ADAPTEC INC, 10-Q, 2000-11-06

ADAPTEC INC
10-Q, 2000-11-06
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, 2000 OR
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
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(State of Incorporation) (I.R.S. Employer Identification No.)

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

Registrant's telephone number, including area code (408) 945-8600
--------------------------------------------------------------------------------------------
</TABLE>

N/A
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(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
September 30, 2000 was 98,769,958.

This document consists of 31 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........ 6-14

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

Results of Operations....................................... 15-18

Liquidity and Capital Resources............................. 18

Recent Accounting Pronouncements............................ 18-19

Certain Factors Bearing Risk on Future Operating Results.... 19-28

Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 29

Part II. Other Information

Item 4. Submission of Matters to a Vote of Security Holders.............. 30

Item 6. Exhibits and Reports on Form 8-K................................. 30

Signatures................................................................ 31
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADAPTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.............................. $185,468 $194,280 $368,895 $386,658
Cost of revenues.......................... 72,830 66,267 143,340 133,054
-------- -------- -------- --------
Gross profit.............................. 112,638 128,013 225,555 253,604
-------- -------- -------- --------
Operating expenses:
Research and development................ 30,987 23,210 61,489 47,735
Selling, marketing and administrative... 45,261 40,242 87,641 79,610
Amortization of goodwill and other
intangibles........................... 19,476 2,255 38,951 2,750
Write-off of acquired in-process
technology............................ -- 3,016 -- 3,016
-------- -------- -------- --------
Total operating expenses.................. 95,724 68,723 188,081 133,111
-------- -------- -------- --------
Income from operations.................... 16,914 59,290 37,474 120,493
Interest and other income................. 90,025 19,113 110,716 31,064
Interest expense.......................... 3,079 2,962 6,123 5,921
-------- -------- -------- --------
Income before provision for income
taxes................................... 103,860 75,441 142,067 145,636
Provision for income taxes................ 44,421 23,277 60,980 42,932
-------- -------- -------- --------
Net income................................ $ 59,439 $ 52,164 $ 81,087 $102,704
======== ======== ======== ========
Net income per share:
Basic................................... $ 0.60 $ 0.51 $ 0.81 $ 0.99
-------- -------- -------- --------
Diluted................................. $ 0.58 $ 0.48 $ 0.78 $ 0.94
-------- -------- -------- --------
Shares used in computing net income per
share:
Basic................................... 99,084 102,523 99,944 103,333
-------- -------- -------- --------
Diluted................................. 105,962 113,062 103,497 113,626
-------- -------- -------- --------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>
ADAPTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 163,599 $ 180,519
Marketable securities..................................... 404,367 482,172
Accounts receivable, net.................................. 98,880 90,165
Inventories............................................... 74,559 68,378
Other current assets...................................... 123,470 74,352
---------- ----------
Total current assets.................................... 864,875 895,586
Property and equipment, net................................. 114,425 135,222
Goodwill and other intangibles.............................. 236,180 275,108
Other long-term assets...................................... 53,615 40,368
---------- ----------
$1,269,095 $1,346,284
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 41,983 $ 34,009
Accrued liabilities....................................... 211,935 193,217
---------- ----------
Total current liabilities............................... 253,918 227,226
---------- ----------
4 3/4% Convertible Subordinated Notes....................... 229,800 229,800
Other long-term liability................................... 10,800 14,400
Contingencies (Note 14)
Stockholders' equity:
Common stock.............................................. 99 103
Additional paid-in capital................................ -- 58,535
Deferred stock-based compensation......................... (1,148) (2,444)
Accumulated other comprehensive income.................... 13,731 51,800
Retained earnings......................................... 761,895 766,864
---------- ----------
Total stockholders' equity.............................. 774,577 874,858
---------- ----------
$1,269,095 $1,346,284
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
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ADAPTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 60,016 $ 138,537
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of certain net assets in connection with
acquisitions, net......................................... -- (14,485)
Purchases of property and equipment......................... (16,577) (3,866)
Net proceeds from the sale of property and equipment........ 43,273 18,518
Purchases of marketable securities.......................... (227,490) (724,266)
Purchases of other investments.............................. (350) (1,000)
Sales of marketable securities.............................. 216,226 385,563
Maturities of marketable securities......................... 71,712 204,634
---------- ----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 86,794 (134,902)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock.................. 12,559 61,817
Net proceeds from the issuance of equity contracts.......... -- 3,725
Repurchases of common stock................................. (176,289) (244,132)
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES...................... (163,730) (178,590)
---------- ----------

NET DECREASE IN CASH AND CASH EQUIVALENTS................... (16,920) (174,955)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 180,519 317,580
---------- ----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 163,599 $ 142,625
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

5
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ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements of Adaptec, Inc. (the "Company") have
been prepared on a consistent basis with the March 31, 2000 audited consolidated
financial statements and include all adjustments, consisting of only normal
recurring adjustments, except as described in Notes 7, 8 and 15, 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 included in the Company's Annual
Report to Stockholders and incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended March 31, 2000. For presentation
purposes, the Company has indicated its second quarters as having ended on
September 30, whereas in fact, the Company's second quarter of fiscal 2001 ended
on September 29, 2000 and the Company's second quarter of fiscal 2000 ended on
October 1, 1999. The results of operations for the six month period ended
September 30, 2000, are not necessarily indicative of the results to be expected
for the entire year.

2. COMPREHENSIVE INCOME

The Company's comprehensive income consists of net income and the change in
the net unrealized gain on available-for-sale securities, net of income taxes,
primarily related to the Company's investment in JNI Corporation ("JNI") common
stock.

The components of comprehensive income, net of income taxes, were as
follows:

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income................................ $ 59,439 $52,164 $ 81,087 $102,704
Change in net unrealized gain on
available-for-sale securities, net of
income taxes............................ (12,723) -- (38,069) --
-------- ------- -------- --------
$ 46,716 $52,164 $ 43,018 $102,704
======== ======= ======== ========
</TABLE>

During the second quarter and first half of fiscal 2001, the Company sold
1,520,000 and 1,700,000 shares of JNI common stock and recorded a gain of
$81.6 million and $87.2 million, respectively. Total proceeds from the sales
were $97.0 million, of which $41.1 million was recorded as a receivable in
"Other current assets" in the Condensed Consolidated Balance Sheet at
September 30, 2000, and was subsequently received as of the date of this Report
on Form 10-Q. As of September 30, 2000, the Company held 272,893 shares of JNI
common stock with a fair market value of $24.3 million. Subsequently and as of
the date of this Report on Form 10-Q, the Company sold all remaining shares of
JNI common stock for $27.1 million. The gain will be recorded in the third
quarter of fiscal 2001.

The realized gain/loss on available-for-sale securities, other than JNI
common stock, was immaterial for all periods presented.

Accumulated other comprehensive income presented in the accompanying
Condensed Consolidated Balance Sheets represents the net unrealized gain on
available-for-sale securities, net of income taxes. The realization of these
gains is dependent on the market value of the securities, which is

6
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. COMPREHENSIVE INCOME (CONTINUED)
subject to fluctuation prior to the date of disposal. There can be no assurance
if and when these gains will be realized.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 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 SFAS No. 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 No. 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, and is in the process of
determining the impact that adoption will have on its consolidated financial
statements.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of Accounting Principles Board
("APB") No. 25. FIN No. 44 became effective July 1, 2000, but certain
conclusions cover specific events that occurred after either December 15, 1998,
or January 12, 2000. The adoption of FIN No. 44 did not have a material effect
on the Company's financial position or results of operations.

In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF No. 00-19, "Determination of Whether
Share Settlement is Within the Control of the Issuer for Purposes of Applying
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock"'. EITF No. 96-13 did not
address embedded settlement features which are contingent on events which are
unlikely to occur. EITF No. 00-19 addresses embedded settlement features and
states that contracts which could require cash payment cannot be accounted for
as equity of the issuer unless certain conditions are met. The adoption of EITF
No. 00-19 did not have a material effect on the Company's financial position or
results of operations.

4. BALANCE SHEET DETAIL

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

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $20,366 $21,806
Work-in-process....................................... 18,999 11,685
Finished goods........................................ 35,194 34,887
------- -------
$74,559 $68,378
======= =======
</TABLE>

7
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. BALANCE SHEET DETAIL (CONTINUED)
The components of other current assets were as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred income taxes................................. $ 54,628 $29,134
Other................................................. 68,842 45,218
-------- -------
$123,470 $74,352
======== =======
</TABLE>

The components of accrued liabilities were as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Tax related.......................................... $144,893 $100,689
Accrued compensation and related taxes............... 21,595 25,430
Acquisition related.................................. 18,694 19,097
Sales and marketing related.......................... 12,811 13,477
Stock repurchase related............................. -- 19,135
Other................................................ 13,942 15,389
-------- --------
$211,935 $193,217
======== ========
</TABLE>

5. LINE OF CREDIT

In March 2000, the Company obtained an unsecured $80.0 million revolving
line of credit which expires in March 2001. The interest rate and commitment fee
are based on a pricing matrix, which correlates with the Company's credit rating
and market interest rates. Under the arrangement, the Company is required to
maintain certain financial ratios among other restrictive covenants. As of
September 30, 2000, the Company was in compliance with all such covenants and no
borrowings were outstanding under the line of credit.

6. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT

In the first quarter of fiscal 2001, the Company and Taiwan Semiconductor
Manufacturing Co., Ltd. ("TSMC") amended the Option II Agreement. In accordance
with the amendment, the Company paid TSMC an additional $20.0 million in advance
payments to secure guaranteed capacity for wafer fabrication through
December 31, 2004. No other terms or conditions were amended.

8
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ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. STATEMENTS OF OPERATIONS

The components of interest and other income were as follows:

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income........................... $ 7,101 $ 8,193 $ 14,741 $16,631
Gain on sale of JNI common stock (Note
2)...................................... 81,608 -- 87,155 --
Gain on sale of property (Note 8)......... 1,316 -- 8,820 3,513
Gain on warrants received................. -- 10,920 -- 10,920
------- ------- -------- -------
$90,025 $19,113 $110,716 $31,064
======= ======= ======== =======
</TABLE>

8. PROPERTY SALES

During the second quarter of fiscal 2001, the Company sold its land and
building located in Colorado, having a net book value of $21.5 million, for net
proceeds of $22.8 million. The sale resulted in a gain of $1.3 million and is
included in "Interest and other income" in the Condensed Consolidated Statements
of Operations for the three and six month periods ended September 30, 2000.

During the first quarter of fiscal 2001, the Company sold land in
California, having a net book value of $12.9 million, for net proceeds of
$20.4 million. The sale resulted in a gain of $7.5 million and is included in
"Interest and other income" in the Condensed Consolidated Statement of
Operations for the six month period ended September 30, 2000.

9. STATUS OF IN-PROCESS TECHNOLOGY PROJECT

In December 1999, the Company purchased Distributed Processing Technology,
Corp., a supplier of high-performance storage solutions, including RAID
controllers and storage subsystems. As part of the purchase, the Company
acquired in-process technology consisting of next generation RAID controllers.
The Company expects to complete the in-process technology project in the first
half of fiscal 2002. The completion of the in-process technology project has
been delayed by approximately six months due to the lack of availability of
compatible industry components and the complexity brought on by additional uses
of this technology in the Company's board level products. However, the Company
still expects that the costs to complete the in-process technology project will
be in line with original estimates. Development of this project remains a
significant risk to the Company due to the remaining effort to achieve technical
feasibility, rapidly changing customer markets and significant competition from
numerous companies. Failure to bring these products to market in a timely manner
could adversely impact sales and profitability of the Company in the future.

9
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

10. NET INCOME PER SHARE

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

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC NET INCOME PER SHARE
Net income available to common
stockholders.................. $ 59,439 99,084 $ 0.60 $ 52,164 102,523 $ 0.51
======= =======

EFFECT OF DILUTIVE SECURITIES
Employee stock options and
equity contracts.............. -- 2,430 -- 6,087
4 3/4% Convertible Subordinated
Notes......................... 1,981 4,448 1,961 4,452
-------- --------- -------- ---------

DILUTED NET INCOME PER SHARE
Net income available to common
stockholders and assumed
conversions................... $ 61,420 105,962 $ 0.58 $ 54,125 113,062 $ 0.48
======== ========= ======= ======== ========= =======
</TABLE>

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC NET INCOME PER SHARE
Net income available to common
stockholders.................. $ 81,087 99,944 $ 0.81 $ 102,704 103,333 $ 0.99
======= =======

EFFECT OF DILUTIVE SECURITIES
Employee stock options and
equity contracts.............. -- 3,553 -- 5,841
4 3/4% Convertible Subordinated
Notes......................... -- -- 3,965 4,452
-------- --------- --------- ---------

DILUTED NET INCOME PER SHARE
Net income available to common
stockholders and assumed
conversions................... $ 81,087 103,497 $ 0.78 $ 106,669 113,626 $ 0.94
======== ========= ======= ========= ========= =======
</TABLE>

10
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

10. NET INCOME PER SHARE (CONTINUED)
Additional stock options to purchase 7,533,000 and 584,000 shares of common
stock were outstanding at September 30, 2000 and 1999, respectively, 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 stock.

The conversion of 4,448,000 shares of common stock related to the 4 3/4%
Convertible Subordinated Notes was not included in the computation of net income
per share for the six month period ended September 30, 2000, because it was
anti-dilutive.

As of September 30, 2000, the Company had one equity contract outstanding
pertaining to its own stock (Note 11). This contract was not included in the
computation of net income per share for the three month period ended
September 30, 2000, because it was anti-dilutive.

11. STOCK REPURCHASES

During the second quarter and first half of fiscal 2001, the Company
repurchased and retired a total of 1,000,000 and 5,000,000 shares of its common
stock for $45.3 million and $157.2 million, respectively, including shares
relating to the settlement of equity contracts as discussed below. The
transactions were recorded as reductions to common stock, additional
paid-in-capital and retained earnings.

During the second quarter of fiscal 2001, the Company physically settled two
equity contracts whereby the Company repurchased 1,000,000 shares of its common
stock at prices ranging from $44 to $46, resulting in a total cash payment of
$45.3 million. During the first quarter of fiscal 2001, the Company physically
settled two equity contracts whereby the Company repurchased 1,000,000 shares of
its common stock at prices ranging from $40 to $42, resulting in a total cash
payment of $40.8 million.

During the first quarter of fiscal 2001, the Company entered into one
additional equity contract in which the Company sold one put warrant and
purchased one call warrant. The equity contract expires in December 2000 and
represents the only equity contract outstanding as of September 30, 2000. The
put warrant could potentially obligate the Company to buy back up to 500,000
shares of its common stock at a strike price of $23 and the call warrant gives
the Company the right to buy back up to 500,000 shares of its common stock at a
strike price of $27. The settlement terms include physical settlement, cash
settlement or net-share settlement at the option of the Company.

12. STOCK PLANS

During the second quarter of fiscal 2001, the Company's Board of Directors
amended the Employee Stock Purchase Plan to extend the offering period from six
months to twenty-four months. Purchases will continue to be made every six
months.

During the second quarter of fiscal 2001, the Company's shareholders
approved the 2000 Director Option Plan and reserved for issuance thereunder
1,000,000 shares.

11
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

13. INCOME TAXES

Income tax provisions for interim periods are based on the Company's
estimated annual income tax rate. The Company recorded an income tax provision
of 42.8% and 30.9% of income before provision for income taxes for the second
quarters of fiscal 2001 and fiscal 2000, respectively. The Company's effective
tax rate is generally less than the combined U.S. federal and state statutory
income tax rate of 40% due to income earned in Singapore where the Company is
subject to a significantly lower income tax rate, resulting from a tax holiday
relating to certain products. However, in the second quarter of fiscal 2001, the
reduction in the Company's effective income tax rate from the Singapore tax
holiday was more than offset primarily by amortization of goodwill and other
intangibles in excess of amounts deductible for tax purposes.

14. 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
Company's motion to dismiss the complaint was granted in April 2000. The
plaintiffs filed an amended complaint in July 2000. In October 2000, the Company
filed a motion to dismiss the amended complaint. The Company believes the class
action lawsuit is without merit and intends to defend itself vigorously.

On June 27, 2000, the Company received a statutory notice of deficiency with
respect to its federal income tax returns for fiscal 1994 through 1996. The
Company filed a Petition with the United States Tax Court on September 25, 2000,
contesting the asserted deficiencies. The Company believes it has meritorious
defenses against all deficiencies asserted in the notice and intends to contest
them. In addition, the IRS is currently auditing the Company's federal income
tax returns for fiscal 1997 through 1999, for which no proposed adjustments have
been received. The Company believes sufficient taxes have been provided in all
prior years and the ultimate outcome of the IRS audits will not have a material
adverse impact on the Company's financial position or results of operations.

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.

15. SEGMENT REPORTING

The Company's operating segments are organized by technologies and include
Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS"), Software
and Other. A complete description of the operating segments can be found in the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Stockholders for the fiscal year ended March 31, 2000.

12
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ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

15. SEGMENT REPORTING (CONTINUED)
subject to board approval and receipt of a tax-free ruling from the IRS. In
September 2000, Roxio filed a Registration Statement on Form S-1 to register the
sale of approximately 15% of its outstanding stock. The S-1 has not become
effective as of the date of this Report on Form 10-Q.

In October 2000, the Company redefined its operating segments to show the
Desktop Products Group ("DPG"), (formerly reported as a component of the DAS
segment) as a separate segment to create greater focus and drive additional
revenue growth in the desktop market. Net revenues from the DPG segment were
$21.0 million in the second quarter of fiscal 2001, compared to $35.6 million in
the second quarter of fiscal 2000. Net revenues from the DPG segment were
$49.0 million in the first half of fiscal 2001, compared to $81.4 million in the
first half of fiscal 2000. The Company is in the process of determining the
historical profitability of the DPG segment. The DPG segment will be reported
separately beginning in the third quarter of fiscal 2001.

Summarized financial information concerning the Company's reportable
segments as of September 30, 2000 is shown in the following table. The Company
does not separately identify assets or depreciation by operating segments nor
are the segments evaluated under these criteria.

SNS:
Net revenues............................ 9,804 5,988 16,372 11,793
Segment profit (loss)................... (1,588) 1,350 (2,904) 2,870

SOFTWARE:
Net revenues............................ 29,082 14,074 58,015 24,627
Segment profit (loss)................... 2,127 (989) 6,835 (1,120)

OTHER:
Net revenues............................ -- 2,250 -- 2,250
Segment profit.......................... 85,568 8,620 99,858 9,868
</TABLE>

13
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ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

15. SEGMENT REPORTING (CONTINUED)
The following table presents the details of "Other" segment profit:

14
<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:

BUSINESS SEGMENTS. The Company's operating segments are organized by
technologies and include Direct Attached Storage ("DAS"), Storage Networking
Solutions ("SNS"), Software and Other. A complete description of the operating
segments can be found in the Notes to Consolidated Financial Statements in the
Company's Annual Report to Stockholders for the fiscal year ended March 31,
2000.

In June 2000, the Company announced its plan to spin-off the Software
segment, subsequently incorporated as Roxio, Inc. ("Roxio"), in the form of a
fully independent and separate company. The Company expects to complete an
initial public offering ("IPO") of approximately 15% of Roxio's stock and
distribute the remaining Roxio stock to the Company's stockholders in a tax-free
distribution. The IPO will be subject to board approval and regulatory approval,
and the stockholder distribution will be subject to board approval and receipt
of a tax-free ruling from the IRS. In September 2000, Roxio filed a Registration
Statement on Form S-1 to register the sale of approximately 15% of its
outstanding stock. The S-1 has not become effective as of the date of this
Report on Form 10-Q.

15
<PAGE>
NET REVENUES. Net revenues were $185.5 million for the second quarter of
fiscal 2001, representing a decrease of 4.5% from net revenues of
$194.3 million for the second quarter of fiscal 2000. Net revenues were
$368.9 million for the first half of fiscal 2001, representing a decrease of
4.6% from net revenues of $386.7 million for the first half of fiscal 2000.

Net revenues for the second quarter of fiscal 2001 were comprised of
$146.6 million from the DAS segment, a decrease of 14.8% from the second quarter
of fiscal 2000, $9.8 million from the SNS segment, an increase of 63.7% from the
second quarter of fiscal 2000, and $29.1 million from the Software segment, an
increase of 106.6% from the second quarter of fiscal 2000.

Net revenues for the first half of fiscal 2001 were comprised of
$294.5 million from the DAS segment, a decrease of 15.4% from the first half of
fiscal 2000, $16.4 million from the SNS segment, an increase of 38.8% from the
first half of fiscal 2000, and $58.0 million from the Software segment, an
increase of 135.6% from the second quarter of fiscal 2000.

Net revenues from the DAS segment decreased year over year, primarily due to
a lack of Intel microprocessors and motherboards in the distribution channel
which adversely impacted some server production. Intel underestimated
microprocessor demand as they transitioned their production from 0.25 micron
technology to 0.18 micron technology and they experienced problems with their
840 memory controller hub, a critical component to motherboards. Because demand
for the Company's board level premium DAS products are dependent on server
production, the Company's net revenues declined in the first half of fiscal
2001. Additionally, net revenues from the DAS segment in the first half of
fiscal 2001 were adversely impacted by a continued decline in demand for desktop
products brought about by penetration of products incorporating the
less-expensive Ultra-DMA technology. Finally, net revenues from the DAS segment
were adversely impacted by defective QLogic, Corp. I/O silicon in one of the
Company's mid-range redundant array of independent disks ("RAID") product
offerings. These defects necessitated a recall of a limited number of the
mid-range Distributed Processing Technology, Corp. ("DPT") based products. This
decline in net revenues from the DAS segment in the first half of fiscal 2001
was partially offset by strong demand for the Company's RAID controllers for
entry and mid-range servers, as well as design wins with certain original
equipment manufacturers ("OEMs").

Net revenues from the SNS segment for the first half of fiscal 2001 and
fiscal 2000 were derived primarily from sales of single-port and multi-port
network interface cards. Net revenues from the sales of these products increased
year over year primarily as a result of design wins with certain OEMs.
Additionally, the increase was attributable to the first sale of the Company's
one-gigabit fibre channel adapters, utilizing technology licensed from Agilent
Technologies, Inc. ("Agilent"), which launched in the second quarter of fiscal
2001.

Net revenues from the Software segment increased year over year as a result
of sales of the Company's Easy CD Creator 4.0 Deluxe which launched domestically
in the second quarter of fiscal 2000 and worldwide in the third quarter of
fiscal 2000. Additionally, the increase was attributable to continued worldwide
growth in the CD-R and CD-RW drive markets and additional design wins with
personal computer ("PC") OEMs. The acquisitions of CeQuadrat GmbH ("CeQuadrat")
and Wild File, Inc. ("Wild File") in the second and fourth quarters of fiscal
2000, respectively, also contributed incremental net revenues in the first half
of fiscal 2001, as compared to the first half of fiscal 2000.

GROSS MARGIN. Gross margin for the second quarter and first half of fiscal
2001 was 60.7% and 61.1%, respectively, compared to 65.9% and 65.6% for the
second quarter and first half of fiscal 2000. The Company's gross margin in the
first half of fiscal 2001 was adversely impacted by excess manufacturing
capacity primarily related to reduced demand for the Company's board level
premium DAS products as discussed above. Additionally, the Company's gross
margins were impacted by proportionately higher sales of the Company's RAID
products, which generally obtain lower margins than most other premium Adaptec
products, and proportionately higher sales to OEMs.

16
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Spending for research and development
was $31.0 million for the second quarter of fiscal 2001, representing an
increase of 33.5% from $23.2 million for the second quarter of fiscal 2000.
Spending for research and development was $61.5 million for the first half of
fiscal 2001, representing an increase of 28.8% from $47.7 million for the first
half of fiscal 2000. As a percentage of net revenues, research and development
expenses increased to 16.7% in both the second quarter and first half of fiscal
2001, from 11.9% and 12.3% in the second quarter and first half of fiscal 2000,
respectively. The increase in research and development expenses was primarily
attributable to additional resources obtained through the Company's fiscal 2000
acquisitions and additional research and development efforts focused on driving
the convergence of storage and networking technologies, delivering interoperable
fibre channel products and building pervasive solutions that broaden the
adoption of Storage Area Network Solutions ("SANS"). Additionally, the Company
recorded amortization of deferred stock-based compensation of $1.3 million,
related to the acquisition of Wild File, in the first half of fiscal 2001.

SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling,
marketing and administrative activities was $45.3 million for the second quarter
of fiscal 2001, representing an increase of 12.5% from $40.2 million for the
second quarter of fiscal 2000. Spending for selling, marketing and
administrative activities was $87.6 million for the first half of fiscal 2001,
representing an increase of 10.1% from $79.6 million for the first half of
fiscal 2000. As a percentage of net revenues, selling, marketing and
administrative expenses increased to 24.4% and 23.8% in the second quarter and
first half of fiscal 2001, respectively, from 20.7% and 20.6% in the second
quarter and first half of fiscal 2000, respectively. The increase in selling,
marketing and administrative expenses was primarily attributable to
$5.6 million of general and administrative expenses incurred in connection with
the planned Software segment spin-off during the first half of fiscal 2001.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $19.5 million and $39.0 million for the second quarter
and first half of fiscal 2001, respectively, compared to $2.3 million and
$2.8 million in the second quarter and first half of fiscal 2000, respectively.
Amortization of goodwill and other intangibles for the first half of fiscal 2001
resulted from the acquisitions of CeQuadrat, DPT and Wild File, and the
amortization of warrant costs associated with the license agreement with
Agilent. Amortization of goodwill and other intangibles for the first half of
fiscal 2000 resulted from the acquisitions of CeQuadrat and Data Kinesis, Inc.
only.

INTEREST AND OTHER INCOME. The components of interest and other income were
as follows:

The decrease in interest income year over year was due to the lower average
cash, cash equivalents and marketable securities balances resulting primarily
from repurchases of the Company's common stock.

INTEREST EXPENSE. Interest expense was $3.1 million and $6.1 million for
the second quarter and first half of fiscal 2001, respectively, compared to
$3.0 million and $5.9 million for the second quarter and first half of 2000,
respectively. Interest expense during these periods resulted primarily from the
Company's 4 3/4% Convertible Subordinated Notes.

17
<PAGE>
INCOME TAXES. Income tax provisions for interim periods are based on
estimated annual income tax rates. The Company recorded an income tax provision
of 42.8% and 30.9% of income before provision for income taxes for the second
quarters of fiscal 2001 and fiscal 2000, respectively. The Company's effective
tax rate is generally less than the combined U.S. federal and state statutory
income tax rate of 40% due to income earned in Singapore where the Company is
subject to a significantly lower income tax rate, resulting from a tax holiday
relating to certain products. However, in the second quarter of fiscal 2001, the
reduction in the Company's effective income tax rate from the Singapore tax
holiday was more than offset primarily by amortization of goodwill and other
intangibles in excess of amounts deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, the Company's principal sources of liquidity
consisted of $568.0 million of cash, cash equivalents and marketable securities,
and an unsecured $80.0 million revolving line of credit. As of September 30,
2000, there were no borrowings outstanding under the line of credit.

Cash, cash equivalents and marketable securities decreased 14.3% from $662.7
million as of March 31, 2000. During the first half of fiscal 2001, the Company
used its liquid assets to repurchase and retire 5,000,000 shares of its common
stock for $157.2 million, and to pay $19.1 million for stock repurchases on
March 31, 2000. Additionally, the Company purchased $16.6 million of property
and equipment during the first half of fiscal 2001. The uses of cash were offset
by cash generated from operations of $60.0 million, net proceeds of $43.3
million from the sale of property and equipment and proceeds of $12.6 million
from the issuance of common stock to employees through its stock option plans.

The Company's cash, cash equivalents and marketable securities also
decreased due to the sales of JNI Corporation ("JNI") common stock. During the
first half of fiscal 2001, the Company sold 1,700,000 shares of JNI common
stock, however, $41.1 million of the proceeds was recorded as a broker
receivable in "Other current assets" in the Condensed Consolidated Balance Sheet
at September 30, 2000. The decrease of $41.1 million related to the broker
receivable was partially offset by an increase in the value of the Company's
marketable securities of $23.3 million, primarily related to its investment in
JNI common stock.

The Company believes that its 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 over the next
twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

18
<PAGE>
The adoption of FIN No. 44 did not have a material effect on the Company's
financial position or results of operations.

CERTAIN FACTORS BEARING RISK ON 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 sales, gross
margins, operating expenditures and the initial public offering and subsequent
distribution of Roxio, Inc. stock, and the Notes to Condensed Consolidated
Financial Statements include statements relating to the completion of an
in-process technology project and the initial public offering and subsequent
distribution of Roxio, Inc. stock. 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 our
expectations, estimates, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements.

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

OUR FUTURE OPERATING RESULTS ARE SUBJECT TO FLUCTUATION, WHICH COULD REDUCE
OUR STOCK PRICE. Our operating results may fluctuate as a result of a wide
variety of factors, including, but not limited to, the following:

- cancellations or postponements of orders

- shifts in the mix of our products and sales channels

- changes in pricing policies by our suppliers

- shortages of components or wafer fabrication capacity affecting us, our
customers or our suppliers

- the market acceptance of new and enhanced versions of our products

- product obsolescence

- shortage of skilled labor

- general worldwide economic and computer industry fluctuations

- future accounting pronouncements

- changes in accounting policies

19
<PAGE>
- the timing of acquisitions of other business products and technologies and
any associated charges or earnings

- restructuring actions or other involuntary terminations

In addition, operating results in any particular quarter or year that do not
meet the expectations of securities analysts are likely to cause volatility in
the price of our common stock.

Fiscal 2001 operating results were materially impacted by unusual charges,
including the following:

- shortage of computer components resulting in a decline in net revenues in
the DAS segment

- general and administrative expenses incurred in connection with the
Software segment spin-off

- amortization of deferred stock-based compensation expense related to the
acquisition of Wild File, Inc.

Fiscal 2000 operating results were materially impacted by unusual charges,
including the following:

- write-offs of acquired in-process technology

- write-off of estimated license fees attributable to a patent settlement
agreement

Fiscal 1999 operating results were materially impacted by unusual charges,
including the following:

- write-offs of acquired in-process technology

- costs related to the termination of the Symbios, Inc. acquisition

- restructuring charges

- impairment of assets

- terminations of senior executives

In addition to the unusual charges described above, our fiscal 1999
operating results were adversely affected by the following:

- shifts in corporate and retail buying patterns

- increased competition

- emerging technologies

- economic instability in Asia

- turbulence in the computer disk drive industry.

IF DEMAND FOR OUR CUSTOMERS' PRODUCTS DECLINE OR OUR CUSTOMERS DO NOT
CONTROL THEIR INVENTORIES EFFECTIVELY, OUR REVENUES MAY BE ADVERSELY
AFFECTED. The volume and timing of orders received during a quarter are
difficult to forecast. Our 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 us. We have historically operated with a relatively small backlog
and have set our operating budget based in part on expectations of future
revenues. Because much of our operating budget is relatively fixed in the
short-term, if revenues do not meet our expectations, then our operating income
and net income will be disproportionately affected.

20
<PAGE>
IF DEMAND FOR SERVERS, WORKSTATIONS OR HIGH-PERFORMANCE DESKTOPS DECLINE,
OUR REVENUES FROM OUR DAS SEGMENT MAY DECLINE. Our Direct Attached Storage, or
DAS, products are used primarily in enterprise-class servers, workstations and
high-end desktop computer systems. Our DAS products include host bus adapters,
or HBA's, Redundant Array of Independent Disks, or RAID, controllers, 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. Historically, our growth has been supported by
increasing demand for systems that support:

- client/server applications

- computer-aided engineering

- Internet/intranet applications

- data storage and digital content

- multimedia

- video

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. Our
business or operating results could be materially adversely affected by a
similar decline in demand for our products. In addition, other technologies may
replace our existing technologies and the acceptance of our technologies in the
market may not be widespread, which could materially adversely affect our
revenues.

IF THE DEMAND FOR DESKTOP COMPUTER SYSTEMS AND CD-R AND CD-RW DRIVES
DECLINES, REVENUES FROM OUR SOFTWARE SEGMENT MAY DECLINE. Our software products
are used primarily in desktop computer systems to enable CD-R and CD-RW
capabilities. We sell our software products primarily to major OEMs and
distributors. Our business depends on general economic and business conditions
and the growth of the CD-R and desktop computer markets. If demand for our
products slows or the CD-R market does not develop as quickly as we expect, our
business or operating results may decline materially due to the resulting
decline in demand for our products.

IF WE ARE UNABLE TO PROVIDE ADEQUATE CUSTOMER SERVICE DURING OUR CUSTOMERS'
DESIGN AND DEVELOPMENT STAGE OR IF WE ARE UNABLE TO PROVIDE SUCH SERVICE IN A
TIMELY MANNER, REVENUES MAY BE LOST TO OUR COMPETITION. Certain of our products
are designed to meet our customers specifications and, to the extent we are not
able to meet these expectations at all or in timely manner, our customers may
choose to buy similar products from another company. As a result, our financial
results could be materially adversely impacted.

WE MAY BE UNABLE TO GENERATE ENOUGH REVENUES FROM PRODUCTS INCORPORATING
TECHNOLOGY LICENSED FROM AGILENT TO OFFSET THE GUARANTEED PAYMENTS TO AGILENT,
WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS. In
January 2000, we entered into a four-year agreement with Agilent
Technologies, Inc., or Agilent, to co-develop, market and sell fibre channel
host adapters. As part of the agreement, we agreed to license Agilent's fibre
channel host adapter and software driver technology and pay guaranteed minimum
royalty payments of $60.0 million over the term of the agreement as follows:
$6.0 million in the first year, $12.0 million in the second year, $18.0 million
in the third year and $24.0 million in the fourth year. Additionally, we issued
Agilent warrants to purchase Adaptec common stock valued at $37.1 million. The
cost of these warrants is being amortized over the term of the agreement. If we
are unable to generate sufficient revenues to offset our commitment per the
agreement and warrant amortization expenses, our results of operations could be
materially adversely impacted.

21
<PAGE>
IF THERE IS A SHORTAGE OF COMPUTER COMPONENTS IN THE MARKET, OUR SALES MAY
DECLINE, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS. If
our customers are unable to purchase certain components which are embedded into
their products, then their demand for our components may decline. Beginning in
the fourth quarter of fiscal 2000, we began to experience the impact of other
companies' chip supply shortages, which reduced the demand for some of our DAS
products. This resulted in a decline in our net revenues in the first half of
fiscal 2001. This shortage, as well as other shortages, could materially
adversely impact our sales and thereby our results of operations going forward.

OUR RELIANCE ON INDUSTRY STANDARDS AND TECHNOLOGICAL CHANGE IN THE
MARKETPLACE MAY CAUSE OUR REVENUES TO FLUCTUATE OR DECLINE. Various standards
and protocols that evolve with time characterize the computer industry. We
design our products to conform to certain industry standards and protocols such
as the following:

TECHNOLOGIES:

- SCSI

- PCI and PCIX

- RAID

- Ultra-DMA (or UDMA)

- Etherstorage

- Infiniband

- Fibre channel

- 1394

- USB

OPERATING SYSTEMS:

- Windows (including Windows 98 and Windows NT)

- OS/2

- Netware

- UNIX

- Novell

- Macintosh

- Linux

In particular, a majority of our revenues are currently derived from
products based on the SCSI standard. If consumer acceptance of these standards
declines, or if new standards emerge, and if we did not anticipate these changes
and develop new products, these changes could materially adversely affect our
business or operating results. For example, we believe 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 our products beginning in fiscal 1998 and may
materially adversely affect our future sales.

22
<PAGE>
IF OUR PRODUCTS DO NOT INTEROPERATE EFFECTIVELY, THIS COULD NEGATIVELY
IMPACT OUR REVENUES AND REDUCE THE PRICE OF OUR STOCK. We must design our
products to interoperate effectively with a variety of hardware and software
products supplied by other manufacturers, including the following:

- microprocessors

- peripherals

- operating system software

We depend on significant cooperation with these manufacturers to achieve our
design objectives and produce products that interoperate successfully. We
believe that generally we have good relationships with leading system,
peripheral, and microprocessor suppliers; however, these suppliers may, from
time to time, make it more difficult for us to design our products for
successful interoperability. These suppliers also may decide to compete with us.

OUR DEPENDENCE ON NEW PRODUCTS MAY CAUSE OUR REVENUES TO FLUCTUATE OR
DECLINE. Our future success is highly dependent upon our completing and
introducing new products at competitive price/performance levels in a timely
manner. The success of new product introductions depends on several factors,
including the following:

- defining products to meet customer needs

- product costs

- timely completion and introduction of new product designs relative to
customers' needs and competitor introductions

- quality of new products

- differentiation of new products from those of our competitors

- market acceptance of our products

As a result, we believe that continued significant expenditures for research
and development will be required in the future. We may fail to identify new
product opportunities and develop and bring new products to market in a timely
manner. In addition, products or technologies developed by others may render our
products or technologies obsolete or noncompetitive, or our targeted customers
may not select our products for design or integration into the products. The
failure of any of our new product development efforts could have a material
adverse effect on our business or operating results.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY OUR REVENUES AND OUR STOCK PRICE MAY
DECLINE. The markets for all of our products are intensely competitive and are
characterized by the following:

- rapid technological advances

- frequent new product introductions

- evolving industry standards

- price erosion

In the DAS and Storage Networking Solutions, or SNS, segments, we compete
with LSI Logic Corporation, QLogic, Corp., American Megatrends, Inc., Mylex
Corporation (a subsidiary of IBM) and other captive manufacturers and suppliers.
Our principal competitors in the Software segment range from small operations to
large consumer software companies. As we have continued to broaden our bandwidth
management product offerings into the server, and workstation and desktop
environments, we have experienced, and expect to experience in the future,
significantly increased competition both from existing competitors and from
additional companies that may enter our markets. Some of these

23
<PAGE>
companies have greater technical, marketing, manufacturing, and financial
resources than we do. We cannot assure that we will have sufficient resources to
accomplish any of the following:

- meet growing product demand

- make timely introduction of new leading-edge solutions in response to
competitive threats

- compete successfully in the future against existing or potential
competitors

- provide OEMs with timely design specifications

- prevent price competition from eroding margins

COSTS ASSOCIATED WITH ACQUISITIONS MAY CAUSE OUR FINANCIAL CONDITION OR
OPERATING RESULTS TO DECLINE, WHICH COULD BE EXACERBATED IF WE ARE UNABLE TO
INTEGRATE THE ACQUIRED COMPANIES, PRODUCTS OR TECHNOLOGIES. In July 1999, we
acquired CeQuadrat, in December 1999, we acquired Distributed Processing
Technology, Corp., or DPT, and in March 2000, we acquired Wild File, Inc. Each
of the acquisitions was accounted for using the purchase method of accounting.
In January 2000, we entered into an agreement with Agilent to co-develop, market
and sell fibre channel HBAs. As part of our overall strategy, we may continue to
acquire or invest in complementary companies, products, or technologies and
enter into joint ventures and strategic alliances with other companies. In order
to be successful in these activities, we must:

- assimilate the operations and personnel of the combined companies

- minimize the potential disruption of our ongoing business

- retain key technical and managerial personnel

- integrate the acquired company into Adaptec's strategic and financial
plans

- accurately assess the value of potential target businesses, products or
technologies

- anticipate changes in the market conditions for acquired products or
technologies

- harmonize standards, controls, procedures, and policies

- minimize the impairment of relationships with employees and customers

We may incur expenses associated with amortization of acquired intangible
assets. The benefits of acquisitions may prove to be less than anticipated and
may not outweigh the costs reported in our financial statements.

We may not be successful in overcoming these risks or any other problems
encountered in connection with these or other business combinations,
investments, or joint ventures. These transactions may materially adversely
affect our business, financial condition or operating results.

WE DEPEND ON WAFER SUPPLIERS WHOSE FAILURE TO MEET OUR MANUFACTURING NEEDS
COULD NEGATIVELY AFFECT OUR OPERATIONS. Independent foundries currently
manufacture to our specifications all of the finished silicon wafers used for
our products. We currently purchase most of our wafers through a supply
agreement with Taiwan Semiconductor Manufacturing Corp., or TSMC. The
manufacture of semiconductor devices is sensitive to a wide variety of factors,
including the following:

- the availability of raw materials

- the availability of manufacturing capacity

- the level of contaminants in the manufacturing environment

- impurities in the materials used

- the performance of personnel and equipment

24
<PAGE>
While we have been satisfied with the quality, yield, and timeliness of
wafer deliveries to date, we cannot assure that manufacturing problems may not
occur in the future. In addition, although we have various supply agreements
with our suppliers, a shortage of raw materials or production capacity could
lead our wafer suppliers to allocate available capacity to other customers, or
to the suppliers' internal uses. Any prolonged inability to obtain wafers with
competitive performance and cost attributes, adequate yields, or timely
deliveries from our foundries would delay our production and our product
shipments and could have a material adverse impact on our business or operating
results. We expect that our current suppliers will seek to convert their
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 our current
suppliers are unable or unwilling to satisfy our wafer needs, we will be
required to identify and qualify additional foundries. Additional wafer
foundries may be unavailable, may prove to be unqualified, and may be unable to
satisfy our requirements on a timely basis.

In order to secure wafer capacity, from time to time we have entered into
"take or pay" contracts that have committed us to purchase specified wafer
quantities over extended periods, and we have made prepayments to foundries. In
the future, we may enter into similar transactions, including, without
limitation, the following:

- non-refundable deposits

- loans

- equity investments

- joint ventures

- other partnership relationships

Any such transaction could require us to seek additional equity or debt
financing to fund such activities. We may not be able to obtain any required
financing on terms acceptable to us.

WE DEPEND ON SUBCONTRACTORS WHOSE FAILURE TO MEET OUR MANUFACTURING NEEDS
COULD NEGATIVELY AFFECT OUR OPERATIONS. We rely on subcontractors for the
assembly and packaging of the integrated circuits, or ICs, included in our
products. We have no long-term agreements with our assembly and packaging
subcontractors. We also use board subcontractors to better balance production
runs and capacity. We cannot assure that such subcontractors will continue to be
able and willing to meet our 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 impact on our business or operating results.

WE DEPEND ON THE EFFORTS OF OUR DISTRIBUTORS, WHICH IF REDUCED, WOULD RESULT
IN LOWER REVENUES AND OPERATING RESULTS. Our distributors generally offer a
diverse array of products from several different manufacturers. Accordingly, we
are at risk that these distributors may give higher priority to selling products
from other suppliers, thus reducing their efforts to sell our products. A
reduction in sales efforts by our current distributors could materially
adversely impact our business or operating results. Our distributors may on
occasion build inventories in anticipation of substantial growth in sales, and
if such growth does not occur as rapidly as they anticipate, distributors may
decrease the amount of product ordered from us in subsequent quarters. In
addition, if we decrease our price protection or distributor-incentive programs,
our distributors may temporarily decrease the amounts of product purchased from
us. This could result in a change in distributor business habits, and
distributors may decide to decrease the amount of product held and reduce their
inventory levels. This could reduce our revenues in any given quarter and could
negatively impact our operating results. In addition, we may from time to time
take actions to reduce levels of products at distributors. These actions could
reduce our revenues in any given quarter and could negatively impact our
operating results or revenues.

25
<PAGE>
Gross revenues from distributors accounted for 54% of our total gross
revenues in fiscal 2000. One distributor accounted for 13% of net revenues in
fiscal 2000 and 19% of gross trade receivables as of March 31, 2000. Another
distributor accounted for 11% of gross trade receivables as of March 31, 2000,
but represented less than 10% of net revenues in fiscal 2000.

OUR OPERATIONS DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD AFFECT OUR
BUSINESS AND REDUCE OUR FUTURE REVENUES. Our future success depends in large
part on the continued service of our key technical, marketing, and management
personnel, and on our ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
who are 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 materially adversely
affect our business, operating results or revenues. Specifically, the expansion
of high technology companies in Silicon Valley, where our corporate offices are
located, has increased demand and competition for qualified personnel. Our
continued growth and future operating results will depend upon our ability to
attract, hire and retain significant numbers of qualified employees.

CERTAIN OF OUR INTERNATIONAL OPERATIONS ARE RISKY, AND MAY NEGATIVELY AFFECT
OUR OPERATIONS OR REVENUES. Our manufacturing facilities and various
subcontractors it utilizes from time to time are primarily located in Asia.
Additionally, we have various sales offices and customers throughout Europe,
Japan, and other countries. Our 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. We may use forward exchange contracts to manage any
exposure associated with certain foreign currency-denominated commitments. In
addition, because our primary wafer supplier, TSMC is located in Taiwan, we may
be subject to certain risks resulting from the political instability in Taiwan,
including conflicts between Taiwan and the People's Republic of China.

IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE
MAY BE UNABLE TO COMPETE EFFECTIVELY. Historically, we have devoted significant
resources to research and development, and we believe that the intellectual
property derived from such research and development is a valuable asset that is
important to the success of our business. Although we actively maintain and
defend our intellectual property rights, we may be unable to adequately protect
our proprietary rights. In addition, the laws of certain territories in which
our products are or may be developed, manufactured, or sold, including Asia and
Europe, may not protect our products and intellectual property rights to the
same extent as the laws of the United States.

Despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property, which could harm
our business. We have from time to time discovered counterfeit copies of our
products being manufactured or sold by others. Although we maintain an active
program to detect and deter the counterfeiting of our products, significant
availability of counterfeit products could reduce our revenue and damage our
reputation and goodwill with customers.

THIRD PARTIES MAY ASSERT INFRINGEMENT CLAIMS AGAINST US, WHICH MAY BE
EXPENSIVE TO DEFEND AND RESULT IN ADDITIONAL COSTS AND COULD MATERIALLY
ADVERSELY IMPACT OUR OPERATIONS AND REVENUES. From time to time, third parties
may assert exclusive patent, copyright, and other intellectual property rights
to our key technologies. We cannot assure you that third parties will not assert
infringement claims against us in the future, that assertions by third parties
will not result in costly litigation, or that we 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 the outcome,
could result in substantial cost to us and diversion of our resources. Any
infringement claim or other litigation against or by us could materially
adversely impact our business, operating results or revenues.

26
<PAGE>
In May 2000, we entered into an agreement with a third party for a patent
cross-license. We will pay the third party a patent settlement fee in return for
a release from past infringement claims prior to January 1, 2000 and a fully
paid-up license fee for the use of certain of the third party's patents through
June 30, 2004. Additionally, we will grant the third party a license to use all
of our patents for the same period. The aggregate fee to be paid by us under the
cross-license agreement will range from $11.0 million to $25.0 million,
depending on the outcome of an evaluation of certain patents by an independent
party. Our best estimate of the aggregate fee that will be payable under the
cross-license agreement is $18.0 million.

WE MAY ENCOUNTER NATURAL DISASTERS, WHICH MAY NEGATIVELY AFFECT OUR
OPERATIONS AND OUR FINANCIAL CONDITION. Our corporate headquarters in
California are located near major earthquake faults. Any damage to our
information systems caused as a result of an earthquake, fire or any other
natural disasters could have a material impact on our business, financial
condition and results of operations. Additionally, our primary wafer supplier is
located in Taiwan, which has experienced significant earthquakes. A severe
earthquake could interrupt our manufacturing process and could materially
adversely impact our business, financial condition or results of operations.

WE MAY EXPERIENCE VOLATILE FLUCTUATIONS IN OUR 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. Often,
these changes have been unrelated to the operating performance of the affected
companies. In addition, factors such as technological innovations or new product
introductions by us, by our competitors, or by our customers may have a
significant impact positively or negatively, on the market price of our common
stock. Furthermore, quarter-to-quarter fluctuations in our 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 our common stock. In addition, general market conditions and
international macroeconomic factors unrelated to our performance may affect our
stock price. These conditions and other conditions and factors that generally
affect the market for stocks of technology companies could cause the price of
our common stock to fluctuate substantially over short periods.

OUR ANNOUNCED SPIN-OFF OF OUR SOFTWARE SEGMENT MAY BE DELAYED OR MAY NOT
OCCUR. In June 2000, the Company announced its plan to spin-off the Software
segment, subsequently incorporated as Roxio, Inc., or Roxio, in the form of a
fully independent and separate company. The Company expects to complete an
initial public offering, or IPO, of approximately 15% of Roxio's stock and
distribute the remaining Roxio stock to the Company's stockholders in a tax-free
distribution. The IPO will be subject to board approval and regulatory approval,
and the stockholder distribution will be subject to board approval and receipt
of a tax-free ruling from the IRS. In September 2000, Roxio filed a Registration
Statement on Form S-1 to register the sale of approximately 15% of its
outstanding stock. The S-1 has not become effective as of the date of this
report on Form 10-Q. We may not be successful, or we may experience unexpected
delays in completing the IPO or the stockholder distribution or both, due to
market conditions or delays in obtaining the necessary approvals and IRS ruling.
In addition, such delays may adversely impact Roxio's ability to attract and
retain qualified employees and require us to incur additional expenses
associated with the spin-off, which could have a material adverse effect on our
financial condition or operating results.

WE ENGAGE IN TRANSACTIONS INVOLVING DERIVATIVES WHICH COULD ADVERSELY AFFECT
OUR FINANCIAL POSITION. We engage in transactions involving derivative
securities to execute repurchases of our common stock under stock repurchase
programs authorized by our board of directors. Some of these transactions may
obligate us to buy back shares of our common stock at prices greater than the
fair market value at the time of repurchase. In the first half of fiscal 2000,
we repurchased shares of our common stock at prices greater than the fair market
value at the date of repurchase in accordance with four derivative contracts.
Although the impact of these repurchases did not materially adversely impact our
financial

27
<PAGE>
position, in the future our obligation could be in excess of the amounts
recognized in our financial statements and could materially adversely affect our
financial position.

WE MAY BE ENGAGED IN LEGAL PROCEEDINGS THAT COULD NEGATIVELY AFFECT OUR
FINANCIAL CONDITION OR BUSINESS OPERATIONS. From time to time we are subject to
litigation or claims that could negatively affect our financial condition or
business operations. For instance, a class action lawsuit is pending in the
United States District Court for the Northern District of California against us
and certain of our officers and directors. This lawsuit alleges that we made
false and misleading statements at various times during the period between
April 1997 and January 1998 and that these statements violated federal
securities laws. Our motion to dismiss the complaint was granted in April 2000.
The plaintiffs filed an amended complaint in July 2000. In October 2000, we
filed a motion to dismiss the amended complaint. We believe this lawsuit is
without merit and we intend to defend ourselves vigorously. However, any
dispute, including this lawsuit, could cause us to incur unforeseen expenses,
could occupy an inordinate amount of our management's time and attention and
could negatively affect our financial condition or business operations.

WE MAY BE SUBJECT TO A HIGHER EFFECTIVE TAX RATE THAT COULD NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. Our effective tax rate
is benefited by a Singapore tax holiday relating to certain of our products. The
terms of the tax holiday provide that profits derived from certain products will
be exempt from tax through fiscal 2005, subject to certain conditions. If we do
not continue to meet the conditions and requirements of the tax holiday in
Singapore, our effective tax rate will increase, which could materially
adversely impact our results of operations and financial position.

WE MAY BE REQUIRED TO PAY ADDITIONAL FEDERAL INCOME TAXES WHICH COULD
NEGATIVELY IMPACT OUR FINANCIAL CONDITION. On June 27, 2000, we received a
statutory notice of deficiency from the IRS with respect to our federal income
tax returns for fiscal 1994 through 1996. The Company filed a Petition with the
United States Tax Court on September 25, 2000, contesting the asserted
deficiencies. The Company believes it has meritorious defenses against all
deficiencies asserted in the notice and intends to contest them. Additionally,
the IRS is currently auditing our federal income tax returns for fiscal 1997
through 1999, for which we have received no proposed adjustments. While we
believe we have meritorious defenses to the proposed adjustments and that
sufficient taxes have been provided, the final outcome of these matters could
materially adversely impact our financial condition.

28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For financial market risks related to changes in interest rates, foreign
currency exchange rates and derivative securities, reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
the Registrant's Annual Report to Stockholders for the year ended March 31,
2000.

As of September 30, 2000, the Company had an outstanding put warrant that
could obligate the Company to buy back 500,000 shares of its common stock at a
strike price of $23 in December 2000. The settlement terms include physical
settlement, cash settlement or net share settlement at the option of the
Company. The put warrant was priced based on the market value of the Company's
common stock at the date of issuance. The Company's obligation increases as the
market value of its common stock declines. As of September 30, 2000, the market
value of the Company's common stock was $20, which is less than the price of the
warrant, representing a $1.3 million obligation as of that date.

This represents an update to the Quantitative and Qualitative Disclosures
About Market Risk contained in the Company's Annual Report to Stockholders for
the year ended March 31, 2000.

29
<PAGE>
PART II. OTHER INFORMATION

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

The Annual Meeting of Stockholders of Adaptec, Inc. was held on August 24,
2000, in Milpitas, California. Of the total 99,124,506 shares outstanding as of
the record date, 86,959,582 shares (87.7%) 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>
Laurence B. Boucher................................... 85,816,064 1,143,518
Carl J. Conti......................................... 85,837,245 1,122,337
John East............................................. 85,843,799 1,115,783
Ilene H. Lang......................................... 85,800,868 1,158,714
Robert J. Loarie...................................... 84,558,085 2,401,497
B. J. Moore........................................... 85,800,988 1,158,594
W. Ferrell Sanders.................................... 85,806,288 1,153,294
Robert N. Stephens.................................... 85,783,643 1,175,939
Phillip E. White...................................... 85,788,478 1,171,104
</TABLE>

The stockholders approved the Company's 2000 Director Option Plan and
reserved for issuance thereunder 1,000,000 shares of common stock. The proposal
received 59,382,470 affirmative votes, 26,528,937 negative votes, 1,039,420
abstentions, and 8,755 broker non-votes.

The stockholders ratified and approved the appointment of
PricewaterhouseCoopers LLP as the independent public accountants of the Company
for the fiscal year ended March 31, 2001. The proposal received 86,404,808
affirmative votes, 231,082 negative votes, 323,692 abstentions, and no broker
non-votes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<S> <C>
10.1 2000 Director Option Plan and Form of Agreement
27.1 Financial Data Schedule for the quarter ended September 30,
2000
</TABLE>

(b.) Reports on Form 8-K:

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

30
<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.

<TABLE>
<S> <C> <C>
ADAPTEC, INC.

By: /s/ DAVID A. YOUNG Date: November 3, 2000
--------------------------------------------
David A. Young
Vice President and
Chief Financial Officer
(principal financial officer)

By: /s/ KENNETH B. AROLA Date: November 3, 2000
--------------------------------------------
Kenneth B. Arola
Vice President and
Corporate Controller
(principal accounting officer)
</TABLE>