ADAPTEC INC, 10-Q/A, 2000-02-03

ADAPTEC INC
10-Q/A, 2000-02-03
COMPUTER COMMUNICATIONS EQUIPMENT

Previous: QUANTUM CORP /DE/, SC 13G, 2000-02-03

Next: ARBOR ENTECH CORP, 10SB12G/A, 2000-02-03

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q/A

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-15071

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

ADAPTEC, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

This document consists of 38 pages, excluding exhibits, of which this is
page 1.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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........ 6-18

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

Results of Operations....................................... 19-27

Liquidity and Capital Resources............................. 27-28

Factors Affecting Future Operating Results.................. 28-34

Normalized Results of Operations............................ 34-35

Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................. 35

Part II. Other Information

Item 2. Changes in Securities and Use of Proceeds................. 36

Item 4. Submission of Matters to a Vote of Security Holders....... 36-37

Item 5. Other Information......................................... 37

Item 6. Exhibits and Reports on Form 8-K.......................... 37

Signatures.............................................................. 38
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------------------------- ---------------------------------------
(REVISED: NOTE 8) (REVISED: NOTE 1) (REVISED: NOTE 8) (REVISED: NOTE 1)
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues...................... $194,280 $143,922 $386,658 $ 324,552
Cost of revenues.................. 66,267 63,087 133,054 142,825
-------- -------- -------- ---------
Gross profit...................... 128,013 80,835 253,604 181,727
-------- -------- -------- ---------
Operating expenses:
Research and development........ 23,210 40,817 47,735 84,814
Sales, marketing and
administrative................ 40,242 43,077 79,610 89,096
Amortization of goodwill and
other intangibles............. 2,255 3,305 2,750 7,111
Write-off of acquired in-process
technology.................... 3,016 -- 3,016 45,482
Restructuring and other
charges....................... -- 31,924 -- 62,187
-------- -------- -------- ---------
Total operating expenses.......... 68,723 119,123 133,111 288,690
-------- -------- -------- ---------
Income (loss) from operations..... 59,290 (38,288) 120,493 (106,963)
Interest and other income......... 19,113 7,912 31,064 17,045
Interest expense.................. (2,962) (3,047) (5,921) (6,114)
-------- -------- -------- ---------
Income (loss) before provision
(benefit) for income
taxes........................... 75,441 (33,423) 145,636 (96,032)
Provision (benefit) for income
taxes........................... 23,277 (7,499) 42,932 (11,359)
-------- -------- -------- ---------
Net income (loss)................. $ 52,164 $(25,924) $102,704 $ (84,673)
======== ======== ======== =========

Net income (loss) per share:
Basic........................... $ 0.51 $ (0.23) $ 0.99 $ (0.75)
======== ======== ======== =========
Diluted......................... $ 0.48 $ (0.23) $ 0.94 $ (0.75)
======== ======== ======== =========

Shares used in computing net
income (loss) per share:
Basic........................... 102,523 111,583 103,333 112,892
======== ======== ======== =========
Diluted......................... 113,062 111,583 113,626 112,892
======== ======== ======== =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

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

<TABLE>
<CAPTION>
(REVISED: NOTE 8) (REVISED: NOTE 1)
SEPTEMBER 30, MARCH 31,
1999 1999
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 142,625 $ 317,580
Marketable securities..................................... 560,401 426,332
Accounts receivable, net.................................. 83,612 67,158
Inventories............................................... 48,888 50,838
Prepaid expenses.......................................... 15,259 11,312
Other current assets...................................... 80,527 136,797
---------- ----------
Total current assets.................................... 931,312 1,010,017
Property and equipment, net................................. 112,658 126,734
Other long-term assets...................................... 64,406 36,317
---------- ----------
$1,108,376 $1,173,068
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,699 $ 39,487
Accrued liabilities....................................... 131,861 112,879
---------- ----------
Total current liabilities............................... 163,560 152,366
---------- ----------
4 3/4% Convertible Subordinated Notes....................... 230,000 230,000
---------- ----------
Contingencies (Note 16)
Stockholders' equity:
Common stock.............................................. 102 106
Additional paid-in capital................................ 15,935 194,521
Retained earnings......................................... 698,779 596,075
---------- ----------
Total stockholders' equity.............................. 714,816 790,702
---------- ----------
$1,108,376 $1,173,068
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

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

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

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

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

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

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

See accompanying notes to condensed consolidated financial statements.

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

1. BASIS OF PRESENTATION

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

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

This Report on Form 10-Q/A represents an amendment to the Company's Report
on Form 10-Q for the second quarter of fiscal 2000 filed with the Securities and
Exchange Commission on November 8, 1999. This Report has been amended to revise
the financial statements as of and for the three and six month periods ended
September 30, 1999, as described in Note 8.

2. COMPREHENSIVE INCOME

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

3. RECENT ACCOUNTING PRONOUNCEMENTS

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

6
<PAGE>
SFAS 133 to have a material impact on the Company's financial position, results
of operations or cash flows.

4. BALANCE SHEET DETAIL

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

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

The components of accrued liabilities are as follows:

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

5. LINE OF CREDIT

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

6. LONG-TERM DEBT

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

7
<PAGE>
7. STATEMENTS OF OPERATIONS

Restructuring and other charges included:

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

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

Interest and other income included:

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.................................. $ 8,193 $7,912 $16,631 $17,045
Gain on sale of land (Note 11)................... -- -- 3,513 --
Gain on exchange of a warrant (Revised:
Note 8)........................................ 10,920 -- 10,920 --
------- ------ ------- -------
Total interest and other income.................. $19,113 $7,912 $31,064 $17,045
======= ====== ======= =======
</TABLE>

8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JNI: Under an Asset Acquisition Agreement, dated November 12, 1998, between
JNI Corporation ("JNI") and the Company ("Asset Acquisition Agreement"), the
Company sold certain fibre channel technology, products and property and
equipment to JNI. As consideration for the assets received, JNI issued to the
Company 1,132,895 shares of JNI Series A Convertible Preferred Stock. In
addition, JNI issued to the Company warrants to purchase up to 2,436,551 shares
of JNI Series A Convertible Preferred Stock (these share amounts reflect a 70%
reverse stock split effected by JNI in October 1999). Exercisability of the
warrants was contingent upon JNI attaining certain milestones such as net
revenue levels from products based on the acquired technology, new product
introductions or a change in majority control including an initial public
offering of JNI's stock before January 31, 2001.

10
<PAGE>
warrants expired unexercisable on October 27, 1999, the effective date of JNI's
initial public offering. Upon the closing of the public offering the Series A
Convertible Preferred Stock automatically converted into shares of common stock.

As a result of the exchange of warrants described above, the Company should
have recorded a gain of $10.9 million ($6.6 million net of income taxes) on
September 30, 1999, reflecting the excess of fair value of the warrant received
over the carrying amount of the warrant surrendered. The Company valued the JNI
warrant received on September 30, 1999 using the Black-Scholes valuation model.
The gain is included in "Interest and other income" in the revised Condensed
Consolidated Statements of Operations for the three and six month periods ended
September 30, 1999. The fair value of the warrant received is included in "Other
long-term assets" in the revised Condensed Consolidated Balance Sheet as of
September 30, 1999.

The Company possesses certain limited registration rights beginning two
years following the date of JNI's initial public offering with respect to the
1,132,895 shares of JNI common stock acquired in November 1998 and the
840,000 shares issuable upon exercise of the warrant. However, the Company may
sell the unregistered common shares beginning one year from the date the shares
were acquired or the warrant is exercised subject to certain restrictions
related to the trading volume or total outstanding shares of JNI.

As of September 30, 1999, there was no readily determinable market for the
common stock acquired in November 1998. Additionally, due to the governmental
and contractual restrictions in excess of one year placed on the disposal of the
shares underlying the warrant, the investments do not qualify as marketable
securities under Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, the investments are accounted for under the historical cost basis
and regularly evaluated for recoverability. When the disposal restrictions are
within one year of lapsing and the stock has a readily determinable market, the
investments will be accounted for as available-for-sale securities under
SFAS 115 which requires investments to be recorded at their fair value.
Unrealized gains or losses, net of income taxes, will be recorded as other
comprehensive income in the equity section of the Condensed Consolidated Balance
Sheet.

11
<PAGE>
The impact of the revision to the Company's financial statement is presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
AS PREVIOUSLY
BALANCE SHEET AT SEPTEMBER 30, 1999 REPORTED AS REVISED
- ----------------------------------- ------------- ----------
<S> <C> <C>
Other current assets........................................ $ 84,895 $ 80,527
Other long-term assets...................................... $ 53,486 $ 64,406
Total assets................................................ $1,101,824 $1,108,376
Retained earnings........................................... $ 692,227 $ 698,779
Total liabilities and stockholders' equity.................. $1,101,824 $1,108,376

<CAPTION>
AS PREVIOUSLY
STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 REPORTED AS REVISED
- --------------------------------------------------------------------------- ------------- ----------
Interest & other income. $ 8,193 $ 19,113
<S> <C> <C>
Income before provision for income taxes............................ $ 64,521 $ 75,441
Provision for income taxes.......................................... $ 18,909 $ 23,277
Net income.......................................................... $ 45,612 $ 52,164
Basic net income per share.......................................... $ 0.44 $ 0.51
Diluted net income per share........................................ $ 0.42 $ 0.48
Shares used in computing diluted net income per share............... 108,610 113,062

<CAPTION>
AS PREVIOUSLY
STATEMENT OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 REPORTED AS REVISED
- ------------------------------------------------------------------------- ------------- ----------
Interest & other income. 20,144 31,064
<S> <C> <C>
Income before provision for income taxes............................ $ 134,716 $ 145,636
Provision for income taxes.......................................... $ 38,564 $ 42,932
Net income.......................................................... $ 96,152 $ 102,704
Basic net income per share.......................................... $ 0.93 $ 0.99
Diluted net income per share........................................ $ 0.88 $ 0.94
Shares used in computing diluted net income per share............... 109,174 113,626
</TABLE>

9. RESTRUCTURING

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

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

10. ASSET IMPAIRMENT AND OTHER CHARGES

The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the

12
<PAGE>
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million in the second quarter of fiscal 1999, including $1.4 million in
manufacturing equipment deemed unnecessary due to non-temporary declines in
production volume and the write-off of $2.6 million of non-trade related
receivables previously classified in "Other current assets" in the Condensed
Consolidated Balance Sheets.

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

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

11. ASSETS HELD FOR SALE

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

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

13
<PAGE>
12. NET INCOME (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
(REVISED: NOTE 8)
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to
common stockholders............ $52,164 102,523 $0.51 $(25,924) 111,583 $(0.23)
===== ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents:
Stock options.................. -- 6,075 -- --
Put warrants................... -- 12 -- --
------- ------- -------- -------
-- 6,087 -- --
4 3/4% Convertible Subordinated
Notes.......................... 1,961 4,452 -- --

DILUTED NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders and assumed
conversions.................... $54,125 113,062 $0.48 $(25,924) 111,583 $(0.23)
======= ======= ===== ======== ======= ======
</TABLE>

<TABLE>
<CAPTION>
(REVISED: NOTE 8)
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders........... $102,704 103,333 $0.99 $(84,673) 112,892 $(0.75)
===== ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents:
Stock options................. -- 5,829 -- --
Put warrants.................. -- 12 -- --
-------- ------- -------- -------
-- 5,841 -- --
4 3/4% Convertible Subordinated
Notes......................... 3,965 4,452 -- --

DILUTED NET INCOME (LOSS) PER
SHARE
Net income (loss) available to
common stockholders and
assumed conversions........... $106,669 113,626 $0.94 $(84,673) 112,892 $(0.75)
======== ======= ===== ======== ======= ======
</TABLE>

Additional options to purchase 584,000 shares of common stock were
outstanding at September 30, 1999, but were not included in the computation of
diluted weighted average shares outstanding because the options' exercise price
was greater than the average market price of the common shares during the second
quarter of fiscal 2000.

14
<PAGE>
Options to purchase 22,100,000 shares of common stock were outstanding at
September 30, 1998, however, the stock options and the conversion of 4,452,000
shares of common stock related to the 4 3/4% Convertible Subordinated Notes were
not included in the computations of net loss per share for the second quarter
and first half of fiscal 1999 because they were anti-dilutive.

13. STOCK REPURCHASES

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

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

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

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

14. STOCK PLANS

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

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

15. INCOME TAXES

Income tax provisions (benefits) for interim periods are based on estimated
annual income tax rates. The difference between the Company's effective income
tax rate and the U.S. federal statutory income tax

15
<PAGE>
rate is primarily due to income earned in Singapore where the Company is subject
to a significantly lower effective income tax rate. In the second quarter of
fiscal 1999, the Company's effective income tax rate, excluding the write-off of
acquired in-process technology, was 25%. In the third quarter of fiscal 1999,
the Company's effective income tax rate changed from 25% to 28% due to a
geographic shift of earnings resulting from restructuring activities and
business divestitures.

The Company recorded an income tax provision of $23.3 million representing
30.9% of income before provision for income taxes for the second quarter of
fiscal 2000, as revised (Note 8), compared with a $7.5 million income tax
benefit representing 22.4% of the loss before benefit for income taxes for the
second quarter of fiscal 1999. The effective income tax rate used to calculate
the income tax provision for the second quarter of fiscal 2000 was higher than
28% primarily as a result of the acquired in-process technology charge
associated with the acquisition of CeQuadrat, for which no tax benefit was
provided, and the gain on the exchange of a warrant to purchase JNI common stock
for which a 40% tax provision was provided. The effective income tax rate used
to calculate the income tax benefit for the second quarter of fiscal 1999 was
lower than 25% primarily as a result of the write-off of goodwill and other
intangible asset, for which no tax benefit was provided.

16. CONTINGENCIES

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

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

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

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

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

16
<PAGE>
17. SEGMENT REPORTING

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

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

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

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

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

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

17
<PAGE>
Summarized pre-tax financial information concerning the Company's reportable
segments is shown in the following table. The Company does not identify or
allocate assets or depreciation by operating segments nor are the segments
evaluated under these criteria. The "Other" column includes corporate related
items and income and expenses not allocated to reportable segments, primarily
unusual transactions and business lines divested in fiscal 1999.

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
------------------------------ ------------------------------
(REVISED: NOTE 8) (REVISED: NOTE 8)
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
------------------ --------- ------------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HOST I/O:
Net revenues............................ $149,312 $103,802 $307,661 $ 230,881
Segment profit.......................... 64,708 22,999 132,679 58,045

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

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

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

OTHER:
Net revenues............................ 2,250 567 2,250 1,317
Segment profit (loss)................... 8,620 (41,490) 9,868 (127,535)
</TABLE>

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

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
----------------------------- -----------------------------
(REVISED: NOTE 8) (REVISED: NOTE 8)
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
----------------- --------- ----------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Losses from divested business lines....... $ -- $(15,375) $ -- $ (31,659)
Unallocated corporate profit (loss)....... (4,515) 944 (12,259) 862
Interest and other income................. 19,113 7,912 31,064 17,045
Interest expense.......................... (2,962) (3,047) (5,921) (6,114)
Write-off of acquired in-process
technology.............................. (3,016) -- (3,016) (45,482)
Restructuring and other charges........... -- (31,924) -- (62,187)
------- -------- -------- ---------
Total..................................... $ 8,620 $(41,490) $ 9,868 $(127,535)
======= ======== ======== =========
</TABLE>

18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------------------------- ---------------------------------------
(REVISED: NOTE 8) (REVISED: NOTE 1) (REVISED: NOTE 8) (REVISED: NOTE 1)
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues...................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 34.1 43.8 34.4 44.0
----- ----- ----- -----
Gross margin...................... 65.9 56.2 65.6 56.0
----- ----- ----- -----
Operating expenses:
Research and development........ 11.9 28.4 12.3 26.1
Sales, marketing and
administrative................ 20.7 29.9 20.6 27.4
Amortization of goodwill and
other intangibles............. 1.2 2.3 0.7 2.2
Write-off of acquired in-process
technology.................... 1.6 -- 0.8 14.0
Restructuring and other
charges....................... -- 22.2 -- 19.2
----- ----- ----- -----
Total operating expenses.......... 35.4 82.8 34.4 88.9
----- ----- ----- -----
Income (loss) from operations..... 30.5 (26.6) 31.2 (32.9)
Interest and other income......... 9.8 5.5 8.0 5.2
Interest expense.................. (1.5) (2.1) (1.5) (1.9)
----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes...... 38.8 (23.2) 37.7 (29.6)
Provision (benefit) for income
taxes........................... 12.0 (5.2) 11.1 (3.5)
----- ----- ----- -----
Net income (loss)................. 26.8% (18.0)% 26.6% (26.1)%
===== ===== ===== =====
</TABLE>

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

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

19
<PAGE>
The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.

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

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

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

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

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

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

20
<PAGE>
Company ships to one significant RAID original equipment manufacturer ("OEM")
customer. However, the Company is continuing to market its RAID products to all
major server manufacturers and continues to work closely with the OEMs on the
design of current and next generation products to meet customer requirements.
The Company also experienced significant growth year over year in its low-end
RAID products through channel distribution.

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

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

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

SALES, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling,
marketing and administrative activities was $40.2 million and $79.6 million for
the second quarter and first half of fiscal 2000, respectively, representing a
decrease of 6.6% and 10.6% from $43.1 million and $89.1 million for the second
quarter and first half of fiscal 1999, respectively. The decrease in spending
for selling, marketing and administrative activities was primarily due to
$2.3 million and $4.3 million of spending from the PTS segment included in the
second quarter and first half of fiscal 1999, respectively. The decrease in
spending for selling, marketing and administrative activities was also
attributable to Company-wide cost reductions initiated in fiscal 1999,
specifically reductions in workforce. As discussed above, the Company initiated
cost reduction programs in order to bring operating expenses in line with net
revenues. Sales, marketing and administrative expenses, as a percentage of net
revenues, decreased to 20.7% and 20.6% in the second quarter and first half of
fiscal 2000, respectively, from 29.9% and 27.5% in the second quarter and first
half of fiscal 1999, respectively.

21
<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $2.3 million and $2.8 million for the second quarter
and first half of fiscal 2000, respectively, compared to $3.3 million and
$7.1 million for the second quarter and first half of fiscal 1999, respectively,
as revised (Note 1). Amortization of goodwill and other intangibles for fiscal
2000 included goodwill associated with the acquisition of Data Kinesis, Inc.
("DKI") and, as it relates to the second quarter, goodwill and other intangibles
assets associated with the acquisition of CeQuadrat. Amortization of goodwill
and other intangibles for fiscal 1999 included goodwill associated with the
acquisition of DKI, Western Digital's Connectivity Solutions Group and Future
Domain Corporation, and goodwill and other intangible assets associated with the
purchase of Ridge Technologies, Inc. ("Ridge") and the acquisition of read
channel and preamplifier ASIC technologies ("ASIC technologies") purchased from
Analog Devices, Inc. ("ADI").

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

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

22
<PAGE>
In May 1998, the Company purchased Ridge, a development stage company, for
1.2 million shares of the Company's common stock valued at $21.2 million, and
assumed stock options valued at $13.1 million. Prior to the acquisition, the
Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million
and Grant Saviers, former Chairman and CEO of the Company, was a director of
Ridge. The Company incurred $0.8 million in professional fees, including legal,
valuation and accounting fees related to the acquisition, which were capitalized
as part of the purchase price of the transaction. In-process technology was
valued at $39.4 million and was written-off in the first quarter of fiscal 1999.
In August 1998, the Company divested the storage subsystems business, abandoned
the in-process technology projects (these projects remained incomplete from the
date of acquisition through abandonment) and wrote-off the remaining unamortized
goodwill of $0.6 million and other intangible asset of $1.2 million associated
with Ridge. The aggregate impact of this acquisition was not material to the
Company's consolidated financial results of operations from the acquisition
date. The tangible liabilities assumed exceeded the tangible assets acquired.
The purchase price allocation is included in the Company's fiscal 1999 Annual
Report on Form 10-K.

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

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

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

23
<PAGE>
OTHER CHARGES. The Company recorded non-cash impairment charges of
$4.0 million in the second quarter of fiscal 1999 including $1.4 million of
manufacturing equipment deemed unnecessary due to non-temporary declines in
production volume and the write-off of $2.6 million of non-trade related
receivables previously classified in "Other current assets" in the Condensed
Consolidated Balance Sheets.

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

On September 30, 1999, pursuant to an offer from JNI, the Company exchanged
existing contingent warrants to purchase shares of JNI Series A Convertible
Preferred Stock for an immediately exercisable warrant to purchase
840,000 shares of JNI Series A Convertible Preferred Stock. The remaining
contingent warrants expired unexercisable on October 27, 1999, the effective
date of JNI's initial public offering. Upon the closing of the public offering
the Series A Convertible Preferred Stock automatically converted into shares of
common stock.

As a result of the exchange of warrants described above, the Company should
have recorded a gain of $10.9 million ($6.6 million net of income taxes) on
September 30, 1999, reflecting the excess of fair value of the warrant received
over the carrying amount of the warrants surrendered. The Company valued the JNI
warrant received on September 30, 1999 using the Black-Scholes valuation model.
The gain is included in "Interest and other income" in the revised Condensed
Consolidated Statements of Operations for the three and six month periods ended
September 30, 1999. The fair value of the warrant is included in "Other
long-term assets" in the revised Condensed Consolidated Balance Sheet as of
September 30, 1999.

As of September 30, 1999, there was no readily determinable market for the
common stock acquired in November 1998. Additionally due to the governmental and
contractual restrictions in excess of one year placed on the disposal of the
shares underlying the warrant, the investments do not qualify as marketable
securities under Statement of Financial Accounting Standards No. 115 ("SFAS
115"), "Accounting for

24
<PAGE>
Certain Investments in Debt and Equity Securities". Accordingly, the investments
are accounted for under the historical cost basis and regularly evaluated for
recoverability. When the disposal restrictions are within one year of lapsing
and the stock has a readily determinable market, the investments will be
accounted for as available-for-sale securities under SFAS 115 which requires
investments to be recorded at their fair value. Unrealized gains or losses, net
of income taxes, will be recorded as other comprehensive income in the equity
section of the Condensed Consolidated Balance Sheet.

The impact of the revision to the Company's financial statement is presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
AS PREVIOUSLY
BALANCE SHEET AT SEPTEMBER 30, 1999 REPORTED AS REVISED
- ----------------------------------- ------------- ----------
<S> <C> <C>
Other current assets.................................... $ 84,895 $ 80,527
Other long-term assets.................................. $ 53,486 $ 64,406
Total assets............................................ $1,101,824 $1,108,376
Retained earnings....................................... $ 692,227 $ 698,779
Total liabilities and stockholders' equity.............. $1,101,824 $1,108,376
</TABLE>

<TABLE>
<CAPTION>
AS PREVIOUSLY AS
STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 REPORTED REVISED
- --------------------------------------------------------------------------- ------------- --------
<S> <C> <C>
Interest & other income............................................ $ 8,193 $ 19,113
Income before provision for income taxes........................... $ 64,521 $ 75,441
Provision for income taxes......................................... $ 18,909 $ 23,277
Net income......................................................... $ 45,612 $ 52,164
Basic net income per share......................................... $ 0.44 $ 0.51
Diluted net income per share....................................... $ 0.42 $ 0.48
Shares used in computing diluted net income per share.............. 108,610 113,062
</TABLE>

<TABLE>
<CAPTION>
AS PREVIOUSLY AS
STATEMENT OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 REPORTED REVISED
- ------------------------------------------------------------------------- ------------- --------
<S> <C> <C>
Interest & other income........................................... $ 20,144 $ 31,064
Income before provision for income taxes.......................... $134,716 $145,636
Provision for income taxes........................................ $ 38,564 $ 42,932
Net income........................................................ $ 96,152 $102,704
Basic net income per share........................................ $ 0.93 $ 0.99
Diluted net income per share...................................... $ 0.88 $ 0.94
Shares used in computing diluted net income per share............. 109,174 113,626
</TABLE>

INTEREST AND OTHER INCOME. Interest and other income for the second quarter
and first half of fiscal 2000 was $19.1 million and $31.1 million, respectively,
as revised (Note 8) compared to $7.9 million and $17.0 million for the second
quarter and first half of fiscal 1999, respectively. Interest and other income
for the first half of fiscal 2000 consisted of $16.6 million of interest income,
$3.5 million from the gain on the sale of land recorded in the first quarter of
fiscal 2000 and $10.9 million from the gain on the exchange of a warrant to
purchase JNI common stock recorded in the second quarter of fiscal 2000.
Excluding the gain on the sale of land and the gain on the exchange of a warrant
to purchase JNI common stock, interest income for the second quarter and first
half of fiscal 2000 remained flat compared to the prior year.

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

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

The Company recorded an income tax provision of $23.3 million representing
30.9% of income before provision for income taxes for the second quarter of
fiscal 2000, as revised (Note 8) compared with a $7.5 million income tax benefit
representing 22.4% of the loss before benefit for income taxes for the second
quarter of fiscal 1999. The effective income tax rate used to calculate the
income tax provision for the second quarter of fiscal 2000 was higher than 28%
primarily as a result of the acquired in-process technology charge associated
with the acquisition of CeQuadrat, for which no tax benefit was provided and the
gain on the exchange of a warrant to purchase JNI common stock for which a 40%
tax provision was provided. The effective income tax rate used to calculate the
income tax benefit for the second quarter of fiscal 1999 was lower than 25%
primarily as a result of the write-off of goodwill and other intangible asset,
for which no tax benefit was provided.

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

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

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

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

The Company presently believes that its products are Year 2000 Compliant.
The majority of the Company's products are not date sensitive. However, for
those products that are date sensitive, the

26
<PAGE>
Company, as a standard part of its product development cycle, has had
procedures, tests, and methodologies in effect since fiscal 1997 to ensure each
product's Year 2000 Compliance readiness.

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

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

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Net cash provided by operating activities for the
first half of fiscal 2000 totaled $138.5 million compared to $72.1 million for
the first half of fiscal 1999. Net cash provided by operating activities for the
first half of fiscal 2000 was primarily attributable to net income of
$102.7 million, adjusted for depreciation and amortization expense of
$19.4 million, the write-off of acquired in-process technology of $3.0 million
and the gain on the exchange of a warrant to purchase JNI common stock of
$6.6 million, net of income tax of $4.3 million. Additionally, net cash provided
by operating activities in the first half of fiscal 2000 was generated by the
decrease in deferred tax assets of $24.8 million and other current assets of
$14.1 million, partially offset by the increase in accounts receivable of
$15.4 million and the increase in prepaid expenses of $3.9 million.

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

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

In the second quarter of fiscal 2000, the Company sold put warrants that
could potentially obligate the Company to repurchase up to 1.0 million shares of
its common stock at prices ranging from $37 to $39. In

27
<PAGE>
exchange, the Company received up front premiums of $3.7 million, which were
used for general business purposes. The settlement terms include physical
settlement, cash settlement or net-share settlement at the option of the
Company. The warrants expire during the third quarter of fiscal 2000. The impact
on diluted earnings per share for the second quarter and first half of fiscal
2000 was minimal.

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

FACTORS AFFECTING FUTURE OPERATING RESULTS

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

FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. In the first half of
fiscal 1999, the Company's operating results were adversely affected by shifts
in corporate and retail buying patterns, increased competition, emerging
technologies, economic instability in Asia and turbulence in the computer disk
drive industry. In addition, fiscal 1999 operating results were significantly
impacted by unusual charges and credits including write-offs of acquired
in-process technology, costs related to the termination of the Symbios
acquisition, restructuring charges, impairment of assets, terminations of senior
executives, the gain on the sale of PTS and the gain on the sale of land.
Operating results for the first quarter of fiscal 2000 were also impacted by a
gain on the sale of land. Additionally, operating results beginning in the
second quarter of fiscal 2000 were affected by the recent acquisition of
CeQuadrat GmbH, resulting in increased goodwill amortization expense and the
write-off of acquired in-process technology. Additionally, operating results in
the future may be affected by the acquisition of Distributed Processing
Technology ("DPT"), pending a definitive agreement and regulatory approval.
Specifically operating results may be affected by increased goodwill
amortization expense and the potential write-off of acquired in-process
technology. In the future, the Company's operating results may fluctuate as a
result of the factors described above and as a result of a wide variety of other
factors, including, but not limited to, cancellations or postponements of
orders, shifts in the mix of the Company's products and sales channels, changes
in pricing policies by the Company's suppliers, interruption in the supply of
custom integrated circuits, the market acceptance of new and enhanced versions
of the Company's products, product obsolescence and general worldwide economic
and computer industry fluctuations. In addition, fluctuations may be caused by
future accounting pronouncements, changes in accounting policies, and the timing
of acquisitions of other business products and technologies and any associated
charges to earnings. The volume and timing of orders received during a quarter
are difficult to forecast. The Company's customers from time to time encounter
uncertain and changing demand for their products. Customers generally order
based on their forecasts. If demand falls below such forecasts or if customers
do not control

28
<PAGE>
inventories effectively, they may cancel or reschedule shipments previously
ordered from the Company. The Company has historically operated with a
relatively small backlog, especially relating to orders of its Host I/O products
and has set its operating budget based in part on expectations of future
revenues. Because much of the Company's operating budget is relatively fixed in
the short-term, if revenues do not meet the Company's expectations, then the
Company's operating income and net income may be disproportionately affected.
Operating results in any particular quarter, which do not meet the expectations
of securities analysts, are likely to cause volatility in the price of the
Company's common stock.

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

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

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

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

The markets for the Company's products are characterized by rapidly changing
technology, frequent new product introductions, and declining average selling
prices over product life cycles. The Company's future success is therefore
highly dependent upon the timely completion and introduction of new products at
competitive price/performance levels. The success of new product introductions
is dependent on several factors, including proper new product definition,
product costs, timely completion and introduction of new

29
<PAGE>
product designs, quality of new products, differentiation of new products from
those of the Company's competitors, and market acceptance of the Company's and
its customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive, or that the
Company's products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
materially adversely impacted if its customers shifted their demand to a
significant extent away from board-based I/O solutions to application-specific
ICs.

COMPETITION. The markets for all of the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of host adapter
manufacturers, including LSI Logic Corporation and other small host adapter
manufacturers. The Company's principal competitors for RAID solutions in the
server market are American Megatrends, Inc., Mylex Corporation and captive
suppliers. The Company's principal competitors in the Software segment range
from small operations to large consumer software companies. As the Company has
continued to broaden its bandwidth management product offerings into the
desktop, server, and networking environments, it has experienced, and expects to
experience in the future, significantly increased competition both from existing
competitors and from additional companies that may enter its markets. Some of
these companies have greater technical, marketing, manufacturing, and financial
resources than the Company. There can be no assurance that the Company will have
sufficient resources to meet growing product demand, that the Company will be
able to make timely introduction of new leading-edge solutions in response to
competitive threats, that the Company will be able to compete successfully in
the future against existing or potential competitors or that the Company's
business or operating results will not be materially adversely affected by price
competition.

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

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

30
<PAGE>
YEAR 2000 COMPLIANCE ISSUES. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process data
fields containing a 2-digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be unable to
accurately process certain date-based information.

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

The Company has communicated with others with whom it does significant
business, including major distributors, suppliers, customer, vendors and
financial service organizations, to assess their Year 2000 Compliance readiness
with respect to both their operations and the products and services they supply.
The analysis will continue into fiscal 2000, with corrective action taken
commensurate with the criticality of affected products and services. However, if
companies with whom the Company does significant business fail because of a Year
2000 malfunction, there could be a material adverse impact on the Company's
operating results. The Company believes it is currently being impacted by its
customers' redirection of corporate management information system budgets
towards resolving Year 2000 Compliance issues. Continuation of this trend could
lower the demand for the Company's products if corporate buyers defer purchases
of high-end business PCs.

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

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

31
<PAGE>
reason the Company's current supplier was unable or unwilling to satisfy the
Company's wafer needs, the Company would be required to identify and qualify
additional foundries. There can be no assurance that any additional wafer
foundries would become available, that such foundries would be successfully
qualified, or that such foundries would be able to satisfy the Company's
requirements on a timely basis.

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

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

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

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

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

32
<PAGE>
supplier, TSMC, is located in Taiwan, the Company may be subject to certain
risks resulting from the political instability in Taiwan, including conflicts
between Taiwan and the People's Republic of China.

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

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

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

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

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

VOLATILITY OF STOCK PRICE. The stock market in general, and the market for
shares of technology companies in particular, has from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers

33
<PAGE>
may have a significant impact on the market price of the Company's common stock.
Furthermore, quarter-to-quarter fluctuations in the Company's results of
operations caused by changes in customer demand, changes in the microcomputer
and peripherals markets, or other factors, may have a significant impact on the
market price of the Company's common stock. In addition, the Company's stock
price may be affected by general market conditions and international
macroeconomic factors unrelated to the Company's performance. These conditions,
as well as factors that generally affect the market for stocks of high
technology companies, could cause the price of the Company's common stock to
fluctuate substantially over short periods.

DERIVATIVES. In the second quarter of fiscal 2000, the Company sold put
warrants that could obligate the Company to buy back shares of its common stock
at prices greater than market value in exchange for up front premiums. In the
future, the Company may sell additional derivative instruments. The derivative
instruments could have an adverse material impact on the Company's financial
position.

NORMALIZED RESULTS OF OPERATIONS

The following normalized results of operations do not represent the
Company's results of operations or earnings per share information in accordance
with generally accepted accounting principles. Normalized operating results have
been presented to provide period to period comparability of the Company's
underlying operating results excluding revenue and expenses related to the PTS
business lines sold in the third and fourth quarters of fiscal 1999, the
write-off of acquired in-process technology, restructuring and other charges,
gain on the sale of land, gain on the exchange of a warrant to purchase JNI
common stock and the related tax effects for each of these items. The normalized
results of operations presented are not necessarily indicative of future
operating results and should be read in conjunction with the historical
financial statements and related notes.

<TABLE>
<CAPTION>
NORMALIZED THREE MONTH PERIOD ENDED
-------------------------------------------
(REVISED: NOTE 1)
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(1) (2)
<S> <C> <C> <C> <C>
Net revenues............................................ $194,280 100.0% $118,319 100.0%
Cost of revenues........................................ 66,267 34.1 46,429 39.2
-------- ----- -------- -----
Gross profit............................................ 128,013 65.9 71,890 60.8
-------- ----- -------- -----
Operating expenses:
Research and development.............................. 23,210 11.9 30,282 25.6
Sales, marketing and administrative................... 40,242 20.7 40,793 34.5
Amortization of goodwill and other intangibles........ 2,255 1.2 661 0.6
-------- ----- -------- -----
Total operating expenses................................ 65,707 33.8 71,736 60.7
-------- ----- -------- -----
Income from operations.................................. 62,306 32.1 154 0.1
Interest and other income............................... 8,193 4.2 7,912 6.7
Interest expense........................................ (2,962) (1.5) (3,047) (2.6)
-------- ----- -------- -----
Income from operations before provision for income
taxes................................................. 67,537 34.8 5,019 4.2
Provision for income taxes.............................. 18,909 9.7 1,255 1.0
-------- ----- -------- -----
Net income.............................................. $ 48,628 25.1% $ 3,764 3.2%
======== ===== ======== =====
Net income per share:
Basic................................................. $ 0.47 $ 0.03
======== ========
Diluted............................................... $ 0.45 $ 0.03
======== ========
Shares used in computing net income per share:
Basic................................................. 102,523 111,583
======== ========
Diluted............................................... 113,062 112,603
======== ========
</TABLE>

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

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

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

34
<PAGE>

<TABLE>
<CAPTION>
NORMALIZED SIX MONTH PERIOD ENDED
-------------------------------------------
(REVISED: NOTE 1)
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(1) (2)
<S> <C> <C> <C> <C>
Net revenues............................................ $386,658 100.0% $264,027 100.0%
Cost of revenues........................................ 133,054 34.4 101,492 38.4
-------- ----- -------- -----
Gross profit............................................ 253,604 65.6 162,535 61.6
-------- ----- -------- -----
Operating expenses:
Research and development.............................. 47,735 12.3 63,538 24.1
Sales, marketing and administrative................... 79,610 20.6 84,793 32.1
Amortization of goodwill and other intangibles........ 2,750 0.7 1,824 0.7
-------- ----- -------- -----
Total operating expenses................................ 130,095 33.6 150,155 56.9
-------- ----- -------- -----
Income from operations.................................. 123,509 32.0 12,380 4.7
Interest and other income............................... 16,631 4.3 17,045 6.4
Interest expense........................................ (5,921) (1.5) (6,114) (2.3)
-------- ----- -------- -----
Income from operations before provision for income
taxes................................................. 134,219 34.8 23,311 8.8
Provision for income taxes.............................. 37,580 9.8 5,828 2.2
-------- ----- -------- -----
Net income.............................................. $ 96,639 25.0% $ 17,483 6.6%
======== ===== ======== =====
Net income per share:
Basic................................................. $ 0.94 $ 0.15
======== ========
Diluted............................................... $ 0.89 $ 0.15
======== ========
Shares used in computing net income per share:
Basic................................................. 103,333 112,892
======== ========
Diluted............................................... 109,174 114,170
======== ========
</TABLE>

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

35
<PAGE>
PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

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

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

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

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

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

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

36
<PAGE>
The stockholders ratified and approved the appointment of
PricewaterhouseCoopers LLP as the independent public accountants of the Company
for the fiscal year ending March 31, 2000. The proposal received 93,888,588
affirmative votes, 71,795 negative votes, 476,106 abstentions, and no broker
non-votes.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

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

(b) Reports on Form 8-K:

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

37
<PAGE>
SIGNATURES

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

ADAPTEC, INC.

<TABLE>
<S> <C> <C>
By: /s/ ANDREW J. BROWN Date: February 2, 2000
--------------------------------------
Andrew J. Brown
Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)

By: /s/ KENNETH B. AROLA Date: February 2, 2000
--------------------------------------
Kenneth B. Arola
Vice President
Corporate Controller
(Principal Accounting Officer)
</TABLE>

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

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 142,625
<SECURITIES> 560,401
<RECEIVABLES> 86,578
<ALLOWANCES> 2,966
<INVENTORY> 48,888
<CURRENT-ASSETS> 931,312
<PP&E> 211,269
<DEPRECIATION> 98,611
<TOTAL-ASSETS> 1,108,376
<CURRENT-LIABILITIES> 163,560
<BONDS> 230,000
0
0
<COMMON> 102
<OTHER-SE> 714,714
<TOTAL-LIABILITY-AND-EQUITY> 1,108,376
<SALES> 194,280
<TOTAL-REVENUES> 194,280
<CGS> 66,267
<TOTAL-COSTS> 66,267
<OTHER-EXPENSES> 68,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,962
<INCOME-PRETAX> 75,441
<INCOME-TAX> 23,277
<INCOME-CONTINUING> 52,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,164
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.48

</TABLE>