STAC SOFTWARE INC, 10-K, 1999-12-20

STAC SOFTWARE INC
10-K, 1999-12-20
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999

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

COMMISSION FILE NO. 0-20095

STAC SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-3825313
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

12636 HIGH BLUFF DRIVE, 4TH FLOOR, SAN DIEGO, CALIFORNIA 92130-2093
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 794-4300

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK
(TITLE OF CLASS)

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 [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K of any amendment to this Form 10-K. [ X ]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of December 10, 1999 was $27,450,000.*

The number of shares outstanding of the Registrant's Common Stock was 6,150,169
as of December 10, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A in connection
with the 2000 Annual Meeting of Shareholders to be held on March 8, 2000 (the
"2000 Annual Meeting") is incorporated herein by reference into Part III of this
Report.

Certain Exhibits filed with the Registrant's Registration Statement on Form S-1
(Registration No. 33-46389), as amended, the Registrant's Annual Report on Form
10-K for the fiscal years ended September 30, 1993, 1994, 1995, and 1996,
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, as amended,
and Current Reports on Form 8-K filed on November 8, 1994 and October 16, 1995,
as amended, are incorporated herein by reference into Part IV of this Report.

Certain Exhibits filed with the Registration Statement on Form 10 filed by
Hi/fn, Inc. on August 7, 1998, as amended, are incorporated herein by reference
into Part IV of this Report.

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

* Excludes the Common Stock held by executive officers, directors and
shareholders whose ownership exceeds 5% of the Common Stock outstanding at
December 10, 1999. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the
Registrant or that such person is controlled by or under common control with
the Registrant.

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PART I

ITEM 1. BUSINESS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES. THE COMPANY'S FUTURE RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS, CONTINUED NEW PRODUCT INTRODUCTIONS BY THE COMPANY, MARKET ACCEPTANCE
OF THE COMPANY'S NEW PRODUCT INTRODUCTIONS, NEW PRODUCT INTRODUCTIONS BY
COMPETITORS, DISTRIBUTOR INVENTORY LEVELS, TECHNOLOGICAL CHANGES IN THE PERSONAL
COMPUTER, DATA STORAGE AND COMMUNICATIONS INDUSTRIES, UNCERTAINTIES REGARDING
INTELLECTUAL PROPERTY RIGHTS AND THE OTHER FACTORS REFERRED TO HEREIN
(INCLUDING, BUT NOT LIMITED TO, THE FACTORS DISCUSSED BELOW IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" UNDER
"REVENUES," "QUARTERLY TRENDS AND CHANNEL INVENTORIES," "SEASONALITY,"
"OPERATING SYSTEMS," AND "STOCK PRICE VOLATILITY").

Stac Software, Inc. ("Stac" or the "Company") designs, develops, markets and
supports high-performance, easy-to-deploy, distributed business systems recovery
software solutions for enterprise customers, which implement the Company's
lossless data compression technologies. Stac also supports a remote access
software suite, which is managed as a mature business unit. The Company has been
and intends to continue to focus its development and marketing resources on the
business segments it believes have the highest growth potential, and to
continually evaluate its strategic objectives with respect to its remote access
software business. Stac's products are sold through a variety of domestic and
international channels.

On December 16, 1998, the Company changed its name to Stac Software, Inc.,
from Stac, Inc., by way of a merger of its wholly-owned subsidiary Stac
Software, Inc., with and into the Company, pursuant to the Delaware General
Corporation Law. References in this Report on Form 10-K to Stac, Inc. mean the
Company. The Company's symbol on the Nasdaq's Stock Market National Market
System ("NMS"), "STAC", was not changed in connection with the name change.

In addition, on December 16, 1998, the Company distributed a special
dividend of its stock in its Hi/fn, Inc. ("Hi/fn"), subsidiary to its
stockholders. Hi/fn was a majority-owned subsidiary of the Company and is
engaged in silicon and software implementations of data compression and data
encryption standards for the network communications and storage equipment
markets. As a result of the spin-off, Hi/fn has been accounted for as a
discontinued operation in the Company's Consolidated Statement of Operations and
Balance Sheet. Hi/fn is currently traded on Nasdaq under the symbol HIFN. Please
refer to the Registration Statement on Form 10 filed by Hi/fn with the SEC for a
complete discussion of Hi/fn and the spin-off transaction.

Stac's storage systems recovery software business is comprised of its
REPLICA TAPE and REPLICA NETWORK DATA MANAGER ("NDM") product lines. REPLICA
TAPE and REPLICA NDM are high-performance, easy-to-deploy, distributed business
systems recovery software products, which enable fast PC server, desktop and
notebook replication and disaster recovery. REPLICA for NetWare was introduced
in February 1996, REPLICA for NT was made available in April 1997 and REPLICA
NDM was introduced to selected customer sites in April 1998, with full
commercial availability in January 1999. The Company intends to focus on the
development of relationships with key OEMs in the storage management software
sector and with system integration partners and is investing the majority of its
product development, marketing and sales resources in the REPLICA product line
and extensions to REPLICA.

The Company also develops and markets REACHOUT ENTERPRISE ("REACHOUT")
remote communications software, a remote access software suite which allows
administrators and end users to access a PC using another PC through a network,
the Internet, ISDN lines or modems. REACHOUT works with Microsoft Corporation's
("Microsoft") Windows NT, Windows 98/95, Windows 3.x and DOS operating systems.

Stac received royalties from Microsoft and IBM Corporation ("IBM") for
licenses of its data compression technology from June 1994 through January 1998
after which the royalties became paid in full. The Company does not expect
further revenues from these agreements. The royalties, net of taxes paid, have
been reinvested in the REACHOUT and REPLICA products which have replaced the
Company's former STACKER disk-compression products.

1
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demand for the Company's products such as the timing of the Company's and
competitors' new product introductions and upgrades. Due to such fluctuations,
historical results and percentage relationships are not necessarily indicative
of the operating results for any future period.

BACKGROUND

STORAGE MANAGEMENT SOFTWARE

The network server market has grown rapidly as more information is being
shared and processed across networks. Also, the storage capacity of hard disk
drives installed on servers and on workstations has grown dramatically. With
network servers providing shared access to mission critical information
twenty-four hours a day, seven days a week, the need for fast, reliable data
backup and disaster recovery has become acute. Traditionally servers have been
backed up a file at a time. If a lost or deleted file needed to be recovered,
specialized software would have to be run by a network systems administrator. If
a server was lost and the files destroyed, a new server would have to be
formatted and the network operating system reinstalled before going to tapes to
try to recover the data. The result has been costly server down time.

Stac began shipping REPLICA TAPE for NetWare in February 1996, REPLICA TAPE
for Windows NT in April 1997 and REPLICA NDM on a limited test basis in April
1998. Unlike traditional file-by-file backup technologies, REPLICA TAPE uses
Stac's Object Replication Technology to replicate entire servers or volumes.
Replication allows live servers to be backed up and is significantly faster than
file-by-file software because REPLICA TAPE does not have to open and close each
file as it replicates. A replicated volume can be mounted directly as a volume
so that downtime due to a server crash can be minimized. Unlike disaster
recovery routines provided by file-by-file software, REPLICA TAPE creates a
complete server copy and can restore a server without having to reinstall
networking software or rebuild disk partitions. REPLICA TAPE introduced Stac's
Object Replication Technology as a replacement for file-by-file back-up software
solutions. Stac has also introduced in REPLICA NDM its proprietary three-tiered
lossless data compression technology, which builds on previous data compression
technology for which the Company is known.

REPLICA NDM addresses the previously unsolved problem of providing fast,
efficient back-up and disaster recovery to Windows-based desktops and notebooks.
The growth of disk drives and the use of notebooks for work away from the
network has exposed enterprises to having large amounts of unprotected data.
Stac's three-tiered data compression technology allows fast, zero-administration
back-up of desktops and notebooks to enterprise network administrators and
allows end users to recover their own files or to recover from loss of their
disk drive or notebook.

The Company discontinued marketing and sales of its STACKER disk compression
products in September 1997. STACKER products provided the majority of Stac's
software revenues for fiscal years 1991 though 1994. Data compression utilities
provided with Windows NT, Windows 98/95, MS-DOS and PC-DOS under patent or
software licenses from Stac and the rapidly declining cost per megabyte of hard
disk storage have provided customers with the choice of inexpensively upgrading
their hard disk drives or using compression utilities that are included with the
operating systems sold with most personal computers.

COMMUNICATIONS SOLUTIONS SOFTWARE

The Company began marketing REACHOUT Remote Control software in 1994 and has
subsequently developed releases of REACHOUT for Microsoft's Windows NT, Windows
98/95 and Windows 3.x operating systems. The remote access market has developed
due to the following trends: i) the need for users to access the programs and
data on their work computer from outside the office; ii) the need to transfer
files from a remote computer to another; iii) the growth in remote technical
support via modem; and iv) the growth in office PC networks and the need for
users to access them remotely.

REACHOUT ENTERPRISE provides a complete, high-performance remote access
solution comprised of remote control, remote node and rapid file transfer.
REACHOUT is designed for enterprise network administrators and supports PCs
using Windows NT, Windows 98/95, Windows 3.x and DOS. REACHOUT remote control
effectively allows one PC to take control of another PC by using a connection
made over a modem, an ISDN line, the Internet or an internal network.

Using REACHOUT, the remote PC, or host, is operated by the user from another
PC, the viewer. The host accesses files and runs programs using keystrokes and
mouse directions sent by the user from the viewer PC. The viewer PC displays
what is on the host PC's screen and thus gives the user a way to remotely
operate the host PC and see the results of the work. REACHOUT includes a remote

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access client that allows users to log into a computer network as a remote node.
REACHOUT also provides a file transfer utility that performs fast file transfer
from one PC to another and allows a user to efficiently update a file by
transmitting only the changes that have been made since the last time the file
was transferred.

STRATEGY

Stac's strategy has been to provide software solutions for information
systems managers of large enterprises to help them better manage and use their
personal computer storage and communications investments through the use of
Intranet and Internet enabled disaster recovery, communications and security
capabilities. The Company is partnering with other OEM software developers,
systems integrators and resellers to provide complete data storage and
management solutions for enterprises. The Company currently has strategic
alliances with Hewlett Packard, Inc. ("Hewlett Packard"), Legato Systems, Inc.
("Legato") and Tivoli Systems, Inc. ("Tivoli") (a wholly owned subsidiary of
IBM).

The Company has implemented this strategy through a combination of strategic
technology acquisitions and internal product development. In March 1995, Stac
acquired certain Novell NetWare server disaster recovery and data protection
technology which was the basis for the Company's REPLICA TAPE product line. The
Company has since made substantial investments in further development of those
technologies and has added features together with new, innovative technology.
The result of those development efforts has been REPLICA TAPE for Windows NT,
REPLICA TAPE for NetWare and REPLICA NDM. In addition, Stac is currently
pursuing possible strategic transactions.

In October 1994, Stac purchased certain REACHOUT remote control software
technology which was the basis for the Company's REACHOUT product line. The
Company has since introduced new versions of REACHOUT, creating a complete
remote access software product targeted for the enterprise.

PRODUCTS

The Company currently licenses its storage management and communications
software solutions to enterprises and OEMs. Software solution sales consist of
the Company's REACHOUT and REPLICA products.

REPLICA TAPE is a backup and disaster recovery software product for Windows
NT and Novell NetWare and IntranetWare servers. REPLICA TAPE uses Stac's Object
Replication Technology to quickly replicate entire servers or volumes and to
provide easy access to backed up files plus fast, dependable disaster recovery.

REPLICA NDM is Stac's newest addition to the REPLICA storage management
product group. REPLICA NDM provides centrally managed enterprise-wide network
data protection and disaster recovery for Windows-based desktops and notebooks.
REPLICA NDM incorporates Stac's proprietary three-tiered data compression
technology, thereby dramatically lowering network traffic and network storage
administrative overhead and media costs.

REACHOUT ENTERPRISE has been redesigned to provide a remote control solution
for enterprise business needs. REACHOUT ENTERPRISE is a communications software
program that allows one PC to remotely control another PC by replicating the
visual display and controlling the keyboard and mouse. Using REACHOUT over a
network connection, an administrator can control or monitor another PC on the
same Local Area Network ("LAN") or Wide-Area Network ("WAN") to provide
help-desk services. Using REACHOUT over a modem, a user can operate a distant
PC, synchronize it with their local PC, transfer files or establish a remote
node connection.

The following table lists each of the Company's principal products and their
pricing as of December 1999.
<TABLE>
<CAPTION>

DATE OF
PRODUCT DESCRIPTION SUGGESTED PRICE FIRST SHIPMENT
------- ----------- --------------- --------------
<S> <C> <C> <C>
REPLICA TAPE Single Server Secure disaster recovery and $624 per server April 1997
Edition for Windows NT volume backup software for
Windows NT servers.

REPLICA TAPE Intranetwork Secure disaster recovery, $1,995 per server December 1997
Edition for Windows NT volume backup, and central
management software for
Windows NT servers.

REPLICA TAPE Single Server Secure disaster recovery and $624 per server February 1996
Edition for NetWare volume backup software for
Novell NetWare servers.

3
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REPLICA TAPE Intranetwork Secure disaster recovery, $1,995 per server March 1996
Edition for NetWare volume backup and central
management software for
Novell NetWare servers.

REPLICA TAPE DATA Centrally managed enterprise- $100 per client, at September 1998
MANAGER wide network protection and 999 client licenses
disaster recovery for Windows-
based client desktops, remote
PC's and notebooks.

REACHOUT ENTERPRISE Remote access software for $219 per user September 1991
Windows NT, Windows 98/95, license
Windows 3.x and DOS-based
computers.

</TABLE>

RESEARCH AND DEVELOPMENT

The market for the Company's products is characterized by rapid
technological change, requiring continuous investment to develop and bring to
market new products. The Company has invested the majority of its software
development resources in its REPLICA product line over the past three fiscal
years. The Company believes that significant factors in its future success will
be its ability to identify and respond to customer needs, to enhance its
existing products, to introduce new products on a timely and cost-effective
basis, to extend its core technology into new platforms and applications, and to
anticipate and respond to emerging standards and other technological changes.

The Company intends to continue to develop its software products as market
conditions warrant and to invest in the development or acquisition of new
products. Foreign language versions of products will be developed as market
conditions warrant. The Company has developed, with the assistance of partners,
French, German and Japanese versions of its software products for sale in
foreign markets and intends to continue its work with partners to produce other
language translations as market conditions warrant. The Company's research and
development is conducted primarily by its internal product development staff and
through contractors. Research and development expenses were $6.2 million in
fiscal 1999, $7.6 million in 1998, and $8.6 million in 1997, which represented
44%, 39% and 26% of revenues in those periods, respectively.

MARKETING AND SALES

The Company markets and sells its storage management and communications
software products domestically and internationally through Stac Europe, Limited
("Stac Europe"), a wholly-owned subsidiary of the Company. The Company sells its
products principally through: i) its internal sales and marketing staffs which,
primarily with partners, corporate resellers, value added resellers and systems
integrators, sell to corporations, government entities and other enterprises and
ii) distributors that sell primarily to software resellers. The Company's
distributors resell the Company's products in North America and Europe on a
nonexclusive basis and in Japan on an exclusive basis pursuant to distribution
agreements that generally have one-year terms with automatic one-year renewal
periods. The Company retains ownership of its proprietary rights associated with
its products and agrees to indemnify the distributor for third-party claims of
proprietary rights infringement to the extent such claims are brought against
the distributor.

International sales accounted for revenues of $5.8 million, $4.8 million and
$5.1 million in fiscal 1999, 1998 and 1997, respectively. Technical support for
Stac products is provided by Stac, Stac Europe or through contracts with third
parties. Stac provides free customer support for 60 days from the time of the
first customer call. Additional support may be purchased by the customer. The
Company's international operations are subject to certain risks common to
international activities, such as changes in foreign governmental regulations,
currency exchange rates, tariffs and taxes, export license requirements, the
imposition of trade barriers, difficulties in staffing and managing foreign
operations, and political and economic instability.

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In addition to the above channels used for marketing and selling the
Company's software products, the Company licenses its software products to
software and hardware OEMs such as Legato and Hewlett Packard for incorporation
into their own products.

The Company's current software return policy allows its distributors to
return any new, unused product in the distributor's inventory within a
contractually defined period of up to 180 days from the notice of discontinuance
of any product, or of any new version of a product, for a credit against
balancing orders for other products of the Company. In addition, distributors
may participate quarterly in a stock balancing program which, subject to certain
limitations, allows them to return purchased products for credit towards future
purchases. The Company believes that this stock balancing provision is customary
in the industry and should not materially increase risks associated with the
relationship. End users may return defective products pursuant to policies
established by their dealer or directly to the Company within ninety days of
purchase. The Company reviews its allowances for returns and distributor
inventory levels on a monthly basis and believes its allowances for returns are
adequate. However, due to uncertainty regarding end user demand, competitive
product introductions and any unforseen issues in connection with the Year 2000,
there can be no assurance that actual returns in excess of recorded allowances
will not occur and result in a material adverse effect on the Company's
business, operating results or financial condition.

COMPETITION AND RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS

The market for the Company's products is intensely competitive. Increased
competition could result not only in a decline in sales volume, but also in
price reductions that could have a material adverse effect on the Company's
business, operating results and financial condition.

The Company's REPLICA product line competes with well established back-up
products from Computer Associates, Inc., Legato and Veritas Software
Corporation, all of which have established channels of distribution and
installed customer bases. The Company has entered into OEM licenses with Legato
and Tivoli which authorize those companies to resell REPLICA products under
certain conditions. While the Company hopes to expand its sales and marketing
reach through these agreements, the Company expects to realize less revenue per
unit than it would if it sold the products itself. In addition, resellers could
choose not to sell REPLICA over competitors' products with the result that
significant sales of REPLICA could fail to materialize, or products similar to
REPLICA could be successfully introduced to resellers by the Company's
competitors. In addition, Microsoft's current operating systems incorporate
back-up functionality and future operating systems are expected to include some
disaster recovery functionality. Also, REPLICA is being introduced into
sophisticated server environments and, while the Company has invested
significant resources in testing REPLICA under a variety of conditions,
configurations and circumstances, there are likely to be environments which have
not been anticipated for which additional development of REPLICA will be
necessary.

The Company's REACHOUT product competes in the remote control software
market against more established products such as Symantec Corporation's
pcAnywhere and Netopia, Inc.'s Timbuktu. Further, Microsoft could elect to
incorporate remote control or additional remote access capabilities into its
operating systems which are pre-installed on most personal computers. The
Company believes that the rate of growth of the remote control market it serves
has decreased from prior years' growth rates or may actually be declining and
that it will have a difficult time gaining further sales growth against its
competitors.

MANUFACTURING AND BACKLOG

The majority of the Company's software products are manufactured by third
parties that specialize in the duplication and assembly of software products, in
accordance with the Company's specifications. The principal materials and
components used in the Company's software products include diskettes and/or CD's
which are used for distribution of the software code and the related user
manuals. The software manufacturing process involves the duplication of media,
the printing of user manuals, assembly of components, and final packaging. The
Company believes there is an adequate supply of and source for the raw materials
used in its software products and that multiple sources are available for media
duplication, manual printing and final packaging.

The Company generally ships software products within ten days after the
receipt of an order, although rapid increases in demand as the result of the
release of a new product or product upgrade could cause shipping delays.
Generally, the Company has relatively little, if any, backlog of orders for its
software products at any given time and does not consider backlog to be a
measure of sales for any future period.

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PATENTS, TRADEMARKS AND PRODUCT PROTECTION

The Company attempts to protect its products with a combination of trade
secret, patent, copyright, and trademark laws and with license agreements. The
Company owns two issued United States patents relating to its storage management
products, which expire in 2015 and 2016. Both of the patents are employed in the
Company's REPLICA products. The Company also has a perpetual, non-royalty
bearing license from Hi/fn to implement in Stac products the patents assigned by
Stac to Hi/fn and to license and sublicense the resulting products to the
Company's customers.

The status of patents covering technology is highly uncertain, involving
complex legal and factual questions. There can be no assurance that patent
applications that may be filed by the Company will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology; nor
can there be any assurance that patents issued to the Company will not be
infringed upon or designed around by others or that others will not obtain
patents that the Company would need to license or design around or that the
Company's competitors will not independently develop non-infringing technologies
or products that are equivalent or superior in function or performance. If
patents held by competitors or others are upheld by the courts and found to be
infringed by Stac's products, the holders of such patents might be in a position
to require the Company to stop manufacturing, using or selling the infringing
products and to pay up to three times damages to the holders of the infringed
patents. There can be no assurance that any licenses that might be required for
the Company's products would be available on reasonable terms, if at all.

The Company often licenses its software products to end user customers by
use of a "shrink-wrap" license (a "shrink-wrap" license agreement is a printed
license agreement included within packaged software or that appears during the
installation of software that sets forth the terms and conditions under which
the end user can use the product). The terms of this license agreement determine
how the software may be used and generally limit the user to use of the software
on a limited number of computers and allow the user to make a back-up copy.
Shrink-wrap licenses are unenforceable under the laws of certain jurisdictions.
Judicial enforcement of copyright laws is also uncertain. Policing unauthorized
use of computer software is difficult, and software piracy is a persistent
problem for the packaged software industry. These problems may be particularly
acute in international markets. There can be no assurance that misappropriation
will not occur.

The Company's trademark rights include rights associated with its use of its
trademarks and rights obtained by registrations of its trademarks. The Company
has obtained United States trademark registrations for certain trademarks, and
has applied for or obtained registration in various international jurisdictions.
The Company's rights to register and use its trademarks do not ensure that the
Company has superior rights to others that may have registered or used identical
or related trademarks on related goods or services, nor that such registrations
or uses will not be used to attempt to foreclose use of a particular trademark
by the Company.

Because the computer industry is characterized by rapid technological
change, the policing of the unauthorized use of computer software is a difficult
task and software piracy is expected to continue to be a persistent problem for
the packaged software industry. Despite steps taken by Stac to protect its
software products, third parties may still make unauthorized copies of Stac's
products for their own use or for sale to others. The Company believes that the
knowledge, abilities and experience of its employees, its timely product
enhancements and upgrades and the availability and quality of the support
services it provides to users are more significant factors in influencing end
users to buy its products than are patent, trade secret and copyright protection
laws.

EMPLOYEES

As of December 10, 1999, Stac employed approximately 111 full-time
employees, of whom approximately 63 were employed in research and development,
31 in sales, marketing and customer support and 17 in operations and
administration. None of the Company's employees are represented by a labor union
or subject to a collective bargaining agreement. Stac has never experienced a
work stoppage due to labor difficulties and believes that its employee relations
are good.

ITEM 2. PROPERTIES

The Company's principal domestic administrative, marketing and sales
activities are located in approximately 18,000 square feet of leased facilities
in San Diego, California. The space is occupied under lease agreements that

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<PAGE>

expire in March 2000. The Company has options to renew the leases for an
additional five-year period on terms specified in the current lease agreements.
The Company's subsidiary in the United Kingdom leases 5,200 square feet of
office space near London under a five-year lease expiring in November 2003. The
Company's product development subsidiary in Estonia leases 396 square meters of
office space in Tallinn, Estonia, under a five year lease expiring September 1,
2004. See Note 9 of Notes to Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.

ITEM 3. LEGAL PROCEEDINGS

The Company from time to time is engaged in legal actions arising in the
ordinary course of its business and believes that the resolution of these
actions will not have a material adverse effect on the Company's results of
operations, liquidity, or financial position.

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

No matters were submitted to a vote of security holders during the quarter
ended September 30, 1999.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Common Stock of Stac is traded on the Nasdaq Stock Market's National
Market System ("NMS") under the symbol "STAC." The following table sets forth
the range of high and low sales prices on the NMS for the Common Stock for the
periods indicated and since January 1, 1997. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
COMMON STOCK PRICES
-------------------
HIGH LOW
---- ---

<S> <C> <C>
CALENDAR YEAR 1997:
First Quarter........................................... $ 28.52 $19.00
Second Quarter.......................................... $ 20.52 $13.52
Third Quarter........................................... $ 21.24 $12.76
Fourth Quarter.......................................... $ 28.76 $16.52

CALENDAR YEAR 1998:
First Quarter........................................... $ 24.00 $17.52
Second Quarter.......................................... $ 21.52 $17.00
Third Quarter........................................... $ 19.00 $10.52
Fourth Quarter.......................................... $ 23.25 $ 2.08

CALENDAR YEAR 1999:
First Quarter........................................... $ 5.00 $ 3.08
Second Quarter.......................................... $ 6.31 $ 3.52
Third Quarter........................................... $ 6.19 $ 4.06
Fourth Quarter (through December 10, 1999).............. $ 7.13 $ 3.50
</TABLE>

The Company had approximately 327 stockholders of record as of December 10,
1999. The last sales price for the Company's Common Stock, as reported on the
NMS on December 10, 1999, was $6.00.

On December 16, 1998, the Company distributed a special dividend of its
stock in its Hi/fn subsidiary to its stockholders. On December 17, 1998, the
Company's Common Stock traded ex-dividend, and its closing price on the NMS on
such date was $5.88.

On April 30, 1999, the Company's Board of Directors declared a one-for-four
reverse stock split of its common stock, which had been approved by the
Company's stockholders at the 1999 Annual Meeting of Stockholders held on March
11, 1999. The reverse split was effective May 7, 1999. (All references to share
and per share amounts have been adjusted retroactively to reflect this stock
split.)

8
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following data, insofar as it relates to each of the fiscal years 1995
through 1999, have been derived from audited financial statements, including the
balance sheets at September 30, 1999 and 1998 and the related statements of
operations for each of the three years ended September 30, 1999 and notes
thereto included herein. This data should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto for
the corresponding periods.

The Company's consolidated financial statements have been restated to
present Hi/fn as a discontinued operation. Accordingly, Hi/fn's assets and
liabilities; revenues, costs and expenses; and cash flows have been excluded
from the respective captions in the consolidated financial statements, and have
been reported as "Net assets of discontinued operations"; "Income from
discontinued operations, net of taxes"; and "Net cash used in discontinued
operations," respectively, for all periods presented.

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- ------------------------------- -------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues............................................. $ 13,856 $19,403 $ 33,190 $ 33,871 $ 38,462
Operating income (loss).............................. (6,132) (4,437) 2,933 (1,240) (3,396)
Income (loss) from continuing operations............. (2,898) (7,882) 3,862 (3,826) 82
Net income (loss).................................... (2,013) (5,815) 5,660 (1,675) 1,496
Net income (loss) available for common stockholders (2,013) (5,815) 5,660 (1,843) (102)

Earnings per common share:
Income (loss) from continuing operations............. $ (0.49) $ (1.24) $ 0.50 $ (0.50) $ 0.01
Net income (loss) available for common stockholders.. $ (0.34) $ (0.92) $ 0.73 $ (0.24) $ (0.02)
Common shares used to compute per share data......... 5,925 6,337 7,732 7,646 6,348

Balance Sheet:
Working capital...................................... $ 29,421 $22,557 $ 50,474 $ 68,864 $ 65,381
Total assets......................................... 34,873 43,866 70,111 81,079 78,357
Stockholders' equity................................. 31,302 39,213 64,123 78,999 76,355
</TABLE>

The Company has never declared or paid any cash dividends on its common
stock. The company currently intends to retain remaining future earnings to
finance the growth and development of its business.

Share and per share amounts have been updated to reflect the one-for-four
reverse stock split approved by the Board of Directors April 30, 1999 and made
effective May 7, 1999.

9
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Stac designs, develops, markets and supports high-performance,
easy-to-deploy, distributed business systems recovery software solutions for
enterprise customers, which implement the Company's lossless data compression
technologies. Stac also supports a remote access software suite, which is
managed as a mature business unit. The Company has been and intends to continue
to focus its development and marketing resources on the business segments it
believes have the highest growth potential, and to continually evaluate its
strategic objectives with respect to its remote access software business. Stac's
products are sold through a variety of domestic and international channels.

On December 16, 1998, the Company distributed a special dividend of its
stock in its Hi/fn, Inc. ("Hi/fn"), subsidiary to its stockholders. Hi/fn was a
majority-owned subsidiary of the Company and is engaged in silicon and software
implementations of data compression and data encryption standards for the
network communications and storage equipment markets. As a result of the
spin-off, Hi/fn has been accounted for as a discontinued operation in the
Company's Consolidated Statement of Operations and Balance Sheet. Hi/fn is
currently traded on Nasdaq under the symbol HIFN. Please refer to the
Registration Statement on Form 10 filed by Hi/fn with the SEC for a complete
discussion of Hi/fn and the spin-off transaction.

The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere within this annual report. Fluctuations
in annual and quarterly results may occur as a result of factors affecting
demand for the Company's products such as the timing of the Company's and
competitors' new product introductions and upgrades. Due to such fluctuations,
historical results and percentage relationships are not necessarily indicative
of the operating results for any future period. In addition, the Company
believes that certain individuals and entities that traditionally buy software
from both the Company and others are deferring purchases of software in the
fourth quarter of the 1999 calendar year due to concern over the Year 2000
issue, which is expected to adversely impact the Company's financial results.

RESULTS OF OPERATIONS

The following table sets forth for the Company's results of operations and
the percentage relationship of certain items to revenues during the periods
shown. Unless otherwise indicated, references to years are to fiscal years which
ended September 30.

<TABLE>
<CAPTION>
1999 1998 1997
--------- ------ -----
<S> <C> <C> <C>
Revenues................................................. 100% 100% 100%
Cost of revenues......................................... 6 5 5
------ ------ ------

Gross margin............................................. 94 95 95
------ ------ ------

Research and development................................. 44 39 26
Sales and marketing...................................... 60 54 44
General and administrative............................... 25 23 14
Restructuring............................................ 9 2 2
------ ------ ------
138 118 86
------ ------ ------

Operating income (loss).................................. (44) (23) 9
Interest income.......................................... 11 13 7
------ ------ ------

Income (loss) before income taxes........................ (33) (10) 16
Provision (benefit) for income taxes .................... (12) 31 4
------- ------ ------

Income (loss) from continuing operations................. (21) (41) 12
Income from discontinued operations, net of taxes........ 6 11 5
------ ------ ------
Net income (loss)........................................ (15)% (30)% 17%
====== ======= ======
</TABLE>

10
<PAGE>

REVENUES

Revenues decreased by 29% to $13.9 million in fiscal 1999 compared to 1998,
and by 42% to $19.4 million in fiscal 1998 compared to 1997 when revenues were
$33.2 million. The decrease in fiscal 1999 revenues from those of 1998 is due to
lower revenues received from royalties received related to licenses of Stac's
data compression technology to operating system vendors. The decrease in fiscal
1998 revenues from those of 1997 is also due primarily to lower revenues
received from these royalties. There were no royalty revenues in fiscal 1999,
$5.1 million in 1998 and $16.0 million in 1997. In 1998 and 1997 these royalty
revenues were solely from agreements with Microsoft and IBM, who were obligated
to continue making payments under the licenses at the rate of $4.0 million per
quarter through December 1997, with a final payment of $1.1 million in the March
1998 quarter. The Company did not receive any royalty payments in fiscal 1999
and expects no further royalty revenues under these agreements with Microsoft
and IBM.

Software sales declined from fiscal 1998 to 1999 and from fiscal 1997 to
1998. Those decreases are discussed below.

1999 1998 1997
------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue ($millions):
Software................................... $ 13.9 100% $ 14.3 74% $ 17.2 52%
Royalties.................................. -- -- 5.1 26 16.0 48
------- ----- ------- ----- ------- -----
Total................................... $ 13.9 100% $ 19.4 100% $ 33.2 100%
======= ===== ======= ===== ======= =====
</TABLE>

Software sales, which are comprised of domestic and international sales and
licenses through distributors, retailers, solution providers, OEMs and direct
channels, accounted for $13.9 million of revenues in fiscal 1999, representing
all the Company's revenues in that year, $14.3 million of revenues in 1998 and
$17.2 million of revenues in 1997. Software sales decreased by 3% in fiscal 1999
from 1998 and by 17% in fiscal 1998 from 1997, due primarily in each case to
declining sales of REACHOUT, which has reached a mature phase of the product
life cycle. These declines were partially offset by increased sales of REPLICA
TAPE, primarily due to higher OEM revenues.

International revenues, which are included above, were $5.8 million, or 42%
of revenues in fiscal 1999, $4.8 million or 25% of revenues in 1998 and $5.1
million, or 15% of revenues in 1997. The increase in international revenues from
fiscal 1998 to 1999 is primarily due to increased European sales related to an
OEM agreement with a large computer manufacturer in the United Kingdom. The
increase in international revenues as a percentage of revenues in fiscal 1998 as
compared to 1997 was primarily due to the decrease in royalty revenues as a
result of the completion of the Company's royalty agreements with Microsoft and
IBM. Stac markets and sells to its European accounts from its office in the
United Kingdom and markets and sells primarily to Japan and Australia through
relationships with distributors and resellers abroad.

GROSS MARGIN

Cost of revenues consists primarily of the user manuals, packaging, media
and assembly associated with the Company's software products. Gross margins were
94% in fiscal 1999 and 95% in 1998 and 1997. The decrease in gross margins from
fiscal 1998 to 1999 is due to the elimination of royalty revenues, which carry
100% gross margin.

RESEARCH AND DEVELOPMENT

The cost of product development consists primarily of salaries, employee
benefits, overhead and outside contractors. Such expenses were $6.2 million in
fiscal 1999, $7.6 million for 1998 and $8.6 million for 1997. The decrease in
product development costs from fiscal 1998 to 1999 is primarily due to lower
product localization costs and lower employee and consulting costs, related to
the reallocation of resources among development facilities in conjunction with
the restructuring discussed below. The decrease in product development in fiscal
1998 from 1997 is due to a decreased level of activity in development of
REACHOUT, consistent with its mature phase in its life cycle. The decrease in
REACHOUT development spending has been partially offset by increased spending
related to development of the REPLICA product line. The increase in product
development expense as a percentage of revenues was primarily due to the
Company's lower revenues in fiscal 1999 as compared to 1998 and in fiscal 1998
as compared to 1997. The Company expects to continue to invest in the
development of products for which it believes there is a need in the market,
however, there can be no assurance that product development programs invested in
by the Company will be successful or that products resulting from such programs
will achieve market acceptance.

11
<PAGE>

SELLING AND MARKETING EXPENSE

Selling and marketing expenses consist primarily of salaries, commissions
and benefits of sales, marketing and customer support personnel, and consulting,
advertising, promotional and overhead expenses. Such expenses were $8.2 million
fiscal 1999, $10.5 million for 1998 and $14.6 million for 1997. The decrease in
marketing and sales expense in fiscal 1999 from 1998 and in fiscal 1998 from
that in 1997 was due to corporate restructurings of these functional areas. The
restructurings refocused sales and marketing efforts towards developing
corporate enterprise customers, rather than individual end users. The increase
in selling and marketing expense as a percentage of revenues was primarily due
to the Company's lower revenues in fiscal 1999 as compared to 1998 and in fiscal
1998 as compared to 1997. Sales and marketing expenses are expected to remain
the Company's most significant ongoing operating expense.

GENERAL AND ADMINISTRATIVE

General and administrative expenses are comprised primarily of salaries for
administrative and corporate services personnel, legal and other professional
fees. Such expenses were $3.4 million for fiscal 1999, $4.4 million for 1998 and
$4.7 million for 1997. The reduction in spending from 1998 to 1999 reflects
lower management costs and non-recurring costs associated with Stac's spin-off
of its former Hi/fn subsidiary. The decrease in fiscal 1998 expenses compared to
those in 1997 was primarily due to the conclusion of an outside strategic
assessment review conducted in and charged to fiscal 1997 expenses. The increase
in general and administrative expenses as a percentage of revenues was primarily
due to the Company's lower revenues in fiscal 1999 as compared to 1998 and in
fiscal 1998 as compared to 1997.

RESTRUCTURING CHARGES

As discussed above, in fiscal 1997, the Company reorganized its sales and
marketing departments and recorded a restructuring charge of $0.9 million. The
principal components of the charge were losses on property and equipment
abandonments ($0.4 million), severance and employee related liabilities ($0.3
million), lease termination costs ($0.1 million) and consulting and outplacement
related to the terminated employees ($0.1 million). In fiscal 1998, the Company
incurred an additional $0.3 million related to the above mentioned
restructuring. This additional amount represented severance and employee related
liabilities which the Company was not permitted to expense until the affected
employees were notified of the termination and the Company had committed to
provide for such costs.

In fiscal 1999, the Company charged $1.2 million to operations, related to
two restructurings which occurred during the year. The first restructuring
charge was $0.8 million and was completed in anticipation of the reorganization
related to the December 16, 1998 spin-off of the Hi/fn subsidiary. Primary
components of the charge were losses on property and equipment abandonments
($0.6 million) and severance and employee related liabilities paid for
terminated employees ($0.2 million). The second restructuring was $0.4 million
and was designed to contain development costs by utilizing offshore facilities
for these functions. The amount charged to restructuring included severance and
employee related liabilities paid for terminated employees ($0.3 million) and
lease termination costs ($0.1 million).

INTEREST INCOME

Interest income was $1.6 million in fiscal 1999 and $2.4 million in 1998 and
1997. The reduction in interest income from fiscal 1998 to 1999 was primarily
due to lower invested balances during the 1999 fiscal year, as a result of the
completion of the Company's stock repurchase program in fiscal 1998. The amount
did not change from fiscal 1997 to 1998 despite lower balances available for
investment, due to a change in investment policy, away from tax-exempt
securities, towards higher-yielding commercial paper. The Company invests the
majority of its funds in high quality commercial paper and tax exempt
securities.

INCOME TAXES

For fiscal 1999, the Company reported a benefit from income taxes of $1.7
million. This amount reflects net operating loss carrybacks to be applied to
prior periods' tax liabilities. The effective tax rate of 37% is lower than the
statutory federal and state rates due to alternative minimum tax limitations the
Company's net operating loss carryback is subject to. The Company continues to
record a 100% valuation allowance against its deferred tax assets. For fiscal
1998, the Company reported a provision for income taxes of $5.9 million, which
is inclusive of a charge to establish a valuation allowance of $6.4 million
against deferred tax assets. Before the valuation allowance, the benefit for
income taxes was $0.5 million for an effective tax rate of 25%. The valuation
allowance was recorded as a result of an assessment made of future taxable
income as required by accounting standards, made in conjunction with the
anticipated spin-off of the Company's Hi/fn subsidiary. The effective tax rate

12
<PAGE>

is lower than the statutory federal and state rates primarily due to
non-deductible expenses related to the spin-off and due to differences in tax
rules impacting foreign operations. For fiscal 1997, the Company reported a
provision for income for taxes of $1.5 million on income before income taxes of
$5.3 million, an effective rate of 28%. The effective tax rate for 1997 is lower
than the statutory federal and state rates due primarily to tax-exempt interest
earned on cash equivalents and marketable securities. Differences in effective
tax rates among years is also affected by the proportion of earnings from
interest income and foreign operations to total earnings and the different
statutory tax rates associated with them.

QUARTERLY TRENDS AND CHANNEL INVENTORIES

The Company historically has experienced significant fluctuations in its
revenues and operating results, including net income, and anticipates that these
fluctuations will continue. The Company operates with relatively little backlog
of its software sales, and the majority of its software revenues each quarter
result from orders received in that quarter. Consequently, if near-term demand
for the Company's products weakens in a given quarter or if inventory of the
Company's products in the retail and distribution channels satisfies near-term
demand, the Company's operating results for that quarter would be adversely
affected. In addition, when the Company announces enhanced versions of its
software products, the announcement may have the effect of slowing sales of the
current version of the product as buyers delay their purchases. Quarterly
results have been or may in the future be influenced by the timing of
announcements or introductions of new products and product upgrades by the
Company or its competitors, distributor ordering patterns, product returns,
delays in product development and licensing of the Company's products and core
technology. In addition, the Company's new products typically have a lengthy
evaluation period before any purchase is made.

SEASONALITY

The software industry has typically experienced some seasonal variations in
demand, with sales declining somewhat in the summer months. The Company believes
that its software sales are subject to similar seasonal variations which, when
combined with the other factors described above, are likely to result in
fluctuations in the Company's quarterly results. As a result, historical
quarter-to-quarter comparisons should not be relied upon as indicative of future
performance.

OPERATING SYSTEMS

Stac's REPLICA TAPE, REPLICA NDM AND REACHOUT products currently operate on
a limited number of personal computer and network operating systems. REACHOUT
supports Microsoft Windows NT, Windows 98, Windows 95, Windows 3.x and DOS,
while REPLICA TAPE supports Windows NT and Novell NetWare servers. REPLICA TAPE
customers may require support of the Unix operating system, which the Company
does not currently provide. REPLICA NDM server component supports only Windows
NT with client support for Windows 98, Windows 95 and Windows NT workstation. In
addition, future versions of Microsoft's Windows operating systems may require
significant changes to the Company's products in order to maintain
compatibility.

STOCK PRICE VOLATILITY

Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period. Shortfalls could be caused by
shortfalls in revenues, timing of the receipt of technology license fees, and/or
increased levels of expenditures. Additionally, the Company participates in a
highly dynamic industry, which often results in significant volatility of the
Company's stock price.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and marketable securities increased by
$5.4 million to $29.8 million at September 30, 1999 from $24.4 million at
September 30, 1998. The increase was primarily attributable to the repayment of
a $5.0 million loan from the Company's former Hi/fn subsidiary. Accounts
receivable increased by $1.6 million to $2.4 million at September 30, 1999 from
that at September 30, 1998, primarily attributable to higher balances
outstanding from a major customer, related to increased sales from that
customer. Working capital increased by $6.9 million to $29.4 million at
September 30, 1999 from that at September 30, 1998, primarily as a result of the
changes in cash and marketable securities discussed above.

13
<PAGE>

The Company believes that existing cash balances and funds provided by
operations will be sufficient to finance the working capital requirements of the
consolidated companies for the foreseeable future.

YEAR 2000

The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.

To date, the Company's primary focus in its analysis of its Year 2000 issue
has been on its product offerings. Stac has performed extensive Year 2000
compliance testing of its current products and believes, to its best knowledge,
that current versions of REPLICA TAPE, REPLICA NDM and REACHOUT ENTERPRISE (the
"Products") are Year 2000 compliant; provided that the underlying operating
system and other software with which these products are being used are Year 2000
compliant.

The Company has also completed its evaluation of Year 2000 compliance with
respect to all of its internal computer, telephone and security systems
(hardware and software). The Company has determined that all business critical
systems are Year 2000 compliant. As of December 10, 1999, the Company had spent
approximately $70,000 on purchases of new hardware and software to insure Year
2000 compliance, and does not expect to spend any significant additional amounts
toward this purpose.

In addition, the Company has communicated with certain significant third
parties with which it does business for the purpose of discussing and evaluating
their Year 2000 compliance plans and state of readiness and to determine the
extent to which the Company's systems may be affected by the failure of others
to remediate their own Year 2000 issues. The Company has received feedback from
such parties indicating that they are in the process of implementing measures to
ensure Year 2000 compliance, and further representing that they will achieve
compliance before the close of calendar 1999. The Company has not independently
confirmed any information received from any other parties with respect to Year
2000 issues. As such, there can be no assurance that such other parties will
complete their Year 2000 conversion in a timely fashion or will not suffer a
Year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.

To date, the Company has not identified any internal system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. However, the Company may ultimately
identify systems which do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability to process
transactions or information, procure inventory, or engage in similar normal
business activities. The failure of the Company to identify systems which
require Year 2000 conversion that are critical to the Company's operations or
the failure of the Company or others with which the Company does business to
become Year 2000 ready in a timely manner could have a material adverse effect
on the Company's financial condition and results of operations.

As part of the Company's contingency Year 2000 effort, information received
from external sources is examined for date integrity before being brought into
the Company's internal systems. The Company will incorporate alternatives into
its contingency plan, should the software upgrades described above prove to not
fully resolve Year 2000 compliance issues. If the Company determines that its
business is at material risk of disruption due to currently unforeseen Year 2000
issue or anticipates that its Year 2000 compliance will not be achieved in a
timely fashion, the Company will work to enhance its contingency plan.

The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion and possible risks associated with the Year 2000
issue are based on the Company's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from the
Company's expectations. Such uncertainties include, among others, the success of
the Company in identifying systems that are not Year 2000 compliant, the nature
and amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 conversion efforts of others.

14
<PAGE>

MARKET RISK

The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.

The Company's foreign currency risks are mitigated principally by
maintaining only nominal foreign currency cash balances. Working funds necessary
to facilitate the short term operations of the Company's subsidiary in the
United Kingdom are kept in the local currencies for the European countries in
which they do business, with excess funds converted to United States currency
and transferred to Stac's offices in the United States for investment.

The fair value of the Company's investments in marketable securities at
September 30, 1999, was $20.7 million. The Company's investment policy is to
manage its portfolio of marketable securities in order to preserve principal and
liquidity while maximizing the return. At September 30, 1999, the Company's
portfolio was primarily invested in high quality commercial paper, typically
with maturities of less than six months. These investments are distributed among
several issuers to minimize the credit risk associated with any single
institution.

15
<PAGE>

SELECTED QUARTERLY DATA (in thousands, except per share data)

<TABLE>
<CAPTION>
SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
FISCAL 1999 1999 1999 1999 1998
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $ 3,865 $ 3,615 $ 3,370 $ 3,006
Gross margin.................................... 3,612 3,356 3,165 2,814
Operating loss.................................. (724) (701) (902) (3,805)
Loss from continuing operations................. (221) (563) (188) (1,926)
Net loss per common share....................... $ (0.04) $ (0.09) $ (0.03) $ (0.18)
Common stock price:
High....................................... $ 6.19 $ 6.31 $ 5.00 $ 23.25
Low........................................ $ 4.06 $ 3.52 $ 3.08 $ 2.08

SEPT. 30, JUNE 30, MAR. 31, DEC. 31,
FISCAL 1998 1998 1998 1998 1997
- ----------- -------- -------- -------- --------
Revenues........................................ $ 3,019 $ 3,764 $ 4,915 $ 7,705
Gross margin.................................... 2,747 3,516 4,702 7,458
Operating income (loss)......................... (2,917) (2,171) (384) 1,035
Income (loss) from continuing operations........ (7,795) (1,015) 134 794
Net income (loss) per common share.............. $ (1.27) $ (0.11) $ .12 $ .25
Common stock price:
High....................................... $ 19.00 $ 21.52 $ 24.00 $ 28.76
Low........................................ $ 10.52 $ 17.00 $ 17.52 $ 16.52

</TABLE>

As of December 10, 1999, there were 327 holders of record of the Company's
common stock.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements at September 30, 1999 and
1998, and for each of the three fiscal years in the period ended September 30,
1999 and the Report of PricewaterhouseCoopers LLP, Independent Accountants, are
included in this report on pages F-1 through F-15.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 2000 Annual Meeting (the "Proxy
Statement") under the headings "Nominees" and "Background of Executive Officers
not Described Above."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

16
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>

(a) Documents filed as part of the report:
<CAPTION>
PAGE
NUMBER
------
<S> <C>
(1) Report of Independent Accountants F-1
Consolidated Balance Sheet at
September 30, 1999 and 1998 F-2
Consolidated Statement of Operations for the years ended
September 30, 1999, 1998 and 1997 F-3
Consolidated Statement of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity for
the years ended September 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
(2) Schedule I -- Marketable Securities S-1
All other schedules have been omitted because they are not
applicable or required, or the information required to be
set forth therein is included in the consolidated financial
statements or notes thereto.
</TABLE>

(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended September 30, 1999.

EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ -----------
<S> <C> <C>
(7) 2.1 Agreement and Plan of Merger, dated April 5, 1996,
between the Registrant and Stac, Inc., a California
corporation.

(7) 3.1 Certificate of Incorporation of the Registrant.

(7) 3.2 Bylaws of the Registrant.

4.1 Reference is made to Exhibits 3.1, 3.2, 10.8, 10.9,
10.10 and 10.12.

(1) 10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers with
related schedule.

(1)(8) 10.2 Registrant's 1992 Stock Option Plan ("the 1992
Plan").

(5)(8) 10.3 Registrant's 1992 Non-Employee Directors' Plan, as
Amended ("the Directors' Plan").

17
<PAGE>

EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ -----------

(1)(8) 10.4 Registrant's Employee Stock Purchase Plan and related
Offering document.

(1) 10.5 Securities Purchase Agreement, dated as of March 27,
1990, among the Registrant and the other persons
Named therein.

(1)(8) 10.6 Distributor Agreement, between the Registrant and
Merisel, Inc., dated as of March 1, 1991.

(1)(8) 10.7 Distributor Agreement, between the Registrant and
Ingram Micro, Inc. dated as of March 13, 1991.

(3)(8) 10.8 License Agreement, between the Registrant and
Microsoft Corporation, dated as of June 20, 1994.

(5)(8) 10.9 Forms of Non-statutory Stock Option Agreements under
the Directors' Plan.

(6) 10.10 Stock Purchase Agreement dated October 6, 1995
between the Registrant and William T. Baker.

(6) 10.11 Option Purchase Agreement dated October 6, 1995 among
the Registrant and Certain Holders of Options to
Purchase Common Stock of California Software, Inc.

(6) 10.12 Indemnity Agreement dated October 6, 1995 between the
Registrant and William T. Baker.

(6) 10.13 Series A Preferred Stock Purchase Agreement dated
October 6, 1995 by and between DynaNet, Inc. and the
Registrant.

(7) 10.14 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.

(7) 10.15 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.

(7) 10.16 Office Lease dated July 12, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.

(7) 10.17 Amendment No. 1 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.

(7) 10.18 Amendment No. 2 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.

(9) 10.19 Cross License Agreement dated as of November 21,
1996 between the Registrant and Hi/fn, Inc.

(9) 10.20 Form of Distribution Agreement.

18
<PAGE>

EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ -----------

(9) 10.21 Form of Employee Benefits and Other Matters Allocation Agreement.

(9) 10.22 Form of Tax Allocation and Indemnity Agreement.

10.23 Distributor Agreement, between the Registrant and
Ingram Micro, Inc. dated as of June 8, 1999.

(10) 10.24 Severance Agreement with Gary Clow.

(10) 10.25 Severance Agreement with John Witzel.

(10) 10.26 1992 Non-Employee Directors' Stock Option Plan, as Amended.

21.1 Subsidiaries of the Registrant.

23.1 Consent of Independent Accountants.

24.1 Power of Attorney. Reference is made to page 20.

27.1 Financial Data Schedule
</TABLE>

- ----------

(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-46389) or amendments thereto and incorporated herein by reference.

(2) Certain confidential portions deleted pursuant to Order Granting Application
Under the Securities Act of 1933, as amended, and Rule 406 thereunder
respecting Confidential Treatment dated May 6, 1992.

(3) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1994, as amended.

(4) Certain confidential portions deleted pursuant to order Granting Application
for Confidential Treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934 dated October 21, 1994.

(5) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995.

(6) Filed as an exhibit to the Company's Report on Form 8-K filed on October 16,
1995, relating to the Company's (i) acquisition of all of the outstanding
capital stock and options to purchase the capital stock of California
Software, Inc. and (ii) acquisition of Series A Preferred Stock of DynaNet,
Inc.

(7) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996.

(8) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).

(9) Filed as an exhibit to the Registration Statement on Form 10, as amended
filed by Hi/fn, Inc. (File No. O-24765) and incorporated herein by
reference.

(10)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.

19
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

STAC SOFTWARE, INC.

By: /S/ JOHN T. TICER, JR.
-----------------------------------------
John T. Ticer, Jr.
Chief Executive Officer, President
and Director

Date: December 20, 1999

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John Ticer and Clifford L. Flowers, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/S/ GARY W. CLOW Chairman of the Board December 20, 1999
- -----------------------------------------------
(Gary W. Clow)

/S/ JOHN T. TICER, Jr. Chief Executive Officer, December 20, 1999
- ----------------------------------------------- President and Director
(John T. Ticer, Jr.)

/S/ CLIFFORD L. FLOWERS Vice President of Finance, December 20, 1999
- ----------------------------------------------- Chief Financial Officer and
(Clifford L. Flowers) Secretary (Principal
Financial and Accounting
Officer)

/S/ COREY M. SMITH Director December 20, 1999
- -----------------------------------------------
(Corey M. Smith)

/S/ PETER D. SCHLEIDER Director December 20, 1999
- -----------------------------------------------
(Peter D. Schleider)

/S/ ROBERT W. JOHNSON Director December 20, 1999
- -----------------------------------------------
(Robert W. Johnson)

/S/ ANTONIO PEREZ Director December 20, 1999
- -----------------------------------------------
(Antonio Perez)
</TABLE>

20
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Stac Software, Inc.

In our opinion, the accompanying Consolidated Balance Sheet and the related
Consolidated Statements of Operations, of Cash Flows and of Changes in
Stockholders' Equity, present fairly, in all material respects, the financial
position of Stac Software, Inc. and its subsidiaries at September 30, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Diego, California
October 25, 1999

F-1
<PAGE>
<TABLE>

STAC SOFTWARE, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>

SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 9,079 $ 11,573
Marketable securities........................................................... 20,711 12,859
Accounts receivable............................................................. 2,381 777
Inventories..................................................................... 240 197
Income taxes receivable......................................................... -- 1,314
Prepaid expenses and other current assets....................................... 454 317
------------ ------------
Total current assets.................................................. 32,865 27,037

Property and equipment, net....................................................... 1,556 3,329
Net assets of discontinued operations............................................. -- 12,995
Other assets...................................................................... 452 505
------------ ------------
$ 34,873 $ 43,866
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable................................................................ $ 1,132 $ 1,458
Accrued expenses and other current liabilities.................................. 2,312 3,022
------------ ------------
Total current liabilities............................................. 3,444 4,480

Other liabilities................................................................. 127 173
------------ ------------
3,571 4,653
------------ ------------
Commitments and contingencies (Notes 9 and 11)

Stockholders' equity:
Common stock, par value $0.001 per share, authorized 100,000,000 shares;
7,930,300 and 7,791,470 shares issued in 1999 and 1998, respectively.......... 8 8
Additional paid-in capital...................................................... 76,633 75,166
Treasury stock, at cost; 1,949,292 shares in 1999 and 1998, respectively........ (41,347) (41,347)
Cumulative translation adjustment............................................... (23) (29)
Retained earnings............................................................... (3,969) 5,415
------------ ------------
Total stockholders' equity........................................... 31,302 39,213
------------ ------------
$ 34,873 $ 43,866
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>
<TABLE>

STAC SOFTWARE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>

YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................... $ 13,856 $ 19,403 $ 33,190
Cost of revenues................................................... 909 980 1,581
-------------- -------------- --------------
Gross margin....................................................... 12,947 18,423 31,609

Operating expenses:
Research and development......................................... 6,179 7,555 8,574
Sales and marketing.............................................. 8,247 10,509 14,564
General and administrative....................................... 3,431 4,446 4,688
Restructuring.................................................... 1,222 350 850
-------------- -------------- --------------
Total operating expenses......................................... 19,079 22,860 28,676

Operating income (loss)............................................ (6,132) (4,437) 2,933
Interest income.................................................... 1,571 2,434 2,404
-------------- -------------- --------------

Income (loss) before income taxes.................................. (4,561) (2,003) 5,337
Provision (benefit) for income taxes............................... (1,663) 5,879 1,475
-------------- -------------- --------------

Net income (loss) from continuing operations....................... (2,898) (7,882) 3,862

Discontinued operations:
Income from discontinued operations, net of taxes of $550 in
1999, $1,627 in 1998 and $1,235 in 1997 885 2,067 1,798
-------------- -------------- --------------

Net income (loss)................................................ $ (2,013) $ (5,815) $ 5,660
============== ============== ==============

Earnings per common share, basic
Income (loss) from continuing operations........................... $ (0.49) $ (1.24) $ 0.51
Income from discontinued operations................................ $ 0.15 $ 0.32 $ 0.23
Net income (loss).................................................. $ (0.34) $ (0.92) $ 0.74

Earnings per common share, diluted
Income (loss) from continuing operations........................... $ (0.49) $ (1.24) $ 0.50
Income from discontinued operations................................ $ 0.15 $ 0.32 $ 0.23
Net income (loss).................................................. $ (0.34) $ (0.92) $ 0.73

Weighted average common shares
outstanding, basic............................................... 5,925 6,337 7,638
Weighted average common shares
outstanding, diluted............................................. 5,925 6,337 7,732
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
<TABLE>

STAC SOFTWARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>

YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ (2,013) $ (5,815) $ 5,660
Adjustments required to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization..................................... 1,744 2,073 2,383
Non-cash restructuring charges.................................... 204 -- 636
Deferred stock compensation....................................... -- -- 22
Tax benefits from exercise of stock options....................... 165 164 111
Loss on disposals and abandonments of property and equipment...... 589 -- 380
Provision (benefit) for deferred income taxes..................... -- 7,523 (574)
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable............................................. (1,604) 1,968 3,132
Inventories..................................................... (43) (16) (135)
Income taxes receivable......................................... 1,314 (1,314) --
Prepaid expenses and other current assets....................... (137) 176 (267)
Other assets.................................................... 13 18 (78)
Accounts payable................................................ (326) 367 302
Accrued expenses and other current liabilities.................. (914) (1,638) 1,478
-------------- -------------- --------------
Cash provided (used) by operating activities of continuing
operations................................................. (1,008) 3,506 13,050
-------------- -------------- --------------

Cash flows from investing activities:
Purchases of marketable securities.................................. (47,852) (45,348) (25,253)
Sales of marketable securities...................................... 40,000 65,529 21,676
Acquisitions, net of cash acquired.................................. -- -- (400)
Acquisitions of treasury stock...................................... -- (19,996) (21,351)
Purchases of property and equipment................................. (520) (1,363) (2,791)
-------------- -------------- --------------
Cash used by investing activities of continuing operations.... (8,372) (1,178) (28,119)
-------------- -------------- --------------

Cash flows from financing activities:
Issuance of common stock, net....................................... 1,256 596 682
-------------- -------------- --------------
Cash provided by financing activities of continuing operations 1,256 596 682
-------------- -------------- --------------

Effect of exchange rate changes on cash............................... 6 77 12
-------------- -------------- --------------
Cash received from repayment of note.................................. 5,000 -- --
-------------- -------------- --------------
Net cash provided (used) by discontinued operations................... 624 (10,037) (2,958)
-------------- -------------- --------------

Net decrease in cash and cash equivalents............................. (2,494) (7,036) (17,333)
Cash and cash equivalents at beginning of year........................ 11,573 18,609 35,942
-------------- -------------- --------------
Cash and cash equivalents at end of year.............................. $ 9,079 $ 11,573 $ 18,609
============== ============== ==============

Supplemental disclosures of cash flow information:
Cash paid for income taxes......................................... $ -- $ 3,007 $ 2,288
Cash received from income taxes.................................... $ 2,548 23 63

Supplemental non-cash activities:
Stock dividend...................................................... $ 7,371 -- --
Conversion of deferred compensation to equity
upon exercise of common stock options............................ 46 64 10
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
<TABLE>

STAC SOFTWARE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>

COMMON STOCK
--------------- CUMULATIVE
ADDITIONAL TRANSLATION RETAINED TREASURY COMPREHENSIVE
SHARES AMOUNT PAID IN CAPITAL ADJUSTMENT EARNINGS STOCK TOTAL INCOME
------ ------ --------------- ---------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996. 7,672 $ 8 $ 73,539 $ (118) $ 5,570 $ -- $ 78,999

Acquisitions of treasury stock (957) -- -- -- -- (21,351) (21,351)
Issuance of common stock upon
exercise of options......... 34 -- 468 -- -- -- 468
Issuance of common stock under
Employee Stock Purchase Plan 14 -- 224 -- -- -- 224
Tax benefits from exercise of
stock options............... -- -- 111 -- -- -- 111
Equity adjustment from foreign
currency translation........ -- -- -- 12 -- -- 12 $ 12
Net income.................... -- -- -- -- 5,660 -- 5,660 5,660
------ ------ --------- -------- --------- --------- --------- ----------
Balance at September 30, 1997. 6,763 8 74,342 (106) 11,230 (21,351) 64,123 $ 5,672
==========

Acquisitions of treasury stock (992) -- -- -- -- (19,996) (19,996)
Issuance of common stock upon
exercise of options......... 62 -- 518 -- -- -- 518
Issuance of common stock under
Employee Stock Purchase Plan 9 -- 142 -- -- -- 142
Tax benefits from exercise of
stock options............... -- -- 164 -- -- -- 164
Equity adjustment from foreign
currency translation........ -- -- -- 77 -- -- 77 77
Net loss...................... -- -- -- -- (5,815) -- (5,815) (5,815)
------ ------ --------- -------- --------- --------- ---------- ----------
Balance at September 30, 1998. 5,842 8 75,166 (29) 5,415 (41,347) 39,213 $ (5,738)
==========

Stock dividend Hi/fn spin-off -- -- -- (7,371) -- (7,371)
Issuance of common stock upon
exercise of options......... 113 -- 1,089 -- -- -- 1,089
Issuance of common stock under
Employee Stock Purchase Plan 26 -- 213 -- -- -- 213
Tax benefits from exercise of
stock options............... -- -- 165 -- -- -- 165
Equity adjustment from foreign
currency translation........ -- -- -- 6 -- -- 6 6
Net loss...................... -- -- -- -- (2,013) -- (2,013) (2,013)
------ ------ --------- -------- --------- --------- --------- ----------
Balance at September 30, 1999. 5,981 $ 8 $ 76,633 $ (23) $ (3,969) $(41,347) $ 31,302 $ (2,007)
====== ====== ========= ======== ========= ========= ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

STAC SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:

DESCRIPTION OF BUSINESS

Stac Software, Inc. (the "Company") designs, develops, markets and supports
networking technologies, systems management software and applications for the
storage and communication of data for personal computers and computer networks.
The Company's major products, REPLICA TAPE and REPLICA NETWORK DATA MANAGER
("NDM"), back-up and disaster recovery solutions, and REACHOUT, a remote control
software, are sold world-wide.

CONSOLIDATION

The financial statements as of and for the years ended September 30, 1999,
1998 and 1997 consolidate the accounts of the Company and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

FINANCIAL STATEMENT PREPARATION

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

REVENUE RECOGNITION

Revenue from licenses of the Company's software, for which there are no
significant continuing obligations, and collection of the related receivable is
probable, is recognized upon delivery of the software. The Company's revenue
from maintenance agreements is recognized ratably over the service period. The
Company's revenue from software installation and implementation and from
contract services is recognized as the services are performed, using the
percentage of completion method based on costs incurred to date compared to
total estimated costs at completion. During the first quarter of 1999, the
Company adopted Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 provides guidance for software revenue recognition. The
adoption of SOP 97-2 did not have a significant impact of the Company's
financial position or results of operations.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.

MARKETABLE SECURITIES

The Company's marketable securities are comprised of funds on deposit with a
liquid asset manager that have been invested principally in commercial paper.
The carrying amount of these investments approximates fair value due to the
short maturities or demand nature of the instruments. At September 30, 1999, all
marketable securities are classified as available-for-sale and carried at fair
value. Unrealized gains or losses at September 30, 1999 and 1998 are not
significant.

INVENTORIES

Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.

F-6
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Additions to property and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of three to
five years and totaled $1,704,000, $1,966,000 and $1,854,000 for fiscal 1999,
1998 and 1997, respectively. Leasehold improvements are amortized over the
shorter of the asset life or lease term.

LONG-LIVED ASSETS

The Company investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill, on an exception basis, when
events or changes in circumstances have made recovery of an asset's carrying
value unlikely. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairments of long-lived assets existed through September 30, 1999.

RESEARCH AND DEVELOPMENT

Expenditures for research and development are charged to expense as
incurred. Development costs for software to be licensed or sold that are
incurred from the time technological feasibility is established, until the
product is available for general release to customers, are capitalized. Through
September 30, 1999, no significant amounts were expended subsequent to reaching
technological feasibility.

ADVERTISING

Expenditures for advertising costs are charged to expense as incurred and
totaled $151,000, $97,000 and $790,000 for fiscal 1999, 1998 and 1997,
respectively.

STOCK-BASED COMPENSATION

The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense.

INCOME TAXES

The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. A
deferred income tax liability or asset, net of valuation allowance, is
established for the expected future consequences resulting from the differences
between the financial reporting and income tax bases of assets and liabilities
and from net operating loss and credit carryforwards. Deferred income tax
expense or benefit represents the net change during the year in the deferred
income tax liability or asset. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts more likely than not to be
realized.

NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per share has been computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Basic Earnings Per
Share ("EPS") is calculated by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted EPS is
calculated by dividing the income available to common stockholders by the
weighed average number of common shares outstanding for the period, increased by
dilutive securities that were outstanding during the period. Net income remains
the same for the calculations of basic EPS and diluted EPS. For the years ended
September 30, 1999 and 1998, the calculation for basic and diluted EPS were the
same. There were 493,164 and 567,517 dilutive securities outstanding for the
years ended September 30, 1999 and 1998, respectively. A reconciliation of the
numerators and denominators of the basic and diluted EPS calculations for the
year ended September 30, 1997 is presented below.

F-7
<PAGE>

YEAR ENDED SEPTEMBER 30, 1997
(in thousands except per share data)
PER SHARE
NET INCOME SHARES AMOUNT
Net income from continuing
operations $ 3,862
Basic EPS 7,638 $0.51
=====
Dilutive securities 94
------
Diluted EPS 7,732 $0.50
====== =====

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and weighted average exchange rates during the period for revenues
and expenses. Gains and losses from translation are excluded from results of
operations and accumulated as a separate component of stockholders' equity.

DIVERSIFICATION OF CREDIT RISK

The Company's policy is to place its cash, cash equivalents and marketable
securities in high credit quality financial instruments and to limit the amount
of credit exposure.

NEW PRONOUNCEMENTS

Comprehensive Income

During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. Comprehensive income is defined as the "change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments and
distributions to owners."

Segment Reporting

For the year ended September 30, 1999 the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Under FAS 131, operating segments are to be determined consistent
with the way in which management organizes and evaluates financial information
internally for making operating decisions and assessing performance.

F-8
<PAGE>

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the
current year presentations.

NOTE 2 -- DISCONTINUED OPERATIONS:

On August 7, 1998, the Company filed a Form 10 information statement with
the Securities and Exchange Commission, announcing its intention to spin-off its
majority owned subsidiary Hi/fn, Inc. ("Hi/fn"). The plan allowed for the
6,000,000 shares of preferred Hi/fn stock, owned by the Company, to be
distributed to the Company's stockholders in a ratio of approximately one Hi/fn
share for every 4 shares of Company stock owned. The distribution was completed
on December 16, 1998.

The Company's consolidated financial statements have been restated to
reflect this distribution as discontinued operations. Accordingly, the assets
and liabilities; revenues, costs and expenses; and cash flows of these
discontinued operations have been excluded from the respective captions in the
Consolidated Balance Sheet, Consolidated Statement of Operations, and
Consolidated Statement of Cash Flows, and have been reported through the fiscal
year end as "Net assets of discontinued operations," as "Income from
discontinued operations, net of taxes"; and as "Net cash used in discontinued
operations" for all periods presented.

Summarized financial information for the discontinued operation is as
follows: (Note: 1999 amounts include activity through December 16, 1998 only.
Balance sheet information is not included for 1999 as balances were no longer
consolidated.)

(in thousands) 1999 1998 1997
---- ---- ----
Revenues $5,886 $21,533 $14,226
Income before income taxes 1,435 3,845 3,068
Net income 885 2,218 1,833
Current assets 14,382 4,796
Total assets 16,611 5,898
Current liabilities 9,659 1,276
Total liabilities 9,659 1,276

NOTE 3 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS:
(table amounts in thousands)

SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Accounts receivable:
Trade receivables......................... $ 2,644 $ 1,092
Less allowance for doubtful accounts...... (263) (315)
----------- -----------
$ 2,381 $ 777
=========== ===========

Substantially all of the Company's customers are software distributors,
resellers and OEMs, which results in concentrated credit risk with respect to
the Company's trade receivables. Management believes that its credit policies
substantially mitigate such concentrated credit risk. Bad debt expenses were
insignificant in fiscal 1999 and 1997, and were $92,000 in fiscal 1998.

F-9
<PAGE>

SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Inventories:
Raw materials.............................. $ 203 $ 132
Finished goods............................. 37 65
----------- -----------
$ 240 $ 197
=========== ===========

Property and equipment:
Computer equipment......................... $ 4,368 $ 7,409
Leasehold improvements..................... 678 1,313
Office equipment........................... 703 1,131
Furniture and fixtures..................... 619 943
Vehicles................................... - 19
----------- -----------
6,368 10,815
Less accumulated depreciation.............. (4,812) (7,486)
----------- -----------
$ 1,556 $ 3,329
=========== ===========

Accrued expenses and other current liabilities:
Customer support and upgrade accruals...... $ 1,106 $ 1,172
Compensation and employee benefits......... 484 902
Restructuring.............................. 204 --
Marketing accruals......................... 133 60
Spin-off charges........................... 2 523
Other...................................... 383 365
----------- -----------
$ 2,312 $ 3,022
=========== ===========

SEPTEMBER 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues:
Software........................... $ 13,856 $ 14,292 $ 17,190
Royalties.......................... - 5,111 16,000
---------- ---------- ----------
$ 13,856 $ 19,403 $ 33,190
========== ========== ==========

NOTE 4 -- BUSINESS ACQUIRED AND NON-RECURRING CHARGES:

In August 1997, the Company acquired the outstanding stock of Datlin
Software, Ltd. ("Datlin") for $400,000 in cash in a transaction accounted for
under the purchase method. The Company has capitalized the purchase price of
this acquisition for the in place organization and other intangible costs, and
is amortizing it on a straight-line basis over a ten-year period.

During the fourth quarter of fiscal 1997, the Company recorded a
restructuring charge to operations of $850,000, representing costs incurred in
conjunction with the Company's reorganization of its software business. During
the first quarter of fiscal 1998, the Company charged another $350,000 to
operations, as additional costs related to the earlier charge, that under
generally accepted accounting principles, the Company was not permitted to
accrue for until the affected employees were notified of the termination and the
Company had committed to provide for such costs. The total restructuring charge
of $1,200,000 was comprised of severance and benefits paid to terminated
employees ($648,000), losses on abandonments of property and equipment
($380,000), costs for consulting and outplacement related to the terminated
employees ($100,000) and lease termination costs ($72,000). These costs were
incurred and paid throughout fiscal 1998, with the final payments being made
during the fourth quarter.

During the first quarter of fiscal 1999, the Company recorded a
restructuring charge to operations of $822,000, representing costs incurred in
anticipation of reorganization related to the December 1998 spin-off of its
Hi/fn subsidiary. The components of this charge were losses on property and
equipment abandonments ($555,000), severance and benefits paid to terminated
employees ($246,000) and lease termination costs ($21,000). These costs were
incurred and paid prior to the end of the fiscal year.

F-10
<PAGE>

During the fourth quarter of fiscal 1999, the Company recorded a
restructuring charge to operations of $400,000, representing costs incurred as
the Company reorganized its product development department and relocated much of
its development activity to offshore locations. The components of this charge
were severance and benefits paid to terminated employees ($274,000), lease
termination costs ($86,000), losses on property and equipment abandonments
($35,000) and outplacement related to terminated employees ($5,000). By the end
of fiscal 1999, the Company had incurred and paid costs of $161,000 in severance
and benefits to terminated employees, and $35,000 in losses on property and
equipment abandonments. The Company expects to pay the remaining $113,000 in
severance and benefits, $86,000 in lease termination costs and $5,000 in
outplacement costs by the end of fiscal 2000.

NOTE 5 -- STOCK REPURCHASES:

During the fourth quarter of fiscal 1997, the Company acquired 956,892
shares of its common stock, totaling $21,351,000, by tender offer using the
Dutch Auction mechanism, and to a lesser extent, open market share repurchases.
During fiscal 1998, the Company acquired an additional 992,400 share of Treasury
stock totaling $19,996,000 through open market share repurchases. The Company
did not purchase any Treasury stock during fiscal 1999.

NOTE 6 - REVERSE STOCK SPLIT:

On May 7, 1999, the Company executed a one-for-four reverse stock split
whereby one share of common stock was issued in exchange for every four shares
issued and outstanding. Share amounts and prices have been adjusted
retroactively throughout these financial statements to reflect the effect of the
split.

NOTE 7 -- INCOME TAXES:
(in thousands)

Deferred income taxes are comprised of the following:

SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Deferred tax assets......... $ 6,421 $ 6,912
Deferred tax liabilities.... (464) (540)
Valuation allowance......... (5,957) (6,372)
----------- -----------
$ - $ -
=========== ===========

The principal components of deferred income taxes are as follows:

SEPTEMBER 30,
--------------------------
1999 1998
---------- ----------
Revenue recognition for tax purposes.......... $ 172 $ 429
Bad debts allowance........................... 111 132
Inventory valuation allowance................. 6 24
Depreciation and amortization................. 586 605
Purchased research and development............ 5,004 5,238
Accrued restructuring......................... 51 -
Accrued compensation and benefits............. 104 267
Other......................................... (77) (323)
Valuation allowance........................... (5,957) (6,372)
---------- ----------
$ - $ -
========== ==========

Components of pre-tax income are as follows:

YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Domestic................... $ (5,266) $ (2,329) $ 5,602
Foreign.................... 705 326 (265)
----------- ----------- -----------
$ (4,561) $ (2,003) $ 5,337
=========== =========== ===========

F-11
<PAGE>

The provision (benefit) for income taxes is comprised of the following:

YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Current tax expense (benefit):
Federal........................ $ (1,665) $ (1,405) $ 1,329
State.......................... 2 (239) 720
----------- ----------- -----------
(1,663) (1,644) 2,049
----------- ----------- -----------
Deferred tax expense (benefit):
Federal........................ -- 5,921 (500)
State.......................... -- 1,602 (74)
----------- ----------- -----------
-- 7,523 (574)
----------- ----------- -----------
$ (1,663) $ 5,879 $ 1,475
=========== =========== ===========

A reconciliation of the amount computed by applying the statutory federal
income tax rate to income before income taxes, to the provision for income taxes
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Amount computed at statutory
Federal rate of 34%.......................... $ (1,551) $ (681) $ 1,815
State income taxes, net of Federal
benefit...................................... (32) 31 328
Expenses not deductible for tax purposes....... 68 230 64
Differentials from foreign operations.......... (22) (42) 90
Tax credits.................................... -- -- (25)
Tax exempt interest............................ -- (38) (808)
Revision of prior year's tax estimates......... -- (127) 41
Valuation of deferred tax asset................ (91) 6,372 --
Other.......................................... (35) 134 (30)
----------- ----------- -----------
$ (1,663) $ 5,879 $ 1,475
=========== =========== ===========
</TABLE>

NOTE 8 -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:

1992 STOCK OPTION PLAN

In March 1992, the Company adopted a Stock Option Plan (the "1992 Plan"), as
amended in March 1999, which provides for the granting of incentive stock
options and non-qualified stock options to purchase up to 3,093,341 shares, as
amended, of the Company's common stock. The 1992 Plan is administered by the
Compensation Committee of the Board of Directors and provides for options for
the purchase of the Company's common stock to be granted to employees, officers
and consultants of the Company at prices that are not less than 100% and 50% of
the estimated fair market value of the related shares at the date of grant for
incentive stock options and non-qualified stock options, respectively. Options
vest as determined by the Compensation Committee. The maximum term of options
granted under the 1992 Plan is ten years.

1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

In March 1992, the Company adopted the 1992 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), as amended in February 1995 and March 1999,
which provides for the automatic granting of non-qualified stock options to
purchase up to 223,446 shares, as amended, of the Company's common stock. The
1992 Plan is administered by the Board of Directors and provides for options for
the purchase of the Company's common stock to each director of the Company (or
an affiliate of the Company) who is not otherwise employed by the Company (or an
affiliate of the Company). Such directors will automatically be granted an
option to purchase common stock upon election to the Board and on each
anniversary of that date thereafter so long as the director continues to serve
on the Board. Vesting periods are five years for initial options granted, and
four years for options granted in re-election years. The maximum term of options
granted under the Directors' Plan is ten years.

F-12
<PAGE>

Combined information for all stock option activities for fiscal 1999, 1998
and 1997 is summarized below:

OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------------ ------------
<S> <C> <C>
Balance at September 30, 1996................... 2,316,341 $ 2.88
Options granted................................ 3,069,022 $ 4.78
Options exercised.............................. (146,366) $ 3.06
Options canceled............................... (1,999,087) $ 7.15
------------
Balance at September 30, 1997................... 3,239,910 $ 3.42
Options granted................................ 444,792 $ 4.38
Options exercised.............................. (262,636) $ 1.69
Options canceled............................... (667,449) $ 4.95
------------
Balance at September 30, 1998................... 2,754,617 $ 3.95
Options granted................................ 286,117 $ 3.75
Options exercised.............................. (307,365) $ 3.36
Options canceled............................... (693,418) $ 4.88
------------
Balance at September 30, 1999................... 2,039,951 $ 4.06
============
</TABLE>
<TABLE>

The following is a summary of stock options outstanding at September 30, 1999:

<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
NUMBER LIFE (YEARS) PRICE
------------ ------------ ------------
<S> <C> <C> <C>
Price Range
$1.64 - $2.72.............. 404,086 4.89 $ 2.59
$3.08 - $3.36.............. 817,787 6.87 $ 3.36
$3.50 - $5.16.............. 413,771 8.11 $ 4.10
$5.19 - $9.60.............. 404,307 7.41 $ 6.67
-----------
$1.64 - $9.60.............. 2,039,951 6.84 $ 4.01
===========
</TABLE>
<TABLE>

The following is a summary of stock options exercisable at September 30, 1999:

<CAPTION>
OPTIONS EXERCISABLE
----------------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER PRICE
----------- -----------
<S> <C> <C>
Price Range
$1.64 - $2.72...................... 349,525 $ 2.57
$3.08 - $3.36...................... 575,724 $ 3.36
$3.50 - $5.16...................... 166,930 $ 4.08
$5.19 - $9.60...................... 328,383 $ 6.87
-----------
$1.64 - $9.60...................... 1,420,562 $ 4.06
===========
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In March 1992, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of the Company's common
stock. The most recent offering under the Purchase Plan terminated on October
31, 1999. The Purchase Plan is administered by the Board of Directors and allows
participating employees to have up to 15% of their earnings withheld and used to
purchase shares of common stock on specified dates. The price of the common
stock purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the common stock at the commencement date or the relevant
purchase date. During fiscal 1999, 10,063 shares were issued under the Plan at a
price of $4.14 per share, and 15,791 shares were issued at a price of $10.84 per
share. At September 30, 1999, 140,745 shares were reserved for future issuance.

F-13
<PAGE>

PRO FORMA DISCLOSURE

No compensation expense has been recognized for stock option grants, which
are fixed in nature, as the options have been granted at fair market value. No
compensation expense has been recognized for the Purchase Plan. Had compensation
cost for the Company's stock based compensation awards issued during fiscal
1999, 1998 and 1997 been determined based on the fair value at the grant date,
the Company's net loss and net loss per share would have been adjusted to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported............................... $(2,013) $ (5,815) $ 5,660
======== ========= ========
Pro forma................................. $(2,248) $ (9,205) $ 3,185
======== ========= ========

Net loss per share:
As reported............................... $ (0.34) $ (0.92) $ 0.73
======== ========= ========
Pro forma................................. $ (0.42) $ (1.45) $ 0.41
======== ========= ========
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended September 30, 1999, 1998 and
1997, respectively: dividend yield of 0.0% for all years, risk free interest
rates of 5.27%, 5.48% and 6.46%, expected volatility of 150%, 84% and 96%, and
expected lives of 2.05, 2.17 and 2.0 years. The weighted-average fair value of
options granted during the years ended September 30, 1999, 1998 and 1997 was
$3.75, $4.38 and $4.78 per share, respectively. The fair value of the employees'
purchase rights pursuant to the Purchase Plan is estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0.0% for
all years, risk-free interest rates of 4.87%, 5.00% and 5.46%, expected
volatility of 150%, 84% and 96%, and an expected life of six months for all
years. The weighted-average fair value of those purchase rights granted during
the years ended September 30, 1999, 1998 and 1997 was $2.72, $1.97 and $2.22 per
share, respectively.

401(K) PLAN

In July 1991, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits, but does not require matching contributions by the Company on behalf of
all participants. No such contributions were made during fiscal 1999, 1998 or
1997.

NOTE 9 -- COMMITMENTS:

The Company occupies its facilities under several cancelable and
non-cancelable operating leases that expire at various dates through September
2004, and which contain renewal options. Future minimum lease payments are as
follows:

For the year ending September 30, AMOUNT
------------
2000.......................................... $ 382,000
2001.......................................... 130,000
2002.......................................... 133,000
2003.......................................... 130,000
2004.......................................... 92,000
------------
$ 867,000
============

Rent expense under operating leases was approximately $615,000, $784,000,
and $894,000 in fiscal 1999, 1998, and 1997, respectively. Certain facilities
leases provide for scheduled rent increases. The total lease commitment for such
leases is being charged ratably to operations.

NOTE 10 -- SIGNIFICANT CUSTOMERS AND FOREIGN OPERATIONS:

A significant portion of the Company's revenues has been derived from
technology licenses and sales to major distributors and OEMs as follows:

Two customers accounted for 17% and 10%, respectively, of fiscal 1999
revenues. Three customers accounted for 21%, 13% and 12%, respectively, of
fiscal 1998 revenues. Three customers accounted for 36%, 13% and 12%,
respectively, of fiscal 1997 revenues.

F-14
<PAGE>

Software revenues are inclusive of royalties received from Microsoft and IBM
Corporation for licenses of the Company's technology. The Company received
$5,100,000 in such revenues in fiscal 1998, completing all obligations
outstanding related to the underlying license agreements. The Company received
$16,000,000 in royalty revenues in fiscal 1997.

In fiscal 1999, 1998 and 1997, international revenues were $5,835,000,
$4,794,000 and $5,068,000, respectively, consisting primarily of sales to
customers in Canada, Europe and the Pacific Rim.

Condensed financial information related to the Company's wholly owned
foreign subsidiaries is as follows:

1999 1998 1997
-------- -------- --------
Revenues.......................... $ 3,898 $ 3,580 $ 3,228
Operating income.................. $ 622 $ 307 $ 212
Identifiable assets............... $ 886 $ 1,218 $ 1,358

NOTE 11 -- CONTINGENCIES:

The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of such matters presently known to management
will not have a material adverse effect on the Company's business, financial
position, or results of operations.

NOTE 12 -- SUBSEQUENT EVENTS:

On December 10, 1999, the Company executed a renewal of its non-cancelable
operating lease for its corporate headquarters, for a five year period ending
March 5, 2005.

F-15
<PAGE>

SCHEDULE I
<TABLE>

STAC SOFTWARE, INC.
SCHEDULE I - MARKETABLE SECURITIES
AT SEPTEMBER 30, 1999
(IN THOUSANDS)

NAME OF ISSUER PRINCIPAL MARKET CARRYING
TITLE OF ISSUE AMOUNT COST VALUE VALUE
- -------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
CP General Motors Acceptance $ 1,500 $ 1,479 $ 1,491 $ 1,491

CP Associates First Cap BV 3,000 2,941 2,966 2,966

CP General Electric Cap 2,000 1,965 1,987 1,987

CP Norwest Financial 2,000 1,966 1,992 1,992

CP Prudential Funding 1,500 1,474 1,490 1,490

CP CITICORP 2,000 1,960 1,965 1,965

CP American General Finance 2,500 2,441 2,452 2,452

CP Commoloco 2,000 1,944 1,962 1,962

CP Daimlerchrysler NA 3,000 2,927 2,938 2,938

CP General Electric 1,500 1,464 1,468 1,468
--------- --------- --------- ---------

Total $ 21,000 $ 20,561 $ 20,711 $ 20,711
========= ========= ========= =========
</TABLE>

S-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------ -----------
<S> <C> <C>
(7) 2.1 Agreement and Plan of Merger, dated April 5, 1996,
between the Registrant and Stac, Inc., a California
corporation.