ANDATACO INC, 10-K, 1999-01-29

ANDATACO INC
10-K, 1999-01-29
COMPUTER STORAGE DEVICES

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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.

For the fiscal year ended October 31, 1998, OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.

Commission File Number: 0-10370

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

<TABLE>
<S> <C>
MASSACHUSETTS 04-2511897
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

10140 Mesa Rim Road, San Diego, California 92121
(Address of principal executive offices)

(619) 453-9191
(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 Par Value
(Title of Class)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

As of January 15, 1999, the aggregate market value of Class A Common Stock
held by non-affiliates of the Registrant was $4,348,589, based on the closing
sale price of such stock on the Nasdaq Over-The-Counter Bulletin Board
Market./1/ The number of shares outstanding of the Registrant's Class A Common
Stock, $0.01 par value, as of January 15, 1999 was 23,819,399.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company's Definitive Proxy Statement to be filed
with the Securities and Exchange Commission (the "Commission"), no later than
120 days after October 31, 1998, pursuant to Regulation 14A in connection with
the 1999 Annual Meeting of Stockholders to be held on April 8, 1999 are
incorporated by reference into Part III of this Form 10-K.

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/1/ Excludes 18,021,281 shares of Common Stock held by directors and officers
and shareholders whose beneficial ownership equaled or exceeded 10% of the
shares outstanding on January 15, 1999. Exclusion of shares held by any person
should not be construed to indicate that such person possess the power, direct
or indirect, to direct or cause the direction of management or policies of the
Registrant or that such person is controlled by or under common control with
the Registrant.
<PAGE>

This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual future results
could differ materially from those statements. Factors that could cause or
contribute to such differences include, but are not limited to, those found in
this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain
Risk Factors Related to the Company's Business", in Part II, Item 7 under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and additional factors discussed elsewhere in this
Annual Report.

PART I

ITEM 1. BUSINESS

Andataco, Inc. (herein "ANDATACO", or the "Company") designs, develops,
manufactures, markets and supports high performance, high availability
information storage solutions for the Open Systems markets in the Windows NT
and UNIX environments including Sun Microsystems, Hewlett-Packard, Silicon
Graphics, and NT-based computing systems. The Company's fully integrated
hierarchy of data storage solutions includes fault tolerant Redundant Array of
Independent Disks ("RAID") and RAID-ready disk storage, tape backup and
restore products and data storage management software. Technical support and
professional services back the Company's products.

The Company distributes internally developed products, as well as products
from other manufacturers through its solution sales group, original equipment
manufacturer ("OEM") and sales and service channels throughout the world.

The customers for the Company's products represent a cross-section of
industries and government agencies operating in distributed client/server as
well as centralized computing environments. These customers range in size from
FORTUNE 1000 companies to small businesses, and from national to local
governments. No one customer accounted for more than 10 percent of total
revenue during fiscal years 1998, 1997 and 1996.

Significant Business Developments

Merger with ANDATACO of California

On June 3, 1997 (the "Closing Date"), the Company (formerly IPL Systems,
Inc.) completed a business combination with ANDATACO of California (formerly
ANDATACO), whereby ANDATACO of California was merged with a wholly-owned
subsidiary of the Company (the "Merger"). Under the terms of the merger
agreement, the shareholders of ANDATACO of California were issued a total of
18,078,381 shares of the Company's Class A Common Stock (the "Common Stock")
in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ANDATACO, for financial
reporting purposes the Merger was treated as a recapitalization of ANDATACO of
California and an acquisition of the Company by ANDATACO of California
(reverse acquisition). The financial reporting requirements of the Securities
and Exchange Commission require that the financial statements reported by the
Company subsequent to the Merger be those of ANDATACO of California, which
include the results of operations of the Company from the Closing Date. The
business combination with ANDATACO of California has allowed the Company to
achieve several strategic objectives, including acquiring ANDATACO of
California's customer base, increasing the Company's revenues, realizing
certain cost savings and adding ANDATACO of California's skilled and
experienced personnel.

The Merger was accounted for using the purchase method. Accordingly, the
purchase price was allocated to the estimated fair market value of
identifiable tangible and intangible assets acquired and liabilities assumed.
Based upon an independent valuation, the Company allocated $2,400,000 to
acquired in-process research and development for which there was no future
alternative use and $400,000 to existing proprietary technology for which
technological feasibility had been established. As required by generally
accepted accounting principles, the amount allocated to in-process technology
was recorded as a one-time charge to operations and the amount

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allocated to existing technology was amortized over its estimated remaining
economic life. The excess of the purchase price over the identifiable net
assets acquired of $8,362,000 was recorded as goodwill and is being amortized
on a straight-line basis over its estimated useful life of five years.

Products

The Company strives to meet its customers' storage and information
management needs by providing the market with comprehensive, performance-
oriented and flexible storage solutions. ANDATACO believes that the success of
corporations today depends on their ability to access and manage the exploding
volumes of data coming on line from so many divergent sources. To that end,
ANDATACO's focus on Simplifying Data Access is the foundation of all efforts
at ANDATACO.

ANDATACO provides comprehensive, performance-oriented and flexible storage
solutions to meet today's continuous-availability mass storage needs. The
Company is committed to the design and implementation of leading storage
systems, featuring both parallel SCSI and Fibre interfaces, that bridge the
gap between CPU performance and I/O throughput. Recognizing that applications
have unique data patterns, ANDATACO developed the design process that matches
the Company's storage systems to these individual patterns. ANDATACO solutions
combine storage hardware, software and services to create the exact
performance, availability and scalability profile required by each client
application.

ANDATACO solutions include: GigaRAID High Availability Series of advanced
disk arrays; GigaRAID JBOD Product Family; Enterprise Storage Packaging(TM)
("ESP"); and comprehensive tape backup and restore solutions.

GigaRAID High Availability Series

ANDATACO's award-winning modular packaging architecture, ESP, is the
framework of the GigaRAID Series. ESP combines, for the first time,
microprocessors and enclosures, to provide the user industry-leading, modular,
and building block packaging combined with proactive, storage management
functionality. All critical components of the enclosure are monitored and a
"Call Home" feature alerts the user should any critical component go out of
specification.

GigaRAID/AA, the newest member of ANDATACO's family of fault-tolerant RAID
storage systems for the UNIX and Windows NT environments, is a high-
performance RAID array that combines the fault-tolerant benefits of RAID with
innovative proactive storage management. The GigaRAID/AA is manufactured for
continuous data availability and provides seamless operation to the host with
dual controller in-the-box failover and allows for continuous 40MB/Sec
performance on all four drive channels with up to 60 drives (with a single
controller), optimizing large-block sequential applications. The GigaRAID/AA
provides visual, audible and electronic alarms signaling potential system
failures allowing system administrators the opportunity to repair faulty
components before affecting critical business information. Providing
capacities of up to 1.08TB per base system, each GigaRAID/AA system includes
single or dual-active controllers and is available in Workgroup or Enterprise
enclosures. GigaRAID/AA's powerful microprocessor, coupled with its cable-less
chassis, provides the outstanding performance and higher reliability needed
for a full range of application types, including imaging, video-on-demand,
bulk storage or on-line transactions. For optional remote monitoring and
control across the Intranet or the Internet, ANDATACO's RAID Management
Utility (RMU) provides a user-friendly Graphic User Interface ("GUI") to
facilitate asset management, service agent management, and system
configuration.

The recently reintroduced GigaRAID/SX is a high-performance RAID array that
combines the fault-tolerant benefits of RAID with innovative proactive storage
management. The GigaRAID/SX is designed for large block, sequential
applications such as: video, data warehousing, Geographic Information Systems
("GIS"), and seismic analysis. The GigaRAID/SX provides visual, audible and
electronic alarms signaling potential system failures allowing system
administrators the opportunity to repair faulty components before affecting
critical business information. Providing capacities of up to 540GB per
controller, each GigaRAID/SX system includes a single-active controller and is
available in Workgroup or Enterprise enclosures. GigaRAID/SX's powerful

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microprocessor coupled with its cable-less chassis provides the outstanding
performance and higher reliability needed for a full range of application
types, including imaging, video-on-demand, bulk storage or on-line
transactions.

ANDATACO's RAID Management Utility (RMU) is an application designed for
monitoring and controlling ANDATACO's GigaRAID SCSI-to-SCSI RAID controller
from a local server, Intranet or the Internet. With ANDATACO's GigaRAID/SX
storage systems, RMU provides an easy-to-use GUI through Netscape 2.x which
allows configuring, monitoring and servicing of systems with simple point-and-
click operations. The use of Netscape and RMU provides quick, reliable RAID
Management access in heterogeneous environments. RMU provides a full range of
management tools to configure, initialize consistency check and rebuild the
drives in a GigaRAID/SX system. The "system view" provides a display of the
GigaRAID/SX configuration being managed. By clicking on a device in the
system, information is displayed on the browser to indicate drive number,
channel number, state, vendor, model, number and size. RMU's icon-based Web
application allows a customer to view and update any configuration option such
as: create new pack, create system drive, and change write policy options, all
from the ease and comfort of Netscape browser.

ANDATACO's GigaRAID/HA overcomes the performance bottlenecks associated with
traditional RAID implementations for small block, random, I/O-intensive
applications such as: Relational Database Management Systems ("RDBMS"), On-
Line Transaction Processing ("OLTP"), Messaging and NT environments. While
designed to accommodate multiple RAID levels, the GigaRAID/HA's biggest
advantage over the competition becomes apparent with the industry's first and
only embedded I/O database accelerator software, called Database RAID(TM).
This eliminates the performance penalty typically associated with RAID level 5
protection in small block random environments such as OLTP, RDBMS, Oracle,
Sybase, Informix, and other database applications. The GigaRAID/HA with
Database RAIDTM is the only storage product on the market today that provides
the power of data placement, allows for segregation of indices from
tablespaces and conforms to the tuning parameters recommended by the major
database vendors for best performance. In Windows NT environments, the
GigaRAID/HA is designed to excel in Microsoft Exchange and SQL server
applications. Its robustness is demonstrated through sustained performance,
automatic recovery of failed disks and the scalability to grow with a
company's requirements.

ANDATACO's Client/S GUI (Graphical User Interface) software manages and
monitors system configuration, providing status notification for the
GigaRAID/HA array. Developed to enable the system user to set-up, tune and
modify their disk arrays for specific application, Client/S is the latest
Application Specific Architecture ("ASA") product offering. Client/S provides
simple GUI menus for system configuration and provides E-mail notification in
the event of a failure or a change in status.

With Client/S, users can 1) control any GigaRAID/HA from any network
location, 2) view locations of all GigaRAID/HA units in the enterprise, 3)
receive an on-line graphical indication of any GigaRAID/HA fault in the
enterprise and 4) receive on-line instructions for correcting detected faults.
In addition, users have complete access to all system configuration options,
RAID controller microcode upgrade capabilities and password protection for
critical functions providing the most comprehensive RAID system management
toolbox in its class.

ANDATACO's GigaRAID/FT is fully-redundant and configurable for either large
block, sequential applications such as: video, data-warehousing, and seismic
analysis, or small block, random applications such as: OLTP/Database,
financial, and technology development. Optional I/O path failover software is
available for upstream protection. GigaRAID/FT provides the ultimate in high
availability, including dual active RAID controllers with mirrored cache, and
multiple levels of hardware and software fault-tolerance, including I/O path
failover (through Sun Solaris, IBM AIX, and Windows NT) and server failover
(through Sun Solaris). For system administrators supporting high-end
workstations, GigaRAID/FT brings three levels of automatic failover to the
high-end server marketplace by providing:

1) RAID set failover from one RAID controller to another;

2) Optional SCSI path monitoring and transparent rerouting; and

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3) Optional application failover from one server to another, including
Oracle, Sybase and Informix applications.

The GigaRAID/FT is also designed for high-end performance in database
environments with dual independent RAID controllers that provide twice the I/O
throughput during normal operating conditions. And with up to 128MB of
mirrored write cache, GigaRAID/FT meets and exceeds the response time
requirements of I/O-intensive environments.

ANDATACO's GigaRAID/FC is the high-performance, fault-tolerant fibre channel
product for today's bandwidth and storage requirements with the flexibility to
grow exponentially. Configurable for either large-block, sequential
applications such as video, data-warehousing, and seismic analysis, or small-
block, random applications such as OLTP/Database, financial, and technology
development, the flexilibity of GigaRAID/FC allows medium-range RAID-Ready
solutions to grow into multi-terabyte, dual-active, fault-tolerant
configurations for disaster recovery. This product is designed using RAID and
RAID-Ready, Flexible High-Performance Storage Solutions.

GigaRAID/FC 5000 FC-to-FC is the RAID-Ready member of the family, allowing
both host-based software RAID or standard JBOD configurations. The flexibility
of GigaRAID/FC provides cost-effective migration as a company's data storage
requirements expand.

The GigaRAID/FC 3400/3500 is the successor to the first active/active SCSI
RAID product on the market, now with fibre channel connectivity to host
servers, hubs, and switches. With single or dual active RAID storage
processors, redundant fans and power supplies, and hot-swappable components,
the 3400/3500 system offers high levels of serviceability in addition to field
upgrade option from standard SCSI to fibre channel host connectivity.

GigaRAID/FC 5400/5500 is the high-end member of ANDATACO's family of RAID
storage systems for the UNIX and Windows NT environments. The GigaRAID/FC
5400/5500 of RAID 0, 1, 0/1, 3 and 5 disk arrays satisfy the on-line storage
needs of the UNIX and NT enterprise with a powerful combination of third-
generation features that result in industry-leading performance, capacity,
availability, system management and self-maintenance capabilities.

GigaRAID JBOD Product Family

GigaRAID/8000 LVD is the first Ultra2 SCSI low voltage differential ("LVD")
storage solution to market featuring 80 MB/sec transfer rates, increased cable
distances, and ANDATACO's Enterprise Storage Packaging technology. This RAID-
ready system provides continuous data availability and the performance,
capacity, and flexibility needed in today's environments. The GigaRAID/8000
LVD incorporates LVD signaling to provide improved performance and
flexibility. With maximum burst bandwidth of 80 MB/sec, Ultra2 provides an
optimal solution for data-intensive applications. This solution not only
offers improved performance, but also increased device connectivity allowing
up to 12 meters on a fully loaded bus with 15 devices. Testing, utilizing the
Iometer (an I/O performance analysis tool), indicates sustained MB/sec
transfer rates for a fully populated unit, in excess of 70 MB/sec. The
GigaRAID/8000 LVD provides the storage and performance to meet escalating
requirements for more capacity and faster data movement. Features include
modular hot-swappable components, an Ultra2 SCSI LVD cableless backplane, and
proactive system monitoring. Through customer replaceable Chassis Interface
Adapters (CIAs), one system provides connectivity to Ultra2 SCSI LVD, Ultra
SCSI high-voltage differential and Ultra SCSI single-ended host bus adapters
("HBAs"). Flexibility is key; allowing attachment to Ultra SCSI single-ended,
Ultra SCSI high voltage differential and Ultra2 SCSI LVD all with the same
system. This flexibility provides the investment protection demanded by
today's data intensive applications.

The GigaRAID/8000 system is a RAID-ready solution designed for UNIX and NT
environments. This system is designed for high performance with fault
tolerant, scalable disk and tape SCSI storage devices. Utilizing 18GB drives
the GigaRAID/8000 system can house up to 144GB in a single tower system or up
to 288GB in a dual 16-drive tower system. Designed to increase data
accessibility and user productivity, the

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GigaRAID/8000 series features modular, hot-swappable components, an Ultra-SCSI
backplane and a cable-less design with Single Connector Attach ("SCA")
technology. It provides proactive system management through visual, audible
and electronic on-line alarms when potential environmental thresholds are
exceeded.

ANDATACO's Web Storage Manager ("WSM") is an application designed for
monitoring and controlling storage from a local server, Intranet or the
Internet. In heterogeneous environments, WSM uniquely offers a common Netscape
graphical user interface to storage systems incorporating ANDATACO's
GigaRAID/8000 family of storage systems. ANDATACO's innovative firmware built
into the storage system monitors all activity of the disks, tapes and CDs in
the chassis. The information gathered is reported back to the WSM host-based
Web server application, which is displayed and controlled via a Netscape 2.x
client browser. When an alarm condition such as over-temperature, power outage
or fan failure is reached, the condition is displayed within the Netscape 2.x
browser. Simply clicking on the graphic of a device in the browser will cause
information such as the manufacturer, firmware level, SCSI ID and capacity to
appear.

The GigaRAID/3000 series is a system for UNIX and NT environments. The
GigaRAID/3000 series is comprised of scalable disk and tape storage devices,
supporting a storage capacity of up to 54GB (utilizing three 18.1GB disk
drives). Designed to increase data accessibility and user productivity, the
GigaRAID/3000 series features modular, hot-swappable components, and an Ultra-
SCSI backplane with Single Connector Attach (SCA) technology. It provides
proactive system management through visual and audible alarms, which alert you
when potential environmental thresholds are exceeded. The GigaRAID/3000
accommodates a complete hierarchy of 3.5" and 5.25" disk and tape drives
providing a modular, scalable solution.

The GigaRAID/1000 is ANDATACO's low-cost, entry-level desktop Ultra SCSI
storage system. The GigaRAID/1000 accommodates the latest in high performance
disk and 8mm tape technology, providing storage capacities up to 40GB and data
transfer rates of 40MB/sec.

Enterprise Storage Packaging(TM)

ESP is an advanced packaging technology comprised of a modular architecture
providing flexibility throughout the product line. ESP's innovative design
increases productivity, improves data accessibility and reduces the cost of
managing storage. Increased productivity is accomplished with a high
performance, zero stub-length design and optimized with Ultra2 SCSI data
transfer rates of 80MB/second. Continuous data availability is provided
through ESP's redundant active components, which are user-replaceable and can
be replaced on-line. With the addition of WSM, ESP hardware can be monitored
and controlled in real-time via a Netscape or Internet Explorer browser.
Removable Storage Elements ("RSE") hot-swappable, modular building blocks are
the modular building blocks for the entire family of ESP enclosures. The RSE
can house a complete hierarchy of 3.5" and 5.25" form factor devices.

Highest Reliability and Performance with SCA Connectivity RSEs support (SCA
and SCA-2) standard narrow or wide, Fast, Ultra and Ultra2 SCSI devices. The
entire ESP product line provides cableless connection for reliability and
efficient use of cable distance. Innovative Cooling System supports 12,000 RPM
drives on the inside, an innovative "venturi effect" system allows ample
cooling for high performance devices up to 12,000 RPM. Hot swappable power
supply/fan assemblies pull air through the ESP system continuously.

Tape Solutions--Autoloader and Library Backup

DLT TM Enterprise Backup Solution Libraries--Enterprise Backup Solution
libraries vary in size to accommodate your backup solution. The libraries come
with one to nine DLT 2000XT, DLT 4000 and DLT 7000 drives to produce native
capacities up to 9.24 Terabytes and a native aggregate transfer rate up to 45
MB/Sec.

DLT TM Autoloaders--Utilizing DLT technology and automated robotics, the
Quantum DLT2700XT, DLT4700 and DLTStor, and Exabyte 18D are single drive,
multiple-cartridge autoloaders with up to 280GB of native storage and are a
perfect sequential tape backup solution.

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8mm Autoloaders and Libraries--Utilizing 8mm technology and automated
robotics, products include Exabyte libraries with one to four drives and
capacities up to 1.6TB of native storage.

Enterprise Backup Solutions (EBS)--Using DLT TM Technology, Enterprise
Backup Solutions systems provide the adaptability needed to handle tomorrow's
higher capacity, faster drives as well as a wide range of formats and powerful
software. EBS libraries, an Odetics product, are part of a tradition of
engineering excellence. Since the early U.S. space explorations and continuing
today, Odetics spaceborne tape systems store vast volumes of information
collected by the world's space craft until receiving stations are available to
accept such information. ANDATACO's EBS provides the flexibility necessary to
meet virtually any data management requirement.

Sales and Marketing

The Company distributes its internally developed products, and products from
other manufacturers, through a network of 20 sales offices, and through
distributors in Europe, Asia, Latin America, Canada and Australia. The Company
sells its products directly to end users through its field sales organization
and indirectly through two channels: (i) original equipment manufacturers
("OEMs") and (ii) volume, consisting of systems integrators, technical
distributors and value added resellers ("VARs").

The Company's direct sales to end users through its field sales organization
has historically been the Company's primary sales channel representing over
90% of total sales. The Company's domestic sales organization consists of
approximately 50 persons located in 20 sales offices in 12 states.

The Company has supply agreements with selected OEMs, all of which
incorporate ANDATACO's products into their system offerings. The OEM sales
cycle is often lengthy and typically consists of a general technology
evaluation, qualification of the product specifications, verification of
product performance against these specifications, integration testing of the
product within the customers' systems, product announcement and volume
shipment. As is typical in the industry, the Company's OEM contracts provide
for annual price reviews and the customers are not required to purchase
minimum quantities. The Company supports this channel through corporate head
office and other Company field representatives.

The Company's volume channel includes systems integrators, technical
distributors and VARs, each of which sells primarily to end-users. ANDATACO's
products are frequently packaged by these customers as part of a complete data
processing system or combined with other storage devices to deliver a storage
subsystem. The Company supports this channel through its field sales force.

ANDATACO supports its sales efforts with various marketing programs designed
to build the Company's reputation as a reliable storage manufacturer, leverage
key partnerships for a complete suite of product offerings and to attract new
customers. Its direct customers and channel partners are provided with a full
range of marketing materials, including product specification literature and
application notes. The Company maintains press relations and trade association
memberships and participates in national and regional trade shows. The Company
also maintains a World Wide Web site ( HYPERLINK http://www.andataco.com)
which features marketing information, product specifications, partners pages,
news releases and application, service and technical support notes and
investor relations information.

Customer Service and Support

The quality and reliability of the Company's products and the support of
these products are important elements of the Company's business. The Company
provides comprehensive customer and technical service support for all of its
products through its technical, customer and professional services
organization, including on-site maintenance, help desk support, contract
programming, project management, and consulting services.

The Company's standard warranty is a one-year return-to-factory policy which
covers both parts and labor. The Company passes on to the customer the
warranty provided by the manufacturers for products that the

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Company distributes and for drives and tapes used in the Company's products
that are manufactured by a third party. The Company also offers extended
warranty (two, three and five years) and on-site service for certain of its
products, including 24-hour service, seven days a week or 9-hour service, five
days a week, for which it contracts primarily with third-party service
providers.

In addition, the Company offers a Depot Express program for certain of its
products. Depot Express provides for advance replacement of a failed
component. If ANDATACO's Help Desk technical staff determines a replacement is
necessary, the Company will ship a new component by the next working day,
based upon availability. This service is available for a one-time fee at the
time of the original purchase.

The Company also offers an Incident Depot Express program for certain of its
products. Incident Depot Express provides expedited shipment for a failed
component on a per-incident basis, based upon availability. This is a non-
contracted service and does not require a charge at the time of the original
purchase. A fee is charged only if a component fails and a replacement is
shipped out.

Manufacturing

The Company's manufacturing operations are located in San Diego, California
with three separate assembly lines. ANDATACO performs product assembly,
integration and testing, while leaving component and piece-part manufacturing
to its supplier partners. The Company works closely with a group of regional,
national and international suppliers, which are carefully selected based on
their ability to provide quality parts and components that meet the Company's
specifications and volume requirements. A number of the Company's parts and
components are not available off the shelf, and are specifically designed by
the Company for integration into its products.

In its current facility, the Company believes that it has the capacity to
support unit output several times greater than its current run rate. The
Company currently uses a single shift which is capable of greater production
levels, and could expand further by adding multiple shifts or utilizing a
qualified out-source assembly site. Staffing levels are currently controlled
and adjusted to meet requirements.

The Company has and will continue to rely on outside vendors to manufacture
certain subsystems and electronic components and subassemblies used in the
production of the Company's products. Certain components, subassemblies,
materials and equipment necessary for the manufacture of the Company's
products are obtained from a sole supplier or a limited group of suppliers.
The Company's reliance on sole suppliers or a limited group of suppliers
involves several risks, including a potential inability to obtain an adequate
supply of required products and reduced control over the price, timely
delivery, reliability and quality of finished products. The Company does not
have any long-term supply agreements with its suppliers. Certain of the
Company's suppliers have relatively limited financial and other resources. Any
inability to obtain timely deliveries of products and services having
acceptable qualities, or any other circumstance that could require the Company
to seek alternative sources of supply or to manufacture its own electronic
components, subassemblies and manufacturing equipment internally, could delay
the Company's ability to ship its products. Any such delay could damage
relationships with customers and could have a material adverse effect on the
Company's business and operating results.

Competition

The computer data storage industry is intensely competitive and is
characterized by rapid technological change and constant price pressure. The
Company competes with a number of companies in various markets, including EMC
Corporation, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq
Computer Corporation and Digital Equipment Corporation, each of which has
substantially greater name recognition, engineering, manufacturing and
marketing capabilities, and greater financial and personnel resources than the
Company. The Company believes that to date no dominant leader has emerged in
the high bandwidth segment of the open systems market. The Company expects to
experience increased competition from established and

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emerging computer storage hardware and management software companies,
particularly DEC, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq
and EMC Corporation.

In addition, increased competitive pressure could lead to intensified
priced-based competition, which could result in a decline in both sales volume
and price reductions. These factors would have a material adverse effect on
the Company's results of operations. There also has been, and may continue to
be, a willingness on the part of certain large competitors to reduce prices in
order to preserve or gain market share, which cannot be foreseen by the
Company. The Company believes that pricing pressures are likely to continue as
competitors develop more competitive product offerings.

The principal elements of competition in the Company's markets include rapid
introduction of new technology, product quality and reliability, price and
performance characteristics, service and support, and responsiveness to
customers. The Company believes that, in general, it competes favorably in
many of these areas. However, there can be no assurance that the Company will
be able to compete successfully or that competition will not have a material
adverse effect on the Company's results of operations.

Patents and Protection of Proprietary Technology

The Company believes that its success in developing new products depends
primarily upon the technical competence and creative skills of its personnel
rather than on the ownership of copyrights or patents. Although the Company
believes that its products and other proprietary rights do not infringe the
proprietary rights of third parties, there can be no assurance that other
third parties will not assert infringement claims against the Company or that
such claims will not be successful. If any infringement exists the Company
would seek, based upon industry practice, licenses to such patents, but there
can be no assurance that the Company will be able to obtain any such licenses
on terms which would not have a material adverse effect on its business. The
Company also relies on unpatented proprietary technology, and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's proprietary technology.
To protect its rights in these areas, the Company requires all employees to
enter into confidentiality agreements. There can be no assurance that these
agreements will provide meaningful protection for the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If the Company is unable to maintain the proprietary
nature of its technologies, the Company's business could be adversely
affected.

Regulatory Approvals

All of the Company's current and proposed products have to comply with and
have regulatory or independent laboratory approval based on emissions and
safety standards for computing equipment. Delays in complying with such
standards or in obtaining any such approvals could delay introductions of new
products.

International sales are subject to compliance with laws of various
countries, import/export restrictions and tariff regulations. While the
Company is aware that it may be subject to export restrictions with respect to
certain countries, it has not experienced difficulty in obtaining export
licenses from the United States Department of Commerce for sales into
countries where it presently sells.

Employees

As of January 15, 1999, the Company employed approximately 165 full-time
employees, of whom approximately 14 were employed in research and development,
82 in sales, marketing and customer support and 69 in operations and
administration. None of the Company's employees is represented by a labor
union or subject to a collective bargaining agreement. The Company's
management believes its employee relations to be good.

9
<PAGE>

Executive Officers and Key Employees

The executive officers and key employees of the Company and their ages as of
January 15, 1999 are as follows:

<TABLE>
<CAPTION>
Name Age Positions Held
---- --- --------------
<S> <C> <C>
Harris Ravine............ 56 Chief Executive Officer of the Company
W. David Sykes........... 42 President
Arun Taneja.............. 51 Senior Vice President of Marketing
Jack Corrao.............. 36 Vice President of Operations
Diane Wong............... 36 Vice President of Finance, Corporate Controller
</TABLE>

Harris Ravine was elected Chairman of the Board and appointed Chief
Executive Officer of the Company upon the consummation of the Merger. Mr.
Ravine has served as Chief Executive Officer and as Chairman of the Board of
Directors of ANDATACO since June 1997. From 1995 through May 1997, he was a
principal in BI Capital, a private venture capital group investing in
technology and medical start up opportunities. From 1985 to 1994, Mr. Ravine
held senior executive positions with Storage Technology Corporation, most
recently as Executive Vice President, Chief Administrative Officer and Group
Officer for midrange and UNIX applications. Mr. Ravine is a member of the
board of directors of Amplicon Financial, Inc., a publicly-held financial
services company.

W. David Sykes founded ANDATACO of California in November 1986 and served as
its President and Chief Executive Officer until the Merger, at which time Mr.
Sykes was elected Vice Chairman of the Board of Directors and appointed
President of the Company. He has also served as a director of ANDATACO of
California since November 1986.

Arun Taneja joined the Company in February 1998 as Senior Vice President of
Marketing. Prior to joining ANDATACO, Mr. Taneja was Vice President of
Marketing of Invincible Technologies Corporation. From 1994 to 1996, Mr.
Taneja was employed by Axil Computer, Inc. as Vice President of Worldwide
Marketing. Mr. Taneja served as Vice President of Marketing of Univel from
1992 to 1994.

Jack Corrao joined ANDATACO of California in 1993 as its Strategic Product
Development Manager to develop and assist in the marketing of high-end storage
products. In 1994, he was promoted to Manager of Application Engineering. Mr.
Corrao was promoted to his current position, Vice President of Operations, in
1995. Mr. Corrao has worked in the high-tech industry for 17 years. Prior to
joining ANDATACO of California, he was the Director of Concurrent Operations
for Artecon, Inc. and the Manufacturing Manager for SCS.

Diane Wong joined the Company in June 1997 as Controller. Ms. Wong was
appointed Vice President of Finance, Corporate Controller and Clerk in August
1998. Prior to joining the Company, Ms. Wong was a Senior Audit Manager at
Price Waterhouse LLP. From 1989 to 1997 Ms. Wong held various positions
including management positions at Price Waterhouse LLP.

10
<PAGE>

CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS

In addition to those risks identified elsewhere in this Annual Report on
Form 10-K, the Company's business and results of operations are subject to
other risks, including the following risk factors:

Rapid Technological and Market Changes. The market for the Company's
products is characterized by rapidly changing technology and evolving customer
needs which increasingly shorten the life cycles of existing products and
require ongoing development and introduction of new products at an
increasingly rapid rate. The Company's ability to realize its expectations
will depend on its success at enhancing its current offerings, developing new
products that keep pace with developments in technology and meet evolving
customer requirements for performance and price, and delivering those products
with appropriate customer service and support. This will require, among other
things, correctly anticipating customer needs, hiring and retaining personnel
with the necessary skills and creativity, and providing adequate resources for
product development. Failure by the Company to anticipate or respond
adequately to technological developments and customer requirements,
significant delays in the development, product testing, or availability of new
or enhanced products, or the failure of customers to accept such products
could adversely affect the Company's technological position and operating
results. Furthermore, there can be no assurance that the Company's competitors
will not succeed in developing products or technologies that have superior
price/performance characteristics compared to any products being offered or
developed by the Company.

Fluctuations in Operating Results and Recent Losses. The Company has
recently experienced losses from operations and may in the future experience
further losses and significant period-to-period fluctuations in operating
results due to product design, development, manufacturing and marketing
expenditures. If significant variations were to occur between forecasts and
actual orders with respect to its products, the Company may not be able to
reduce its expenses proportionately and operating results could be adversely
affected. The Company's revenues in any quarter are dependent on the timing of
product shipments as well as the status of competing product introductions.
Like many other high technology companies, a disproportionately large
percentage of quarterly sales occur in the closing weeks of each quarter. Any
forward-looking statements about operating results made by members of
management will be based on assumptions about the likelihood of closing sales
then in the pipeline and other factors management considers reasonable based
in part on knowledge of performance in prior periods. The failure to
consummate any of those sales may have a disproportionately negative impact on
operating results, given the Company's relatively high fixed costs, and may
thus prevent management's projections from being realized.

Dependence on Key Personnel. The success of the Company's operations depends
on its ability to attract and retain experienced technical, sales, marketing
and management personnel. Such personnel are in great demand and the Company
must compete for their services. Management's projections necessarily assume
that the Company will continue to attract and retain such personnel, and the
failure to do so could have a material adverse effect on the Company's ability
to develop and market competitive products.

Dependence on Suppliers. The Company has and will continue to rely on
outside vendors to manufacture certain subsystems and electronic components
and subassemblies used in the production of the Company's products. Certain
components, subassemblies, materials and equipment necessary for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. The Company's reliance on sole suppliers or a
limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required products and reduced
control over the price, timely delivery, reliability and quality of finished
products. The Company does not have any long-term supply agreements with its
suppliers. Certain of the Company's suppliers have relatively limited
financial and other resources. Any inability to obtain timely deliveries of
products and services having acceptable qualities, or any other circumstance
that could require the Company to seek alternative sources of supply or to
manufacture its own electronic components, subassemblies and manufacturing
equipment internally, could delay the Company's ability to ship its products.
Any such delay could damage relationships with customers and could have a
material adverse effect on the Company's business and operating results.

11
<PAGE>

Dependence on New Products. To meet its strategic objectives, the Company
must continue to develop, manufacture and market new products, develop new
processes and improve its existing processes. As a result, the Company expects
to continue to make significant investments in research and development and to
consider from time to time the strategic acquisition of businesses, products,
or technologies complementary to the Company's business. The success of the
Company in developing, introducing and selling new and enhanced products
depends upon a variety of factors, including product selection, timely and
efficient completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance in the field. There can be no assurance that
the Company will be able to develop and introduce new products or enhancements
to its existing products and processes in manner that satisfies customer needs
or achieves market acceptance. The failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Competition. The computer data storage industry is intensely competitive and
is characterized by rapid technological change and constant price pressure.
The Company competes with a number of companies in various markets, including
EMC Corporation, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq
Computer Corporation and Digital Equipment Corporation, each of which has
substantially greater name recognition, engineering, manufacturing and
marketing capabilities, and greater financial and personnel resources than the
Company. The Company believes that to date no dominant leader has emerged in
the high bandwidth segment of the open systems market. The Company expects to
experience increased competition from established and emerging computer
storage hardware and management software companies, particularly DEC, Hewlett-
Packard, Sun Microsystems, Silicon Graphics, Compaq and EMC Corporation.

Stock Price Volatility. The trading price of the Company's Common Stock
could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes
in earnings estimates by analysts, announcements of technological innovations
or new products by the Company or its competitors, general conditions in the
storage solutions industries and other events or factors. The Company was
delisted from the Nasdaq SmallCap Market on December 3, 1998 and is currently
trading on the Nasdaq Over-The-Counter Bulletin Board Market. In addition, the
stock market in general has experienced extreme price and volume fluctuations
that have affected the market price for many companies in industries similar
or related to that of the Company and that have been unrelated to the
operating performance of those companies.

Control of Majority Stockholder. W. David Sykes the Company's President and
Vice Chairman of the Board and his affiliates beneficially own 75.7% of the
Company's outstanding Common Stock. As a result, Mr. Sykes will have the
ability to control the election of all the Company's directors, to determine
the outcome of all the corporate actions submitted to the vote of the
Company's stockholders and to generally control the affairs and management of
the Company. In addition, the voting power of Mr. Sykes under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.

Transition from Reseller to Manufacturing Business. Historically, the
reseller business of the Company accounted for the majority of the Company's
revenues. In Fiscal 1998, revenue from the sale of third party

12
<PAGE>

non-GigaRAID products accounted for 18.9% of revenues. Such decline is
attributable to the Company's strategy to focus increased resources on the
design, development, manufacturing and marketing of internally developed
products. There can be no assurance, however, that the Company will be
successful in developing any new products. The Company's success will depend,
in part, on its ability to maintain and enhance its existing products and
broaden its product offerings by developing and introducing new products that
keep pace with technological developments in a cost effective manner, respond
to evolving customer preferences and requirements and achieve market
acceptance. Lack of market acceptance for the Company's existing or new
products, the Company's failure to introduce new products in a timely or cost
effective manner, or the Company's failure to achieve a technological
advantage over its competition while also remaining price competitive, would
materially adversely affect the Company's results of operations and financial
condition. There can be no assurance that the Company will be successful in
its product development efforts. In addition, there can be no assurance that
the Company's products, even if successfully developed, will achieve timely
market acceptance.

Moreover, the introduction of products embodying new technology and the
emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. The Company's future success will depend
on its ability to continue to develop and manufacture new competitive products
and to enhance its existing products, both of which will require continued
investment in engineering and product development. The success of product
enhancements and new products depends on a variety of factors, including
product selection and specification, timely and efficient completion of
product design, cost effective implementation of manufacturing and assembly
processes and effective sales and marketing efforts. There can be no assurance
that the Company will be able to successfully manage all of the diverse
aspects of successful new product development in order to develop and maintain
competitive products.

Year 2000 Compliance. Many current computer systems and software products
were not designed to handle any dates beyond the year 1999. As a result,
computer systems and/or software used by many companies may need to be
modified prior to the Year 2000 in order to remain functional. Significant
uncertainty exists in the hardware and software industry concerning the
potential effects associated with such compliance.

In mid-1997, the Company formed an internal task force to evaluate those
areas of the Company that may be affected by the Year 2000 problem and devised
a plan for the Company to become Year 2000 compliant in a timely manner (the
"Plan"). The Plan focuses on three major areas: the Company's mission critical
business transaction systems; the products the Company sells; and issues
associated with the Company's business partners, including suppliers,
customers, and bankers. To date, the Company has executed approximately 95% of
its Plan and anticipates completing the remaining portions of the Plan by the
end of the third calendar quarter of 1999 while the evaluation and testing of
certain ancillary PC office and specialized PC applications will continue
through 1999. However, if the Company's Plan cannot be completed on a timely
basis, the Year 2000 issue could have a material adverse impact on the
Company's business, financial condition and results of operations. Because of
the many uncertainties associated with Year 2000 compliance issues, and
because the Company's assessment is necessarily based on information from
third party vendors and suppliers, there can be no assurance that the
Company's assessment is correct. If the Company's assessment is incorrect, it
could have a material adverse effect on the Company's business.

ITEM 2. PROPERTIES

The Company's principal administrative, marketing and sales activities are
located in approximately 42,400 square feet of facilities in San Diego,
California leased from an entity owned by the president and principal
shareholder of the Company. The space is occupied under a lease agreement that
expires in March 2003. The Company also leases approximately 24,700 square
feet of office and manufacturing space located in Maynard, Massachusetts,
primarily for research and development activities, for a term extending
through March 2001. The Company distributes internally developed products, and
products from other manufacturers, through a network of 20 sales offices
worldwide. See Note 9 of the Notes to Consolidated Financial Statements for
information regarding the Company's obligations under its facilities leases.

13
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings to which the Company is a party, other than
routine litigation incidental to its business, which, in the opinion of its
management, is unlikely to have a material adverse effect on its financial
condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company's security holders during
the quarter ended October 31, 1998.

14
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Company's Common Stock was traded on the Nasdaq SmallCap Market under
the symbol ANDA until December 3, 1998. The Company is currently traded on the
Nasdaq Over-The-Counter Bulletin Board under the symbol ANDA. The following
table reflects, for the period indicated, the high and low sales prices for
the Common Stock as reported by Nasdaq prior to December 4, 1998, and as
reported by the Nasdaq Over-The-Counter Bulletin Board after such date.

<TABLE>
<CAPTION>
Price
--------------
Year High Low
---- ---- ---
<S> <C> <C>
1998:
First Quarter............................................... $2.000 $1.0938
Second Quarter.............................................. 2.500 1.5625
Third Quarter............................................... 2.250 1.0625
Fourth Quarter.............................................. 1.250 0.5000
1997:
First Quarter............................................... 2.125 1.3375
Second Quarter.............................................. 2.625 1.4175
Third Quarter............................................... 1.750 0.9375
Fourth Quarter.............................................. 2.750 1.3125
</TABLE>

On January 15, 1999, the last sale price of the Company's Common Stock was
$0.75, and there were approximately 265 stockholders of record of the
Company's Common Stock.

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings to finance the
growth and development of its business.

ITEM 6. SELECTED FINANCIAL DATA.

The following financial data, insofar as it relates to each of the fiscal
years 1994 through 1998, have been derived from audited consolidated financial
statements and notes thereto. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and
related notes thereto set forth at the pages indicated in Item 14(a)(1).

<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- -------- -------
(in thousands, except for per share
amounts)
<S> <C> <C> <C> <C> <C>
Sales............................ $77,519 $93,259 $99,733 $100,048 $83,559
Operating (loss) income.......... (1,413) (5,098) 811 2,838 181
Net (loss) income................ (2,434) (6,209) 39 2,106 (202)
Net (loss) income per share...... (0.10) (0.30) 0.00 0.12 (0.01)
Shares used to compute per share
data............................ 23,819 20,464 18,168 18,184 18,078
Working capital.................. $ 3,486 $ 5,169 $ 8,932 $ 3,639 $ 2,069
Total assets..................... 25,682 29,989 23,667 26,481 18,285
Shareholders' equity (deficit)... 2,302 4,736 (798) 2,118 12
</TABLE>

15
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The discussion contained herein as well as elsewhere in this report contains
forward-looking statements based on the current expectations of the Company's
management. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Factors that could cause or contribute to such differences include but are not
limited to fluctuations in the Company's operating results, continued new
product introductions by the Company, market acceptance of the Company's new
product introductions, new product introductions by competitors, technological
changes in the computer storage industry and other factors referred to herein
including but not limited to the factors discussed under the caption "Certain
Risk Factors Related to the Company's Business." Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.

Overview

ANDATACO designs, develops, manufactures, markets and supports high
performance, high availability information storage solutions for the Open
Systems markets in the Windows NT and UNIX environments including Sun
Microsystems, Hewlett-Packard, Silicon Graphics, and NT-based computing
systems. The Company's fully integrated hierarchy of data storage solutions
includes fault tolerant RAID and RAID-ready disk storage, tape backup and
restore products and data storage management software. Technical support and
professional services back the Company's products. The Company distributes
internally developed products, and products from other manufacturers, through
a network of sales offices worldwide and through distributors in Europe, Asia,
Latin America, Canada, and Australia. The customers for the Company's products
represent a cross-section of industries and government agencies operating in
distributed client/server as well as centralized computing environments. These
customers range in size from FORTUNE 1000 companies to small businesses, and
from national to local governments.

In the second quarter of fiscal 1998 the GigaRAID/FC Series, one of the
first storage systems to provide the availability, performance and
connectivity advantages of Fibre Channel technology, was introduced. Other
GigaRAID Series products, including the GigaRAID/SX, offer high performance
and availability for certain data warehouse, seismic processing and video
applications characterized by large block, sequential processing. In August
1998, the Company introduced two powerful new RAID storage systems, an
enhanced version of the GigaRAID/HA, and the GigaRAID/AA which is the next
generation of the GigaRAID/SX. The Company also announced the industry's first
Ultra2 SCSI LVD intelligent storage enclosure, the GigaRAID 8000 LVD
enclosure, featuring Ultra2 SCSI LVD interface technology. The Company also
introduced, in August 1998, two storage management software products, Client/S
for the GigaRAID/HA, and Web Storage Manager for the GigaRAID/AA.

In fiscal year 1998 the Company focused its efforts on identifying and
developing solutions for selected market segments in which the Company could
provide customers with application-specific storage. These markets include,
high technology development companies, oil and gas exploration, financial and
retail markets with large data warehouse and relational database
installations, and video and entertainment.

The Company's goal is to become the leading provider of open systems storage
solutions. The principal elements of the Company's business strategy are as
follows:

. Develop open systems SCSI-based storage solutions based on its
intelligent enclosure and controller technology.

. Cooperate with leading hardware and software developers, resellers and
systems integrators to enhance its storage and storage management
product offerings for end users.

16
<PAGE>

. Develop solutions for the OEM market based on its enclosure and
controller technology as well as its web storage management software.

. Expand its service business through the Professional Services Group
established by the Company during fiscal year 1997.

Results of Operations

The following table sets forth for the Company's results of operations and
the percentage relationship of certain items to sales during the periods
shown:

<TABLE>
<CAPTION>
Year ended
October 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Sales................................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 70.0 76.9 80.6
----- ----- -----
Gross profit.......................................... 30.0 23.1 19.4
----- ----- -----
Operating expenses:
Selling, general and administrative................. 29.4 24.3 17.4
Rent expense to shareholder......................... 0.4 0.3 0.3
Purchased research and development.................. -- 2.6 --
Research and development............................ 2.0 1.4 0.9
----- ----- -----
Total operating expenses.............................. 31.8 28.6 18.6
----- ----- -----
(Loss) income from operations......................... (1.8) (5.5) 0.8
Other expense, net.................................... (1.3) (1.2) (0.8)
----- ----- -----
Net (loss) income..................................... (3.1)% (6.7)% 0.0%
===== ===== =====

The following table sets forth the Company's product mix as a percentage of
sales during the periods shown:

<CAPTION>
Year ended
October 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
GigaRAID Product Family:
GigaRAID/SA/HA/SX/HA/AA............................. 16.6% 15.0% 0.5%
GigaRAID FT/FC...................................... 27.9 13.8 9.6
GigaRAID 3000/8000.................................. 15.6 20.0 5.0
Rapid Tape.......................................... 0.3 1.1 1.9
RAID Lite........................................... 0.1 1.4 11.8
RAID-ready Disk Arrays.............................. 3.1 4.9 20.9
Tape Library Systems................................ 3.0 9.2 13.1
----- ----- -----
66.6 65.4 62.8
Non-GigaRAID Distribution Product:
ATL................................................. 6.5 3.3 2.3
OEM................................................. 2.1 -- --
Service............................................. 5.9 1.9 --
Other............................................... 18.9 29.4 34.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

Fiscal Year Ended October 31, 1998 Compared to Fiscal Year Ended October 31,
1997

Revenues. Revenues in fiscal 1998 were $77,519,000 compared with $93,259,000
in fiscal 1997. The increase in sales of current GigaRAID products, OEM
revenues, and service revenues of $7,913,000, $1,677,000 and $2,750,000,
respectively, in fiscal 1998 as compared with fiscal 1997, was more than
offset by the $16,980,000 decrease of older mass storage products including
RAID Lite and RAPID-Tape products and a

17
<PAGE>

decrease of $10,771,000 in sales of non-GigaRAID distribution products. The
decrease in non-GigaRAID distribution product sales in fiscal 1998 compared to
fiscal 1997 is consistent with the Company's strategy to focus its sales
organization on internally designed products capable of producing higher
margins and its focus on expanding its OEM channel. Although the Company plans
to continue to sell third-party non-GigaRAID products, management's strategy
is to focus increased resources on the design, development, manufacturing and
marketing of internally developed products.

Gross Profit. Notwithstanding the decline in revenues, gross profit in
fiscal 1998 was $23,226,000, representing 30.0% of revenues compared to
$21,577,000 in fiscal 1997, representing 23.1% of revenues. This increase in
gross profit was primarily attributable to increased revenues from higher
margin internally designed and integrated GigaRAID products as a percentage of
total revenues as well as the reduction in costs of certain components used to
manufacture products in fiscal 1998 as compared to fiscal 1997. The increase
was also attributable to the 153.2% increase in service revenue in fiscal 1998
as compared to fiscal 1997.

Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses increased $135,000, or 0.6%, to $22,755,000
in fiscal 1998 as compared with $22,620,000 in fiscal 1997. SG&A consists
primarily of salaries, commissions and employee benefits, as well as
consulting, advertising, promotion and certain Merger related expenses. In
fiscal 1998, the Company incurred $2,536,000 of SG&A related to the Merger
between the Company and ANDATACO of California as compared to $2,133,000 in
fiscal 1997. The Merger related expenses primarily include amortization of
goodwill, amortization of existing purchased technology, and depreciation of
acquired equipment and improvements. Excluding the Merger related SG&A
expenses, fiscal 1998 SG&A expense decreased $268,000 as compared to fiscal
1997. This decrease was primarily due to a reduction in payroll and executive
compensation related to headcount reductions, lower commissions associated
with sales and support personnel, and a reduction of bad debt charges.

Research and Development. Research and development increased $227,000, or
17.1%, in fiscal 1998 to $1,552,000 from $1,325,000 as compared to fiscal
1997. The increase was primarily due to design development of various products
and technologies, including, but not limited to, the GigaRAID/AA, GigaRAID/HA
and GigaRAID/8000 LVD product family, Ultra 3 160/M technology, OEM
partnership agreements and storage management software. In fiscal 1998, the
Company incurred $850,000 in costs in connection with the development of
Hewlett-Packard's new Sure Tape(R) enclosure. All development costs were
reimbursed by Hewlett-Packard throughout fiscal 1998 and recorded as a credit
to research and development costs including a fourth quarter reimbursement of
$340,000. This is in line with the Company's strategy to continue to focus
increased resources on design and development of products and differentiating
technologies for which it believes there is a need in the market. However,
there can be no assurance that product development programs in which the
Company invests will be successful or that products resulting from such
programs will achieve market acceptance.

Interest Expense. Interest expense decreased $97,000, or 14.9%, to $553,000
in fiscal 1998 from $650,000 in fiscal 1997. The decrease was primarily the
result of the decrease in the bank borrowings throughout the year and the
Company's effective borrowing rate in fiscal 1998 as compared to fiscal 1997.

Net Loss. In 1998 the Company had a net loss of $2,434,000, or $0.10 per
share, compared with the 1997 net loss of $6,209,000, or $0.30 per share.

Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31,
1996

Revenues. In fiscal 1997, the Company's revenues remained relatively flat at
$93,259,000 compared to $99,733,000 in fiscal 1996. The 6.5% decrease in
revenues was primarily attributable to a decrease of $32,127,000 in sales of
older mass storage products including RAID Lite and RAPID-Tape products and a
decrease of $4,760,000 in sales of non-GigaRAID distribution products. The
decrease was partially offset by a $27,112,000 increase in sales of internally
developed GigaRAID Products and a $3,300,000 increase in

18
<PAGE>

distribution GigaRAID products. The decrease in non-GigaRAID distribution
product sales in fiscal 1997 compared to fiscal 1996 is consistent with the
Company's strategy to focus its sales organization on internally designed
products capable of producing higher margins. The decrease in revenues was
further impacted by the Merger. The time required of management to affect the
integration of operations and administration, and the restructuring of the
combined sales and service organization, diverted personnel and management
resources from day to day operating activities.

Gross Profit. Gross margins increased slightly to 23.1% in fiscal 1997
compared with 19.4% in fiscal 1996. The increase in gross profit was
attributable to the increased revenues from higher margin products as well as
the reduction in costs of certain components used to manufacture products in
fiscal 1997 compared to fiscal 1996.

Selling, General and Administrative Expense. SG&A expenses increased
approximately $5,322,000, or 30.8%, to $22,620,000 in fiscal 1997 from
$17,298,000 in fiscal 1996. In fiscal 1997, the Company had an additional
$2,133,000 of SG&A related to the Merger including $1,036,000 representing the
portion of the Company's expenses not eliminated as a result of the Merger in
order to effect the integration, goodwill amortization of $697,000, and
$400,000 of amortization of existing purchased technology related to the
Merger. Before the impact of these changes in fiscal 1997, SG&A expenses
increased $3,189,000 or 18.4%. This increase is primarily due to costs
associated with the development of the Company's sales organization and
overall infrastructure including the addition of sales and support personnel;
the focus of its sales organization on internally developed and other GigaRAID
products capable of producing higher margins; the development of alternative
distribution channels; and the addition of key management, service and
engineering personnel.

Research and Development. Research and development increased $406,000, or
44.2%, in fiscal 1997 to $1,325,000 from $919,000 as compared with fiscal
1996. Such expenses consisted primarily of salaries, employee benefits,
overhead and outside contractors. The increase in product development costs in
fiscal 1997 over fiscal 1996 was primarily due to an increase in personnel and
related expenses resulting from the Merger, including additional costs
incurred to further develop the acquired in-process research and development.

The Merger in June 1997 was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the estimated fair market
value of identifiable tangible and intangible assets acquired and liabilities
assumed. Based upon an independent valuation, in fiscal 1997 the Company
allocated $2,400,000 to acquired in-process research and development for which
there is no future alternative use and $400,000 to existing proprietary
technology for which technological feasibility had been established. As
required by generally accepted accounting principles, the amount allocated to
in-process technology was recorded as a one-time charge to operations and the
amount allocated to existing technology was amortized over its estimated
remaining economic life. The in-process research and development purchased in
the acquisition generally related to the next generation of Database RAID
Architecture which merged the Company's Advanced Controller Technology with
ANDATACO of California's ESP. The research and development costs incurred in
fiscal 1997 after the Merger were largely incurred to merge the Company's
Advanced Controller Technology with the ANDATACO of California packaging
technology, resulting in the initial beta shipment of the GigaRAID/HA in July
1997 and general availability in September 1997. The post-merger effort in
developing this technology represented 33% of the product development cycle,
or a two month period of a total six month product development period.

Interest Expense. Interest expense increased $178,000, or 37.7%, to $650,000
in fiscal 1997 from $472,000 in fiscal 1996. The increase was primarily a
result of an increase in bank borrowings throughout the year and the Company's
effective borrowing rate in fiscal 1997 as compared to fiscal 1996. Interest
expense on the shareholder loan increased $160,000, or 53.2%, to $461,000 in
fiscal 1997 from $301,000 in fiscal 1996. The increase was the result of an
increase of the shareholder loan balance.

Net Loss. In 1997 the Company had a net loss of $6,209,000, or $0.30 per
share, compared with 1996 net income of $39,000, or $0.00 per share.

19
<PAGE>

Liquidity and Capital Resources

The Company's cash as of October 31, 1998 was $23,000 compared with $41,000
at October 31, 1997. Net working capital decreased by $1,683,000 to $3,486,000
at October 31, 1998 from that of the prior year. During fiscal 1998, the
Company generated $2,692,000 from operating activities which was primarily
used in investing expenditures for purchases of property and equipment of
$1,531,000 and finance activities for payments on notes payable and a net
reduction in the bank line of credit of $1,179,000.

Management believes that its projected income and its bank line of credit
will be sufficient to meet the Company's capital and operating requirements
for the next 12 months. If sales are less than projected, or if the Company is
unable to generate adequate cash flow from its sales, the Company may need to
seek additional sources of capital and/or decrease its planned capital and
operating expenditures.

The Company is currently satisfying all working capital and capital
expenditure requirements through internally generated cash flows from
operations and borrowings available on its credit facility. Management
believes that its financial position and available borrowings on its credit
facility will be sufficient to meet the operating requirements of its business
for a period of at least twelve months.

Inflation

Inflation has not had a significant negative impact on the Company's
operations during the periods presented. The Company has historically been
able to pass on to its customers increases in raw material prices caused by
inflation. There can be no assurance, however, that the Company will be able
to continue to pass on any future increases should they occur. Although the
Company's exposure to the effects of inflation will be magnified by the
expected increase in OEM business, the Company believes that its continuous
efforts at material and labor cost reductions will minimize such effects.

Year 2000

Many current computer systems and software products were not designed to
handle any dates beyond the year 1999. As a result, computer systems and/or
software used by many companies may need to be modified prior to the Year 2000
in order to remain functional. Significant uncertainty exists in the hardware
and software industry concerning the potential effects associated with such
compliance.

Costs incurred directly relating to the Year 2000 issue are expensed by the
Company during the period in which they are incurred. The Company has incurred
to date no incremental material costs associated with its efforts to become
Year 2000 compliant, as the majority of the costs have occurred as a result of
normal upgrade procedures. Costs incurred in fiscal 1998 directly relating to
the Year 2000 issue include the time spent by employees reviewing and
addressing Year 2000 risks and amounted to $20,000.

Based on current information, the Company does not expect future costs to
address Year 2000 risks to be material. However, there can be no assurances
that there will not be interruptions or other limitations of financial or
operating systems functionally or that the Company will not incur significant
costs to avoid such interruptions

20
<PAGE>

or limitations. The Company's expectations about future costs associated with
the Year 2000 issue are subject to uncertainties that could cause actual
results to have a greater financial impact than currently anticipated. Factors
that could influence the amount and timing of future costs include but are not
limited to the success of the Company's suppliers in completing their
respective plan of action for Year 2000 compliance.

Mission Critical Business Transaction Systems

The Company has completed a review of its critical business transaction
systems, and its Year 2000 compliance related to business transaction systems
is as follows:

All of the Company's systems for processing business transactions are Year
2000 compliant and the Company expects that these systems will correctly
process transactions prior to and following 12:00 am January 1, 2000. This
compliance extends to the underlying hardware, operating systems, and other
software on which the Company's business systems operate. This compliance
includes the following transactions and related printed documents: accepting
orders from customers, fulfilling customer orders, invoicing customers,
crediting customer accounts, applying customer payments, refunding customers,
placing orders with vendors, receiving vendor shipments, processing vendor
invoices, and paying vendors.

The Company is in the process of evaluating certain ancillary PC office
applications (e.g. word processing, spreadsheets, e-mail, etc.) and
specialized PC applications including art, drawing and other creative
department applications, hardware design and other engineering department
applications, software development systems, bank account management, fixed
asset management, and stock option database management. This effort will
continue through 1999.

Products the Company Sells

The Company has also completed a review of all significant products the
Company sells for Year 2000 compliance. All significant products that the
Company currently sells are Year 2000 compliant and the Company believes these
products will not produce date errors in changing from the year 1999 to 2000.
Any products the Company intends to sell in the future will be reviewed for
Year 2000 compliance. The functionality of all of these products, however, are
dependent on the software compliance of the underlying operating systems.

The Company's Business Partners

The Company's suppliers (particularly sole-source and long lead-time
suppliers), key customers and other key business partners (e.g. bankers) may
be adversely affected by their respective failure to address the Year 2000
problem. Should any of the Company's suppliers encounter Year 2000 problems
that cause them to delay manufacturing or shipments of key components to
ANDATACO, the Company may be forced to delay or cancel shipments of its
products, which would have a material adverse effect on the Company's results
of operations. Any inability of ANDATACO's key customers to become Year 2000
compliant which would cause them to delay or cancel substantial purchase
orders or delivery of ANDATACO's products would also have a material adverse
effect on the Company's results of operations. Additionally, any inability of
the Company's other key business partners, including the Company's bank, to
become Year 2000 compliant could cause them to become unable to provide
critical business services, such as to provide funding on the Company's line
of credit, and could therefore also have a material adverse effect on the
Company.

The Company does not rely on any one significant customer (i.e. representing
greater than 10% of total revenue). However, it is unknown how customer
spending patterns may be impacted by Year 2000 programs. As customers focus on
preparing their businesses for the Year 2000 in the near term, capital budgets
may be spent on remediation efforts, potentially delaying the purchase and
implementation of new systems, thereby creating less demand for the Company's
products and services. This could adversely affect the Company's business.

21
<PAGE>

Conversely, demand for the Company's products could accelerate as customers
focus on the need to protect their stored data by enhancing their
capabilities.

The Company has contacted all identified key vendors and obtained either a
statement of Year 2000 compliance or a status report on the progress achieved
to date on execution of their respective Year 2000 Plan. Based on this review,
the Company is satisfied that all identified key vendors have satisfactorily
addressed their Year 2000 issues with a plan of action as applicable and are,
or will be, Year 2000 compliant by the end of the third calendar quarter of
1999.

22
<PAGE>

SELECTED QUARTERLY FNANCIAL DATA
(In thousands, except per share data)

The following table presents selected quarterly financial information for
the periods indicated. This information has been derived from unaudited
consolidated financial statements which, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of such information. These operating results are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
Jan. April July Oct.
31, 30, 31, 31,
1998 1998 1998 1998
Fiscal 1998: ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales....................................... $21,760 $20,996 $17,092 $17,671
Gross profit................................ 6,785 6,671 4,359 5,411
(Loss) income from operations............... (140) 78 (1,617) 291
Net (loss) income........................... (420) (189) (1,874) 49
Net (loss) income per share................. (0.02) (0.01) (0.08) 0.00
<CAPTION>
Jan. April July Oct.
31, 30, 31, 31,
1997 1997 1997 1997
Fiscal 1997: ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales....................................... $25,497 $21,540 $22,057 $24,165
Gross profit................................ 5,992 4,587 4,906 6,092
(Loss) income from operations............... 235 (111) (3,896) (1,326)
Net (loss) income........................... (110) (339) (4,169) (1,591)
Net (loss) income per share................. (0.01) (0.02) (0.19) (0.07)
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and supplementary data
required by this item are set forth in the pages indicated in Item 14(a)(1).

23
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See the section entitled "Executive Officers" in Part I Item 1 hereof for
information regarding executive officers. The information required by this
item with respect to directors is incorporated by reference from the
information under the caption "Election of Directors" contained in the
Company's Definitive Proxy Statement which will be filed with the Commission
pursuant to Regulation 14A in connection with the solicitation of proxies for
the Company's 1999 Annual Meeting of Stockholders to be held on April 8, 1999
(the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
information appearing under the caption "Certain Transactions" of the Proxy
Statement and Note 10 of the Notes to Consolidated Financial Statements
contained elsewhere in this report.

24
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(a)(1) Index to Consolidated Financial Statements:
The financial statements required by this item are admitted in a separate section
beginning on page F-1 of this Annual Report on Form 10-K.
Report of Independent Accountants.................................................. F-1
Consolidated Balance Sheet as of October 31, 1998 and 1997......................... F-2
Consolidated Statement of Operations for the Years Ended October 31, 1998, 1997
and 1996.......................................................................... F-3
Consolidated Statement of Cash Flows for the Years Ended October 31, 1998, 1997
and 1996.......................................................................... F-4
Consolidated Statement of Shareholders' Equity (Deficit) For the Years Ended
October 31, 1998, 1997, and 1996.................................................. F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Index to Financial Statement Schedules:
The financial statement schedules required by this item are submitted in a
separate section beginning on page S-1 of this Annual Report on Form 10-K.
Schedule VIII-- Valuation and Qualifying Accounts.................................. S-1
</TABLE>

All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto appearing elsewhere in this Annual Report
on Form 10-K.

<TABLE>
<CAPTION>
(a)(3) Index to Exhibits:
<S> <C>
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger and Reorganization dated as of February 28, 1997, by
and among the Company, IPL Acquisition Corp., ANDATACO and W. David Sykes, filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of February
28, 1997 and incorporated herein by reference.
3.1 Restated Articles of Organization dated March 24, 1981, and Articles of
Amendment, dated May 12, 1981, and July 8, 1992, filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992
(the "1992 Form 10-K"), and incorporated herein by reference.
3.2 By-Laws, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1987 (Commission File No. 0-10370)
and incorporated herein by reference.
10.1 Stockholder Agreement dated as of April 25, 1980, as amended, filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1 (File No. 2-71414) "1981
Registration Statement") and incorporated herein by reference.
10.2 Second Amendment to Stockholder Agreement dated as of May 24, 1989, filed as
Exhibit 10.3. to the Company's Registration Statement on Form S-1 (File No. 33-
40454) (the "1991 Registration Statement") and incorporated herein by reference.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.3 Form of Indemnification Agreement, filed as Exhibit 10.8 to the Company's 1991
Registration Statement and incorporated herein by reference.
10.4 Lease dated August 20, 1992 between the Company and Maynard Industrial Park
Associates, filed as Exhibit 10.2 to the 1992 Form 10-K and incorporated herein
by reference.
10.5 1993 Director Stock Option Plan, filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form
10-K") and incorporated herein by reference.
10.6 Form of Executive Severance Agreement, filed as Exhibit 10.13 to the 1993 Form
10-K and incorporated herein by reference.
10.7 1991/1993 Consolidated Equity Incentive Plan, filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(the "1994 Form 10-K") and incorporated herein by reference.
10.8 Consulting Agreement dated as of January 1, 1995 between the Company and
Firecracker Technology Corp., filed as Exhibit 10.8 to the 1994 Form 10-K and
incorporated herein by reference.
10.9 Employment Agreement with Ronald J. Gellert dated as of December 4, 1995 between
the Company and Ronald J. Gellert, filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form
10-K") and incorporated herein by reference.
10.10 Stock Option Agreement dated as of December 4, 1995 between the Company and
Ronald J. Gellert, filed as Exhibit 10.10 to the 1995 Form 10-K and incorporated
herein by reference.
10.11 1996 Consolidated Equity Incentive Plan, filed as Exhibit 10.11 to Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996
Form 10-K") and incorporated herein by reference.
10.12 Consulting Agreement dated as of October 1, 1996 between the Company and
Cornelius P. McMullan, filed as Exhibit 10.12 to the 1996 Form 10-K and
incorporated herein by reference.
10.13 Consulting Agreement dated as of October 1, 1996 between the Company and Harris
Ravine, filed as Exhibit 10.13 to the 1996 Form 10-K and incorporated herein by
reference.
10.14 Consulting Agreement dated as of January 1, 1997 between the Company and BI
Capital, Ltd., filed as Exhibit 10.14 to the 1996 Form 10-K and incorporated
herein by reference.
10.15 Consulting Agreement dated as of March 1, 1997 between the Company and Harris
Ravine, filed as Exhibit 10.15 to the 1996 Form 10-K and incorporated herein by
reference.
10.16 OEM Agreement dated as of February 25, 1997 between the Company and ANDATACO,
filed as Exhibit 10.16 to the 1996 Form 10-K and incorporated herein by
reference.
10.17 Lease Agreement dated January 1, 1993 and Addendum dated October 1, 1994, between
the Company and Syko Properties, Inc., filed as Exhibit 10.17 to the 1997 Form
10-K and incorporated herein by reference.
10.18 Line of Credit Agreement dated 12/1/97 between Imperial Savings Bank and the
Company, filed as Exhibit 10.18 to the 1997 Form 10-K and incorporated herein by
reference.
10.19 Employment Agreement dated May 1, 1997, entered between ANDATACO and Harris
Ravine, filed as Exhibit 10.19 to the 1997 Form 10-K and incorporated herein by
reference.
10.20 Employment Agreement dated June 3, 1997, entered into between the Company and W.
David Sykes, filed as Exhibit 10.20 to the 1997 Form 10-K and incorporated herein
by reference.
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.21 Noncompetition Agreement dated June 3, 1997, entered into between the Company and
W. David Sykes, filed as Exhibit 10.21 to the 1997 Form 10-K and incorporated
herein by reference.
10.22 Letter Agreement regarding employment terms dated September 20, 1996 between the
Company and Richard A. Hudzik, filed as Exhibit 10.22 to the 1997 Form 10-K and
incorporated herein by reference.
10.23 Compensation Agreement dated July 8, 1997, entered between the Company and Peter
W. Bell, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1997 and incorporated herein by reference.
10.24 Promissory Note dated February 10, 1997, between the Company and W. David Sykes,
filed as Exhibit 10.24 to the 1997 Form 10-K and incorporated herein by
reference.
10.25 Loan Agreement dated as of April 30, 1998 between Wells Fargo Bank and the
Company, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 30, 1998 and incorporated herein by reference.
10.26 Amendment No. 1 to Loan Agreement dated as of July 29, 1998 between Wells Fargo
Bank and the Company, filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31,1998 and incorporated herein by
reference.
10.27 Amendment No. 2 to Loan Agreement dated as of December 14, 1998 between Wells
Fargo Bank and the Company.
10.28 Letter Agreement dated May 5, 1997 between the Company and Diane Wong.
10.29 Letter Agreement dated January 27, 1998 between the Company and Arun Taneja.
21.1 List of subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants, filed herewith as
Exhibit 23.
</TABLE>

Executive Compensation Plans and Arrangements

Exhibits 10.3, 10.5 through 10.15 and 10.19 through 10.23 to this Form 10-K
are management contracts or compensatory plan arrangements.

Reports on Form 8-K

There were no reports on Form 8-K filed for the quarter ended October 31,
1998.

27
<PAGE>

SIGNATURES

Pursuant to the requirement of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, IPL Systems, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

ANDATACO, INC.

/s/ Harris Ravine
By: _________________________________
Harris Ravine
Chief Executive Officer
January 27, 1999

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Harris Ravine and W. David Sykes, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or their of his
substitute or substituted, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Harris Ravine Chief Executive Officer January 27, 1999
____________________________________ and Director (Principal
Harris Ravine Executive Officer)

/s/ W. David Sykes President and Vice Chairman January 27, 1999
____________________________________ of the Board and Director
W. David Sykes

/s/ Diane Wong Vice President of Finance January 27, 1999
____________________________________ and Corporate Controller
Diane Wong (Principal Financial and
Accounting Officer)

/s/ Cornelius P. McMullan Director January 27, 1999
____________________________________
Cornelius P. McMullan

/s/ Melville Straus Director January 27, 1999
____________________________________
Melville Straus
</TABLE>

28
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Shareholders of Andataco, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) of this Form 10-K present fairly, in all
material respects, the financial position of Andataco, Inc. and its
subsidiaries at October 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended October
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) of this Form 10-K presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Diego, California
January 13, 1999

F-1
<PAGE>

ANDATACO, INC.

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
October 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 23,000 $ 41,000
Accounts receivable, net........................... 10,628,000 10,846,000
Inventories........................................ 4,923,000 7,458,000
Other current assets............................... 634,000 353,000
----------- -----------
Total current assets............................. 16,208,000 18,698,000

Goodwill, net........................................ 5,993,000 7,665,000
Property and equipment, net.......................... 3,415,000 3,599,000
Other assets......................................... 66,000 27,000
----------- -----------
$25,682,000 $29,989,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 7,853,000 $ 7,660,000
Accrued expenses................................... 2,610,000 4,202,000
Deferred revenue................................... 2,259,000 1,554,000
Current portion of notes payable................... -- 113,000
----------- -----------
Total current liabilities........................ 12,722,000 13,529,000
----------- -----------
Bank line of credit.................................. 5,462,000 6,500,000
Notes payable, less current portion.................. -- 28,000
Shareholder loan..................................... 5,196,000 5,196,000
----------- -----------
Total long-term liabilities...................... 10,658,000 11,724,000
----------- -----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized; 23,819,399 shares issued and
outstanding....................................... 238,000 238,000
Additional paid in capital......................... 10,107,000 10,107,000
Accumulated deficit................................ (8,043,000) (5,609,000)
----------- -----------
Total shareholders' equity....................... 2,302,000 4,736,000
----------- -----------
$25,682,000 $29,989,000
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>

ANDATACO, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales.................................. $77,519,000 $93,259,000 $99,733,000
Cost of sales.......................... 54,293,000 71,682,000 80,375,000
----------- ----------- -----------
Gross profit......................... 23,226,000 21,577,000 19,358,000
Operating expenses:
Selling, general and administrative.. 22,755,000 22,620,000 17,298,000
Rent expense to shareholder.......... 332,000 330,000 330,000
Purchased research and development... -- 2,400,000 --
Research and development............. 1,552,000 1,325,000 919,000
----------- ----------- -----------
24,639,000 26,675,000 18,547,000
----------- ----------- -----------
(Loss) income from operations.......... (1,413,000) (5,098,000) 811,000
Other income (expense):
Interest income...................... -- -- 1,000
Interest expense..................... (553,000) (650,000) (472,000)
Interest expense to shareholder...... (468,000) (461,000) (301,000)
----------- ----------- -----------
(1,021,000) (1,111,000) (772,000)
----------- ----------- -----------
(Loss) income before provision for
taxes................................. (2,434,000) (6,209,000) 39,000
Provision for income taxes............. -- -- --
----------- ----------- -----------
Net (loss) income...................... $(2,434,000) $(6,209,000) $ 39,000
=========== =========== ===========
Net (loss) income per share (basic and
diluted).............................. $ (0.10) $ (0.30) $ 0.00
=========== =========== ===========
Shares used in computing net (loss)
income per share:
Basic................................ 23,819,000 20,464,000 18,078,000
=========== =========== ===========
Diluted.............................. 23,819,000 20,464,000 18,168,000
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

ANDATACO, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................... $(2,434,000) $(6,209,000) $ 39,000
Adjustments to reconcile net (loss)
income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 1,715,000 1,335,000 446,000
Amortization of goodwill............... 1,672,000 697,000 --
Purchased research and development..... -- 2,400,00 --
Stock compensation..................... -- 137,000 --
Changes in assets and liabilities, net of
Merger transaction (Note 2):
Accounts receivable.................... 218,000 3,149,000 492,000
Inventories............................ 2,535,000 192,000 3,176,000
Other assets........................... (320,000) 73,000 (70,000)
Accounts payable....................... 193,000 (3,525,000) (4,866,000)
Accrued expenses....................... (1,592,000) 328,000 (569,000)
Deferred revenue....................... 705,000 1,154,000 74,000
----------- ----------- ----------
Net cash provided by (used in)
operating activities................. 2,692,000 (269,000) (1,278,000)
----------- ----------- ----------
Cash flows from investing activities:
Cash acquired in Merger transaction (net
of cash expended of $478,000) (Note 2)... -- 676,000 --
Payments for purchases of property and
equipment................................ (1,531,000) (682,000) (770,000)
----------- ----------- ----------
Net cash used in investing
activities........................... (1,531,000) (6,000) (770,000)
----------- ----------- ----------
Cash flows from financing activities:
(Payments) proceeds under bank line of
credit agreement, net.................... (1,038,000) (553,000) 4,508,000
Dividends paid............................ -- -- (2,955,000)
Proceeds from shareholder loan............ -- 269,000 2,000,000
Payments on shareholder loan.............. -- -- (758,000)
Payments on notes payable................. (141,000) (165,000) (287,000)
----------- ----------- ----------
Net cash (used in) provided by
financing activities................. (1,179,000) (449,000) 2,508,000
----------- ----------- ----------
Net (decrease) increase in cash............ (18,000) (724,000) 460,000
Cash at beginning of year.................. 41,000 765,000 305,000
----------- ----------- ----------
Cash at end of year $ 23,000 $ 41,000 $ 765,000
=========== =========== ==========
Supplemental disclosures of cash flow
information:
Cash paid for interest.................... $ 976,000 $ 1,127,000 $ 812,000
=========== =========== ==========
Cash paid for income taxes................ $ -- $ -- $ 27,000
=========== =========== ==========
Supplemental disclosure of non-cash
activities:
Issuance of stock in Merger transaction
(Note 2)..................................$.. -- $11,606,000 $ --
=========== =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

ANDATACO, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Common Stock Additional Accumulated
-------------------- Paid in Earnings
Shares Amount Capital (Deficit) Total
---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 31,
1995................... 10,000 $ 2,000 $ 2,116,000 $ 2,118,000
Dividends paid.......... (2,955,000) (2,955,000)
Net income.............. 39,000 39,000
---------- -------- ----------- ----------- -----------
Balance at October 31,
1996................... 10,000 2,000 (800,000) (798,000)
Recapitalization of
ANDATACO of California
as a result of Merger
with IPL Systems, Inc.
(Note 2)............... (10,000) (2,000) $ 2,000 --
Elimination of S
Corporation deficit
against additional paid
in capital at date of
Merger (Note 2)........ (1,400,000) 1,400,000 --
IPL common stock
outstanding immediately
before Merger (Note
2)..................... 5,633,819 56,000 (56,000) --
Issuance of IPL common
stock in Merger (Note
2)..................... 18,078,381 181,000 11,425,000 11,606,000
Issuance of common stock
for compensation....... 107,199 1,000 136,000 137,000
Net loss................ (6,209,000) (6,209,000)
---------- -------- ----------- ----------- -----------
Balance at October 31,
1997................... 23,819,399 238,000 10,107,000 (5,609,000) 4,736,000
Net loss................ (2,434,000) (2,434,000)
---------- -------- ----------- ----------- -----------
Balance at October 31,
1998................... 23,819,399 $238,000 $10,107,000 $(8,043,000) $ 2,302,000
========== ======== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--The Company

ANDATACO, Inc. (the "Company" or "ANDA"), founded in 1986, designs,
develops, manufactures, markets and supports high performance, high
availability information storage solutions for the open systems markets in the
Windows NT and UNIX environments. The Company's fully integrated hierarchy of
data storage solutions includes fault tolerant RAID (Redundant Array of
Independent Disks) and RAID-ready disk storage, tape backup and restore
products, and data storage management software. The Company supplies its
products through direct, indirect and original equipment manufacturer sales
and service channels throughout the world. The Company's president and
principal shareholder and his affiliates beneficially own 75.9% of the
Company's outstanding common stock.

NOTE 2--Business Combination

On June 3, 1997 (the "Closing Date"), ANDA (formerly IPL Systems, Inc.)
completed a business combination with ANDATACO of California, whereby ANDATACO
of California was merged with a wholly-owned subsidiary of ANDA (the
"Merger"). Under the terms of the merger agreement, the shareholders of
ANDATACO of California were issued a total of 18,078,381 shares of ANDA Class
A Common Stock in exchange for all outstanding shares of capital stock of
ANDATACO of California. Although as a legal matter the Merger resulted in
ANDATACO of California becoming a wholly-owned subsidiary of ANDA, for
financial reporting purposes the Merger was treated as a recapitalization of
ANDATACO of California and an acquisition of ANDA by ANDATACO of California
(reverse acquisition). The financial reporting requirements of the Securities
and Exchange Commission require that the financial statements reported by ANDA
subsequent to the Merger be those of ANDATACO of California, which include the
results of operations of ANDA from the Closing Date.

The acquisition of ANDA by ANDATACO of California was accounted for using
the purchase method. Accordingly, the purchase price was allocated to the
estimated fair market value of identifiable tangible and intangible assets
acquired and liabilities assumed. Based upon an independent valuation, the
Company allocated $2,400,000 to acquired in-process research and development
for which there is no future alternative use and $400,000 to existing
proprietary technology for which technological feasibility had been
established. As required by generally accepted accounting principles, the
amount allocated to in-process research and development was recorded as a one-
time charge to operations and the amount allocated to existing technology was
amortized over its estimated useful life. The excess of the purchase price
over the identifiable net assets acquired of $8,362,000 was recorded as
goodwill and is being amortized on a straight-line basis over its estimated
useful life of five years.

The following table sets forth the allocation of the purchase price to the
estimated fair value of identifiable tangible and intangible assets acquired
and liabilities assumed:

<TABLE>
<S> <C>
Purchase Price:
Fair value of ANDA stock of 5,633,819 shares outstanding
immediately before the Merger................................ $11,606,000
Transaction costs............................................. 478,000
-----------
12,084,000
-----------
Allocation of Purchase Price to Identifiable Net Assets:
Tangible assets............................................... 4,203,000
Assumed liabilities........................................... (3,281,000)
In-process research and development........................... 2,400,000
Intangible asset.............................................. 400,000
-----------
3,722,000
-----------
Excess of Purchase Price Over Identifiable Net Assets......... $ 8,362,000
===========
</TABLE>

F-6
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following is unaudited pro forma results of operations as if the
transaction had been consummated at the beginning of fiscal year ended October
31, 1997:

<TABLE>
<CAPTION>
Year Ended
October 31,
1997
------------
(unaudited)
<S> <C>
Sales..................................................... $ 97,507,000
============
Net loss.................................................. $(12,500,000)
============
Net loss per share (basic and diluted).................... $ (0.53)
============
</TABLE>

NOTE 3--Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements as of and for the year ended October 31, 1998
consolidate the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Revenue Recognition

Revenue from the sale of products is recognized as of the date shipments are
made to customers net of an allowance for returns. A provision is made for
warranty costs in excess of those provided for by the original equipment
manufacturer. Revenue related to extended warranty contracts is deferred and
recognized over the period in which costs are expected to be incurred, based
upon historical evidence, in performing services under the contract. The
Company also contracts with outside vendors to provide service relating to
various on-site warranties which are offered for sale to customers; on-site
warranty revenues and amounts paid in advance to outside service organizations
are recognized in the financial statements in sales and cost of goods sold,
respectively, over the warranty period.

Inventories

Inventories are stated at the lower of cost (first-in-first-out method) or
market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the depreciable
assets (generally five years). Leasehold improvements are amortized on a
straight-line basis over the shorter of the useful life of the asset or the
lease term. Upon the sale or retirement of property or equipment, the asset
cost and related accumulated depreciation are removed from the respective
accounts and any gain or loss is included in the results of operations. Total
depreciation and amortization was $1,715,000, $935,000 and $446,000 in fiscal
1998, 1997 and 1996, respectively.

F-7
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-Lived Assets

The Company assesses potential impairments to its long-lived assets,
identifiable intangibles and goodwill when there is evidence that events or
changes in circumstances have made recovery of an asset's carrying value
unlikely. An impairment loss would be recognized when the sum of the expected
future net undiscounted cash flows is less than the carrying amount of the
asset. No such impairment losses have been recorded by the Company.

Goodwill

The Company has classified as goodwill the purchase price in excess of fair
value of the identifiable net assets acquired in the Merger. Goodwill is being
amortized on a straight-line basis over its estimated useful life of five
years. Amortization charged to operations amounted to $1,672,000 and $697,000
for the years ended October 31, 1998 and 1997, respectively.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if fair value based
methods had been applied in measuring compensation expense (Note 8).
Compensation charges related to non-employee stock-based compensation are
measured using fair value based methods.

Income Taxes

The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense or benefit represents the amount
of income taxes expected to be payable or refundable for the current year. A
deferred income tax liability or asset is established for the expected future
consequences resulting from the differences between the financial reporting
and income tax bases of assets and liabilities and from net operating loss and
credit carryforwards. Deferred income tax expense or benefit represents the
net change during the year in the deferred income tax liability or asset. A
valuation allowance is established when necessary to reduce deferred tax
assets to the amounts expected to be more likely than not realized.

Concurrent with the Merger, ANDATACO of California changed its taxpayer
status from a Subchapter S Corporation to a Subchapter C Corporation.
Effective with that change, the Company transferred the amount of its
accumulated deficit at that date to additional paid in capital. Therefore, the
Company's accumulated deficit at October 31, 1998 includes losses solely
incurred by the Company since the Merger.

Prior to the consummation of the Merger, ANDATACO of California elected to
be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended,
and consequently all federal income taxes and most state taxes were paid
directly by its shareholders. Because of the change in taxpayer status to a
Subchapter C Corporation, the Company is subject to federal and state income
taxes. The tax provision in fiscal 1997 is calculated giving effect to the
change of ANDATACO of California from a Subchapter S Corporation to a
Subchapter C Corporation, and resultant adjustments for federal and state
income taxes, as if ANDATACO of California had been taxed as a C Corporation
rather than an S Corporation since inception.

Pro Forma Net Income (Loss) per Share (Unaudited)

Pro forma net income (loss) per share amounts of $(0.10), $(0.31) and $0.00
in fiscal 1998, 1997 and 1996, respectively, reflect the Company's conversion
from a Subchapter S Corporation to a Subchapter C Corporation

F-8
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and the resultant adjustments for federal and state income taxes as if the
Company had been taxed as a Subchapter C Corporation rather than a Subchapter
S Corporation since inception. Pro forma net income (loss) per share is
computed based on the weighted average number of shares of common stock
outstanding during the respective periods.

Fair Value of Financial Instruments

It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair values
based on their terms or short-term nature. The carrying amount shown for the
bank line of credit approximates its fair value due to the relatively short
term nature of this arrangement and to its adjustable interest rate. The
carrying amounts shown for notes payable and shareholder loan are reasonable
approximations of their fair values based upon the interest rates at which the
Company could enter into similar borrowing arrangements.

Net Income (Loss) Per Share

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" as required in the first quarter of fiscal 1998. Basic
earnings per share is computed based on the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per share is
computed based on the weighted average number of shares of common stock
outstanding during the period increased by the weighted average number of
common stock equivalents outstanding during the period, using the treasury
stock method. Shares issuable upon exercise of outstanding stock options and
warrants, totaling 2,991,000 and 2,402,000 as of October 31, 1998 and 1997,
respectively, have been excluded from the computation of diluted earnings per
share as their effect would be anti-dilutive.

Concentration of Credit Risk

The Company's customers include original equipment manufacturers,
integrators, distributors and end-users. Financial instruments which
potentially subject the Company to concentrations of credit risk are primarily
accounts receivable. The Company performs ongoing credit evaluations of its
customers, generally requires no collateral and maintains allowances for
potential credit losses and sales returns. Credit losses have been within
management's expectations.

Dependence on Suppliers

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt in the
first quarter of fiscal 1999. This statement will require the Company to
report in the financial statements, in addition to net income, comprehensive
income and its components including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on

F-9
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

certain investments in debt and equity securities. Upon adoption, the Company
will also be required to reclassify financial statements for earlier periods
provided for comparative purposes. The Company expects that adoption will have
no material impact on the Company's statement of operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. Under FAS 131, operating
segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The Company expects that adoption will
have no material impact on the Company's financial statements.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal 2000. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The Company expects that adoption will
have no material impact on the Company's financial statements.

NOTE 4--Composition of Certain Financial Statement Captions

<TABLE>
<CAPTION>
October 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable:
Accounts receivable--trade.......................... $10,960,000 $11,106,000
Less allowance for doubtful accounts and returns.... (332,000) (260,000)
----------- -----------
$10,628,000 $10,846,000
=========== ===========
Inventories:
Purchased components................................ $ 3,900,000 $ 5,541,000
Work in progress.................................... 280,000 125,000
Finished goods...................................... 743,000 1,792,000
----------- -----------
$ 4,923,000 $ 7,458,000
=========== ===========
Property and equipment:
Equipment........................................... $ 5,666,000 $ 4,334,000
Leasehold improvements.............................. 1,098,000 942,000
Furniture and fixtures.............................. 809,000 797,000
Vehicles............................................ 150,000 119,000
----------- -----------
7,723,000 6,192,000
Less accumulated depreciation and amortization...... (4,308,000) (2,593,000)
----------- -----------
$ 3,415,000 $ 3,599,000
=========== ===========
Accrued expenses:
Sales commissions................................... $ 885,000 $ 1,807,000
Other............................................... 1,725,000 2,395,000
----------- -----------
$ 2,610,000 $ 4,202,000
=========== ===========
</TABLE>

F-10
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Bonuses Payable

The Company has recorded a long-term obligation related to ten-year bonus
agreements (the "Agreements") with certain employees. Under the Agreements, a
bonus will be payable to an employee ten years after the date employment
commenced with the Company. Continuous employment during the ten years is a
condition precedent to the Company's obligation to pay the bonus. The bonus is
accrued over the ten year service period; amounts forfeited are credited to
operations. In fiscal 1998, the last participating member of the Agreement
achieved the ten year anniversary and was paid in full. At October 31, 1998
and 1997, the Company has accrued $0 and $172,000 as a short-term liability. A
net charge of $6,000 and $5,000 and a net credit of $108,000 are included in
the results of operations for the years ended October 31, 1998, 1997 and 1996,
respectively.

The Company has a management incentive award plan which provides for the
payment of cash awards or bonuses to officers and other key employees when the
Company achieves specified objectives. Awards earned under the plan were $0,
$17,000, and $0 during the years ended October 31, 1998, 1997 and 1996,
respectively.

NOTE 5--Bank Line of Credit

The Company has a revolving line of credit with a bank which provides for it
to borrow the lesser of (i) $10,000,000 or (ii) 80 percent of eligible
domestic accounts receivable plus the lesser of $1,750,000 or 25 percent of
eligible inventory, at the bank's prime rate plus one-half percent (8.5
percent at October 31, 1998). The revolving line of credit was renewed in
April 1998 for a thirty-six month period. The line is secured by all of the
Company's property and accounts receivable and is guaranteed by the Company's
principal shareholder. As of October 31, 1998 and 1997, there was $5,462,000
and $6,500,000 outstanding and $3,799,000 and $3,311,000 available under the
line of credit, respectively. The credit agreement includes covenants which,
among other things, require the Company to maintain stated minimum working
capital and net worth amounts plus specific liquidity and long-term solvency
ratios.

NOTE 6--Notes Payable

<TABLE>
<CAPTION>
October 31,
-----------------
1998 1997
------- ---------
<S> <C> <C>
Notes payable are comprised as follows:
Note payable to a bank, payable in monthly installments of
$9,375 principal plus interest at the bank's prime rate
plus 1 percent (9.5 percent at October 31, 1997) through
April 1998 (secured by certain assets)................... $ -- $ 141,000
------- ---------
-- 141,000
Less current portion...................................... -- (113,000)
------- ---------
$ -- $ 28,000
======= =========
</TABLE>

F-11
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 7--Income Taxes

No provision for income taxes has been recorded in fiscal 1998 and 1997
because of losses incurred in these years.

Deferred income taxes at October 31, 1998 and 1997 are comprised as follows:

<TABLE>
<CAPTION>
October 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 5,120,000 $ 3,991,000
Inventory........................................... 666,000 1,299,000
Allowance for doubtful accounts and returns......... 130,000 194,000
Warranty reserves................................... 59,000 102,000
Vacation and deferred compensation.................. 86,000 268,000
State income taxes.................................. 5,000 4,000
Property and equipment depreciation................. 150,000 --
Other............................................... 39,000 259,000
----------- -----------
Gross deferred tax asset.......................... 6,255,000 6,117,000
----------- -----------
Deferred tax liabilities:
Property and equipment depreciation................. -- (33,000)
----------- -----------
Gross deferred tax liability...................... -- (33,000)
----------- -----------
Valuation allowance................................... (6,255,000) (6,084,000)
----------- -----------
Net deferred income taxes............................. $ -- $ --
=========== ===========
</TABLE>

The Company has recorded a valuation allowance in full for deferred tax
assets which, more likely than not, will not be realized based on recent
operating results.

The Company has approximately $14,159,000 in federal and $5,793,000 in state
net operating loss carryforwards which expire through 2018 and 2003,
respectively. The Company experienced a change of control as a result of the
Merger, which limits the ability of the Company to utilize the carryforward
amounts. Any future change of control, as defined in Section 382 of the
Internal Revenue Code, could further limit the Company's ability to utilize
the carryforwards.

A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes
follows:

<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------
1998 1997 1996
--------- ----------- -------
<S> <C> <C> <C>
Amount computed at statutory federal rate
of 34%.................................. $(828,000) $(2,111,000) $13,000
Benefit of "S" Corporation status........ -- 209,000 (13,000)
Increase in valuation allowance.......... 171,000 783,000 --
Expenses not deductible for tax
purposes................................ 602,000 1,257,000 --
Conversion from "S" to "C" Corporation... -- (138,000) --
Other.................................... 55,000 -- --
--------- ----------- -------
$ -- $ -- $ --
========= =========== =======
</TABLE>

F-12
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 8--Stock Options and Employee Benefit Plans

The Company has a number of stock option plans, administered by its Board of
Directors or its designees, which provide for the issuance of options to
employees, officers and directors. The exercise price of a stock option is
generally equal to the fair market value of the Company's common stock on the
date the option is granted. Certain of the plans permit options granted to
qualify as "Incentive Stock Options" under the Internal Revenue Code while
other plans are specified as non-qualified. Additionally, certain of the non-
qualified plans call for 100% vesting of outstanding options upon a change of
control of the Company. Options generally vest at a rate of 20 percent per
year over a period of five years from the date of grant and expire after a
period not to exceed ten years. However, the Board may, at its discretion,
implement a different vesting schedule with respect to any new stock option
grant. A total of 4,725,500 shares of Class A Common Stock has been reserved
for issuance under the Company's stock option plans.

Transactions under the Company's stock option plans during the years ended
October 31, 1998, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
1993, 1996 Consolidated and 1997 Plans Director Plan
-------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Weighted Number Average Average
Number of Exercise Average Fair of Exercise Fair
Options Price Value Options Price Value
---------------- ------------ ------------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, October 31,
1995................... 522,300 $ 3.04 32,000 $ 6.12
Granted................ 243,500 2.40 $ 1.08 12,000 14.54 $3.27
Exercised.............. (46,300) 2.66 --
Canceled............... (143,900) 3.48 (7,200) 8.92
---------------- ------
Outstanding, October 31,
1996................... 575,600 2.69 36,800 8.32
Granted................ 1,989,500 1.56 1.07 --
Canceled............... (380,600) 2.79 --
---------------- ------
Outstanding, October 31,
1997................... 2,184,500 1.64 36,800 8.32
Granted................ 2,031,000 1.33 1.08 --
Canceled............... (1,437,272) 1.53 (4,800) 8.92
---------------- ------
Outstanding, October 31,
1998................... 2,778,228 0.97 32,000 8.23
================ ======
Exercisable, October 31,
1998................... 512,985 1.13 19,600 10.28
================ ======
</TABLE>

The following table sets forth information regarding options outstanding at
October 31, 1998 under the 1993, 1996 Consolidated and 1997 Plans:

<TABLE>
<CAPTION>
Weighted
Weighted Average
Weighted Average Exercise
Range of Number Average Remaining Price for
Number of Exercise Currently Exercise Life Currently
Options Prices Exercisable Price (Years) Exercisable
--------- ---------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
200,000 $0.69 -- $0.69 9.92 $ --
1,654,852 0.75 186,845 0.75 9.31 0.75
530,000 0.81--1.13 250,000 1.09 8.71 1.13
278,000 1.56--1.88 -- 1.75 9.02 --
115,376 2.00--2.44 76,140 2.11 7.94 2.11
--------- -------
2,778,228 512,985
========= =======
</TABLE>

F-13
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table sets forth information regarding options outstanding at
October 31, 1998 under the Director Plan:

<TABLE>
<CAPTION>
Weighted
Weighted Average
Weighted Average Exercise
Range of Number Average Remaining Price for
Number of Exercise Currently Exercise Life Currently
Options Prices Exercisable Price (Years) Exercisable
--------- ---------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
10,000 $3.25 4,000 $3.25 7.06 $3.25
10,000 5.63 6,000 5.63 6.61 5.63
6,000 8.25--9.25 3,600 8.58 6.63 8.81
6,000 20.50 6,000 20.50 2.81 20.50
------ ------
32,000 19,600
====== ======
</TABLE>

No compensation expense has been recognized for the Company's employee
option grants, which are fixed in nature, as the options have been granted at
fair market value. Pro forma information regarding net income and net earnings
per common share is determined as if the Company had accounted for its stock-
based awards to employees under fair value methods. The fair value of options
granted in fiscal 1998, 1997 and 1996 has been estimated at the date of grant
using the Black-Scholes option pricing model using the following assumptions:

<TABLE>
<CAPTION>
Year Ended
October 31,
-----------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Risk-free interest rate................................... 5.50% 6.13% 6.16%
Volatility................................................ 168.0% 80.0% 80.0%
Dividend yield............................................ 0.0% 0.0% 0.0%
Expected life (years)..................................... 6.0 5.0 5.0
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting
period. The Company's pro forma information for the years ended October 31 is
as follows:

<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported........................... $(2,434,000) $(6,209,000) $ 39,000
=========== =========== ========
Pro forma............................. $(3,120,000) $(6,385,000) $(69,000)
=========== =========== ========
Net (loss) income per share:
As reported........................... $ (0.10) $ (0.30) $ 0.00
=========== =========== ========
Pro forma............................. $ (0.13) $ (0.31) $ 0.00
=========== =========== ========
</TABLE>

401(k) Plan

During 1992, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits, but does not require, matching contributions by the Company on behalf
of all participants. No such contributions were made in fiscal 1998, 1997 or
1996.

Stock Warrant

There are warrants outstanding with a right to purchase 180,783 shares of
the Company's common stock with an exercise price of $1.94 per share. The
warrants expire in March 1999.

F-14
<PAGE>

ANDATACO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 9--Commitments and Contingencies

The Company currently conducts its operations in twenty facilities
throughout the United States. Certain of these facilities are leased from
various parties, including related parties, under noncancelable operating
leases that expire at various times through October 2003.

Future minimum rental commitments under non-cancelable operating leases,
inclusive of the Company's obligation to its president and principal
shareholder (Note 10), are reflected in the following table:

<TABLE>
<CAPTION>
Year ending October 31,
-----------------------
<S> <C>
1999......................................................... $ 786,000
2000......................................................... 727,000
2001......................................................... 604,000
2002......................................................... 494,000
2003......................................................... 187,000
----------
$2,798,000
==========
</TABLE>

Total rent expense was $1,107,000, $918,000 and $853,000 for the years ended
October 31, 1998, 1997 and 1996, respectively.

The Company may be subject to various claims and legal proceedings in the
ordinary course of conducting its business. In the opinion of management, the
liability associated with the resolution of such matters, if any, will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.

NOTE 10--Certain Related Party Transactions

The Company currently leases its corporate headquarters from an entity owned
by the president and principal shareholder of the Company. The Company paid
this entity approximately $330,000 during each of the years ended October 31,
1998, 1997 and 1996 under the terms of the lease agreement.

The shareholder loan from the Company's president and principal shareholder
to the Company is unsecured, due in June 2004, with interest payable monthly
at 9 percent per annum. This loan is subordinate to the bank line of credit.
Interest expense from the shareholder loan was $468,000, $461,000 and $301,000
during the years ended October 31, 1998, 1997 and 1996, respectively.

F-15
<PAGE>

Schedule VIII-- Valuation and Qualifying Accounts

Fiscal Years Ended October 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
Additions
Balance at Additions Resulting Balance at
Beginning Charged from End of
of Year to Income Merger Deductions* Year
---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Receivable:
1998.................. $ 417,000 $138,000 $ -- $ 223,000 $ 332,000
1997.................. 219,000 236,000 339,000 377,000 417,000
1996.................. 272,000 60,000 -- 113,000 219,000
Allowance for Inventory
Obsolescence:
1998.................. $3,261,000 $600,000 $ 238,000 $2,404,000 $1,695,000
1997.................. 200,000 600,000 2,463,000 2,000 3,261,000
1996.................. 183,000 30,000 -- 13,000 200,000
</TABLE>
- --------
* Deductions represent amounts written off against the allowance, net of
recoveries.

S-1

<PAGE>

EXHIBIT 10.27
AMENDMENT NO. 2 TO
------------------

LOAN AGREEMENT
--------------

This Amendment No. 2 to Loan Agreement ("Amendment") dated as of
---------
December 14, 1998, is made by and between anDATAco of California, Inc., a
California corporation ("Borrower"), and Wells Fargo Bank, National Association
--------
("Lender").
------

RECITALS
--------
This Amendment is made with reference to the following facts:

A. Borrower is currently indebted to Lender pursuant to the terms and
conditions of that certain Loan Agreement between Borrower and Lender dated as
of April 30, 1998 (as amended from time to time, the "Loan Agreement").
--------------
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth for such terms in the Loan Agreement.

B. Subject to the terms and conditions set forth herein, Borrower and
Lender have agreed to amend the Loan Agreement as set forth below.

AGREEMENT
---------

NOW, THEREFORE, in consideration of the mutual covenants and benefits
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, Borrower and Lender agree as follows:

1. AMENDMENTS OF CREDIT AGREEMENT
------------------------------

1.1 Section 1.4. Section 1.4(B) is amended to read in full as
-----------
follows:

"(B) the lesser of (i) the sum of twenty-five percent (25%) of
the Value of Eligible Inventory, or (ii) an amount equal to
$1,750,000; less"
----

1.2 Section 1.24. Section 1.24 is amended by replacing the number
------------ ------------
"$15,000,000" therein with the number "$10,000,000".

1.3 Section 2.4. Section 2.4 is amended to read in full as follows:
----------- -----------

"All indebtedness of Borrower to Lender pursuant to this
Agreement shall be guaranteed by Guarantor in the principal
amount of Ten Million
<PAGE>

Dollars ($10,000,000), as evidenced by and subject to the terms
of a guaranty in form and substance satisfactory to Lender (the
'Guaranty')."

1.4 Section 8.10(a). The table in Section 8.10(a) is amended by
--------------- ---------------
replacing the third through the seventh entries thereof with the
following:

Period Minimum Tangible Net Worth
------ --------------------------
January 31, 1999 through April 29, 1999 $1,200,000.00

April 30, 1999 through July 30, 1999 1,400,000.00

July 31, 1999 through October 30, 1999 1,600,000.00

October 31, 1999 through January 31, 2000 1,900,000.00

February 1, 2000 through April 29, 2000 3,600,000.00

1.5 Section 10.1(m). Section 10.1(m) is amended by replacing the
--------------- ---------------
reference to "Richard A. Hudzik" therein with "Diane Wong".

1.6 Section 11.1. The first sentence of Section 11.1(a) is amended to
------------ ---------------
read in full as follows:

"This Agreement and the other Loan Documents shall become
effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending on the
date four (4) years from the date hereof."

1.7 Section 11.3. Section 11.3 is amended by deleting the fourth line
------------ ------------
of Borrower's address in its entirety and by replacing it with
the following: "Attention: Diane Wong."

1.8 Exhibit B. Exhibit B attached to the Loan Agreement is replaced
--------- ---------
by Exhibit B attached hereto as Annex 1.
--------- -------

2. CONDITIONS PRECEDENT
--------------------

The effectiveness of this Amendment and Lender's agreements set forth
herein are subject to the satisfaction of each of the following conditions
precedent on or before December 14, 1998:
<PAGE>

2.1 Documentation. Borrower shall have delivered or caused to be
-------------
delivered to Lender, at Borrower's sole cost and expense, the following, each of
which shall be in form and substance satisfactory to Lender:

(a) The executed original of this Amendment;

(b) The Second Amended and Restated Line of Credit Note dated
December 14, 1998 by Borrower in favor of Lender in the form
of Annex 1 attached to this Amendment;
-------

(c) The First Amended and Restated Continuing Guaranty dated
December 14, 1998 by Guarantor in favor of Lender in the
form of Annex 2 attached to this Amendment;
-------

(d) With respect to each of Borrower and Guarantor, such
documentation as Lender may reasonably require to establish
such party's authority to execute, deliver and perform any
Loan Document to which it is a party, the identity,
authority and capacity of each responsible official thereof
authorized to act on its behalf, including without
limitation, certified copies of corporate resolutions,
incumbency certificates, and the like; and

(e) Such additional agreements, certificates, reports,
approvals, instruments, documents, consents and/or
reaffirmations as Lender may reasonably request.

2.2 Amendment Fee. Lender shall have received an amendment fee in
-------------
the sum of $2,500.00 from Borrower.

2.3 Representations and Warranties. All of Borrower's
------------------------------
representations and warranties contained herein shall be true and correct on and
as of the date of execution hereof and no Event of Default shall have occurred
and be continuing under the Loan Agreement or any of the other Loan Documents,
as modified hereby.

3. REPRESENTATIONS AND WARRANTIES
------------------------------

Borrower makes the following representations and warranties to Lender
as of the date hereof, which representations and warranties shall survive the
execution, termination or expiration of this Amendment and shall continue in
full force and effect until the full and final satisfaction and discharge of all
obligations of Borrower to Lender under the Loan Agreement and the other Loan
Documents:

3.1 Reaffirmation of Prior Representations and Warranties. Borrower
-----------------------------------------------------
hereby reaffirms and restates as of the date hereof, all of the representations
and warranties made by
<PAGE>

Borrower in the Loan Agreement and the other Loan Documents, except to the
------
extent such representations and warranties specifically relate to an earlier
date.

3.2 No Default. After giving effect to this Amendment, no Event of
----------
Default has occurred and remains continuing under any of the Loan Documents.

3.3 Due Execution. The execution, delivery and performance of this
-------------
Amendment and any instruments, documents or agreements executed in connection
herewith are within the powers of Borrower, have been duly authorized by all
necessary action, and do not contravene any law or the articles of incorporation
or bylaws of Borrower, result in a breach of, or constitute a default under, any
contractual restriction, indenture, trust agreement or other instrument or
agreement binding upon Borrower.

3.4 No Further Consent. The execution, delivery and performance of
------------------
this Amendment and any documents or agreements executed in connection herewith
do not require any consent or approval not previously obtained of any
stockholder, beneficiary or creditor of Borrower.

3.5 Binding Agreement. This Amendment, and each of the other
-----------------
instruments, documents and agreements executed in connection herewith constitute
the legal, valid and binding obligation of Borrower or other party thereto and
are enforceable against Borrower in accordance with their terms, except as such
------
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws or equitable principles relating to or limiting
creditors' rights generally.

4. MISCELLANEOUS
-------------

4.1 Recitals Incorporated. The Recitals set forth above are
---------------------
incorporated into and are made a part of this Amendment.

4.2 Further Assurances. Borrower, at its sole cost and expense,
------------------
agrees to execute and deliver all documents and instruments and to take all
other actions as may be specifically provided for herein and as may be required
in order to consummate the purposes of this Amendment. Borrower shall
diligently and in good faith pursue the satisfaction of any conditions or
contingencies in this Amendment.

4.3 No Third Parties. Except as specifically provided herein, no
---------------- ------
third party shall be benefited by any of the provisions of this Amendment; nor
shall any such third party have the right to rely in any manner upon any of the
terms hereof, and none of the covenants, representations, warranties or
agreements herein contained shall run in favor of any third party.

4.4 Time is of the Essence. Time is of the essence for the
----------------------
performance of all obligations and the satisfaction of all conditions of this
Amendment. The parties intend that all time periods specified in this Amendment
shall be strictly applied, without any extension (whether or not material)
unless specifically agreed to in writing by all parties hereto.
<PAGE>

4.5 Costs and Expenses. In addition to the obligations of Borrower
------------------
under the Loan Agreement, Borrower agrees to pay all costs and expenses
(including without limitation reasonable attorneys' fees) expended or incurred
by Lender in connection with the negotiation, documentation and preparation of
this Amendment and any other documents executed in connection herewith, and in
carrying out the terms of this Amendment, whether incurred before or after the
effective date hereof.

4.6 Integration; Interpretation. The Loan Documents, including this
---------------------------
Amendment and the documents, instruments and agreements executed in connection
herewith, contain or expressly incorporate by reference the entire agreement of
the parties with respect to the matters contemplated herein and supersede all
prior negotiations, discussions and correspondence. The Loan Documents shall
not be modified except by written instrument executed by all parties.

4.7 Counterparts and Execution. This Amendment may be executed in
--------------------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. However, this Amendment
shall not be binding on Lender until all parties have executed it.

4.8 Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of California.

4.9 Non-Impairment of Loan Documents. On the date all conditions
--------------------------------
precedent set forth herein are satisfied in full, this Amendment shall be a part
of the Loan Agreement. Except as expressly provided in this Amendment or in any
other document, instrument or agreement executed by Lender, all provisions of
the Loan Documents shall remain in full force and effect, and the Lender shall
continue to have all its rights and remedies under the Loan Documents.

4.10 No Waiver. Nothing herein shall be deemed a waiver by Lender of
---------
any Event of Default. No delay or omission of Lender to exercise any right,
remedy or power under any of the Loan Documents shall impair such right, remedy
or power or be construed to be a waiver of any default or an acquiescence
therein, and single or partial exercise of any such right, remedy or power shall
not preclude other or further exercise thereof or the exercise of any other
right, remedy or power. No waiver of any term, covenant, or condition shall be
deemed to waive Lender's right to enforce such term, covenant or condition at
any other time.

4.11 Successors and Assigns. The terms of this Amendment shall be
----------------------
binding upon and inure to the benefit of the successors and assigns of the
parties to this Amendment.

IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date first set forth above.
<PAGE>

ANDATACO OF CALIFORNIA, INC., WELLS FARGO BANK,
a California corporation NATIONAL ASSOCIATION

By: /s/ W. David Sykes By: /s/ Angelo Samperisi
----------------------- ----------------------
Title: President Angelo Samperisi
----------------------- Vice President

<PAGE>

EXHIBIT 10.28
May 1, 1997

Diane Wong
831 Neptune Avenue
Encinitas, CA 92024

Re: Offer of Employment

Dear Diane,

I am very pleased to confirm our offer to you of employment with ANDATACO (the
"Company"). You will report to me, in the position of Controller. If you accept
our offer, your effective date of hire will be June 16, 1997.

The terms of our offer are as follows:

1. Your starting salary will be $7,916.66 per month, payable as earned in
accordance with the Company's normal payroll policies.

2. You are eligible for the Executive Bonus Plan which can pay up to 15%
depending on Company financial performance.

3. You are eligible for an option plan which vest equally over four years, when
available. The number of options to be no less than 60,000.

4. You are eligible for Andataco 401k profit sharing when available.

5. You will be eligible for the group health insurance, paid holidays, twelve
(12) vacation days, and sick days as stipulated in the Company's personnel
policies.

6. If your employment is terminated by Andataco without mutual consent by
yourself, you will be eligible to seek other employment or be entitled to
up to six (6) months severance pay, whichever comes sooner.

7. As an employee of the Company you will have access to certain Company
confidential information and you may, during the course of your employment,
develop certain information or inventions which will be the property of the
Company. To protect the interest of the Company, you will need to sign the
Company's standard "Proprietary Rights & Confidentiality Agreement" as a
condition of your employment. We wish to impress upon you that we do not
wish you to bring with you any confidential or proprietary material of any
former employer or to violate any other obligations you may have to your
former employers.
<PAGE>

Letter to Diane Wong
Offer of Employment
May 1, 1997
Page Two of Three

8. Your employment with the Company is terminable at will, which means that you
will be free to terminate your employment with the Company at any time for
any reason or no reason, with or without notice. Similarly, the Company may
terminate your employment at any time for any reason or no reason, with or
without notice, subject to the provisions of Item 6. By accepting this offer
of employment, you will be agreeing that your employment is terminable at
will, and acknowledge that no one has the authority to promise you, either
orally or in writing, anything to the contrary.

9. The terms of this letter constitutes the entire agreement between us
regarding your employment with the Company and shall supersede any other
agreements made prior to or on the date of this letter. This offer, if not
accepted, will expire on May 8, 1997 at 5:00pm.

The Company requires the following as an important condition to employment: all
new employees must pass the pre-employment drug screening test and provide
information verifying authorization to work in the United States. You have three
(3) days of acceptance of this offer to provide the verifying documents.

Please be aware that as our Company evolves, there may be opportunities or
changes in your initial responsibilities, salary, title, or reporting
relationships.

Any disputes or questions arising hereunder, including the construction or
application of this Agreement, shall be settled by arbitration in accordance
with the rules of the American Arbitration Association then in force. If the
parties cannot agree upon an arbitrator with ten (10) days after demand of
either party, either or both parties may request the American Arbitration
Association to name a panel of five (5) arbitrators. Andataco shall strike the
names of two (2) on this list; the offeree shall then strike two (2) names and
the remaining name shall be the arbitrator. The decision of the arbitrator shall
be final and binding upon the parties, both as to law and to fact, and shall not
be appealable to any court in any jurisdiction. The expenses of the arbitrator
shall be shared equally by the parties, unless the arbitrator determines that
the expenses shall be otherwise assessed.

The Company is an Affirmative Action and Equal Opportunity Employer and does not
discriminate based on age, color, disability, national origin, race, medical
condition, marital status, religion or sex.
<PAGE>

Letter to Diane Wong
Offer of Employment
May 1, 1997
Page Three of Three

We are pleased to extend this offer to you. To let us know that you have read it
and accept all of its terms, please sign and return this letter to me. We look
forward to you joining us, Diane, and feel confident that your abilities and
qualifications will contribute to our mutual success. If you have any questions,
please feel free to contact me or Ligaya Bowman at (619) 453-9191.

Sincerely,

ANDATACO

/s/ Richard A. Hudzik
- ---------------------
Richard Hudzik
Chief Financial Officer

Acknowledged, Accepted and Agreed

/s/ Diane Wong Date signed May 5, 1997
- ---------------------------- ------------------
Diane Wong

<PAGE>

EXHIBIT 10.29

January 27, 1998

Arun Taneja
12 Wedgewood Drive
Hopkinton, MA 01748

Re: Offer of Employment

Dear Arun,

I am very pleased to confirm our offer to you of employment with ANDATACO (the
"Company"). You will report to me, in the position of Senior Vice President of
Marketing. If you accept our offer, your effective date of hire will be January
9, 1998.

The terms of our offer are as follows:

1. Your starting salary will be $13,750.00 per month, payable as earned in
accordance with the Company's normal payroll policies.

2. You are eligible for a $25,000 quarterly bonus based on the Company's
achievement of the quarterly Budget. If the Company achieves it's quarterly
budgeted pre-tax income you will be paid a bonus of $20,000. If the Company
exceeds it's quarterly budgeted pre-tax income by 10% or more you will be
paid an additional $5,000.

3. You are eligible to participate in the company's option plan. Options
granted under this plan will vest equally over five (5) years. The number of
options to be granted will be no less then 200,000. This option grant is
subject to Board approval at which time the strike price of the shares shall
be fixed.

4. You will be eligible for the group health insurance, paid holidays, vacation
days, and sick days as stipulated in the Company's personnel policies.

5. As an employee of the Company you will have access to certain Company
confidential information and you may, during the course of your employment,
develop certain information or inventions which will be the property of the
Company. To protect the interest of the Company, you will need to sign the
Company's standard "Proprietary Rights & Confidentiality Agreement" as a
condition of your employment, a copy of which is attached hereto. We wish to
impress upon you that we do not wish you to bring with you any confidential
or proprietary material of any former employer or to violate any other
obligations you may have to your former employers.
<PAGE>

Letter to Arun Taneja
Offer of Employment
January 27, 1998
Page Two of Three

6. Your employment with the Company is terminable at will, which means that you
will be free to terminate your employment with the Company at any time for
any reason or no reason, with or without notice. Similarly, the Company may
terminate your employment at any time for any reason or no reason, with or
without notice. By accepting this offer of employment, you will be agreeing
that your employment is terminable at will, and acknowledge that no one has
the authority to promise you, either orally or in writing, anything to the
contrary. Not withstanding the above, it is understood that in the event
your employment is terminated for other than legal cause as that term is
defined under California law, or for non-performance of duties, during the
first three (3) years of employment with the Company, You shall be entitled
to six (6) months severance pay equal to the monthly base compensation
provided for under paragraph 1 above. If such termination should occur
following your employment with the Company for more than three (3)
consecutive years, the severance payment shall be equal to twelve (12)
months pay. Any such severance pay shall be made monthly. Non-performance of
duties shall be determined by the Board of Directors. You will be informed
of such non-performance in writing from the Board of Directors and given up
to thirty (30) days to cure such non-performance. The Board of Directors
will determine if performance has improved to be acceptable during the
thirty (30) day cure period.

7. The terms of this letter constitutes the entire agreement between us
regarding your employment with the Company and shall supersede any other
agreements made prior to or on the date of this letter. This offer, if not
accepted, will expire on February 4, 1998 at 5:00pm.

Please be aware that as our Company evolves, there may be opportunities or
changes in your initial responsibilities, salary, title, or reporting
relationships.

Letter to Arun Taneja
Offer of Employment
January 27, 1998
Page Three of Three

We are pleased to extend this offer to you. To let us know that you have read it
and accept all of its terms, please sign and return this letter to me. We look
forward to you joining us, Arun, and feel confident that your abilities and
qualifications will contribute to our mutual success.

Sincerely, Acknowledged, Accepted and Agreed

ANDATACO /s/ Arun Taneja
-----------------------------------
Arun Taneja

/s/ W. David Sykes
- ------------------------
W. David Sykes
President Date signed January 30, 1998
----------------------

<PAGE>

EXHIBIT 21.1

ANDATACO, INC.
SUBSIDIARIES OF REGISTRANT

ANDATACO of California
IPL International Sales Corporation
IPL Investments, Inc.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-35441 and 333-35467) of Andataco, Inc. of our
report dated January 13, 1999 appearing on page F-1 of this Form 10-K.

PricewaterhouseCoopers LLP

San Diego, California
January 27, 1999

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FY98
ANDATACO, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 23,000
<SECURITIES> 0
<RECEIVABLES> 10,628,000
<ALLOWANCES> 0
<INVENTORY> 4,923,000
<CURRENT-ASSETS> 16,208,000
<PP&E> 3,415,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,682,000
<CURRENT-LIABILITIES> 12,722,060
<BONDS> 0
0
0
<COMMON> 238,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,302,000
<SALES> 77,519,000
<TOTAL-REVENUES> 77,519,000
<CGS> 54,293,000
<TOTAL-COSTS> 24,639,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,413,000)
<INTEREST-EXPENSE> 1,021,000
<INCOME-PRETAX> (2,434,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,434,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,434,000)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)

</TABLE>