ADAPTEC INC, 10-Q, 1999-11-08

ADAPTEC INC
10-Q, 1999-11-08
COMPUTER COMMUNICATIONS EQUIPMENT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-15071

------------------------

ADAPTEC, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 94-2748530
(State of Incorporation) (I.R.S. Employer Identification No.)

691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code (408) 945-8600

N/A
(Former name, former address and former fiscal year, if changed since last
report)

------------------------

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

The number of shares outstanding of the Company's common stock as of
October 1, 1999 was 102,111,307.

This document consists of 35 pages, excluding exhibits, of which this is
page 1.

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<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
Part I. Financial Information

Item 1. Financial Statements:

Condensed Consolidated Statements of Operations............. 3

Condensed Consolidated Balance Sheets....................... 4

Condensed Consolidated Statements of Cash Flows............. 5

Notes to Condensed Consolidated Financial Statements........ 6-16

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:

Results of Operations....................................... 17-23

Liquidity and Capital Resources............................. 24

Factors Affecting Future Operating Results.................. 24-30

Normalized Results of Operations............................ 30-32

Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................. 32

Part II. Other Information

Item 2. Changes in Securities and Use of Proceeds................. 33

Item 4. Submission of Matters to a Vote of Security Holders....... 33

Item 5. Other Information......................................... 33-34

Item 6. Exhibits and Reports on Form 8-K.......................... 34

Signatures.............................................................. 35
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues....................................... $194,280 $143,922 $386,658 $ 324,552
Cost of revenues................................... 66,267 63,087 133,054 142,825
-------- -------- -------- ---------
Gross profit....................................... 128,013 80,835 253,604 181,727
-------- -------- -------- ---------
Operating expenses:
Research and development......................... 23,210 40,817 47,735 84,814
Sales, marketing and administrative.............. 40,242 44,842 79,610 92,444
Amortization of goodwill and other intangibles... 2,255 1,540 2,750 3,763
Write-off of acquired in-process technology...... 3,016 -- 3,016 45,482
Restructuring and other charges.................. -- 31,924 -- 62,187
-------- -------- -------- ---------
Total operating expenses........................... 68,723 119,123 133,111 288,690
-------- -------- -------- ---------
Income (loss) from operations...................... 59,290 (38,288) 120,493 (106,963)
Interest and other income.......................... 8,193 7,912 20,144 17,045
Interest expense................................... (2,962) (3,047) (5,921) (6,114)
-------- -------- -------- ---------
Income (loss) before provision (benefit) for income
taxes............................................ 64,521 (33,423) 134,716 (96,032)
Provision (benefit) for income taxes............... 18,909 (7,499) 38,564 (11,359)
-------- -------- -------- ---------
Net income (loss).................................. $ 45,612 $(25,924) $ 96,152 $ (84,673)
======== ======== ======== =========

Net income (loss) per share:
Basic............................................ $ 0.44 $ (0.23) $ 0.93 $ (0.75)
======== ======== ======== =========
Diluted.......................................... $ 0.42 $ (0.23) $ 0.88 $ (0.75)
======== ======== ======== =========

Shares used in computing net income (loss) per
share:
Basic............................................ 102,523 111,583 103,333 112,892
======== ======== ======== =========
Diluted.......................................... 108,610 111,583 109,174 112,892
======== ======== ======== =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 142,625 $ 317,580
Marketable securities..................................... 560,401 426,332
Accounts receivable, net.................................. 83,612 67,158
Inventories............................................... 48,888 50,838
Prepaid expenses.......................................... 15,259 15,920
Other current assets...................................... 84,895 132,189
---------- ----------
Total current assets.................................... 935,680 1,010,017
Property and equipment, net................................. 112,658 126,734
Other long-term assets...................................... 53,486 36,317
---------- ----------
$1,101,824 $1,173,068
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,699 $ 39,487
Accrued liabilities....................................... 131,861 112,879
---------- ----------
Total current liabilities............................... 163,560 152,366
---------- ----------
4 3/4% Convertible Subordinated Notes....................... 230,000 230,000
---------- ----------
Contingencies (Note 16)
Stockholders' equity:
Common stock.............................................. 102 106
Additional paid-in capital................................ 15,935 194,521
Retained earnings......................................... 692,227 596,075
---------- ----------
Total stockholders' equity.............................. 708,264 790,702
---------- ----------
$1,101,824 $1,173,068
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
<PAGE>
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
---------------------
SEPT. 30, SEPT. 30,
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 138,537 $ 72,060
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of certain net assets in connection with
acquisitions, net......................................... (14,485) (34,126)
Purchases of property and equipment......................... (3,866) (28,671)
Net proceeds from the sale of property and equipment........ 1,941 --
Net proceeds from the sale of land held for sale............ 16,577 --
Purchases of marketable securities.......................... (724,266) (279,644)
Sales of marketable securities.............................. 385,563 233,307
Maturities of marketable securities......................... 204,634 98,579
Purchase of minority investment............................. (1,000) --
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES...................... (134,902) (10,555)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock.................. 61,817 9,707
Proceeds from the issuance of put warrants.................. 3,725 --
Repurchases of common stock................................. (244,132) (97,216)
Principal payments on long-term debt........................ -- (5,550)
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES...................... (178,590) (93,059)
--------- ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS................... (174,955) (31,554)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 317,580 227,183
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 142,625 $ 195,629
========= =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

5
<PAGE>
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements have been prepared on a consistent
basis with the March 31, 1999 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments, except
as described in Notes 7 through 11, necessary to provide a fair statement of the
results for the interim periods presented. These interim financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto in the Company's Annual Report on Form 10-K for the year ended
March 31, 1999. For presentation purposes, the Company has indicated its second
quarter as having ended on September 30, whereas in fact, the Company's second
quarter of fiscal 2000 and 1999 ended on October 1, 1999 and October 2, 1998,
respectively. The results of operations for the three and six month periods
ended September 30, 1999, are not necessarily indicative of the results to be
expected for the entire year. Additionally, certain items previously reported in
specific financial statement captions have been reclassified to conform with the
current presentation.

On June 8, 1999, the Company received a comment letter from the Securities
and Exchange Commission ("SEC") regarding certain of the Company's previous
filings under the Securities Exchange Act of 1934, primarily relating to
disclosures in the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes to Consolidated Financial
Statements. Accordingly, the Company has responded to the SEC's inquiries and
provided additional disclosures in its fiscal 1999 Annual Report on Form 10-K
and all subsequent 1934 Act filings, including this Report on Form 10-Q for the
second quarter of fiscal 2000. However, there can be no assurance that the SEC
will not take exception with the Company's disclosures and require that the
Company make additional disclosures in its periodic reports or further amend its
previous filings.

2. COMPREHENSIVE INCOME

As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
requires components of comprehensive income, including unrealized gains or
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, to be reported in the financial statements. These
amounts are not material to the Company's financial statements for the periods
presented.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives as assets or liabilities and measurement
of those instruments at fair value. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the required date of adoption of SFAS 133 for one year, to fiscal years
beginning after June 15, 2000. The Company will adopt this statement in its
first quarter of fiscal 2002, but does not expect the adoption of SFAS 133 to
have a material impact on the Company's financial position, results of
operations or cash flows.

6
<PAGE>
4. BALANCE SHEET DETAIL

Inventories are stated at the lower of cost (first-in, first-out) or market.
The components of inventory are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $13,443 $16,354
Work-in-process....................................... 10,468 8,202
Finished goods........................................ 24,977 26,282
------- -------
$48,888 $50,838
======= =======
</TABLE>

The components of accrued liabilities are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related taxes............... $ 32,876 $ 22,137
Sales and marketing related.......................... 7,598 7,708
Tax related.......................................... 68,537 65,754
Other................................................ 22,850 17,280
-------- --------
$131,861 $112,879
======== ========
</TABLE>

5. LINE OF CREDIT

In March 1999, the Company obtained an unsecured $60.0 million revolving
line of credit which expires on March 25, 2000. No borrowings were outstanding
under this line of credit as of September 30, 1999. The interest rate and
commitment fee is based on a pricing matrix, which correlates with the Company's
credit rating. Under the arrangement, the Company is required to maintain
certain financial ratios among other restrictive covenants. The Company was in
compliance with all such covenants as of September 30, 1999.

6. LONG-TERM DEBT

In June 1992, the Company entered into a $17.0 million term loan agreement
bearing interest at 7.65%, with principal and interest payable in quarterly
installments of $850,000. In the first quarter of fiscal 1999, the Company paid
the remaining outstanding principal and interest due on the loan.

7
<PAGE>
7. STATEMENTS OF OPERATIONS

Restructuring and other charges included:

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Acquisition related costs (Note 10)................. $ -- $21,463
Restructuring charges (Note 9)...................... 24,530 33,330
Asset impairments and other charges (Note 10)....... 7,394 7,394
------- -------
Total restructuring and other charges............... $31,924 $62,187
======= =======
</TABLE>

There were no restructuring and other charges incurred during the second
quarter and first half of fiscal 2000.

Interest and other income included:

8. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS

CEQUADRAT: In July 1999, the Company purchased CeQuadrat GmbH
("CeQuadrat"), a developer of CD-R software products, for $24.0 million in cash.
As part of the purchase agreement, the Company held back $4.8 million of the
purchase price for unknown liabilities that may have existed as of the
acquisition date. The amount held back will be paid for such unknown liabilities
or to the seller within 12 months from the acquisition date and was capitalized
as part of the purchase price. Additionally, the Company incurred $0.3 million
in professional fees, including legal, valuation and accounting fees related to
the acquisition, which were capitalized as part of the purchase price of the
transaction.

The Company accounted for the acquisition of CeQuadrat using the purchase
method of accounting and, excluding the write-off of acquired in-process
technology, the impact of the acquisition was not material to the Company's
consolidated financial results of operations from the acquisition date. The
allocation of the Company's purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed is summarized below. The
allocation was based on an independent appraisal and estimate of fair value.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net tangible assets......................................... $ 123
In-process technology....................................... 3,016
Goodwill and other intangible assets:
Goodwill.................................................. 10,341
Purchased technology...................................... 3,140
Covenant not to compete................................... 4,360
Acquired employees........................................ 1,173
OEM relationships......................................... 1,186
Trade name................................................ 953
-------
$21,153
-------
Net assets acquired......................................... $24,292
=======
</TABLE>

8
<PAGE>
The net tangible assets acquired were comprised primarily of cash and
receivables offset by accrued liabilities. The acquired in-process technology
was written-off in the second quarter of fiscal 2000. The goodwill will be
amortized over a period of 3 years. The other intangible assets, having a
similar estimated life as the goodwill, will be amortized over the same period.

The $3.0 million allocation of the purchase price to the acquired in-process
technology has been determined by identifying research projects in areas for
which technological feasibility had not been established and no alternative
future uses existed. The Company acquired technology consisting of next
generation consumer-oriented CD-R software, next generation
professional-oriented CD-R software and CD backup software; the amount of
in-process technology allocated to each of the projects was $0.6 million,
$2.2 million and $0.2 million, respectively. The value for each of the projects
was determined by estimating the expected cash flows from the projects once
commercially viable, discounting the net cash flows back to their present value,
and then applying a percentage of completion to the calculated value as defined
below.

NET CASH FLOWS. The net cash flows from the identified projects were based
on estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, royalty costs and income taxes from
those projects. These estimates were based on the assumptions mentioned below.
The research and development costs excluded costs to bring acquired in-process
projects to technological feasibility.

The estimated revenues were based on management projections of the acquired
in-process projects for the next generation consumer-oriented CD-R software,
next generation professional-oriented CD-R software and the CD backup software.
The business projections were compared with and found to be in line with
industry analysts' forecasts of growth in substantially all of the relevant
markets. Estimated total revenues from all of the acquired in-process technology
products are expected to peak in fiscal 2002 and decline in fiscal 2003 as other
new products are expected to become available. These projections were based on
estimates of market size and growth, expected trends in technology, and the
nature and expected timing of new product introductions by the Company and its
competitors.

Projected gross margins were based on CeQuadrat's historical margins which
were in line with the Company's Software segment that acquired CeQuadrat. The
estimated selling, general and administrative costs, as well as research and
development costs, were consistent with CeQuadrat's historical cost structure.

ROYALTY RATE. The Company applied a royalty charge of 30% of operating
income for each in-process project to attribute value for dependency on
predecessor core technologies.

DISCOUNT RATE. Discounting the net cash flows back to their present value
was based on the cost of capital for well managed venture capital funds which
typically have similar risk and returns on investments. The cost of capital used
in discounting the net cash flows from acquired in-process technology was 30%
for each of the acquired in-process technology projects. Higher required rates
of return, which would correspond to higher risk, are partially mitigated by the
Company's expertise in the CD-R market.

PERCENTAGE OF COMPLETION. The percentage of completion for the projects was
determined using costs incurred by CeQuadrat prior to the acquisition date
compared to the remaining research and development to be completed to bring the
projects to technological feasibility. The Company estimates, as of the
acquisition date, the next generation consumer-oriented CD-R software, next
generation professional-oriented CD-R software and the CD backup software
projects were 82%, 69% and 82% complete, respectively, and the estimated costs
to complete the projects were approximately $0.1 million in aggregate.
Substantially all of the acquired in-process technology projects were expected
to be completed during the third quarter of fiscal 2000.

9
<PAGE>
RIDGE: In May 1998, the Company purchased Ridge Technologies, Inc.
("Ridge"), a development stage company, for 1.2 million shares of the Company's
common stock valued at $21.2 million, and assumed stock options valued at $13.1
million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge
with a carrying value of $1.5 million and Grant Saviers, former Chairman and CEO
of the Company, was a director of Ridge. The Company incurred $0.8 million in
professional fees, including legal, valuation and accounting fees related to the
acquisition, which were capitalized as part of the purchase price of the
transaction. In-process technology was valued at $39.4 million and was
written-off in the first quarter of fiscal 1999. In August 1998, the Company
divested the storage subsystems business, abandoned the in-process technology
projects (these projects remained incomplete from the date of acquisition
through abandonment) and wrote-off the remaining unamortized goodwill of $0.6
million and other intangible asset of $1.2 million associated with Ridge. The
aggregate impact of this acquisition was not material to the Company's
consolidated financial results of operations from the acquisition date. The
tangible liabilities assumed exceeded the tangible assets acquired. The purchase
price allocation is included in the Company's fiscal 1999 Annual Report on Form
10-K.

ADI: In April 1998, the Company purchased read channel and preamplifier
ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for
$34.4 million in cash. The ASIC technologies purchased from ADI were to be
incorporated into the mainstream removable Peripheral Technology Solutions
("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of
the Company, is a director of ADI. The Company incurred $0.4 million in
professional fees, including legal, valuation and accounting fees related to the
acquisition, which were capitalized as part of the purchase price of the
transaction. The acquired in-process technology was valued at $6.1 million and
was written-off in the first quarter of fiscal 1999. In January 1999, the
Company sold the mainstream removable PTS business line, including the
in-process technologies purchased from ADI (these projects remained incomplete
from the date of acquisition through their disposition), and relieved the
remaining unamortized goodwill of $18.3 million and other intangible asset of
$1.7 million associated with the ASIC technologies purchased from ADI. The
aggregate impact of this acquisition was not material to the Company's
consolidated financial results of operations from the acquisition date. The
purchase price allocation is included in the Company's fiscal 1999 Annual Report
on Form 10-K.

DPT: On November 1, 1999, the Company announced that it signed a letter of
intent to acquire Distributed Processing Technology ("DPT") for $235.0 million,
including cash and assumed stock options. DPT is a leading supplier of
high-performance storage solutions, including adapters, RAID controllers,
storage subsystems, and management software. However, the acquisition is subject
to the Company and DPT reaching a definitive agreement, to regulatory approval,
and to certain other contingencies. If the acquisition is consummated, the
Company will account for the acquisition using the purchase method and will
evaluate the allocation of the purchase price to the assets acquired, which may
include in-process technology that will be written-off, and goodwill that will
be amortized over the benefit period.

9. RESTRUCTURING

In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $8.8 million, comprised primarily of severance and benefits. In the
second quarter of fiscal 1999, the Company recorded a restructuring charge of
$24.5 million, net of an adjustment to the restructuring charge taken in the
first quarter of fiscal 1999 of $1.4 million. The second quarter restructuring
charge was comprised primarily of severance and benefits and the write-off of
fixed assets, inventory and other current and long-term assets. In the fourth
quarter of fiscal 1999, the Company recorded a restructuring charge of $6.6
million, net of an adjustment to the restructuring charges taken in the first
and second quarters of fiscal 1999 of $1.2 million. The fourth quarter
restructuring charge was comprised primarily of severance and benefits.

10
<PAGE>
for severance and benefits and $1.0 million for other charges, primarily lease
payments for vacated facilities. As of September 30, 1999, substantially all of
the reserve balance has been paid out.

10. ASSET IMPAIRMENT AND OTHER CHARGES

The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million in the second quarter of fiscal 1999, including $1.4 million in
manufacturing equipment deemed unnecessary due to non-temporary declines in
production volume and the write-off of $2.6 million of non-trade related
receivables previously classified in "Other current assets" in the Condensed
Consolidated Balance Sheets.

Additionally, the Company recorded executive termination costs of $3.4
million in the second quarter of fiscal 1999, relating to three executives. The
costs consisted of $1.9 million in severance and benefits payments and $1.5
million in non-cash stock compensation charges resulting from amended option
agreements.

In February 1998, the Company entered into an agreement to purchase all of
the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai
Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed
to terminate the agreement. The Company paid a $7.0 million termination fee and
$6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred
$7.8 million in other acquisition related charges, including legal, consulting
and other costs. The Company expensed the entire $21.5 million in fees
associated with this terminated acquisition in the first quarter of fiscal 1999.

11. ASSETS HELD FOR SALE

In March 1999, the Company sold land located in California for net proceeds
of $5.1 million resulting in a gain of $1.6 million recorded in the fourth
quarter of fiscal 1999. Net proceeds from the sale were received in April 1999.

As of March 31, 1999, the Company had $41.1 million in assets held for sale
which were included in "Other current assets" in the Condensed Consolidated
Balance Sheet, representing several pieces of land in California and land and a
building in Colorado. In April 1999, the Company sold some land held for sale in
California for net proceeds of $11.5 million resulting in a gain of $3.5 million
recorded in the first quarter of fiscal 2000. The gain is included in "Interest
and other income" in the Condensed Consolidated Statement of Operations for the
six month period ended September 30, 1999. Net proceeds from the sale were
received in April 1999. The remaining assets held for sale are valued at cost
and included in "Other current assets" in the Condensed Consolidated Balance
Sheet. The Company expects to sell these assets within the next six months.

11
<PAGE>
12. NET INCOME (LOSS) PER SHARE

Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below.

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders........... $45,612 102,523 $0.44 $(25,924) 111,583 $(0.23)
===== ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents:
Stock options................. -- 6,075 -- --
Put warrants.................. -- 12 -- --
------- ------- -------- -------
-- 6,087 -- --
DILUTED NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders and
assumed conversions........... $45,612 108,610 $0.42 $(25,924) 111,583 $(0.23)
======= ======= ===== ======== ======= ======
</TABLE>

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders........... $96,152 103,333 $0.93 $(84,673) 112,892 $(0.75)
===== ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents:
Stock options................. -- 5,829 -- --
Put warrants.................. -- 12 -- --
------- ------- -------- -------
-- 5,841 -- --
DILUTED NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders and
assumed conversions........... $96,152 109,174 $0.88 $(84,673) 112,892 $(0.75)
======= ======= ===== ======== ======= ======
</TABLE>

Additional options to purchase 584,000 shares of common stock were
outstanding at September 30, 1999, but were not included in the computation of
diluted weighted average shares outstanding because the options' exercise price
was greater than the average market price of the common shares during the second
quarter of fiscal 2000. The conversion of 4,452,000 shares of common stock
related to the 4 3/4% Convertible Subordinated Notes were also not included in
the computation of diluted net income per share for the second quarter and first
half of fiscal 2000 because they were anti-dilutive.

Options to purchase 22,100,000 shares of common stock were outstanding at
September 30, 1998, however, the stock options and the conversion of 4,452,000
shares of common stock related to the 4 3/4% Convertible Subordinated Notes were
not included in the computations of net loss per share for the second quarter
and first half of fiscal 1999 because they were anti-dilutive.

12
<PAGE>
13. STOCK REPURCHASES

In January 1998, the Company's Board of Directors approved a stock buy back
program under which the Company could repurchase up to 10.0 million shares of
its common stock in the open market. During the second quarter of fiscal 1999,
the Company repurchased and retired 8,261,000 shares of its common stock for
$97.2 million under this program. The transactions were recorded as reductions
to common stock and additional paid-in-capital.

In October 1998, the Company's Board of Directors approved a stock buy back
program under which the Company could repurchase up to $200.0 million of its
common stock in the open market. In May 1999, the Company's Board of Directors
approved another stock buy back program under which the Company could repurchase
up to an additional $200.0 million of its common stock in the open market.
During the second quarter and first half of fiscal 2000, the Company repurchased
and retired 3,054,000 and 7,902,000 shares of its common stock for
$112.9 million and $244.1 million, respectively, under the October 1998 and
May 1999 stock buy back programs. The transactions were recorded as reductions
to common stock and additional paid-in-capital.

Aggregate purchases under the October 1998 and May 1999 programs were $343.4
million as of September 30, 1999, leaving $56.6 million remaining authorized for
stock buy back under the May 1999 program.

In the second quarter of fiscal 2000, the Company sold put warrants that
could potentially obligate the Company to buy back up to 1.0 million shares of
its common stock at prices ranging from $37 to $39. In exchange, the Company
received up front premiums of $3.7 million which were used for general business
purposes. The settlement terms include physical settlement, cash settlement or
net-share settlement at the option of the Company. The warrants expire during
the third quarter of fiscal 2000. The impact on diluted earnings per share for
the second quarter and first half of fiscal 2000 was minimal (Note 12).

14. STOCK PLANS

During the second quarter of fiscal 2000, the Company's Board of Directors
and its stockholders approved the Company's 1999 Stock Plan and reserved for
issuance thereunder (a) 1,000,000 shares of common stock plus (b) any shares of
common stock reserved but ungranted under the Company's 1990 Stock Plan as of
the date of stockholder approval plus (c) any shares returned to the 1990 Stock
Plan after the date of stockholder approval of the 1999 Stock Plan as a result
of termination of options under the 1990 Stock plan. Upon stockholder approval
of the 1999 Stock Plan, the 1990 Stock Plan was terminated with respect to new
option grants.

The 1999 Stock Plan provides for granting of incentive and nonstatutory
stock options to employees, consultants and directors of the Company. Options
granted under this plan are for periods not to exceed ten years, and are granted
at prices not less than 100% and 85% for incentive and nonstatutory stock
options, respectively, of the fair market value on the date of grant. Generally,
stock options become fully vested and exercisable over a four-year period. As of
September 30, 1999, no shares were issued under the 1999 Stock Plan.

15. INCOME TAXES

Income tax provisions (benefits) for interim periods are based on estimated
annual income tax rates. The difference between the Company's effective income
tax rate and the U.S. federal statutory income tax rate is primarily due to
income earned in Singapore where the Company is subject to a significantly lower
effective income tax rate. In the second quarter of fiscal 1999, the Company's
effective income tax rate, excluding the write-off of acquired in-process
technology, was 25%. In the third quarter of fiscal 1999, the Company's
effective income tax rate changed from 25% to 28% due to a geographic shift of
earnings resulting from restructuring activities and business divestitures.

13
<PAGE>
The Company recorded an income tax provision of $18.9 million representing
29.3% of income before provision for income taxes for the second quarter of
fiscal 2000 compared with a $7.5 million income tax benefit representing 22.4%
of the loss before benefit for income taxes for the second quarter of fiscal
1999. The effective income tax rate used to calculate the income tax provision
for the second quarter of fiscal 2000 was higher than 28% primarily as a result
of the acquired in-process technology charge associated with the acquisition of
CeQuadrat, for which no tax benefit was provided. The effective income tax rate
used to calculate the income tax benefit for the second quarter of fiscal 1999
was lower than 25% primarily as a result of the write-off of goodwill and other
intangible asset, for which no tax benefit was provided.

16. CONTINGENCIES

A class action lawsuit is pending in the United States District Court for
the Northern District of California against the Company and certain of its
officers and directors. The class action lawsuit alleges that the Company made
false and misleading statements at various times during the period between
April 1997 and January 1998 in violation of federal securities laws. The
complaint does not set forth purported damages. The Company believes the class
action lawsuit is without merit and intends to defend itself vigorously.

In addition, a derivative action was filed in the Superior Court of the
State of California against the Company and certain of its officers and
directors, alleging that the individual defendants improperly profited from
transactions in the Company's stock during the same time period referenced by
the class action lawsuit. In July 1999, the Company entered into an agreement to
settle the derivative action. Under the terms of the agreement, the Company will
reimburse the fees and costs incurred by the plaintiff's attorney in an amount
to be approved by the court up to a maximum amount of $600,000. The settlement
is subject to approval by the court, and does not affect the class action
lawsuit still pending. The potential liability is included in "Accrued
liabilities" in the Condensed Consolidated Balance Sheet at September 30, 1999.

An outside party has contacted the Company regarding alleged infringement of
certain patents. The Company is discussing resolutions of these claims including
a possible cross-license agreement. However, there can be no assurance the
Company will be able to obtain acceptable terms or conditions for such a
license, in which case, these claims may result in litigation. While the outcome
is not possible to determine, the Company believes the resolution of these
claims will not have a material adverse impact on the Company's financial
position.

The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such
litigations and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a materially adverse impact
on the Company's consolidated financial position or results of operations.

The IRS is currently auditing the Company's federal income tax returns for
its fiscal years 1994 through 1996. No proposed adjustments have been received
for these years. The Company believes sufficient taxes have been provided in
prior years and that the ultimate outcome of the IRS audits will not have a
material adverse impact on the Company's financial position or results of
operations.

17. SEGMENT REPORTING

The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" in its fiscal 1999 Annual Report on Form 10-K. The Company
evaluated its product segments in accordance with SFAS 131 and concluded that
its reportable segments are Host I/O, RAID (Redundant Array of Independent
Disks), Software and PTS.

14
<PAGE>
scanners, CD-ROMs, CD-Rs, CD-RWs, DVD-ROMs, and Zip and Jaz drives among many
other devices. The Company's HBAs are based on Small Computer System Interface
("SCSI") technology and are utilized in servers, high-end workstations, desktops
and laptops where high performance I/O is a vital component of overall system
performance.

The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.

The Software segment designs, develops and markets primarily application
software for optical peripherals, including CD-R, CD-RW and DVD recordable
devices. In addition, the segment offers software utility products that simplify
connecting a SCSI host adapter and peripherals to a microcomputer system. The
Company's application software products allow users to store data, including
audio, video and still photos, to virtually all marketed CD-R and CD-RW drives
using industry standard formats. The application software, along with the
peripherals, provide users with a cost effective alternative to other forms of
removable media for general purpose computing needs, including the ability to
transfer downloaded music from the Internet to CDs for private use or creating
compilations of music from purchased music CD labels. The Company's CD-R
software offerings are available as stand-alone products, and also ship built-in
or "bundled" with most CD-R drives in the desktop market.

In July 1999, the Company acquired CeQuadrat, a German-based software
company, also providing CD-R and CD-RW products. With the acquisition, came
enhanced product development and engineering expertise, as well as a greater
European customer base. Results of CeQuadrat have been combined with those of
the Company, specifically the Software segment, for the second quarter of fiscal
2000.

The business lines that comprised the PTS segment were sold in
November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST
Microelectronics, Inc. ("ST"), respectively. This segment designed, developed,
manufactured and marketed proprietary integrated circuits ("ICs") for use in
mass storage devices and other peripherals.

15
<PAGE>
Summarized pre-tax financial information concerning the Company's reportable
segments is shown in the following table. The Company does not identify or
allocate assets or depreciation by operating segments nor are the segments
evaluated under these criteria. The "Other" column includes corporate related
items and income and expenses not allocated to reportable segments, primarily
unusual transactions and business lines divested in fiscal 1999.

RAID:
Net revenues..................................... 28,644 3,465 52,120 9,850
Segment profit (loss)............................ 3,102 (5,331) 4,209 (9,783)

SOFTWARE:
Net revenues..................................... 14,074 10,485 24,627 21,979
Segment profit (loss)............................ (989) 1,303 (1,120) 3,957

PTS:
Net revenues..................................... -- 25,603 -- 60,525
Segment loss..................................... -- (10,904) -- (20,716)

OTHER:
Net revenues..................................... 2,250 567 2,250 1,317
Segment loss..................................... (2,300) (41,490) (1,052) (127,535)
</TABLE>

The following table presents the details of "Other" segment loss:

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Losses from divested business lines.................. $ -- $(15,375) $ -- $ (31,659)
Unallocated corporate profit (loss).................. (4,515) 944 (12,259) 862
Interest and other income............................ 8,193 7,912 20,144 17,045
Interest expense..................................... (2,962) (3,047) (5,921) (6,114)
Write-off of acquired in-process technology.......... (3,016) -- (3,016) (45,482)
Restructuring and other charges...................... -- (31,924) -- (62,187)
------- -------- -------- ---------
Total................................................ $(2,300) $(41,490) $ (1,052) $(127,535)
======= ======== ======== =========
</TABLE>

16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth the items in the Condensed Consolidated
Statements of Operations as a percentage of net revenues:

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 34.1 43.8 34.4 44.0
----- ----- ----- -----
Gross margin.............................................. 65.9 56.2 65.6 56.0
----- ----- ----- -----
Operating expenses:
Research and development................................ 11.9 28.4 12.3 26.1
Sales, marketing and administrative..................... 20.7 31.1 20.6 28.4
Amortization of goodwill and other intangibles.......... 1.2 1.1 0.7 1.2
Write-off of acquired in-process technology............. 1.6 -- 0.8 14.0
Restructuring and other charges......................... -- 22.2 -- 19.2
----- ----- ----- -----
Total operating expenses.................................. 35.4 82.8 34.4 88.9
----- ----- ----- -----
Income (loss) from operations............................. 30.5 (26.6) 31.2 (32.9)
Interest and other income................................. 4.2 5.5 5.2 5.2
Interest expense.......................................... (1.5) (2.1) (1.5) (1.9)
----- ----- ----- -----
Income (loss) before provision (benefit) for income
taxes................................................... 33.2 (23.2) 34.9 (29.6)
Provision (benefit) for income taxes...................... 9.7 (5.2) 10.0 (3.5)
----- ----- ----- -----
Net income (loss)......................................... 23.5% (18.0)% 24.9% (26.1)%
===== ===== ===== =====
</TABLE>

SEC COMMENT LETTER. On June 8, 1999, the Company received a comment letter
from the Securities and Exchange Commission ("SEC") regarding certain of the
Company's previous filings under the Securities Exchange Act of 1934, primarily
relating to disclosures in the Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes to Consolidated
Financial Statements. Accordingly, the Company has responded to the SEC's
inquiries and provided additional disclosures in its fiscal 1999 Annual Report
on Form 10-K and all subsequent 1934 Act filings, including this Report on Form
10-Q for the second quarter of fiscal 2000. However, there can be no assurance
that the SEC will not take exception with the Company's disclosures and require
that the Company make additional disclosures in its periodic reports or further
amend its previous filings.

BUSINESS SEGMENTS. The Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company
evaluated its product segments in accordance with SFAS 131 and concluded that
its reportable segments are Host I/O, RAID (Redundant Array of Independent
Disks), Software and PTS.

The Host I/O segment designs, develops, manufactures and markets host bus
adapter ("HBA") boards and chips that allow computers to transfer information to
and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's
HBAs are based on Small Computer System Interface ("SCSI") technology and are
utilized in servers, high-end workstations, desktops and laptops where high
performance I/O is a vital component of overall system performance.

17
<PAGE>
The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.

In July 1999, the Company acquired CeQuadrat GmbH ("CeQuadrat"), a
German-based software company, also providing CD-R and CD-RW products. With the
acquisition, came enhanced product development and engineering expertise, as
well as a greater European customer base. Results of CeQuadrat have been
combined with those of the Company, specifically the Software segment, for the
second quarter of fiscal 2000.

NET REVENUES. Net revenues were $194.3 million and $386.7 million for the
second quarter and first half of fiscal 2000, respectively, an increase of 35.0%
and 19.1% from net revenues of $143.9 million and $324.6 million for the second
quarter and first half of fiscal 1999, respectively.

Net revenues for the second quarter of fiscal 2000 were comprised of $149.3
million from the Host I/O segment, an increase of 43.8% from the second quarter
of fiscal 1999, $28.6 million from the RAID segment, an increase of 726.7% from
the second quarter of fiscal 1999, $14.1 million from the Software segment, an
increase of 34.2% from the second quarter of fiscal 1999, and $2.3 million
representing unallocated corporate net revenues. Net revenues for the second
quarter of fiscal 1999 also included $25.6 million from the PTS segment.
Excluding the PTS segment, total net revenues increased $76.0 million or 64.2%
in the second quarter of fiscal 2000, compared to the second quarter of fiscal
1999.

Net revenues for the first half of fiscal 2000 were comprised of $307.7
million from the Host I/O segment, an increase of 33.3% from the first half of
fiscal 1999, $52.1 million from the RAID segment, an increase of 429.1% from the
first half of fiscal 1999, $24.6 million from the Software segment, an increase
of 12.0% from the first half of fiscal 1999, and $2.3 million representing
unallocated corporate net revenues. Net revenues for the first half of fiscal
1999 also included $60.5 million from the PTS segment. Excluding the PTS
segment, total net revenues increased $122.6 million or 46.4% in the first half
of fiscal 2000, compared to the first half of fiscal 1999.

Net revenues from the Host I/O segment increased year over year as a result
of increased demand for high performance I/O. The demand for high performance
I/O increased due to growth in on-line applications like electronic commerce,
on-line publishing, and the proliferation of the Internet and corporate
intranets. Additionally, in the second quarter of fiscal 1999, the Company
focused on reducing inventory in the distribution channel as a result of
Ultra-DMA penetration in the desktop market.

Net revenues from the RAID segment increased year over year as a result of
sales of the Company's high-end RAID product which was first introduced in the
third quarter of fiscal 1999. Currently, the

18
<PAGE>
Company ships to one significant RAID original equipment manufacturer ("OEM")
customer. However, the Company is continuing to market its RAID products to all
major server manufacturers and continues to work closely with the OEMs on the
design of current and next generation products to meet customer requirements.
The Company also experienced significant growth year over year in its low-end
RAID products through channel distribution.

Net revenues from the Software segment increased year over year primarily
due to worldwide growth in the CD-R and CD-RW drive markets and additional
design wins with PC system OEMs in fiscal 2000. Additionally, net revenues
increased due to shipments of the Company's Easy CD Creator 4.0 Deluxe product,
which was first introduced at the end of the first quarter of fiscal 2000, and
the acquisition of CeQuadrat, which contributed additional net revenues. The
increase in net revenues for the first half of fiscal 2000, compared to the
first half of fiscal 1999 was partially offset by increased unit volume at lower
per unit royalties on the Company's other software products, as the Company
strives to maintain its market share in the rapidly expanding CD-R peripheral
market.

GROSS MARGIN. Gross margin in the second quarter and first half of fiscal
2000 was 65.9% and 65.6%, respectively, compared to 56.2% and 56.0% in the
second quarter and first half of fiscal 1999. The higher gross margin
experienced in the first half of fiscal 2000 primarily resulted from the
exclusion of net revenues and cost of sales from PTS products included in the
fiscal 1999 gross margin. The PTS products generally obtained a lower gross
margin than the Host I/O segment, which represented the largest percentage of
net revenues. Excluding the PTS segment, gross margin in the second quarter and
first half of fiscal 1999 was 60.8% and 61.6%, respectively. Excluding the PTS
segment, the increase in gross margin was due to manufacturing efficiencies
obtained through greater production volumes, as well as improved pricing
obtained from the Company's global suppliers in the first half of fiscal 2000.

RESEARCH AND DEVELOPMENT. Spending for research and development was $23.2
million and $47.7 million for the second quarter and first half of fiscal 2000,
respectively, representing a decrease of 43.1% and 43.7% from $40.8 million and
$84.8 million for the second quarter and first half of fiscal 1999,
respectively. The decrease in spending for research and development was
primarily due to $10.5 million and $21.3 million of spending related to the PTS
segment included in the second quarter and first half of fiscal 1999,
respectively. The decrease in spending for research and development was also
attributable to Company-wide cost reduction programs initiated in fiscal 1999
which included reductions in workforce and the curtailment of costs related to
the divesting of certain unprofitable business activities. The Company initiated
cost reduction programs in order to bring operating expenses in line with net
revenues and the business divestitures were completed to further management's
objective to refocus the business. Research and development expenses, as a
percentage of net revenues, decreased to 11.9% and 12.3% in the second quarter
and first half of fiscal 2000, respectively, from 28.4% and 26.1% in the second
quarter and first half of fiscal 1999, respectively.

SALES, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling,
marketing and administrative activities was $40.2 million and $79.6 million for
the second quarter and first half of fiscal 2000, respectively, representing a
decrease of 10.3% and 13.9% from $44.8 million and $92.4 million for the second
quarter and first half of fiscal 1999, respectively. The decrease in spending
for selling, marketing and administrative activities was primarily due to $4.0
million and $7.7 million of spending from the PTS segment included in the second
quarter and first half of fiscal 1999, respectively. The decrease in spending
for selling, marketing and administrative activities was also attributable to
Company-wide cost reductions initiated in fiscal 1999, specifically reductions
in workforce. As discussed above, the Company initiated cost reduction programs
in order to bring operating expenses in line with net revenues. Sales, marketing
and administrative expenses, as a percentage of net revenues, decreased to 20.7%
and 20.6% in the second quarter and first half of fiscal 2000, respectively,
from 31.1% and 28.4% in the second quarter and first half of fiscal 1999,
respectively.

19
<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $2.3 million and $2.8 million for the second quarter
and first half of fiscal 2000, respectively, compared to $1.5 million and $3.8
million for the second quarter and first half of fiscal 1999, respectively.
Amortization of goodwill and other intangibles for fiscal 2000 included goodwill
associated with the acquisition of Data Kinesis, Inc. ("DKI") and, as it relates
to the second quarter, goodwill and other intangibles assets associated with the
acquisition of CeQuadrat. Amortization of goodwill and other intangibles for
fiscal 1999 included goodwill associated with the acquisition of DKI, Western
Digital's Connectivity Solutions Group and Future Domain Corporation, and
goodwill and other intangible assets associated with the purchase of Ridge
Technologies, Inc. ("Ridge") and the acquisition of read channel and
preamplifier ASIC technologies ("ASIC technologies") purchased from Analog
Devices, Inc. ("ADI").

WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. In July 1999, the Company
purchased CeQuadrat, a developer of CD-R software products, for $24.0 million in
cash. As part of the purchase agreement, the Company held back $4.8 million of
the purchase price for unknown liabilities that may have existed as of the
acquisition date. The amount held back will be paid for such unknown liabilities
or to the seller within 12 months from the acquisition date and was capitalized
as part of the purchase price of the transaction. Additionally, the Company
incurred $0.3 million in professional fees, including legal, valuation and
accounting fees related to the acquisition, which were capitalized as part of
the purchase price.

The net tangible assets acquired were comprised primarily of cash and
receivables offset by accrued liabilities. The acquired in-process technology
was written-off in the second quarter of fiscal 2000. The goodwill will be
amortized over a period of 3 years. The other intangible assets, having a
similar estimated life as the goodwill, will be amortized over the same period.

20
<PAGE>
In May 1998, the Company purchased Ridge, a development stage company, for
1.2 million shares of the Company's common stock valued at $21.2 million, and
assumed stock options valued at $13.1 million. Prior to the acquisition, the
Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million
and Grant Saviers, former Chairman and CEO of the Company, was a director of
Ridge. The Company incurred $0.8 million in professional fees, including legal,
valuation and accounting fees related to the acquisition, which were capitalized
as part of the purchase price of the transaction. In-process technology was
valued at $39.4 million and was written-off in the first quarter of fiscal 1999.
In August 1998, the Company divested the storage subsystems business, abandoned
the in-process technology projects (these projects remained incomplete from the
date of acquisition through abandonment) and wrote-off the remaining unamortized
goodwill of $0.6 million and other intangible asset of $1.2 million associated
with Ridge. The aggregate impact of this acquisition was not material to the
Company's consolidated financial results of operations from the acquisition
date. The tangible liabilities assumed exceeded the tangible assets acquired.
The purchase price allocation is included in the Company's fiscal 1999 Annual
Report on Form 10-K.

In April 1998, the Company purchased ASIC technologies from ADI for $34.4
million in cash. The ASIC technologies purchased from ADI were to be
incorporated into the mainstream removable Peripheral Technology Solutions
("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of
the Company, is a director of ADI. The Company incurred $0.4 million in
professional fees, including legal, valuation and accounting fees related to the
acquisition, which were capitalized as part of the purchase price of the
transaction. The acquired in-process technology was valued at $6.1 million and
was written-off in the first quarter of fiscal 1999. In January 1999, the
Company sold the mainstream removable PTS business line, including the
in-process technologies purchased from ADI (these projects remained incomplete
from the date of acquisition through their disposition), and relieved the
remaining unamortized goodwill of $18.3 million and other intangible asset of
$1.7 million associated with the ASIC technologies purchased from ADI. The
aggregate impact of this acquisition was not material to the Company's
consolidated financial results of operations from the acquisition date. The
purchase price allocation is included in the Company's fiscal 1999 Annual Report
on Form 10-K.

On November 1, 1999, the Company announced that it signed a letter of intent
to acquire Distributed Processing Technology ("DPT") for $235.0 million,
including cash and assumed stock options. DPT is a leading supplier of
high-performance storage solutions, including adapters, RAID controllers,
storage subsystems, and management software. However, the acquisition is subject
to the Company and DPT reaching a definitive agreement, to regulatory approval,
and to certain other contingencies. If the acquisition is consummated, the
Company will account for the acquisition using the purchase method and will
evaluate the allocation of the purchase price to the assets acquired, which may
include in-process technology that will be written-off, and goodwill that will
be amortized over the benefit period.

RESTRUCTURING CHARGES. In the first quarter of fiscal 1999, the Company
recorded a restructuring charge of $8.8 million, comprised primarily of
severance and benefits. In the second quarter of fiscal 1999, the Company
recorded a restructuring charge of $24.5 million, net of an adjustment to the
restructuring charge taken in the first quarter of fiscal 1999 of $1.4 million.
The second quarter restructuring charge was comprised primarily of severance and
benefits and the write-off of fixed assets, inventory and other current and
long-term assets. In the fourth quarter of fiscal 1999, the Company recorded a
restructuring charge of $6.6 million, net of an adjustment to the restructuring
charges taken in the first and second quarters of fiscal 1999 of $1.2 million.
The fourth quarter restructuring charge was comprised primarily of severance and
benefits.

In total, the Company recorded $39.9 million in restructuring charges during
fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999,
the Company paid $20.0 million in cash relating to restructuring activities. The
restructuring reserve balance at March 31, 1999 was comprised of $1.5 million
for severance and benefits and $1.0 million for other charges, primarily lease
payments for vacated facilities. As of September 30, 1999, substantially all of
the reserve balance has been paid out.

21
<PAGE>
OTHER CHARGES. The Company recorded non-cash impairment charges of
$4.0 million in the second quarter of fiscal 1999 including $1.4 million of
manufacturing equipment deemed unnecessary due to non-temporary declines in
production volume and the write-off of $2.6 million of non-trade related
receivables previously classified in "Other current assets" in the Condensed
Consolidated Balance Sheets.

Additionally, the Company recorded executive termination costs of
$3.4 million in the second quarter of fiscal 1999, relating to three executives.
The costs consisted of $1.9 million in severance and benefits payments and
$1.5 million in non-cash stock compensation charges resulting from amended
option agreements.

INTEREST AND OTHER INCOME. Interest income for the second quarter and first
half of fiscal 2000 was $8.2 million and $20.1 million, respectively, compared
to $7.9 million and $17.0 million for the second quarter and first half of
fiscal 1999, respectively. Interest and other income for the first half of
fiscal 2000 consisted of $16.6 million of interest income and $3.5 million from
the gain on the sale of land recorded in the first quarter of fiscal 2000.
Excluding the gain on the sale of land, interest income for the second quarter
and first half of fiscal 2000 remained flat compared to the prior year.

Interest expense was $3.0 million and $5.9 million for the second quarter
and first half of fiscal 2000, respectively, compared to $3.0 million and $6.1
million for the second quarter and first half of fiscal 1999, respectively. The
interest expense was primarily related to the 4 3/4% Convertible Subordinated
Notes.

INCOME TAXES. Income tax provisions (benefits) for interim periods are
based on estimated annual income tax rates. The difference between the Company's
effective income tax rate and the U.S. federal statutory income tax rate is
primarily due to income earned in Singapore where the Company is subject to a
significantly lower effective income tax rate. In the second quarter of fiscal
1999, the Company's effective income tax rate, excluding the write-off of
acquired in-process technology, was 25%. In the third quarter of fiscal 1999,
the Company's effective income tax rate changed from 25% to 28% due to a
geographic shift of earnings resulting from restructuring activities and
business divestitures.

The Company recorded an income tax provision of $18.9 million representing
29.3% of income before provision for income taxes for the second quarter of
fiscal 2000 compared with a $7.5 million income tax benefit representing 22.4%
of the loss before benefit for income taxes for the second quarter of fiscal
1999. The effective income tax rate used to calculate the income tax provision
for the second quarter of fiscal 2000 was higher than 28% primarily as a result
of the acquired in-process technology charge associated with the acquisition of
CeQuadrat, for which no tax benefit was provided. The effective income tax rate
used to calculate the income tax benefit for the second quarter of fiscal 1999
was lower than 25% primarily as a result of the write-off of goodwill and other
intangible asset, for which no tax benefit was provided.

RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and requires recognition of all
derivatives as assets or liabilities and measurement of those instruments at
fair value. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133," which deferred the required date of adoption of
SFAS 133 for one year, to fiscal years beginning after June 15,

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2000. The Company will adopt this statement in its first quarter of fiscal 2002,
but does not expect the adoption of SFAS 133 to have a material impact on the
Company's financial position, results of operations or cash flows.

YEAR 2000. The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain date-based information.

During fiscal 1998, the Company completed implementation of Enterprise
Resource Planning ("ERP") software to replace the Company's core business
applications, which support sales and customer service, manufacturing,
distribution, and finance and accounting. The ERP software was selected not only
because it was Year 2000 Compliant, but more importantly, to add functionality
and efficiency to the business processes of the Company. The Company completed
Year 2000 testing of the ERP software and is satisfied that it will not present
any Year 2000 Compliance issues.

In the first half of fiscal 1998, the Company also began a project to
analyze and assess the remainder of its business not addressed by the ERP
software such as other computer and network hardware and software, production
process controllers and related manufacturing equipment. Internal and external
resources are being used to complete any required modification and tests for
Year 2000 Compliance. Furthermore, with the replacement or upgrade of its
internal use software, which is primarily commercial off-the-shelf software, and
non-compatible hardware, the Company believes that the Year 2000 Compliance
issue will not pose significant operational problems for the Company or its
customers.

The Company presently believes that its products are Year 2000 Compliant.
The majority of the Company's products are not date sensitive. However, for
those products that are date sensitive, the Company, as a standard part of its
product development cycle, has had procedures, tests, and methodologies in
effect since fiscal 1997 to ensure each product's Year 2000 Compliance
readiness.

In addition, the Company has defined its critical suppliers and communicated
with them to determine their Year 2000 Compliance readiness and the extent to
which the Company is vulnerable to any third party Year 2000 Compliance issues.
However, there can be no guarantee that the systems of other companies, on which
the Company's operations rely, will be remediated in a timely manner, or that a
failure to become Year 2000 Compliant by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
impact on the Company.

The Company's costs to date related to the Year 2000 Compliance issue
consist primarily of reallocation of internal resources to evaluate and assess
systems and products as described above and to plan testing and remediation
efforts. The total cost to the Company for Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year (less than $1.0 million). Such costs
exclude costs to implement the ERP system and the reallocation of internal
resources, as these costs are not considered incremental to the Company. These
costs and the date on which the Company plans to complete the Year 2000
Compliance remediation and testing processes are based on management's best
estimates, which were derived utilizing various assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans.

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LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Net cash provided by operating activities for the
first half of fiscal 2000 totaled $138.5 million compared to $72.1 million for
the first half of fiscal 1999. Net cash provided by operating activities for the
first half of fiscal 2000 was primarily attributable to net income of
$96.2 million, adjusted for depreciation and amortization expense of
$19.4 million and the write-off of acquired in-process technology of
$3.0 million. Additionally, net cash provided by operating activities in the
first half of fiscal 2000 was generated by the decrease in deferred tax assets
of $24.8 million and other current assets of $14.1 million, partially offset by
the increase in accounts receivable of $15.4 million and the increase in prepaid
expenses of $3.9 million.

INVESTING ACTIVITIES. Net cash used for investing activities for the first
half of fiscal 2000 totaled $134.9 million, compared to $10.6 million for the
first half of fiscal 1999. Net cash used for investing activities for the first
half of fiscal 2000 included investments in marketable securities of
$134.1 million (net of sales and maturities of marketable securities).
Additionally, the Company paid $14.5 million (net of cash received) in
connection with the acquisition of CeQuadrat and $3.9 million for capital
expenditures, and received $16.6 million for the sale of land held for sale and
$1.9 million for the sale of property and equipment.

FINANCING ACTIVITIES. Net cash used for financing activities for the first
half of fiscal 2000 totaled $178.6 million, compared to $93.1 million for the
first half of fiscal 1999. During the first half of fiscal 2000, the Company
repurchased 7.9 million shares of its common stock from the open market for
$244.1 million. The stock repurchases were partially offset by proceeds of
$61.8 million received from the issuance of common stock to employees through
the Company's stock option and employee stock purchase plans.

In the second quarter of fiscal 2000, the Company sold put warrants that
could potentially obligate the Company to repurchase up to 1.0 million shares of
its common stock at prices ranging from $37 to $39. In exchange, the Company
received up front premiums of $3.7 million, which were used for general business
purposes. The settlement terms include physical settlement, cash settlement or
net-share settlement at the option of the Company. The warrants expire during
the third quarter of fiscal 2000. The impact on diluted earnings per share for
the second quarter and first half of fiscal 2000 was minimal.

LIQUIDITY. As of September 30, 1998, the Company's principal sources of
liquidity consist of $703.0 million of cash, cash equivalents and marketable
securities and an unsecured $60.0 million revolving line of credit. As of
September 30, 1999, the Company had no borrowings that were outstanding under
the line of credit. The Company believes that existing working capital, together
with expected cash flows from operations and available sources of bank, equity
and equipment financing, will be sufficient to support its operations for the
next twelve months.

FACTORS AFFECTING FUTURE OPERATING RESULTS

This report contains forward-looking statements that involve risks and
uncertainties. For example, Management's Discussion and Analysis of Results of
Operations and Financial Condition includes statements relating to expected
sales growth, gross margins, anticipated operating expenditures and anticipated
capital expenditures. The statements contained in this document that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this document. In

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evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information set forth
in this document.

FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. In the second half of
fiscal 1998 and the first half of fiscal 1999, the Company's operating results
were adversely affected by shifts in corporate and retail buying patterns,
increased competition, emerging technologies, economic instability in Asia and
turbulence in the computer disk drive industry. In addition, fiscal 1999
operating results were significantly impacted by unusual charges and credits
including write-offs of acquired in-process technology, costs related to the
termination of the Symbios acquisition, restructuring charges, impairment of
assets, terminations of senior executives, the gain on the sale of PTS and the
gain on the sale of land. Operating results for the first quarter of fiscal 2000
were also impacted by a gain on the sale of land. Additionally, operating
results beginning in the second quarter of fiscal 2000 were affected by the
recent acquisition of CeQuadrat GmbH, resulting in increased goodwill
amortization expense and the write-off of acquired in-process technology.
Additionally, operating results in the future may be affected by the acquisition
of Distributed Processing Technology ("DPT"), pending a definitive agreement and
regulatory approval. Specifically operating results may be affected by increased
goodwill amortization expense and the potential write-off of acquired in-process
technology. In the future, the Company's operating results may fluctuate as a
result of the factors described above and as a result of a wide variety of other
factors, including, but not limited to, cancellations or postponements of
orders, shifts in the mix of the Company's products and sales channels, changes
in pricing policies by the Company's suppliers, interruption in the supply of
custom integrated circuits, the market acceptance of new and enhanced versions
of the Company's products, product obsolescence and general worldwide economic
and computer industry fluctuations. In addition, fluctuations may be caused by
future accounting pronouncements, changes in accounting policies, and the timing
of acquisitions of other business products and technologies and any associated
charges to earnings. The volume and timing of orders received during a quarter
are difficult to forecast. The Company's customers from time to time encounter
uncertain and changing demand for their products. Customers generally order
based on their forecasts. If demand falls below such forecasts or if customers
do not control inventories effectively, they may cancel or reschedule shipments
previously ordered from the Company. The Company has historically operated with
a relatively small backlog, especially relating to orders of its Host I/O
products and has set its operating budget based in part on expectations of
future revenues. Because much of the Company's operating budget is relatively
fixed in the short-term, if revenues do not meet the Company's expectations,
then the Company's operating income and net income may be disproportionately
affected. Operating results in any particular quarter, which do not meet the
expectations of securities analysts, are likely to cause volatility in the price
of the Company's common stock.

CERTAIN RISKS ASSOCIATED WITH THE HIGH-PERFORMANCE COMPUTER MARKET. The
Company's Host I/O products are used primarily in high performance computer
systems designed to support bandwidth-intensive applications and operating
systems. Historically, the Company's growth has been supported by increasing
demand for systems that support client/server and Internet/intranet
applications, computer-aided engineering, desktop publishing, multimedia, and
video. Beginning in the second half of fiscal 1998, the demand for such systems
slowed as more businesses chose to use relatively inexpensive PC's for desktop
applications and information technology managers shifted resources toward
resolving Year 2000 problems and investing in network infrastructure. Should
demand for such systems continue to slow, the Company's business or operating
results could be materially adversely affected by a resulting decline in demand
for the Company's products.

CERTAIN RISKS ASSOCIATED WITH THE SERVER MARKET. The Company's RAID
products are used primarily in workstations and enterprise servers. The use of
RAID technology in this market is an industry standard, however, there can be no
assurance that another technology will not replace RAID in the disk array
controller marketplace or that there will be continuing widespread acceptance or
growth of the use of RAID products in general, or the Company's RAID controllers
in particular, in that market. Should demand for such systems slow or should the
Company's products not be widely accepted, the Company's

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<PAGE>
business or operating results could be materially adversely affected by a
resulting decline in demand for the Company's products.

CERTAIN RISKS ASSOCIATED WITH THE SOFTWARE MARKET. The Company's Software
products are used primarily in high performance computer systems to enable the
control of SCSI peripherals and/or enable CD-R and CD-RW. The Company's sales
are primarily to major OEM's and distributors, thus the Company's business
depends on general economic and business conditions and the growth of the CD-R
and high-performance computer markets. Should demand for the Company's products
slow and/or the CD-R market not develop as quickly as expected, the Company's
business or operating results could be materially adversely affected by a
resulting decline in demand for the Company's products.

RELIANCE ON INDUSTRY STANDARDS, TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW
PRODUCTS. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
Ultra2 SCSI, Ultra3 SCSI, PCI, RAID, and Fast Ethernet. In particular, a
majority of the Company's revenues are currently derived from products based on
the SCSI standard. If consumer acceptance of these standards was to decline, or
if they were replaced with new standards, and if the Company did not anticipate
these changes and develop new products, the Company's business or operating
results could be materially adversely affected. For example, the Company
believes that changes in consumers' perceptions of the relative merits of SCSI
based products and products incorporating a competing standard, Ultra-DMA, have
materially adversely affected the sales of the Company's products and may
materially adversely affect the Company's future sales.

The markets for the Company's products are characterized by rapidly changing
technology, frequent new product introductions, and declining average selling
prices over product life cycles. The Company's future success is therefore
highly dependent upon the timely completion and introduction of new products at
competitive price/performance levels. The success of new product introductions
is dependent on several factors, including proper new product definition,
product costs, timely completion and introduction of new product designs,
quality of new products, differentiation of new products from those of the
Company's competitors, and market acceptance of the Company's and its customers'
products. As a result, the Company believes that continued significant
expenditures for research and development will be required in the future. There
can be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
materially adversely impacted if its customers shifted their demand to a
significant extent away from board-based I/O solutions to application-specific
ICs.

COMPETITION. The markets for all of the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of host adapter
manufacturers, including LSI Logic Corporation and other small host adapter
manufacturers. The Company's principal competitors for RAID solutions in the
server market are American Megatrends, Inc., Mylex Corporation and captive
suppliers. The Company's principal competitors in the Software segment range
from small operations to large consumer software companies. As the Company has
continued to broaden its bandwidth management product offerings into the
desktop, server, and networking environments, it has experienced, and expects to
experience in the future, significantly increased competition both from existing
competitors and from additional companies that may enter its markets. Some of
these companies have greater technical, marketing, manufacturing, and financial
resources than the Company. There can be no assurance that the Company will have
sufficient resources to meet growing product

26
<PAGE>
demand, that the Company will be able to make timely introduction of new
leading-edge solutions in response to competitive threats, that the Company will
be able to compete successfully in the future against existing or potential
competitors or that the Company's business or operating results will not be
materially adversely affected by price competition.

CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS. In July 1999, the Company
acquired CeQuadrat GmbH in an acquisition accounted for under the purchase
method of accounting. As part of its overall strategy, the Company may continue
to acquire or invest in complementary companies, products, or technologies and
to enter into joint ventures and strategic alliances with other companies. Risks
commonly encountered in such transactions include the difficulty of assimilating
the operations and personnel of the combined companies, the potential disruption
of the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures, and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with this
or other business combinations, investments, or joint ventures, or that such
transactions will not materially adversely affect the Company's business,
financial condition, or operating results.

CERTAIN RISKS ASSOCIATED WITH RESTRUCTURING ACTIVITIES. During fiscal 1999,
the Company decided to exit certain activities and undertook certain
restructuring actions. In connection with these actions, the Company effected a
workforce reduction of 975 people. There is no assurance that restructuring
activities will be successful or have a long-term positive impact on the
Company's future operations. Furthermore, should such actions have a negative
impact on the Company's ability to design and develop new products, attract or
retain employees, market new or existing products, or produce and/or purchase
products at competitive prices, these actions could have a material adverse
impact on the Company's results of operations.

YEAR 2000 COMPLIANCE ISSUES. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process data
fields containing a 2-digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be unable to
accurately process certain date-based information.

During fiscal 1998, the Company completed implementation of Enterprise
Resource Planning ("ERP") software to replace the Company's existing core
business applications and accordingly does not anticipate any internal Year 2000
issues. Additionally, the Company has analyzed the remainder of its business not
addressed by the ERP software and has, through its standard product development
cycle, ensured its products are Year 2000 Compliant through procedures, tests
and methodologies that have been in effect since fiscal 1997. However, if
internal systems do not properly recognize and process date information for
years into and beyond the turn of the century, there could be a material adverse
impact on other Company's operations. A significant disruption of the Company's
financial or business systems would materially adversely impact the Company's
ability to process orders, manage production and issue and pay invoices. The
Company's inability to perform these functions for a long period of time could
result in a material adverse impact on the Company's result of operations and
financial condition. Failure of these systems could cause a disruption in the
manufacturing process and could result in a delay in completion and shipment of
product.

The Company has communicated with others with whom it does significant
business, including major distributors, suppliers, customer, vendors and
financial service organizations, to assess their Year 2000 Compliance readiness
with respect to both their operations and the products and services they supply.
The analysis will continue into fiscal 2000, with corrective action taken
commensurate with the criticality of affected products and services. However, if
companies with whom the Company does significant business

27
<PAGE>
fail because of a Year 2000 malfunction, there could be a material adverse
impact on the Company's operating results. The Company believes it is currently
being impacted by its customers' redirection of corporate management information
system budgets towards resolving Year 2000 Compliance issues. Continuation of
this trend could lower the demand for the Company's products if corporate buyers
defer purchases of high-end business PCs.

The Company has developed a contingency plan for some of its applications
and systems to address any of the consequences of internal or external failures
to be Year 2000 Compliant. It is also in the process of creating a contingency
plan for internal and external sources, including key suppliers, which it
expects to complete in the first half of fiscal 2000. The potential
ramifications of a Year 2000 type failure are potentially far-reaching and
largely unknown. The Company cannot assure that a contingency plan in effect at
the time of a system failure will adequately address the immediate or long-term
effects of a failure, or that such a failure would not have a material adverse
impact on the Company's operations or financial results in spite of prudent
planning.

DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases most of its wafers through a supply agreement with TSMC. The
manufacture of semiconductor devices is sensitive to a wide variety of factors,
including the availability of raw materials, the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. While the quality, yield, and timeliness of wafer
deliveries to date have been acceptable, there can be no assurance that
manufacturing yield problems will not occur in the future. In addition, although
the Company has various supply agreements with its supplier, a shortage of raw
materials or production capacity could lead the Company's wafer supplier to
allocate available capacity to customers other than the Company, or to internal
uses. Any prolonged inability to obtain wafers with competitive performance and
cost attributes, adequate yields, or timely deliveries from its foundries would
delay production and product shipments and could have a material adverse effect
on the Company's business or operating results. The Company expects that it will
in the future seek to convert its fabrication process arrangements to smaller
wafer geometries and to more advanced process technologies. Such conversions
entail inherent technological risks that can affect yields and delivery times.
If for any reason the Company's current supplier was unable or unwilling to
satisfy the Company's wafer needs, the Company would be required to identify and
qualify additional foundries. There can be no assurance that any additional
wafer foundries would become available, that such foundries would be
successfully qualified, or that such foundries would be able to satisfy the
Company's requirements on a timely basis.

In order to secure wafer capacity, the Company from time to time has entered
into "take or pay" contracts that committed the Company to purchase specified
wafer quantities over extended periods, and has made prepayments to foundries.
In the future, the Company may enter into similar transactions or other
transactions, including, without limitation, non-refundable deposits with or
loans to foundries, or equity investments in, joint ventures with or other
partnership relationships with foundries. Any such transaction could require the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that the Company will be able to obtain any required
financing on terms acceptable to the Company.

Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. In addition, the
Company is increasingly using board subcontractors to better balance production
runs and capacity. There can be no assurance that such subcontractors will
continue to be able and willing to meet the Company's requirements for such
components or services. Any significant disruption in supplies from, or
degradation in the quality of components or services supplied by, such
subcontractors could delay shipments and result in the loss of customers or
revenues or otherwise have a material adverse effect on the Company's business
or operating results.

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CERTAIN ISSUES RELATED TO DISTRIBUTORS. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a material adverse effect on its
business or operating results. The Company's distributors may on occasion build
inventories in anticipation of substantial growth in sales, and if such growth
does not occur as rapidly as anticipated, distributors may decrease the amount
of product ordered from the Company in subsequent quarters. In addition, there
has recently been an industry trend towards the elimination of price protection
and distributor incentive programs and channel assembly. These trends could
result in a change in distributor business habits, with distributors possibly
deciding to decrease the amount of product held so as to reduce inventory
levels. This in turn could reduce the Company's revenues in any given quarter
and give rise to fluctuation in the Company's operating results. In addition,
the Company may from time to time take actions to reduce inventory levels at
distributors. These actions could reduce the Company's revenues in any given
quarter and give rise to fluctuations in the Company's operating results.

DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large
part on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such personnel is
intense, and the loss of key employees could have a material adverse effect on
the Company's business or operating results.

CERTAIN RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs, and
freight rates. The Company may use forward exchange contracts to manage any
exposure associated with certain foreign currency denominated commitments. In
addition, because the Company's wafer supplier, TSMC, is located in Taiwan, the
Company may be subject to certain risks resulting from the political instability
in Taiwan, including conflicts between Taiwan and the People's Republic of
China.

INTELLECTUAL PROPERTY PROTECTION AND DISPUTES. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree, it could materially adversely affect the
business or operating results of the Company.

From time to time, third parties may assert exclusive patent, copyright, and
other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.

29
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An outside party has contacted the Company regarding alleged infringement of
certain patents. The Company is discussing resolutions of these claims including
a possible cross-license agreement. However, there can be no assurance that the
Company will be able to obtain acceptable terms or conditions for such a
license, in which case, these claims may result in litigation. While the outcome
is not possible to determine, the Company believes the resolution of these
claims will not have a material adverse impact on the Company's financial
position.

NEED FOR INTEROPERABILITY. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.

NATURAL DISASTERS. The Company's corporate headquarters are located near
major earthquake faults. Any damage to the Company's information systems caused
as a result of an earthquake, fire or any other natural disasters could have a
material impact on the Company's business, financial condition and results of
operations. Additionally, the Company's primary wafer supplier is located in
Taiwan, which has recently experienced significant earthquakes. Although there
was no major damage to their facilities or the equipment, additional earthquakes
could interrupt the Company's manufacturing process and have a material adverse
impact on the Company's business, financial condition or results of operations.

VOLATILITY OF STOCK PRICE. The stock market in general, and the market for
shares of technology companies in particular, has from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's common stock. Furthermore, quarter-to-quarter fluctuations in
the Company's results of operations caused by changes in customer demand,
changes in the microcomputer and peripherals markets, or other factors, may have
a significant impact on the market price of the Company's common stock. In
addition, the Company's stock price may be affected by general market conditions
and international macroeconomic factors unrelated to the Company's performance.
These conditions, as well as factors that generally affect the market for stocks
of high technology companies, could cause the price of the Company's common
stock to fluctuate substantially over short periods.

NORMALIZED RESULTS OF OPERATIONS

The following normalized results of operations do not represent the
Company's results of operations or earnings per share information in accordance
with generally accepted accounting principles. Normalized operating results have
been presented to provide period to period comparability of the Company's
underlying operating results excluding revenue and expenses related to the PTS
business lines sold in the third and fourth quarters of fiscal 1999, the
write-off of acquired in-process technology, restructuring and other charges,
gain on the sale of land and the related tax effects for each of these items.
The normalized

30
<PAGE>
results of operations presented are not necessarily indicative of future
operating results and should be read in conjunction with the historical
financial statements and related notes.

<TABLE>
<CAPTION>
NORMALIZED THREE MONTH PERIOD ENDED
-------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(1) (2)
<S> <C> <C> <C> <C>
Net revenues............................................ $194,280 100.0% $118,319 100.0%
Cost of revenues........................................ 66,267 34.1 46,429 39.2
-------- ----- -------- -----
Gross profit............................................ 128,013 65.9 71,890 60.8
-------- ----- -------- -----
Operating expenses:
Research and development................................ 23,210 11.9 30,282 25.6
Sales, marketing and administrative..................... 40,242 20.7 40,874 34.6
Amortization of goodwill and other intangibles........ 2,255 1.2 580 0.5
-------- ----- -------- -----
Total operating expenses................................ 65,707 33.8 71,736 60.7
-------- ----- -------- -----
Income from operations.................................. 62,306 32.1 154 0.1
Interest and other income............................... 8,193 4.2 7,912 6.7
Interest expense........................................ (2,962) (1.5) (3,047) (2.6)
-------- ----- -------- -----
Income from operations before provision for income
taxes................................................. 67,537 34.8 5,019 4.2
Provision for income taxes.............................. 18,909 9.7 1,255 1.0
-------- ----- -------- -----
Net income.............................................. $ 48,628 25.1% $ 3,764 3.2%
======== ===== ======== =====
Net income per share:
Basic................................................... $ 0.47 $ 0.03
======== ========
Diluted................................................. $ 0.45 $ 0.03
======== ========
Shares used in computing net income per share:
Basic................................................. 102,523 111,583
======== ========
Diluted............................................... 113,062 112,603
======== ========
</TABLE>

- ------------------------

(1) As a percentage of net revenues for the three month period ended
September 30, 1999

(2) As a percentage of net revenues for the three month period ended
September 30, 1998

31
<PAGE>

<TABLE>
<CAPTION>
NORMALIZED SIX MONTH PERIOD ENDED
-------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(1) (2)
<S> <C> <C> <C> <C>
Net revenues............................................ $386,658 100.0% $264,027 100.0%
Cost of revenues........................................ 133,054 34.4 101,492 38.4
-------- ----- -------- -----
Gross profit............................................ 253,604 65.6 162,535 61.6
-------- ----- -------- -----
Operating expenses:
Research and development................................ 47,735 12.3 63,538 24.1
Sales, marketing and administrative..................... 79,611 20.6 84,774 32.1
Amortization of goodwill and other intangibles........ 2,749 0.7 1,843 0.7
-------- ----- -------- -----
Total operating expenses................................ 130,095 33.6 150,155 56.9
-------- ----- -------- -----
Income from operations.................................. 123,509 32.0 12,380 4.7
Interest and other income............................... 16,631 4.3 17,045 6.4
Interest expense........................................ (5,921) (1.5) (6,114) (2.3)
-------- ----- -------- -----
Income from operations before provision for income
taxes................................................. 134,219 34.8 23,311 8.8
Provision for income taxes.............................. 37,580 9.8 5,828 2.2
-------- ----- -------- -----
Net income.............................................. $ 96,639 25.0% $ 17,483 6.6%
======== ===== ======== =====
Net income per share:
Basic................................................... $ 0.94 $ 0.15
======== ========
Diluted................................................. $ 0.89 $ 0.15
======== ========
Shares used in computing net income per share:
Basic................................................. 103,333 112,892
======== ========
Diluted............................................... 109,174 114,170
======== ========
</TABLE>

- ------------------------

(1) As a percentage of net revenues for the six month period ended
September 30, 1999

(2) As a percentage of net revenues for the six month period ended
September 30, 1998

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For financial market risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1999.

In the second quarter of fiscal 2000, the Company sold put warrants that
could potentially obligate the Company to buy back up to 1.0 million shares of
its common stock at prices ranging from $37 to $39 in exchange for up front
premiums of $3.7 million. The settlement terms include physical settlement, cash
settlement or net-share settlement at the option of the Company and expire
during the third quarter of fiscal 2000. The warrants were priced based on the
market value of the Company's common stock at the date of issuance, however, the
Company's obligation is subject to declines in the market value of its common
stock. At September 30, 1999, the market value of the Company's common stock was
greater than the price of the warrants, therefore no obligation existed at that
date. For each $1 decline in market value of the Company's common stock below
the put warrant price range of $37 to $39, the aggregate potential cash or share
settlement obligation of the Company would be $1.0 million.

This represents an update to the Quantitative and Qualitative Disclosures
About Market Risk contained in the Company's Annual Report on Form 10-K for the
year ended March 31, 1999, due to the put warrants issued during the second
quarter of fiscal 2000. Actual results may differ materially.

32
<PAGE>
PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In the second quarter of fiscal 2000, the Company sold put warrants that
could potentially obligate the Company to buy back up to 1.0 million shares of
its common stock at prices ranging from $37 to $39 in exchange for up front
premiums of $3.7 million. The settlement terms included physical settlement,
cash settlement or net-share settlement at the option of the Company and expire
during the third quarter of fiscal 2000. The warrants were priced based on the
market value of the Company's common stock at the date of issuance, however, the
Company's obligation is subject to declines in the market value of its common
stock. At September 30, 1999, the market value of the Company's common stock was
greater than the price of the warrants, therefore no obligation existed at that
date. For each $1 decline in market value of the Company's common stock below
the put warrant price range of $37 to $39, the aggregate potential cash or share
settlement obligation of the Company would be $1.0 million.

The put warrants were issued only to "accredited investors" (as such term is
defined under Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act")) in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) under the Securities
Act. No underwriters were involved. Each transaction was privately negotiated
and each purchaser represented that they acquired the put warrants for their own
account and not with a view to, or in connection with, any distribution of such
securities.

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

The Annual Meeting of Stockholders of Adaptec Inc. was held on September 9,
1999 in Milpitas, California. Of the total 103,299,529 shares outstanding as of
the record date, 94,436,489 shares (91.4%) were present or represented by proxy
at the meeting. The table below presents the voting results of election of the
Company's Board of Directors:

<TABLE>
<CAPTION>
VOTES
VOTES WITHHELD
---------- ----------
<S> <C> <C>
John G. Adler....................................... 93,613,515 822,974
Laurence B. Boucher................................. 93,612,799 823,690
Carl J. Conti....................................... 93,641,090 795,399
John East........................................... 93,648,636 787,853
Ilene H. Lang....................................... 93,619,795 816,694
Robert J. Loarie.................................... 93,600,879 835,610
B.J. Moore.......................................... 93,660,043 776,446
W. Ferreall Sanders................................. 93,596,356 840,133
Robert N. Stephens.................................. 93,640,996 795,493
Phillip E. White.................................... 93,559,755 876,734
</TABLE>

The stockholders approved the Company's 1999 Stock Plan and the reservation
for issuance thereunder of 1,000,000 shares plus (i) any shares which are
reserved but unissued under the Company's 1990 Stock Plan as of the date of the
stockholder approval of the 1999 Stock Plan and (ii) any shares returned to the
1990 Stock Plan after the date of stockholder approval of the 1999 Stock Plans
as a result of the termination of options under the 1990 Stock Plan. The
proposal received 44,089,499 affirmative votes, 34,532,627 negative votes,
594,324 abstentions, and 15,220,039 broker non-votes.

The stockholders approved an amendment to the Company's Bylaws to prohibit
the repricing of outstanding stock options to a lower exercise price during the
term of such options without stockholder approval. The proposal received
78,117,854 affirmative votes, 670,029 negative votes, 438,867 abstentions, and
15,209,739 broker non-votes.

33
<PAGE>
The stockholders ratified and approved the appointment of
PricewaterhouseCoopers LLP as the independent public accountants of the Company
for the fiscal year ending March 31, 2000. The proposal received 93,888,588
affirmative votes, 71,795 negative votes, 476,106 abstentions, and no broker
non-votes.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
10.1 1999 Stock Plan
Financial Data Schedule for the quarter ended September 30,
27.1 1999
</TABLE>

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter.

34
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ADAPTEC, INC.

<TABLE>
<S> <C> <C>
By: /s/ ANDREW J. BROWN Date: November 5, 1999
--------------------------------------
Andrew J. Brown
Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)

By: /s/ KENNETH B. AROLA Date: November 5, 1999
--------------------------------------
Kenneth B. Arola
Vice President
Corporate Controller
(Principal Accounting Officer)
</TABLE>

<PAGE>
Exhibit 10.1

ADAPTEC, INC.

1999 STOCK PLAN

1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.

2. DEFINITIONS. As used herein, the following definitions shall
apply:

(a) "ADMINISTRATOR" means the Board or any of its
Committees as shall be administering the Plan, in accordance with Section 4 of
the Plan.

(b) "APPLICABLE LAWS" means the requirements relating to
the administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.

(d) "CODE" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.

(e) "COMMON STOCK" means the Common Stock, $.001 par
value, of the Company.

(f) "COMPANY" means Adaptec, Inc., a Delaware
corporation.

(g) "COMMITTEE" means a Committee, if any, appointed by
the Board in accordance with paragraph (a) of Section 4 of the Plan.

(h) "CONSULTANT" means any person, including an advisor,
who is engaged by the Company or any Parent or Subsidiary to render services
including, without limitation, directors of the Company who are not compensated
for their services or are paid only a director's fee by the Company.

-1-
<PAGE>

(i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT"
means the absence of any interruption or termination of the employment or
consulting relationship by the Company or any Parent or Subsidiary. Continuous
Status as an Employee or Consultant shall not be considered interrupted in the
case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence
approved by the Board, provided that such leave is for a period of not more than
ninety (90) days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time to time; or (iv) in the case of transfers
between locations of the Company or between the Company, its Parent or
Subsidiaries or its successor. If reemployment upon expiration of a leave of
absence in excess of ninety (90) days is not guaranteed, on the 181st day of
such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.

(j) "DISABILITY" means total and permanent disability, as
defined in Section 22(e)(3) of the Code.

(k) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Subsidiary. The payment of directors'
fees by the Company shall not be sufficient to constitute "employment" by the
Company.

(l) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

(m) "FAIR MARKET VALUE" means, as of any date, the value
of Common Stock determined as follows:

(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a
Share of Common Stock shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such system or exchange (or
the exchange with the greatest volume of trading in Common Stock) on the last
market trading day prior to the day of determination, as reported in the Wall
Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high and
low asked prices for the Common Stock or on the last market trading day prior to
the day of determination, as reported in the Wall Street Journal or such other
source as the Administrator deems reliable;

-2-
<PAGE>

(iii) In the absence of an established market for
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Administrator.

(n) "INCENTIVE STOCK OPTION" means an Option that
satisfies the provisions of Section 422 of the Code.

(o) "NONSTATUTORY STOCK OPTION" means an Option that is
not an Incentive Stock Option.

(p) "OPTION" means an Option granted pursuant to the
Plan.

(q) "OPTIONED STOCK" means the Common Stock subject to an
Option.

(r) "OPTIONEE" means an Employee or Consultant who
receives an Option.

(s) "PARENT" corporation shall have the meaning defined
in Section 424(e) of the Code.

(t) "PLAN" means this 1999 Stock Plan.

(u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or
any successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.

(v) "SHARE" means the Common Stock, as adjusted in
accordance with Section 11 of the Plan.

(w) "SUBSIDIARY" corporation shall have the meaning
defined in Section 424(f) of the Code.

In addition, the terms "Cause," and "Change of Control" shall have the
meanings set forth, respectively, in Section 9 below.

3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 9 of the Plan, the total number of Shares reserved and available for
distribution pursuant to awards made under the Plan shall be (a) 1,000,000 plus
(b) any Shares which have been reserved but unissued under the Company's 1990
Stock Plan (the "1990 Plan") as of the date of stockholder approval of this
Plan, and (c) any Shares returned to the 1990 Plan after the date of stockholder
approval of this Plan as a result of the termination of options under the 1990
Plan.

Subject to Section 9 of the Plan, if any Shares that have been
optioned under an Option cease to be subject to such Option (other than through
exercise of the Option), or if any Option granted hereunder is forfeited, or any
such award otherwise terminates prior to the issuance

-3-
<PAGE>

of Common Stock to the participant, the Shares that were subject to such
Option shall again be available for distribution in connection with future
Option grants under the Plan. Shares that have actually been issued under the
Plan, whether upon exercise of an Option, shall not in any event be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, and the original purchaser of such
Shares did not receive any benefits of ownership of such Shares, such Shares
shall become available for future grant under the Plan. For purposes of the
preceding sentence, voting rights shall not be considered a benefit of Share
ownership.

4. ADMINISTRATION OF THE PLAN.

(a) PROCEDURE.

(i) ADMINISTRATION WITH RESPECT TO CONSULTANTS
AND OTHER EMPLOYEES. With respect to grants of Options to Employees or
Consultants who are neither directors nor officers of the Company, the Plan
shall be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to satisfy
Applicable Laws. Once appointed, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies, however caused, and remove all members of
the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.

(ii) MULTIPLE ADMINISTRATIVE BODIES. The Plan may
be administered by different bodies with respect to directors, non-director
officers and Employees who are neither directors nor officers and Consultants
who are not directors.

(iii) SECTION 162(M). To the extent that the
Administrator determines it to be desirable to qualify Options granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.

(iv) RULE 16B-3. To the extent desirable to
qualify transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.

(b) POWERS OF THE ADMINISTRATOR. Subject to the
provisions of the Plan and in the case of a Committee, the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:

-4-
<PAGE>

(i) to determine the Fair Market Value of the
Common Stock, in accordance with Section 2(m) of the Plan;

(ii) to select the Consultants and Employees to
whom Options may from time to time be granted hereunder;

(iii) to determine whether and to what extent
Options or any combination thereof, are granted hereunder;

(iv) to determine the number of shares of Common
Stock to be covered by each such award granted hereunder;

(v) to approve forms of agreement for use under
the Plan;

(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option or other award and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator shall
determine, in its sole discretion);

(vii) to determine whether and under what
circumstances an Option may be settled in cash under subsection 7(a)(vi) instead
of Common Stock;

(viii) to determine whether, to what extent and
under what circumstances Common Stock and other amounts payable with respect to
an award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the amount
(if any) of any deemed earnings on any deferred amount during any deferral
period);

(ix) to determine the terms and restrictions
applicable to Options; and

(x) to allow Optionees to satisfy withholding
tax obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable and shall be subject to the
consent or disapproval of the Administrator.

(c) EFFECT OF COMMITTEE'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding.

-5-
<PAGE>

5. ELIGIBILITY. Nonstatutory Stock Options may be granted only to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee who has been granted an Option may, if he or she is
otherwise eligible, be granted additional Options. Each Option shall be
evidenced by a written Option agreement, which shall expressly identify the
Options as Incentive Stock Options or as Nonstatutory Stock Options, and which
shall be in such form and contain such provisions as the Administrator shall
from time to time deem appropriate. Without limiting the foregoing, the
Administrator may, at any time, or from time to time, authorize the Company,
with the consent of the respective recipients, to issue Options in exchange for
the surrender and cancellation of any or all outstanding Options, other options.

Neither the Plan nor any Option agreement shall confer upon
any Optionee any right with respect to continuation of employment by the
Company, nor shall it interfere in any way with the Optionee's right or the
Company's right to terminate the Optionee's employment at any time.

6. TERM OF PLAN. Subject to Section 15 of the Plan, the Plan
shall become effective upon the earlier to occur of its adoption by the Board or
its approval by the stockholders of the Company as described in Section 15. It
shall continue in effect for a term of ten (10) years from the date the Plan or
any amendment to add shares to the Plan was last adopted by the Board unless
sooner terminated under Section 11 of the Plan.

7. OPTIONS.

(a) OPTIONS. The Administrator, in its discretion, may
grant Options to eligible participants and shall determine whether such Options
shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option
shall be evidenced by a written Option agreement which shall expressly identify
the Options as Incentive Stock Options or as Nonstatutory Stock Options, and be
in such form and contain such provisions as the Administrator shall from time to
time deem appropriate. Without limiting the foregoing, the Administrator may, at
any time, or from time to time, authorize the Company, with the consent of the
respective recipients, to issue Options in exchange for the surrender and
cancellation of any or all outstanding Options. Option agreements shall contain
the following terms and conditions:

(i) OPTION PRICE; NUMBER OF SHARES. The per
Share exercise price for the Shares issuable pursuant to an Option shall be such
price as is determined by the Administrator, but shall in no event be less than
75% of the Fair Market Value of Common Stock, determined as of the date of grant
of the Option.

The Option agreement shall specify the number of
Shares to which it pertains.

(ii) WAITING PERIOD AND EXERCISE DATES. At the
time an Option is granted, the Administrator will determine the terms and
conditions to be satisfied before Shares may be purchased, including the dates
on which Shares subject to the Option may first be purchased. The

-6-
<PAGE>

Administrator may specify that an Option may not be exercised until the
completion of the service period specified at the time of grant. (Any such
period is referred to herein as the "waiting period.") At the time an Option
is granted, the Administrator shall fix the period within which the Option
may be exercised, which shall not be less than the waiting period, if any,
nor, in the case of an Incentive Stock Option, more than ten (10) years, from
the date of grant.

(iii) FORM OF PAYMENT. The consideration to be
paid for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Administrator (and, in the case of
an Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares
which (x) in the case of Shares acquired upon exercise of an Option either have
been owned by the Optionee for more than six months on the date of surrender or
were not acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (5) delivery of a
properly executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (6) any combination of the foregoing methods
of payment, or (7) such other consideration and method of payment for the
issuance of Shares to the extent permitted under Applicable Laws.

(iv) SPECIAL INCENTIVE STOCK OPTION PROVISIONS.
In addition to the foregoing, Options granted under the Plan, which are intended
to be Incentive Stock Options under Section 422 of the Code shall be subject to
the following terms and conditions:

(1) EXERCISE PRICE. The per share
exercise price of an Incentive Stock Option shall be no less than 100% of the
Fair Market Value per Share on the date of grant.

(2) DOLLAR LIMITATION. To the extent
that the aggregate Fair Market Value of (i) the Shares with respect to which
Options designated as Incentive Stock Options plus (ii) the shares of stock of
the Company, Parent and any Subsidiary with respect to which other incentive
stock options are exercisable for the first time by an Optionee during any
calendar year under all plans of the Company and any Parent and Subsidiary
exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options.
For purposes of the preceding sentence, (i) Options shall be taken into account
in the order in which they were granted, and (ii) the Fair Market Value of the
Shares shall be determined as of the time the Option or other incentive stock
option is granted.

Except as modified by the preceding provisions of this Section 7(a)(iv) and
except as otherwise limited by Section 422 of the Code, all of the provisions of
the Plan shall be applicable to the Incentive Stock Options granted hereunder.

-7-
<PAGE>

(v) OTHER PROVISIONS. Each Option granted under
the Plan may contain such other terms, provisions, and conditions not
inconsistent with the Plan as may be determined by the Administrator.

(vi) BUYOUT PROVISIONS. The Administrator may at
any time offer to buy out for a payment in cash or Shares, an Option previously
granted, based on such terms and conditions as the Administrator shall establish
and communicate to the Optionee at the time that such offer is made.

(b) METHOD OF EXERCISE.

(i) PROCEDURE FOR EXERCISE; RIGHTS AS A
STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times and
under such conditions as determined by the Administrator and as shall be
permissible under the terms of the Plan.

An Option may not be exercised for a fraction of a
Share.

An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator
(and, in the case of an Incentive Stock Option, determined at the time of grant)
and permitted by the Option Agreement consist of any consideration and method of
payment allowable under Section 7(a)(iii) of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in Section 9 of the Plan.

Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter shall be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.

(ii) TERMINATION OF EMPLOYMENT. Upon termination
of an Optionee's Continuous Status as an Employee or Consultant (other than upon
the Optionee's death or Disability), the Optionee may, but only within three (3)
months (or such other period of time as is determined by the Administrator but
in no event later than the expiration of the term of such Option as set forth in
the stock option agreement) after the date of such termination, exercise his or
her Option to the extent that it was exercisable at the date of such
termination.

-8-
<PAGE>

(iii) DISABILITY OF OPTIONEE. In the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of the Optionee's Disability, the Optionee may, but only within six (6)
months from the date of such termination (and in no event later than the
expiration of the term of such Option as set forth in the stock option
agreement), exercise the Option to the extent that the Optionee was entitled to
exercise it at the date of such termination.

(iv) DEATH OF OPTIONEE. In the event of the death
of an Optionee, Options granted hereunder to such Optionee shall become vested
and exercisable, in addition to Shares as to which such Options would otherwise
be vested and exercisable, for the lesser of the full number of Shares covered
by the Options or an aggregate of 50,000 Shares. Each Option held by the
Optionee at the time of death may be exercised at any time within six (6) months
following the date of death by the Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance. In no event shall an
Option be exercised later than the expiration of the term of the Option, as set
forth in the stock option agreement.

(i) No Employee shall be granted, in any fiscal
year of the Company, Options under the Plan to purchase more than 1,000,000
Shares.

(ii) The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 9(a).

(iii) If an Option is canceled (other than in
connection with a transaction described in Section 9), the canceled Option shall
be counted against the limits set forth in Section 7(c)(i). For this purpose, if
the exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.

8. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise
by the Administrator, Options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or
by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. If the Administrator makes an
Option transferable, such Option shall contain such additional terms and
conditions as the Administrator deems appropriate.

9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER, ASSET SALE
OR CHANGE IN CONTROL.

(a) Subject to any required action by the stockholders of
the Company, the number of Shares covered by each outstanding Option, and the
number of Shares which have been authorized for issuance under the Plan but as
to which no Options have yet been granted or which

-9-
<PAGE>

have been returned to the Plan upon cancellation or expiration of an Option,
as well as the price per Share covered by each such outstanding Option, shall
be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the aggregate number of issued Shares effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment
shall be made by the Board, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of Shares of stock of any class, or securities
convertible into Shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of Shares subject to an Option.

(b) In the event of the proposed dissolution or
liquidation of the Company, all outstanding Options will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board. The Board may, in the exercise of its sole discretion in such
instances, declare that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his Option as to all or any
part of the Optioned Stock, including Shares as to which the Option would not
otherwise be exercisable.

(c) In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding Option shall be assumed or an
equivalent Option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option, the Optionee shall
fully vest in and have the right to exercise the Option as to one hundred
percent (100%) of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For purposes of this paragraph, an
Option granted under the Plan shall be deemed to be assumed if, following the
sale of assets or merger, the Option confers the right to purchase, for each
Share of Optioned Stock subject to the Option immediately prior to the sale of
assets or merger, the consideration (whether stock, cash or other securities or
property) received in the sale of assets or merger by holders of Common Stock
for each Share held on the effective date of the transaction (and if such
holders were offered a choice of consideration, the type of consideration chosen
by the holders if a majority of the outstanding Shares); provided, however, that
if such consideration received in the sale of assets or merger was not solely
Common Stock of the successor corporation or its parent, the Board may, with the
consent of the successor corporation and the participant, provide for the
consideration to be received upon exercise of the Option to be solely Common
Stock of the successor corporation or its parent equal in Fair Market Value to
the per share consideration received by holders of Common Stock in the sale of
assets or merger.

-10-
<PAGE>

(d) In the event of a "Change in Control" of the Company
(as such term is defined in paragraph (f) below), then any Options outstanding
upon the date of such Change in Control that are not yet exercisable and vested
on such date shall have their vesting accelerated as to an additional
twenty-five percent (25%) of the unvested Shares subject to such Options as of
the date of such Change in Control, and such Stock Options shall continue to
otherwise vest, (subject to (i) Optionee remaining in Continuous Status as an
Employee or Consultant, and (ii) accelerated vesting as provided for in Sections
9(c) or 9(e) of this Plan) at the same rate and as to the same number of Shares
per vesting period as immediately prior to the Change in Control. For example,
if an Optionee holds an Option that is fifty percent (50%) vested immediately
prior to the date of a Change in Control, which Option ordinarily vests so as to
be one hundred percent (100%) vested four years after the date of grant (subject
to Optionee maintaining his or her Continuous Status as an Employee or
Consultant), the Option would become seventy-five percent (75%) vested upon the
date of the Change in Control and would resume vesting (subject to (i) Optionee
maintaining his or her Continuous Status as an Employee or Consultant, and (ii)
accelerated vesting as provided for in Sections 9(c) or 9(e) of this Plan) so as
to be one hundred percent (100%) vested three years following the date of grant.

(e) In the event an Optionee is involuntarily terminated
without Cause within twelve (12) months following a "Change in Control" of the
Company (as such terms are defined in Section 9(f) below), then any Options
outstanding upon the date of such Change in Control that are not yet exercisable
and vested on such date shall become one hundred percent (100%) exercisable and
vested. Notwithstanding the foregoing, (unless Optionee is party to a duly
authorized written agreement with the Company providing otherwise) this Plan
does not constitute a contract of employment or impose on the Company any
obligation to retain the Optionee, or to change the Company's policies regarding
termination of employment or other provision of services. The employment of
Optionees who are Employees is and shall continue to be at-will, as defined
under applicable law, and may be terminated at any time, with or without cause.

(f) DEFINITIONS.

(i) CHANGE IN CONTROL. For purposes of this
Section, a "Change in Control" means the occurrence of any of the following:

(A) When any "person," as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act (other
than the Company, a Subsidiary or a Company employee benefit plan,
including any trustee of such plan acting as trustee) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Company's
then outstanding securities; or

-11-
<PAGE>

(B) A change in the composition of the
Board occurring within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (I) are directors of the
Company as of the date hereof, or (II) are elected, or nominated for
election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest
relating to the election of directors to the Company);

(C) The consummation of a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least fifty percent (50%)
of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation; or

(D) The consummation of the sale or
disposition by the Company of all or substantially all the Company's
assets.

(ii) CAUSE. For purposes of this Section, "Cause"
shall mean (A) any act of personal dishonesty taken by the Optionee in
connection with his responsibilities as a service provider to the Company and
intended to result in substantial personal enrichment of the Optionee, (B) the
Optionee's conviction of a felony, or (C) a willful act by the Optionee which
constitutes gross misconduct and which is injurious to the Company, or (D)
continued substantial violations by the Optionee of the Optionee's duties to the
Company which are demonstrably willful and deliberate on the Optionee's part
after there has been delivered to the Optionee a written demand for performance
from the Company which specifically sets forth the factual basis for the
Company's belief that the Optionee has committed continued substantial
violations of his or her duties.

(g) GOLDEN PARACHUTE EXCISE TAX VESTING ACCELERATION
LIMITATION. Notwithstanding any other provision of this Plan, in the event that
the vesting acceleration provided for in this Plan or amounts or benefits
otherwise payable to an Optionee (i) constitute "parachute payments" within the
meaning of Section 280G of the Code, and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"), then the Optionee's accelerated vesting hereunder shall be either

(i) made in full, or
(ii) made as to such lesser extent as would
result in no portion of such acceleration,
amounts or benefits being subject to the
Excise Tax,

-12-
<PAGE>

whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by the
Optionee on an after-tax basis, of the greatest amount of severance benefits,
notwithstanding that all or some portion of such severance benefits may be
taxable under Section 4999 of the Code. Unless the Company and the Optionee
otherwise agree in writing, any determination required under this Section shall
be made in writing in good faith by the accounting firm serving as the Company's
independent public accountants immediately prior to the Change of Control (the
"Accountants"). In the event of a reduction in benefits hereunder, the Optionee
shall be given the choice of which benefits to reduce. For purposes of making
the calculations required by this Section, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code. The Company and the Optionee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section.

10. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option. Notice of the determination shall be
given to each Employee or Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.

11. AMENDMENT AND TERMINATION OF THE PLAN.

(a) AMENDMENT AND TERMINATION. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Section 422 of
the Code (or any other applicable law or regulation), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.

(b) EFFECT OF AMENDMENT OR TERMINATION. Any such
amendment or termination of the Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Plan had not
been amended or terminated.

12. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

-13-
<PAGE>

As a condition to the exercise of an Option or the issuance of
Shares on exercise of an Option, the Company may require the person exercising
such Option to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.

13. RESERVATION OF SHARES. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.

Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the non-issuance or sale of such Shares
as to which such requisite authority shall not have been obtained.

14. AGREEMENTS. Options shall be evidenced by written agreements
in such form as the Board shall approve from time to time.

15. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject
to approval by the stockholders of the Company within twelve (12) months before
or after the date the Plan is adopted as provided in Section 6. Such stockholder
approval shall be obtained in the degree and manner required under applicable
state and federal law.

-14-

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 142,625
<SECURITIES> 560,401
<RECEIVABLES> 86,578
<ALLOWANCES> 2,966
<INVENTORY> 48,888
<CURRENT-ASSETS> 935,680
<PP&E> 211,269
<DEPRECIATION> 98,611
<TOTAL-ASSETS> 1,101,824
<CURRENT-LIABILITIES> 163,560
<BONDS> 230,000
0
0
<COMMON> 102
<OTHER-SE> 708,162
<TOTAL-LIABILITY-AND-EQUITY> 1,101,824
<SALES> 194,280
<TOTAL-REVENUES> 194,280
<CGS> 66,267
<TOTAL-COSTS> 66,267
<OTHER-EXPENSES> 68,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,962
<INCOME-PRETAX> 64,521
<INCOME-TAX> 18,909
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<EPS-BASIC> 0.44
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</TABLE>