AUSPEX SYSTEMS INC, 10-Q, 2000-05-11

AUSPEX SYSTEMS INC
10-Q, 2000-05-11
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number: 0-21432

AUSPEX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 93-0963760
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)

2800 SCOTT BOULEVARD
SANTA CLARA, CA 95050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

FORMER BUSINESS ADDRESS:

2300 CENTRAL EXPRESSWAY
SANTA CLARA, CA 95050

REGISTRANT'S TELEPHONE NUMBER: (408) 566-2000

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 [ ]

NUMBER OF SHARES OF COMMON STOCK, $.001 PAR VALUE, OUTSTANDING AS OF MAY
4, 2000: 29,717,688

<PAGE> 2

- --------------------------------------------------------------------------------
FORM 10-Q
AUSPEX SYSTEMS, INC.
INDEX

<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
p ITEM 1. Financial Statements 1

Condensed Consolidated Balance Sheets as of March 31, 2000 1
and June 30, 1999

Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 2000 and March 2
31, 1999

Consolidated Statements of Cash Flows for the Nine Months 3
Ended March 31, 2000 and March 31, 1999

Notes to Condensed Consolidated Financial Statements 4-8

ITEM 2. Management's Discussion and Analysis of Financial 9-14
Condition and Results of Operations

ITEM 3. Qualitative and Quantitative Disclosures about Market Risks 14

PART II. OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds 15

ITEM 5. Other Information 15

ITEM 6. Exhibits and Reports on Form 8-K 16

SIGNATURES 17
</TABLE>

<PAGE> 3

PART I. FINANCIAL INFORMATION
Item 1. Financial statements

Auspex Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

<TABLE>
<CAPTION>
ASSETS

March 31, 2000 June 30, 1999
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 32,386 $ 26,592
Short-term investments 7,667 16,045
Accounts receivable, net 17,413 20,374
Inventories 5,422 10,905
Income tax receivable -- 4,865
Prepaid expenses and other 4,147 5,054
-------- --------
Total current assets 67,035 83,835
-------- --------
Property and equipment, net 16,959 28,841
Other assets 2,159 2,372
-------- --------
Total assets $ 86,153 $115,048
======== ========
</TABLE>

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY

March 31, 2000 June 30, 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 11,029 $ 13,316
Accrued liabilities 22,743 11,975
Deferred revenue 9,263 9,276
-------- --------
Total current liabilities 43,035 34,567
-------- --------
Long Term Liabilities
Deferred revenue 1,029 1,304
-------- --------
Stockholders' equity 42,089 79,177
-------- --------
Total liabilities and stockholders' equity $ 86,153 $115,048
======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

Page 1
<PAGE> 4

AUSPEX SYSTEMS, INC.
Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Product revenue $ 14,501 $ 18,551 $ 49,158 $ 62,934
Service revenue 6,861 8,218 20,980 24,456
-------- -------- -------- --------
Total revenues 21,362 26,769 70,138 87,390
-------- -------- -------- --------
Cost of Revenues
Cost of product revenue 12,087 9,987 32,113 32,465
Cost of service revenue 7,622 5,598 20,828 17,067
-------- -------- -------- --------
Total cost of revenues 19,709 15,585 52,941 49,532
-------- -------- -------- --------
Gross margin 1,653 11,184 17,197 37,858
-------- -------- -------- --------
Operating Expenses
Selling, general and administrative 15,567 13,701 43,759 38,730
Engineering and development 8,578 9,026 24,858 26,125
Restructuring charges 17,642 - 17,642 -
-------- -------- -------- --------
Total operating expenses 41,787 22,727 86,259 64,855
-------- -------- -------- --------
Loss from operations (40,134) (11,543) (69,062) (26,997)

Other income, net 555 652 1,088 1,569
-------- -------- -------- --------

Loss before provision
for income taxes (39,579) (10,891) (67,974) (25,428)

Provision for income taxes 279 40 429 107
-------- -------- -------- --------

Net loss $(39,858) $(10,931) $(68,403) $(25,535)
======== ======== ======== ========
Dividends to preferred stockholders 1,175 - 1,175 -

Loss available to common stockholders $(41,033) $(10,931) $(69,578) $(25,535)
======== ======== ======== ========
Income (loss) per share
Basic $ (1.45) $ (0.42) $ (2.51) $ (0.99)
======== ======== ======== ========
Diluted $ (1.45) $ (0.42) $ (2.51) $ (0.99)
======== ======== ======== ========

Shares used for income (loss) per share
Basic 28,254 26,007 27,672 25,833
======== ======== ======== ========
Diluted 28,254 26,007 27,672 25,833
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

Page 2
<PAGE> 5

AUSPEX SYSTEMS, INC.
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
March 31, March 31,
Nine Months Ended 2000 1999
- -------------------------------------------------------------------------------------------------------------------
(In thousands) (Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(68,403) $(25,535)
Adjustments to reconcile net loss
to net cash used in operating activities
Restructuring charge 17,642 -
Depreciation and amortization 7,274 10,885
Changes in assets and liabilities
Decrease in accounts receivable 2,961 1,172
(Increase) decrease in inventories 3,366 (2,782)
Decrease in income tax receivable 4,865 11,125
Decrease in prepaid expenses and other 1,120 1,493
Increase (decrease) in accounts payable (2,287) 2,028
Increase in accrued liabilities 2,568 234
Decrease in deferred revenue (288) (1,212)
------- ------
Net cash used in operating activities (31,182) (2,592)
------- ------
Cash Flows from Investing Activities
Purchases of available-for-sale short-term investments (4,812) (30,969)
Proceeds from sales/maturities of available-for-sale short-term investments 13,253 39,485
Purchase of property and equipment (2,756) (9,538)
------- ------
Net cash provided by (used in) investing activities 5,685 (1,022)
------- ------
Cash Flows from Financing Activities
Principal payments on capital lease obligations (13) (13)
Proceeds from sale and lease back of equipment - 5,250
Proceeds from sale of common and preferred stock, net 31,221 1,633
------- ------
Net cash provided by financing activities 31,208 6,870
------- ------
Effect of exchange rate changes on cash 83 73
------- ------
Net Increase in Cash and Cash Equivalents 5,794 3,329

Cash and Cash Equivalents, Beginning of Period 26,592 23,312
------- ------
Cash and Cash Equivalents, End of Period $ 32,386 $ 26,641
======= ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

Page 3
<PAGE> 6

AUSPEX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The accompanying interim condensed consolidated financial statements and
related notes should be read in conjunction with the financial statements and
related notes included in the Company's fiscal 1999 Annual Report to
Stockholders.

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position as of the dates and results of operations for the
periods indicated.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Additionally, the preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. While
management makes its best effort to achieve its estimates, actual results could
differ from these estimates.

The results of operations for the three months and nine months ended
March 31, 2000, are not necessarily indicative of results for the entire fiscal
year ending June 30, 2000. (See "Factors That May Affect Future Operating
Performance" in Management's Discussion and Analysis of Financial Condition and
Results of Operations.)

Prior to the first quarter of fiscal 2000, the Company's fiscal year
ended on the last day of the quarter within the year ended June 30. Beginning
fiscal year 2000, the Company is operating and reporting on a 52-53 week fiscal
year. Accordingly, the Company's fiscal year 2000 will end on July 1, 2000. The
Company's fiscal quarters end on the Saturday of the thirteenth week of the
quarter. For presentation purposes, the financial statements reflect the
calendar month-end date. The change in reporting periods did not have a material
effect on the accompanying financial statements for the first three quarters of
fiscal 2000.

2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Substantially all cash equivalents consist of investments in
certificates of deposits, money market deposits and U.S. agency bonds with
original maturities of three months or less. Substantially all short-term
investments consist of certificates of deposits, commercial paper and U.S.
agency bonds, which the Company intends to hold between three and twelve months.

3. NON-CASH INVESTING ACTIVITIES

Net inventory capitalized into property and equipment was $2,036,000 and
$5,185,000 for the nine months ended March 31, 2000 and 1999, respectively.

Page 4
<PAGE> 7

4. REVENUE RECOGNITION

Product revenue includes hardware sales and software license fees. The
Company recognizes system sales to end-users upon shipment. The installation of
the Company's systems is not considered a significant obligation and acceptance
by the customer is not considered a significant uncertainty. Revenues from
upgrade sales are generally recognized at the time the equipment is shipped.
Provisions for product sales returns and allowances are recorded in the same
period as the related revenue. Revenues earned under software license agreements
with end users are recognized when the software has been shipped and there are
no significant obligations remaining.

Service revenue includes installation, maintenance and training, and is
recognized ratably over the contractual period or as the services are provided.

5. NET INCOME/(LOSS) PER SHARE

Basic net income per share is computed based only on the weighted
average number of common shares outstanding during the period and does not give
effect to the dilutive effect of common equivalent shares, such as stock
options. Diluted net income per share is computed based on the weighted average
number of common shares plus dilutive potential common shares calculated in
accordance with the treasury stock method.

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(39,858) $(10,931) $(68,403) $(25,535)
========= ========= ========= =========
Basic Earnings Per Share
Income (loss) available to common stockholders $(41,033) $(10,931) $(69,578) $(25,535)
Weighted average common shares outstanding 28,254 26,007 27,672 25,833
--------- --------- --------- ---------
Basic earnings (loss) per share $ (1.45) $ (0.42) $ (2.51) $ (0.99)
========= ========= ========= =========
Diluted Earnings Per Share
Income (loss) available to common stockholders $(41,033) $(10,931) $(69,578) $(25,535)
========= ========= ========= =========

Weighted average common shares outstanding 28,254 26,077 27,672 25,833
Dilutive potential common shares from stock
options - - - -
--------- --------- --------- ---------

Weighted average common shares and dilutive
potential common shares 28,254 26,077 27,672 25,833
--------- --------- --------- ---------

Diluted earnings (loss) per share $ (1.45) $ (0.42) $ (2.51) $ (0.99)
========= ========= ========= =========
</TABLE>

All weighted average stock options outstanding during the three months
ended March 31, 2000 and 1999 of 4,788,483 and 4,056,294 shares, respectively,
were excluded from the computation of diluted earnings per share because the
effect of including them would have been antidilutive due to the loss available
to common stockholders. All weighted average stock options outstanding during
the nine months ended March 31, 2000 and 1999 of 3,746,616 and 3,595,608 shares,
respectively, were excluded from the computation of diluted earnings per share
because the effect of including them would have been antidilutive due to the
loss available to common stockholders.

Page 5
<PAGE> 8

6. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market, and include material, labor and manufacturing overhead costs.
Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Purchased materials $ 2,149 $ 4,158
Systems in process 2,604 4,044
Finished goods 669 2,703
------- -------
Total inventories $ 5,422 $10,905
======= =======
</TABLE>

Inventories contained components and assemblies in excess of the
Company's current estimated requirements and were fully reserved at March 31,
2000 and June 30, 1999.

Certain of the Company's products contain critical components supplied
by a single or limited number of third parties. The Company has an inventory of
these critical components so as to ensure an available supply of products for
its customers. Any significant shortage of these components or the failure of
the third-party suppliers to maintain or enhance these components could
materially adversely affect the Company's results of operations. (See "Factors
That May Affect Future Operating Performance--Dependence on Certain Suppliers.")

7. COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years
beginning after December 15, 1997 and has restated information for all prior
periods reported below to conform to this standard. The following table sets
forth the components of other comprehensive income (loss) as follows (in
thousands):

<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended,
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(39,858) $(10,931) $(68,403) $(25,535)
Other comprehensive income (loss):
Unrealized holding gains (losses)
on available-for-sale securities 11 6 13 (36)
Foreign currency translation adjustments 308 (240) 83 73
-------- -------- -------- --------
Comprehensive loss $(39,539) $(11,165) $(68,307) $(25,498)
======== ======== ======== ========

</TABLE>

8. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 requires
enterprises to report information about operating segments in annual financial
statements and selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers.

Page 6
<PAGE> 9

The Company, which operates in one reportable industry segment,
develops, manufactures, distributes and supports a line of multi-protocol high
performance network file servers and high availability enterprise data
management software solutions for storing, serving and managing multiple
terabytes of network data for the technical network market.

Revenues and long-lived assets by geography (net of accumulated
depreciation) consisted of the following for the quarters ended (in thousands):

<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------------ ------------------------
Long Lived Long Lived
Revenue Assets Revenue Assets
------- ------- ------- -------
<S> <C> <C> <C> <C>
United States .... $13,005 $15,852 $18,407 $30,324
Europe ........... 3,776 736 4,022 740
Pacific Rim ...... 3,957 371 3,515 251
Canada ........... 624 - 825 2
------- ------- ------- -------
Total ...... $21,362 $16,959 $26,769 $31,317
======= ======= ======= =======
</TABLE>

One customer accounted for 18% of total revenues during three months
ended March 31, 2000. One customer accounted for 17% of total revenues during
three months ended March 31, 1999.

9. NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that a reporting entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair market value. The Company is
required to adopt SFAS No. 133 in the first quarter of fiscal 2001 and does not
expect such adoption to have a material effect on the consolidated financial
statements.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company is currently evaluating the effect that
such adoption may have on the consolidated results of operations and financial
position and may be required to adopt SAB 101 in the fourth quarter of fiscal
2000.

10. RESTRUCTURING COSTS

In the quarter ended March 31, 2000, the Company recorded restructuring
charges totalling $17.6 million. These charges reflect steps the Company is
taking to strengthen its competitiveness in the growing Network Attached Storage
market, streamline operations and reduce overall costs. The restructuring
charges are comprised primarily of $3.8 million for reduction of personnel and
$13.6 million to retire excess equipment and other assets related to the
restructuring of company operations. In connection with the restructuring
charges taken in the quarter ended March 31, 2000, the Company terminated 169
employees on April 12, 2000 and will consolidate all of its Santa Clara
activities into one facility. The Company anticipates that the implementation of
the restructuring plan will be substantially complete by the end of May 2000.

Page 7
<PAGE> 10

The following table summarizes the Company's restructuring activity for the
third quarter ended March 31, 2000 (in thousands):

<TABLE>
<CAPTION>
Severance Excess Equipment
and Benefits and Other Assets Other Total
------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
Restructuring charges $ 3,800 $ 13,642 $ 200 $ 17,642
Non-cash charges - (9,429) - (9,429)
-------- -------- -------- --------
Reserve balances, March 31, 2000 $ 3,800 $ 4,213 $ 200 $ 8,213
======== ======== ======== ========
</TABLE>

11. PREFERRED STOCK

On January 18, 2000, the Company sold $25 million of its Series B
Convertible Preferred Stock to four institutional investors in a private
placement. The Series B Convertible Preferred Stock is non-voting, carries a 7%
per annum cumulative dividend, which may be paid in cash or Common Stock, and is
convertible into the Company's Common Stock at an 8% discount. In connection
with the sale, the Company issued four-year warrants to purchase an aggregate of
1,605,136 shares of the Company's Common Stock at a price of $8.5663 per share.
During the quarter ended March 31, 2000, the Company recorded $1,175,000 in
dividends to holders of the Series B Convertible Preferred Stock as a result of
the 7% dividend, the 8% conversion discount and the warrants. For more
information with respect this transaction, see Item 2 of Part II of this report.

Page 8
<PAGE> 11

AUSPEX SYSTEMS, INC.

FORWARD-LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE GENERALLY IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS AND
PHRASES, SUCH AS "INTENDED," "EXPECTS," "ANTICIPATES" AND "IS (OR ARE) EXPECTED
(OR ANTICIPATED)." THESE FORWARD-LOOKING STATEMENTS INCLUDE BUT ARE NOT LIMITED
TO THOSE IDENTIFIED BELOW WITH AN ASTERISK (*) SYMBOL. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND
STOCKHOLDERS OF AUSPEX SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET
FORTH IN THIS FORM 10-Q, INCLUDING THOSE SET FORTH UNDER THE CAPTION "FACTORS
THAT MAY AFFECT FUTURE RESULTS". AUSPEX DOES NOT UNDERTAKE TO UPDATE ANY OF SUCH
FORWARD-LOOKING STATEMENTS.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Total revenues for the third quarter of fiscal 2000, ended March 31,
2000, were $21.4 million, a decrease of 20% compared to total revenues of $26.8
million in the third quarter of fiscal 1999. Total revenues for the nine months
ended March 31, 2000 were $70.1 million, a decrease of 20% compared to total
revenues of $87.4 million for the nine months ended March 31, 1999.

Product revenues for the third quarter of fiscal 2000 were $14.5 million
or 68% of total revenues compared to $18.6 million or 69% of total revenues in
the third quarter of fiscal 1999. Product revenues for the nine months ended
March 31, 2000 were $49.2 million or 70% of total revenues compared to $62.9
million or 72% of total revenues for the nine months ended March 31, 1999.
Revenues from system sales accounted for 41% of total revenues during the third
quarter of fiscal 2000 and 42% for the third quarter of fiscal 1999, while
revenues from upgrades, add-on options and software license agreements comprised
27% of total revenues during the third quarter of fiscal 2000 and 1999,
respectively. Service revenues for the third quarter of fiscal 2000 were $6.9
million or 32% of total revenues compared to 31% in the third quarter of fiscal
1999. Service revenues for the nine months ended March 31, 2000 were $21.0
million or 30% of total revenues compared to $24.5 million or 28% for the nine
months ended March 31, 1999. Geographically, North America accounted for 64% and
71% of total revenues in the third quarters of fiscal 2000 and 1999,
respectively; the Pacific Rim accounted for 19% and 13% in the third quarters of
fiscal 2000 and 1999; and Europe accounted for 18% and 16% in the third quarters
of fiscal 2000 and 1999, respectively. The decrease in revenues was attributable
to a slow down in the customer upgrading of Legacy product that has not been
offset by customer upgrading of the NS2000 product and the lower than expected
acceptance by the market of our NS2000 product. In addition, we have reduced our
average selling price as a result of competitive pressure.

Gross margin was 8% of net revenues in the third quarter of fiscal 2000
compared with 42% in the third quarter of fiscal 1999. For the nine months ended
March 31, 2000 and 1999, gross margins were 25% and 43%, respectively. Product
gross margin decreased to 17% in the third quarter of fiscal year 2000 from 46%
in the third quarter of fiscal year 1999. The decline in gross margin was partly
attributable to an increase in revenue from indirect channels. Furthermore,
gross margin was impacted by operational inventory and other asset write-offs of
$3.7 million during the quarter ended March 31, 2000.

Service gross margin was <11%> in the third quarter of fiscal year 2000
as compared to 32% in the third quarter of fiscal year 1999. The decline in
gross margin was due to a decline in revenue and an increase in costs related to
the transition to the NS2000 product. The cost increases are related to
retention plans for key employees and an operational write-off of spares
inventory.

Page 9
<PAGE> 12

Selling, general and administrative expenses during the third quarter of
fiscal 2000 totaled $15.6 million, an increase of 14% from $13.7 million in the
corresponding period of the prior fiscal year, and comprised 73% and 51% of
total revenues, respectively. For the nine months ended March 31, 2000, selling,
general and administrative expenses totaled $43.8 million, an increase of 13%
from $38.7 million for the nine months ended March 31, 1999, and were 62% and
44% of total revenues for the first nine months of fiscal years 2000 and 1999,
respectively. The increase in absolute dollars for the comparison periods can be
attributed to increased commission programs plus higher recruiting costs. The
increase in selling, general and administrative expenses as a percentage of
revenues for the comparison periods was impacted by lower revenues in the third
quarter and the first nine months of fiscal 2000.

Engineering and development expenses during the third quarter of fiscal
2000 were $8.6 million, a decrease of 4% from $9.0 million in the corresponding
period of the prior fiscal year, and comprised 40% and 34% of total revenues,
respectively. For the nine months ended March 31, 2000, engineering and
development expenses were $24.9 million, a decrease of 5% from $26.1 million for
the nine months ended March 31, 1999, and were 35% and 30% of total revenues for
the first nine months of fiscal years 2000 and 1999, respectively. This increase
in engineering and development expenses as a percentage of revenues was
primarily due to lower revenues in the third quarter and the first nine months
of fiscal 2000.

Loss from operations for the third quarter of fiscal 2000 was $40.1
million, compared with $11.5 million in the third quarter of fiscal year 1999.
These operating losses were primarily due to a one-time restructuring charge of
$17.6 million, operational write-offs of $3.7 million, lower revenues and
margins and increased selling, general and administrative expenses.

During the quarter ended March 31, 2000, the Company recorded $1,175,000
in dividends to holders of the Series B Convertible Preferred Stock as a result
of the 7% dividend, the 8% conversion discount and the warrants.

The Company's income tax rate for the third quarter and first nine
months of fiscal 2000 and 1999 was essentially 0%. The Company's tax provision
includes state and minimum statutory taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and short-term investments
decreased by $2.6 million to $40.1 million for the nine months ended March 31,
2000. The Company used approximately $31.2 million in cash from operating
activities in the first nine months of fiscal 2000, which included a loss from
operations of $43.5 million, after depreciation and amortization and
restructuring charges which are partially offset by the collection of income tax
refunds, accounts receivable and an increase in accrued liabilities. The
Company's primary investing activities included the purchase of
available-for-sale short-term investments of $4.8 million and additional
property and equipment of $2.8 million, offset by the sale/maturity of
available-for-sale short-term investments of $13.3 million. Lastly, the
Company's primary financing activities included a preferred stock dividend
payable of $1.2 million offset by proceeds from the sale of its Common Stock
pursuant to employee benefit plans of $7.4 million and proceeds of $25 million
from the sale of preferred stock in a private placement.

At March 31, 2000, the Company's principal sources of liquidity included
$40.1 million in cash, cash equivalents and short-term investments and net $11.3
million available under a secured United States currency bank line of credit,
expiring December 22, 2002. At March 31, 2000, the Company had commitments
against the line of credit, for letters of credit totalling $3.7 million.

Page 10
<PAGE> 13

Based on its current operating plans, the Company believes that its
existing cash, cash equivalents, and short-term investments will be adequate to
meet its working capital and capital expenditure requirements at least through
the next 12 months. *

FACTORS THAT MAY AFFECT FUTURE RESULTS

RISKS OF THE RESTRUCTURING PLAN

The Company is implementing a restructuring plan that includes a
significant reduction in force and a consolidation of Santa Clara based
operations into one building. While management believes these measures are
necessary and that the reduction in force was not so great as to impair any of
the critical functions of the Company, the Company's inability to retain and
recruit employees with critical skills in the future could have a negative
impact on future results.

POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS

The Company's operating results may fluctuate significantly from quarter
to quarter due to a combination of factors. These factors include the timing of
orders and shipments, the timing of new product introductions by the Company or
its competitors, the mix of distribution channels through which the Company's
products are sold, and the Company's ability to align its expense levels with
changing revenue levels. The Company generally realizes higher gross margins on
sales of systems to end users and on single-system sales than on systems sold
through distributors and OEMs and on multiple-system sales. In addition, given
the Company's focus on highly configured enterprise class systems, the loss or
delay in a given quarter of a relatively limited number of system sales could
adversely affect the Company's revenues.

Historically, the Company often has recognized a substantial portion of
its revenues in the last month of any given quarter. Because the Company's
operating expenses are based on anticipated revenue levels and because a high
percentage of the Company's expenses are relatively fixed, a small variation in
the timing of the recognition of revenues could cause significant variations in
operating results from quarter to quarter.

COMPETITIVE MARKET

The market for the Company's products is highly competitive. The Company
experiences substantial competition, principally from Sun Microsystems, Network
Appliance Corporation, EMC Corporation, Hewlett-Packard Company and SGI, among
others. Some companies have introduced proprietary products to provide network
attached storage. Most of the Company's competitors are better known and have
substantially greater financial, technological, production and marketing
resources than the Company. While the Company believes that the
price/performance characteristics of its products are competitive, price
competition in the markets for the Company's products is intense. Any material
reduction in the price of the Company's products without corresponding decreases
in manufacturing costs and increases in unit volume would negatively affect
gross margins, which could in turn have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also derives a significant portion of its revenues from sales of product
upgrades to its installed base of customers, including additional processors,
memory and disk drives. Increased competition for the Company's products that
results in lower product sales could also adversely impact the Company's
upgrades sales. In addition, decisions by customers not to increase capacity of
their current systems could adversely impact the Company's revenues and results
of operations. The Company's ability to maintain its competitive position will
depend upon, among other factors, its success in anticipating industry trends,
investing in product research and development, developing new products with
improved price/performance characteristics and effectively managing the
introduction of new products into targeted markets.

* See "Forward-Looking Statements" on page 9.

Page 11
<PAGE> 14

MANAGEMENT IN TRANSITION; EMPLOYEE TURNOVER

Competition for employees with technical, management and other skills is
intense in the computer industry and is particularly intense in the San
Francisco Bay Area. The Company has recently encountered some difficulties in
fulfilling its hiring needs and retaining key employees in this employment
market, and there can be no assurance that the Company will be successful in
hiring and retaining qualified employees in the future. The Company's failure to
retain the services of key personnel or to attract additional qualified
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has experienced
turnover of several senior members of management. In particular, on February 15,
2000, Mr. Gary J. Sbona replaced Mr. Bruce N. Moore as the Company's Chief
Executive Officer and Chairman of the Board of Directors, and the Company
entered into an agreement with Regent Pacific Management Corporation, a
management firm of which Mr. Sbona is the Chief Executive Officer. Pursuant to
the agreement, Regent Pacific will provide management services to the Company,
including the services of Mr. Sbona as Chief Executive Officer, one of a five
person Regent Pacific management team. The agreement has a one year term and may
be cancelled by the Company after expiration of the initial 26 week period, with
a minimum compensation to Regent Pacific of $1,950,000 for that initial period.
We rely on Regent Pacific Management Corporation for the management of Auspex
and the loss of these services could adversely affect our business.

SOFTWARE PRODUCT RISKS

The Company markets software products in addition to its line of network
file servers. These software products include: NeTservices(TM), DriveGuard(TM),
FastBackup(TM), ServerGuard(TM), ServerGuard Global(TM) and DataGuard(TM). The
Company also expects to release enhancements and new features for these products
from time to time.* Although the Company performs extensive testing prior to
releasing software products, such products may contain undetected errors or bugs
when first released. These may not be discovered until the product has been used
by customers in different application environments. Failure to discover product
deficiencies or bugs could delay product introductions, require design
modifications to previously shipped products, cause unfavorable publicity or
negatively impact system shipments; any of which could result in a materially
adverse effect on the Company's business, financial condition and results of
operations.

NEW PRODUCTS

New product introductions by the Company or its competitors carry the
risk that customers could delay or cancel orders for existing products pending
shipment of the new products. For instance, product transition issues had an
adverse impact on North America and Europe revenue in the first nine months of
fiscal 2000 and entire fiscal 1999. The Company's strategy is to continue to
introduce new products and upgrades to existing products on an ongoing basis.
There can be no assurance that the Company will not experience difficulties that
delay or prevent the successful development, introduction or marketing of these
products and enhancements or that these new products and enhancements will
adequately address market requirements, achieve market acceptance or generate
substantial sales. Additionally, delays in the launch or lack of availability of
new products could have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON ESTABLISHED STANDARDS

The rapid emergence of new or alternate standards such as Linux, which
replace or diminish the market acceptance of UNIX operating systems, Network
File System (NFS) or Windows NT, on which the Company's products are currently
based, could materially and adversely affect the Company's results of operations
unless the Company is able to incorporate any such standards in the Company's
products in a timely manner.

* See "Forward-Looking Statements" on page 9.

Page 12
<PAGE> 15

DEPENDENCE ON CERTAIN CUSTOMERS/DISTRIBUTORS

For the three months ended March 31, 2000, direct sales of products and
services to one customer represented approximately 18% of the Company's
revenues. For the three months ended March 31, 1999, direct sales of products
and services to one customer represented approximately 17% of the Company's
revenues. Customers are not obligated to purchase any minimum level of products
from the Company. However, significant reductions in product sales to certain
key customers would materially and adversely affect the Company's business,
financial condition and results of operations.

DEPENDENCE ON CERTAIN SUPPLIERS

Certain of the Company's products contain critical components supplied
by a single or limited number of third parties. While the Company has an
inventory of these critical components, any significant or prolonged shortage of
these components or the failure of the third-party suppliers to maintain or
enhance these components could materially and adversely affect the Company's
results of operations.

EXCESS OR OBSOLETE INVENTORY

Managing the Company's inventory of components and finished products is
a complex task. A number of factors, including, but not limited to, the need to
maintain a significant inventory of certain components which are in short supply
or which must be purchased in bulk to obtain favorable pricing, the general
unpredictability of demand for specific products and customer requests for quick
delivery schedules, may result in the Company maintaining large amounts of
inventory. Other factors, including changes in market demand and technology, may
cause inventory to become obsolete. Any excess or obsolete inventory could
result in sales price reductions and/or inventory write-downs, which in turn
could adversely affect the Company's business and results of operations.

RISKS OF INTERNATIONAL SALES; EUROPEAN AND JAPANESE MARKET RISKS

During the nine months ended March 31, 2000 and 1999, approximately 36%
and 32%, respectively, of the Company's total revenues were derived from markets
outside of North America. The Company expects that sales to the Pacific Rim and
Europe will continue to represent a significant portion of its business.*
Nonetheless, there can be no assurance that the Company's Pacific Rim or
European operations will continue to be successful.

The Company's international business may be affected by changes in
demand resulting from localized economic and market conditions. For example, the
Company experienced a decrease in revenues from the Pacific Rim during the six
months ended December 31, 1999 due to continued weakness in the Japanese
economy. In addition, the Company's international business may be affected by
fluctuations in currency exchange rates and currency restrictions. The Company
purchases the majority of its materials and services in U.S. dollars, and most
of its foreign sales are transacted in U.S. dollars. Continued increases in the
value of the U.S. dollar relative to foreign currencies will make the Company's
products sold internationally less price competitive. The Company has offices in
a number of foreign countries, the operating expenses of which are also subject
to the effects of fluctuations in foreign exchange rates. Financial exposure may
result due to the timing of transactions and movement of exchange rates. The
Company's international business may further be affected by risks such as trade
restrictions, increase in tariff and freight rates and difficulties in obtaining
necessary export licenses and meeting appropriate local regulatory standards.
For example, the Company has had to modify its products in minor respects in
Japan to comply with local electromagnetic emissions standards, and must also
comply with corresponding European Economic Community standards. In marketing
its products to the European Economic Community, the Company also must face the
challenges posed by a fragmented market complicated by local distribution
channels and local cultural considerations. For international sales, the Company
has largely relied on distributors or OEMs, most of whom are entitled to carry
products of the Company's competitors. There can be no assurance that any of the
foregoing risks or issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.

* See "Forward-Looking Statements" on page 9.

Page 13
<PAGE> 16

STOCK MARKET FLUCTUATIONS

In recent years, the stock market in general and the market for
technology stocks in particular, including the Company's Common Stock, have
experienced extreme price fluctuations. The market price of the Company's Common
Stock may be significantly affected by various factors such as quarterly
variations in the Company's operating results, changes in revenue growth rates
for the Company as a whole or for specific geographic areas or products, changes
in earning estimates by market analysts, the announcements of new products or
product enhancements by the Company or its competitors, speculation in the press
or analyst community, and general market conditions or market conditions
specific to particular industries. There can be no assurance that the market
price of the Company's Common Stock will not continue to experience significant
fluctuations in the future.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company currently relies on a combination of patent, copyright,
trademark and trade secret laws and contractual provisions to protect its
proprietary rights in its hardware and software products. The Company currently
holds fifteen United States patents and has filed applications for additional
patents. The Company also has filed applications for counterpart patents in
foreign countries, including Japan. There can be no assurance that the Company's
present or future competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Further,
there can be no assurance that the Company's patent applications will result in
issued patents, or that the Company's issued patents will be upheld if
challenged. Additionally, there can be no assurance that third parties will not
assert intellectual property infringement claims against the Company in the
future with respect to current or future projects or that any such assertions
may not require the Company to refrain from the sale of its products, enter into
royalty arrangements or undertake costly litigation.

The Company's adherence to industry standards with respect to its
products limits the Company's opportunities to provide proprietary features,
which may be protected. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.

YEAR 2000 COMPLIANCE

To date, the Company has not incurred material costs associated with
Year 2000 compliance nor any disruption with vendors or operations. Furthermore,
the Company believes that any future costs associated with Year 2000 compliance
efforts will not be material. *

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

INTEREST RATE RISK

There were no material changes during the third quarter of fiscal 2000
to the Company's exposure to market risk for changes in interest rates.

FOREIGN CURRENCY EXCHANGE RISK

There were no material changes during the third quarter of fiscal 2000
to the Company's foreign currency hedging programs.

* See "Forward-Looking Statements" on page 9.

Page 14
<PAGE> 17

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(b) On January 18, 2000 the Registrant sold and issued $25 million of
Series B Convertible Preferred Stock in a private placement to
four institutional investors. Each share of this stock has a
liquidation value of $1,000 and pays annual dividends of 7% on a
quarterly basis, payable in cash or stock. Each share of Series B
Preferred Stock is nonvoting and is convertible into Common Stock
on the basis summarized below and as set forth in detail in the
Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock filed with the Secretary of State of
the State of Delaware on January 18, 2000 (see Exhibit 2.1 to
this report). The Series B Convertible Preferred Stock must be
either redeemed or converted by January 18, 2002. As a result of
the liquidation preference of the Series B Convertible Preferred
Stock, the assets available for distribution to holders of common
stock would be reduced in certain events. Additionally,
conversion of the Series B Preferred Stock will dilute the
interests of the holders of common stock.

(c)(i) Concurrently with the issuance of the Series B Convertible
Preferred Stock described in the preceding paragraph, the
Registrant also issued to the same investors four-year warrants
to purchase 1,605,136 shares of common stock of the Registrant
(see Exhibit 3.1 to this report). The consideration for the
issuance of the Preferred Stock and warrants was $25,000,000 in
cash. The Registrant issued the Preferred Stock and warrants
under the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. Each of the investors represented
that it was acquiring the securities for investment and with no
view to distribution thereof. The securities bore appropriate
legends restricting their transfer without compliance with the
registration provisions of the Securities Act or an exemption
therefrom.

(ii) The warrants are initially exercisable at a price of $8.5663 per
share. The exercise price for the warrants will be adjusted
downward if the average of closing bid price of the Registrant's
common stock for the 10 trading days after January 18, 2001 is
less than $7.785. In addition, the exercise price of the warrants
and the number of shares issuable upon exercise of the warrants
are subject to certain anti-dilution adjustments.

(iii) The Series B Convertible Preferred Stock may be converted into
common stock at a conversion price into equal to 92% of the
average closing price of the Registrant's common stock on the
four trading days preceding conversion, provided that the
conversion price may not exceed $14.211. Prior to January 18,
2001, the holders of the Series B Convertible Preferred Stock may
not voluntarily convert their stock except (i) if, on the date of
conversion, the price of Registrant's common stock on 10 of the
15 preceding trading days has been less than $4.1875, (ii) if,
on the date of conversion, the price of the Registrant's common
stock on 15 of the 20 preceding trading days has exceeded
$10.4688 and (iii) under certain other limited conditions. Prior
to January 18, 2001, the Registrant may require the holders of
the Series B Convertible Preferred Stock to convert their stock
provided that a registration statement is in effect with respect
to the stock issuable upon conversion and certain other
conditions are met.

Page 15
<PAGE> 18

ITEM 5. OTHER INFORMATION

a. Effective February 15, 2000, Bruce N. Moore, President and Chief
Executive Officer, resigned from the Company. Subsequently, on
April 20, 2000, the Senior Vice President of Engineering,
resigned from the Company.

b. On February 15, 2000, the Company announced that it had entered
into a one-year agreement with Regent Pacific Management
Corporation. Regent Pacific will provide the services of Gary J.
Sbona as Chairman of the Board and Chief Executive Officer as
well as the services of other principals of Regent Pacific as
part of the Company's management team.

c. On February 15, 2000, K. C. Powell and John E. McNulty were
appointed to the Board of Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

a. Exhibits

3.1 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware on January 18,
2000 (incorporated herein by reference to Exhibit 3.1 to
the Registrant's Current Report on Form 8-K dated January
19, 2000)

4.1 Form of Warrant to Purchase Common Stock dated January 18,
2000, issued to certain investors (incorporated herein by
reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated January 19, 2000).

10.1 Registration Rights Agreement, dated as of January 18,
2000, between Registrant and the investors named therein
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated on January
19, 2000).

10.2 Securities Purchase Agreement, dated as of January 18,
2000, between Registrant and the investors listed on the
Schedule of Buyers attached thereto (incorporated herein
by reference to Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated on January 19, 2000).

10.2 Retainer Agreement between Company and Regent Pacific
Management Corporation, effective February 15, 2000.

10.4 Employee Stock Option Agreement, as amended, dated April
18, 2000 between Registrant and Gary J. Sbona.

27 Financial Data Schedule

b. Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K dated
January 19, 2000 which reported under "Item 5. Other
Events."

Page 16
<PAGE> 19

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.

Date May 11, 2000 /s/ PETER R. SIMPSON
------------------------------- --------------------------------------
Peter R. Simpson
Chief Financial Officer

Page 17
<PAGE> 20

AUSPEX SYSTEMS, INC.
EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
Sequentially
Exhibit Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
3.1 Certificate of Designations, Preferences and Rights of Series B 18
Convertible Preferred Stock as filed with the Secretary of State of the
State of Delaware on January 18, 2000 (incorporated herein by reference
to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated
January 19, 2000).

4.1 Form of Warrant to Purchase Common Stock dated January 18, 2000, issued 19
to certain investors (incorporated herein by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K dated January 19, 2000).

10.1 Registration Rights Agreement, dated as of January 18, 2000, between 20
Registrant and the investors named therein (incorporated herein by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated on January 19, 2000).

10.2 Securities Purchase Agreement, dated as of January 18, 2000, between 21
Registrant and the investors listed on the Schedule of Buyers attached
thereto (incorporated herein by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated on January 19, 2000).

10.3 Retainer Agreement between Company and Regent Pacific Management 22
Corporation, effective February 15, 2000.

10.4 Employee Stock Option Agreement, as amended, dated April 18, 2000 23
between Registrant and Gary J. Sbona.

27 Financial Data Schedule 24
</TABLE>

<PAGE> 1
EXHIBIT 10.3

February 10, 2000

The Board of Directors of Auspex Systems, Inc.
Mr. Bruce N. Moore., President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
2300 Central Expressway
Santa Clara, CA 95050

Dear Messrs. Moore, King, and Cheheyl:

RE: Retainer Agreement between Regent Pacific Management Corporation and
Auspex Systems, Inc.

I am writing this letter, pursuant to your request, to set forth the terms and
conditions upon which Regent Pacific Management Corporation, a California
corporation ("Regent Pacific"), will be engaged to perform certain management
services for Auspex Systems, Inc., a California corporation, and its wholly
owned and controlled subsidiaries (collectively, "Auspex"), under certain
guarantees and indemnities to be provided by the company. This agreement is
contingent upon and subject to an indemnification and guarantee agreement, in a
form acceptable to Regent Pacific.

Included within these services will be the following work product, which Regent
Pacific will supply to Auspex in accordance with the terms of this letter and
for the agreed-upon cash payments required by this letter:

1. Regent Pacific agrees to provide a five person team, to immediately
assume the chief executive and general management responsibilities of
Auspex, and to develop and implement a restructuring plan for Auspex.
The goal of this assignment shall be to redirect the company with
respect to the potential operational restructuring of the ongoing
business of Auspex.

2. Regent Pacific shall provide the services of Gary J. Sbona, Chairman and
Chief Executive Officer of Regent Pacific Management Corporation, who
shall be a part of the team and lead the engagement on behalf of Regent
Pacific as the board-appointed Chairman and interim Chief Executive
Officer of Auspex. Regent Pacific shall be appointed by the Board of
Directors to provide General Management services to Auspex. Both Regent
Pacific and Mr. Sbona shall report

<PAGE> 2

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 2

to the Board of Directors of Auspex and shall be solely accountable to
the Board for fulfilling the obligations of this engagement.

3. Within four (4) weeks of the date of this agreement, Regent Pacific will
provide an appropriately qualified person to serve as principal
financial officer of Auspex. Until such time, Mr. Gary J. Sbona shall
serve as principal financial officer of Auspex.

Regent Pacific's services do not include the following activities and/or work
product:

With the exception of Gary J. Sbona, Regent Pacific personnel provided
under the terms of this engagement shall not be appointed officers of
Auspex, and shall not accept nor be held accountable for the fiduciary
obligations of an officer or director of Auspex.

Regent Pacific is prepared to begin our services this week, contingent upon:

1. This duly executed retainer agreement on the part of Auspex;

2. The transfer of and receipt by Regent Pacific of the required initial
payments of this retainer agreement;

3. Duly executed indemnification agreement between Auspex and Mr. Sbona and
Auspex and Regent Pacific in a form acceptable to Regent Pacific.

4. Duly executed employee stock option agreement in a form acceptable to
Regent Pacific.

In addition to Mr. Sbona, the initial team assigned will be Dennis J. Dunnigan,
Thomas E. Gardner, James A. Garvey, Matthew W. Service and/or Earl C. Royse
and/or Peter R. Simpson, Principals of Regent Pacific. You understand that
Regent Pacific retains the right to assign or interchange these people with
other people as the work progresses, in order to address your requirements, as
long as the fee paid for our services is not increased for the included work
product.

FEES: We have agreed to provide the work product included in this agreement for
a period of twelve months, including twenty-six (26) weeks of non-cancelable
services. This

<PAGE> 3

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 3

service shall be $75,000 per week payable in four (4) week increments, each to
be paid in advance of each Regent Pacific standard four-week billing period,
except that the parties agree to negotiate a mutually acceptable fee reduction
for the second (26) week period commensurate with a reduced level of service. It
is agreed and understood between us that the payments of such cash fees are to
be made immediately preceding the start of each four-week billing period, and
that failure to pay such periodic payments when due shall constitute a breach of
this agreement by Auspex. It is further understood that Regent Pacific's fees
are to be paid in advance of the work to be performed, and that the initial
payment is to be paid on or before the start of the engagement. It is further
agreed that such cash payments are earned in full upon receipt by Regent
Pacific, by virtue of our accepting this agreement and the responsibilities it
entails, and are nonrefundable.

ADVANCE RETAINER: In the light of the uncertainty of the situation facing
Auspex, Auspex agrees to pay Regent Pacific an advance four (4) weeks retainer
for services which may be rendered and expenses which may be incurred in
connection with this engagement. The amount of that retainer is to be in the sum
of $300,000. The funds shall be deposited in an escrow account titled "Regent
Pacific Management Corporation, for the benefit of Auspex". Immediately prior to
any cancellation by Auspex, prior to the expiration of the non-cancelable period
or, thereafter, without 60 days written notice, or immediately upon the filing
of any petition in bankruptcy by or against Auspex, the retainer, plus any
interest earned thereon, shall become the property of Regent Pacific, free and
clear of any claims of Auspex, and shall be transferred to Regent Pacific's
general account. In such an event the retainer shall be deemed earned in full by
virtue of Regent Pacific's undertaking this engagement and be nonrefundable.
This sum is in addition to and not in satisfaction of any damages which Regent
Pacific may otherwise recover against Auspex for breach of this agreement, and
reflects Auspex's agreement that the retainer represents the minimum fee for
Regent Pacific's acceptance of the agreement and the work undertaken,
irrespective of the amount of time actually spent by Regent Pacific in the
course of its employment. In the event that this agreement expires upon
completion of the term, or terminates in accordance with its cancellation
provisions, the escrow account, plus any interest, will be returned to Auspex
within five business days after such expiration or termination.

TERM OF AGREEMENT: The term of this agreement shall be for twelve (12) months,
unless earlier terminated in accordance with this paragraph. Regent Pacific
hereby commits the availability of its resources to Auspex under this agreement
for the full twelve (12) month

<PAGE> 4

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 4

term of the engagement. Auspex may discharge Regent Pacific at any time after
the non-cancelable period provided that Auspex had delivered 60-day written
notice of intent to cancel this agreement. Regent Pacific may withdraw from this
assignment at any time with Auspex's consent or for good cause without Auspex's
consent. Good cause includes Auspex's breach of this agreement (including
Auspex's failure to pay any invoice within five working days of presentation),
or any fact or circumstance that would render our continuing participation in
the assignment unethical or unlawful.

EXPENSE REIMBURSEMENT: In addition to the fees, any requests for compensation
will also include certain charges for costs and expenses. Such costs and
expenses will include, among others, charges for messenger services, air
couriers, word processing services, photocopying, travel expenses, postage, long
distance telephone, legal advice, and other charges customarily invoiced by
professional firms for reimbursement of out-of-pocket expenses. Said expenses
shall not include meal expenses except when Regent Pacific professionals are
engaged in business-related activities and company travel. Regent Pacific will
periodically present invoices, which shall include reasonable supporting detail,
to Auspex for reimbursement of such charges, and Auspex agrees to pay such
invoices within ten (10) working days of presentation.

We will provide regular progress reviews to Auspex and its Board of Directors at
approximately biweekly intervals, as the work progresses. These progress reviews
will include a discussion of the alternatives available to Auspex and the
performance of the company relative to the restructuring of the ongoing
business. In addition, Regent Pacific requires, and Auspex agrees, that the
Board of Directors of Auspex will be available to Regent Pacific on a reasonable
consultation and communication basis and will meet with Regent Pacific in person
in regularly scheduled monthly board meetings to review the status of the
engagement.

During the progress of the work, should circumstances warrant, we may apply for
additions to the retainer fees, and attendant increases in the payments
scheduled above. Should we seek such additional compensation in order to
continue the level of effort required by the undertaking, we will do so based
upon our professional guideline hourly rates. We understand and acknowledge that
nothing in this agreement obligates Auspex to pay such additional retainer fees
or other compensation unless the Auspex Board of Directors shall have agreed to
make such payments after a written request by Regent Pacific.

<PAGE> 5

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 5

Because of the breadth and nature of our practice, from time to time our firm
may work for one client whose interest may be opposed to that of another client,
for which we work in an unrelated matter. Please be assured that, despite any
potential difference in the interests of our clients, we strictly preserve all
client confidences and zealously pursue the interests of each of our clients.
Auspex agrees that it does not consider such concurrent work in unrelated
matters of Auspex and any other client of Regent Pacific to be inappropriate,
and therefore waives any objections to any such present or future concurrent
assignments provided, however, that such waiver shall not apply to any willful
misconduct or breach of confidentiality obligations of Regent Pacific hereunder.

Except in the case of willful misconduct or gross negligence, Auspex shall
indemnify, defend, and hold Regent Pacific, its officers, directors, principals,
associates, affiliates, employees, agents, and counsel, harmless against any
damages, costs, fines, penalties, liabilities, attorneys' and other professional
fees and disbursements, suffered, incurred by, or asserted against, Regent
Pacific, its officers, directors, principals, associates, affiliates, employees,
agents, and/or counsel, including any amounts incurred or paid in settlement or
any judgment of any action, suit, or proceeding brought under any statute, at
common law, or otherwise, which arises under or in connection with the
performance by Regent Pacific of services pursuant to this agreement and any
amendment or modification thereto. The obligations of Auspex under this
paragraph are hereinafter collectively referred to as "Indemnity Obligations."
The Indemnity Obligations shall survive, for a period of five (5) years, any
termination of Regent Pacific's services under this agreement and any amendment
or modification thereto. Auspex agrees to promptly tender any payments due to
Regent Pacific, its officers, directors, principals, associates, affiliates,
employees, agents, and/or counsel, under or in respect of the Indemnity
Obligations, within three (3) business days following written demand by Regent
Pacific, its officers, directors, principals, associates, affiliates, employees,
agents, and/or counsel. Auspex's Indemnity Obligations shall not apply to
amounts paid in settlement of any loss, claim, damage, liability, or action if
such settlement is effected without the consent of Auspex, which consent shall
not be unreasonably withheld.

CONFIDENTIAL INFORMATION: Regent Pacific and its team shall have access under
this agreement to certain proprietary and/or confidential information with
respect to Auspex's business. Regent Pacific hereby agrees to protect such
confidential information as though

<PAGE> 6

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 6

it were Regent Pacific's own confidential information, in accordance with the
following terms and conditions:

1. Auspex shall permit Regent Pacific to review financial and proprietary
information necessary to Regent Pacific's participation in Auspex's
management.

2. Auspex shall permit, and Regent Pacific shall require, review of all
Auspex Board of Directors minutes and all executive actions taken within
the three months prior to the execution of this agreement.

3. Regent Pacific shall maintain the confidentiality of all such
information and prevent the unauthorized disclosure thereof. No such
information shall be made available for the use of any other party or be
divulged to others unless it:

a. is independently developed by Regent Pacific, provided that the
person or persons developing same have had no access to
confidential information received from Auspex;

b. is or becomes publicly available; or

c. is rightfully and lawfully received by Regent Pacific from an
independent third party.

This agreement is made under the laws of the State of California. If any legal
action arises under this Agreement or by reason of an asserted breach of it, the
prevailing party shall be entitled to recover all costs and expenses, including
reasonable attorney's fees, incurred in enforcing or attempting to enforce the
terms of this agreement.

NON-SOLICITATION: in recognition of the fact that the Regent Pacific individuals
that we provide to Auspex under this agreement may perform similar services from
time to time for others, this agreement shall not prevent Regent Pacific from
performing such similar services or restrict Regent Pacific from using such
individuals. Regent Pacific and Auspex agree that they shall not, except by
mutual agreement between the parties, during the term of this agreement nor for
a period of three (3) years after its termination, solicit for employment nor
employ, whether as employee or independent contractor or agent, any person who
performs services under this agreement or employees of Auspex. It is

<PAGE> 7

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 7

agreed that in the event of a breach of this paragraph by Auspex, it would be
impractical or extremely difficult to fix actual damages and, therefore, Regent
Pacific and Auspex agree that either party in breach of this paragraph shall pay
to the other party $350,000 per individual solicited or employed as employee,
independent contractor or agent, as Liquidated Damages and not as a penalty,
which is agreed by Regent Pacific and Auspex to represent reasonable
compensation for the foreseeable loss that will, in all likelihood, be incurred
because of such breach.

It is our policy to provide such additional services as you may request, in
addition to those covered in this letter, when qualified individuals are
available to fulfill your request. In such instances, the additional services
will be provided and paid for in accordance with Regent Pacific's guideline
hourly rates as contained in Regent Pacific's published fee schedules, a copy of
which is enclosed with this agreement.

This constitutes the entire understanding between Regent Pacific and Auspex
regarding our services. Further, this agreement supersedes and replaces any
prior agreement(s) between the parties. By executing this agreement you
acknowledge that you have read it carefully and understand all of its terms.
This agreement cannot be modified except by further written agreement signed by
each party.

If you have any questions about the foregoing, please call me. If Auspex is in
agreement with the foregoing, and it accurately represents your understanding of
the agreement between Auspex and our firm, please approve the enclosed copy of
this letter, and return the approved copy to me, along with the advance retainer
of $300,000 and the first four (4) week service fee of $300,000. Said payments
may be wire-transferred to the account of Regent Pacific Management Corporation
at Comerica Bank, 333 West Santa Clara Street, San Jose, CA 95113, Account #
Routing number. Our contact there is Zona Peterson. If there are any questions
with regard to the terms set forth herein, kindly contact me immediately. In
order to maintain continuity in scheduling of our resources, we ask that we
receive your affirmative response as soon as possible. In any event, this offer
to provide our services will expire on February 11, 2000, unless accepted by you
prior to that date, or extended in writing by an officer of Regent Pacific.
Please understand that we can assume no responsibility in connection with the
services to be provided under this agreement until the signed copy has been
returned and the required funds, as agreed to by us, have been received.

<PAGE> 8

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 8

# # # # # #

<PAGE> 9

Mr. Bruce N. Moore, President, CEO & Director
Mr. W. Frank King, Director
Mr. R. Stephen Cheheyl, Director
Auspex Systems, Inc.
February 10, 2000
Page 9

Very truly yours,

REGENT PACIFIC MANAGEMENT CORPORATION

/s/ Gary J. Sbona

Gary J. Sbona
Chairman and Chief Executive Officer

THE FOREGOING IS HEREBY APPROVED AND AGREED TO:

DATED: February 15, 2000

AUSPEX SYSTEMS, INC.
(Signifies full agreement with all terms and conditions)

BY: /s/ Bruce N. Moore
-----------------------------------------------------------------
Bruce N. Moore President, CEO & Director
On Behalf of the Board of Directors

BY: /s/ W. Frank King
-----------------------------------------------------------------
W. Frank King Director
On Behalf of the Board of Directors

BY: /s/ R. Stephen Cheheyl
-----------------------------------------------------------------
R. Stephen Cheheyl Director
On Behalf of the Board of Directors

<PAGE> 1
Exhibit 10.4

AUSPEX SYSTEMS, INC.
EMPLOYEE/DIRECTOR STOCK OPTION AGREEMENT
AS AMENDED APRIL 18, 2000

1. NOTICE OF STOCK OPTION GRANT

Gary J. Sbona
----------------------------------------------
Optionee

You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of this Option Agreement, as follows:

Date of Grant February 14, 2000
-----------------------------------

Vesting Commencement Date February 15, 2000
-----------------------------------

Exercise Price Per Share 9.4375
-----------------------------------

Total Number of Shares Granted 2,400,000
-----------------------------------

Total Exercise Price $22,650,000
-----------------------------------

Term/Expiration Date February 14, 2005
-----------------------------------

Vesting Schedule:

This Option may be exercised, in whole or in part, in accordance with the
following schedule:

1/12 of the options subject to this grant shall vest and become exercisable
at the end of each one month period after the Vesting Commencement Date,
provided that Optionee's status as an employee or director of the Company
has not terminated prior to any such date.

Notwithstanding the foregoing, this option shall vest and become fully
exercisable upon a Change of Control or if Optionee's employment with the
Company is terminated without Cause.

For the purpose of this section a "Change of Control" shall be deemed to
have occurred if: (i) the Company sells or otherwise disposes of all or
substantially all of its assets; (ii) there is a merger or consolidation of the
Company with any other corporation or corporations, provided that the

<PAGE> 2

shareholders of the Company, as a group, do not hold, immediately after such
event, more than 50% of the voting power of the surviving or successor
corporation as a result of their shareholdings immediately prior to such event;
or (iii) a person or entity, including any "person" as such term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), becomes the "beneficial owner" (as defined in the Exchange Act)
of Common Stock of the Company representing 50% or more of the combined voting
power of the voting securities of the Company.

For the purpose of this section, "Cause" means (i) the failure by Optionee
to substantially perform his material duties after a specific written demand for
substantial performance is delivered to Optionee by the Board of Directors (ii)
the failure (in material respect) by Optionee to follow reasonable policies or
directives established by the Board of Directors after written notice to
Optionee that Optionee is not following such policies or directives, (iii) bad
faith conduct that is materially detrimental to the Company, or (iv) the
conviction of Optionee of a felony.

Termination Period:

This Option may be exercised for one year after termination of Optionee's
status as an employee or director of the Company, or such longer period as may
be applicable upon death or Disability of Optionee as provided below, but in no
event later than the Term/Expiration Date as provided above.

AGREEMENT

1. Grant of Option. Auspex Systems, Inc., a Delaware corporation (the
"COMPANY"), hereby grants to the Optionee named in the Notice of Grant (the
"OPTIONEE"), an option (the "OPTION") to purchase a total number of shares of
Common Stock (the "SHARES") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "EXERCISE PRICE").

2. Exercise of Option. This Option shall be exercisable during its term
in accordance with the Exercise Schedule set out in the Notice of Grant and as
follows:

(i) Right to Exercise.

(a) This Option may not be exercised for a fraction of a share.

(b) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitation contained in subsection
2(i)(c).

(c) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Grant.

(ii) Method of Exercise. This Option shall be exercisable by written
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of

<PAGE> 3

Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.

No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.

3. Registration of Shares. The Company shall register the shares issuable
upon exercise of this Option on a Form S-8 Registration Statement within ninety
(90) days after the grant of this Option.

4. Method of Payment. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:

(i) cash; or

(ii) check; or

(iii) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a fair market value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or

(iv) delivery of a properly executed exercise notice together with
such other documentation as the Company and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price.

5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.

6. Termination of Relationship. In the event of termination of Optionee's
continuous status as an employee or director of the Company, Optionee may, to
the extent otherwise so entitled at the date of such termination (the
"TERMINATION DATE"), exercise this Option during the

<PAGE> 4

Termination Period set out in the Notice of Grant. To the extent that Optionee
was not entitled to exercise this Option at the date of such termination, or if
Optionee does not exercise this Option within the time specified herein, the
Option shall terminate.

7. Disability of Optionee. Notwithstanding the provisions of Section 6
above, in the event of termination of Optionee's continuous status as an
employee or director of the Company as a result of total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of termination of employment (but in no
event later than the date of expiration of the term of this Option as set forth
in Section 10 below), exercise the Option to the extent otherwise so entitled at
the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.

8. Death of Optionee. In the event of termination of Optionee's
continuous status as an employee or director of the Company as a result of the
death of Optionee, the Option may be exercised at any time within twelve (12)
months following the date of death (but in no event later than the date of
expiration of the term of this Option as set forth in Section 10 below), by
Optionee's estate, by a person who acquired the right to exercise the Option by
bequest or inheritance, or by Optionee's legal representative on behalf of
Optionee, but only to the extent the Optionee could exercise the Option at the
date of death.

9. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him or by Optionee's
legal representative on behalf of Optionee. The terms of this Option shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.

10. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the terms of this Option.

11. Taxation Upon Exercise of Option. Optionee understands that, upon
exercising a nonstatutory Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then fair market value of the
Shares over the exercise price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). If the
Optionee is an employee, the Company will be required to withhold from
Optionee's compensation, or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income.
Additionally, the Optionee may at some point be required to satisfy tax
withholding obligations with respect to the disqualifying disposition of an
Incentive Stock Option. The Optionee shall satisfy his or her tax withholding
obligation arising upon the exercise of this Option out of Optionee's
compensation or by payment to the Company.

<PAGE> 5

12. Tax Consequences. Set forth below is a brief summary as of the date of
this Option of some of the federal and California tax consequences of exercise
of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.

(i) Exercise of Nonstatutory Stock Option. There may be a regular
federal income tax liability and California income tax liability upon the
exercise of the Option. The Optionee will be treated as having received
compensation income (taxable at ordinary income tax rates) equal to the excess,
if any, of the fair market value of the Shares on the date of exercise over the
Exercise Price. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.

(ii) Disposition of Shares. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes.

13. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.

(i) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
this Option, as well as the Exercise Price, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to this Option.

(ii) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Company shall notify Optionee as
soon as practicable prior to the effective date of such proposed transaction.
Optionee shall have the right to exercise this Option until fifteen (15) days
prior to such transaction as to all of the Shares covered hereby, including
Shares as to which the Option would not otherwise be exercisable. To the extent
it has not been previously exercised, this Option will terminate immediately
prior to the consummation of such proposed action.

AUSPEX SYSTEMS, INC.
a Delaware corporation

By: /s/ R. Stephen Cheheyl
-------------------------
Title: Director
-------------------------

<PAGE> 6

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING AS AN EMPLOYEE OR DIRECTOR OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT CONFERS UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF STATUS AS AN EMPLOYEE OR DIRECTOR OF THE COMPANY, NOR SHALL IT
INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS
STATUS AS AN EMPLOYEE OR DIRECTOR.

Optionee hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed this Option in its entirety, has had
an opportunity to obtain the advice of counsel prior to executing this Option
and fully understands all provisions of the Option. Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Company upon any questions arising under this Option.

Dated: May 10, 2000 /s/ Gary J. Sbona
---------------------------
Optionee

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,386
<SECURITIES> 7,667
<RECEIVABLES> 19,198
<ALLOWANCES> 1,785
<INVENTORY> 5,422
<CURRENT-ASSETS> 67,035
<PP&E> 74,532
<DEPRECIATION> 57,573
<TOTAL-ASSETS> 86,153
<CURRENT-LIABILITIES> 43,035
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 42,060
<TOTAL-LIABILITY-AND-EQUITY> 86,153
<SALES> 14,501
<TOTAL-REVENUES> 21,362
<CGS> 12,087
<TOTAL-COSTS> 19,709
<OTHER-EXPENSES> 41,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (39,579)
<INCOME-TAX> 279
<INCOME-CONTINUING> (39,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,858)
<EPS-BASIC> (1.45)
<EPS-DILUTED> (1.45)

</TABLE>