ADAPTEC INC, 10-Q, 2000-08-11

ADAPTEC INC
10-Q, 2000-08-11
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 JUNE 30, 2000
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) (IRS Employer Identification No.)

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

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

NOT APPLICABLE
(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
June 30, 2000 was 99,172,500.

This document consists of 28 pages, excluding exhibits, of which this is
page 1.

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<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <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.... 6-13

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

Results of Operations................................... 14-16

Liquidity and Capital Resources......................... 16

Recent Accounting Pronouncements........................ 16-17

Certain Factors Bearing on Future Operating Results..... 17-25

Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................. 26

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K.................. 27

Signature................................................. 28
</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
-------------------------------
JUNE 30, JUNE 30,
2000 1999
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net revenues................................................ $183,427 $192,378
Cost of revenues............................................ 70,510 66,787
-------- --------
Gross profit................................................ 112,917 125,591
-------- --------
Operating expenses:
Research and development.................................. 30,502 24,525
Selling, marketing and administrative..................... 42,380 39,368
Amortization of goodwill and other intangibles............ 19,475 495
-------- --------
Total operating expenses.................................... 92,357 64,388
-------- --------
Income from operations...................................... 20,560 61,203
Interest and other income................................... 20,691 11,951
Interest expense............................................ (3,044) (2,959)
-------- --------
Income before provision for income taxes.................... 38,207 70,195
Provision for income taxes.................................. 16,559 19,655
-------- --------
Net income.................................................. $ 21,648 $ 50,540
======== ========

Net income per share:
Basic..................................................... $ 0.21 $ 0.49
-------- --------
Diluted................................................... $ 0.21 $ 0.46
-------- --------

Shares used in computing net income per share:
Basic..................................................... 100,805 104,142
-------- --------
Diluted................................................... 105,480 114,191
-------- --------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>
ADAPTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 121,485 $ 180,519
Marketable securities..................................... 423,735 482,172
Accounts receivable, net.................................. 90,965 90,165
Inventories............................................... 67,316 68,378
Other current assets...................................... 79,215 74,352
---------- ----------
Total current assets.................................. 782,716 895,586
Property and equipment, net................................. 134,536 135,222
Goodwill and other intangibles.............................. 255,566 275,108
Other long-term assets...................................... 58,571 40,368
---------- ----------
$1,231,389 $1,346,284
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 39,087 $ 34,009
Accrued liabilities....................................... 177,067 193,217
Line of credit............................................ 10,000 --
---------- ----------
Total current liabilities............................. 226,154 227,226
---------- ----------
4 3/4% Convertible Subordinated Notes....................... 229,800 229,800
Other long-term liability................................... 10,800 14,400
Contingencies (Note 13)
Stockholders' equity:
Common stock.............................................. 99 103
Additional paid-in capital................................ -- 58,535
Deferred stock-based compensation......................... (1,796) (2,444)
Accumulated other comprehensive income.................... 26,454 51,800
Retained earnings......................................... 739,878 766,864
---------- ----------
Total stockholders' equity............................ 764,635 874,858
---------- ----------
$1,231,389 $1,346,284
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
<PAGE>
ADAPTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 28,102 $ 72,560
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (7,190) (1,883)
Net proceeds from the sale of property and equipment........ -- 1,941
Net proceeds from the sale of land held for sale............ 20,418 16,577
Purchases of marketable securities.......................... (111,825) (496,131)
Sales of marketable securities.............................. 86,521 153,904
Maturities of marketable securities......................... 41,598 117,670
Purchases of minority investments........................... (350) (1,000)
--------- ---------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 29,172 (208,922)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock.................. 4,724 32,782
Repurchases of common stock................................. (131,032) (131,192)
Net proceeds from line of credit............................ 10,000 --
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES...................... (116,308) (98,410)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (59,034) (234,772)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 180,519 317,580
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 121,485 $ 82,808
========= =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

5
<PAGE>
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 and 8, 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 Form 10-K
for the year ended March 31, 2000. For presentation purposes, the Company has
indicated its first quarter of fiscal 2000 as having ended on June 30, 1999,
whereas in fact, the Company's first quarter of fiscal 2000 ended on July 2,
1999. The results of operations for the three month period ended June 30, 2000,
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.

2. COMPREHENSIVE INCOME (LOSS)

The Company's comprehensive income (loss) 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 (loss), net of income taxes, were as
follows:

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net income.......................................... $ 21,648 $50,540
Change in net unrealized gain on available-for-sale
securities, net of income taxes................... (25,346) --
-------- -------
$ (3,698) $50,540
======== =======
</TABLE>

During the first quarter of fiscal 2001, the Company sold 180,000 shares of
JNI common stock and recorded a gain of $5.5 million. Total proceeds from the
sales were $6.6 million, of which $5.4 million was recorded as a receivable in
"Other current assets" in the Condensed Consolidated Balance Sheet as of
June 30, 2000. As of June 30, 2000, the Company holds 1,792,893 shares of JNI
common stock. The realized gain/loss on available-for-sale securities, other
than JNI, was immaterial in the first quarter of fiscal 2001.

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 subject to
fluctuation prior to the date of disposal, and the Company's ability to sell the
securities under its current limitations. 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

6
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

3. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board tentatively 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' ". Additionally,
the EITF reached a tentative consensus that for those contracts that are entered
into before the date of the final consensus, companies will have until June 30,
2001 to bring these contracts into compliance with the final consensus. The EITF
intends to reach a final consensus at the September 2000 EITF meeting. Pending
the final consensus, the Company believes the impact of EITF No. 00-19 will not
have a material effect on its financial position or results of operations.

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 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 has not had 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 inventory were as follows:

<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................... $18,744 $21,806
Work-in-process................................... 15,558 11,685
Finished goods.................................... 33,014 34,887
------- -------
$67,316 $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>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred income taxes............................. $45,834 $29,134
Other............................................. 33,381 45,218
------- -------
$79,215 $74,352
======= =======
</TABLE>

The components of accrued liabilities were as follows:

<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Tax related....................................... $108,597 $100,689
Accrued compensation and related taxes............ 19,462 25,430
Acquisition related............................... 18,749 19,097
Sales and marketing related....................... 11,599 13,477
Stock repurchase related.......................... -- 19,135
Other............................................. 18,660 15,389
-------- --------
$177,067 $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. As of June 30, 2000, $10.0 million
was outstanding under the line of credit. 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. The Company
was in compliance with all such covenants as of June 30, 2000.

6. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT

In the first quarter of 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
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. STATEMENTS OF OPERATIONS

Interest and other income included:

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Interest income..................................... $ 7,640 $ 8,438
Gain on sale of JNI common stock (Note 2)........... 5,547 --
Gain on sale of land (Note 8)....................... 7,504 3,513
------- -------
$20,691 $11,951
======= =======
</TABLE>

8. ASSETS HELD FOR SALE

As of March 31, 2000, $12.9 million in assets held for sale, representing
land in California, was included in "Other current assets" in the Condensed
Consolidated Balance Sheet. During the first quarter of fiscal 2001, the Company
sold the land for net proceeds of $20.4 million, resulting in a gain of
$7.5 million. The gain was included in "Interest and other income" in the
Consolidated Statement of Operations for the three month period ended June 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 that the costs to complete the in-process technology project
will be in line with original estimates and it expects to complete the
in-process technology project in the fourth quarter of fiscal 2001. However,
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
JUNE 30, 2000 JUNE 30, 1999
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE
Net income available to
common stockholders........ $21,648 100,805 $0.21 $50,540 104,142 $0.49
===== =====

EFFECT OF DILUTIVE SECURITIES
Employee stock options....... -- 3,753 -- 5,597
Equity contracts............. -- 922 -- --
4 3/4% Convertible
Subordinated Notes......... -- -- 2,004 4,452
------- ------- ------- -------

DILUTED NET INCOME PER SHARE
Net income available to
common stockholders and
assumed conversions........ $21,648 105,480 $0.21 $52,544 114,191 $0.46
======= ======= ===== ======= ======= =====
</TABLE>

Additional options to purchase 8,172,000 and 3,574,000 shares of common
stock were outstanding at June 30, 2000 and June 30, 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 three month period ended June 30, 2000, because they were
anti-dilutive.

As of June 30, 2000, the Company had several equity contracts outstanding
pertaining to its own stock (Note 11). Net assumed issuances of 922,000 shares
of common stock were included in the dilutive securities with respect to these
equity contracts.

11. STOCK REPURCHASES

During the first quarter of fiscal 2001, the Company repurchased and retired
a total of 4,000,000 shares of its common stock for $111.9 million, including
shares relating to the settlement of equity contracts. The transactions were
recorded as reductions to common stock and additional paid-in-capital.

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.

10
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

11. STOCK REPURCHASES (CONTINUED)
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. As of June 30, 2000, the Company had three
outstanding put warrants which could potentially obligate the Company to buy
back up to 1,500,000 shares of its common stock at strike prices ranging from
$23 to $46, and one outstanding call warrant which 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 of these warrants include physical settlement, cash
settlement or net-share settlement at the option of the Company. All outstanding
put and call warrants expire by the end of the third quarter of fiscal 2001.

12. 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 $16.6 million representing 43% of income before provision for income taxes
for the first quarter of fiscal 2001, compared to an income tax provision of
$19.7 million representing 28% of income before provision for income taxes for
the first quarter of fiscal 2000. The Company's effective tax rate is generally
less than the combined U.S. federal and state statutory income tax rates 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 first quarter of fiscal 2001, the reduction in the Company's
effective income tax rate from the Singapore tax holiday was more than offset by
amortization of goodwill and other intangibles in excess of amounts deductible
for tax purposes.

13. 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, and the Company plans to
file a motion to dismiss the amended complaint. The Company believes the class
action lawsuit is without merit and intends to defend itself vigorously.

In May 2000, the Company entered into an agreement with a third party for a
patent cross-license. Under the agreement, the Company 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 patent license fee for the use of certain of the
third party's patents through June 30, 2004. Additionally, the Company will
grant the third party a license to use all of its patents for the same period.
The aggregate patent fee to be paid by the Company 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. The
Company's best estimate of the aggregate patent fee that will be payable under
the cross-license agreement is $18.0 million and was accrued in the third
quarter of fiscal 2000. The Company paid the first installment of $3.6 million
in the first quarter of fiscal 2001. As of June 30, 2000, $1.9 million of the
intangible asset was included in "Other current assets" and $5.6 million was
included in "Other long-term assets" in the Condensed Consolidated Balance
Sheet. As of June 30, 2000, $3.6 million of the aggregate estimated patent fee
was included in "Accrued liabilities"

11
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

13. CONTINGENCIES (CONTINUED)
and the remaining $10.8 million was reflected as "Other long-term liability" in
the Condensed Consolidated Balance Sheet.

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 believes it has meritorious defenses and intends to contest the proposed
deficiencies. 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 financial position or results of operations.

14. 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.

On June 8, 2000, the Company announced that it plans to spin off the
Software segment in the form of a fully independent and separate company (the
"Software Company"). The Company anticipates to complete an initial public
offering ("IPO") of approximately 15% of the Software Company's stock and
distribute the remaining Software Company shares held by the Company 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.

12
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

14. SEGMENT REPORTING (CONTINUED)
Summarized financial information concerning the Company's reportable
segments 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.

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-------------------------
JUNE 30, JUNE 30,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
DAS:
Net revenues.............................................. $147,926 $176,020
Segment profit............................................ 20,525 67,558
SNS:
Net revenues.............................................. 6,568 5,805
Segment profit (loss)..................................... (1,316) 1,520
SOFTWARE:
Net revenues.............................................. 28,933 10,553
Segment profit (loss)..................................... 4,708 (131)
OTHER:
Net revenues.............................................. -- --
Segment profit............................................ 14,290 1,248
</TABLE>

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

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Unallocated corporate expenses, net......................... $ (491) $(7,744)
Interest and other income................................... 20,691 11,951
Interest expense............................................ (3,044) (2,959)
General and administrative expenses relating to the Software
segment spin-off.......................................... (2,866) --
------- -------
$14,290 $ 1,248
======= =======
</TABLE>

13
<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 PERIOD ENDED
-------------------------------
JUNE 30, 2000 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Net revenues........................................ 100% 100%
Cost of revenues.................................... 38 35
--- ---
Gross profit........................................ 62 65
--- ---
Operating expenses:
Research and development.......................... 17 13
Selling, marketing and administrative............. 23 20
Amortization of goodwill and other intangibles.... 11 --
--- ---
Total operating expenses............................ 51 33
--- ---
Income from operations.............................. 11 32
Interest and other income........................... 12 6
Interest expense.................................... (2) (2)
--- ---
Income before provision for income taxes............ 21 36
Provision for income taxes.......................... 9 10
--- ---
Net income.......................................... 12% 26%
=== ===
</TABLE>

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.

On June 8, 2000, the Company announced that it plans to spin off the
Software segment in the form of a fully independent and separate company (the
"Software Company"). The Company anticipates to complete an initial public
offering ("IPO") of approximately 15% of the Software Company's stock and
distribute the remaining Software Company shares held by the Company 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.

NET REVENUES. Net revenues were $183.4 million in the first quarter of
fiscal 2001, a decrease of 4.7% from net revenues of $192.4 million from the
first quarter of fiscal 2000.

Net revenues for the first quarter of fiscal 2001 were comprised of
$147.9 million from the DAS segment, a decrease of 16.0% from the first quarter
of fiscal 2000, $6.6 million from the SNS segment, an increase of 13.1% from the
first quarter of fiscal 2000, and $28.9 million from the Software segment, an
increase of 174.2% from the first 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,
adversely impacting 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 the Company's board level
premium DAS products are essential components in server production, the Company
experienced revenue degradation in the DAS segment. Additionally, net revenues
from the DAS segment in the first quarter of fiscal 2001 were

14
<PAGE>
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.

SNS net revenues for the first quarter 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 additional design wins with certain original equipment
manufacturers ("OEMs").

Net revenues from the Software segment increased year over year primarily 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 is 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 and Wild
File, Inc. in the second and fourth quarters of fiscal 2000, respectively, also
contributed incremental net revenues in the first quarter of fiscal 2001.

GROSS MARGIN. Gross margin for the first quarter of fiscal 2001 was 61.6%
compared to 65.3% for the first quarter of fiscal 2000. The Company's fiscal
2001 first quarter gross margin was adversely impacted by decreased
manufacturing capacity utilization due to lower production volumes. The lower
production volumes were primarily related to reduced demand for the Company's
board level premium DAS products stemming from the lack of Intel microprocessors
and motherboards in the distribution channel discussed above. Additionally, the
Company's fiscal 2001 first quarter gross margin was adversely impacted by
warranty costs accrued for the recall of the Company's mid-range DPT based RAID
products discussed above, as well as the amortization of the patent license fee
included as a component of cost of revenues.

RESEARCH AND DEVELOPMENT EXPENSES. Spending for research and development
was $30.5 million for the first quarter of fiscal 2001, an increase of 24.4%
from spending for research and development of $24.5 million in the first quarter
of fiscal 2000. As a percentage of net revenues, research and development
expenses increased to 16.6% in the first quarter of fiscal 2001 from 12.7% in
the first quarter of fiscal 2000. The increase in research and development
expenses was primarily attributable to additional resources obtained through the
Company's fiscal 2000 acquisitions and its focus on new emerging technologies,
including fibre channel, etherstorage and infiniband. Additionally, the Company
recorded amortization of deferred stock-based compensation of $0.6 million,
related to the acquisition of Wild File, Inc., in the first quarter of fiscal
2001.

SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling,
marketing and administrative activities was $42.4 million for the first quarter
of fiscal 2001, an increase of 7.7% from spending for selling, marketing and
administrative activities of $39.4 million in the first quarter of fiscal 2000.
As a percentage of net revenues, selling, marketing and administrative expenses
increased to 23.1% in the first quarter of fiscal 2001 from 20.4% in the first
quarter of fiscal 2000. The increase in selling, marketing and administrative
expenses was primarily attributable to expenses incurred in connection with the
planned spin-off of the Software segment of $2.9 million.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $19.5 million for the first quarter of fiscal 2001,
compared to $0.5 million in the first quarter of fiscal 2000. Amortization of
goodwill and other intangibles for the first quarter of fiscal 2001 resulted
from the acquisitions of CeQuadrat GmbH, DPT and Wild File, Inc., and the
amortization of warrant costs associated with the license agreement with Agilent
Technologies, Inc. Amortization of goodwill and other intangibles for the first
quarter of fiscal 2000 resulted from the acquisition of Data Kinesis, Inc.

INTEREST AND OTHER INCOME. Interest and other income for the first quarter
of fiscal 2001 was $20.7 million, an increase of 73.1% from interest and other
income of $12.0 million in the first quarter of fiscal 2000. Interest and other
income for the first quarter of fiscal 2001 consisted of interest income of
$7.7 million,

15
<PAGE>
gain on the sale of land of $7.5 million and gain on the sale of JNI Corporation
common stock of $5.5 million. Interest and other income for the first quarter of
fiscal 2000 consisted of interest income of $8.5 million and gain on the sale of
land of $3.5 million. The decrease in interest income from $8.5 million in the
first quarter of fiscal 2000 to $7.7 million in the first quarter of fiscal 2001
was due to the lower average cash balances resulted primarily from repurchases
of the Company's common stock over the last 12 months.

INTEREST EXPENSE. Interest expense was $3.0 million for both the first
quarter of fiscal 2001 and the first quarter of fiscal 2000. Interest expense in
both periods resulted primarily from the Company's 4 3/4% Convertible
Subordinated Notes.

INCOME TAXES. Income tax provisions for interim periods are based on
estimated annual income tax rates. The Company recorded an income tax provision
of $16.6 million representing 43% of income before provision for income taxes
for the first quarter of fiscal 2001, compared to an income tax provision of
$19.7 million representing 28% of income before provision for income taxes for
the first quarter of fiscal 2000. The Company's effective tax rate is generally
less than the combined U.S. federal and state statutory income tax rates 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 first quarter of fiscal 2001, the reduction in the Company's
effective income tax rate from the Singapore tax holiday was more than offset by
amortization of goodwill and other intangibles in excess of amounts deductible
for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, the Company's principal sources of liquidity consisted
of $545.2 million of cash, cash equivalents and marketable securities, and an
unsecured $80.0 million revolving line of credit, of which $10.0 million was
outstanding as of June 30, 2000.

Cash, cash equivalents and marketable securities decreased 17.7% from
$662.7 million as of March 31, 2000. During the first quarter of fiscal 2001,
the Company used its liquid assets to repurchase and retire 4,000,000 shares of
its common stock for $111.9 million and to pay $19.1 million for stock
repurchased on March 31, 2000. Additionally, the Company purchased $7.2 million
of property and equipment during the first quarter of fiscal 2001. The uses of
cash were offset by cash generated from operations of $28.1 million, net
proceeds from the sale of land of $20.4 million, proceeds from net borrowings
upon the Company's line of credit of $10.0 million and proceeds received from
the issuance of common stock to employees through its stock option plans of
$4.7 million.

During the first quarter of fiscal 2001, the Company recorded a reduction of
its net unrealized gain (excluding the impact of income taxes) on its marketable
securities, primarily relating to its investment in JNI Corporation common
stock, of $42.2 million.

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

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

16
<PAGE>
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 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 has not had a
material effect on the Company's financial position or results of operations.

CERTAIN FACTORS BEARING 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 Notes to Condensed Consolidated
Financial Statements include statements relating to the completion of an
in-process technology project. 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
evaluating the Company's 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

17
<PAGE>
- product obsolescence

- shortage of skilled labor

- general worldwide economic and computer industry fluctuations

- future accounting pronouncements

- changes in accounting policies

- the timing of acquisitions of other business products and technologies and
any associated charges or earnings

- restructuring actions or other involuntary terminations

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

- write-offs of acquired in-process technology

- write-off of patent settlement fee attributable to a patent cross-license
agreement

IF DEMAND FOR OUR CUSTOMERS' PRODUCTS DECLINES 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. Also, operating results in
any particular quarter that do not meet the expectations of securities analysts
are likely to cause volatility in the price of our common stock.

IF DEMAND FOR SERVERS, WORKSTATIONS OR HIGH-PERFORMANCE DESKTOPS DECLINES,
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 HBAs, 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

18
<PAGE>
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 continue to develop 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
HBAs. As part of the agreement, we agreed to license Agilent's fibre channel
HBAs 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.

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 shortage, as well as other shortages, could materially adversely
impact our sales and thereby our results of operations.

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)

19
<PAGE>
- Etherstorage

- Infiniband

- Fibre channel

OPERATING SYSTEMS:

- Windows (including Windows 98 and Windows NT)

- OS/2

- Netware

- UNIX

- Novel

- Macintosh

- Linux

In particular, a majority of our revenues are currently derived from
products based on the small computer system interface, or SCSI, standards. 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.

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

20
<PAGE>
- 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, 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 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
competition

- 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 GmbH, 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 our 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

21
<PAGE>
- harmonize standards, controls, procedures, and policies

- minimize the impairment of relationships with employees and customers as a
result of integration of new personnel

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 Co., Ltd., 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

While we have been satisfied with the quality, yield, and timeliness of
wafer deliveries to date, we cannot assure that manufacturing yield 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.

22
<PAGE>
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 a 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 we anticipate, distributors may
decrease the amount of products ordered from us in subsequent quarters. In
addition, if we decrease our price protection or distributor-incentive programs,
our distributors may temporarily decrease the amount of products purchased from
us. This could result in a change in distributor business habits, and
distributors may decide to decrease the amount of products 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.

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 we utilize 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.

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<PAGE>
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 revenues 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 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.

In May 2000, we entered into an agreement with a third party for a patent
cross-license. We will pay the third party a 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 adverse 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. On June 8, 2000, we announced plans to (i) establish the Software
segment as a fully independent and separate company, or the Software Company,
(ii) to effect an initial public offering, or IPO, of approximately 15% of the
Software Company's stock and (iii) to distribute the remaining Software Company
shares held by Adaptec to our stockholders in a tax-free distribution. The IPO
will be subject to board and regulatory approvals, and the stockholder
distribution will be subject to board approval and receipt of a tax-free letter
ruling from the Internal Revenue Service, or IRS. We may not be successful, or
we may experience unexpected delays, for example, due to market conditions, in
obtaining the necessary approvals and IRS ruling to effectuate the

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spin-off. In addition, the approval process or unexpected delays may 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 ARE EXPOSED TO CERTAIN EQUITY PRICE RISKS OR INVESTMENT RISKS WHICH COULD
AFFECT OUR QUARTERLY OR ANNUAL PROFITS AND OUR STOCK PRICE. We are exposed to
equity price risk with our investment in JNI Corporation, or JNI, common stock
included in "Marketable securities" in our Condensed Consolidated Balance Sheet
as of June 30, 2000. Since JNI's IPO in October 1999 through June 30, 2000, the
market price of JNI common stock has ranged from $20.19 to $93.88 and is likely
to continue to fluctuate. An adverse change in the price of JNI common stock and
limitations on the sale of that stock could materially adversely affect our
financial position and, if we were to sell our investment at a loss, could
materially adversely affect our financial 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 June 2000, we repurchased shares
of our common stock at prices greater than the fair market value at the date of
repurchase in accordance with two derivative contracts. Although the impact of
the June 2000 repurchases did not materially adversely impact our financial
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. The complaint does not specify damages. Our motion to dismiss
the complaint was granted in April 2000. The plaintiffs filed an amended
complaint in July 2000, and the Company plans to file 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. We benefit from a
significantly lower effective tax rate than the combined U.S. federal and state
statutory tax rates on income earned in Singapore, resulting from 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. We received a statutory notice of
deficiency from the IRS relating to our taxable fiscal years 1994 through 1996.
Additionally, the IRS is auditing our income tax returns for fiscal years 1997
through 1999, for which we have received no proposed adjustments. We intend to
contest the proposed deficiencies. 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.

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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.

The Company is exposed to equity price risk relating to its
available-for-sale securities. The Company has not attempted to reduce or
eliminate its market exposure on the available-for-sale securities. The
realization of the unrealized gains on its equity securities is dependent on the
market value for the securities, which is subject to fluctuation prior to the
date of disposal, and the Company's ability to sell the securities under its
current limitations. There can be no assurance if and when the unrealized gains
will be realized. For each 10% decline in market value of its available-for-sale
equity securities from June 30, 2000, the Company's marketable securities would
decline in value by $5.7 million.

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.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibit:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
27.1 Financial Data Schedule for the quarter ended June 30, 2000
</TABLE>

(b.) Reports on Form 8-K:

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

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SIGNATURE

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: August 11, 2000
--------------------------------------
Andrew J. Brown
Vice President, Finance and
Chief Financial Officer
(principal financial officer)
</TABLE>