit, health and other insurance plans of the 36 month period. We anticipate that we will record a charge for the severance obligations of approximately $2.3 million in the quarter ended July 31, 2002. allowances;

We• ~~expect~~valuation ~~to have sufficient cash generated from operations, our income tax refunds for fiscal 2001 and 2002, and, if necessary, the sale or refinancing~~ of ~~our~~accounts ~~headquarters~~receivable; 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. and

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

•

valuation of inventory.

~~NEW~~Revenue ~~ACCOUNTING~~recognition ~~STANDARDS~~and allowances

InOur ~~July~~NAS ~~2001,~~products ~~the~~include ~~Financial~~an ~~Accounting~~operating ~~Standards~~system ~~Board~~that ~~(FASB)~~is ~~issued~~integral ~~SFAS~~to ~~No.~~the ~~141,~~overall ~~“Business~~product ~~Combinations,”~~ and ~~SFAS~~its Nofunctionality. ~~142,~~We ~~“Goodwill~~recognize ~~and~~revenue ~~Other Intangible Assets.” Under SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted~~ for ~~using~~our ~~the~~NAS ~~purchase~~products ~~method.~~in ~~Under~~accordance ~~SFAS No. 142, goodwill and intangible assets~~ with ~~indefinite~~Statement ~~lives are no longer amortized but are reviewed annually for impairment (or more frequently if indicators~~ of ~~impairment~~Position ~~arise~~(“SOP”). ~~Separable~~97-2, “Software ~~intangible~~Revenue ~~assets~~Recognition”, ~~that~~as ~~are~~amended ~~not~~by ~~deemed~~SOP to98-9, ~~have~~“Software ~~indefinite~~Revenue ~~lives~~Recognition ~~will continue to be amortized over their useful lives (but~~ with noRespect ~~maximum life). The amortization provisions of SFAS No. 142 apply~~ to ~~goodwill~~Certain ~~and intangible assets acquired after June 30, 2001~~Arrangements.” ~~With~~We ~~respect~~recognize torevenue ~~goodwill~~for ~~and~~our ~~intangible~~NAS ~~assets acquired prior to July 1~~products, ~~2001,~~net ~~the~~of ~~Company~~estimated ~~is required to adopt SFAS No. 142 effective August 1~~returns, ~~2002.~~when:

AsPersuasive ofEvidence ~~the date~~ of ~~adoption,~~an ~~the~~Arrangement 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 142Exists. ~~Amortization~~It ~~expense~~is ~~related~~our ~~to goodwill was $361,000 and $262,000 for the nine~~customary ~~months~~practice ~~ended April 30, 2002 and 2001, respectively. Because of the extensive effort needed~~ to ~~comply~~have ~~with~~a ~~adopting~~purchase ~~SFAS~~order ~~141~~prior ~~and 142, it is not practicable~~ to ~~reasonably~~recognizing ~~estimate~~revenue ~~the impact of adopting these statements~~ on ~~the~~an 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 principlearrangement.

InDelivery ~~October~~Has ~~2001,~~Occurred. ~~the~~Our ~~FASB~~product ~~issued~~is ~~SFAS~~physically ~~No.~~delivered ~~144~~to our customers, ~~“Accounting~~generally ~~for~~with ~~Impairment~~standard ortransfer ~~Disposal~~terms of ~~Long-Lived~~FOB ~~Assets~~shipping point.” ~~SFAS~~The ~~144~~core ~~supersedes~~operating ~~SFAS~~system ~~No.~~software ~~121,~~that ~~“Accounting for~~ the ~~Impairment~~customer ofpurchases ~~Long~~is pre-~~Lived~~installed ~~Assets~~ and ~~for~~tested ~~Long-Lived~~at ~~Assets~~our tofacility Beprior ~~Disposed~~to ~~Of,”~~shipment and ~~addresses~~does ~~financial~~not ~~accounting~~require ~~and~~significant ~~reporting~~production, ~~for~~modification, ~~the impairment~~ or ~~disposal~~customization ofat ~~long-lived~~the ~~assets.~~customers ~~This~~site; ~~statement~~as ~~is effective for fiscal years beginning after December 15~~such, ~~2001.~~the ~~Adoption~~system ~~of this statement~~ is ~~not~~functional ~~expected~~according to ~~have a material impact on~~ our ~~consolidated~~specifications ~~financial~~at ~~position~~the ortime ~~results~~ of ~~operations~~shipment.

~~RISK~~The ~~FACTORS~~Price Is Fixed or Determinable. Arrangements with extended payment terms are not considered to be fixed or determinable. Revenue from such arrangements is recognized as the fees become due and payable.

~~Before~~Collection ~~investing~~Is inProbable. ~~our~~Probability ~~common~~of ~~stock,~~collection ~~you should~~is beassessed ~~aware~~on ~~that~~a ~~there~~customer-by-customer ~~are risks inherent in our business, including those indicated below~~basis. ~~Additional~~Customers ~~risks~~are ~~and~~subjected ~~uncertainties not presently known~~ to usa orcredit review process that weevaluates ~~currently~~the ~~deem~~customers’ ~~immaterial~~financial ~~may~~position ~~also~~and ~~impair~~ultimately ~~our~~their ~~business~~ability ~~operations~~to pay. If ~~any~~it ofis ~~the following~~determined ~~risks~~from ~~actually~~the ~~occurs,~~outset ~~our~~of ~~business~~an ~~could~~arrangement ~~be harmed. In~~ that ~~case,~~collection ~~the~~is ~~trading~~not ~~price~~probable ofbased upon our ~~common~~review ~~stock could decline~~process, ~~and~~revenue ~~you~~is ~~might~~recognized ~~lose~~when ~~part~~cash ~~or all of your investment. You should carefully consider the following risk factors as well as~~is ~~the other information in this Report on Form 10-Q~~collected.

~~COMPETING~~We ~~DATA~~recognize ~~STORAGE~~revenue ~~TECHNOLOGIES~~on ~~MAY~~multiple ~~EMERGE~~element arrangements ASusing Athe ~~STANDARD~~residual ~~FOR~~method. ~~DATA~~Under ~~STORAGE~~the residual method, revenue is recognized when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the ~~SOLUTIONS~~delivered ~~WHICH~~elements ~~COULD~~in ~~CAUSE~~the ~~GROWTH~~arrangement. INAt ~~THE~~the ~~NAS~~outset ~~MARKET~~of ~~NOT~~the TOarrangement ~~MEET~~with ~~OUR~~the ~~EXPECTATIONS~~customer, ~~AND~~we ~~DEPRESS~~defer ~~OUR~~revenue ~~STOCK~~for ~~PRICE~~the fair value of the undelivered elements such as consulting services and product maintenance, and recognize the revenue for the remainder of the arrangement fee attributable to the elements initially delivered when the basic criteria in SOP 97-2 have been met. Revenue from consulting services is recognized as the related services are performed. Revenue from product maintenance is recognized ratably over the term of the support period.

~~The~~Revenue ~~market~~from ~~for~~sales ~~data~~of ~~storage~~our isnon ~~rapidly~~NAS ~~evolving.~~products ~~There~~is ~~are~~recognized ~~other storage technologies~~ in ~~use,~~accordance ~~including~~with ~~storage~~Staff ~~area~~Accounting ~~network~~Bulletin ~~technology,~~(SAB) ~~which provide an alternative to network attached storage~~No. ~~We are not able to predict how the data storage market will evolve. For example~~101, it“Revenue isRecognition ~~not clear whether usage of a number of different solutions will grow and co-exist~~ in ~~the~~Financial ~~marketplace~~Statements.” orThe ~~whether~~revenue ~~one~~recognition orcriteria ~~a small number~~ of ~~solutions~~SAB ~~will~~101 beare ~~dominant~~consistent ~~and displace~~ with the ~~others. It is also not clear whether network attached storage technology will emerge as a dominant or even prevalent solution. Whether~~ NAS ~~becomes~~policies andescribed ~~accepted standard will be due to factors outside our control~~above. 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.

14We record reductions to revenue for estimated sales returns at the time of shipment. Some of our agreements with distributors allow limited product return, stock balancing and price protection privileges. We maintain reserves, adjusted at each reporting period, to estimate anticipated returns, including stock balancing and price protection claims, relating to each reporting period. The reserves are based on historical rates of sales and returns, including stock balancing and price protection claims, and the level of our product held by our distribution customers in their inventory. If we were to experience a significant unexpected increase in product sales returns, our sales return allowance may not be adequate and incremental sales reserves would be required. To the extent management cannot make reliable estimates of future product returns, revenue will be deferred until it is actually realized.

IFOur ~~GROWTH~~product INevaluation ~~THE~~program enables the customer to receive NAS ~~MARKET~~appliances ~~DOES~~on ~~NOT~~a ~~MEET~~trial ~~OUR~~basis ~~EXPECTATIONS~~and return the NAS appliances within a specified period, generally ~~OUR~~30-60 ~~FUTURE~~days. ~~FINANCIAL~~The ~~PERFORMANCE~~period ~~COULD~~may be extended if the customer needs additional time to evaluate the product within the customer’s particular operating environment. The value of evaluation units at customer sites at a financial reporting date ~~SUFFER~~is included in inventory as finished goods. At April 30, 2003 and July 31, 2002, inventory related to evaluation units was $1.0 million and $1.0 million, net of valuation allowances, respectively. Revenue is not recorded for evaluation units until the customer has agreed to purchase the products.

We13 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.

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

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

IFWe WEalso ~~FAIL~~maintain TOa separate allowance for doubtful accounts for estimated losses resulting from the inability of our ~~SUCCESSFULLY~~customers ~~MANAGE~~to ~~OUR~~make ~~TRANSITION~~required TOpayments. AWe ~~FOCUS~~analyze ONaccounts ~~NAS~~receivable ~~PRODUCTS~~and historical bad debts, ~~OUR~~customer ~~BUSINESS~~concentrations, ~~AND~~customer ~~PROSPECTS~~solvency, ~~WOULD~~current BEeconomic ~~HARMED~~and geographic trends, and changes in customer payment terms and practices when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

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

We ~~also~~write-down ~~expect~~ our ~~transition~~inventory, including our estimated excess and obsolete inventory, to the estimated net realizable value based upon assumptions about future demand and market conditions. Although we strive to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant ~~NAS~~impact on the value of our inventory and commitments, and our reported results. If actual market conditions are less favorable than those projected, additional write-~~focused~~downs ~~business~~and toother ~~require~~charges usagainst toearnings ~~continue:~~may be required.

•New ~~engaging~~Accounting inStandards ~~significant marketing and sales efforts to achieve market awareness as a NAS vendor;~~

•In ~~reallocating~~December ~~resources~~2002, inthe ~~product~~FASB ~~development~~issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and ~~service~~Disclosure. SFAS No. 148 amends the disclosure requirements in SFAS No. 123, Accounting for Stock-Based Compensation, for annual periods ending after December 15, 2002, and ~~support~~for interim periods beginning after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 during the three months ended April 30, 2003. Effective for financial statements for fiscal years ending after December 15, 2002, Statement 148 also provides three alternative transition methods for companies that choose to adopt the fair value measurement provisions of SFAS No. 123. Should we be required to adopt the fair value measurement provisions of SFAS No. 123 and SFAS No. 148, it would have a material impact on our ~~NAS~~results ~~appliances;~~of operations. However, we have no plans to adopt the fair value measurement provisions of SFAS No. 123 unless required to under new accounting standards and, as such, believe the adoption of SFAS No. 148 will not have a material impact at this time on our financial position, results of operations, or liquidity.

•In ~~modifying~~November ~~existing~~2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or ~~entering~~rights ~~into~~to ~~new~~use ~~channel~~assets. ~~partner~~The ~~relationships~~provisions of EITF Issue No. 00-21 will apply to revenue ~~include~~arrangements ~~sales~~entered into in fiscal periods beginning after June 15, 2003. We believe that the adoption of EITF Issue 00-21 will not have a material impact on our ~~NAS~~financial ~~appliances~~position or results of operations.

In ~~addition~~November 2002, wethe ~~may~~FASB ~~face~~issued ~~unanticipated~~FASB ~~challenges~~Interpretation in(FIN) ~~implementing~~No. ~~our~~45, “Guarantor’s ~~transition~~Accounting toand aDisclosure ~~NAS-focused~~Requirements ~~company~~for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. WeThis ~~may~~Interpretation ~~not~~elaborates on the disclosures to be ~~successful~~made by a guarantor in its interim and annual ~~managing~~financial ~~any~~statements ~~anticipated~~about orits ~~unanticipated~~obligations ~~challenges~~under ~~associated~~certain ~~with~~guarantees ~~this~~that ~~transition~~it has issued. ~~Moreover,~~It wealso ~~expect~~clarifies tothat ~~continue~~a guarantor is required to ~~incur~~recognize, ~~costs~~at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing ~~addressing~~the ~~these~~guarantee. ~~challenges~~This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. This Interpretation also incorporates, ~~and~~without ~~there~~change, the guidance in FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”, which is nobeing ~~assurance~~superseded. ~~that~~The weinitial ~~will~~recognition beand ~~able~~initial tomeasurement ~~generate~~provisions ~~sufficient~~are ~~revenues~~applicable on a prospective basis to guarantees issued or ~~cover~~modified ~~these~~after ~~costs~~December 31, 2002. IfThe wedisclosure ~~fail~~requirements toare ~~successfully~~effective ~~implement~~for ~~our~~financial ~~transition~~statements toof ainterim ~~NAS-focused~~or ~~company~~annual periods ending after December 15, ~~our~~2002. ~~business~~The ~~and~~adoption ~~prospects~~of ~~would~~FIN beNo. ~~harmed~~45 did not have a material impact on our financial position or results of operations.

IF14 ~~WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.~~

NetTable sales to our international customers, including export sales from the United States, accounted for approximately 33%, 41% and 56% of our net sales for the years ended July 31, 1999, 2000, 2001, respectively, and approximately 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: Contents

•Results ~~currency~~of ~~exchange~~Operations ~~rate fluctuations, particularly when we sell our products in currencies other than U.S. dollars;~~

•The ~~difficulties~~following intable ~~collecting~~sets ~~accounts~~forth ~~receivable~~consolidated ~~and~~statement ~~longer~~of ~~accounts~~operations ~~receivable~~data ~~payment~~as ~~cycles;~~a percentage of net sales for each of the periods indicated:

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


	THREE MONTHS ENDED APRIL 30,				NINE MONTHS ENDED APRIL 30,
	2003		2002		2003		2002
STATEMENT OF OPERATIONS

Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	63.1		59.7		60.3		55.2

Gross profit	36.9		40.3		39.7		44.8
Operating expenses:
Selling, general and administrative	50.9		132.7		67.0		95.2
Research and development	25.1		33.6		23.6		23.0
Asset impairment	70.2		—		22.0		—

Total operating expenses	146.2		166.3		112.6		118.2

Operating loss	(109.3	)	(126.0	)	(72.9	)	(73.4	)
Interest expense, net	(3.9	)	(2.7	)	(3.8	)	(3.6	)

Loss before income taxes	(113.2	)	(128.7	)	(76.7	)	(77.0	)
Provision (benefit) for income taxes	—		(102.7	)	0.3		(21.9	)

Net loss	(113.2	)%	(26.0	)%	(77.0	)%	(55.1	)%

•15 ~~legal uncertainties regarding tariffs, export controls and other trade barriers;~~

•Table the burdens of complying with a wide variety of foreign laws and regulations; andContents

15COMPARISON OF THREE AND NINE MONTHS ENDED APRIL 30, 2003 AND 2002

•Net ~~seasonal~~sales ~~fluctuations~~of $4.1 million for the three months ended April 30, 2003 were comparable to sales of $4.4 million in ~~purchasing~~the ~~patterns~~three months ended April 30, 2002. The decline in ~~other~~net ~~countries~~sales was primarily attributable to a decline in unit sales in domestic markets of our NAS and Legacy products which were partially offset by an increase in product sales in international markets of our NAS and Legacy products. Net sales decreased by 35.8% to $13.1 million for the nine months ended April 30, ~~particularly~~2003, from $20.4 million for the nine months ended April 30, 2002. The decrease was due primarily to a decline in ~~Europe~~product sales in domestic and international markets for our NAS and Legacy products.

~~Any~~Net sales of ~~these~~our ~~factors~~NAS ~~could~~products ~~have~~increased an16.0% ~~adverse~~to ~~impact~~$3.7 onmillion ~~our~~for ~~existing~~the ~~international~~three ~~operations~~months ~~and~~ended ~~business~~April or30, ~~impair~~2003, ~~our~~from ~~ability~~$3.2 tomillion ~~continue expanding~~for ~~into~~the ~~international~~comparable ~~markets.~~quarter ~~For~~in fiscal ~~example,~~2002. ~~our~~The ~~reported~~increase ~~sales~~was ~~can~~due beprimarily ~~affected~~to byan ~~changes~~increase in ~~the~~international ~~currency~~NAS ~~rates~~product ~~in effect during any particular period~~sales. ~~The~~Net ~~effects~~sales of ~~currency~~our ~~fluctuations~~NAS ~~were~~products ~~evident~~decreased in30.4% ~~our~~to ~~results~~$11.5 ofmillion ~~operations~~ for the ~~fiscal~~ ~~year 2001 and the first~~ nine months ofended ~~fiscal~~April ~~2002.~~30, ~~During this period~~2003, ~~the~~from ~~Euro~~$16.5 ~~and~~million ~~two~~for ~~currencies whose values are pegged to~~ the ~~Euro,~~comparable ~~fluctuated~~period ~~significantly~~in fiscal ~~against the U~~2002.S. ~~dollar.~~The Asdecrease awas ~~result,~~due weprimarily ~~incurred~~to a ~~foreign~~decline ~~currency loss of approximately $54,000~~ in ~~fiscal~~domestic ~~2001~~ and ainternational ~~foreign~~NAS ~~currency~~product ~~gain~~sales. ofAs ~~$53,000~~a inpercentage ~~the first nine months~~ of ~~fiscal~~total ~~2002.~~net ~~Also~~sales, ~~these~~NAS ~~currency~~product ~~fluctuations~~sales ~~can~~increased ~~cause us~~ to ~~report~~90.0% ~~higher~~from or73.2% ~~lower~~for ~~sales by virtue of~~ the ~~translation~~three ofmonths ~~the~~ended ~~subsidiary’s sales~~April ~~into~~30, ~~U.S.~~2003 ~~dollars~~and at2002, anand increased ~~average~~to ~~rate in effect throughout the fiscal year~~87.3% Infrom ~~addition, we have funded operational losses of our subsidiaries of approximately $3~~80.5% ~~million~~for ~~between~~ the ~~date~~nine ofmonths ~~purchase~~ended ~~and~~ April 30, ~~2002,~~2003 and ~~if our subsidiaries continue to incur operational losses~~2002, ~~our cash and liquidity would be negatively impacted~~respectively.

InInternational ~~order to~~sales ~~successfully~~were ~~expand~~$1.0 million, or 24.1% of our ~~international~~net sales, wefor ~~must~~the ~~strengthen~~three ~~foreign~~months ~~operations~~ended ~~and~~April ~~recruit~~30, ~~additional~~2003, ~~international~~compared ~~distributors~~to ~~and~~$0.14 ~~resellers~~million, or 3.3% ~~Expanding~~of ~~internationally~~our ~~and~~net ~~managing~~sales, for the ~~financial~~three ~~and~~months ~~business~~ended ~~operations~~April of30, ~~our~~2002. ~~foreign~~The increase ~~subsidiaries~~was ~~will~~due ~~also~~primarily ~~require~~to ~~significant~~higher ~~management~~NAS ~~attention~~ and ~~financial~~Legacy ~~resources.~~product ~~For~~sales ~~example,~~to ~~our~~international ~~foreign~~customers, ~~subsidiaries~~primarily in ~~Europe~~European ~~have~~markets. ~~incurred~~International ~~operational~~sales ~~losses~~were $4.3 Tomillion, ~~the~~or ~~extent~~32.4% ~~that~~of weour ~~are~~net ~~unable~~sales, tofor ~~address~~the ~~these~~nine ~~concerns~~months inended aApril ~~timely~~30, ~~manner~~2003, compared to $8.0 million, or 39.0% of our ~~growth~~net sales, iffor ~~any~~the nine months ended April 30, in2002. ~~international~~The decrease was due primarily to lower overall sales ~~will~~of beNAS ~~limited~~and Legacy products to international customers, ~~and~~primarily ~~our~~in ~~operating~~Asia ~~results~~and ~~could~~Europe. There can be ~~materially~~no ~~adversely~~assurance ~~affected.~~that Inour revenues ~~addition,~~of weour ~~may~~NAS ~~not~~products bewill ~~able~~increase toin ~~maintain~~any particular quarter or ~~increase~~period ~~international~~or ~~market~~that ~~demand~~any ~~for~~specific customers will continue to purchase our products in such period.

IFGross ~~THE~~profit ~~AGING~~decreased OF13.8% ~~OUR~~to ~~ACCOUNTS~~$1.5 ~~RECEIVABLE~~million ~~CONTINUE~~for TOthe ~~INCREASE~~three ORmonths IFended WEApril ~~EXPERIENCE~~30, A2003, ~~SIGNIFICANT~~from ~~INCREASE~~$1.8 INmillion ~~SALES~~for ~~RETURNS~~the three months ended April 30, WE2002. ~~MAY~~Gross ~~NEED~~profit TOdecreased ~~RECORD~~43.0% to $5.2 million for the nine months ended April 30, 2003, from $9.2 million for the nine months ended April 30, 2002. The decrease in both periods was due primarily to lower overall sales. ~~ADDITIONAL~~Gross ~~RESERVES~~margins ~~WHICH~~decreased ~~WOULD~~to ~~ADVERSELY~~36.9% ~~AFFECT~~and ~~OUR~~39.7% ~~OPERATING~~of ~~RESULTS~~net sales for the three and nine months ended April 30, 2003 from 40.3% and 44.8% of net sales for the comparable three and nine month periods in fiscal 2002. The decrease in gross margin was due primarily to lower product margins realized on sales in both domestic and international markets combined with lower overall sales.

AtSelling, ~~April~~general ~~30,~~and ~~2002,~~administrative ~~our~~expenses ~~net~~decreased ~~accounts receivable~~63.9% ~~totaled~~to $72.61 million, ~~which~~for isthe ~~net~~three ofmonths ~~reserves~~ended ~~for~~April ~~bad~~30, ~~debts~~2003, offrom $95.28 million for the three months ended April 30, 2002, and ~~sales~~decreased ~~returns~~as a percentage of $2net sales to 50.69% ~~million~~in the third quarter of fiscal 2003 from 132.7% ~~Approximately~~in $1the comparable quarter of fiscal 2002.5 ~~million,~~In orthe ~~20%,~~third quarter of fiscal 2002, based on our ~~net~~analysis ~~accounts~~of our accounts receivable, ~~were~~we ~~past~~increased ~~due~~our ~~greater~~allowance ~~than~~for 90bad ~~days~~debt by $1.~~Although~~1 ~~management believes~~million. ~~that~~Excluding ~~these~~this ~~accounts~~additional ~~are~~provision, ~~collectible~~selling, ifgeneral and administrative expenses for the ~~financial~~third ~~condition~~quarter of ~~our~~fiscal ~~customers~~2003 ~~were~~decreased to$2.6 ~~deteriorate~~million, ~~resulting~~or 55.4%, from $4.7 million in anthe third ~~impairment~~quarter of ~~their~~fiscal ~~ability~~2002. This decrease was due primarily to ~~make~~a ~~payments,~~decrease orin ifsales ~~our~~and ~~receivable~~administrative ~~aging~~salaries ~~continued~~and tocommissions, ~~lengthen~~a ~~for~~decrease ~~some~~in ofmarketing ~~our~~expenses ~~European~~ and ~~any~~decreases ~~other~~in ~~customers,~~overall wegeneral ~~may~~administrative beexpenses ~~required~~during tothe ~~record~~third ~~additional~~quarter ~~bad~~of fiscal ~~debt~~2003, ~~reserves~~including ~~which~~cost ~~would~~savings ~~adversely~~associated ~~affect~~with the sale of our ~~operating~~Swiss ~~results~~subsidiary in the second quarter of fiscal 2003.

~~Net~~Selling, ~~sales~~general and administrative expenses decreased 54.8% to $8.8 million for the nine months ended April 30, ~~2002~~2003, ~~and~~from ~~2001 were~~ $2019.45 million ~~and~~for ~~$33.0~~the ~~million,~~nine months ~~respectively.~~ended WeApril ~~recognize~~30, ~~revenue~~2002, onand ~~NAS~~decreased ~~product~~as ~~sales,~~a ~~sold~~percentage ~~through~~of ~~direct~~net sales ~~channels~~to ~~and~~67.0% ~~resellers,~~from ~~generally upon shipment of the product~~95.2%. In ~~addition,~~the wefirst ~~sell~~nine ~~service~~months ~~contracts for certain~~ of ~~our~~fiscal ~~appliances~~2002, ~~that~~based ~~require~~on ~~service~~our ~~for~~analysis aof ~~specified~~our ~~period~~accounts ~~of time~~receivable, ~~usually~~we ~~one~~increased toour ~~three~~allowances ~~years.~~for ~~Revenue~~bad ~~from~~debt ~~these~~$4.9 ~~contracts~~million. isExcluding this ~~billed~~additional toprovision, ~~customers at the time of sale~~selling, ~~but~~ ~~earned~~general ~~ratably~~and ~~over~~administrative ~~the~~expenses ~~life~~decreased of$5.8 ~~the~~million, ~~service~~or ~~agreement~~39.7% ~~Revenue~~from is$14.6 ~~recognized~~million onin ~~sales~~the ofnine ~~our~~months ~~Legacy~~ended ~~products~~April 30, ~~which~~2002 ~~are~~to ~~sold~~$8.8 ~~primarily~~million ~~through~~in ~~distributors, when~~ the ~~distributor~~comparable ~~receives~~period ~~the~~in ~~product~~fiscal 2003. WeThis ~~maintain~~decrease ~~sales~~is ~~reserves for estimated~~due ~~reductions~~primarily to ~~revenue~~a ~~for~~decrease ~~anticipated~~in ~~returns,~~sales ~~including~~and ~~stock~~administrative ~~balancing~~salaries and ~~price~~commissions ~~protection~~and ~~claims,~~decreases ~~based~~in onoverall ~~historical~~general ~~rates~~administrative ofexpenses ~~sales~~during ~~returns.~~fiscal If2003, weincluding ~~were~~cost tosavings ~~experience~~associated awith ~~significant~~the ~~increase~~sale inof ~~product~~our ~~sales~~Swiss ~~returns,~~subsidiary ~~incremental~~in ~~sales~~the ~~reserves~~second quarter ~~may~~of befiscal ~~required~~2003.

~~OUR~~Research ~~STOCK~~and ~~MAY~~development BEexpenses ~~DE-LISTED~~decreased 29.3% ~~FROM~~to ~~NASDAQ~~$1.0 million, or 25.1% of net sales, in the third quarter of fiscal 2003, from $1.5 million, or 33.6% of net sales, for the comparable period of fiscal 2002. For the nine months ended April 30, 2003, research and development expenses decreased to $3.1 million, or 23.6% of net sales, from $4.7 million, or 23.0% of net sales, for the comparable period of fiscal 2002. The dollar decrease for both periods was due primarily to a decrease in compensation expenses related to reductions in headcount in fiscal 2002 and 2003.

~~The~~Interest ~~closing~~income decreased ~~price of our common stock on June 13, 2002 was $0~~66.863% ~~per share. The NASDAQ National Market generally requires listed issuers~~ to ~~maintain a minimum bid price of~~ $~~1.00~~28,000 ~~and~~for ~~may~~the ~~delist~~three anmonths ~~issuer~~ended ~~whose~~April ~~share~~30, ~~price~~2003, ~~falls~~from ~~below~~$83,000 ~~that threshold~~ for anthe ~~extended~~comparable period of ~~time~~fiscal 2002. IfInterest weincome ~~are~~decreased ~~unable~~72.7% to ~~meet~~$114,000 for the ~~minimum~~nine ~~listing~~months ~~requirements~~ended April 30, we2003, ~~may~~from be$418,000 ~~subject~~for tothe ~~delisting~~comparable period ~~from~~of ~~the~~fiscal ~~NASDAQ~~2002. ~~National~~The ~~Market,~~decrease ~~which~~was ~~will~~attributable ~~have~~to a ~~material~~ ~~adverse~~decline ~~effect~~in oninterest ~~our~~rates ~~common~~along ~~stock~~with ~~and~~a ~~would~~decrease ~~severely~~in ~~restrict~~ our ~~ability~~cash ~~to raise additional capital~~balance.

~~THE~~16 ~~RECENT TERRORIST ATTACKS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.~~

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

~~DUE TO~~Interest ~~DETERIORATING~~expense Udecreased 7.S.4% ~~AND~~to ~~WORLD~~$188,000 ~~ECONOMIC~~for ~~CONDITIONS~~the three months ended April 30, ~~INFORMATION~~2003, ~~TECHNOLOGY~~from ~~SPENDING~~$203,000 ONfor the ~~DATA~~comparable ~~STORAGE~~period ~~AND~~of ~~OTHER~~fiscal ~~CAPITAL~~2002. ~~EQUIPMENT~~Interest ~~HAS~~expense ~~DECLINED~~decreased 47.2% IFto ~~TECHNOLOGY~~$609,000 ~~SPENDING~~for ~~CONTINUES~~the TOnine ~~DECLINE~~months ended April 30, ~~OUR~~2003, ~~SALES~~from ~~AND~~$1,154,000 ~~OPERATING~~for ~~RESULTS~~the ~~COULD~~comparable BEperiod ~~HARMED~~of fiscal 2002. The decrease was due primarily to lower interest expense we incurred on our mortgage note in fiscal 2003, and to the fact that fiscal 2002 interest expense included costs related to our now repaid $15.0 million convertible debenture and higher amortization of debt issuance costs.

~~Many~~Provision offor ~~our~~income ~~customers~~taxes ~~are~~for ~~affected~~the bynine ~~economic~~months ~~conditions~~ended inApril ~~the~~30, ~~United~~2003, ~~States~~is attributable ~~and~~to ~~throughout~~a provision for earnings of our Italian subsidiary. In the ~~world~~third quarter of fiscal 2002, we recorded a $4.5 ~~Many companies~~million ~~have~~income ~~announced~~tax ~~that~~benefit ~~they~~relating ~~will~~to ~~reduce~~tax ~~their~~law ~~spending~~changes onwhich ~~data~~allowed ~~storage~~us to carry back deferred net operating losses, generated in fiscal 2001 and ~~other~~2002, ~~capital~~five ~~equipment.~~years, Ifas ~~spending~~opposed onto ~~data~~the ~~storage~~two years allowed under the tax law previously in effect.

16LIQUIDITY AND CAPITAL RESOURCES

~~technology~~As ~~products~~of isApril ~~reduced further by customers and potential customers~~30, ~~our sales could be harmed~~2003, ~~and~~ we ~~may~~had ~~experience~~cash ~~greater~~and ~~pressures~~cash onequivalents ~~our~~totaling ~~gross margins~~$7.7 Ifmillion ~~economic~~and ~~conditions~~$0.5 domillion ~~not~~of ~~improve,~~restricted orcash if(see ~~our~~footnote ~~customers continue to reduce their overall information technology purchases, our sales, gross profits and operating results may be reduced~~10).

IFNet WEcash ~~FAIL~~used TOin ~~INCREASE~~operating ~~THE~~activities ~~NUMBER~~was OF$2.4 ~~INDIRECT~~million ~~SALES~~for ~~CHANNELS~~the ~~FOR~~nine ~~OUR~~months ended ~~NAS~~April ~~PRODUCTS~~30, ~~OUR~~2003. ~~ABILITY~~Net TOcash ~~INCREASE~~used ~~NET~~in ~~SALES~~operating ~~MAY~~activities BEin the fiscal 2003 relates primarily to our net loss, a decrease in accounts payable and payments to related parties accrued for in fiscal 2002. These uses of cash were partially offset by ~~LIMITED~~an income tax refund and decreases in our inventories and accounts receivable. Net cash used in operating activities in fiscal 2002 relates primarily to our net loss, an increase in our inventories and income tax receivable and a decrease in our accounts payable.

InNet ~~order~~cash toused ~~grow~~in ~~our~~investing ~~business,~~activities ~~we will need to increase market awareness and sales of our NAS~~was ~~products. To achieve these objectives~~$47,000 weand ~~plan to expand revenues from our indirect sales channels~~$154,000 ~~including~~for ~~resellers~~the ~~and~~nine ~~systems~~months ~~integrators.~~ended ToApril ~~do this~~30, we2003 ~~will need to modify~~ and ~~expand our existing relationships with these indirect channel partners~~2002, ~~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~~respectively, ~~our~~which ~~ability~~was tothe ~~increase~~result ~~revenues~~of ~~may~~purchases beof ~~limited~~equipment.

~~BECAUSE~~Net WEcash DOused ~~NOT~~in ~~HAVE~~financing ~~EXCLUSIVE~~activities ~~RELATIONSHIPS~~of ~~WITH~~$669,000 ~~OUR~~for ~~DISTRIBUTORS~~the ~~FOR~~nine ~~OUR~~months ~~LEGACY~~ended ~~PRODUCTS~~April 30, ~~THESE~~2003 ~~CUSTOMERS~~was ~~MAY~~due ~~GIVE~~primarily ~~HIGHER~~to restricted cash deposit requirements under ~~PRIORITY~~our TOflooring ~~PRODUCTS~~line, OFpayments ~~COMPETITORS~~on our long-term debt and net payments under our flooring lines. Net cash used in financing activities of $1.2 million for the nine months ended April 30, ~~WHICH~~2002 ~~COULD~~was ~~HARM~~primarily ~~OUR~~the ~~OPERATING~~result ~~RESULTS~~of the repayment of our convertible debenture, partially offset by borrowings under a financing arrangement secured by our corporate headquarters.

~~Our~~As ~~distributors~~of ~~generally~~April ~~offer~~30, 2003, our long-term debt consisted of $8.75 million borrowed under a financing arrangement secured by our corporate headquarters. The ~~products~~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 ~~several~~the ~~different~~principal ~~companies~~amount outstanding under the note shall bear interest at a LIBOR based rate, ~~including~~but ~~products~~not less than 7.0%. As of ~~our~~April ~~competitors~~30, 2003, the interest rate on the loan was 7.0%. ~~Accordingly~~Principal reduction payments of $14,400 ~~these~~plus ~~distributors~~accrued interest are due monthly with the remaining principal balance and unpaid interest due at the maturity date of January 1, 2007. Up to an additional $1.0 million may ~~give~~be ~~higher~~borrowed ~~priority~~under this financing arrangement to ~~products~~cover leasing costs and tenant improvements on the vacant, unimproved space within the corporate headquarters upon finding a qualified tenant. At April 30, 2003, the outstanding principal balance of ~~our~~the ~~competitors~~loan totaled approximately $8.5 million. Under the terms of the loan agreement, ~~which~~the ~~could~~lender ~~harm~~may immediately accelerate all amounts disbursed under the loan agreement and terminate any further obligation of the lender to disburse additional amounts under the financing arrangement if there exists any event or condition that the lender in good faith believes impairs (or is substantially likely to impair) the prospect of payment or performance by us of our ~~operating~~obligations ~~results~~under the applicable loan documents. In ~~addition~~March 2004, we signed a sale-leaseback agreement on our ~~distributors~~corporate ~~often demand~~headquarters. ~~additional~~In ~~significant~~April ~~selling~~2004, ~~concessions~~we ~~and~~completed ~~inventory~~the ~~rights~~transaction, ~~such~~receiving asproceeds, ~~limited~~net ~~return~~of selling ~~rights~~costs and ~~price~~the ~~protection~~payoff of the associated building debt of $8.4 Wemillion, ~~cannot~~of ~~assure~~approximately ~~you~~$3.8 ~~that~~million. ~~sales~~In tothe ~~our~~quarter ~~distributors~~ended ~~will~~April ~~continue~~30, or2003, ~~that~~based ~~these~~on the final net sales ~~will~~price, bewe ~~profitable~~recorded an impairment loss on the building of approximately $2.9 million.

~~BECAUSE~~On WEOctober ~~HAVE~~10, ~~ONLY~~2000, ~~APPROXIMATELY~~we ~~FOUR~~entered ~~YEARS~~into OFa three-year ~~OPERATING~~working ~~HISTORY~~capital INline ~~THE~~of ~~NAS~~credit ~~MARKET~~with The CIT Group/Business Credit (“CIT”). The working capital line of credit allows for borrowings, ~~WHICH~~on ISa ~~NEW~~revolving ~~AND~~basis, ~~RAPIDLY~~for ~~EVOLVING~~a period of three years, ~~OUR~~in ~~HISTORICAL~~an ~~FINANCIAL~~amount based upon a specified ~~INFORMATION~~percentage ISof OFour ~~LIMITED~~eligible ~~VALUE~~accounts INreceivable ~~PROJECTING~~(approximately ~~OUR~~$1.0 ~~FUTURE~~million ~~OPERATING~~at ~~RESULTS~~April OR30, ~~PROSPECTS~~2003), up to a limit of $5.0 million. Amounts outstanding under the working capital line bear interest at the lender’s prime rate plus 0.25%. At April 30, 2003, no amounts were outstanding under the working capital line of credit. 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 twelve month period ended on April 30, 2003, we were not in compliance with the minimum EBITDA requirement. The lender has not waived our non-compliance with this covenant for this period. On September 2, 2003, we negotiated a mutual agreement with CIT to terminate the working capital line of credit. No amounts were outstanding at the time of termination.

We have ~~been~~a ~~manufacturing~~flooring ~~and~~line ~~selling~~with ~~our~~IBM ~~NAS products for only approximately four years. For the years ended July 31~~Credit, ~~1999,~~which ~~2000~~at ~~and 2001, these products accounted for approximately 8%, 28% and 68% of our total net sales, respectively. For the nine months ended~~ April 30, ~~2002,~~2003 ~~these~~IBM ~~products~~Credit ~~accounted~~committed ~~for~~to ~~approximately~~make ~~39% of our total net sales~~$0.5 Wemillion ~~expect~~in ~~sales~~flooring ofinventory ~~our~~commitments ~~NAS~~available ~~products~~ to ~~represent~~us an(the ~~increasing~~flooring ~~percentage~~line ofcommitment ~~our~~was ~~net~~reduced ~~sales~~from ~~in the future~~$2.0 ~~Because~~million ~~our~~at ~~operating~~July ~~history~~31, in2002). ~~the~~In ~~NAS~~November ~~product market is only approximately four years~~2002, ~~as well as~~ at the ~~rapidly~~request ~~evolving nature~~ of ~~the~~IBM ~~NAS market~~Credit, itwe isestablished ~~difficult~~an toirrevocable ~~evaluate~~letter ~~our~~of ~~business~~credit or(“ILOC”) ~~our~~totaling ~~prospects~~$0.5 Inmillion ~~particular,~~to ~~our~~collateralize ~~historical~~purchases ~~financial information is of limited value in projecting our future operating results.~~

~~MARKETS~~17 ~~FOR BOTH OUR NAS APPLIANCES AND OUR LEGACY PRODUCTS ARE INTENSELY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES.~~

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

WEunder ~~DEPEND~~the ONflooring Aline. ~~FEW~~As ~~CUSTOMERS~~of April 30, ~~INCLUDING~~2003 ~~DISTRIBUTORS~~and ~~AND~~July ~~SPECIALIZED~~31, ~~END-USERS~~2002, ~~FOR~~we Aowed ~~SUBSTANTIAL~~$147,000 ~~PORTION~~and OF$251,000, ~~OUR~~respectively, ~~NET~~under ~~SALES,~~the flooring ~~AND~~line. ~~CHANGES~~The INflooring ~~THE TIMING~~line ~~AND~~is ~~SIZE~~also OFcollateralized ~~THESE~~by ~~CUSTOMERS~~the specific inventory purchased pursuant to the flooring commitments. CIT and IBM Credit have entered into an intercreditor agreement which determines the level of priority of each lender’s ~~ORDERS~~security ~~MAY~~interest. ~~CAUSE~~The ~~OUR~~flooring ~~OPERATING~~line ~~RESULTS~~requires TOus ~~FLUCTUATE~~to maintain a minimum net worth of $16.0 million and requires us not to be in default of any covenants in the CIT agreement. IBM Credit modified the agreement and waived any violations at April 30, 2003 as long as the ILOC is in place. In January 2004, at our request, the flooring line commitment and the ILOC were reduced to $250,000.

~~For~~In ~~the~~addition nine months ended April 30, 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 until we diversify and expand our customer base for NAS products, our future success will depend to ~~a large extent on~~ the ~~timing~~line ~~and size~~ of ~~future purchase orders~~credit, ~~if any, from these customers. In addition, we may receive from single site purchasers of large installations of~~ our ~~NAS products~~foreign ~~large~~subsidiary ~~volume~~in ~~purchases~~Italy ofhas ~~our~~a ~~NAS~~line ~~products over relatively short periods~~ of ~~time.~~credit ~~This~~with ~~may~~their ~~cause~~bank ~~our~~that ~~sales~~is toutilized befor ~~highly~~overdraft ~~concentrated~~ and ~~significantly~~short-term ~~dependent on one or only a few customers~~cash needs. IfAt weApril ~~lose~~30, ~~a major customer~~2003, orthere ifwere ~~one~~no ~~of our customers significantly reduces its purchasing volume or experiences financial difficulties and is unable to or does not pay~~ amounts ~~owed~~outstanding tounder ~~us,~~this line.

17In May 2002, the employment of three of our executives was terminated. Under the agreements, one of the executives will receive monthly payments of $18,750 for 36 months following termination, one will receive monthly payments of $18,750 for 30 months following termination, and the third will receive monthly payments of $18,750 for 30 months following termination and monthly payments of $37,500 for six months after the last such $18,750 monthly payment. Each former executive will be entitled to participate in our employee benefit, health and other insurance plans of the 36 months following their termination. In fiscal 2002, we accrued approximately $1.9 million for the present value of the remaining unpaid severance and employee benefits. As of April 30, 2003, the remaining balance was $1.4 million and is included in payable to related parties in the condensed consolidated balance sheet.

We have incurred substantial losses during the last three fiscal years and have limited resources to continue to fund cash operating losses and other contractual obligations. To address our ~~results~~continued losses, we have reduced our headcount, both domestically and internationally, from 211 employees at July 31, 2001 to 135 employees at July 31, 2002, and have further reduced headcount by approximately 46 employees in the first nine months of fiscal 2003. Our plan to address our liquidity issues is primarily to generate cash flow from operations. ~~would~~These besteps ~~adversely~~include generating ~~affected~~additional sales from our existing inventory and sales of our new NetFORCE 4000 series product, enhancing our attention to soliciting and supporting Original Equipment Manufactures (“OEMs”) and system integrators, improving the profitability of our service and support organization. In ~~fiscal 2001~~addition, we ~~sold~~are ~~our~~continuing ~~Legacy~~to ~~products principally~~seek to ~~distributors~~reduce our cost structure. WeThere ~~cannot~~can be ~~certain~~no assurance that ~~customers~~we will be able to increase our sales or further reduce costs sufficiently to provide positive cash flows from operations. Based on these and other cost saving measures, we believe that we have ~~accounted~~cash ~~for~~and ~~significant~~other ~~revenues~~resources insufficient ~~past~~to ~~periods~~meet ~~will~~our ~~continue~~anticipated tocash ~~purchase~~requirements through at least April 30, 2004. In March 2004, we signed a sale-leaseback agreement on our ~~products~~corporate orheadquarters. ~~fully~~In ~~pay~~April ~~for~~2004, ~~products~~we ~~they~~completed ~~purchase~~the intransaction, receiving proceeds, net of selling costs and the payoff of the associated building debt of $8.4 million, of approximately $3.8 million. In the future, ~~periods~~we will investigate other financing alternatives including equity private placements and bridge loans.

~~OUR~~In ~~GROSS~~June ~~MARGINS~~2003, OFwe ~~OUR~~terminated ~~VARIOUS~~a ~~PRODUCT~~telephone ~~LINES~~equipment ~~HAVE~~operating ~~FLUCTUATED~~lease ~~SIGNIFICANTLY~~in INGermany ~~THE~~and ~~PAST~~negotiated ~~AND~~a ~~MAY~~settlement ~~CONTINUE~~totaling TOapproximately ~~FLUCTUATE SIGNIFICANTLY~~$83,000. ~~FOR~~The ~~EXAMPLE,~~settlement was WEpaid ~~MAY~~in ~~NOT EXPERIENCE~~July ~~INCREASED~~2003 ~~SALES~~and OFwill ~~OUR~~reduce ~~NAS~~our ~~APPLIANCES~~contractual cash obligations by approximately $50,000 annually through December 2008.

~~Historically~~Effective May 1, ~~our~~2003, ~~gross~~we ~~margins~~entered ~~have~~into ~~fluctuated significantly.~~an ~~Our~~agreement ~~gross~~with ~~margins~~the ~~vary~~third-party ~~significantly~~provider byof ~~product~~a ~~line~~portion ~~and~~of ~~distribution~~the ~~channel,~~source-code used in our NAS operating system to amend and, ~~therefore~~restate a May 1, ~~our~~1998 ~~overall~~Original ~~gross~~Equipment ~~margin~~Manufacturer ~~varies~~Agreement ~~with~~as amended, to provide us the ~~mix~~option ofto ~~products~~obtain wea ~~sell.~~perpetual ~~Our~~royalty-free ~~markets~~license ~~are~~in ~~characterized~~exchange byfor ~~intense~~a ~~competition~~one-time ~~and~~license ~~declining average~~fee ~~unit~~of ~~selling~~$800,000, ~~prices~~payable over ~~the~~a ~~course~~one ofyear period, and to provide us the ~~relatively~~option ~~short~~to ~~life~~acquire ~~cycles~~joint-ownership of ~~individual~~such ~~products.~~software ~~For~~and ~~example~~materials, wesubject ~~derive~~to aconfidentiality ~~significant~~restrictions, ~~portion~~in ofexchange ~~our~~for ~~sales~~a ~~from~~one-time ~~NAS~~purchase ~~products.~~price ~~The~~of ~~market~~$600,000. ~~for~~In ~~these~~July ~~products~~2003, isthe ~~highly~~agreement ~~competitive~~was ~~and~~amended ~~subject~~ to ~~intense~~ ~~pricing~~remove ~~pressures.~~these Ifconfidentiality restrictions wewith ~~fail~~regard to ~~increase~~the ~~sales~~source code of ~~our~~the ~~NAS~~software ~~appliances~~for a one-time fee of $300,000. orWe ifmade ~~demand~~payments totaling $1,600,000 ~~sales~~(which orincluded ~~gross~~a ~~margins~~prepayment ~~for~~discount ~~our~~of ~~Legacy~~$100,000), ~~products~~as ~~decline~~follows: ~~rapidly~~$400,000 wein ~~believe~~June ~~our~~2003, ~~overall~~$200,000 ~~gross~~in ~~margins~~November ~~may~~2003 ~~continue~~and $1,000,000 toin ~~decline~~April 2004.

~~Our~~In ~~gross~~March ~~margins~~2004, ~~have~~we ~~been~~signed a software development and ~~may~~license ~~continue~~agreement to(“the beAgreement”) ~~affected~~with bySun aMicrosystems, ~~variety~~Inc. Under the Agreement, in April 2004, we received $2,750,000 in prepaid royalties and $250,000 for an internal use source and object code license. Prior to the signing of ~~other~~the ~~factors~~Agreement, ~~including:~~we received $750,000 in February 2004 for engineering development services under an Engineering Services Agreement.

•18 ~~new product introductions and enhancements;~~

•Table competition;of Contents

• Item ~~changes~~3. inQuantitative ~~the~~and ~~distribution~~Qualitative ~~channels~~Disclosure weabout ~~use;~~Market Risks

•Interest ~~the~~Rate ~~mix~~Risk ~~and average selling prices of products; and~~

•Our exposure to market risk for changes in interest rates relates primarily to the ~~cost~~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, ~~availability~~by policy, we limit the amount of ~~components~~credit exposure to any one issuer. As stated in our policy, we ensure the safety and ~~manufacturing~~preservation ~~labor~~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.

IFIn WEDecember ~~ARE~~2001, ~~UNABLE~~we TOborrowed ~~TIMELY~~$8.75 ~~INTRODUCE~~million ~~COST-EFFECTIVE~~under ~~HARDWARE~~a ORfinancing ~~SOFTWARE~~arrangement. ~~SOLUTIONS~~The ~~FOR~~principal ~~NAS~~amount ~~ENVIRONMENTS~~outstanding bears interest at prime plus 1.0%, ORalthough IFat a ~~OUR~~minimum ~~PRODUCTS~~of ~~FAIL~~7%. TOAccordingly, ~~KEEP~~if ~~PACE~~the ~~WITH~~prime ~~TECHNOLOGICAL~~rate ~~CHANGES~~were INto ~~THE~~fluctuate ~~MARKETS~~above WE6%, ~~SERVE~~we would experience interest rate risk on our debt. In April 2004, ~~OUR OPERATING~~the ~~RESULTS~~principal ~~COULD~~amount BEoutstanding ~~MATERIALLY~~under ~~ADVERSELY~~this ~~AFFECTED~~agreement was paid off as a result of the closing of the corporate headquarter’s building sale.

~~Our~~Foreign ~~future~~Currency ~~growth~~Exchange ~~will depend in large part upon~~Rate ~~our~~Risk ability to successfully develop and introduce new hardware and software for the NAS market. Due to the complexity of products such as ours, we face significant challenges in developing and introducing new products. The development of new products requires significant research and development expense and effort. We may not have the financial resources to fund the research and development efforts necessary to develop new NAS products, and we may be unable to introduce new products on a timely basis or at all. If we are unable to introduce new products in a timely manner, our operating results could be harmed.

~~Even~~We iftransact webusiness ~~are successful~~ in ~~introducing~~various ~~new~~foreign ~~products~~countries, but we ~~may~~only behave ~~unable~~significant toassets ~~keep~~deployed ~~pace~~outside ~~with~~the ~~technological~~United ~~changes~~States in ~~our~~Europe. ~~markets~~We have effected intercompany advances and ~~our~~sold ~~products~~goods ~~may~~to ~~not~~our ~~gain~~European ~~any~~subsidiaries ~~meaningful~~denominated ~~market~~in ~~acceptance~~U.S. ~~The~~dollars, ~~markets~~and wethose ~~serve~~amounts are ~~characterized~~subject byto currency fluctuation ~~rapid~~and ~~technological~~require ~~change,~~constant ~~evolving~~revaluation ~~industry~~on ~~standards~~our financial statements. In the nine months ended April 30, 2003 and ~~frequent~~2002, ~~new~~we ~~product~~incurred ~~introductions~~foreign currency transaction gains of $208,000 and ~~enhancements~~$53,000, ~~that~~respectively, ~~could~~which ~~render~~are included in our ~~products~~selling, ~~obsolete~~general and administrative ~~less competitive~~expenses. AsWe do not operate a ~~result,~~hedging ~~our~~program ~~position~~to inmitigate ~~these~~the ~~markets~~effect ~~could~~of ~~erode~~a ~~rapidly~~significant ~~due~~rapid ~~to changes~~change in ~~features~~the ~~and~~value ~~functions~~ of ~~competing~~the ~~products~~Euro orcompared ~~price~~to ~~reductions~~the byU.S. ~~our competitors~~dollar. InIf ~~order~~such toa ~~avoid~~change ~~product~~did ~~obsolescence~~occur, we ~~will~~would have to ~~keep~~take ~~pace~~into ~~with~~account ~~rapid~~a ~~technological~~currency exchange ~~developments~~gain ~~and~~or ~~emerging~~loss ~~industry~~in ~~standards~~the amount of the change in the U.S. Wedollar ~~may~~denominated ~~not~~balance ~~have~~ of the ~~financial~~amounts ~~resources~~outstanding toat dothe sotime orof ~~otherwise~~such change. Our net sales can also be ~~successful~~affected by a change in ~~doing~~the ~~so,~~exchange ~~and~~rate ifbecause we ~~fail~~translate sales of our subsidiaries at the average rate in ~~this~~effect ~~regard~~during a financial reporting period. At April 30, 2003, approximately $7.3 million in current intercompany advances and accounts receivable from our ~~operating~~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 ~~could~~of operations beor ~~harmed~~financial condition.

WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SEVERAL KEY COMPONENTS USED IN OUR PRODUCTS, INCLUDING DISK DRIVES, COMPUTER BOARDS, POWER SUPPLIES, MICROPROCESSORS AND OTHER COMPONENTS, AND ANY DISRUPTION OR TERMINATION OF THESE ~~SUPPLY~~Item ~~ARRANGEMENTS~~4. ~~COULD~~Controls ~~DELAY~~and ~~SHIPMENT~~Procedures ~~OF OUR PRODUCTS AND HARM OUR OPERATING RESULTS.~~

WeThe ~~rely~~Company ~~upon~~maintains ~~a limited~~disclosure ~~number~~controls ofand ~~suppliers~~procedures ofthat ~~several~~are ~~key~~designed ~~components~~to ~~used~~ensure inthat ~~our~~information ~~products,~~required ~~including~~to ~~disk~~be ~~drives,~~disclosed ~~computer~~in ~~boards,~~the ~~power~~Company’s ~~supplies~~Exchange ~~and~~Act ~~microprocessors.~~reports Inis ~~the past~~recorded, ~~we have experienced periodic shortages~~processed, ~~selective~~summarized ~~supply allocations~~ and ~~increased~~reported ~~prices~~within ~~for~~the ~~these~~time ~~and~~periods ~~other~~specified ~~components. We may experience similar supply issues~~ in the ~~future.~~SEC’s ~~Even~~rules ifand ~~we are able to obtain component supplies~~forms, ~~the~~and ~~quality~~that ofsuch ~~these~~information ~~components~~is ~~may~~accumulated ~~not~~and ~~meet~~communicated ~~our requirements. For example, in order~~ to ~~meet~~the ~~our~~Company’s ~~product performance requirements~~management, weincluding ~~must~~its ~~obtain~~Chief ~~disk~~Executive ~~drives~~Officer ~~of extremely high quality~~ and ~~capacity.~~Chief ~~Even~~Financial aOfficer, ~~small~~as ~~deviation~~appropriate, ~~from~~to allow ~~our~~timely ~~requirements~~decisions ~~could~~regarding ~~render~~required ~~any of the disk drives we receive unusable by us~~disclosure. In ~~the~~designing ~~event~~and ofevaluating ~~a reduction or interruption in~~ the ~~supply~~disclosure orcontrols aand ~~degradation~~procedures, inmanagement ~~quality~~recognized ofthat any ofcontrols ~~our~~and ~~components~~procedures, weno ~~may~~matter ~~not~~how bewell ~~able~~designed toand ~~complete the assembly of our products on a timely basis or at all~~operated, ~~which~~can ~~could~~provide ~~force~~only usreasonable assurance ~~to delay or reduce shipments~~ of ~~our~~achieving ~~products.~~the Ifdesired wecontrol ~~were forced to delay or reduce product shipments~~objectives, ~~our~~and ~~operating~~management ~~results~~necessarily ~~could~~was berequired ~~harmed.~~to Inapply ~~addition,~~its ~~product~~judgment ~~shipment~~in ~~delays~~evaluating ~~could~~the ~~adversely~~cost-benefit ~~affect~~relationship ~~our~~of ~~relationships~~possible ~~with~~controls ~~our channel partners~~ and ~~current or future end-users~~procedures.

18As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this Report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

~~UNDETECTED~~There ~~DEFECTS~~have ORbeen no ~~ERRORS~~changes ~~FOUND~~in INthe ~~OUR~~Company’s ~~PRODUCTS,~~internal ORcontrol ~~THE~~over ~~FAILURE~~financial OFreporting, ~~OUR~~during ~~PRODUCTS~~the TOthree ~~PROPERLY INTERFACE~~months ~~WITH~~ended ~~THE~~April ~~PRODUCTS~~30, ~~OF OTHER VENDORS~~2003, ~~MAY~~that ~~RESULT~~have INmaterially ~~DELAYS~~affected, ~~INCREASED~~or ~~COSTS~~are ORreasonably ~~FAILURE~~likely TOto ~~ACHIEVE~~materially ~~MARKET ACCEPTANCE~~affect, ~~WHICH~~the ~~COULD~~Company’s ~~MATERIALLY~~internal ~~ADVERSELY~~control ~~AFFECT~~over financial ~~OUR OPERATING RESULTS~~reporting.

~~Complex~~19 products such as those we develop and offer may contain defects or errors, or may fail to properly interface with the products of other vendors, when first introduced or as new versions are released. Despite internal testing and testing by our customers or potential customers, we do, from time to time, and may in the future encounter these problems in our existing or future products. Any of these problems may:

•Table causeof delays in product introductions and shipments;Contents

• PART ~~result~~II ~~in increased costs and diversion of development resources;~~

• Item ~~require~~1. ~~design~~Legal ~~modifications;~~Proceedings or

•In ~~decrease~~December ~~market~~2000, ~~acceptance~~we oracquired ~~customer~~Scofima ~~satisfaction~~Software, S.r.l., an Italian company. One of the former shareholders of Scofima Software became our Managing Director of European Sales. The consideration issued in the transaction was 480,000 shares of our common stock which we agreed, as part of the acquisition, to register the shares for resale under the Securities Act of 1933. The shares of common stock issued in the transaction were registered for resale but the former Scofima Software shareholders alleged, among other things, that delays in the registration of the shares caused them to incur substantial losses. On October 4, 2002, we entered into a settlement agreement with the former Scofima Software shareholders under which these ~~products~~individuals released any and all claims against us arising from the transaction in return for a payment of $970,000, of which ~~could~~$560,000 ~~result~~was paid upon execution of the agreement and the remaining balance was paid through February 2003. The settlement was charged to expense in ~~product~~the ~~returns~~fourth quarter of fiscal 2002. At April 30, 2003, no amounts were outstanding.

InOn ~~addition~~September 20, we2002, ~~may~~a ~~not~~putative ~~find~~class ~~errors~~action orcomplaint ~~failures~~styled inAlbert ~~our~~Ree ~~products~~v. ~~until~~Alex ~~after~~Aydin, ~~commencement~~Alex ofRazmjoo, ~~commercial~~and ~~shipments~~Procom Technology, ~~resulting~~Inc. was filed in the ~~loss~~United States District Court for the Southern District of orNew York, Case No.02 CV 7613.Two weeks later, on October 4, 2002, a putative class action complaint styled Gary Squires v Alex Aydin, Alex Razmjoo, and Procom Technology, Inc. was ~~delay~~also filed in ~~market~~the ~~acceptance,~~United ~~which~~States ~~could~~District ~~significantly~~Court ~~harm~~for ~~our~~the ~~operating~~Southern ~~results~~District of New York, Case No.02 ~~Our~~CV ~~current~~7952. orThe ~~potential~~allegations ~~customers~~of ~~might~~the ~~seek~~two orcomplaints ~~succeed~~are inidentical, ~~recovering~~and ~~from~~the usactions ~~any~~were ~~losses~~consolidated. ~~resulting~~On ~~from~~May ~~errors~~28, or2003, ~~failures~~plaintiffs in the consolidated action filed an Amended Consolidated Class Action Complaint. The consolidated action, as amended, is purportedly brought on behalf of all public investors who purchased our ~~products~~common stock from December 9, 1999 to June 25, 2001.

~~OUR~~The ~~PROPRIETARY~~amended ~~SOFTWARE~~complaint ~~RELIES~~alleges ONviolations ~~OUR~~of ~~INTELLECTUAL~~Section ~~PROPERTY~~10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934. The amended complaint includes allegations that, ~~AND~~during ~~ANY~~the ~~FAILURE~~period BYfrom USDecember TO9, ~~PROTECT~~1999 ~~OUR~~to ~~INTELLECTUAL~~June ~~PROPERTY~~25, ~~COULD~~2001, ~~ENABLE~~we ~~OUR~~falsely ~~COMPETITORS~~and TOrecklessly overstated revenues in violation of generally accepted accounting ~~MARKET~~principles. ~~PRODUCTS~~We ~~WITH~~believe ~~SIMILAR~~that ~~FEATURES~~the ~~THAT~~allegations ~~MAY~~stated ~~REDUCE~~in ~~DEMAND~~the ~~FOR~~amended ~~OUR~~complaint ~~PRODUCTS~~are without merit, ~~WHICH~~Nevertheless, ~~WOULD~~due ~~ADVERSELY~~to ~~AFFECT~~the ~~OUR~~uncertainties ~~NET~~of ~~SALES~~the litigation process and the continued business distractions, which have and would likely continue, we have reached a tentative settlement agreement with the class plaintiffs by executing a memorandum of understanding (“MOU”) on December 16, 2003. On September 10, 2004, the Court signed the Final Order of Settlement granting final approval of settlement.

~~Despite~~We ~~our~~are ~~efforts~~from totime ~~protect our proprietary rights, unauthorized parties may attempt~~ to ~~copy~~time orinvolved ~~otherwise~~in ~~obtain and use our proprietary software or technology. We believe the protection of our proprietary technology is important~~litigation torelated ~~our business. If we are unable~~ to ~~protect~~ our ~~intellectual~~ordinary ~~property rights~~operations, ~~our~~such ~~business~~as ~~could~~collection beactions ~~materially adversely affected. We currently rely on a combination of copyright~~ and ~~trademark~~vendor ~~laws and trade secrets to protect our proprietary rights~~disputes. ~~In addition, we generally enter into confidentiality agreements with our employees and license agreements with end-users and control access to our source code and other intellectual property.~~ We ~~have~~do ~~applied for the registration of some, but~~ not ~~all,~~believe ofthat ~~our trademarks. We have applied for U.S. patents with respect to~~ the ~~design~~resolution ~~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~~such ~~advantages~~existing ~~over,~~claim or ~~may~~lawsuit bewill ~~challenged~~have ~~by,~~a ~~third~~materially ~~parties.~~adverse ~~Despite~~affect ~~our~~on ~~efforts to protect~~ our ~~proprietary rights~~business, ~~unauthorized parties~~results ~~may attempt to copy aspects~~ of ~~our~~operations ~~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~~financial ~~extent as do the laws of the United States~~condition. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent issued to us or other intellectual property rights of ours.

~~In addition, we may initiate claims or~~ ~~litigation~~Item ~~against third parties for infringement of our proprietary rights to establish the validity of our proprietary rights~~6. ~~This~~Exhibits ~~litigation, whether or not it is resolved in our favor, could result in significant expense to us~~ and ~~divert~~Reports ~~the efforts~~on ofForm ~~our~~8-K ~~technical and management personnel.~~

WE(a) ~~MAY~~See ~~FROM~~the ~~TIME~~exhibit TOindex ~~TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES’ PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS~~below, ~~PATENTS~~which ORis ~~OTHER~~incorporated ~~INTELLECTUAL~~herein ~~PROPERTY~~by ~~RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED~~reference.

We(b) ~~may~~Reports ~~from~~on ~~time~~Form to time receive claims that we are infringing third parties’ intellectual property rights or claims that our own trademarks, patents or other intellectual property rights are invalid. For example, we have been notified by Intel Corporation that our products may infringe some of the intellectual property rights of Intel. In its notification, Intel offered us a non8-~~exclusive license for patents in their portfolio~~K. ~~We are investigating whether our products infringe the patents of Intel, and we have had discussions with Intel regarding this matter~~None. 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

1920

agreements,Table 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. Contents

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

WePursuant ~~have~~to ~~experienced~~the requirements ~~significant~~of ~~declines~~the inSecurities ~~net~~Exchange ~~sales~~Act ~~and~~of ~~gross~~1934, ~~profit~~as ~~and~~amended, ~~incurred~~the ~~operating~~Registrant ~~losses,~~has ~~causing~~duly ~~our~~caused ~~quarterly~~this ~~operating~~report ~~results~~ to ~~vary~~be ~~significantly.~~signed Ifon weits ~~fail~~behalf toby ~~meet~~ the ~~expectations~~undersigned, ofthereunto ~~investors~~duly ~~or securities analysts~~authorized, asin ~~well~~the asCity ~~our~~of ~~internal operating goals~~Irvine, asCounty ~~a result~~ of ~~any future fluctuations in our quarterly operating results~~Orange, ~~the~~State ~~market price~~ of ~~our~~California, ~~common stock could decline significantly. Our net sales and quarterly operating results~~on ~~are likely to fluctuate significantly in~~ the ~~future~~1st ~~due to a number~~ of ~~factors~~October, 2004. ~~These factors include:~~

•PROCOM ~~market~~TECHNOLOGY, ~~acceptance~~INC. ofBy: ~~our~~/s/ ~~new~~Alex ~~products~~Razmjoo ~~and~~Alex ~~product~~Razmjoo ~~enhancements~~Chairman, orPresident ~~those~~and ofChief ~~our~~Executive ~~competitors;~~Officer

•Pursuant to the requirements ~~level~~of the Securities Exchange Act of ~~competition~~1934, as amended, this Report on Form 10-Q has been signed below by the following persons in ~~our~~the ~~target~~capacities ~~product~~and ~~markets;~~on the dates indicated.

• delays in our introduction of new products;


SIGNATURES	TITLE	DATE
/s/ Alex Razmjoo Alex Razmjoo	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	October 1, 2004

/s/ Edward Kirnbauer Edward Kirnbauer	Controller and Acting Chief Financial Officer (Principal Accounting Officer)	October 1, 2004

•21 ~~changes in sales volumes through our reseller and distribution channels, which have varying commission and sales discount structures;~~

•Table changingof technological needs within our target product markets;Contents

•INDEX ~~the~~TO ~~impact~~EXHIBITS ~~of price competition on the selling prices for our products;~~

• the availability and pricing of our product components;


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		Form of Indemnity Agreement between the Company and each of its executive officers and directors (incorporated by reference to Exhibit 10.1 in the Form S-1 filed on October 30, 1996)

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

10.3		Loan Agreement dated November 28, 2001 by and between the Registrant and First Bank & Trust (incorporated by reference to Exhibit 10.1 in the Form 10-Q filed on March 18, 2002)

10.4		Agreement dated May 24, 2002 between the Registrant and Alex Aydin (incorporated by reference to Exhibit 10.2 in the Form 10-Q filed on June 14, 2002)

10.5		Agreement dated May 24, 2002 between the Registrant and Nick Shahrestany (incorporated by reference to Exhibit 10.3 in the Form 10-Q filed on June 14, 2002)

10.5.1		Amendment to Agreement, dated November 11, 2002 between the Registrant and Nick Shahrestany (incorporated by reference to Exhibit 10.5.1 in the Form 10-K filed on November 13, 2002)

10.6		Agreement dated May 24, 2002 between the Registrant and Frank Alaghband (incorporated by reference to Exhibit 10.4 in the Form 10-Q filed on June 14, 2002)

10.6.1		Amendment to Agreement, dated November 11, 2002 between the Registrant and Frank Alaghband (incorporated by reference to Exhibit 10.6.1 in the Form 10-K filed on November 13, 2002)

10.7		Agreement for Wholesale Financing (Security Agreement) between Procom Technology, Inc. and IBM Credit Corporation (incorporated by reference to Exhibit 10.1 to the Form S-3/A filed on January 17, 2001)

10.8		Addendum to Amended and Restated Executive Employment Agreement, dated August 1, 2002 between the Registrant and Alex Razmjoo

31.1		Rule 13a – 14(a) Certifications

31.2		Rule 13a – 14(a) Certifications

32.1		Section 1350 Certifications

32.2		Section 1350 Certifications

•22 ~~our expenditures on research and development and the cost to expand our sales and marketing programs; and~~

• the volume, mix and timing of orders received.

Due to these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance. In addition, it is difficult for us to forecast accurately our future net sales. This difficulty results from our limited operating history in the emerging NAS market, as well as the fact that product sales in any quarter are generally booked and shipped in that quarter. Because we incur expenses, many of which are fixed, based in part on our expectations of future sales, our operating results may be disproportionately affected if sales levels are below our expectations.

Our revenues in any quarter may also be affected by product returns and any warranty obligations in that quarter. Many of our distributors have limited product return rights. In addition, we generally extend warranties to our customers that correspond to the warranties provided by our suppliers. If returns exceed applicable reserves or if a supplier were to fail to meet its warranty obligations, we could incur significant losses. In the first nine months of fiscal 2002 and 2001, we experienced product return rates of approximately 16.7% and 14.0%, respectively. This rate may vary significantly in the future, and we cannot assure you that our reserves for product returns will be adequate in any future period.

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

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

We believe that our success will depend on the continued services of our executive officers and other key employees. The loss of any of these key executive officers or other key employees could harm our business.

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

In recent periods, we have experienced significant declines in net sales and gross profit, and we have incurred operating losses. We incurred operating losses of $5.2 million for fiscal 1999, $12.1 million for fiscal 2000, $16.6 million (including a charge for in-process research and development) in fiscal year 2001 and $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.

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

As of April 30, 2002, our executive officers and directors beneficially owned approximately 5,970,000 shares, or approximately 37.0% of the outstanding shares of common stock. Acting together, these shareholders would be able to exert substantial influence on matters requiring approval by shareholders, including the election of directors. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could in turn have an adverse effect on the market price of our common stock or prevent our shareholders from realizing a premium over the market price for their shares of common stock.

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

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

• fluctuations in our operating results;

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

• a shortfall in net sales or operating results compared to securities analysts’ expectations;

• changes in analysts’ recommendations or projections;

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

• changes in our relationships with our suppliers or customers, including failures by customers to pay amounts owed to us.

WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD REDUCE YOUR OWNERSHIP PERCENTAGE AND DILUTE THE VALUE OF YOUR SHARES.

Events over which you have no control could result in the issuance of additional shares of our common stock, which would dilute your ownership percentage. Our issuance of 480,000 shares in connection with the acquisition of Scofima Software S.r.l. is an example of an issuance of additional shares to finance an acquisition that may dilute your ownership. Also in June 2001, we completed the sale of 3.8 million shares of our common stock in an offering. In the future, we may issue additional shares of common stock or preferred stock to raise additional capital or finance acquisitions, upon the exercise or conversion of outstanding options, warrants and shares of convertible preferred stock, or in lieu of cash payment of dividends. Our issuance of additional shares would dilute your shares.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio as well as the fluctuation in interest rates on our various borrowing arrangements. We do not use derivative financial instruments in our investment portfolio. We invest in high-credit quality issuers and, by policy, we limit the amount of credit exposure to any one issuer. As stated in our policy, we ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in safe and high-credit quality securities and by constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only marketable securities with active secondary or resale markets to help ensure reasonable portfolio liquidity.

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

In December 2001, we borrowed $8.75 million under a financing arrangement. The principal amount outstanding bears interest at prime plus 1.0%, 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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