JTS CORP, 424B3, 1997-12-03

JTS CORP
424B3, 1997-12-03
COMPUTER STORAGE DEVICES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-21881

PROSPECTUS
56,392,046 SHARES

JTS CORPORATION
COMMON STOCK
------------------------

10,037,500 of the shares of Common Stock, $.001 par value ("Common Stock"),
of JTS Corporation (the "Company" or "JTS") offered hereby have been issued or
are issuable upon (i) the conversion of Series B Preferred Stock, $.001 par
value (the "Series B Preferred Stock"), or the exercise of Common Stock purchase
warrants (the "Investor Warrants"), issued or issuable upon conversion of the
Series B Preferred Stock, issued to Advantage Fund Limited ("Advantage") in a
November 1996 private placement, (ii) the payment of dividends on the
outstanding shares of Series B Preferred Stock in Common Stock, and (iii) the
exercise of Common Stock purchase warrants (the "Finder's Warrants" and together
with the Investor Warrants, the "Warrants") issued to Wharton Capital
Corporation in consideration for financial consulting services furnished in
connection with the November 1996 private placement. 17,000,000 shares of Common
Stock offered hereby have been issued or are issuable upon the conversion of
Series C Preferred Stock, $.001 par value (the "Series C Preferred Stock")
issued to Advantage, RGC International Investors, LDC and Capital Ventures
International (together with Advantage and Wharton Capital Corporation, the
"Selling Security Holders") in a January 1997 private placement. The shares of
Common Stock offered by the Selling Security Holders hereby include such
presently indeterminate number of additional shares as may be issuable on
conversion of the Series B Preferred Stock and Series C Preferred Stock and the
exercise of Warrants or payment of dividends on the Series B Preferred Stock
pursuant to the provisions thereof regarding determination of the applicable
conversion and exercise price and number of shares issuable in payment of
dividends. The Company has agreed to initially register a number of shares of
Common Stock equal to approximately two times the number of shares of Common
Stock that would have been issued if all the Series B Preferred Stock and Series
C Preferred Stock had been converted at the conversion price in effect at the
time of the sale of such shares to the Selling Security Holders. However, the
actual number of shares of Common Stock issued or issuable upon the conversion
of the Series B Preferred Stock and the Series C Preferred Stock is subject to
adjustment and could be materially less or more than such estimated amount or
the 27,037,500 shares of Common Stock noted as being offered by the Selling
Security Holders, depending upon factors which cannot be predicted by the
Company at this time, including, among others, the future market price of the
Common Stock. See "Description of Capital Stock." The remaining 29,354,546
shares of Common Stock offered hereby are held by, or are issuable upon
conversion of warrants to purchase Common Stock held by, certain holders of
registration rights (the "Registration Rights Holders"). All of the shares are
being offered hereby by the Selling Security Holders and the Registration Rights
Holders, or by pledges, donees, transferees or other successors in interest that
receive such shares as a gift, partnership distribution or other non-sale
related transfer, from time to time on The American Stock Exchange, Inc.
("AMEX"), in market transactions, in privately negotiated transactions, or by a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The shares are being
registered by the Company pursuant to registration rights granted to the Selling
Security Holders in connection with the November 1996 private placement and the
January 1997 private placement and to the Registration Rights Holders pursuant
to a Registration Rights Agreement dated February 3, 1995, as amended. The
Selling Security Holders and the Registration Rights Holders may effect such
transactions by selling the shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and the Registration Rights
Holders or the purchasers of the shares for whom such broker-dealers may act as
agent or to whom they sell as principal or both. See "Selling Security Holders"
and "Plan of Distribution." The Company has agreed to indemnify certain of the
Selling Security Holders against certain liabilities, including certain
liabilities under the Securities Act, or to contribute to payments which such
Selling Security Holders may be required to make in respect thereof. The Common
Stock is traded on AMEX under the symbol "JTS." The last reported sales price of
the Common Stock on AMEX on December 1, 1997 was $ 5/16 per share.
------------------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated cumulative expenses payable by the
Company in connection with this offering are $358,000. The aggregate proceeds to
the Selling Security Holders and the Registration Rights Holders from the Common
Stock will be the purchase price of the Common Stock sold less the aggregate
agents' commissions and underwriters' discounts, if any, and other expenses of
issuance and distribution not borne by the Company. See "Plan of Distribution."

The Company has agreed to indemnify certain Selling Security Holders and the
Registration Rights Holders and certain other persons against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act").

The Selling Security Holders and the Registration Rights Holders and any
broker-dealers or agents that participate with the Selling Security Holders and
the Registration Rights Holders in the distribution of the shares of Common
Stock offered hereby may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by them and
any profit on the resale of such shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
------------------------

THE DATE OF THIS PROSPECTUS IS DECEMBER 3, 1997
<PAGE> 2

PROSPECTUS SUMMARY

The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and financial statements and the
notes thereto appearing elsewhere in this Prospectus. This Prospectus Summary
and other parts of this Prospectus include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements other than statements of
historical fact included in this Prospectus Summary and other parts of this
Prospectus, including without limitation, statements regarding the Company's
financial position, business strategy, budgets and the plans and objectives of
management for future operations, including plans and objectives relating to the
Company's products, are forward-looking statements. Although the Company
believes that assumptions underlying such forward-looking statements are
reasonable, it can give no assurance that such assumptions will prove to have
been correct. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Important cautionary
factors that could cause actual results to differ materially from the Company's
expectations include, but are not limited to, those disclosed under "Risk
Factors", "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus, including
without limitation, in conjunction with the forward-looking statements included
in this Prospectus. All written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by these cautionary statements. Prospective investors should
consider carefully the information discussed under "Risk Factors", "Business",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this prospectus.

THE COMPANY

For purposes of this Prospectus, Atari Corporation ("Atari") refers to the
pre-merger business of Atari and its multimedia entertainment operations. JTS
Corporation ("JTS" or the "Company") refers to the pre-and post-merger business
of JTS and its hard disk drive operations.

JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS was incorporated in February 1994
and remained in the development stage until October 1995, when it began shipping
its 3.5-inch "Palladium" disk drives to customers in the United States and
Europe. The Company introduced into production its higher performance "Champion"
family for desktop personal computers in the first quarter of fiscal 1998. JTS
currently has two product families in production: the 3-inch form factor
"Nordic" family for notebook computers and the 3.5-inch form factor "Champion"
family for desktop personal computers. Shipments of Nordic drives to Compaq
Computer Corporation ("Compaq") began in the second quarter of fiscal 1997;
however, volume shipments of 3-inch drives have only recently commenced and
there can be no assurance that such shipments will continue. The Company markets
its products to computer companies and systems integrators for incorporation
into their computer systems and subsystems and to original equipment
manufacturers ("OEMs"). The Company sells its products through a direct sales
force operating throughout the United States, Europe and Asia, as well as
through distributors in the United States, Europe, Latin America, Canada and
Asia.

In July 1996, the Company completed its merger (the "Merger") with Atari.
Since 1992, Atari has significantly downsized its operations, and, following
completion of the Merger, JTS' hard disk drive operations have represented the
significant portion of the Company's business. To obtain a low-cost
manufacturing source of hard disk drives, JTS acquired 90% of the outstanding
stock of the hard disk drive division of JTS Technology Ltd. (formerly Moduler
Electronics (India) Pvt. Ltd.) ("JTS Technology"), located in Madras, India, in
April 1996.

2
<PAGE> 3

COMPANY STRATEGY

In recent years, the computer industry has witnessed the emergence of
several trends that JTS believes will continue to drive demand for innovative
disk drive products. First, new data- and image-intensive multimedia
applications are generating increased demand for greater storage capacities and
performance at a lower cost. Second, the demand for portable computing devices,
such as notebook computers, has kept pace with the significant growth in sales
of personal computers, with portables representing approximately 14.1% of all
personal computers sold in 1996. As the gap in technology and pricing between
desktop and portable computers continues to narrow, consumers are demanding
storage capacities in portable computers comparable to those offered by
desktops. Lastly, the notebook computer industry is generally migrating towards
lower profile computing devices. The pressure to reduce the profiles, increase
the capacities and lower the costs of personal computers has presented
manufacturers with a substantial ongoing technical challenge.

JTS has undertaken several key initiatives to meet the challenges currently
facing hard disk drive manufacturers and to position the Company to become a
leading international supplier of hard disk drives to the notebook and desktop
computer markets. These key initiatives include the following:

ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable computing market for lower
profiles, greater storage capacities and lower costs, JTS has developed its
Nordic family of 3-inch form factor disk drives. The disks used in the 3-inch
format have 82% greater recording area than disks used in 2.5-inch drives, the
current industry standard for notebook computers, offering nearly double the
storage capacity at the same areal densities. Nordic drives also offer cost
advantages per megabyte of storage space over competing drives. The design of
the Nordic drives makes them the lowest profile disk drives currently in the
market.

FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital Corporation ("Western Digital"), as an alternate source for disk
drives incorporating Nordic technology. JTS intends to continue to take
advantage of its management's considerable experience in the computer industry
to obtain access to other key computer industry participants.

DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design drives that satisfy the customers'
end-product requirements using efficient and low-cost manufacturing methods. JTS
is committed to the timely development of new products and the continuing
evaluation of new technologies. In this regard, JTS is presently designing into
each of its hard disk drive product families various high performance features,
such as MR heads, new application specific integrated circuit ("ASIC")/channel
technology and advanced dynamic head lifters, positive latch mechanisms and
multi-insertion interface connections.

ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities in
Madras, India, JTS intends to capitalize upon a low-cost and highly-skilled
labor force. JTS believes that labor costs in India are significantly lower than
labor costs in other countries where hard disk drives are commonly manufactured,
such as Singapore, Malaysia and Thailand. To leverage its low-cost labor force,
JTS manufactures a portion of certain labor-intensive components in-house rather
than purchasing such components from outside suppliers. The Company also
utilizes many common components in its 3-inch and 3.5-inch form factor disk
drives, thereby reducing inventory requirements, creating significant assembling
efficiencies and providing cost advantages from volume purchases of materials
and toolings.

3
<PAGE> 4

RISK FACTORS

In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 7 to 14 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investment in the Common Stock include the following factors:

- The Company has a history of losses and there can be no assurance that it
will achieve profitability.

- The hard disk drive business is extremely capital intensive, and JTS will
need significant additional financing resources in fiscal 1998 and over
the next several years for facilities expansion, capital expenditure,
working capital, research and development and vendor tooling. There can
be no assurance that additional funding will be available on terms
acceptable to JTS or at all.

- The Nordic family of 3-inch form factor disk drives has only recently
been introduced to the industry, and there is uncertainty of its market
acceptance.

- The hard disk drive industry is intensely competitive, and there can be
no assurance that the Company will compete successfully with other disk
drive companies and computer companies with disk drive operations, most
of which have significantly greater financial, technical and marketing
resources than the Company.

- The exact number of shares of Common Stock issuable upon conversion of
all of the Series B Preferred Stock and the Series C Preferred Stock and
offered hereby cannot currently be estimated, but, generally, such
issuances of Common Stock will vary inversely with the market price of
the Common Stock. The holders of the Common Stock may be materially
diluted by conversion of the Series B Preferred Stock and the Series C
Preferred Stock which dilution will depend on, among other factors, the
future market price of the Common Stock.

The Company was incorporated in Delaware on February 3, 1994, and its
corporate headquarters are located at 166 Baypointe Parkway, San Jose,
California 95134, where the telephone number is (408) 468-1800.

Certain trademarks of the Company and other companies are used in this
Prospectus and are the property of their respective holders.

4
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Common Stock outstanding before the Offering.......... 158,125,559 shares(1)
Common Stock offered by the Selling Security Holders
and the Registration Rights Holders................. 56,392,046 shares(2)
Common Stock to be outstanding after the Offering..... 168,464,707 shares(1)(2)
Use of proceeds....................................... The Company will not receive any of
the proceeds from the sale of Common
Stock by the Selling Security Holders
and the Registration Rights Holders.
AMEX Symbol........................................... JTS
</TABLE>

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

(1) Includes 29,354,546 shares of Common Stock offered by the Registration
Rights Holders hereby. Also includes approximately 23,716,159 and 36,692,121
shares of Common Stock that have already been issued upon conversion of
Series B Preferred Stock and Series C Preferred Stock, respectively, as of
September 30, 1997. Excludes as of September 30, 1997 (i) 7,449,284 shares
of Common Stock issuable upon exercise of outstanding options, of which
3,594,220 shares were exercisable at such date; (ii) 337,500 shares issuable
upon exercise of outstanding warrants (excluding the Warrants); (iii)
6,550,716 shares of Common Stock reserved for issuance upon future option
grants under the Company's Amended and Restated 1995 Stock Option Plan; (iv)
475,000 shares of Common Stock reserved for issuance upon future option
grants under the Company's 1996 Non-Employee Directors' Stock Option Plan;
and (v) 2,596,414 shares of Common Stock issuable upon conversion of the
Company's 5 1/4% Convertible Subordinated Debentures.

(2) Includes approximately 23,716,159 and 36,692,121 shares of Common Stock that
have already been issued upon conversion of Series B Preferred Stock and
Series C Preferred Stock, respectively, as of September 30, 1997. All of the
Series B Preferred Stock has been converted into Common Stock, and no shares
of Series B Preferred Stock remain outstanding. Also includes approximately
8,000,000 shares of Common Stock which may be issued upon conversion of
4,600 shares of Series C Preferred Stock, outstanding as of September 30,
1997, based upon a conversion price of approximately $0.575 per share (which
price is equal to 85% of the average lowest sale price for the five trading
days preceding September 30, 1997). Also includes 2,339,148 shares of Common
Stock issuable upon exercise of Investor Warrants outstanding as of
September 30, 1997. The shares of Common Stock offered by the Selling
Security Holders hereby include such presently indeterminate number of
shares as may be issued on conversion of the Series B Preferred Stock and
Series C Preferred Stock pursuant to the provisions thereof regarding
determination of the applicable conversion price. The Company has agreed to
initially register a number of shares of Common Stock equal to approximately
two times the number of shares of Common Stock that would have been issued
if all the Series B Preferred Stock and Series C Preferred Stock had been
converted at the conversion price in effect at the time of the sale of such
shares to the Selling Security Holders. However, the actual number of shares
of Common Stock issued or issuable upon the conversion of the Series B
Preferred Stock and the Series C Preferred Stock is subject to adjustment
and could be materially less or more than such estimated amount or the
27,037,500 shares of Common Stock noted as being offered by the Selling
Security Holders, depending upon factors which cannot be predicted by the
Company at this time, including, among others, the future market price of
the Common Stock. See "Description of Capital Stock." Also includes
29,354,546 shares to be offered by the Registration Rights Holders hereby.

5
<PAGE> 6

SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED
FEBRUARY QUARTER ENDED
FISCAL YEARS ENDED DECEMBER 31, 2, ---------------------
----------------------------------------- --------- MAY 4, MARCH 31,
1992 1993 1994 1995 1997(1) 1997 1996
-------- -------- -------- -------- --------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues..................... $127,340 $ 29,108 $ 38,748 $ 14,626 $ 90,530 $ 73,413 $ 1,272
Cost of revenues................. 132,455 42,768 35,200 44,234 100,328 70,220 6,211
Acquired in-process research and
development.................... -- -- -- -- 110,012 -- --
Selling, general and
administrative expenses........ 47,669 16,538 21,820 18,647 13,067 6,081 2,009
Amortization of acquired
technology..................... -- -- -- -- 3,923 701 --
Research and development
expenses....................... 9,171 4,876 5,775 5,410 12,849 6,700 201
Restructuring charges............ 17,053 12,425 -- -- -- -- --
Operating loss................... (79,008) (47,499) (24,047) (53,665) (149,649) (10,289) (7,149)
Other income (expense), net(2)... (4,145) (1,631) 33,441 3,507 (2,846) (1,535) 6,343
Income (loss) from continuing
operations..................... (82,719) (48,866) 9,394 (50,158) (152,495) (11,824) (806)
Discontinued operations.......... 9,000 -- -- -- -- -- --
Income (loss) before
extraordinary income........... (73,719) (48,866) 9,394 (50,158) (152,495) (11,824) (806)
Extraordinary credit............. 104 -- -- 582 -- -- --
Net income (loss)................ (73,615) (48,866) 9,394 (49,576) (152,495) (11,824) (806)
EARNINGS (LOSS) PER COMMON
SHARES:
Income (loss) from continuing
operations..................... (1.44) (0.85) 0.16 (0.79) (1.81) (0.11) (0.01)
Income (loss) before
extraordinary credit........... (1.29) (0.85) 0.16 (0.79) (1.81) (0.11) (0.01)
Net income (loss)................ (1.28) (0.85) 0.16 (0.78) (1.81) (0.11) (0.01)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- FEBRUARY 2, MAY 4,
1992 1993 1994 1995 1997(1) 1997
-------- ------- -------- ------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets............................... $109,551 $51,538 $113,188 $65,126 $ 66,302 $ 75,257
Working capital (deficit).................... 75,563 33,896 92,670 55,084 1,072 (12,431)
Total assets................................. 138,508 74,833 131,042 77,569 130,717 142,256
Current liabilities.......................... 33,988 17,492 20,518 10,042 65,230 87,688
Long-term debt............................... 53,937 52,987 43,454 42,354 53,081 54,365
Shareholders' equity......................... 50,583 4,354 67,070 25,173 12,406 203
</TABLE>

- ---------------
(1) The Merger was consummated on July 30, 1996, and was accounted for as a
purchase of JTS by Atari. Subsequent to the Merger, the fiscal year of the
Company was changed from a 52/53 week fiscal year ending on the Saturday
closest to December 31 to a 52/53 week fiscal year ending on the Sunday
closest to January 31. Accordingly, the Company's current fiscal year begins
on January 29, 1996 and the twelve-month period for fiscal 1997 includes the
results of Atari's options from January 29, 1996 through February 2, 1997
and JTS' operations from July 30, 1996 through February 2, 1997.

(2) Includes a gain from the sale of marketing securities of $3.9 million in
1997 and $6.3 million in the first quarter of 1996, a loss from disposal of
obsolete equipment of $2.7 million and a gain from the settlement of patent
litigation of $32.1 million in 1994.

6
<PAGE> 7

RISK FACTORS

An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully before purchasing the Common Stock
offered hereby.

RISK FACTORS

LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. JTS was
incorporated in February 1994 and did not commence production of hard disk
drives until October 1995. JTS experienced operating losses for its fiscal years
ended January 29, 1995, January 28, 1996 and February 2, 1997 of $5.2 million,
$32.5 million and $149.6 million, respectively, which resulted from the
substantial costs associated with the design, development and marketing of new
products, the establishment of manufacturing operations, the development of a
supplier base and, in fiscal 1997, the $110.0 million write off of in-process
research and development costs as a result of the merger with Atari. In
addition, JTS experienced operating losses of $10.3 million for the quarter
ended May 4, 1997. The Company has yet to generate profits and cannot assure
that it will achieve or maintain successful operations in the future. Such
factors have raised substantial doubt about the ability of JTS to continue its
operations without achieving successful future operations or obtaining financing
to meet its working capital needs, neither of which can be assured. As of May 4,
1997, JTS had a working capital deficit of $12.4 million and a net worth of $0.2
million.

NEED FOR ADDITIONAL FINANCING; POSSIBLE BREACH OF LOAN COVENANTS. The hard
disk drive business is extremely capital intensive, and JTS will need
significant additional financing resources in fiscal 1998 and over the next
several years for facilities expansion, capital expenditure, working capital,
research and development and vendor tooling. The issuance of equity or
convertible debt securities, upon conversion, would result in dilution of the
voting control of existing stockholders and could result in dilution to earnings
per share. There can be no assurance that additional funding will be available
on terms acceptable to JTS or at all. If JTS is unable to obtain sufficient
capital, it would be required to curtail its facilities expansion, capital
expenditures, working capital, research and development and vendor tooling
expenditures, which would materially adversely affect JTS' business, operating
results and financial condition. In this regard, due to delays in the receipt of
additional financing, the Company took action in September 1996 to conserve its
cash resources by reducing the production of disk drives planned for the third
and fourth quarters of fiscal 1997. Furthermore, certain equipment and
receivables financing as well as term loans made to JTS Technology are
contingent on JTS' ability to comply with stringent financial covenants. JTS'
failure to comply with such covenants could result in the loss of such financing
sources. The loss of any such sources of funding could have a material adverse
effect on JTS' business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

UNCERTAINTY OF MARKET ACCEPTANCE; LENGTHY SALES CYCLE. Since its inception
in February 1994, JTS has primarily engaged in research and development of its
core technology for hard disk drives. JTS' marketing strategy depends
significantly on its ability to establish distribution, licensing, product
development and other strategic relationships with major computer OEMs and on
the willingness and ability of these companies to utilize and to promote JTS'
hard disk drive technology and products. JTS' first commercial product line, the
Palladium family of hard disk drives, was introduced in September 1995 and is
targeted at the desktop personal computer market. JTS' second product line, the
Nordic family of hard disk drives, has been designed for notebook computers. In
the second quarter of fiscal 1997, the Company introduced its newest family of
hard disk drives, the Champion product line. See "Business -- Products." There
can be no assurance that any significant market for any product family will
develop. In particular, the Nordic drives use a 3-inch form factor, which JTS
has only recently introduced to the industry. At present, only a limited number
of computer manufacturers are developing or have plans to develop computers that
may accommodate Nordic drives. If additional computer manufacturers do not
modify their existing products or develop new products to accommodate 3-inch
form factor disk drives, sales of Nordic disk drives and, therefore, JTS'
business, operating results and financial condition would be materially
adversely affected.

Qualifying hard disk drives for incorporation into a new computer product
requires JTS to work extensively with the customer and the customer's other
suppliers to meet product specifications. Customers

7
<PAGE> 8

often require a significant number of product presentations and demonstrations,
as well as substantial interaction with JTS' senior management, before making a
purchasing decision. Accordingly, JTS' products typically have a lengthy sales
cycle during which JTS may expend substantial financial resources and management
time and effort with no assurance that a sale will result.

HIGHLY COMPETITIVE MARKET. The hard disk drive industry is intensely
competitive and dominated by a small number of large companies, including
Maxtor, Quantum, Seagate and Western Digital. In addition, a number of computer
companies, such as IBM and Toshiba, have in-house or "captive" disk drive
manufacturing operations that produce disk drives for incorporation into their
own computers as well as for sale to other OEMs. Many of JTS' competitors have
broader product lines than JTS, and all have significantly greater financial,
technical and marketing resources. In this regard, JTS' lack of sufficient
working capital in the last three quarters has put JTS at a competitive
disadvantage relative to certain of its competitors which have had access to
greater financial resources. Furthermore, JTS has licensed key 3-inch form
factor technology to Western Digital, a competitor in the personal computer disk
drive market that could become a significant supplier of 3-inch form factor disk
drives to Compaq and other OEMs. See "Business -- Strategic Licenses." There can
be no assurance that JTS will develop and manufacture products on a timely basis
with the quality and features necessary to compete effectively. Generally, OEM
customers for hard disk drives rely on a limited number of suppliers. As a
result, it may be necessary for JTS to displace competitors to increase its net
sales. In addition, JTS faces competition from the manufacturing operations of
its current and potential OEM customers, which could initiate or increase
internal production of hard disk drives and reduce or cease purchasing from
independent hard disk drive suppliers such as JTS. Moreover, the hard disk drive
industry is characterized by price erosion and resulting pressure on gross
margins. JTS expects that hard disk drive prices will continue to decline and
that competitors will offer products which meet or exceed the performance
capabilities of JTS' current products. Due to such pricing pressures, JTS'
future gross margins will substantially depend upon its ability to control
manufacturing costs, improve manufacturing yields and introduce new products on
a timely basis. Any increase in price competition would have a material adverse
effect on JTS' business, operating results and financial condition. JTS may also
experience competition from other forms of data storage, including optical
storage, flash memory and holographic storage. If JTS' current and prospective
customers and end users were to adopt such data storage products as an
alternative to JTS' products, JTS' business, operating results and financial
condition would be materially adversely affected. See "Business -- Competition."

RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES. The hard disk drive
industry is characterized by rapid technological change and short product life
cycles. As a result, JTS must continually anticipate change and adapt its
products to meet demand for increased storage capacities. Although JTS intends
to continuously develop new products and production techniques, there can be no
assurance that JTS will anticipate advances in hard disk drive technology and
develop products incorporating such advances in a timely manner to compete
effectively against its competitors' new products. Due to the rapid
technological change and frequent development of new hard disk drive products,
it is common in the industry for the relative mix of customers and products to
change rapidly, even from quarter to quarter. For example, in the first half of
calendar 1996, the demand for 1 gigabyte 3.5-inch form factor hard disk drives
decreased dramatically due to increased availability of and demand for larger
capacity disk drives. As a result, pricing pressure on such disk drives,
including those marketed by JTS, increased and gross margins decreased.
Generally, new products have higher selling prices than more mature products.
Therefore, JTS' ability to introduce new products on a timely basis is an
important factor in achieving growth and profitability. In addition, JTS
anticipates continued changes in the requirements of its customers in the
computer industry. There can be no assurance that JTS will be able to develop,
manufacture and sell products that respond adequately to such changes or that
future technological innovations will not reduce demand for hard disk drives.
JTS' business, operating results and financial condition will be materially
adversely affected if its development efforts are unsuccessful, if the
technologies that JTS has chosen not to develop prove to be competitive
alternatives or if its current and prospective customers and end users were to
adopt alternative data storage products, such as optical storage, flash memory
and holographic storage. As JTS increases its production and shipment of hard
disk drives and expands its product line, JTS' inventory levels will increase.
Due to the rapid rate of technological change in the computer industry, a large
inventory poses the risk of inventory obsolescence which could have a material

8
<PAGE> 9

adverse effect on JTS' business, operating results and financial condition. In
this regard, JTS anticipates incurring future inventory allowances, the level of
which will depend upon a number of factors, including manufacturing yields, new
product introductions, maturity or obsolescence of product designs, inventory
levels and competitive pressures.

AVAILABILITY OF COMPONENTS AND MATERIALS; DEPENDENCE ON SUPPLIERS. JTS
relies on a limited number of suppliers for many components and materials used
in its manufacturing processes, including recording disks, head stack components
and integrated circuits. At present, JTS does not have multiple suppliers to all
of its materials and component requirements, and there can be no assurance that
JTS will secure more than one source for all of its requirements in the future
or that its suppliers will be able to meet its requirements on a timely basis or
on acceptable terms. Furthermore, JTS does not have contractual arrangements
with any of its sole source suppliers. In particular, JTS presently relies on
sole source suppliers for controller ASICs, read channels, digital signals wP
and spindle motor drivers, and certain head stack components. Delays in the
receipt of certain components and materials have occurred in the past, and there
can be no assurance that delays will not occur in the future or that suppliers
will not extend lead times. Moreover, changing suppliers for certain materials,
such as spindle motors, could require requalification of JTS' products with some
or all of its customers. Requalification could prevent early design-in wins or
could prevent or delay continued participation in hard disk drive programs for
which JTS' products have been qualified. In addition, long lead times are
required to obtain many materials, such as integrated circuits utilized in JTS'
PCBAs. Regardless of whether these materials are available from established or
new sources of supply, long lead times could impede JTS' ability to quickly
respond to changes in demand and product requirements. Any limitations on, or
delays in, the supply of materials could disrupt JTS' production volume and
could have a material adverse effect on JTS' business, operating results and
financial condition. Furthermore, a significant increase in the price of one or
more of these components or materials could adversely affect JTS' business,
operating results and financial condition. In addition, there are only a limited
number of providers of hard disk drive manufacturing equipment, such as
servo-writers, burn-in equipment and final test equipment, and ordering
additional equipment for replacement or expansion involves long lead times,
which limit the rate and flexibility of capacity expansion. Failure to obtain
such manufacturing equipment on a timely basis could limit JTS' production of
hard disk drives and adversely affect JTS' business, operating results and
financial condition. See "Business -- Manufacturing."

CYCLICAL NATURE OF HARD DISK DRIVE AND COMPUTER INDUSTRIES. JTS' operating
results are dependent on the demand for hard disk drives, which in turn depends
on the demand for notebook and desktop personal computers. The hard disk drive
industry is cyclical and has experienced periods of oversupply, resulting in
significantly reduced demand for hard disk drives, as well as pricing pressures
and reduced production levels. The effect of these cycles has been magnified by
computer manufacturers' practice of ordering components, including hard disk
drives, in excess of their needs during periods of rapid growth. In recent
years, the disk drive industry has experienced significant growth, and JTS
intends to expand its capacity based on current and anticipated demand. There
can be no assurance that such growth will continue or that the level of demand
will not decline. In this regard, certain personal computer manufacturers have
announced reductions in anticipated revenue growth. A decline in demand for hard
disk drives would have a material adverse effect on JTS' business, operating
results and financial condition. Additionally, in the past some computer
manufacturers have experienced substantial financial difficulties due to the
cyclical nature of the computer industry and other factors. Any increased price
pressure in the personal computer industry could be passed through to personal
computer component suppliers, including manufacturers of hard disk drives. To
date, JTS has not incurred significant bad debt expense. However, there can be
no assurance that JTS will not face difficulty in collecting receivables or be
required to offer more liberal payment terms in the future, particularly in a
period of reduced demand. Any failure to collect or delay in collecting
receivables could have a material adverse effect on JTS' business, operating
results and financial condition.

DEPENDENCE ON COMPAQ COMPUTER RELATIONSHIP; CUSTOMER CONCENTRATION. JTS'
strategy to commercialize its products and achieve market acceptance has focused
on the development of distribution, licensing, product development and other
strategic relationships with leading computer companies, other manufacturers of
computer peripherals and recognized distribution organizations. In this regard,
JTS entered into a

9
<PAGE> 10

Development Agreement with Compaq in 1994 pursuant to which Compaq agreed to
design JTS' Nordic disk drives into at least one of Compaq's products and to
purchase a minimum number of Nordic disk drives from JTS within two years
following Compaq's acceptance of the first of such products. In return, JTS
granted Compaq certain pricing preferences and agreed to pay royalties to Compaq
on sales of Nordic disk drives to third parties during the term of the
agreement. Compaq was also granted a License to use the Nordic designs to
manufacture or to have manufactured Nordic drives on a royalty-free basis in the
event JTS fails to meet the agreed upon production schedule or, if JTS is not in
default under the agreement, to have Nordic drives manufactured by third-parties
upon payment of a royalty to JTS. The Development Agreement also restricts JTS'
ability to sublicense Nordic technology. The Development Agreement has a five
year term, which will automatically be renewed under certain circumstances and
may be terminated by either party only with cause. In order to provide an
alternate source of Nordic products, JTS entered into a Technology Transfer and
License Agreement with Western Digital pursuant to which Western Digital has the
right to manufacture and sell Nordic disk drives to Compaq and others. If either
of these agreements were to terminate prematurely, JTS' efforts to establish
market acceptance of its products and, consequently, its business, operating
results and financial condition would be adversely affected. In the first half
of calendar 1996, Compaq delayed introduction of a notebook product line that
incorporates the Company's hard disk drives, which resulted in shipment delays
by the Company to Compaq and others. The Company may experience similar delays
in the future. In fiscal 1997, Karma International AG, FutureTech International,
Inc. and Synnex Information Technology accounted for approximately 30%, 13% and
12%, respectively, of JTS' total revenues. JTS expects that sales to a
relatively small number of customers will account for a substantial portion of
its net revenues for the foreseeable future, although the companies that
comprise JTS' largest customers may change from period to period. The loss of,
or decline in orders from, one or more of JTS' key customers would have a
material adverse effect on JTS' business, operating results and financial
condition. See "Business -- Initial Efforts to Achieve Market Acceptance of Hard
Disk Drive Products."

RELIANCE ON LICENSED TECHNOLOGY. JTS currently owns no patents (other than
those acquired from Atari in the Merger) and has obtained licenses to a
substantial portion of the technology used in its hard disk drives pursuant to
license agreements with TEAC Corporation ("TEAC"), Pont Peripherals Corporation
("Pont") (formerly DZU Corporation), and Western Digital. If such license
agreements were prematurely terminated or if JTS were enjoined from relying upon
such licenses due to JTS' alleged or actual breach of such agreements, JTS would
be prevented from manufacturing hard disk drives incorporating technology
subject to such licenses. As a result, JTS' business, operating results and
financial condition would be materially adversely affected. See
"Business -- Patents and Licenses."

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Although JTS attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that JTS will be able to
protect its technology adequately or that competitors will not be able to
develop similar technology independently. There can be no assurance that patents
will be issued with respect to JTS' pending patent applications or that any
future patents will be sufficiently broad to protect JTS' technology. There can
be no assurance that any future patent issued to JTS will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection to JTS' products. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate JTS'
products or design around any possible patents issued to JTS in the future. In
addition, the laws of certain foreign countries may not protect JTS'
intellectual property rights to the same extent as do the laws of the United
States.

In recent years, the hard disk drive industry has experienced an increase
in litigation to enforce intellectual property rights. Litigation may be
necessary to enforce any future JTS patents, patents acquired in the Merger,
copyrights or other intellectual property rights, to protect JTS' trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or claims for indemnification resulting
from infringement claims. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on JTS' business, operating results and financial condition.
Alternatively, if any claims are asserted against JTS, JTS may seek to obtain a
license under the third party's intellectual property rights or to seek to
design around such claims. There can be no assurance, however, that a license
will be available on reasonable terms or at all, and it could

10
<PAGE> 11

be expensive and time consuming or prove impossible for JTS to design around
such claims. Any of such alternatives could materially and adversely affect JTS'
business, results of operations and financial condition.

Pursuant to the Merger, JTS has exclusive use of the "Atari" name and
"Fuji" logo in all areas other than coin-operated arcade video game use. JTS
also has a portfolio of other intellectual properties of Atari, including
patents, trademarks, and copyrights associated with its video game and computer
businesses. JTS believes these patents, trademarks and other intellectual
property are important assets. As of February 2, 1997, Atari held approximately
150 patents in the United States and other jurisdictions which expire from 1997
to 2010 and had applications pending for three additional patents. There can be
no assurance that any of these patent rights will be upheld in the future or
that JTS will be able to preserve any of these intellectual property rights.
Atari has in the past received communications from third parties asserting title
to certain of its intellectual property. Atari has also been involved in several
major lawsuits regarding its intellectual property. In the event any third party
were to make a valid claim with respect to the Atari division's intellectual
property and a license were not available on commercially reasonable terms, JTS'
business, financial condition and results of operations could be materially and
adversely affected. Litigation, which has in the past resulted and could in the
future result in substantial costs and diversion of resources, may also be
necessary to enforce the Atari patents at other intellectual property rights or
to defend against third party infringement claims. The occurrence of litigation
relating to patent enforcement, patent infringement or other intellectual
property matters, regardless of the outcome, could have a material adverse
effect on JTS' business, financial condition and results of operations.

EXPANSION OF MANUFACTURING CAPACITY. JTS' competitive position will depend
substantially on its ability to expand its manufacturing capacity. Accordingly,
JTS is continuing to make significant investments to expand such capacity,
particularly through the acquisition of capital equipment, facilities expansion
and the hiring and training of new personnel. JTS currently plans to complete
the fit out of its existing manufacturing facility in Madras, India during
fiscal year 1998, after which time JTS will occupy 125,000 square feet of floor
space at this facility. There can be no assurance that JTS will be able to
expand such capacity in a timely manner, that the cost of such expansion will
not exceed management's current estimates, that such capacity will not exceed
the demand for JTS products or that such additional capacity will achieve
satisfactory levels of manufacturing efficiency in a timely manner or at all.
For example, the Company's failure to obtain a term loan when expected in 1995
resulted in the postponement of planned facilities improvements at JTS
Technology and, consequently, the curtailment of manufacturing capacity
expansion. In addition, the expansion of manufacturing capacity will
significantly increase JTS' fixed costs. JTS' profitability will depend on its
ability to utilize its manufacturing capacity in an effective manner, and JTS'
inability to fully utilize its capacity would have a material adverse effect on
JTS' business, operating results and financial condition. See
"Business -- Manufacturing."

DEPENDENCE ON SINGLE MANUFACTURING FACILITY. Substantially all of JTS'
manufacturing operations take place at JTS Technology in Madras, India. Because
JTS does not currently operate multiple facilities in different geographic
areas, a disruption of JTS' manufacturing operations resulting from various
factors, including sustained process abnormalities, human error, government
interventions or a natural disaster such as fire or flood, could cause JTS to
cease or limit its manufacturing operations and consequently would have a
material adverse effect on JTS' business, operating results and financial
condition. See "Business -- Manufacturing."

RISKS OF INTERNATIONAL SALES AND MANUFACTURING. In fiscal 1997, 65% of
JTS' net sales consisted of products sold to customers in Europe, Asia and Latin
America, and JTS anticipates that a substantial percentage of its products will
be sold to customers outside of the United States for the foreseeable future. In
the near term, JTS expects to conduct substantially all of its manufacturing
operations in India, although JTS will evaluate alternative or additional
locations from time to time. Accordingly, JTS' operating results are subject to
the risks of doing business in a foreign country, including compliance with, or
changes in, the law and regulatory requirements of a foreign country, political
instability, local content rules, taxes, tariffs or other barriers, and
transportation delays and other interruptions. For example, the Indian
government has granted JTS' subsidiary, JTS Technology, a five year reduced tax
rate which is expected to expire in 2001. In addition, JTS Technology is located
in the Madras Export Processing Zone, where it currently enjoys an exemption

11
<PAGE> 12

from Indian taxes on export profits. To date, JTS has obtained only minimal
benefits from such tax exemptions. Such exemptions may be terminated or
additional taxes may be imposed at any time, for political or economic reasons,
in which event JTS may become subject to significantly greater taxes on sales of
disk drives outside of India at rates currently up to 46%. Furthermore, JTS
Technology does not have a long-term lease agreement, but rather occupies the
Madras facility pursuant to allotment letters from the Development Commissioner
of the Madras Export Processing Zone. Such benefits associated with conducting
business in India, which historically has experienced considerable political
instability, are subject to the vagaries of the Indian government and may be
withdrawn at any time. Although all of JTS' sales presently are made in U.S.
dollars, there can be no assurance that future international sales will not be
denominated in foreign currencies. Regardless of whether JTS' sales are
denominated in foreign currencies, JTS is, and will continue to be, subject to
risks related to foreign currency fluctuations. See "Business -- Manufacturing."

PRODUCTION YIELDS; PRODUCT QUALITY. The hard disk drive manufacturing
process is complex, and low production yields may result from a variety of
factors, including the introduction of new products, increased complexity in
product specifications, human error, the introduction of contaminants in the
manufacturing environment, equipment malfunction, use of defective materials and
components and inadequate testing. From time to time, JTS has experienced lower
than anticipated production yields as a result of such factors. Furthermore,
while JTS has implemented procedures to monitor the quality of the materials
received from its suppliers, there can be no assurance that materials will meet
JTS' specifications or that substandard materials will not adversely impact
production yields or cause other production problems. JTS' failure to maintain
high quality production standards or acceptable production yields would result
in loss of customers, delays in shipments, increased costs, cancellation of
orders and product returns for rework, any of which could have a material
adverse effect on JTS' business, operating results and financial condition. For
example, JTS' cost of sales for fiscal 1996 and fiscal 1997 included a $4.3
million and $2.8 million, respectively, provision for inventory allowances
principally due to the costs for return of defective products, scrapped material
associated with unrepairable damage caused during the assembly process and
estimates of physical loss of inventory associated with high volume
manufacturing activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

VARIABILITY OF OPERATING RESULTS. JTS' operating results are expected to
be subject to significant quarterly and annual fluctuations based upon a variety
of factors including market acceptance of JTS' products, timing of significant
orders, changes in pricing by JTS or its competitors, the timing of product
announcements by JTS, its customers or its competitors, changes in product mix,
manufacturing yields, order cancellations, modifications and quantity
adjustments and shipment reschedulings, the level of utilization of JTS'
production capacity, increases in production and engineering costs associated
with initial manufacture of new products, changes in the cost of or limitations
on availability of components and materials and customer returns. The impact of
these and other factors on JTS' revenues and operating results in any future
period cannot be predicted with certainty. JTS' expense levels are based, in
large part, on its expectations as to future revenues. Substantial advance
planning and commitment of financial and other resources is necessary for
expansion of manufacturing capacity, while JTS' sales are generally made
pursuant to purchase orders that are subject to cancellation, modification,
quantity reductions or rescheduling without significant penalties. Furthermore,
because the hard disk drive industry is capital intensive and requires a high
level of fixed costs, operating results are extremely sensitive to changes in
volume. Accordingly, if revenue levels do not meet expectations, operating
results and net income, if any, are likely to be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

MANAGEMENT OF GROWTH. JTS has recently experienced and may continue to
experience substantial growth in the number of its employees and the scope of
its operations. Such growth would further strain JTS' managerial, financial,
manufacturing and other resources. In addition, to manage its growth
effectively, JTS must implement additional operating, financial and management
information systems and hire and train additional personnel. In particular, JTS
must hire and train a significant number of additional personnel to operate the
highly complex capital equipment required by its manufacturing operations. There
can be no assurance that JTS will successfully implement additional systems in a
timely or efficient manner, hire and properly train a sufficient number of
qualified personnel or effectively manage such growth, and JTS' failure to

12
<PAGE> 13

do so could have a material adverse effect on its business, operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Employees."

DEPENDENCE ON KEY MANAGEMENT PERSONNEL. JTS' operating results will depend
in significant part upon the continued contributions of its key management and
technical personnel, who are difficult to replace. See "Management." JTS does
not have an employment agreement with any of its key executives, other than with
Kenneth D. Wing, its Executive Vice President, Engineering and Chief Operating
Officer. The loss of any of these key personnel could have a material adverse
effect on the business, operating results and financial condition of JTS. In
addition, JTS' future operating results will depend in part upon its ability to
attract, train, retain and motivate other qualified management, technical,
manufacturing, sales and support personnel for its operations. Competition for
such personnel is intense, and there can be no assurance that JTS will be
successful in attracting or retaining such personnel. The loss of the services
of existing personnel as well as the failure to recruit additional personnel
could materially adversely affect JTS' business, operating results and financial
condition. See "Business -- Employees."

PURCHASE ORDERS SUBJECT TO CANCELLATION, MODIFICATION AND
RESCHEDULING. JTS' sales are generally made pursuant to purchase orders that
are subject to cancellation, modification, quantity reductions or rescheduling
without significant penalties. Changes in forecasts, cancellations, rescheduling
and quantity reductions may result in excess inventory costs, inventory losses
and under-utilization of production capacity and could have a material adverse
effect on JTS' business, operating results and financial condition. As a result
of the foregoing, JTS' backlog as of any particular date may not be
representative of actual sales for any succeeding period.

RISK OF POTENTIAL LIABILITIES RELATED TO ATARI'S BUSINESS. In connection
with the restructuring of Atari's business in 1992 and 1993 and Atari's decision
in late 1995 to significantly downsize its Jaguar operations, Atari has
terminated and JTS plans to terminate numerous contracts and business
relationships, including several related to software development activities.
Although JTS does not regard such contracts or business relationships, either
individually or in the aggregate, as material, the termination of contracts and
relationships has, from time to time, resulted in litigation, diverting
management attention and financial resources. There can be no assurance that the
parties to such contracts will not commence or threaten to commence litigation
related to such contracts. Any such litigation or threatened litigation would
divert management attention and financial resources and could have a material
adverse effect on JTS' business, operating results and financial condition. See
"Business -- Legal Proceedings."

CONTROL BY AFFILIATES; ANTI-TAKEOVER EFFECTS. As of May 31, 1997,
directors and executive officers of the Company owned beneficially approximately
27.1% of the outstanding shares of Common Stock. As a result, these affiliates
of JTS, acting together, have the ability to exert significant influence over
the election of directors and other corporate actions affecting JTS. Certain
provisions of the Certificate of Incorporation and Bylaws of JTS and certain
provisions of the Delaware General Corporation Law, including Section 203
thereof, may also discourage certain transactions involving a change in control
of JTS. In addition to the foregoing, the ability of the Board of Directors of
JTS to issue additional "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of JTS. See "Principal and Selling Stockholders" and
"Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL DILUTION. Sales of substantial
amounts of Common Stock in the public market could adversely affect prevailing
market prices. A substantial number of shares of Common Stock are issuable by
the Company upon the conversion of the Company's Series B Preferred Stock and
Series C Preferred Stock and the exercise of outstanding warrants, which would
result in substantial dilution to a stockholder's percentage ownership interest
in the Company and could adversely affect the market price of the Common Stock.
Under the applicable conversion formulas of the Series B Preferred Stock and the
Series C Preferred Stock, (i) the number of shares of Common Stock issuable upon
conversion is generally inversely proportional to the market price of the Common
Stock at the time of conversion (i.e., the number of shares issuable increases
as the market price of the Common Stock decreases); and (ii) a minimum of
4,567,474 shares and 6,920,415 shares are issuable upon conversion of the Series
B Preferred Stock and Series C

13
<PAGE> 14

Preferred Stock, respectively (based on a conversion price, subject to
adjustment, of $3.6125). In addition, the number of shares issuable upon
conversion of the Series B Preferred Stock and the Series C Preferred Stock and
the exercise of certain outstanding warrants is subject to adjustment upon the
occurrence of certain dilutive events. As of September 30, 1997, the Company had
approximately 158,125,559 shares of Common Stock outstanding. In March 1997, the
Company's Registration Statement on Form S-1 (No. 333-21881) was declared
effective, registering for public resale 56,392,046 shares of Common Stock
(consisting of 10,037,500 newly-issued shares of Common Stock issuable upon the
conversion of outstanding Series B Preferred Stock and Common Stock purchase
warrants, 17,000,000 newly-issued shares of Common Stock issuable upon
conversion of the Series C Preferred Stock, and 29,354,546 previously
outstanding shares of Common Stock). The Company may be obligated to register
additional shares of Common Stock for resale upon conversion of the Series B
Preferred Stock and Series C Preferred Stock depending on, among other factors,
the future market price of the Common Stock. The Company is also obligated to
register for public resale the shares of Common Stock issuable upon conversion
of the Series D Preferred Stock issued in a September 1997 private placement. In
addition, JTS has registered for sale on a Form S-8 Registration Statement under
the Securities Act an aggregate of 8,985,000 shares of Common Stock issued or
issuable upon the exercise of options granted under JTS' Amended and Restated
1995 Stock Option Plan, 500,000 shares of Common Stock issued or issuable upon
the exercise of options granted under JTS' 1996 Non-Employee Directors' Stock
Option Plan, and 225,800 shares of Common Stock issued or issuable upon the
exercise of options granted under Atari's 1986 Stock Option Plan which were
assumed by JTS in the merger with Atari.

LIQUIDITY; STOCK PRICE VOLATILITY. The trading price of the Common Stock
may be subject to wide fluctuations in response to quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by JTS or its competitors, general conditions in the hard disk drive, computer
or video game industries, changes in earnings estimates or recommendations by
analysts, or other events or factors. In addition, the public stock markets have
occasionally experienced extreme price and trading volume volatility. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Common Stock.

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<PAGE> 15

USE OF PROCEEDS

The shares of Common Stock offered by the Selling Security Holders and the
Registration Rights Holders may be sold from time to time to purchasers directly
by the Selling Security Holders and the Registration Rights Holders acting as
principals for their own accounts in one or more transactions at a fixed price,
which may be changed, or at varying prices determined at the time of sale or at
negotiated prices. Alternatively, the Selling Security Holders and the
Registration Rights Holders may from time to time offer the Common Stock through
underwriters, dealers or agents who may receive compensation in the form of
underwriting discounts, commissions or concessions from the Selling Security
Holders and the Registration Rights Holders, and/or the purchasers of shares for
whom they may act as agent. Sales may be made on AMEX or in private
transactions.

The Selling Security Holders, the Registration Rights Holders and any
underwriters, dealers or agents that participate in the distribution of the
Common Stock offered hereby may be deemed to be underwriters within the meaning
of the Securities Act and any discounts, commissions or concessions received by
them and any provided pursuant to the sale of shares by them might be deemed to
be underwriting discounts and commissions under the Securities Act.

In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is available and
is complied with.

The Company entered into agreements with certain of the Selling Security
Holders and the Registration Rights Holders to register their Common Stock under
applicable federal and state securities laws. The Company will pay substantially
all of the expenses incident to the offering and sale of the Common Stock to the
public, other than commissions, concessions and discounts of underwriters,
dealers or agents, if any. Such expenses (excluding such commissions and
discounts) are estimated to be $358,000. The registration rights agreements
provide for indemnification of such Selling Security Holders and the
Registration Rights Holders to the extent permitted by law, for losses, claims,
damages, liabilities and expenses arising, under certain circumstances, out of
any registration of the Common Stock.

DIVIDEND POLICY

Pursuant to the Series B Preferred Stock Subscription Agreements entered
into between the Company and each of Advantage (the "Subscription Agreements"),
the Company is obligated to pay 5% annual dividends on the Company's outstanding
shares of Series B Preferred Stock, payable in cash or Common Stock (the "Series
B Dividends"). In addition, the Company is obligated to pay 5% annual dividends
on the Company's outstanding shares of Series C Preferred Stock, payable in cash
or Common Stock (the "Series C Dividends"). Other than the Series B Dividends
and the Series C Dividends, the Company has not declared or paid cash dividends
on its capital stock since inception and presently intends to retain earnings,
if any, for use in its business, and does not anticipate paying cash dividends
in the foreseeable future. However, the Company may issue additional shares of
preferred stock in the future which require the payment of cash or stock
dividends. The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), restricts the Company's ability to issue
dividends with respect to capital stock that is junior in preference to the
Series B Preferred Stock. Furthermore, the Company's Certificate of
Incorporation prohibits the issuance of cash dividends on its Common Stock
without the consent of the outstanding shares of Series C Preferred Stock. See
"Description of Capital Stock."

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<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of May
4, 1997.

<TABLE>
<CAPTION>
ACTUAL PRO FORMA(2)
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term obligations:
Current maturities of long-term obligation......................... $ 1,583 $ 1,583
Bank line of credits and borrowings under factoring arrangement.... 16,659 16,659
Long-term obligations:
Total long-term obligations........................................ 54,365 54,365
--------- ---------
Total obligations............................................... $ 72,607 $ 72,607
--------- ---------
Stockholders' equity:
Preferred Stock: $0.001 par value, authorized 10,000,000 shares;
35,807 shares and no shares outstanding pro forma(2) ........... -- --
Common Stock: $0.001 par value, authorized 150,000,000 shares;
107,151,842 shares issued and outstanding(1) and 131,928,087
shares outstanding pro forma(2)................................. 107 132
Additional paid-in capital......................................... 350,036 350,011
Notes receivable, secured by common stock.......................... (2,510) (2,510)
Accumulated deficit................................................ (347,430) (347,430)
--------- ---------
Total stockholders' equity...................................... 203 203
--------- ---------
Total capitalization....................................... $ 72,810 $ 72,810
========= =========
</TABLE>

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

(1) Includes 29,354,546 shares of Common Stock offered by the Registration
Rights Holders hereby. Also includes 1,985,668 and 275,000 shares of Common
Stock that had already been issued upon conversion of shares of Series B
Preferred Stock and Series C Preferred Stock, respectively, as of May 4,
1997. Excludes as of May 4, 1997 (i) 6,748,978 shares of Common Stock
issuable upon exercise of outstanding options, of which 1,304,530 shares
were exercisable at such date; (ii) 337,500 shares issuable upon exercise of
outstanding warrants; (iii) 1,402,771 shares of Common Stock reserved for
issuance upon future option grants under the Company's Amended and Restated
1995 Stock Option Plan; (iv) 450,000 shares of Common Stock reserved for
issuance upon future option grants under the Company's 1996 Non-Employee
Directors' Stock Option Plan; and (v) 2,596,414 shares of Common Stock
issuable upon conversion of the Company's 5 1/4% Convertible Subordinated
Debentures.

(2) Includes, as of May 4, 1997, an aggregate of 24,776,245 shares of Common
Stock that may be issued upon: (i) conversion of outstanding shares of the
Series B Preferred Stock; (ii) exercise of all of the Investor Warrants
issuable upon conversion of the Series B Preferred Stock and all of the
Finder's Warrants; (iii) payment of dividends on the outstanding shares of
Series B Preferred Stock in Common Stock; (iv) further adjustment to the
Series B Preferred Stock conversion ratio due to anti-dilution adjustments;
(v) conversion of outstanding shares of the Series C Preferred Stock; and
(vi) further adjustment to the Series C Preferred Stock conversion ratio due
to anti-dilution adjustments and price fluctuation of Common Stock. The
shares of Common Stock offered by the Selling Security Holders hereby
include such presently indeterminate number of shares as may be issued on
conversion of the Series B Preferred Stock and Series C Preferred Stock
pursuant to the provisions thereof regarding determination of the applicable
conversion price. The actual number of shares of Common Stock issued or
issuable upon the conversion of the Series B Preferred Stock and the Series
C Preferred Stock is subject to adjustment and could be materially less or
more than such estimated amount or the 27,037,500 shares of Common Stock
noted as being offered by the Selling Security Holders, depending upon
factors which cannot be predicted by the Company at this time, including,
among others, the future market price of the Common Stock. See "Description
of Capital Stock." Also includes 29,354,546 shares to be offered by the
Registration Rights Holders hereby.

16
<PAGE> 17

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on The American Stock Exchange, Inc.
under the symbol "JTS." The table below sets forth the high and low sales prices
for the Company's Common Stock (as reported on The American Stock Exchange,
Inc.) during the periods indicated. The reported last sale price of the Common
Stock on The American Stock Exchange, Inc. on December 1, 1997 was $ 5/16.

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
----- ----
<S> <C> <C>
YEAR ENDED FEBRUARY 2, 1997:
3rd Quarter................................................ 5 13/16 3 1/8
4th Quarter................................................ 4 1/2 2 15/16
YEAR ENDING FEBRUARY 1, 1998:
1st Quarter................................................ 3 7/16 1 1/2
2nd Quarter................................................ 1 3/4 3/8
3rd Quarter................................................ 1 3/8
4th Quarter (through December 1, 1997)..................... 5/8 5/16
</TABLE>

As of September 30, 1997, there were approximately 2,700 holders of record
of the Company's Common Stock.

17
<PAGE> 18

SELECTED HISTORICAL FINANCIAL DATA

The following historical selected consolidated financial data have been
derived from the historical consolidated financial statements of Atari prior to
its merger with JTS and the combined operations of Atari and JTS post merger and
should be read in conjunction with such consolidated financial statements and
notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Registration
Statement with the exception of the Consolidated Statement of Operations Data
prior to fiscal 1994 and the Consolidated Balance Sheet Data prior to December
31, 1995, which were derived from historical consolidated financial statement
not included herein. These historical results are not necessarily indicative of
results to be expected in the future.

(2) Includes a gain from the sale of marketing securities of $3.9 million in
1997 and $6.3 million in the first quarter of 1996 and a loss from disposal
of obsolete equipment of $2.7 million in 1997 and a gain from the settlement
of patent litigation of $32.1 million in 1994.

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Prospectus, including without limitation, statements regarding
the Company's financial position, business strategy, budgets and the plans and
objectives of management for future operations, including plans and objectives
relating to the Company's products, are forward-looking statements. Although the
Company believes that assumptions underlying such forward-looking statements are
reasonable, it can give no assurance that such assumptions will prove to have
been correct. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Important cautionary
factors that could cause actual results to differ materially from the Company's
expectations include, but are not limited to, those disclosed under "Risk
Factors", "Business", and elsewhere in this Prospectus, including without
limitation, in conjunction with the forward-looking statements included in this
Prospectus. All written and oral forward-looking statements attributable to the
Company, or persons acting on its behalf, are expressly qualified in their
entirety by these cautionary statements. Prospective investors should consider
carefully the information discussed under "Risk Factors", "Business", and
elsewhere in this Prospectus.

JTS AND ATARI BACKGROUND

On July 30, 1996, Atari was merged into JTS and the separate existence of
Atari ceased. The Merger was accounted for as a purchase of JTS by Atari, and,
accordingly, the operating results of JTS from July 30, 1996 forward were
combined with Atari's operating results and reported as JTS' operating results.
The aggregate purchase price of $112.3 million was allocated to the acquired
assets and liabilities of JTS.

Subsequent to the Merger, the Company changed its fiscal year from a 52/53
week fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. The Merger was accounted
for as a purchase of JTS by Atari, and, as such, the historical balance sheets
and the statements of operations for the prior years include Atari only. In
addition, due to the change in year end, Atari's balance sheet for the end of
the transition period as of January 28, 1996 is included herein, as are Atari's
operating results for the one month period then ended.

Throughout this discussion, "fiscal 1997" refers to the fiscal year ended
February 2, 1997 and "fiscal 1998" refers to the fiscal year ending February 1,
1998.

Prior to the Merger, Atari had significantly downsized its video game
operations due primarily to lack of market acceptance of its video game console,
Jaguar. This downsizing resulted in significant reductions in Atari's workforce
and significant curtailment of research and development and sales and marketing
activities for Jaguar and related products. Despite the introduction of four
additional game titles in the first quarter of 1996, sales of Jaguar and related
software remained disappointing. As a result, management revised estimates and
wrote-down inventory by $5.0 million in the first quarter of 1996 and by an
additional $3.3 million during July 1996. The prior business of Atari is now
conducted through the Company's Atari division; however, the Atari division is
not expected to represent a significant portion of the Company's business going
forward.

The most significant portion of the Company's business today is its disk
drive division, which designs, manufactures and markets hard disk drives for use
in notebook computers and desktop personal computers. JTS was incorporated in
February 1994 and remained in the development stage until October 1995, when it
began shipping its 3.5-inch "Palladium" disk drives to customers in the United
States and Europe. The Company currently has two disk drive product families in
production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Champion" family for desktop personal computers. The
Company introduced the Champion drives into production during the first quarter
of fiscal 1998.

JTS began shipment of Nordic disk drives to Compaq in the second quarter of
fiscal 1997; however, volume shipments of 3.0-inch drives have only recently
commenced and there can be no assurance that such shipments will continue. The
Company markets its disk drives to computer companies and systems integrators

19
<PAGE> 20

for incorporation into their computer systems and subsystems and to OEMs. The
Company sells its products through a direct sales force operating throughout the
United States, Europe and Asia, as well as through distributors in the United
States, Europe, Latin America and Canada.

All of JTS' products are manufactured in Madras, India by its subsidiary,
JTS Technology (formerly Moduler Electronics (India) Pvt. Ltd.), which was
acquired in April 1996 and employed approximately 6,630 individuals at September
30, 1997.

Since its inception, JTS has incurred significant losses which have
resulted from the substantial costs associated with the design and development
of its products, the establishment of manufacturing operations, the development
of a supplier base, and the marketing of its new products and the ramp up of
production volumes. JTS has yet to generate profits from its disk drive business
and cannot assure that it will achieve or maintain successful operations in the
future.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 4, 1997 COMPARED TO THE JTS
AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
APRIL 28, 1996

Revenues for the three months ended May 4, 1997 were $73.4 million.
Revenues from the disk drive division increased from $17.6 million for the same
quarter in the prior year to $72.3 million for the current quarter. Such
increase reflects increased sales of disk drives starting in October 1995.
During the quarter ended May 4, 1997, the Company shipped 540,000 disk drives,
compared to 106,000 in the three months ended April 28, 1996, which primarily
consisted of the 3.5-inch drives, in capacities ranging from 1 gigabyte to 1.6
gigabytes. Sales to the top six customers for the three months ended May 4, 1997
were 72% of net sales and four customers had sales greater than 10% of total net
sales for the three month period. The Atari division revenues including royalty
income for the current quarter amounted to $1.1 million. Pro forma combined
revenues for the first quarter in the previous year totaled $18.9 million and
included approximately $1.3 million of Atari revenues recorded for the three
month period ended March 31, 1996.

The gross margin for the three month period ended May 4, 1997 was $3.2
million compared to a deficit of $9.1 million on a pro forma basis for the first
quarter in the prior year. The portion of the current quarter's gross margin
attributable to the disk drive division was $2.1 million compared to a deficit
of $1.9 million incurred by the disk drive division in the three month period
ended April 28, 1996. The improvement in the gross margin resulted principally
from the greater absorption of fixed costs due to increased production volumes.
The gross margin for the Atari division for the three month period ended May 4,
1997 was $1.1 million compared to a deficit of $5.3 million for the three month
period ended March 31, 1996. The improvement in the Atari division's gross
margin resulted from sales of the Jaguar product and inventory that had been
previously written off in the first quarter of the prior year.

Research and development expenses for the three months ended May 4, 1997
were $6.7 million compared to research and development expenses on a pro forma
basis of $7.6 million for the first quarter in the prior year. The quarter over
quarter decrease for the disk drive division was $0.7 million and was primarily
attributed to significant investments in firmware and disk drive platforms
during the first quarter of fiscal 1997. The Atari division experienced a
quarter over quarter decline in research and development expenses of $0.2
million due to the elimination of the game development team.

Selling, general and administrative expenses for the three months ended May
4, 1997 were $6.1 million, including $5.7 million from the disk drive division,
compared to $5.8 million pro forma selling, general administrative expenses
incurred during the first quarter of the previous year which included $3.1
million from the disk drive division. The $2.6 million increase incurred by the
disk drive division resulted primarily from increases in sales office locations
(including an increase in personnel, office and related expenses) and increases
in promotion and marketing expenses. In addition, professional fees required to
support the expansion of JTS' operations and the continuation of marketing and
sales efforts increased significantly. Selling, general and administrative
expenses for the Atari division declined $2.3 million as a result of staff
reductions, reduced rent and other reductions in operating costs for the
division.

20
<PAGE> 21

YEAR ENDED FEBRUARY 2, 1997 COMPARED TO THE ATARI YEAR ENDED DECEMBER 31, 1995

The year ended February 2, 1997 operating results include only Atari for
the two quarters prior to the merger date, and for the two quarters after the
merger date the operations of both companies are included. For fiscal 1997, the
Company incurred a net loss of $152.5 million, including a one time charge of
$110 million, compared to a net loss for Atari for 1995 of $49.6 million.

Total revenues for the Company for fiscal 1997 were $90.5 million compared
to $14.6 million for Atari for 1995. Included in the $90.5 million in revenues
derived from the sales of disk drive products during the second half of fiscal
1997 on shipments of approximately 600,000 units. For the entire fiscal year
including the two quarters prior to the merger with Atari, approximately 820,000
disk drives were shipped which generated revenues of $119.1 million.

The prior year's revenues of $14.6 million are entirely attributed to the
sale of Atari games, and sales of the Jaguar video game console represented 68%
of the total revenue for 1995.

The gross margin deficit for fiscal 1997 was $9.8 million compared to $29.6
million for 1995. The fiscal 1997 gross margin deficit includes $8.7 million
attributed to the disk drive division for the six-month period after the merger
and $1.1 million is attributed to the Atari operations for the entire year. The
fiscal 1997 gross margin deficit includes approximately $3.3 million of
inventory write-offs related to Atari games, and a provision of approximately
$2.8 million for inventory allowances related to the disk drive operation. The
principal reasons for these allowances are obsolete and unsalable inventory and
costs associated with the repair of defective product. JTS anticipates recording
future inventory allowances, the level of which will depend upon a number of
factors including manufacturing yields, new product introductions, maturity or
obsolescence of product designs, inventory levels and competitive pressures. The
portion of the gross margin deficit attributed to the disk drive division also
included amounts provided for potential product returns and distributor price
protection of $2.8 million.

The hard disk drive industry has been characterized by ongoing rapid price
erosion and resulting pressure on gross margins. JTS expects that hard disk
drive prices will continue to decline in the future and that competitors will
offer products which meet or exceed the performance capabilities of JTS
products. Due to such pricing pressures, JTS future gross margins will be
substantially dependent upon its ability to control manufacturing costs, improve
manufacturing yields and introduce new products on a timely basis.

The $110 million one time charge represented that portion of the purchase
price which was attributed to in-process research and development and was
expensed in Atari's July operations as the technology had not yet reached
technological feasibility and did not have alternative future uses.

Research and development expenses for JTS for 1997 were $12.8 million
compared to $5.4 million for Atari for 1995. The prior year's research and
development expenses reflect that of the video game business only, which had
begun to downsize. In the fourth quarter of 1995, Atari entirely eliminated its
internal Jaguar development teams and other development staff as titles for
Jaguar were completed. The fiscal 1997 research and development expenses include
six months of research and development expenses of the disk drive division. The
1997 research and development expenses reflect amounts significantly greater
than the expenses incurred in the prior year due primarily to salaries and
benefits for staffing required for the design of disk drives and the development
of manufacturing processes as well as $1.9 million of expense for amortization
of purchased technology acquired at the time of the Merger. Going forward, the
company expects that research and development expenses will continue to increase
in the next fiscal year in absolute dollars but will decline as a percent of
revenues.

Selling, general and administrative expenses for 1997 were $13.7 million
compared to $18.6 million for 1995. The decrease in such expenses was primarily
a result of the Atari division's staff reductions, reduced rent, reduced legal
fees and other operating costs. The Company expects selling, general and
administrative expenses will increase in the next fiscal year in absolute
dollars primarily to support the expansion of the disk drive marketing and sales
efforts, but will decline as a percent of revenues.

21
<PAGE> 22

Other income and expense for 1997 was a net expense of $2.8 million and
consisted primarily of $2.7 million of losses from disposal of obsolete
equipment, approximately $3.5 million of interest expense and approximately $3.9
million of realized gain from the sale of marketable securities. For 1995, other
income of $3.5 million was primarily due to realized gains of approximately $6.0
million from the sale of Dixon PLC holdings, which was offset by approximately
$2.0 million of interest expense on the $42 million of the Company's 5 1/4%
convertible debentures.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

Total revenues for Atari for 1995 were $14.6 million compared to $38.7
million for 1994. Sales of Jaguar and related products represented 68% and 76%
of total revenues for 1995 and 1994, respectively, and sales of other products
and royalties represented the balance of revenues in each such year. The
reduction in revenues was primarily the result of lower unit volumes of Jaguar
products and lower average selling prices of Jaguar and certain of its software
titles. In the first quarter of 1995, Atari reduced the suggested retail price
of Jaguar from its original price of $249.99 to $149.99. As a result of the
Jaguar price reductions, the substantial curtailment of sales and marketing
activities for Jaguar and the substantial curtailment of efforts by Atari and
independent software developers to develop additional software titles for
Jaguar, Atari expected sales of Jaguar and related products to decline
substantially in 1996 and thereafter.

Cost of revenues for 1995 was $44.2 million compared to $35.2 million for
1994. Included in cost of revenues for 1995 were accelerated amortization and
write-offs of capitalized game software development costs of $16.6 million and
inventory write-downs of $12.6 million primarily relating to Jaguar products. As
a result of these charges and lower selling prices for Jaguar products and
provisions for returns and allowances and price protection, gross margin for the
year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or
9.2% of revenues. Included in cost of revenues for 1994 were write-downs of
inventory of $3.6 million and amortization and the write-off of capitalized game
software development costs of $1.5 million. As of December 31, 1995, Atari had
approximately 100,000 units of the Jaguar console in inventory which was
subsequently written off in 1996.

Research and development expenses for 1995 were $5.4 million compared to
$5.8 million for 1994. During 1995 and 1994, a significant number of Atari
employees and consultants were devoted to developing hardware and software for
the Jaguar, and Atari contracted with third-party software developers to develop
Jaguar software titles. As a result of Jaguar's poor sales performance, in the
third and fourth quarters of 1995, Atari accelerated its amortization of
contracted software development which resulted in charges in those quarters of
$6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994,
Atari had capitalized software development costs of $758,000 and $5.1 million,
respectively. In the fourth quarter of 1995, Atari eliminated its internal
Jaguar development teams and other development staff as titles for Jaguar were
completed.

Marketing and distribution expenses for 1995 were $12.7 million compared to
$14.7 million for 1994. Such costs included television and print media,
promotions and other activities to promote Jaguar.

General and administrative expenses for 1995 were $5.9 million compared to
$7.2 million for 1994. The decrease in such expenses was primarily a result of
staff reductions, reduced legal fees and other operating costs.

Atari experienced a gain on foreign currency exchange of $13,000 for 1995
compared to a gain of $1.2 million for 1994. These changes were a result of
lower foreign asset exposure and a greater percentage of sales made in U.S.
dollars which further reduced exposure to foreign currency transaction
fluctuations.

In 1994, Atari received $2.2 million in connection with the settlement of
litigation between Atari, Atari Games Corporation and Nintendo. In 1994, Atari
also reached an agreement with Sega, which resulted in a gain of $29.8 million,
after contingent legal fees, and the sale of 4,705,883 shares of Atari Common
Stock to Sega at $8.50 per share for an aggregate of $40.0 million.

22
<PAGE> 23

During 1995, Atari sold a portion of its holdings in Dixon PLC, a retailer
in England, and realized a gain of $2.4 million, of which $1.8 million was
realized in the fourth quarter of 1995. In the first quarter of 1996, Atari sold
the remaining portion of its holdings and realized a gain of $6.1 million. The
1995 gain of $2.4 million together with other income items resulted in a total
other income of $2.7 million compared to $484,000 for 1994.

For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Debentures. In 1995, Atari repurchased a portion of the Atari
Debentures and realized a gain of $582,000. As of December 31, 1995, the
outstanding balance of these debentures was $42.4 million.

Interest income for 1995 and 1994 was $3.1 million and $2.0 million,
respectively. The increase in interest income was primarily attributable to
higher average cash balances in 1995.

As a result of Atari's operating losses, there was no provision for income
taxes in 1995.

As a result of the factors discussed above, Atari reported a net loss for
1995 of $49.6 million compared to net income of $9.4 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

At May 4, 1997, JTS had cash and cash equivalents of $13.4 million, a
working capital deficit of $11.6 million and a net worth of $0.2 million.

At May 4, 1997, total debt, including bank credit lines and notes payable,
was $71.7 million. JTS also had equipment lease financing of $0.9 million at May
4, 1997. There were $6.0 million of working capital loans outstanding between
JTS Technology and three Indian banks as of May 4, 1997 each at an interest rate
of 13%, as well as term loan facilities with the Industrial Credit and
Investment Corporation of India Limited (ICICI) and the Shipping Credit and
Investment Corporation of India Limited (SICI) in the aggregate amount of $12.5
million at interest rates of LIBOR plus 2.75% and LIBOR plus 4%, respectively.
At May 4, 1997, JTS Technology's borrowings under these term loan facilities
were $12.3 million, which borrowings have maturities ranging from 2000 through
2002. Amounts borrowed under these loan agreements have been used for working
capital purposes, tooling, facilities expansion and purchases of capital
equipment.

At May 4, 1997, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued in 1987 by
Atari.

On April 30, 1997, the Company entered into an agreement with a finance
company for a revolving line of credit to refinance present debt and to provide
working capital of up to $30 million and a term loan to finance capital
expenditures of up to $2 million. The revolving line of credit has an initial
term of three years with automatic annual renewals thereafter unless terminated
by the finance company. The Company granted the finance company a first and
exclusive lien on all of the Company's present and future accounts receivable,
inventory, equipment and intangible assets to secure the obligations. The
agreement contains restrictions on the Company's and its subsidiaries' ability
to incur additional indebtedness, dispose of assets, pay dividends and, in the
case of JTS Technology, to sell inventory to parties other than the Company or
its European subsidiary. The agreement further requires the Company to maintain
a specified minimum tangible net worth and fixed charge coverage ratio and to
limit its capital expenditures. JTS cannot assure that any level of future
revenues will be attained or that JTS will achieve or maintain successful
operations in the future. The Company's accounts receivable are heavily
concentrated with a small number of customers. If any large customer of the
Company became unable to pay its debts to the Company, liquidity would be
adversely affected. In the event the Company is unable to increase sales or
maintain production yields at acceptable levels there would be a significant
adverse impact on liquidity. This would require the Company to either obtain
additional capital from external sources or to curtail its capital, research and
development and working capital expenditures. Such curtailment could adversely
affect the Company's operations and competitive position. Due to delays in the
receipt of additional financing, the Company took action in September 1996 to
conserve its cash resources by reducing the production of drives planned for the
third and fourth quarters of fiscal 1997.

23
<PAGE> 24

The Company will need significant additional financing resources over the
next several years for facilities expansion, capital expenditures, working
capital, research and development and vendor tooling. In addition, significant
cash resources will be required to fund purchases of inventory needed to achieve
anticipated sales levels. The precise amount and timing of the Company's funding
needs cannot be determined at this time, and will depend upon a number of
factors, including the market demand for the purchase of its products, the
progress of the Company's product development efforts and the Company's
inventory and accounts receivable management. The Company currently expects that
it would seek to obtain such funds from additional borrowing arrangements and/or
a public offering of debt and equity securities. There can be no assurance that
funds required by the Company in the future will be available on terms
satisfactory to the Company or at all. Failure to obtain such cash resources
would negatively impact the Company's ability to manufacture its products at
required levels and would have a materially adverse effect on the Company's
business operating results and financial condition.

As of May 4, 1997, the Company had Federal and state net operating loss
("NOL") carryforwards of approximately $245 million and $94 million,
respectively, and Federal and state research and development tax credit
carryforwards of approximately $2.1 million and $1.0 million, respectively, all
of which will expire on various dates through 2012.

Under the Internal Revenue Code of 1986, as amended, certain changes in the
ownership or business of a corporation that has Federal NOLs or tax credit
carryforwards will result in the inability to use, or the imposition of
significant restrictions on the use of such NOLs or tax credit carryforwards to
offset future income and tax liabilities of the Company. The merger between
Atari and JTS constituted a change in ownership of JTS and, accordingly,
restricts the use of JTS' pre-merger NOLs against post-merger income of the
Company to the maximum of $12.5 million per year, unless previously expired. In
addition, subsequent events may result in the imposition of restrictions on the
ability of the Company to utilize its NOLs and tax credit carryforwards. There
can be no assurance that the Company will be able to utilize all or any of its
NOL's or tax credit carryforwards.

24
<PAGE> 25

BUSINESS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Prospectus and other parts of this Prospectus, including
without limitation, statements regarding the Company's financial position,
business strategy, budgets and the plans and objectives of management for future
operations, including plans and objectives relating to the Company's products,
are forward-looking statements. Although the Company believes that assumptions
underlying such forward-looking statements are reasonable, it can give no
assurance that such assumptions will prove to have been correct. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Important cautionary factors that could cause actual
results to differ materially from the Company's expectations are disclosed under
"Risk Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Prospectus, including without
limitation, in conjunction with the forward-looking statements included in this
Prospectus. All written and oral forward-looking statements attributable to the
Company, or persons acting on its behalf, are expressly qualified in their
entirety by these cautionary statements. Prospective investors should consider
carefully the information discussed under "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.

JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS was incorporated in February 1994
and remained in the development stage until October 1995, when it began shipping
its 3.5-inch "Palladium" disk drives to customers in the United States and
Europe. The Company introduced into production its higher performance "Champion"
family for desktop personal computers in the first quarter of fiscal 1998. JTS
currently has two product families in production, the 3-inch form factor
"Nordic" family for notebook computers and the 3.5-inch form factor "Champion"
family for desktop personal computers. Shipments of Nordic drives to Compaq
Computer Corporation ("Compaq") began in the second quarter of fiscal 1997;
however, to date volume shipments of 3-inch drives have not occurred. The
Company markets its products to computer companies and systems integrators for
incorporation into their computer systems and subsystems and to original
equipment manufacturers ("OEMs"). The Company sells its products through a
direct sales force operating throughout the United States, Europe and Asia, as
well as through distributors in the United States, Europe, Latin America, Canada
and Asia.

In July 1996, the Company completed its merger (the "Merger") with Atari.
Since 1992, Atari has significantly downsized its operations and, after
completion of the Merger, JTS' hard disk drive operations have represented the
most significant portion of the Company's business. To obtain a low-cost
manufacturing source of hard disk drives, JTS acquired 90% of the outstanding
stock of the hard disk drive division of JTS Technology Ltd. (formerly Moduler
Electronics (India) Pvt. Ltd.) ("JTS Technology"), located in Madras, India, in
April 1996.

INDUSTRY BACKGROUND

DISK DRIVE MARKET. The hard disk drive industry is intensely competitive
and is dominated by a small number of large companies, including Maxtor
Corporation ("Maxtor"), Quantum Corporation ("Quantum"), Seagate Corporation
("Seagate") and Western Digital Corporation ("Western Digital"). In addition,
several computer companies, such as Toshiba Corporation ("Toshiba") and
International Business Machines Corp. ("IBM"), have in-house or "captive" disk
drive manufacturing operations that produce disk drives for incorporation into
their own computers as well as for sale to other OEMs.

In 1996, approximately 106 million hard disk drives were shipped,
representing a 18% increase over the prior year. Approximately 85 million, or
80%, of the hard disk drives shipped in 1996 were sold as part of desktop
personal computers, and approximately 14 million, or 13%, were sold as part of
notebook computers. In 1996, Seagate, Quantum and Western Digital controlled
approximately 74% of the desktop hard disk drive market and IBM and Toshiba
controlled approximately 73% of the notebook hard disk drive market.

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DISK DRIVE TECHNOLOGY. All hard disk drives used in notebook and desktop
personal computers incorporate the same basic technology. One or more rigid
disks are attached to a spin motor assembly which rotates the disks at a
constant speed within a sealed, contamination-free enclosure. Typically, both
surfaces of each disk are coated with a thin layer of magnetic material.
Magnetic heads record and retrieve data from discrete magnetic domains located
on preformatted concentric tracks in the magnetic layers of the rotating disks.
An actuator positions the head over the proper track upon instructions from the
drive's electronic circuitry. Most disk drives are "intelligent" disk drives
which incorporate an embedded application specific integrated circuit ("ASIC")
controller to manage communications with the computer. The magnetic heads
employed in disk drives have traditionally been based on inductive-head
technology (referred to as metal-in-gap or "MIG" technology) which combines the
read and write function within a single head. Magneto-resistive ("MR") head
technology, which segregates the read and write function to different elements
of the head to optimize performance, has emerged recently as an alternative to
inductive-head technology.

The size of a hard disk drive is referred to as the drive's "form factor"
or "footprint." At present, the vast majority of personal desktop and notebook
computers incorporate disk drives with 3.5-inch or 2.5-inch form factors,
respectively. The size of the form factor determines the size of the recording
disk and, hence, dictates the recording capacity of the disk drive. Disk drives
with smaller form factors must incorporate more disks and, therefore, more heads
to offer the same recording capacity as larger form factor drives. Because heads
and disks are the most expensive components in the hard disk drive, larger form
factor disk drives are relatively less expensive to manufacture than smaller
form factor drives with comparable recording capacities. As a result, 3.5-inch
drives are better suited for desktop personal computers, which are not subject
to the size constraints of notebook computers. In contrast, 2.5 inch drives,
because of their reduced size, power conservation features, shock resistance and
lightweight design, presently dominate the notebook computer market.

EMERGING INDUSTRY TRENDS. In recent years, the computer industry has
witnessed the emergence of several trends that JTS believes will continue to
drive demand for innovative disk drive products. First, new data and
image-intensive, multimedia applications are generating increased demand for
greater storage capacities and performance at a lower cost. Second, the demand
for portable computing devices, such as notebook computers, has kept pace with
the significant growth in sales of personal computers, with portables
representing approximately 14.1% of all personal computers sold in 1996. As the
gap in technology and pricing between desktop and portable computers continues
to narrow, consumers are demanding storage capacities in portable computers
comparable to those offered by desktops. Lastly, the notebook computer industry
is generally migrating towards lower profile computing devices. The pressure to
reduce the profiles, increase the capacities and lower the costs of personal
computers has presented manufacturers with a substantial ongoing technical
challenge.

JTS' STRATEGY

ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable computing market for
lower profiles, greater storage capacities and lower costs, JTS has developed
its Nordic family of 3-inch form factor disk drives. The disks used in the
3-inch format have 82% greater recording area than disks used in 2.5-inch
drives, the current industry standard for notebook computers, offering nearly
double the storage capacity at the same areal densities. Nordic drives also
offer cost advantages per megabyte of storage space over competing drives. The
design of the Nordic drives makes them the lowest profile disk drives currently
in the market.

FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital, as an alternate source for disk drives incorporating Nordic
technology. JTS intends to continue to take advantage

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of its management's considerable experience in the computer industry to obtain
access to other key computer industry participants.

DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design drives that satisfy the customers'
end-product requirements using efficient and low-cost manufacturing methods. JTS
is committed to the timely development of new products and the continuing
evaluation of new technologies. In this regard, JTS is presently designing into
its hard disk drive product families various high-performance features, such as
MR heads, new ASIC/channel technology, advanced dynamic head lifters, positive
latch mechanisms, and multi-insertion interface connectors.

ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities
in Madras, India, JTS intends to capitalize upon a low-cost and highly-skilled
labor force. JTS believes that labor costs in India are significantly lower than
labor costs in other countries where hard disk drives are commonly manufactured,
such as Singapore, Malaysia and Thailand. To leverage its low-cost labor force,
JTS manufactures a portion of certain labor-intensive components inhouse rather
than purchasing such components from outside suppliers. The Company also uses
many common components in its 3-inch and 3.5-inch form factor disk drives,
thereby reducing inventory requirements, creating significant assembling
efficiencies and providing cost advantages from volume purchases of materials
and toolings.

PRODUCTS

JTS currently has two product families in production, the 3-inch form
factor "Nordic" family for notebook computers and the 3.5-inch form factor
"Champion" family for desktop personal computers. Shipments of Nordic drives to
Compaq began in the second quarter of fiscal 1997; however, volume shipments of
3-inch drives have just recently commenced. JTS began volume production of
Palladium disk drives in October 1995 and replaced these drives with Champ
drives in the fourth quarter of fiscal 1997. The Company introduced its high
performance Champion drives into production in the first quarter of fiscal 1998.

JTS' disk drives are characterized by the following design features:

LOW-PROFILE AND FULLY ENCAPSULATED DESIGN. JTS' hard disk drives have a
lower profile than competing hard disk drives with comparable form factors and
recording capacities. The low-profile design is made possible by the drives'
high level of electronic integration that permits placement of the printed
circuit board assembly ("PCBA") in the same plane as the recording disks
(referred to as "board in the plane of the media" packaging). Most competing
drives place the PCBA under the drive mechanics which significantly increases
the height of the drive. JTS disk drives are fully-encapsulated with no exposed
PCBA and contain either a standard fixed drive connector or optional
multi-insertion connector. The encapsulated design eliminates the possibility of
damage to the PCBA due to electrostatic discharge and improves the
electromagnetic interference immunity of the drive.

SIMPLIFIED AND HIGHLY-INTEGRATED PLATFORM APPROACH. JTS' product families
share a simplified, highly-integrated platform approach characterized by a
reduced number of components. JTS believes that its PCBAs have the fewest
components in the industry due to JTS' use of highly-integrated ASIC
controllers. JTS believes this simplified platform approach combined with a
substantial percentage of common componentry among its product families
facilitates the introduction of new technology and utilizes research personnel
in a more efficient manner, thereby reducing development costs.

COMMON COMPONENTRY AND MICRO-CODE. The Nordic and Champion product
families share a substantial percentage of common electronic componentry and
micro-code which facilitates the simultaneous development of products for the
notebook and desktop computer markets and reduces time to market for JTS
products. For example, JTS' product families share spindle motors, certain head
stack components and controller ASICs. Common componentry also reduces inventory
requirements, thereby creating significant

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assembling efficiencies and providing cost advantages from volume purchases of
materials. The commonality of micro-code assists in production testing,
diagnostics, failure analysis and uniform product performance.

NORDIC PRODUCT FAMILY

JTS' Nordic product family is designed for notebook computers. Nordic
drives measure 90mm wide, the same width as a floppy diskette, and are
classified as 3-inch drives. The Nordic drives incorporate low-profile
architecture, measuring 10.5mm high for the two-disk version and 12.5mm for the
three-disk version. Nordic drive capacity presently ranges from 1.0 and 1.4
gigabytes for the two-disk version to 1.2 and 1.6 gigabytes for the three-disk
version. The two and three-disk Nordic drives are significantly thinner than the
two and three-disk 2.5-inch drives (10.5mm and 12.5mm compared to 17mm and
19mm), while the surface area of the recording disk in a Nordic drive is 82%
greater than a 2.5-inch disk. The greater surface area of the disk media used in
the Nordic drives provides greater recording capacity using the same areal
densities. Moreover, the Nordic drives consume approximately the same amount of
power as 2.5-inch drives, making them well suited for battery operated
applications. Nordic drives are currently offered at prices that are competitive
with the prices of 2.5-inch drives.

The Nordic product family was developed in conjunction with Western
Digital, which has entered into a Technology Transfer and License Agreement with
JTS. Under the terms of this agreement, Western Digital is obligated to share
advancements in 3-inch technology and is licensed by JTS to serve as an
alternate source of Nordic products to Compaq. In addition, JTS has entered into
a Development Agreement with Compaq which obligates Compaq to purchase a minimum
number of disk drives prior to June 1998. Production and shipment to Compaq of
Nordic disk drives commenced in the second quarter of fiscal 1997. Volume
shipments of 3-inch disk drives have just recently commenced and there can be no
assurance that such shipments will continue. See "-- Strategic Alliances."

CHAMPION PRODUCT FAMILY

JTS' recently-introduced Champion family of hard disk drives has been
developed for the desktop personal computer market. The Champion family includes
3.5-inch form factor drives that are offered in two and three-disk versions. The
two-disk version presently offers capacities of 1.7 and 2.0 gigabytes, and the
three-disk version presently offers capacities of 2.5 and 3.0 gigabytes. The
Champion drives incorporate the same low-profile architecture used in the Nordic
drives. This family of disk drives has been designed with MIG head technology,
thereby reducing the cost of the drives. The most important distinguishing
factor of the Champion family is that Champion drives incorporate a
recently-introduced chipset from Adaptec, Inc. ("Adaptec"). The Adaptec chipset
enhances the performance and capacity of the drives. As a result, the increased
transfer rate of the Champion drives supports full-motion video, making them
ideal for multimedia applications. JTS began production of Champion drives and
initiated shipments to distributors in the first quarter of fiscal 1998.

STRATEGIC ALLIANCES

As part of the Company's strategy to establish the Nordic family of disk
drives as the standard for notebook computers, the Company has entered into key
strategic alliances with Compaq and Western Digital.

COMPAQ. In June 1994, JTS and Compaq entered into a Development Agreement
pursuant to which Compaq agreed to design JTS' Nordic disk drives into at least
one of Compaq's products and to purchase a minimum number of hard disk drives
from JTS prior to June 1998. In addition, JTS granted to Compaq certain pricing
preferences and agreed to pay royalties to Compaq on sales of Nordic disk drives
to third parties during the term of the agreement. Compaq was granted a license
to use the Nordic designs to manufacture or to have manufactured Nordic drives
on a royalty-free basis in the event JTS fails to meet the agreed upon
production schedule or, if JTS is not in default under the agreement, to have
Nordic drives manufactured by third-parties upon payment of a royalty to JTS.
The Development Agreement also restricts JTS' ability to sublicense Nordic
technology. The Development Agreement has a five year term, which will
automatically be renewed under certain circumstances and may be terminated by
either party only with cause.

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The Company began shipments of Nordic disk drives to Compaq in June 1996.
However, volume shipments of Nordic disk drives have just recently commenced.
See "Risk Factors -- Dependence on Compaq Computer Relationship; Customer
Concentration."

WESTERN DIGITAL. In February 1995, JTS and Western Digital entered into a
Technology Transfer and License Agreement pursuant to which Western Digital
obtained manufacturing and marketing rights to JTS' 3-inch hard disk drive
products and is licensed to act as an alternate source of Nordic drives to
Compaq. In return, Western Digital has made payments to JTS totalling $5.3
million upon the achievement of certain development milestones. In February
1995, Western Digital also made a $4.1 million equity investment in JTS as part
of the transaction. The parties have reciprocal, royalty-free, cross-license
agreements for future 3-inch drive developments, and Western Digital has granted
to JTS licenses on existing patents covering its 3-inch disk drive technology.
The Technology Transfer and License Agreement restricts JTS from sublicensing
Nordic technology, under certain circumstances, until 1998. See " -- Patents and
Licenses." JTS intends to establish similar arrangements with other major
computer OEMs and notebook computer manufacturers. See "Risk
Factors -- Dependence on Compaq Computer Relationship; Customer Concentration."

MANUFACTURING

JTS' manufacturing strategy is to be a low-cost producer of hard disk
drives for the notebook and desktop personal computer markets by capitalizing on
low labor costs, common componentry and selective vertical integration. Due to
the common componentry of the Nordic and Champion disk drives, JTS believes that
it enjoys considerable flexibility in managing inventory levels and meeting its
customers' production requirements. In addition, JTS believes that common
componentry reduces the amount of scrap materials in the manufacturing process
and facilitates the training of operators in producing new products, thus
reducing production costs. JTS is evaluating continued selective vertical
integration as an alternative to outsourcing certain sub-assembly manufacturing.
At present, JTS is vertically integrated in certain labor intensive components,
such as head stacks.

All of JTS' manufacturing operations are currently conducted at its Indian
subsidiary, JTS Technology, which JTS acquired in April 1996. JTS Technology was
founded in 1986 by members of the family of Sirjang L. Tandon, JTS' Chairman and
Corporate Technical Strategist, as a contract manufacturer of power supplies for
computers and hard disk drive subassemblies. In December 1994, JTS Technology
received Indian government approval to manufacture hard disk drives. At
approximately the same time, JTS Technology discontinued production of hard disk
drive subassemblies for customers other than JTS. In March 1995, JTS entered
into a verbal agreement to acquire the hard disk drive division of JTS
Technology. JTS subsequently assumed operational and management control of
certain portions of the hard disk drive business of JTS Technology. In April
1996, JTS purchased 90% of the outstanding capital stock of JTS Technology. JTS
has a right of first refusal to purchase the remaining equity interest in JTS
Technology at a proportionate percent of the net book value of JTS Technology at
the time of the purchase.

JTS Technology's Madras facility presently occupies 85,000 square feet. At
this facility, JTS is adding production lines and expanding its clean room
environment. JTS believes that locating its manufacturing operations in India is
an important element of its low-cost manufacturing strategy due to the
availability of a high-quality, low-cost technical labor pool. JTS believes that
labor costs in India are significantly lower than labor costs in other countries
where hard disk drives are commonly manufactured, such as Singapore, Malaysia
and Thailand. As of September 30, 1997, approximately 6,500 individuals were
employed at JTS Technology. In 1995, JTS Technology was granted a five year "tax
holiday," which is expected to expire in 2001, with respect to sales of JTS'
products in and outside of India. In addition, JTS Technology is located in the
Madras Export Processing Zone and, therefore, enjoys a tax exemption with
respect to profits generated from sales outside of India. Such exemption may be
terminated or additional taxes may be imposed at any time, for political or
economic reasons, in which event JTS would become subject to significantly
greater taxes on sales of disk drives outside of India. Furthermore, JTS does
not have a long-term lease agreement, but rather occupies the Madras facility
pursuant to allotment letters from the Development Commissioner of the Madras
Export Processing Zone. Such benefits associated with conducting business in
India, which historically has

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experienced considerable political instability, are subject to the vagaries of
the Indian government and may be withdrawn at any time.

The manufacture of high-capacity hard disk drives is a complex process,
requiring a clean room environment, the assembly of precision components within
narrow tolerances and extensive testing to ensure reliability. JTS'
manufacturing process is performed in three stages: subassembly, final assembly
and final test. The subassembly group builds mechanical subassemblies and flex
cables and modifies PCBAs. Printed circuit board assembly is performed by
outside vendors. The final assembly group assembles all subassemblies and
components into the mechanical head/disk assembly ("HDA"), writes servo
information, and performs preliminary testing. To avoid contamination by dust
and other particles which may impair the functioning of the disk drive, most
assembly takes place under controlled clean room conditions. The final test
group connects PCBAs to HDAs, burns-in completed drives and performs final
tests.

The principal components used in JTS' manufacturing process are disks,
heads and PCBAs. JTS has three qualified sources each for PCBAs and disks and
four qualified sources for heads. JTS Technology imports approximately 85% of
the componentry used in the manufacture of disk drives from outside of India. In
the past, JTS has experienced delays in obtaining certain components, and there
can be no assurance that such delays, or difficulties in obtaining those or
other components, will not occur in the future. JTS' inability to obtain
essential components or to qualify additional sources as necessary, if
prolonged, could have a material adverse effect on JTS' business, operating
results and financial condition.

JTS has developed a comprehensive quality assurance program. All
significant electrical and mechanical parts received from outside sources are
inspected or tested, normally on a sample basis, and testing and burn-in of
certain components and subassemblies occurs during assembly. In addition, JTS
performs several in-process quality checks and inspections, both in the PCBA and
HDA processes, and a final drive-level quality check prior to packaging.
Additional performance and reliability testing is done on a sample basis from
each week's production units in order to monitor quality levels and provide
corrective action to the factory processes. JTS generally warrants its products
against defects in design, materials and workmanship for three years. See "Risk
Factors -- Availability of Components and Materials; Dependence on Suppliers,"
"-- Expansion of Manufacturing Capacity," "-- Dependence on Single Manufacturing
Capacity," "-- Risks of International Sales and Manufacturing," and
"-- Production Yields; Product Quality."

RESEARCH AND DEVELOPMENT

The disk drive industry is characterized by rapid technological change and
short product life cycles. As a result, JTS' success will depend upon its
ability to develop new products, successfully introduce these products to the
market and ramp up production to meet customer demand. Accordingly, JTS is
committed to timely development of new products and the continuing evaluation of
new technologies. JTS' research and development efforts are presently
concentrated on broadening its existing 3.5- and 3-inch product lines and
introducing new generations of products with increased capacities and improved
performance at a lower cost. In this regard, JTS has designed various high
performance features, such as new ASIC/channel technology and advanced head
lifters, into its recently-introduced Champion family of hard disk drive. In
addition, the Company is currently designing into its disk drives MR head
component technology, which allows data to be recorded and read at much higher
track densities than MIG or inductive thin-film head technology. JTS expects to
begin shipment of Champion drives with recording capacities of up to 3.0
gigabytes and Nordic drives with recording capacities of up to 2.1 gigabytes in
the second quarter of fiscal 1998. As of September 30, 1997, JTS employed 572
individuals in engineering.

SALES AND MARKETING; CUSTOMERS

JTS sells and markets its products through a direct sales force that
operates in the United States, Europe and Asia. In addition, JTS sells and
markets its products through an international network of distributors to OEMs,
VARs and systems integrators. The Company presently has sales offices throughout
the world that market JTS disk drives. International sales accounted for 56% of
revenues in fiscal 1997.

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A limited number of customers account for a significant percentage of JTS'
total revenue. In fiscal 1997, Karma International AG, FutureTech International,
Inc. ("FutureTech") and Synnex Information Technology accounted for
approximately 30%, 13% and 12%, respectively, of JTS' total revenue. JTS expects
that sales to a relatively small number of customers will account for a
substantial portion of its net revenues for the foreseeable future, although the
companies that comprise JTS' largest customers may change from period to period.
In particular, based on existing contracts with FutureTech and Compaq, JTS
expects that revenues from these companies will account for a substantial
percentage of JTS' revenues in the foreseeable future. The loss of, or decline
in orders from, one or more of JTS' key customers would have a material adverse
effect on JTS' business, operating results and financial condition.

BUSINESS OF ATARI DIVISION

Atari was incorporated under the laws of Nevada in May 1984. From 1984 to
1992, Atari designed, manufactured and marketed proprietary personal computers
and video games and related software. Over the past several years, Atari has
undergone significant change. In 1992 and 1993, Atari significantly downsized
operations, decided to exit the computer business and focused on its video game
business. As a result, revenues from computer products as a percentage of total
revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales
of entertainment systems and related software and peripheral products and the
receipt of royalties represented the balance of revenues in each such year.
These actions resulted in significant restructuring charges for closed
operations and write-downs of computer and certain video game inventories in
1992 and 1993. (See Note 13 to Consolidated Financial Statements for discussion
of segment information.)

While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices.

By late 1995, Atari recognized that despite a significant commitment of
financial resources to the Jaguar and related products, it was unlikely that
Jaguar would ever become a broadly accepted video game console or that Jaguar
technology would be broadly adopted by software title developers. As a result,
Atari decided to significantly downsize its Jaguar operations. This downsizing
resulted in significant reductions in Atari's workforce, and significant
curtailment of research and development and sales and marketing activities for
Jaguar and related products. Accordingly, Atari decided to focus its efforts on
selling its inventory of Jaguar and related products and to emphasize its
existing licensing and development activities related to multimedia
entertainment software for various platforms. As a result of Atari's investment
in game design, and programming for its Jaguar software, Atari has ported
certain of its Jaguar titles to the IBM PC compatible platform. In this regard,
Atari commenced shipment of the PC CD-ROM version of Tempest 2000 in Europe
during the first quarter of 1996. In 1997, Atari plans to continue its efforts
to license titles for its game library to third party publishers and to sell
various properties held for investment purposes.

PATENTS AND LICENSES

JTS currently owns no patents (other than those acquired from Atari in the
Merger) and has licensed in a substantial portion of the technology used in its
hard disk drives pursuant to license agreements with Pont, TEAC and Western
Digital. If such license agreements were prematurely terminated or if JTS were
enjoined from relying upon such licenses due to JTS' alleged or actual breach of
such agreements, JTS would be prevented from manufacturing disk drives
incorporating technology subject to such licenses. As a result, JTS' business,
operating results and financial condition would be materially adversely
affected. JTS has filed three United States patents applications. Although JTS
believes that patent protection could offer significant value, the rapidly
changing technology of the computer industry makes JTS' future success dependent
primarily upon the technical competence and creative skills of its personnel
rather than on patent protection.

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A license with respect to certain key technology employed in JTS' Nordic
disk drives was granted to JTS by TEAC pursuant to a license agreement dated
February 4, 1994 (the "TEAC Agreement"). The TEAC Agreement also includes a
cross-license with respect to Nordic technology developed jointly by TEAC and
JTS, which will be owned jointly by the two companies, and granted certain
rights to TEAC with respect to Nordic technology developed independently by JTS,
which will be owned solely by JTS. Under the TEAC Agreement, JTS is obligated
under certain circumstances to make royalty payments to TEAC in connection with
the sale of future generation disk drives incorporating Nordic technology that
is jointly developed by JTS and TEAC or independently developed by TEAC. JTS is
not obligated to make royalty payments with respect to developments to Nordic
technology made independently by JTS, but JTS is obligated to license such
developments to TEAC on a royalty-free basis. The TEAC Agreement restricts JTS'
ability to sublicense certain technology licensed to JTS. Under the TEAC
Agreement, JTS has granted TEAC certain pricing preferences on purchases of
Nordic drives. TEAC originally acquired its rights in certain Nordic disk drive
technology pursuant to the Agreed Order Compromising Controversies dated
February 4, 1994 (the "Order") governing the distribution of the assets of Kalok
Corporation. The Order imposes certain restrictions on JTS' right to sublicense,
manufacture and sell certain disk drive technology of Kalok Corporation that was
transferred to both TEAC and Pont pursuant to the Order.

In June 1994, JTS entered into a Development Agreement with Compaq which
imposes certain restrictions on JTS' ability to sublicense Nordic technology to
third parties. In addition, the Development Agreement imposes a royalty
obligation upon JTS with respect to the sale of Nordic disk drives to third
parties during the term of the agreement. Moreover, Compaq has a right of first
refusal with respect to all production of Nordic drives until June 1997 and a
right of first refusal to license and/or acquire future JTS technologies and
products during the term of the agreement. JTS has also granted certain
non-exclusive manufacturing and marketing rights with respect to certain Nordic
technology and developments thereto within the term of the Development
Agreement.

In January 1995, JTS and Pont entered into a cross-licensing agreement (the
"Pont Agreement") pursuant to which JTS granted to Pont a royalty-free,
nonexclusive, perpetual license to use certain JTS and jointly-developed hard
disk drive technology, to make developments to such technology and to
manufacture and sell in certain territories hard disk drives incorporating such
technology. In return, Pont granted to JTS a royalty-free, nonexclusive,
perpetual license to use certain Pont and jointly-developed hard disk drive
technology, to make developments to such technology and to manufacture and sell
in certain territories hard disk drives incorporating such technology. In
addition, Pont was obligated to make certain royalty payments to JTS for a
limited period of time with respect to the sale of hard disk drives
incorporating certain JTS technology.

In February 1995, the TEAC Agreement, the Order, the Pont Agreement and the
Compaq Development Agreement were each amended to permit the license and
sublicense by JTS to Western Digital of certain rights in Nordic disk drive
technology. In addition, the amendment to the TEAC Agreement provides that JTS
will pay certain royalties to TEAC, under certain circumstances, upon the sale
of Nordic drives for a limited period of time. The Pont Agreement was also
amended to expand the territories in which JTS may manufacture and sell hard
disk drives incorporating technology subject to the agreement. JTS and Western
Digital concurrently entered into a Technology Transfer and License Agreement
pursuant to which Western Digital obtained certain manufacturing and marketing
rights to Nordic disk drive technology. The parties have reciprocal,
royalty-free, cross-license agreements for future Nordic technology
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch hard disk drive technology.

The Company has exclusive use of the "Atari" name and "Fuji" logo in all
areas other than coin-operated arcade video game use. The Company also has a
portfolio of other intellectual properties including patents, trademarks, and
copyrights associated with the Atari video game and computer businesses. The
Company believes that such patents, trademarks and other intellectual property,
are important assets. As of May 4, 1997, the Company held approximately 150
patents in the United States and other jurisdictions relating to the business of
the Atari division which expire from 1997 to 2010 and had applications pending
for three additional patents. There can be no assurance that any of these patent
rights will be upheld in the future or that the Company will be able to preserve
any of the Atari division's other intellectual property rights. The

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occurrence of litigation relating to patent infringement or other intellectual
property, matters, regardless of the outcome, could have a material adverse
effect on the Company's business, financial condition and results of operations.

COMPETITION

The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Maxtor, Quantum, Seagate, and Western
Digital. In addition, a number of computer companies, such as Toshiba and IBM,
have in-house or "captive" disk drive manufacturing operations that produce disk
drives for incorporation into their own computers as well as for sale to other
OEMs. Many of JTS' competitors have broader product lines than JTS, and all have
significantly greater financial, technical and marketing resources. Furthermore,
JTS has licensed key 3-inch form factor technology to Western Digital, a
competitor in the personal computer disk drive market that could become a
significant supplier of 3-inch form factor disk drives to Compaq and other OEMs.
See "Initial Efforts to Achieve Market Acceptance of Hard Disk Drive Products."
There can be no assurance that JTS will develop and manufacture products on a
timely basis with the quality and features necessary to compete effectively.
Generally, OEM customers for hard disk drives rely on a limited number of
suppliers. As a result, it may be necessary for JTS to displace competitors to
increase its net sales. In addition, JTS faces competition from the
manufacturing operations of its current and potential OEM customers, which could
initiate or increase internal production of hard disk drives and reduce or cease
purchasing from independent hard disk drive suppliers such as JTS. Moreover, the
hard disk drive industry is characterized by price erosion and resulting
pressure on gross margins. JTS expects that hard disk drive prices will continue
to decline and that competitors will offer products which meet or exceed the
performance capabilities of JTS' current products. Due to such pricing
pressures, JTS' future gross margins will substantially depend upon its ability
to control manufacturing costs, improve manufacturing yields and introduce new
products on a timely basis. Any increase in price competition would have a
material adverse effect on JTS' business, operating results and financial
condition. JTS may also experience competition from other forms of data storage,
including optical storage, flash memory and holographic storage. If JTS' current
and prospective customers and end users were to adopt such data storage products
as an alternative to JTS' products, JTS' business, operating results and
financial condition would be materially adversely affected.

BACKLOG

JTS' sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, quantity reductions or rescheduling without
significant penalties. Changes in forecasts, cancellations, rescheduling and
quantity reductions may result in excess inventory costs, inventory losses and
under-utilization of production capacity and may have a material adverse effect
on JTS' business, operating results and financial condition. As a result of the
foregoing, JTS' backlog as of any particular date may not be representative of
actual sales for any succeeding period. As of May 4, 1997, JTS had a backlog of
approximately $5.7 million. Backlog on any given date is not necessarily
indicative of total orders for a given period, which may be more or less than
expected.

EMPLOYEES

As of September 30, 1997, JTS (excluding the Atari division) had
approximately 6,630 full-time employees, of whom approximately 150 were located
in San Jose, California, approximately 6,500 were located in Madras, India,
approximately 30 were located in the Far East and seven were located in Europe.
Of the full-time employees, approximately 6,000 are engaged in manufacturing,
approximately 30 in marketing, sales and service, 572 in engineering and 14 in
administration and finance. Due to disappointing sales of Jaguar and related
products, Atari reduced its workforce from 101 persons at December 31, 1994 to
73 persons at December 31, 1995 and to 15 persons at December 31, 1996. As of
September 30, 1997, the Atari division had five employees in the United States,
including three in engineering and product development and two in distribution.
In addition, the Atari division had six employees outside the United States
engaged in sales and finance.

33
<PAGE> 34

The market for well-trained employees with disk drive industry experience
is intensely competitive. JTS believes that its future success will depend on
its ability to continue to attract and retain a team of highly motivated and
skilled individuals. None of JTS' employees is represented by a labor
organization. JTS believes that its employee relations are good.

PROPERTIES

JTS presently leases facilities in San Jose, Sunnyvale and Santa Clara,
California; Madras, India; Singapore; Slough, England; and Taipei, Taiwan. JTS'
executive and administrative headquarters are located in a 52,000 square foot
building in San Jose. The lease on this facility expires in July 2000, and JTS
has an option to renew for four years, subject to certain restrictions.

The Madras facility comprises approximately 85,000 square feet and is used
for all of JTS' manufacturing operations. The Madras facility is owned by the
Indian Government, and JTS currently pays $14,000 per month for its use. JTS
does not have a long-term lease agreement, but rather occupies the Madras
facility pursuant to allotment letters from the Development Commissioner of the
Madras Export Processing Zone. Such allotment letters authorize JTS to occupy
the premises so long as the space is used in the reasonable conduct of JTS'
business and rents are paid in a timely fashion. The allotment letters and other
benefits associated with conducting business in India, which historically has
experienced considerable political instability, are subject to the vagaries of
the Indian government and may be withdrawn at any time. JTS currently intends to
increase the size of the Madras facility by 40,000 square feet by the end of
fiscal 1998.

The Singapore office comprises approximately 1,500 square feet and is used
for JTS' purchasing operations in Southeast Asia. The lease for this facility
expires in October 1997. The Taiwan sales office has approximately 1,144 square
feet and is used for JTS' marketing and sales operations in Taiwan. The lease
for this facility expires in July 1997.

In addition, JTS leases a 7,200 square feet facility in Sunnyvale,
California under a lease which expires in 2001, which is presently being
subleased. JTS also leases a 20,200 square feet warehouse facility in Santa
Clara, California and a 33,600 square feet international sales facility in
Slough, England. Each of these leases was assumed by JTS when it merged with
Atari, and each facility is presently used primarily for the Atari division's
operations.

The following table summarizes the principal properties occupied by the
Company:

<TABLE>
<CAPTION>
EXPIRATION DATE
LOCATION SQUARE FOOTAGE OF LEASE
--------------------------------------------- -------------- ---------------
<S> <C> <C>
Administrative and Sales Offices:
San Jose, California....................... 52,000 July 2000
Slough, England............................ 33,600 September 1997
Singapore.................................. 1,500 July 1997
Taiwan..................................... 1,144 July 1997
Manufacturing Facility:
Madras, India.............................. 85,000 *
Warehouse Facility:
Santa Clara, California.................... 20,200 July 1999
</TABLE>

- ---------------
* Occupied pursuant to allotment letters provided certain conditions are
satisfied.

LEGAL PROCEEDINGS

The Company is a defendant and counter claimant in a civil action for
alleged breach of contract brought in U.S. District Court for the Southern
District of New York, case number 95 Civ. 1935, by Tradewell, Inc., a New York
corporation, seeking specific performance for release of goods having a value of
$1.6 million. The Company has counterclaimed seeking specific performance for
the purchase of media or, alternatively,

34
<PAGE> 35

damages in the amount of $3.3 million. As a result of a partial resolution, the
Company now seeks damages of approximately $2.5 million.

The Company is a defendant in a civil action brought in England titled
Bullfrog Production, Ltd., v. Atari Corporation, Case No. 1996 B No. 584, for
which Bullfrog obtained judgment against the Company in the amount of $250,000
plus interest and costs.

The Company is a plaintiff in a civil action brought in the Superior Court
of the State of California in and for the county of Santa Clara brought against
Philips Laser Magnetic Storage ("Philips") for breach of contract and breach of
implied covenant of good faith and fair dealing arising out of Philips' failure
to deliver goods to Atari. Philips has filed a counterclaim to the action for
goods sold and delivered and work in process for approximately $3 million.

On January 23, 1992, certain debenture holders filed an involuntary
bankruptcy petition against The Federated Group, Inc., a subsidiary of the
Company and formerly a subsidiary of Atari. The case was appealed by the Company
to the Ninth Circuit Court of Appeals, and a hearing for oral arguments was held
on December 12, 1996. The case was reversed and remanded to the District Court
for further proceedings.

The Company is a defendant in a claim brought by Extron Contract
Manufacturing Co. in the Superior court of the State of California in and for
the County of Santa Clara for work in material overages in excess of
$215,826.33.

On January 3, 1997, Dusseldorf Securities, Limited ("DSL") and Greystone
Capital, Ltd. ("GCL"), through counsel, made a letter demand of the Company for
payment of $1,250,000 allegedly due under a letter agreement between DSL and the
Company dated December 21, 1996 (the "Agreement"). DSL and GCL claim that the
Company owes $1,250,000 as fees for a January 1997 private placement of the
Company's stock which was not completed through DSL and/or GCL. On February 26,
1997, DSL and GCL filed suit against the Company in Los Angeles County Superior
Court, No. BC166450, entitled Dusseldorf Securities, Limited v. JTS Corporation.
The lawsuit asserts claims for breach of contract, breach of warranty, and
misrepresentation against the Company and asserts those and other tort claims
against Michael Arnous, an individual not affiliated with the Company, through
whom it is alleged the Company recently completed a private placement of its
securities. An application for writ of attachment was filed and argued on May 9,
1997; the application was denied. The Company has filed counterclaims for breach
of contract and fraud.

The Company is a defendant in a claim brought by Zion Technology, Corp. in
the Superior Court of the State of California in and for the County of Santa
Clara for goods ordered. The claim is in excess of $66,000.

The Company is a defendant in a claim brought by Creative Talents, Inc. in
the Superior Court of the State of California in and for the County of Santa
Clara, Case No. CV765828. The complaint alleges breach of a software licensing
agreement. The plaintiff seeks damages in the amount of approximately $297,000.

The Company is presently, and may become in the future, a defendant in
certain other actions relating to the downsizing of Atari's operations. The
above actions may include claims for attorneys fees and interest. The Company
believes that none of these claims will have a material adverse effect on its
business, financial condition or results of operations.

35
<PAGE> 36

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and officers of JTS as of the date of this Prospectus are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------- ---- --------------------------------------------------
<S> <C> <C>
David T. Mitchell 54 Chief Executive Officer, President and Director
Sirjang L. Tandon 55 Chairman of the Board of Directors and Corporate
Technical Strategist
Kenneth D. Wing 49 Executive Vice President, Engineering and Chief
Operating Officer
Steven L. Kaczeus 62 Chief Technical Officer
Joseph A. Prezioso 36 Acting Chief Financial Officer
Jean D. Deleage(2) 56 Director
Roger W. Johnson(1) 62 Director
Lip-Bu Tan(2) 37 Director
Jack Tramiel(1)(2) 69 Director
</TABLE>

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

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

MR. DAVID T. MITCHELL joined JTS in May 1995 as Chief Executive Officer and
President and is a member of the Board of Directors of JTS. Prior to joining
JTS, he served as President, Chief Operating Officer and a director of Conner
Peripherals, Inc. commencing in October 1992. Prior to that time, Mr. Mitchell
co-founded Seagate, where he served as President, Chief Operating Officer and
director.

MR. SIRJANG L. TANDON founded JTS in February 1994 and served as its
Chairman of the Board of Directors, Chief Executive Officer and President from
inception until May 1995. Since such time, he has served as Chairman of the
Board of Directors and Corporate Technical Strategist. Prior to founding JTS,
Mr. Tandon founded and was Chief Executive Officer of Tandon Corporation, a
personal computer manufacturing firm. Tandon Corporation filed a petition under
the Federal bankruptcy laws in 1993.

MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President,
Research & Development Quality/Reliability and became Executive Vice President,
Engineering and Chief Operating Officer in 1996. Prior to joining JTS, Mr. Wing
worked for 14 years at Seagate. During his tenure at Seagate, Mr. Wing served in
several capacities, including Vice President of Process Engineering, Vice
President of Quality, Vice President of Manufacturing Operations and Vice
President of Worldwide Automation. He holds a Bachelor of Science degree in
Science and Engineering and a Master of Science in Mechanical Engineering from
the University of Michigan.

MR. STEVEN L. KACZEUS joined JTS in February 1994 as Chief Technical
Officer. Prior to joining JTS, he founded Kalok Corporation in 1987 and served
in various technical and management positions, most recently as Chairman of the
Board of Directors and Chief Technical Officer. Kalok Corporation filed a
petition under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master
of Science and Bachelor of Science in Mechanical Engineering from the University
of Bridgeport and University of Budapest, Hungary, respectively.

MR. JOSEPH A. PREZIOSO joined JTS in February 1997 as Vice President and
Corporate Controller and served in that position until his appointment as Acting
Chief Financial Officer in June 1997. Prior to joining JTS, Mr. Prezioso served
as Manager of Financial Planning in the Technology Products Group and Manager of
Worldwide Financial Reporting for IBM. Mr. Prezioso succeeded Ms. W. Virginia
Walker, who resigned as Chief Financial Officer on May 30, 1997.

MR. JEAN D. DELEAGE has served as a Director of JTS since 1995. He has been
a managing partner of Burr, Egan, Deleage & Co., a major venture capital firm in
San Francisco and Boston, since its formation in 1979. He has been a managing
general partner of Alta California Partners, L.P. since its formation in 1996.
He

36
<PAGE> 37

is (or has been) on the Board of Directors of many companies, including Tandon
Corporation, Chiron Corporation, Versaflex Delivery Systems, SyQuest Technology,
Stratagene Cloning Systems and Interpore International. He was the founder of
Sofinnova, a venture capital organization in Paris, and in 1976 formed
Sofinnova, Inc. (the U.S. subsidiary of Sofinnova). He holds a Master's Degree
in Electrical Engineering from Ecole Superieure d'Electricite and a Ph.D. in
Economics from the Sorbonne. In 1984, he was awarded the Ordre National du
Merite, and in 1993, he was awarded the Legion of Honor from the French
government in recognition of his career accomplishments.

MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as
Administrator of the United States General Services Administration from July
1993 to March 1996. From 1984 to 1993, Mr. Johnson served as Chairman of the
Board and Chief Executive Officer of Western Digital. Mr. Johnson received a
Bachelor of Business Administration from Clarkson University and a Master of
Business Administration in Industrial Management from the University of
Massachusetts.

MR. LIP-BU TAN became a director of JTS in 1995. He has served as General
Partner of the Walden Group, a venture capital firm, since 1985. He is also the
founder and Chairman of Walden International Investment Group in Asia. Mr. Tan
received a Bachelor of Science degree from Nanyang University, Singapore, a
Master of Science in Nuclear Engineering from the Massachusetts Institute of
Technology and a Master of Business Administration from the University of San
Francisco, where he served on the Advisory Council and the Board of Trustees.
Mr. Tan is also a director of Creative Technology Ltd. and Premisys
Communications, Inc.

MR. JACK TRAMIEL became a director of JTS in June 1996 when Atari merged
with JTS. Mr. Tramiel and a group of associates purchased Atari Corporation May
1984 and Mr. Tramiel served as Atari's Chairman of the Board of Directors until
June 1996. Mr. Tramiel served as Atari's Chief Executive Officer from May 1984
through May 1988.

All directors hold office until the next annual meeting of stockholders at
which their term expires and until their successors have been duly elected and
qualified. Executive officers of JTS are appointed by and serve at the
discretion of the Board of Directors of JTS. There are no family relationships
among any of the directors, officers or key employees of JTS.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of JTS has an Audit Committee, a Compensation
Committee and a Non-Officer Stock Option Committee. The Audit Committee consists
of Messrs. Jack Tramiel and Roger W. Johnson. The Audit Committee makes
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of audits and other services provided by JTS'
independent auditors, and reviews and evaluates JTS' internal audit and control
functions.

JTS' Compensation Committee consists of Messrs. Jack Tramiel, Lip-Bu Tan
and Jean D. Deleage. The Compensation Committee makes recommendations concerning
salaries and incentive compensation, awards stock options to employees and
consultants under the Company's 1995 Stock Option Plan and otherwise determines
compensation levels and performs such other functions regarding compensation as
the Board may delegate.

JTS' Non-Officer Stock Option Committee consists of Mr. David T. Mitchell.
The Non-Officer Stock Option Committee administers the Company's 1995 Amended
and Restated Stock Option Plan, including the granting of any options under such
plan.

37
<PAGE> 38

DIRECTOR COMPENSATION

The members of JTS' Board of Directors do not currently receive any cash
compensation from JTS for their services as members of the Board of Directors or
any committee thereof. Roger W. Johnson, a director of JTS, provides consulting
services to JTS pursuant to a two-year agreement which compensates Mr. Johnson
in the amount of $2,000 per month. Mr. Johnson's consulting agreement expires in
April 1998.

In March 1996, the JTS Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of JTS Common Stock to non-employee directors of JTS
("Non-Employee Directors"). The maximum number of shares of JTS Common Stock
that may be issued pursuant to options granted under the Directors' Plan is
500,000. Pursuant to the express terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Board) who is elected to the
JTS Board for the first time after adoption of the Directors' Plan and each
other Non-Employee Director (other than a compensated Chairman of the Board) who
is reelected to the JTS Board at or after the 1998 stockholders meeting will
automatically be granted an option to purchase 50,000 shares of Common Stock on
the date of his or her election or reelection to the Board. Thereafter, each
Non-Employee Director (other than a compensated Chairman of the Board) will
automatically be granted an option to purchase an additional 50,000 shares of
Common Stock under the Directors' Plan on the date any and all previous options
or stock purchases by such person, either under the Directors' Plan or
otherwise, become fully vested. Neither directors of JTS serving on the date the
Directors' Plan was adopted nor former directors of Atari appointed to the JTS
Board in connection with the Merger have received option grants under the
Directors' Plan, nor will such individual's be eligible to receive such grants
until the 1998 stockholders' meeting.

Outstanding options under the Directors' Plan vest in two equal annual
installments measured from the date of grant. The exercise price of options
granted under the Directors' Plan shall equal the fair market value of the
Common Stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date of grant.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate in March 2006, unless earlier terminated by the
Board.

In the event of the dissolution, liquidation or sale of substantially all
of the assets of JTS, a specified form of merger, consolidation or
reorganization involving JTS or an acquisition transaction resulting in the
change in control of the voting power of JTS' voting securities, options
outstanding under the Plan will automatically become fully vested and will
terminate if not exercised prior to such event.

38
<PAGE> 39

EXECUTIVE COMPENSATION

The following table sets forth for the fiscal years ended February 2, 1997,
January 28, 1996 and January 27, 1995, the compensation paid to or earned by
JTS' Chief Executive Officer and JTS' five other most highly compensated
executive officers whose total annual salary and bonuses exceeded $100,000 as of
February 2, 1997 (together, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- -------------------------------------------------------- ----- --------- -------- ------------
<S> <C> <C> <C> <C>
David T. Mitchell(1).................................... 1997 $ 250,000 -- 1,000,000
President and Chief Executive Officer 1996 226,972 -- --
1995 139,081 -- --
Sirjang L. Tandon(2).................................... 1997 200,000 -- --
Chairman of the Board of Directors and 1996 176,923 -- --
Corporate Technical Strategist 1995 161,538 -- --
Kenneth D. Wing(3)...................................... 1997 225,000 -- 600,000
Executive Vice President, Engineering and Chief
Operating 1996 199,835 -- 100,000
Officer 1995 103,790 -- --
Amit Chokshi(4)......................................... 1997 203,846 -- 200,000
Executive Vice President, Worldwide Materials 1996 104,327 -- 200,000
1995 -- -- --
W. Virginia Walker(5)................................... 1997 225,000 -- 200,000
Executive Vice President, Finance 1996 49,327 -- --
and Administration, Chief 1995 -- -- --
Financial Officer and Secretary
</TABLE>

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

(1) Mr. Mitchell became Chief Executive Officer of JTS in May 1995. Mr. Mitchell
purchased 2,000,000 shares of restricted Common Stock in fiscal 1996 at a
price of $0.25 per share, 250,000 shares of which were immediately vested.
The remaining 1,750,000 shares are subject to a right of repurchase by JTS
which lapses as to 1/48th of such shares monthly, commencing on January 5,
1996. Mr. Mitchell purchased 1,000,000 shares of restricted Common Stock in
fiscal 1997 at a price of $1.00 per share, none of which shares are subject
to a right of repurchase by JTS. The dollar value to Mr. Mitchell of each
such purchase, net of the consideration paid by Mr. Mitchell, was zero on
the date of each such purchase.

(2) Mr. Tandon served as Chief Executive Officer of JTS from February 1994 to
May 1995. Mr. Tandon purchased 1,000,000 shares of restricted Common Stock
in fiscal 1997 at a price of $1.00 per share, none of which shares are
subject to a right of repurchase by JTS. The dollar value to Mr. Tandon of
such purchase, net of the consideration paid by Mr. Tandon, was zero on the
date of purchase.

(3) Mr. Wing became Executive Vice President, Research & Development
Quality/Reliability of JTS in July 1995 and became Executive Vice President,
Engineering and Chief Operating Officer in 1996. Mr. Wing purchased 300,000
shares of restricted Common Stock in fiscal 1996 at a price of $0.25 per
share. Such 300,000 shares are subject to a right of repurchase by JTS which
lapsed with respect to one-eighth of such shares in January 1996 and which
lapses as to 1/48th of such shares monthly thereafter. The dollar value to
Mr. Wing of such purchase, net of the consideration paid by Mr. Wing, was
zero on the date of such purchase. The Company made a $160,000 loan to Mr.
Wing, of which $80,000 of principal and accrued interest was forgiven on
January 1, 1996 and the remainder of which was forgiven on January 1, 1997.
See "Employment Agreement."

(4) Mr. Chokshi became Vice President, Worldwide Operations and Managing
Director of India Operations of JTS in June 1995 and became Executive Vice
President, Worldwide Materials in 1996. Mr. Chokshi terminated his
employment with the Company in July 1997.

(5) Ms. Walker joined JTS in November 1995. Annual compensation for fiscal 1996
reflects salary paid from November 1995 to January 28, 1996. Ms. Walker
resigned from the Company on May 30, 1997.

39
<PAGE> 40

EMPLOYMENT AGREEMENT

In June 1995, Kenneth D. Wing, Executive Vice President, Research &
Development Quality/Reliability who became Executive Vice President, Engineering
and Chief Operating Officer of JTS in 1996, entered into an employment agreement
with JTS which provides for an annual base salary of $225,000, eligibility for
annual bonuses and severance package that, under certain circumstances, provides
that Mr. Wing will continue to receive his base salary until June 1997 in the
event he is terminated prior to such time. In addition, the employment agreement
provided for a $160,000 loan, of which $80,000 of principal and accrued interest
was forgiven on January 1, 1996 and the remainder of which was forgiven on
January 1, 1997.

1995 STOCK OPTION PLAN

In April 1996, JTS amended and restated its 1995 Stock Option Plan (the
"1995 Plan"), which was adopted in March 1995 and subsequently amended in July
1997. Under the 1995 Plan, as amended and restated, an aggregate of 14,000,000
shares of JTS Common Stock have been reserved for issuance upon exercise of
options granted to employees, officers and directors of an consultants to JTS.
As of September 30, 1997, options to purchase approximately 7,449,284 shares of
JTS Common Stock had been granted under the 1995 Plan and were outstanding. The
1995 Plan will terminate in February 2006, unless sooner terminated by the Board
of Directors.

The 1995 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Code and nonstatutory stock
options. The Compensation Committee of the Board of Directors administers the
1995 Plan. The Board of Directors has also established a Non-Officer Stock
Option Committee, consisting of David T. Mitchell, JTS' President, Chief
Executive Officer and Director, with authority to grant sock options to persons
who are not at the time of the grant of the options subject to Section 16 of the
Exchange Act. As used herein with respect to the 1995 Plan, the JTS Board refers
to the Compensation Committee, the Non-Officer Stock Option Committee as well as
to the Board of Directors of JTS. The JTS Board has the authority to select the
persons to whom grants are to be made, to designate the number of shares to be
covered by each option, to establish vesting schedules, to specify the type of
consideration to be paid upon exercise and, subject to certain restrictions, to
specify other terms of the options. The maximum term of options granted under
the 1995 Plan is ten years. Options granted under the 1995 Plan generally are
nontransferable and generally expire three months after the termination of an
optionee's employment, directorship or consulting relationship with JTS. In
general, if an optionee becomes permanently disabled or dies while employed or
retained by JTS, such person's options generally may be exercised up to 12
months after his or her disability and up to 18 months after his or her death.

The exercise price of incentive stock options granted under the 1995 Plan
must equal at least the fair market value of JTS' Common Stock on the date of
grant. The exercise price of nonstatutory stock options granted under the 1995
Plan must equal at least 85% of the fair market value of JTS' Common Stock on
the date of grant. The exercise price of incentive stock options granted to any
person who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant and the terms of these options
cannot exceed five years. Options under the 1995 Plan typically become
exercisable over four years, as to one-eighth of the shares subject to such
options six months after the date of grant and as to 1/48th of such shares each
month thereafter.

The 1995 Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to the 1995
Plan and the class, number of shares and price per share of stock subject to
such outstanding options in the event of stock splits, stock dividends,
recapitalizations and similar events. Under the 1995 Plan, the Board of
Directors has discretion in connection with a merger, consolidation or
liquidation involving JTS to provide that outstanding options shall be
terminated or shall be assumed or otherwise continued or to provide for the
accelerated vesting of outstanding options.

40
<PAGE> 41

401(K) PLAN

On January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving
Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively
bargained employees and employees who are nonresident aliens with no United
States source income. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
matching contributions and profit sharing contributions to the Plan by JTS on
behalf of all participants. JTS has not made any such contributions to date. The
401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by JTS to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn, and
contributions by JTS, if any, are deductible by JTS.

OPTION GRANTS IN FISCAL YEAR 1997

The following table contains information concerning the grant of stock
options under the 1995 Plan to each Named Executive Officer during fiscal 1997:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIALLY REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERMS(3)
OPTIONS FISCAL BASE PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) YEAR(%)(2) ($/SH) DATE 5%($) 10%($)
- ------------------- ------------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David T. Mitchell 1,000,000 14.5% $2.94 1/26/2007 $1,852,200 $4,674,600
Sirjang L. Tandon -- -- -- -- -- --
Kenneth D. Wing 400,000 5.8 4.00 7/14/2006 1,008,000 2,544,000
200,000 2.9 2.94 1/26/2007 370,440 934,920
Amit Chokshi 100,000 1.4 4.00 7/14/2006 252,000 636,000
100,000 1.4 2.94 1/26/2007 185,220 467,460
W. Virginia Walker 100,000 1.4 4.00 7/14/2006 252,000 636,000
100,000 1.4 2.94 1/26/2007 185,220 467,460
</TABLE>

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

(1) Under the 1995 Plan, options granted to employees vest at the rate of
one-eighth at the end of six months from the grant date and an additional
1/48 per month until all options have become vested at the end of four
years' service. In the event an option was granted to an existing employee
of JTS (rather than a newly-hired employee), such option shall vest at the
rate described above based on the grant date of such option.

(2) Based on total grants of options to purchase 6,896,670 shares of Common
Stock.

(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.

41
<PAGE> 42

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
February 2, 1997 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of February 2, 1997:

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
YEAR-END(#) YEAR-END($)(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
David T. Mitchell -- -- 0/1,000,000 0/$435,000
Sirjang L. Tandon -- -- -- --
Kenneth D. Wing 16,667 $82,300 70,833/612,500 $39,063/$221,353
Amit Chokshi -- -- 35,416/316,667 $65,103/$43,700
W. Virginia Walker -- -- 14,583/185,417 0/$43,700
</TABLE>

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

(1) Fair market value of Common Stock at February 2, 1997 ($3.375), minus the
exercise price of the options, multiplied by the number of shares underlying
the options.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

As permitted by the DGCL, JTS' Certificate of Incorporation provides that
no director of JTS will be personally liable to JTS or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to JTS or to its
stockholders, (ii) for acts or omissions not made in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit. In addition, JTS' Bylaws
provide that any director or executive officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to JTS will be indemnified to the fullest extent permitted by the
DGCL.

JTS has entered into indemnification agreements with each of its directors
and executive officers under which JTS has agreed to indemnify each of them
against expenses and losses incurred for claims brought against them by reason
of their being a director or officer of JTS. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.

There is no pending litigation or proceeding involving a director or
officer of JTS as to which indemnification is being sought, nor is JTS aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

42
<PAGE> 43

CERTAIN TRANSACTIONS

Since JTS' inception in February 1994, JTS has maintained significant
business relationships with JTS Technology, Tantec Magnetics, Inc., a California
corporation ("Tantec"), and Maazda Travel, Inc. ("Maazda"). Mr. Sirjang L.
Tandon, JTS' Chairman and Corporate Technical Strategist, or members of his
immediate family, directly or indirectly own controlling equity interests in
both Tantec and Maazda and owned a controlling interest in JTS Technology prior
to JTS' acquisition of a 90% interest in JTS Technology. In fiscal 1996, JTS
Technology provided subassembly and final assembly manufacturing services to JTS
for which JTS had made aggregate payments to JTS Technology of approximately
$13.0 million, and JTS has provided certain equipment on consignment to JTS
Technology with an aggregate value of approximately $4.4 million. Tantec has
provided certain hard disk drive component parts, test equipment and services to
JTS for which JTS had made aggregate payments to Tantec of approximately
$366,000 and $295,000 in fiscal 1995 and 1996, respectively, and JTS sold
certain hard disk drives to Tantec with an aggregate value of approximately
$653,000 in fiscal 1996. During fiscal 1996, JTS made aggregate payments to
Maazda, JTS' principal travel agent, of approximately $100,000.

From February 1994 to February 1995, JTS received bridge loans aggregating
approximately $2.9 million from certain significant JTS stockholders evidenced
by secured convertible notes (the "First Financing Notes"). The First Financing
Notes accrued interest at a rate of 8.5% per annum. All of the First Financing
Notes were canceled and the principal outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with the JTS Series A
Preferred Stock financing in February 1995 (the "First Series A Financing"). JTS
sold an aggregate of 16,200,000 shares of JTS Series A Preferred Stock in the
First Series A Financing for a purchase price of $1.00 per share in exchange for
cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred
Stock in the First Series A Financing included the following:

<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<S> <C> <C> <C>
Entities affiliated with Burr, Egan,
Deleage & Co.(1)..................... 2,500,000 $1,673,374 $ 826,626
Entities affiliated with Sofinnova
Management, L.P.(2).................. 1,000,000 709,349 290,651
Steven L. Kaczeus(3)................... 223,511 -- 223,511
</TABLE>

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

(1) Jean D. Deleage, a director of JTS, is Managing General Partner of Burr,
Egan, Deleage & Co. ("Burr Egan").

(2) Alain L. Azan is a Managing General Partner of three funds affiliated with
Sofinnova Management, L.P. ("Sofinnova").

(3) Steven L. Kaczeus is the Chief Technical Officer of JTS.

In connection with the First Series A Financing and pursuant to that
certain Debt Cancellation Agreement, dated as of February 3, 1995, by and among
JTS, Tantec and Mr. Tandon, JTS issued 2,202,227 shares of JTS Series A
Preferred Stock to Tantec in exchange for the cancellation of $2,202,227 of
indebtedness owed by JTS to Tantec.

In June 1995, JTS received bridge loans aggregating approximately $2.75
million from certain significant JTS stockholders, evidenced by secured
convertible notes (the "Second Financing Notes"). The Second Financing Notes
accrued interest at a rate of 8% per annum. All of the Second Financing Notes
were canceled and the principal amount outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with a JTS Series A
Preferred Stock financing in August 1995 (the "Second Series A Financing"). JTS
sold an aggregate of 12,496,370 shares of JTS Series A Preferred Stock in the
Second

43
<PAGE> 44

Series A Financing for a purchase price of $1.00 per share in exchange for cash
and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the
Second Series A Financing included the following:

<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<S> <C> <C> <C>
Entities affiliated with the Walden
Group of Venture Capital Funds(1).... 3,000,000 $3,000,000 --
Entities affiliated with Burr Egan..... 1,437,500 437,500 1,000,000
David T. Mitchell(2)................... 1,010,196 -- 1,010,196
Entities affiliated with Sofinnova..... 500,000 500,000 --
Steven L. Kaczeus...................... 37,000 37,000 --
</TABLE>

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

(1) Lip-Bu Tan, a director of JTS, is a General Partner of the Walden Group.

(2) David T. Mitchell is the President, Chief Executive Officer and a member of
the Board of Directors of JTS.

During fiscal 1996, in connection with the Technology Transfer and
Licensing Agreement between JTS and Western Digital, JTS provided certain hard
disk drive components to Western Digital, a principal stockholder of JTS, with
an aggregate value of approximately $358,000. In addition, JTS received
aggregate milestone payments of approximately $5.3 million from Western Digital
in fiscal 1996. See "Business -- Initial Efforts to Achieve Market Acceptance of
Hard Disk Drive Products."

In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D.
Wing, Virginia Walker and David B. Pearce in connection with the purchase by
such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and 450,000
shares of JTS Common Stock, respectively, at a purchase price of $0.25 per
share. Each purchaser executed a restricted stock purchase agreement (each, a
"Restricted Stock Purchase Agreement") granting JTS a right of repurchase as to
such shares in the event the purchasers' employment with JTS terminates. With
respect to Mr. Mitchell, 250,000 shares of the JTS Common Stock purchased were
immediately vested, and JTS' repurchase right lapses monthly with respect to the
remainder of such shares at the rate of 1/48th per month. With respect to the
shares purchased by Mr. Wing, JTS' repurchase right lapsed as to one-eighth of
such shares in January 1996 and as to 1/48th of such shares monthly thereafter.
With respect to the shares purchased by Ms. Walker, JTS' repurchase right lapsed
as to one-eighth of such shares in May 1996 and as to 1/48th of such shares
monthly thereafter. With respect to the shares purchased by Mr. Pearce, 253,125
shares of the JTS Common Stock purchased were immediately vested and 14,063
additional shares had vested at the time Mr. Pearce's employment with JTS
terminated. In March 1996, JTS repurchased 182,812 shares of JTS Common Stock
from Mr. Pearce. In addition, the Restricted Stock Purchase Agreements provide
that JTS' repurchase right shall lapse entirely upon certain events following a
change in control of JTS.

From January 1996 to April 1996, JTS received an aggregate of approximately
$2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"),
from certain significant stockholders of JTS. The Bridge Notes accrued interest
at a rate of 10% per annum and were canceled after principal and accrued
interest were paid in full in July 1996. Individuals and entities to whom Bridge
Notes were issued included the following:

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
STOCKHOLDER(S) BRIDGE NOTE ($)
---------------------------------------------------- -------------------
<S> <C>
Tantec.............................................. $ 1,000,000
Entities affiliated with Burr Egan.................. 260,000
Entities affiliated with the Walden Group of Venture
Capital Funds..................................... 200,000
Entities affiliated with Sofinnova.................. 99,900
</TABLE>

In March 1996, JTS made loans to each of David T. Mitchell and Sirjang L.
Tandon in connection with the purchase by such individuals of 1,000,000 shares
of Common Stock each at a purchase price of $1.00 per

44
<PAGE> 45

share. Each purchaser executed a restricted stock purchase agreement. All of the
shares held by each purchaser are immediately vested. The dollar value to each
purchaser, net of the consideration paid, was zero on the date of each such
purchase.

In April 1996, JTS acquired a 90% interest in JTS Technology in exchange
for issuing 1,911,673 shares of JTS Series A Preferred Stock (which converted
into Common Stock on a one-for-one basis upon the closing of the Merger) and a
warrant to purchase 750,000 shares of JTS Common Stock at an exercise price of
$0.25 per share to Lunenburg S.A., an affiliate of Sirjang L. Tandon. Such
warrant is immediately exercisable as to 500,000 shares and becomes exercisable
as to 250,000 shares when certain credit facilities in India are made available
to JTS Technology in the amount of at least $29 million. JTS has a right of
first refusal to purchase the remaining 10% equity interest in JTS Technology,
owned by a family member of Sirjang Lal Tandon, at 10% of the net book value of
JTS Technology at the time of the purchase.

A family member of Sirjang Lal Tandon, JTS' Chairman and Corporate
Technical Strategist, has guaranteed the secured short term borrowings and
secured long term loans of JTS Technology furnished by certain Indian banks. See
Notes 4 and 5 to the Financial Statements to the Hard Disk Drive Division of JTS
Technology (India) Private Ltd.

In September 1996, JTS and Jack Tramiel, a director of the Company, entered
into that certain Agreement for Purchase and Sale of Real Property with
Repurchase Option and related documents, pursuant to which JTS sold to Mr.
Tramiel certain properties in Texas and Southern California in exchange for
$10,000,000. The properties had been acquired by the Company in connection with
its merger with Atari in July 1996. Mr. Tramiel was a director of Atari prior to
the Merger. The property was sold to Mr. Tramiel at fair value and the Company
has an option to repurchase the property one year from the date of sale for
$10,000,000.

The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines, and settlements he or she may
be required to pay in actions or proceedings which he or she is or may be made a
party by reason of his or her position as a director, officer, or other agent of
the Company, and otherwise to the full extent permitted under Delaware law and
the Company's Bylaws.

JTS believes that all of the transactions set forth above were made on
terms no less favorable to JTS than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between JTS and its
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the JTS Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of Directors,
and have been and will be on terms no less favorable to JTS than could be
obtained from unaffiliated third parties.

45
<PAGE> 46

PRINCIPAL STOCKHOLDERS AND SELLING SECURITY HOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997 (unless
otherwise noted) held by (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director and Named Executive Officer of the Company, (iii) the Selling Security
Holders and Registration Rights Holder, and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law. None of the Selling
Security Holders is currently an affiliate of the Company or has had a material
relationship with the Company during the last three years. Except as otherwise
provided below, the address of each person listed below is c/o the Company, 16
Baypointe Parkway, San Jose, California 95134.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SELLING SECURITY HOLDERS AND REGISTRATION
RIGHTS HOLDERS:
Amber Arbitrage LDC(2)................... 14,933,604 0 14,933,604 9.4%
Advantage Fund Limited(3)................ 11,280,226 11,280,226 0 0
Wharton Capital Corporation(4)........... 37,500 37,500 0 0
Capital Ventures International(5)........ 4,392,157 4,392,157 0 0
Jawahar L. Tandon(6)..................... 337,778 337,778 0 0
Devinder & Usha Tandon(7)................ 337,778 337,778 0 0
J. & S. Tandon, LLC...................... 1,013,335 1,013,335 0 0
D. & U. Tandon, LLC...................... 1,013,335 1,013,336 0 0
Jean Deleage(8).......................... 3,937,500 3,937,500 0 0
Brentwood Associates VI, L.P............. 2,602,083 2,602,083 0 0
B. Kipling & Mary Ann Hagopian(9)........ 75,000 75,000 0 0
Mr. & Mrs. Pennington(10)................ 75,000 75,000 0 0
Roger C. Davisson(11).................... 25,000 25,000 0 0
Jos Henkens(12).......................... 3,826,424 3,826,424 0 0
Richard J. Testa......................... 20,000 20,000 0 0
Jasper A. Welch.......................... 10,000 10,000 0 0
Robert Easton............................ 10,000 10,000 0 0
McLane Harper Charitable
Foundation(13)......................... 100,000 100,000 0 0
C. Kevin Landry.......................... 325,000 325,000 0 0
TA Associates Money Purchase Pension Plan
& Trust FBO Katherine Cromwell(14)..... 25,000 25,000 0 0
Jacqueline C. Morby...................... 37,500 37,500 0 0
S. N. Venture Capital, Inc............... 250,000 250,000 0 0
Alain Azan(15)........................... 1,500,000 1,500,000 0 0
Steve Kaczeus, Sr........................ 450,199 260,511 189,688 *
Richard D. DeGolia(16)................... 18,500 18,500 0 0
William Elmore........................... 50,000 50,000 0 0
Roger H. Lustberg........................ 48,000 48,000 0 0
James A. Hamilton........................ 38,750 38,750 0 0
Jeffrey L. DuRocher(17).................. 200,250 200,250 0 0
Michael P. Whalen........................ 22,250 22,250 0 0
James L. Loss............................ 8,750 8,750 0 0
Thomas Harnsberger....................... 7,000 7,000 0 0
</TABLE>

46
<PAGE> 47

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
L. Andrew Gifford........................ 3,500 3,500 0 0
Martin J. Thompson....................... 3,500 3,500 0 0
J. Frederick Simmons..................... 30,000 30,000 0 0
William M. Wardlaw....................... 19,000 19,000 0 0
William H. Emer.......................... 15,000 15,000 0 0
Timothy F. Sylvester..................... 1,000 1,000 0 0
Lip-Bu Tan(18)........................... 1,533,469 1,533,469 0 0
Richard C. DeGolia and Sallie V.D.
DeGolia................................ 6,500 6,500 0 0
Marie-Helene Habert-Dassault............. 100,000 100,000 0 0
Gilde Investment Management(19).......... 544,500 544,500 0 0
Teddy Hadlono............................ 5,000 5,000 0 0
Greg Kudo................................ 20,000 20,000 0 0
David T. Mitchell(20).................... 4,135,196 1,010,196 3,125,000 2.8%
SBCB Holdings............................ 1,000,000 1,000,000 0 0
Goldman Sachs International.............. 4,100,000 4,100,000 0 0
Lunenberg S.A............................ 2,411,673 2,411,673 0 0
Venture Leasing and Lending, Inc......... 346,432 346,432 0 0
WALDEN INVESTORS
600 Montgomery Street Investors.......... 7,448 7,448 0 0
Leo M. Alchimisti........................ 4,297 4,297 0 0
Associates of Huntington................. 4,297 4,297 0 0
Bradford S. Barr......................... 287 287 0 0
Clifford Barr............................ 4,297 4,297 0 0
Gregory E. Barr.......................... 287 287 0 0
Todd A. Barr............................. 287 287 0 0
Kent T. Baum............................. 2,005 2,005 0 0
Robert I. & Peggy O. Beaver.............. 4,297 4,297 0 0
Nicholas J. Bez.......................... 14,323 14,323 0 0
Eugene D. Brody.......................... 4,297 4,297 0 0
Keith A. Brooks.......................... 2,865 2,865 0 0
Trustee, Keith A. Brooks, DMD Self-
Employed Profit Sharing Plan
Hazel D. Burger.......................... 859 859 0 0
Camir Investment Company................. 4,297 4,297 0 0
Chester & Catherine Chastek.............. 4,297 4,297 0 0
Cox Living Trust......................... 2,149 2,149 0 0
Cummings Family Partnership.............. 8,594 8,594 0 0
William Cvengros......................... 573 573 0 0
Henry S. Dakin........................... 8,594 8,594 0 0
Davis Family Trust....................... 4,297 4,297 0 0
Under Agreement Dtd 1/15/74
Paul Ginsburg, Trustee
DBD Investment........................... 4,297 4,297 0 0
</TABLE>

47
<PAGE> 48

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Leonard S. Eber & Robin G. Eber.......... 716 716 0 0
and Successors, in trust as Trustees of
the Leonard S and Robin G Eber Family
Trust Dtd 9/14/84
R. Jay Engel............................. 2,149 2,149 0 0
Profit Sharing Plan & Trust
R. Jay Engel............................. 2,149 2,149 0 0
Pension Plan & Trust
1st Trust & Co., Custodian............... 2,865 2,865 0 0
FBO William W. Fay IRA Rollover
Joseph Fragola........................... 358 358 0 0
Richard N. Frank......................... 4,297 4,297 0 0
as Trustee and the Successor Trustees, of
the Richard N. Frank Living Trust dtd
1/21/88
Richard Roger Frank...................... 716 716 0 0
Ralph Frank, Jr. ........................ 716 716 0 0
Trustee of the Ralph Frank Jr. Trust
Dated 10/25/91
Susan A. Frank........................... 716 716 0 0
The Friedman Group Ltd................... 2,005 2,005 0 0
F&R Rubenstein Partners, L.P............. 1,432 1,432 0 0
J&R Rubenstein Partners, L.P............. 1,432 1,432 0 0
Eugene Garfinkle and Jack M. Garfinkle... 2,865 2,865 0 0
as Tenants-In-Common
Willis Gelston........................... 358 358 0 0
Bernard Gore............................. 716 716 0 0
Yoel I. Haller........................... 716 716 0 0
as Trustees of the Yoel I. & Carol M.
Haller
By-Pass Trust dated 1/22/88
Harriet Hansen Living Trust.............. 5,729 5,729 0 0
DTD 12/2/93 Harriet Hansen Trustee
James B. Hansen.......................... 2,865 2,865 0 0
Robert J. Harrison....................... 2,149 2,149 0 0
Trustee of the Robert J. Harrison Living
Trust
Harris Trust & Savings Bank as Trustee... 5,729 5,729 0 0
for the Robbins & Myers, Inc. Pension
Trust
Ann S. Hedges Revocable Trust, dtd
6/22/93................................ 2,148 2,148 0 0
Ann S. Hedges, Trustee
Benjamin Hedges.......................... 2,148 2,148 0 0
George R. Hermach........................ 1,432 1,432 0 0
Howard Properties Money Purchase
Pension................................ 2,148 2,148 0 0
Plan and Trust, DTD 5/30/76
William L. & Nancy R. Hudson............. 1,432 1,432 0 0
Nancy Tilden Jackman..................... 2,865 2,865 0 0
Norman C & Marie H. Jack................. 4,297 4,297 0 0
Trustees UDT Living Revocable Trust DTD
12/11/86
Dennis Jaffe............................. 716 716 0 0
KL & P Investments....................... 4,297 4,297 0 0
Daniel Koshland.......................... 4,297 4,297 0 0
</TABLE>

48
<PAGE> 49

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Douglas Koshland......................... 4,297 4,297 0 0
Marian Koshland.......................... 4,297 4,297 0 0
Trust under the will of Anna Krieger..... 4,297 4,297 0 0
Alfred Krieger et al, Trustees
Marvin Kristan........................... 716 716 0 0
Kim Rosen................................ 1,146 1,146 0 0
Luria Family Trust....................... 4,583 4,583 0 0
Maltzman Investment Company.............. 2,865 2,865 0 0
Michael S. Orwitz........................ 1,146 1,146 0 0
Pacific Mutual Life Insurance............ 57,292 57,292 0 0
MARBERT III.............................. 859 859 0 0
Lorraine F. Petitfils.................... 4,297 4,297 0 0
Pomona College........................... 21,485 21,485 0 0
Gary B. Rappaport........................ 1,432 1,432 0 0
William H. Roberts....................... 2,148 2,148 0 0
Robland Company.......................... 4,297 4,297 0 0
Scott A. & Louise S. Rogers.............. 5,729 5,729 0 0
Trustees Scott & Louise Rogers Family
Trust dtd 8/25/89
Susan S. Rosenberg....................... 716 716 0 0
Andrew Rosenblatt and Erica Wilner
Rosenblatt............................. 358 358 0 0
Randall A. Rose.......................... 1,432 1,432 0 0
Robert S. Rubenstein..................... 1,432 1,432 0 0
Joseph Schwartz 11/5/90 Trust............ 2,148 2,148 0 0
Joseph Schwartz, Trustee
LLewelyn A. & Mary J. Shelton............ 2,865 2,865 0 0
Trustees LLewelyn A. & Mary J. Shelton
Revocable Living Trust Dated 12/12/90
George D. Smith Jr....................... 5,729 5,729 0 0
Pamela D. Smith.......................... 1,074 1,074 0 0
Spar Investment Company.................. 4,297 4,297 0 0
James H. Stein........................... 1,218 1,218 0 0
Trustee of the Stein Trust dtd 6/20/89
Thorn EMI Venture Fund Ltd............... 7,162 7,162 0 0
Trust Company of America................. 716 716 0 0
Custodian FBO Kenneth Harley, MD IRA
William B. & Michelle Turner............. 1,432 1,432 0 0
USAIR, Inc. Retirement Trust............. 45,834 45,834 0 0
Helen M. Ventura......................... 11,458 11,458 0 0
Trustee Helen M. Ventura Trust 10/27/92
Randolph D. West......................... 2,865 2,865 0 0
Laurie Frank Wilson...................... 716 716 0 0
Lyman P Wood, Jr......................... 2,865 2,865 0 0
Treva Wood Burger........................ 1,432 1,432 0 0
Nancy B. Crater.......................... 1,432 1,432 0 0
Marjorie B. Brent........................ 1,432 1,432 0 0
</TABLE>

49
<PAGE> 50

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
George Sarlo Revocable Trust............. 41,508 41,508 0 0
George Sarlo, Trustee UTD 12/23/91
Arthur S. Berliner....................... 41,508 41,508 0 0
Trustee Arthur S. Berliner Family Trust
Date of Trust 4/24/85
Theodore Wright.......................... 12,744 12,744 0 0
VAN FRANK VENTURES
Mark M. Buerk............................ 76 76 0 0
Arthur Clumeck........................... 17 17 0 0
Custodian for Michael S. Clumeck
Arthur Clumeck........................... 17 17 0 0
Custodian for Annemarie Clumeck
Arthur Clumeck........................... 17 17 0 0
Custodian for Anthony A. Clumeck
Janine F. Florence....................... 227 227 0 0
Janine F. Florence....................... 76 76 0 0
Trustee for Brittany Barker UDT 10/14/83
Janine F. Florence....................... 76 76 0 0
Trustee for Michele Marikos UDT 10/14/83
Carole Fortin............................ 227 227 0 0
Richard N. Frank......................... 668 668 0 0
Trustee of the Richard N. Frank Living
Trust dated 1/21/88
Richard R. Frank......................... 437 437 0 0
Susan A. Frank........................... 412 412 0 0
Robert V. Fuelling....................... 25 25 0 0
Thomas F. Fuelling....................... 25 25 0 0
Thomas N. and Sharon W. Fuelling......... 9 9 0 0
Trustees of the Fuelling Family Trust
dated 4/30/91
Lillian Goodman.......................... 42 42 0 0
Walter Goodman........................... 58 58 0 0
Mary K. Lynch............................ 25 25 0 0
Lynda Lou Marikos........................ 134 134 0 0
Denise L. Petitfils...................... 668 668 0 0
Lorraine F. Petitfils.................... 986 986 0 0
Trustee UDT 1/19/89
Louis R. Petitfils....................... 555 555 0 0
Trustee of the Louis R. Petitfils Living
Trust DUA 10/18/95
Suzanne G. Stolnitz...................... 42 42 0 0
Georgie Van de Kamp, John Van de Kamp,
Gretchen Ward and Richard N. Frank....... 96 96 0 0
Trustees UW 12/21/76 FBO Harry J. and
Georgie Van de Kamp
John Van de Kamp......................... 225 225 0 0
Christopher & Gretchen Ward.............. 107 107 0 0
Gretchen Ward............................ 70 70 0 0
Laurie F. Wilson......................... 412 412 0 0
</TABLE>

50
<PAGE> 51

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NEEDHAM CAPITAL PARTNERS, L.P.
Mark S. Ain.............................. 5,250 5,250 0 0
Aweida Ventures.......................... 8,750 8,750 0 0
Bancroft Investments..................... 13,825 13,825 0 0
Richard W. Barrett....................... 3,500 3,500 0 0
George Boyadjieff........................ 1,750 1,750 0 0
Wiley L. Carter & Nancy M. Carter........ 3,500 3,500 0 0
Trustees of the Wiley L. Carter & Nancy
M. Carter Trust
Saul S. Cohen IRA........................ 3,500 3,500 0 0
Smith Barney Shearson, IRA Rollover
Custodian
T.J. Coolidge, Jr........................ 1,400 1,400 0 0
James M. & Nancy Coriston................ 3,500 3,500 0 0
Wilfred J. Corrigan...................... 17,500 17,500 0 0
Trustee of the Corrigan Family Trust
U/D/T
dated June 12, 1984
Peter O. Crisp........................... 7,000 7,000 0 0
Lawrence F. DeGeorge..................... 7,000 7,000 0 0
Dench Living Trust dtd June 16, 1994..... 8,750 8,750 0 0
Kenneth L. & Wendy H. Epstein............ 1,750 1,750 0 0
Thomas W. Ford........................... 8,750 8,750 0 0
Delaware Charter Guarantee & Trust....... 1,750 1,750 0 0
FBO Jerry B. Gin
Delaware Charter Guarantee & Trust....... 1,750 1,750 0 0
FBO Peggy B. Gin
D.M. Laurice & M.M. Rosati............... 3,500 3,500 0 0
TTEES WSGR Retirement Plan FBO John
Goodrich
NBR-Needham Partnership.................. 8,750 8,750
John M. Hennessy......................... 3,500 3,500 0 0
J. Tomilson Hill......................... 8,750 8,750 0 0
Gregory K. & Mary Chomenko Hinckley...... 700 700 0 0
David L. & Nancy Olsen House............. 3,500 3,500 0 0
Brian A. Humphries....................... 1,050 1,050 0 0
Syed H. Iftikar.......................... 3,500 3,500 0 0
Roger W. Johnson......................... 3,500 3,500 0 0
Chad W. Keck............................. 5,250 5,250 0 0
Richard A. Kertson....................... 1,400 1,400 0 0
United Missouri Bank, N.A................ 3,500 3,500 0 0
Trustee of Brobeck Phleger & Harrison
Retirement Savings Trust FBO Ed Leonard
Employee Benefit Division
The Levy Family Trust, Dated 2/18/83..... 5,250 5,250 0 0
John C. Lewis............................ 7,000 7,000 0 0
Constantine Macricostas.................. 8,750 8,750 0 0
James I. Magid........................... 3,500 3,500 0 0
Smith Barney Custodian FBO............... 1,750 1,750 0 0
Jay L. Margulies IRA
</TABLE>

51
<PAGE> 52

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
E. Stanton McKee, Jr..................... 5,250 5,250 0 0
John J. McManus.......................... 1,750 1,750 0 0
James A. McNeill......................... 3,500 3,500 0 0
George M. Merriman....................... 3,500 3,500 0 0
John C. Michaelson....................... 2,625 2,625 0 0
J. Roger Moody........................... 8,400 8,400 0 0
Gordon E. & Betty I. Moore............... 7,000 7,000 0 0
Trustees of the Gordon E. & Betty I.
Moore Trust U/A dated January 20, 1993
George A. Needham........................ 2,625 2,625 0 0
Peter G. Pantazelos...................... 3,500 3,500 0 0
John Pappajohn........................... 3,500 3,500 0 0
Suhas S. Patil........................... 3,500 3,500 0 0
Joseph R. Perella........................ 5,250 5,250 0 0
James P. Poitros......................... 3,500 3,500 0 0
Ryal R. Poppa............................ 8,750 8,750 0 0
Xanadu Partners.......................... 8,750 8,750 0 0
James L.D. Roser......................... 3,500 3,500 0 0
Tincium Investors........................ 8,750 8,750 0 0
Jon S. Saxe & Mrs. Myrna G. Marshall, H &
W...................................... 3,500 3,500 0 0
Richard C. Seaver........................ 5,530 5,530 0 0
Trustee of the Richard C. Seaver Living
Trust UA 07/31/91
Seaver Partners.......................... 8,295 8,295 0 0
A. Brooke Seawell........................ 3,500 3,500 0 0
Shoemakers Family Partners, L.P.......... 8,750 8,750 0 0
Weiskopf, Silver & Co.................... 7,000 7,000 0 0
Prithipal Singh & Rajinder K. Singh...... 3,500 3,500 0 0
Trustees, Singh Trust UDT April 17, 1986
J. Larry & Cheryl L. Smart............... 3,500 3,500 0 0
Robert A. Smith.......................... 1,400 1,400 0 0
Alfred J. Stein.......................... 3,500 3,500 0 0
Walter W. & Carol H. Straub.............. 3,500 3,500 0 0
C.S. & Nan Y. Strauch Living Trust dated
October 26, 1982....................... 3,500 3,500 0 0
Richard J. Testa......................... 3,500 3,500 0 0
Steven B. Thornton Trust of 1990......... 3,500 3,500 0 0
Trimble Navigation Limited Non Qualified
Deferred Compensation Plan FBO Charles R.
Trimble.................................. 3,500 3,500 0 0
Gregory A. Tymn.......................... 1,750 1,750 0 0
Leslie L. & Judy K. Vadasz Trust......... 3,500 3,500 0 0
Steven R. Wade........................... 17,500 17,500 0 0
Ralph B. Wagner.......................... 3,500 3,500 0 0
Richard J. & Louise R. Wiesner........... 3,500 3,500 0 0
Trustees of The Wiesner Family 1992
Living Trust U/A Dated 12/30/92
</TABLE>

52
<PAGE> 53

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Robert C. Wilson......................... 17,500 17,500 0 0
Paul J. van der Wansem................... 3,500 3,500 0 0
Robert B. Calhoun, Jr.................... 3,500 3,500 0 0
Gabelli Funds, Inc....................... 8,750 8,750 0 0
Needham & Company,Inc.................... 140,000 140,000 0 0
WALDEN CAPITAL PARTNERS II, L.P.
Ann Hedges Revocable Trust Dtd 6/22/93... 2,464 2,464 0 0
Ann S. Hedges, Trustee
Anthony Michael Glassman................. 4,929 4,929 0 0
Arba, a California General Partnership,
Pel.................................... 4,929 4,929 0 0
Associates of Huntington................. 4,929 4,929 0 0
Barry Goldstein.......................... 4,929 4,929 0 0
Barbara Ancona........................... 4,929 4,929 0 0
Betty Jane Schuss Trust.................. 9,858 9,858 0 0
C. Phillip Chapman & Donna R. Chapman.... 2,464 2,464 0 0
Caryn A. Peck............................ 4,929 4,929 0 0
Chais 1991 Family Trust.................. 4,929 4,929 0 0
Stanley Chais & Pamela Chais, Trustee
Charles S. G. Bolton..................... 4,929 4,929 0 0
Charles Hsu.............................. 986 986 0 0
Chester & Catherine Chastek.............. 9,858 9,858 0 0
Chong-Moon Lee & Reiko Takahashi Lee..... 4,929 4,929 0 0
Christopher Cochrane..................... 4,929 4,929 0 0
Columbia General Investments, L.P........ 4,929 4,929 0 0
Cypress VI Partners...................... 4,929 4,929 0 0
David Jackson Separate Property Trust UTD
2/13/86................................ 4,929 4,929 0 0
Dave Jackson Trustee
David S. Lambert & Carol A. Lambert...... 2,464 2,464 0 0
David S. Steiner......................... 4,929 4,929 0 0
Carlo Cannell & Jennifer B. Cannell...... 4,929 4,929 0 0
Davis Family Trust Dtd 1/15/74........... 4,929 4,929 0 0
Paul Ginsburg, Trustee
Doug Carlston............................ 4,929 4,929 0 0
Elder Family Trust UTD 12/2/88........... 4,929 4,929 0 0
William W.R. Elder & Gloria L.S. Elder,
Trustee
Elton Blum............................... 4,929 4,929 0 0
Ernest C. Goggio......................... 4,929 4,929 0 0
Eugene D. Brody.......................... 4,929 4,929 0 0
Francis O. Scarpulla..................... 4,929 4,929 0 0
Freidman Family Rev. Trust UTD 8/2/89.... 9,858 9,858 0 0
Stanley J. Freidman & Mary W. Freidman
Friend Friend & Friend................... 4,929 4,929 0 0
George J.W. Goodman...................... 4,929 4,929 0 0
Glenn Doshay & Karan Doshay.............. 4,929 4,929 0 0
</TABLE>

53
<PAGE> 54

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Goldman-Valeriote Family Trust UDT
11/15/95............................... 4,929 4,929 0 0
Ken Goldman & Susan Goldman
Guy T. & Jean E. Saperstein.............. 19,715 19,715 0 0
Harriet Hansen Living Trust Dtd
12/2/93................................ 4,929 4,929 0 0
Harriet Hansen, Trustee
Herb Alpert.............................. 9,858 9,858 0 0
Herbert and Ellen Goldstein Family
Trust.................................. 4,929 4,929 0 0
Jack M. & Eugene Garfinkle, as TIC
HMSS Investments......................... 4,929 4,929 0 0
Howard Properties Money Purchase
Pension................................ 4,929 4,929 0 0
Irving Loube............................. 4,929 4,929 0 0
J. Stephen & Nancy Thornborrow........... 2,464 2,464 0 0
James B. Hansen & Betsy A. Hansen Living
Trust.................................. 4,929 4,929 0 0
James B. Hansen & Betsy A. Hansen, Co-
Trustees
James Usdan.............................. 4,929 4,929 0 0
Jerome S. Moss........................... 9,858 9,858 0 0
Joseph Blum.............................. 4,929 4,929 0 0
K & L Properties......................... 4,929 4,929 0 0
Keith A. Brooks, D.M.D., Self Employed
Profit Sharing Plan.................... 4,929 4,929 0 0
Ken J. McEwan............................ 4,929 4,929 0 0
Kent T. Baum............................. 4,929 4,929 0 0
Laurence E. & Elenor Myers Family
Trust.................................. 4,929 4,929 0 0
Laurence E. Myers, Trustee
Lawrence K. Samuels...................... 4,929 4,929 0 0
Le Hagen Partners, Ltd................... 4,929 4,929 0 0
Lee J. Schweichler & Ann W.
Schweichler............................ 4,928 4,928 0 0
Lorraine F. Petitfils Trust UTD Dtd
1/9/89
Lorraine F. Petitfils.................... 2,957 2,957 0 0
Lung Yeh Chia & Ling Wang Heuy........... 4,929 4,929 0 0
Marc L. Abramowitz & Anita L.
Abramowitz............................. 4,929 4,929 0 0
Marshall George Cox...................... 4,929 4,929 0 0
Maryles Casto............................ 4,928 4,928 0 0
Mathide Albers........................... 4,929 4,929 0 0
Nicholas J. Bez.......................... 7,886 7,886 0 0
Norman C. Jack & Marie H. Jack Living
Trust.................................. 5,915 5,915 0 0
Norman C. Jack & Marie H. Jack, Trustees
Prudential Securities C/F Norman Kidd.... 4,929 4,929 0 0
Paul & Kathryn Leitner................... 2,464 2,464 0 0
Paul Coghlan............................. 2,464 2,464 0 0
Paul Lee................................. 4,929 4,929 0 0
Pauline Lo Alker......................... 4,929 4,929 0 0
Peter K. Wagner, Jr...................... 4,929 4,929 0 0
Richard Carpenter........................ 4,929 4,929 0 0
Richard D. Young......................... 4,929 4,929 0 0
</TABLE>

54
<PAGE> 55

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Richard N. Frank Living Trust Dtd
1/21/86................................ 2,957 2,957 0 0
Richard N. Frank, Trustee
Robert J. Schweich....................... 4,929 4,929 0 0
Trustee of the Charlos Richard Rose
Irrevocable Trust dtd 11/27/96
Robbins & Meyers, Inc. Master Pension
Trust.................................. 19,715 19,715 0 0
Robert A. Lanford........................ 2,464 2,464 0 0
Robert S. Rubenstein..................... 4,929 4,929 0 0
Robert Schweich.......................... 4,929 4,929 0 0
Roger E. Susi............................ 4,929 4,929 0 0
Singapore Technologies Pte Ltd........... 19,715 19,715 0 0
Stephen C. Johnes........................ 4,929 4,929 0 0
Steve Eskenazi........................... 4,929 4,929 0 0
Steve Sanghi............................. 2,464 2,464 0 0
Steven Berger & Paula Hughmanik.......... 4,929 4,929 0 0
Stewart J. Bonn & Laurel V. Bonn......... 4,929 4,929 0 0
Targa Capital, Ltd....................... 3,943 3,943 0 0
The Anges Victoria Linhardt 1994
Revocable.............................. 2,957 2,957 0 0
Anges Linhardt, Trustee
The Corrigan Family Partners, a CA Ltd
P...................................... 9,858 9,858 0 0
The Friedmann Group, Ltd................. 4,929 4,929 0 0
The Lauck Family 1994 Revocable Trust
D...................................... 2,464 2,464 0 0
J. Steven & Kathryn L. Lauck, TRUSTS
Third Amended Trust of Gregory Lee
Coll................................... 4,929 4,929 0 0
Timothy Blair Billington................. 2,464 2,464 0 0
Trust Agreement Dtd 11/1/93.............. 4,929 4,929 0 0
FBO William J. & Marilee J. Schroeder
Vencap Holdings (1992) Pte. Ltd.......... 197,155 197,155 0 0
Wayne A. Ricciardi & Wendy Ricciardi..... 4,929 4,929 0 0
Werner F. Wolfen......................... 4,928 4,928 0 0
George Sarlo Revocable Trust............. 1,541 1,541 0 0
Arthur S. Berliner Family Trust.......... 1,541 1,541 0 0
William P. Tai........................... 1,064 1,064 0 0
Charles Hsu.............................. 700 700 0 0
Verona Ventures, Inc..................... 175 175 0 0
M.E.K. Holdings Corporation.............. 175 175 0 0
Shirley Chan Wong........................ 175 175 0 0
W S INVESTMENT
Sonsini, Larry W......................... 2,904 2,904 0 0
Bremond, Harry B......................... 434 434 0 0
Goodrich, John B......................... 1,049 1,049 0 0
Rosati, Mario M.(21)..................... 6,386 6,386 0 0
Bertelsen, Mark A........................ 1,066 1,066 0 0
Schneiderman, Arthur F................... 780 780 0 0
Saper, Jeffrey D......................... 1,170 1,170 0 0
Laurice, Douglas M....................... 286 286 0 0
Compton, Charles T.C..................... 547 547 0 0
</TABLE>

55
<PAGE> 56

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Jack, Robert B........................... 547 547 0 0
Massey, Henry............................ 1,084 1,084 0 0
O'Brien, Bradford C...................... 581 581 0 0
Stewart, Blair W......................... 321 321 0 0
Ladra, Michael A......................... 667 667 0 0
O'Brien, Judith M........................ 607 607 0 0
Vanyo, Bruce G........................... 1,386 1,386 0 0
Currie, Francis S........................ 997 997 0 0
Taylor, Barry E.......................... 1,136 1,136 0 0
Schatz, Steven M......................... 1,136 1,136 0 0
Bradley, Donald E........................ 737 737 0 0
Collom, Douglas H........................ 581 581 0 0
Diboise, James A......................... 910 910 0 0
Latta, Robert P.......................... 910 910 0 0
McGlynn, J. Casey........................ 1,066 1,066 0 0
Kurpius, James A......................... 254 254 0 0
Laboskey, Peter.......................... 416 416 0 0
Walker, Ann Yvonne....................... 451 451 0 0
Feldman, Robert P........................ 797 797 0 0
Summers, Debra S......................... 564 564 0 0
Austin, Alan K........................... 1,136 1,136 0 0
Amantea, Denise M........................ 425 425 0 0
Bochner, Steven E........................ 833 833 0 0
Johnson, Terry T......................... 737 737 0 0
Morgan, Allen L.......................... 650 650 0 0
Roth, Ronald M........................... 477 477 0 0
Braham, Tor R............................ 797 797 0 0
Clarkson, Robert T....................... 677 677 0 0
DeFilipps, Thomas C...................... 485 485 0 0
Feldman, Boris........................... 850 850 0 0
Haviland, Dana D......................... 451 451 0 0
Parnes, Mark G........................... 451 451 0 0
Plant, Harry K........................... 547 547 0 0
Roos, John V............................. 685 685 0 0
Humphreys, Ivan H........................ 547 547 0 0
Sterling, Marcia Kemp (T)................ 485 485 0 0
Steuer, David............................ 667 667 0 0
Char, Richard J.......................... 547 547 0 0
Chen, Peter P............................ 434 434 0 0
Creighton, Susan Abouchar................ 547 547 0 0
Danaher, Michael J....................... 364 364 0 0
Fore, John A............................. 529 529 0 0
Kopel, Jared L........................... 434 434 0 0
Sparks, Timothy J........................ 547 547 0 0
Reback, Gary L........................... 1,091 1,091 0 0
</TABLE>

56
<PAGE> 57

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fockler, Herbert P....................... 408 408 0 0
Locker, Nina F........................... 434 434 0 0
Scott, Timothy T......................... 451 451 0 0
Durant, Steve C.......................... 399 399 0 0
Petkanics, Donna M....................... 364 364 0 0
Segre, David J........................... 364 364 0 0
Siegel, Kenneth M........................ 364 364 0 0
Wolff, Neil J............................ 364 364 0 0
Zeprun, Howard S......................... 364 364 0 0
Barclay, Michael......................... 477 477 0 0
O'Donnell, Michael J..................... 547 547 0 0
Schloss, Harvey.......................... 254 254 0 0
Clark, Kenneth........................... 382 382 0 0
Alter, Aaron J........................... 321 321 0 0
Birn, Jerome F. Jr....................... 321 321 0 0
Degolia, Richard C....................... 329 329 0 0
Flint, Elizabeth R....................... 321 321 0 0
Mailliard, Page.......................... 321 321 0 0
Smilan, Laurie B......................... 321 321 0 0
Barry, Henry V........................... 564 564 0 0
Arrieta, Aileen.......................... 286 286 0 0
Axelrad, Jonathan........................ 286 286 0 0
Berger, David............................ 286 286 0 0
Berson, Steven........................... 286 286 0 0
Bonham, Mark............................. 286 286 0 0
Bridges, Andrew.......................... 286 286 0 0
Mitchell, Christopher.................... 286 286 0 0
Sheridan, John........................... 286 286 0 0
Shulman, Ron............................. 607 607 0 0
Strawbridge, James....................... 286 286 0 0
Wilson, Kenneth.......................... 286 286 0 0
Bell, Suzanne............................ 81 81 0 0
Brownell, Robert......................... 81 81 0 0
Cervantes, Marta......................... 81 81 0 0
Priest, Gregory.......................... 81 81 0 0
Caroll, Megan J.......................... 82 82 0 0
Fennell, Chris F......................... 82 82 0 0
Husick, Gail Clayton..................... 82 82 0 0
Jacobs, James L.......................... 81 81 0 0
Klein, Thomas C.......................... 81 81 0 0
Mesel, Noah D............................ 82 82 0 0
Rabson, Michael.......................... 82 82 0 0
Saunders, Elizabeth M.................... 82 82 0 0
Schultheis, Patrick J.................... 82 82 0 0
Stern, Roger............................. 82 82 0 0
</TABLE>

57
<PAGE> 58

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Winawer, Lloyd........................... 82 82 0 0
Cassidy, Bernard J....................... 82 82 0 0
Eggleton, Keith E........................ 82 82 0 0
Fabela, Robert R......................... 82 82 0 0
Good, Sarah A............................ 82 82 0 0
Harrington, Sara......................... 82 82 0 0
Hetherington, Michael.................... 82 82 0 0
Herest, Jeffrey A........................ 82 82 0 0
Horii, Dwayne M.......................... 82 82 0 0
Jackson, Meredith S...................... 82 82 0 0
Kirkman, Catherine S..................... 82 82 0 0
Krohn, Douglas K......................... 82 82 0 0
Lambert, Joan E.......................... 82 82 0 0
Larson, David L.......................... 82 82 0 0
Priebe, David............................ 82 82 0 0
Skaer, Susan I........................... 82 82 0 0
Suffoletta, J. Robert.................... 82 82 0 0
Theodorakis, D. John..................... 82 82 0 0
Wadsworth, Clyde J....................... 82 82 0 0
WALDEN TECHNOLOGY VENTURES II, L.P.
Vencap Holdings (1992) Pts, Ltd. ........ 99,000 99,000 0 0
George Sarlo Revocable Trust, George
Sarlo,................................. 247 247 0 0
Trustee UTD 12/23/91
Arthur S. Berliner, Trustee, Arthur S.
Berliner............................... 247 247 0 0
Family Trust Date of Trust 4/24/95
William Tai.............................. 160 160 0 0
Charles Hau.............................. 100 100 0 0
WALDEN VENTURES LP
- -----------------------------------------
Angela Arnold............................ 738 738 0 0
Emilio Bassini........................... 553 553 0 0
Mary Armstrong Warner-Berkes, Guardian
for.................................... 692 692 0 0
Edwin T. Warner, a minor
Nicholas J. Bez.......................... 22,129 22,129 0 0
Clare B. Cummings........................ 3,688 3,688 0 0
Elizabeth Bakin Trustee of the Marital... 1,107 1,107 0 0
Deduction Trust Established under the
Richard
L. & Elizabeth C. Dakin Revoable trust
dated 4/30/90
Henry S. Datkin.......................... 5,532 5,532 0 0
Elizabeth Dakin, Trustee of the
Survivor's............................. 4,426 4,426 0 0
Trust Established under the Richard L.
&
Elizabeth C. Dakin Revocable Trust
dated 4/30/90
Davidge Capital Company.................. 1,844 1,844 0 0
William Davidge, Trustee for the William
H...................................... 1,844 1,844 0 0
Davidge Trust, dated 7/31/78
</TABLE>

58
<PAGE> 59

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER THE OFFERING
TO THE BEING -------------------------
OFFERING(1) OFFERED NUMBER(1) PERCENT(1)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ann S. Hedges Revocable Trust dated
6/22/93,............................... 2,766 2,766 0 0
Ann S. Hedges Trustee
Benjamin Hedges.......................... 2,766 2,766 0 0
Richard Helzberg......................... 2,766 2,766 0 0
Sandra Hunter, Trustee of the Sandra
Hunter................................. 2,766 2,766 0 0
Trust dated 11/21/88
Lurla Family Trust, Sol B. Lurla
Trustee................................ 5,532 5,532 0 0
Randall Rose............................. 2,766 2,766 0 0
Robert S. Rubenstein..................... 2,766 2,766 0 0
William P. Tai........................... 2,766 2,766 0 0
Betty Jane Schuss Trust, dated 5/13/76... 17,519 17,519 0 0
A.G. Edwards & Sons, Custodian for....... 2,766 2,766 0 0
Richard B. Stern Rollover IRA Account
Wachovia Bank & Trust Co. NS Trustee
for.................................... 18,441 18,441 0 0
USAIR Airlines Employee Pension Fund
Helen M. Ventura, Trustee; Helen M.
Ventura................................ 14,753 14,753 0 0
1992 Trust dated 10/27/92
Peter Wanger............................. 2,766 2,766 0 0
Dr. H.J. Murell, as Trustee for Frederic
W. Warner, IV.......................... 692 692 0 0
Dr. H.J. Murrell, as Trustee for Narclasa
Thorne Warner.......................... 692 692 0 0
Dr. H.J. Murrell, as Trustee for Victoria
Ward Warner............................ 692 692 0 0
Walden Management Corporation Pension
Trust FBO Arthur S. Berliner........... 2,766 2,766 0 0
Randolph D. West......................... 2,766 2,766 0 0
Calmont & Co. for Zellerbach Family
Fund................................... 5,164 5,164 0 0
Taylor and Co. Jennie B. Zellerbach,
Trust Dated May 14, 1975 Sanwa Bank
California, Trustee Attn: Susan
Hochberg............................... 3,688 3,688 0 0
Arthur S. Berliner, Trustee; Arthur S.
Berliner Family Trust.................. 26,932 26,932 0 0
George Sario Revocable Trust; George S.
Sarlo Trustee.......................... 26,932 26,932 0 0
----------- ---------- ---------- -----
Total Shares................... 63,654,172 56,392,046 0 0
========= ========= ========= ========
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS:
Jack Tramiel(22)......................... 12,602,713 0 12,594,616 8.0%
Sirjang L. Tandon(23).................... 7,761,673 2,411,673 5,350,000 4.9%
David T. Mitchell(24).................... 4,218,529 1,010,196 3,208,333 2.7%
Jean D. Deleage(25)...................... 3,937,500 3,937,500 0 0
Lip-Bu Tan(26)........................... 1,531,973 1,531,973 0 0
Steven L. Kaczeus(27).................... 468,949 260,511 208,438 *
Kenneth D. Wing(28)...................... 383,334 0 383,334 *
Roger W. Johnson(29)..................... 28,500 0 28,500 *
Joseph A. Prezioso(30)................... 18,333 0 18,333 *
</TABLE>

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<PAGE> 60

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

* Less than 1% of the outstanding Common Stock.

(1) Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Beneficial ownership is determined in accordance
with the rules of the Securities Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of Common
Stock subject to options, warrants and convertible notes currently
exercisable or convertible, or exercisable or convertible within 60 days,
are deemed outstanding, including for purposes of computing the percentage
of the person holding such option, but not for purposes of computing the
percentage of any other holder. Based on 158,125,559 shares of Common Stock
outstanding as of September 30, 1997.

(2) Beneficial ownership of Common Stock does not include 30,000,016 shares of
Common Stock over which Amber has shared voting power pursuant to the terms
of an irrevocable proxy (the "Series D Proxy") granted to a designee of
Amber by certain stockholders of the Company. Beneficial ownership of Series
D Preferred Stock does not include approximately 4,496 shares of Series D
Preferred Stock held in Escrow as of September 30, 1997. Pursuant to the
terms of the Escrow Agreement, the funds in the Escrow are the property of
Amber and the other purchasers of Series D Preferred Stock and the shares of
Series D Preferred Stock in the Escrow are the property of the Company, in
each case until delivered pursuant to the Escrow Agreement by the Escrow
Agent upon the instruction of a representative designated by a majority in
interest of the Purchasers, who shall have sole discretion to cause the
delivery of such funds and shares at any time until May 31, 1998. The
approximately 4,496 shares of Series D Preferred Stock represents 22,480,773
shares of Common Stock which is the maximum number of shares of Common Stock
attributable to Amber that can be issued to Amber upon conversion of shares
of Series D Preferred Stock held in Escrow prior to the amendment of the
Company's Certificate of Incorporation increasing the Company's authorized
capital.

(3) Beneficial ownership is based upon: (i) conversion of all of the Series B
Preferred Stock and the Series C Preferred Stock held by such selling
security holder at $.31875 per share of Common Stock; and (ii) exercise of
all of the Investor Warrants issuable upon conversion of the Series B
Preferred Stock. The shares of Common Stock offered by the Selling Security
Holders hereby include such presently indeterminate number of additional
shares as may be issuable on conversion of the Series B Preferred Stock and
the Series C Preferred Stock held by Advantage and the exercise of the
Investor Warrants or payment of dividends on the Series B Preferred Stock
pursuant to the provisions thereof regarding determination of the applicable
conversion and exercise prices and number of shares issuable in payment of
dividends. The Company has agreed to initially register a number of shares
of Common Stock equal to approximately two times the number of shares of
Common Stock that would have been issued if all the Series B Preferred Stock
and the Series C Preferred Stock had been converted at the conversion price
in effect at the time of the sale of such shares to the Selling Security
Holders. The actual number of shares of Common Stock issued or issuable upon
the conversion of the Series B Preferred Stock and Series C Preferred Stock
and exercise of the Investor Warrants is subject to adjustment and could be
materially less or more than such estimated amount depending upon factors
which cannot be predicted by the Company at this time, including, among
others, the future market price of the Common Stock, the payment of
dividends on the Series B Preferred Stock in Common Stock and anti-dilution
adjustments. Pursuant to the terms of the Series B Preferred Stock and the
Series C Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock is convertible by the holders thereof only to the extent
that the number of shares of Common Stock then held by such holder and its
affiliates (not including shares underlying unconverted shares of Series B
Preferred Stock) would not exceed 4.9% of the then

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<PAGE> 61

outstanding Common Stock as determined in accordance with Section 13(d) of the
Securities Act of 1934, as amended. Accordingly, the number of shares of Common
Stock set forth for such Selling Security Holder may exceed the actual number of
shares of Common Stock that such Selling Security Holder could own
beneficially at any given time through its ownership of the Series B
Preferred Stock and the Series C Preferred Stock. See "Risk
Factors -- Shares Eligible for Future Sale; Potential Dilution" and
"Description of Capital Stock -- Preferred Stock." The number of shares
noted as being offered by the Selling Security Holders is also subject to
increase in the event of a stock split, stock dividend or similar
transaction involving the Common Stock pursuant to Rule 416 under the
Securities Act.

(4) Consists of 37,500 shares of Common Stock issuable upon exercise of the
Finder's Warrants, which are immediately exercisable. See "Description of
Capital Stock."

(5) Beneficial ownership is based upon conversion of all of the Series C
Preferred Stock held by such selling security holder at $.31875 per share of
Common Stock. The shares of Common Stock offered by the Selling Security
Holder hereby include such presently indeterminate number of shares as may
be issued on conversion of the Series C Preferred Stock pursuant to the
provisions thereof regarding determination of the applicable conversion
price. The Company has agreed to initially register a number of shares of
Common Stock equal to approximately two times the number of shares of Common
Stock that would have been issued if all the Series C Preferred Stock had
been converted at the conversion price in effect at the time of the sale of
such shares to the Selling Security Holders. The actual number of shares of
Common Stock issued or issuable upon the conversion of the Series C
Preferred Stock is subject to adjustment and could be materially less or
more than such estimated amount depending upon factors which cannot be
predicted by the Company at this time, including, among others, the future
market price of the Common Stock, accretive of a 5% premium per annum and
anti-dilution adjustments. Pursuant to the terms of the Series C Preferred
Stock, the Series C Preferred Stock is convertible by the holders thereof
only to the extent that the number of shares of Common Stock thereby
issuable, together with the number of shares of Common Stock then held by
such holder and its affiliates (not including shares underlying unconverted
shares of Series C Preferred Stock) would not exceed 4.9% of the then
outstanding Common Stock as determined in accordance with Section 13(d) of
the Securities Act of 1934, as amended. Accordingly, the number of shares of
Common Stock set forth for such Selling Security Holder may exceed the
actual number of shares of Common Stock that such Selling Security Holder
could own beneficially at any given time through its ownership of the Series
C Preferred Stock. See "Risk Factors -- Shares Eligible for Future Sale:
Potential Dilution" and "Description of Capital Stock -- Preferred Stock."
The number of shares noted as being offered by the Selling Security Holder
are also subject to increase in the event of a stock split, stock dividend
or similar transaction involving the Common Stock pursuant to Rule 416 under
the Securities Act.

(6) Consists of 337,778 shares held by Jawahar L. Tandon as trustee of the
Jawahar L. Tandon Irrevocable Trust, as amended.

(7) Consists of 337,778 shares held by Devinder L. Tandon, MD & Usha Tandon as
trustees of the Devinder & Usha Tandon Family Trust, as amended.

(8) Includes 3,896,550 shares and 40,950 shares of Common Stock held by Alta V
Limited Partnership and Custom House Partners, respectively. Jean Deleage,
a director of JTS, is Vice President of Burr, Egan, Deleage & Co., which is
a general partner of Alta V Management Partners, L.P., a general partner of
Alta V Limited Partnership, L.P. and Customs House Partners, L.P. Mr.
Deleage and the general partners of Alta V Management Partners, L.P. and
Customs House Partners disclaim beneficial ownership of such shares except
to the extent of their proportionate partnership interests therein.

(9) Consists of 75,000 shares held by B. Kipling & Mary Ann Hagopian as
trustees of the B. Kipling & Mary Ann Hagopian Trustees UTD 3/25/88, as
amended.

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<PAGE> 62

(10) Consists of 75,000 shares held by Timothy M. Pennington, III & Melissa J.
Pennington as trustees of the Pennington Family Revocable Trust DTD
5/23/84, as amended.

(11) Consists of 25,000 shares held by Roger C. Davisson as trustee of the
Davisson Family Trust DTD 11/29/94, as amended.

(12) Consists of 1,576,424 shares and 2,250,000 shares of Common Stock held by
Advanced Technology Ventures III and Advanced Technology Ventures IV,
respectively. Mr. Henkens is a general partner of Advanced Technology
Ventures III and Advanced Technology Ventures IV. Certain shares held in
the name of Advanced Technology may be distributed to and sold by certain
limited partners of Advanced Technology, each of whom beneficially holds
less than 1% of the outstanding shares of Common Stock.

(13) Consists of 100,000 shares held by P. Andrew McLane gifted to the McLane
Harper Charitable Foundation on January 22, 1997.

(14) Consists of 100,000 shares held by Katherine Cromwell as trustee of the TA
Associates Money Purchase Pension Plan & Trust, as amended.

(15) Includes 800,000 and 700,000 shares of Common Stock held by C.V. Sofinnova
Ventures Partners III and C.V. Sofinnova Ventures Partners II,
respectively. Alain Azan is a general partner of Sofinnova Management,
L.P., the general partner of C.V. Sofinnova Ventures Partners III and C.V.
Sofinnova Ventures Partners II and has voting and investment power with
respect to such shares. Mr. Azan disclaims beneficial ownership of such
shares except to the extent of his proportionate partnership interest
therein.

(16) Consists of 18,500 shares of Common Stock of which 6,000 shares are held by
the WSGR Retirement Plan U/A DTD 02/01/88, of which Mr. DeGolia is the
beneficiary. The remaining 12,500 shares of Common Stock beneficially owned
are held by Mr. DeGolia directly.

(17) Consists of 2,500 shares of Common Stock held by Jeffrey L. DuRocher and
35,000, 31,500, 31,500, 25,000, 15,250, 9,750, 4,000, 20,000, 10,500,
4,500, 4,500 and 6,250 shares of Common Stock held by Jeffrey L. DuRocher
as trustee of the Riordan & McKenzie Profit Sharing and Savings Plan FBO
Jeffrey B. DuRocher, FBO Carl W. McKenzie; FBO Richard J. Welch; FBO
Lawrence C. Weeks; FBO Cynthia M. Dunnett; FBO Jeffrey L. Glassman; FBO
Louise LaMothe; FBO Janis B. Salin; FBO Martin J. Thompson; FBO Kenneth D.
Klein; FBO Scott R. Miller, FBO James L. Loss, as amended, respectively.
Jeffrey L. DuRocher has investment and voting power with respect to the
shares held by each of the foregoing investment funds. Mr. DuRocher
disclaims beneficial ownership of such shares except to the extent of his
proportionate partnership interests therein.

(18) Includes 600,000, 300,000, 200,000, 200,000 and 200,000 shares of Common
Stock held by International Venture Capital Investment Corporation; BI
Walden Ventures Kedua Sdn Bhd; Seed Ventures II Limited; OWW Pacrim
Investments Ltd; OCBC, Wearnes & Walden Investments (Singapore) Ltd.,
respectively. Lip-Bu Tan, a director of JTS, has investment and voting
power with respect to the shares held by each of the foregoing investment
funds. Mr. Tan disclaims beneficial ownership of such shares except to the
extent of his proportionate partnership interests therein. Also includes
28,981 shares of Common Stock held by the Lip-Bu Tan and Ysa Loo Trust
Agreement dated 2/3/92, 1,496 shares held by Ysa Loo, Mr. Tan's wife, and
1,496 shares held by each of Andrew Tan and Elliot Tan, Mr. Tan's children.

(19) Includes 272,250, 272,250 and 5,500 shares of Common Stock held by Gilde IV
B.V., Gilde Investment Fund B.V., and One Liberty Fund III, L.P.,
respectively. Gilde Investment Management has investment and voting power
with respect to the shares held by each of the foregoing investment funds.

(20) Includes 3,010,196 shares of Common Stock owned by Mr. Mitchell and
Jintamai K. Mitchell as trustees of the Mitchell 1990 Rev. Trust UTA 3390,
as amended. Of such shares, 1,010,196 are being offered hereby. Also
includes 1,208,333 shares issuable pursuant to options exercisable within
60 days of September 30, 1997.

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<PAGE> 63

(21) Includes 5,000 shares of Common Stock held by Atherton Ventures. Mr. Rosati
has investment and voting power with respect to the shares held by the
investment fund. Mr. Rosati disclaims beneficial ownership of such shares
except to the extent of his proportionate partnership interests therein.

(22) Includes 11,597,315 shares held by Mr. Tramiel's wife. Also includes
279,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
benefit of Mr. Tramiel's minor grandchildren. The remaining 707,611 shares
are held directly by Mr. Tramiel.

(23) Includes 2,411,673 shares of Common Stock held by Lunenburg S.A. Sirjang L.
Tandon, a director of JTS, may have shared voting power over the shares
held by Lunenberg S.A. Also includes 4,350,000 shares of Common Stock held
by the Tandon Family Partnership, of which Mr. Tandon is a general partner.
Also includes 1,000,000 shares issued pursuant to options exercisable
within 60 days of September 30, 1997. Mr. Tandon disclaims beneficial
ownership of the shares held by Lunenberg S.A. and the Tandon Family
Partnership except to the extent of his proportionate partnership and
shareholder interests therein.

(24) Please refer to (20).

(25) Please refer to (8).

(26) Please refer to (18).

(27) Includes 208,438 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.

(28) Includes 202,084 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.

(29) Includes 25,000 shares issuable pursuant to options exercisable within 60
days of September 30, 1997.

(30) Includes 18,333 shares issuable pursuant to options exercisable within 60
days of May 31, 1997.

(31) Includes information contained in the notes above, as applicable.

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<PAGE> 64

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 250,000,000 shares
of Common Stock, 9,931,198 shares of undesignated, "blank check" preferred
stock, $.001 par value per share, 15,000 shares of Series B Preferred Stock,
25,000 shares of Series C Preferred Stock and 28,802 shares of Series D
Preferred Stock.

The following summary of certain provisions of the capital stock of the
Company does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Certificate of Incorporation and
Bylaws which are included as exhibits to the Registration Statement of which
this Prospectus is a part, and by the provisions of applicable law.

COMMON STOCK

As of September 30, 1997, there were outstanding 158,125,559 shares of
Common Stock held of record by approximately 2,700 stockholders, options to
purchase 7,449,284 shares of Common Stock, and warrants to purchase 337,500
shares of Common Stock (excluding the Warrants). Upon the completion of this
offering, assuming full conversion of the Series B Preferred Stock and Series C
Preferred Stock at $0.575 per share (which price represents 85% of the average
lowest sale price of the Common Stock for the five days immediately preceding
September 30, 1997) and full exercise of the Warrants as of September 30, 1997,
and assuming no exercise of outstanding stock options or outstanding warrants
after September 30, 1996, the Company would have 168,464,707 shares of Common
Stock outstanding.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. However, the subscription agreements restrict the
payment of dividends with respect to capital stock of the Company that is junior
to the Series B Preferred Stock, including the Common Stock. Furthermore, the
Company's Certificate of Incorporation prohibits the issuance of cash dividends
on its Common Stock without the consent of the outstanding shares of Series C
Preferred Stock. In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the payment of the liquidation
preference of the Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and any other series of preferred stock that the Company may
designate and issue in the future. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and any other series
of preferred stock that the Company may designate and issue in the future.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any such series. The issuance of preferred stock could adversely
affect the rights and powers, including voting rights, of holders of Common
Stock and the availability of earnings and assets for dividends, other
distributions and payments upon liquidation to the holders of Common Stock. The
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of the Company. In certain circumstances, such
issuances could have the effect of decreasing the market price of the Common
Stock.

SERIES B PREFERRED STOCK Of the 10,000,000 shares of preferred stock
authorized for issuance by the Company, 15,000 shares have been designated as
Series B Preferred Stock, all of which are outstanding. The holders of Series B
Preferred Stock have the right to convert all or a portion of the Series B
Preferred Stock into units consisting of Common Stock and Investor Warrants at
the earlier of the date of effectiveness of this

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Registration Statement or eighty days after the Series B Closing. The Series B
Preferred Stock, together with any accrued and unpaid dividends, may be
converted into Common Stock at a conversion price (the "Series B Initial
Conversion Price") equal to the lower of (i) 85% of the average lowest trading
price for the five days immediately preceding the conversion notice date; or
(ii) $3.6125. As of May 31, 1997, 4,911 shares of Series B Preferred had been
converted into 3,037,007 shares of Common Stock. In addition, for every 10
shares of Common Stock issued upon conversion of the Series B Preferred Stock,
the holder thereof shall be entitled to receive an Investor Warrant to purchase
one share of Common Stock. See "Warrants". The Series B Preferred Stock is
convertible at the option of the Company at any time after three years from the
date of the Series B Closing.

The Series B Initial Conversion Price of the Series B Preferred Stock is
subject to proportional adjustment for stock splits, stock dividends,
recapitalizations and the like. The Series B Initial Conversion Price is subject
to further adjustment in the event that (i) the Registration Statement is not
declared effective within 80 days of the Series B Closing, (ii) the Registration
Statement ceases to remain effective for a specified period, or (iii) the
conversion rights of the holders of the Series B Preferred Stock are suspended
for any reason.

The Series B Preferred Stock, together with any accrued and unpaid
dividends, may be redeemed by the Company in whole or in part at any time after
six months following the Series B Closing at a price equal to the market value
of the Common Stock, assuming conversion of the Series B Preferred Stock at the
then prevailing conversion price at the time of redemption.

The holders of the Series B Preferred Stock may cause the Company to
repurchase all or any portion of the holders' Series B Preferred Stock upon the
occurrence of certain events, including the absence of closing bid prices for
the Common Stock for ten consecutive trading days, the failure of the Common
Stock to be listed for trading on AMEX, the New York Stock Exchange or the
Nasdaq National Market, the Company's default in the performance of any material
obligations under the transaction documents relating to the sale of Series B
Preferred Stock, the inability of the holders of Series B Preferred Stock to use
this Registration Statement for a period of 30 or more days after it is declared
effective, and any merger of the Company in which stockholders of the Company do
not hold at least 51% of the stock of the surviving company or in which the
stock of the surviving company is not listed for trading on AMEX, the New York
Stock Exchange or Nasdaq National Market. Such repurchase will be for cash at
the market value of the Common Stock into which the Series B Preferred Stock
could be converted at the time of repurchase, plus accrued dividends and
interest.

SERIES C PREFERRED STOCK Of the 10,000,000 shares of preferred stock
authorized for issuance by the Company, 25,000 shares have been designated as
Series C Preferred Stock, all of which are outstanding and presently convertible
into Common Stock. The Series C Preferred Stock may be converted into Common
Stock at a conversion price (the "Series C Initial Conversion Price") equal to
the lower of (i) 85% (subject to adjustment) of the average lowest sale price
for the five days immediately preceding the conversion date, or (ii) $2.8875
(subject to adjustment). As of May 31, 1997, 5,900 shares of Series C Preferred
Stock had been converted into 5,017,729 shares of Common Stock. In addition,
upon conversion of the Series C Preferred Stock, the Company is obligated to pay
an additional amount, in cash or Common Stock, to the holder thereof equal to 5%
of the converted principal amount per annum.

The Series C Initial Conversion Price is subject to proportional adjustment
for stock splits, stock combinations, reclassifications and the like. The Series
C Initial Conversion Price is subject to further adjustment in the event that
(i) the Registration Statement is not declared effective within 80 days of the
Series C Closing or (ii) sales cannot be made pursuant to the Registration
Statement for any reason.

Under certain circumstances, the Series C Preferred Stock may be redeemed
by the Company in whole or in part at any time.

The holders of two-thirds of the Series C Preferred Stock then outstanding
may cause the Company to repurchase all of the Series C Preferred Stock upon the
consolidation or merger of the Company with or into another person, the sale or
transfer of substantially all of the Company's assets, the sale of more than 10%
of

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<PAGE> 66

the outstanding shares of Common Stock, the failure of this Registration
Statement to be declared effective on a timely basis, the inability to sell
shares of Common Stock issuable upon conversion of the Series C Preferred Stock
pursuant to this Registration Statement for a certain period of time, Mr.
Mitchell's failure to remain a director and officer of the Company for a certain
period of time, the failure of the Common Stock to be listed on AMEX, the Nasdaq
National Market or the New York Stock Exchange, Inc. for a certain period of
time or the Company's failure to comply with a proper request to convert the
Series C Preferred Stock into Common Stock.

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series C Preferred Stock shall be
entitled to receive a cash liquidation payment in preference to any payments to
the holders of any capital stock of the Company of any class junior in rank to
the Series C Preferred Stock. All shares of Common Stock are of junior rank to
the Series C Preferred Stock, and the Series C Preferred Stock is of equal rank
with the Series B Preferred Stock.

SERIES D PREFERRED STOCK. Of the 10,000,000 shares of preferred stock
authorized for issuance by the Company, 28,802 shares have been designated as
Series D Preferred Stock, all of which shares were initially deposited into an
escrow account (the "Escrow Account") together with the proceeds from the sale
of such shares in the aggregate amount of $25,201,750. At the closing of the
sale of the Series D Preferred Stock, approximately 10,285 shares of Series D
Preferred Stock were released to the purchasers, and approximately $9,000,000 in
proceeds from the sale thereof were released to the Company, from the Escrow
Account. The remaining shares shall be released to the purchasers, and the
proceeds from the sale thereof shall be released to the Company, from the Escrow
Account upon the satisfaction of certain conditions. As of September 30, 1997,
no additional shares of Series D Preferred Stock had been released from the
Escrow Account.

The Series D Preferred Stock shall be voted together with the Common Stock
and not as a separate class on all matters to come before the Company's
stockholders based upon the number of shares of Common Stock into which the
outstanding shares of Series D Preferred Stock are then convertible. In
addition, the holders of the Series D Preferred Stock shall be entitled to elect
a single member to the Board of Directors, and the holders of Common Stock shall
be entitled to elect six members, with the remaining members of the Board to be
elected by the holders of Common Stock and Series D Preferred Stock voting
together as a class.

The Series D Preferred Stock is entitled to a liquidation preference of
$875 per share, which shall be paid before any distribution or payment to the
holders of Common Stock but after all required distributions and payments have
been made to any series of preferred stock that is senior in liquidation
preference to the Series D Preferred Stock. Any consolidation or merger of the
Company with another company where the Company's stockholders do not hold at
least 50% of the surviving corporation's voting power, or a sale of
substantially all of the Company's assets, shall be deemed a liquidation for
purposes of the liquidation preference.

At any time, and from time to time, the Company may redeem the Series D
Preferred Stock if the closing price per share of the Company's Common Stock
exceeds $3.9375 for 20 consecutive trading days, subject to certain limitations,
including that the Company may not redeem more than one-third of the Series D
Preferred Stock shares within any one-year period.

At any time, and from time to time, the holders of Series D Preferred Stock
may convert their shares into shares of Company Common Stock. The conversion
rate shall be 5,000 shares of Common Stock for each share of Series D Preferred
Stock being converted, subject to adjustment for stock splits and combinations,
dividends, distributions, reorganizations and the like. Upon conversion of the
Series D Preferred Stock into shares of Common Stock, the holder of Series D
Preferred Stock shall pay additional consideration equal to $0.65625 multiplied
by the number of shares of Common Stock to be issued.

WARRANTS

Investor Warrants

The holders of Series B Preferred Stock have the right to convert all or a
portion of the Series B Preferred Stock into units consisting of Common Stock
and Investor Warrants. For every 10 shares of Common Stock

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issued upon conversion of the Series B Preferred Stock, the holder thereof shall
be entitled to receive an Investor Warrant to purchase one share of Common
Stock. Each Investor Warrant is exercisable for one share of Common Stock at
110% of the lower of the average closing bid price of the Company's Common Stock
for the five days immediately preceding (i) the conversion notice date or (ii)
the Series B Closing. The Investor Warrants are exercisable in full or in part
at any time or from time to time for up to three years after the issuance date
of the Investor Warrants. The exercise price of the Investor Warrants is subject
to adjustment under certain circumstances, including dividends, stock splits,
reorganizations, reclassifications, and consolidations. The holders may elect to
exercise the Investor Warrants, in whole or in part by receiving shares of
Common Stock equal to the net issuance value upon surrender of the Investor
Warrants.

Finder's Warrants

In connection with the issuance of Series B Preferred Stock to Advantage in
a November 1996 private placement, the Company issued 37,500 Finder's Warrants
to Wharton Capital Corporation in consideration for financial consulting
services furnished to the Company. Each Finder's Warrant is exercisable for one
share of Common Stock at $4.2625 per share, which price is equal to 110% of the
closing price of the Company's Common Stock on the issuance date of the Finder's
Warrants. The Finder's Warrants are exercisable in full or in part at any time
or from time to time through November 5, 1999. The exercise price of the
Finder's Warrants is subject to adjustment under certain circumstances,
including dividends, stock splits, reorganizations, reclassifications and
consolidations. The holders of the Finder's Warrants may elect to exercise the
Finder's Warrants in whole or in part by receiving shares of Common Stock equal
to the net issuance value upon surrender of the Finder's Warrants.

REGISTRATION RIGHTS

Pursuant to a Registration Rights Agreement, dated February 3, 1995, by and
among the Company and certain holders of Common Stock, as amended (the
"Registration Rights Agreement"), the holders of 30,542,802 shares of Common
Stock (including the shares of Common Stock offered by the Registration Rights
Holders hereby) are entitled to certain rights with respect to the registration
of the Common Stock under the Securities Act. Under the terms of the
Registration Rights Agreement, the Company is obligated to register the shares
of Common Stock held by such holders under the Securities Act upon the request
of the holders and the satisfaction of certain conditions, including a proposed
aggregate offering price of at least $500,000. Furthermore, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or the account of any holder of securities of the Company, the
holders are entitled to written notice of such registration and are entitled to
include, at the Company's expense, such shares of their Common Stock in such
registration, provided, among other conditions, that the underwriters of any
such offering have the right to limit the number of shares included in such
registration. All fees, costs and expenses of such registrations (other than
underwriting discounts and commissions and legal expenses of such holders) will
be borne by the Company.

In addition, pursuant to registration rights agreements by and among the
Company and certain of the Selling Security Holders, such holders are entitled
to certain registration rights with respect to the Common Stock issuable upon
conversion of their shares of Series B Preferred Stock, their shares of Series C
Preferred Stock and Series D Preferred Stock, or upon exercise of their Warrants
under the Securities Act. Such registration rights will only become available to
the Selling Security Holders if the Company fails to maintain the effectiveness
of this Registration Statement as required by the registration rights
agreements.

DELAWARE TAKEOVER STATUTE AND CERTAIN CHARTER PROVISIONS

The Company is subject to Section 203 of the DGCL, which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder

67
<PAGE> 68

owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned (a) by persons who are directors and
also officers and (b) by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer, or (iii) at or
subsequent to such time, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation by
the interested stockholder, or (v) the receipt by the interested stockholder of
the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested stockholder as any entity or person owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.

The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called meeting and may not be effected by
written consent. In addition, the Company's Certificate of Incorporation and
Bylaws provide that only the Chairman of the Board of Directors, the Chief
Executive Officer, or the Board of Directors pursuant to a resolution adopted by
at least two directors, are permitted to call a special meeting of stockholders.
These and other provisions, including the creation of "blank check" preferred
stock, could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing change in the management of the Company. See
"Risk Factors -- Control by Affiliates; Anti-takeover Effects."

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation contains certain provisions
permitted under Delaware Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as (i) any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) any acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
any transaction from which the director derives an improper personal benefit.
These provisions do not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. The Company's
Certificate of Incorporation also contains provisions indemnifying the directors
and officers of the Company to the fullest extent permitted by Delaware General
Corporation Law. The Company believes that these provisions will assist the
Company in attracting and retaining qualified individuals to serve as directors.

68
<PAGE> 69

TRANSFER AGENT

The transfer agent for the Common Stock of the Company is Registrar and
Transfer Company.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. As of September 30, 1997, the Company
had approximately 158,125,559 shares of Common Stock outstanding. In January
1997, the Company's Registration Statement on Form S-1 (No. 333-17093) was
declared effective, registering for public resale 39,392,046 shares of Common
Stock (consisting of 10,037,500 newly issued shares of Common Stock issuable
upon the conversion of outstanding Series B Preferred Stock and Common Stock
purchase warrants, and 29,354,546 previously outstanding shares of Common Stock
held by the Registration Rights Holders). This Registration Statement registers
for public resale an additional 17,000,000 shares of Common Stock issuable upon
conversion of the Series C Preferred Stock, bringing the total number of shares
to be registered under the two registration statements to 56,392,046. The
Company may be obligated to register additional shares of Common Stock for
resale upon conversion of the Series B Preferred Stock and Series C Preferred
Stock depending on, among other factors, the future market price of the Common
Stock. The Company is also obligated to register for public resale the shares of
Common Stock issuable upon conversion of the Series D Preferred Stock issued in
a September 1997 private placement. In addition, JTS has registered for sale on
a Form S-8 Registration Statement under the Securities Act an aggregate of
8,985,000 shares of Common Stock issued or issuable upon the exercise of options
granted under JTS' Amended and Restated 1995 Stock Option Plan, 500,000 shares
of Common Stock issued or issuable upon the exercise of options granted under
JTS' 1996 Non-Employee Directors' Stock Option Plan, and 225,800 shares of
Common Stock issued or issuable upon the exercise of options granted under
Atari's 1986 Stock Option Plan which were assumed by JTS in the Merger. See
"Risk Factors -- Shares Eligible for Future Sale; Potential Dilution" and
"Description of Capital Stock -- Registration Rights."

PLAN OF DISTRIBUTION

All of the shares of Common Stock offered hereby are being offered by the
Selling Security Holders and the Registration Rights Holders, or by pledges,
donees, transferees or other successors in interest that receive such shares as
a gift, partnership distribution or other non-sale related transfer. The Company
has been advised by the Selling Security Holders and the Registration Rights
Holders that they intend to sell all or a portion of the shares of Common Stock
offered hereby from time to time on AMEX, in privately negotiated transactions
or otherwise, including the settlement of short sales, and that sales will be
made at fixed prices that may be changed, at market prices prevailing at the
times of such sales, at prices related to such market prices or at negotiated
prices. The Selling Security Holders and the Registration Rights Holders may
also make private sales directly or through a broker or brokers, who may act as
agent or as principal. In effecting sales, broker-dealers or agents engaged by
the Selling Security Holders may arrange for other broker-dealers or agents to
participate. In connection with any sales, the Selling Security Holders and the
Registration Rights Holders and any brokers participating in such sales may be
deemed to be underwriters within the meaning of the Securities Act. The Company
will receive no part of the proceeds of sales made hereunder.

Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Security Holders and the Registration Rights
Holders (and, if they act as agent for the purchaser of such shares of Common
Stock, from such purchaser). Brokerage fees may be paid by the Selling Security
Holders and the Registration Rights Holders which may be in excess of usual and
customary brokerage fees. Broker-dealers may agree with the Selling Security
Holders and the Registration Rights Holders to sell a specified number of shares
of Common Stock at a stipulated price, and, to the extent such a broker-dealer
is unable to do so acting as agent for the Selling Security Holders and the
Registration Rights Holders to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer's commitment to the Selling Security
Holders and the Registration Rights Holders. Broker-dealers who acquire shares
of Common Stock as principal may thereafter resell such shares from time to time
in transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) on AMEX, in privately negotiated transactions or
otherwise at fixed prices that

69
<PAGE> 70

may be changed, at market prices prevailing at the time of sale, at prices
related to such market prices or at negotiated prices, and in connection with
such resales may pay to or receive from the purchasers of such shares
commissions computed as described above.

The Company, certain of the Selling Security Holders and the Registration
Rights Holders have each agreed to indemnify the other against certain
liabilities, including certain liabilities under the Securities Act.

Any shares of Common Stock covered by this Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under that Rule
rather than pursuant to this Prospectus.

There can be no assurance that any of the Selling Security Holders and the
Registration Rights Holders will sell any or all of the shares of Common Stock
offered by them hereunder.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements of JTS Corporation (formerly Atari
Corporation) and its subsidiaries as of December 31, 1995 and for each of the
two years in the period ended December 31, 1995 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.

The consolidated financial statements of JTS Corporation and subsidiaries
as of February 2, 1997 and January 28, 1996 and for the year ended February 2,
1997 and the one month ended January 28, 1996 included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

70
<PAGE> 71

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are necessarily incomplete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. All material terms of the subject
matter relating to any such statements or contracts are set forth in this
Prospectus. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and
exhibits. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and copies of all or any part thereof may be obtained from
the Public Reference Branch of the Commission upon payment of certain fees
prescribed by the Commission.

The Company is subject to the informational requirements of the Exchange
Act of 1934, as amended, and, in accordance therewith, files annual and
quarterly reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information may be inspected and copied
at the public reference facilities maintained by the Commission at the address
set forth above, and at the regional offices maintained by the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained at prescribed rates from the public reference facilities of the
Commission at the address noted above. The Common Stock of the Company is traded
on AMEX. Reports, proxy statements and other information concerning the Company
may be inspected at AMEX, at 86 Trinity Place, New York, NY 10006-1881. In
addition, the Commission maintains a web site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the web site is: http://www.sec.gov.

71
<PAGE> 72

JTS CORPORATION
(FORMERLY ATARI CORPORATION)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP......................................................... F-2
Report of Deloitte & Touche LLP....................................................... F-3
Consolidated Balance Sheets as of February 2, 1997, January 28, 1996 and December 31,
1995................................................................................ F-4
Consolidated Statements of Operations for the years ended February 2, 1997, December
31, 1995 and 1994 and for the one month ended January 28, 1996...................... F-5
Consolidated Statements of Shareholders' Equity for the years ended February 2, 1997,
December 31, 1995 and 1994 and for the one month ended January 28, 1996............. F-6
Consolidated Statements of Cash Flows for the years ended February 2, 1997, December
31, 1995 and 1994 and for the one month ended January 28, 1996...................... F-7
Notes to Consolidated Financial Statements............................................ F-8
Unaudited Consolidated Balance Sheet as of May 4, 1997................................ F-22
Unaudited Consolidated Statement of Operations for the three months ended May 4,
1997................................................................................ F-23
Unaudited Consolidated Statement of Cash Flows for the three months ended May 4,
1997................................................................................ F-24
Condensed Notes to Consolidated Financial Statements.................................. F-25
</TABLE>

F-1
<PAGE> 73

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors
of JTS Corporation:

We have audited the accompanying consolidated balance sheets of JTS
Corporation (formerly Atari Corporation) and subsidiaries as of February 2, 1997
and January 28, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year ended February 2, 1997 and the
one month ended January 28, 1996. 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 in accordance with generally accepted auditing
standards. These standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JTS Corporation and
subsidiaries as of February 2, 1997 and January 28, 1996 and the results of
their operations and their cash flows for the year ended February 2, 1997 and
the one month period ended January 28, 1996 in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

San Jose, California
April 21, 1997

F-2
<PAGE> 74

REPORT OF DELOITTE & TOUCHE LLP

To the Shareholders and Board of Directors
of Atari Corporation:

We have audited the accompanying consolidated balance sheet of Atari
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the two years in the period ended December 31, 1995. Our audits also included
the financial statement schedule for the two years in the period ended December
31, 1995 listed in the Index at Item 14. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Atari Corporation and
subsidiaries at December 31, 1995 and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP

San Jose, California
March 1, 1996

F-3
<PAGE> 75

JTS CORPORATION (FORMERLY ATARI CORPORATION)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FEBRUARY 2, JANUARY 28, DECEMBER 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $1,800, $700 and $700
held as restricted balances in 1997, 1996, and 1995,
respectively)............................................... $ 24,766 $ 31,790 $ 28,941
Marketable securities......................................... -- 16,460 21,649
Accounts receivable, less allowances for returns and doubtful
accounts of $1,615, $4,271 and $4,221 in 1997, 1996 and
1995, respectively.......................................... 21,445 2,784 2,468
Inventories................................................... 17,750 5,666 10,934
Other current assets.......................................... 2,341 1,895 1,134
--------- --------- ---------
Total current assets................................... 66,302 58,595 65,126
PROPERTY AND EQUIPMENT, net..................................... 27,674 599 671
REAL ESTATE HELD FOR SALE....................................... -- 10,443 10,468
ACQUIRED TECHNOLOGY, net........................................ 19,618 -- --
GOODWILL, net................................................... 16,673 -- --
OTHER ASSETS.................................................... 450 538 1,304
--------- --------- ---------
TOTAL.................................................. $ 130,717 $ 70,175 $ 77,569
========= ========= =========
</TABLE>

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Bank line of credits.......................................... $ 10,540 $ -- $ --
Borrowings under factoring arrangement........................ 2,981 -- --
Accounts payable.............................................. 33,327 4,316 4,954
Accrued liabilities........................................... 16,415 5,847 5,088
Current portion of long-term obligations...................... 1,967 -- --
--------- --------- ---------
Total current liabilities.............................. 65,230 10,163 10,042
--------- --------- ---------
LONG-TERM OBLIGATIONS........................................... 53,081 42,354 42,354
--------- --------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)

SHAREHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value -- authorized,
10,000,000 shares; 40,000 shares outstanding in 1997;
liquidation value of $40,227................................ -- -- --
Common Stock, $.001 par value in 1997 and $.01 par value in
1996 and 1995 -- authorized, 150,000,000 shares;
outstanding: 104,744,765, 63,690,418, and 63,687,118 in
1997, 1996 and 1995, respectively........................... 105 637 637
Additional paid-in capital.................................... 349,961 196,213 196,209
Notes receivable from shareholders............................ (2,510) -- --
Unrealized gain on marketable securities...................... -- 3,930 7,088
Cumulative translation adjustments............................ -- (694) (663)
Accumulated deficit........................................... (335,150) (182,428) (178,098)
--------- --------- ---------
Total shareholders' equity............................. 12,406 17,658 25,173
--------- --------- ---------
TOTAL.................................................. $ 130,717 $ 70,175 $ 77,569
========= ========= =========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 76

JTS CORPORATION (FORMERLY ATARI CORPORATION)

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ONE MONTH
PERIOD
ENDED YEARS ENDED DECEMBER
YEAR ENDED JANUARY 31,
FEBRUARY 2, 28, ---------------------
1997 1996 1995 1994
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
REVENUES...................................... $ 90,530 $ 735 $ 14,626 $ 38,748
-------- -------- -------- --------
COST AND EXPENSES:
Cost of revenues............................ 100,328 6,156 44,234 35,200
Acquired in-process research and
development.............................. 110,012 -- -- --
Amortization of acquired technology......... 3,923 -- -- --
Research and development.................... 12,849 161 5,410 5,775
Selling, general and administrative......... 13,067 1,089 18,647 21,820
-------- -------- -------- --------
Total operating expenses............ 240,179 7,406 68,291 62,795
-------- -------- -------- --------
OPERATING LOSS................................ (149,649) (6,671) (53,665) (24,047)
Settlements of patent litigation.............. -- -- -- 32,062
Exchange gain (loss).......................... (590) (115) 13 1,184
Other income, net............................. 394 2,533 2,670 484
Interest income............................... 895 112 3,133 2,015
Interest expense.............................. (3,545) (189) (2,309) (2,304)
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT..... (152,495) (4,330) (50,158) 9,394
Extraordinary credit -- gain on extinguishment
of 5 1/4% convertible subordinated
debentures.................................. -- -- 582 --
-------- -------- -------- --------
NET INCOME (LOSS)............................. $ (152,495) $ (4,330) $(49,576) $ 9,394
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary credit... $ (1.81) $ (0.07) $ (0.79) $ 0.16
Net income (loss)........................... $ (1.81) $ (0.07) $ (0.78) $ 0.16
Weighted average shares used in
computations............................. 84,322 63,687 63,697 58,962
======== ======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 77

JTS CORPORATION (FORMERLY ATARI CORPORATION)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NOTES
RECEIVABLE
CONVERTIBLE FROM UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL SALE OF GAIN ON CUMULATIVE
---------------- ---------------- PAID-IN COMMON MARKETABLE TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK SECURITIES ADJUSTMENTS DEFICIT TOTAL
------ ------- ------- ------ ---------- ---------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

BALANCES,
DECEMBER 31,
1993....... -- $ -- 57,215 $ 572 $142,497 $ (3) $ -- $ (796) $(137,916) $ 4,354
Sale of common
stock........ 6,277 63 53,270 53,333
Stock options
exercised.... 157 1 371 372
Collection of
notes
receivable... 3 3
Translation
adjustments... (928) (928)
Unrealized
gain on
marketable
securities... 542 542
Net income.... 9,394 9,394
------ ------ ------ ---- -------- ---- ------- ------ ------ ---------

BALANCES,
DECEMBER 31,
1994....... -- -- 63,649 636 196,138 -- 542 (1,724) (128,522) 67,070
Stock options
exercised.... 82 1 109 110
Stock
repurchased... (44) (38) (38)
Translation
adjustments... 1,061 1,061
Unrealized
gain on
marketable
securities... 6,546 6,546
Net loss...... (49,576) (49,576)
------ ------ ------ ---- -------- ---- ------- ------ ------ ---------

BALANCES,
DECEMBER 31,
1995....... -- -- 63,687 637 196,209 -- 7,088 (663) (178,098) 25,173
Stock options
exercised.... 4 4 4
Translation
adjustment... (31) (31)
Change in
unrealized
gain on
marketable
securities... (3,158) (3,158)
Net loss...... (4,330) (4,330)
------ ------ ------ ---- -------- ---- ------- ------ ------ ---------

BALANCES,
JANUARY 28,
1996....... -- -- 63,691 637 196,213 -- 3,930 (694) (182,428) 17,658
Change in
unrealized
gain on
marketable
securities... (3,930) (3,930)
Common stock
issued in
connection
with JTS
acquisition... 39,907 40 113,562 (2,510) 111,092
Reduction of
par value
from $.01
per share to
$.001 per
share........ (573) 573
Issuance of
convertible
Series B and
C preferred
stock, net of
$2,027
issuance
costs........ 40 -- 37,973 37,973
Stock options
exercised.... 1,147 1 1,640 1,641
Translation
adjustment... 694 694
Preferred
stock
dividends.... (227) (227)
Net loss...... (152,495) (152,495)
------ ------ ------ ---- -------- ---- ------- ------ ------ ---------

BALANCES,
FEBRUARY 2,
1997....... 40 $ -- 104,745 $ 105 $349,961 $ (2,510) $ -- $ -- $(335,150) $ 12,406
====== ====== ====== ==== ======== ==== ======= ====== ====== =========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 78

JTS CORPORATION (FORMERLY ATARI CORPORATION)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED PERIOD YEARS ENDED
FEBRUARY ENDED DECEMBER 31,
2, JANUARY 28, --------------------
1997 1996 1995 1994
---------- ----------- -------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................. $(152,495) $(4,330) $(49,576) $ 9,394
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation................................................ 7,505 363 2,270 2,619
Acquired in-process research and development................ 110,012 -- -- --
Amortization of goodwill and acquired technology............ 5,207 -- -- --
Loss from disposal of equipment and real estate............. 2,700 31 -- --
Gain on sale of marketable securities....................... (3,930) (2,436) (2,377) --
Gain from extinguishment of debentures...................... -- -- (582) --
Change in operating assets/liabilities
Accounts receivable......................................... (10,056) (316) 6,715 (3,626)
Inventories................................................. 676 5,268 7,251 (8,815)
Other current assets........................................ 797 (4) 16,973 468
Other assets................................................ 89 8 -- --
Accounts payable............................................ 5,625 (637) (7,193) 3,763
Accrued liabilities......................................... 1,931 759 (42) (660)
-------- -------- -------- -------
Net cash provided (used) by operating activities.............. (31,939) (1,294) (26,561) 3,143
INVESTING ACTIVITIES:
Cash acquired in connection with the Merger................. 684 -- -- --
Loan to JTS Corporation prior to the Merger................. (30,000) -- -- --
Proceeds from sale of marketable securities................. 16,460 4,467 55,703 --
Purchase of marketable securities........................... -- -- (9,997) (50,000)
Purchase of property and equipment.......................... (16,239) (297) (782) (1,207)
Proceeds from sale of property and equipment................ 10,000 -- 29 7,543
Game software development costs............................. -- -- (12,791) (5,810)
Other assets................................................ -- -- 107 482
-------- -------- -------- -------
Net cash provided (used) by investing activities.............. (19,095) 4,170 32,269 (48,992)
FINANCING ACTIVITIES:
Extinguishment of debentures................................ -- -- (518) --
Borrowing under line of credit and bank borrowings.......... 7,084 -- -- --
Repayments of borrowings.................................... -- -- -- (7,642)
Repayments of capital leases................................ (3,382) -- -- --
Issuance of common stock.................................... 1,641 4 72 53,708
Issuance of preferred stock................................. 40,000 -- -- --
Issuance costs of preferred stock........................... (2,027) -- -- --
-------- -------- -------- -------
Net cash provided (used) by financing activities.............. 43,316 4 (446) 46,066
EFFECT OF EXCHANGE RATE CHANGES............................... 694 (31) 1,087 (684)
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (7,024) 2,849 6,349 (467)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 31,790 28,941 22,592 23,059
-------- -------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ 24,766 $31,790 $ 28,941 $22,592
======== ======== ======== =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and assumptions of warrants and
employee stock options in connection with the Merger........ $ 111,093 $ -- $ -- $ --
Liabilities of $84,308 assumed net of related assets of
$45,297 acquired from the Merger............................ 39,011 -- -- --
Notes receivable from shareholders acquired from the Merger... 2,510 -- -- --
Extinguishment of note receivable from the Merger............. 30,000 -- -- --
Exchange of inventory for advertising services................ -- -- -- 3,179
Exchange of property for retirement of debt................... -- -- -- 1,891
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE> 79

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS:

Atari Corporation ("Atari" or the "Company") was formed to design and
market interactive multimedia entertainment systems and related software and
peripheral products. On July 30, 1996, Atari merged into JTS Corporation
("JTS"), a manufacturer of hard disk drives for notebook and desktop personal
computers. Due to a lack of market acceptance of its video game console, Jaguar,
Atari had significantly downsized its video game operations prior to the merger,
described below. This downsizing resulted in significant reductions in Atari's
workforce and significant curtailment of research and development and sales and
marketing activities for Jaguar and related products. Despite the introduction
of additional game titles in the first quarter of 1996, sales of Jaguar and
related software remained disappointing such that by the end of fiscal 1997
approximately all of the remaining inventory had been written off. The prior
business of Atari is now conducted through the Company's Atari division;
however, the Atari division does not and is not expected to represent a
significant portion of the Company's business going forward.

The most significant portion of the Company's business today is its disk
drive division acquired in the merger with JTS, which designs, manufactures and
markets hard disk drives for use in notebook computers and desktop personal
computers. JTS was incorporated in February 1994 and remained in the development
stage until October 1995, when it began shipping its 3.5-inch "Palladium" disk
drives to customers in the United States and Europe. The Company currently has
three disk drive product families in production, the 3-inch form factor "Nordic"
family for notebook computers and the 3.5-inch form factor "Champ" and
"Champion" families for desktop personal computers. The Company introduced into
production its higher performance "Champion" family for desktop personal
computers in the first quarter of fiscal 1998. All of JTS' products are
manufactured in Madras, India by its subsidiary, JTS Technology Ltd. (formerly
Moduler Electronics (India) Pvt. Ltd.).

On July 30, 1996, Atari was merged with JTS (the "Merger") and the separate
existence of Atari ceased. Although the business combination resulted in Atari
merging into the JTS legal entity, the substance of the transaction was that
Atari, as a public company with substantially greater operating history and net
worth owned approximately 62% of the equity of the merged company. Therefore,
for accounting purposes the merger was accounted for as a purchase of JTS by
Atari. (See Note 3.)

The hard disk drive business is extremely capital intensive, and the
Company will need significant additional financing resources in 1998 and over
the next several years for facilities expansion, capital expenditure, working
capital, research and development and vendor tooling. There can be no assurance
that additional funding will be available on terms acceptable to the Company or
at all. If the Company is unable to obtain sufficient capital, it would be
required to curtail its facilities expansion, capital expenditures, working
capital, research and development and vendor tooling expenditures, which would
materially adversely affect, the Company's business, operating results and
financial condition.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation -- The consolidated financial statements
include the Company and its subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.

Pervasiveness of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities 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 these estimates.

Cash and Cash Equivalents -- For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with original
maturities of less than three months to be cash equivalents.

F-8
<PAGE> 80

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted Cash -- As of February 2, 1997, January 28, 1996 and December
31, 1995, cash balances of $1,800,000, $700,000 and $700,000 were collateral for
outstanding commercial letters of credit associated with inventory components,
software development agreements and for bank borrowings.

Marketable Securities -- Marketable securities are carried as
available-for-sale securities and reported at the fair market value. Unrealized
gains and losses are reported as a separate component of shareholders' equity
until realized. The cost of securities sold is based on average cost.

Factored Receivables with Recourses -- Certain accounts receivable have
been factored with recourse with a European bank. The net cash proceeds from the
bank amounted to $2,981,000 as of February 2, 1997 and are reflected as a
current liability in the accompanying balance sheet.

Concentration of Credit Risk -- The Company sells its products to original
equipment manufacturers and distributors throughout the world. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for uncollectible accounts receivable based upon the expected
collectibility of all accounts receivable.

Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market and consist of the following (in thousands):

<TABLE>
<CAPTION>
FEBRUARY 2, JANUARY 28, DECEMBER 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Finished goods................................... $ 489 $ 5,666 $ 9,927
Raw materials and work-in-process................ 17,261 -- 1,007
------- ------- -------
Total....................................... $17,750 $ 5,666 $ 10,934
======= ======= =======
</TABLE>

Property and Equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over estimated useful lives of two to
seven years. Repairs and maintenance costs are expensed as incurred. Major
renewals and betterments which substantially extend the useful life of the asset
are capitalized.

Real Estate Held for Sale -- Real property associated with closed
operations of former Atari Corporation in the United States is stated at
estimated market value as of December 31, 1995 and January 28, 1996 as
determined by valuations, appraisals or pending sales offers. The real property
was sold at fair value to one of the Company's directors in September 1996 for
cash of $10 million. The Company has an option to repurchase the property from
the director before September 1997 for $10 million.

Research and Development -- Research and development costs are expensed as
incurred and consist primarily of salaries, materials and supplies.

Revenue Recognition and Product Warranty -- Revenue from product sales is
generally recognized upon shipment to customers. The Company warrants its
products against defects in design, materials and workmanship generally for
three years. A provision for estimated future costs relating to warranty expense
is recorded when products are shipped.

Foreign Currency Translation -- For the one month ended January 28, 1996
and the years ended December 31, 1995 and 1994, assets and liabilities of
operations outside the United States were translated into United States dollars
using current exchange rates, and the effects of foreign currency translation
adjustments were deferred and included as a component of shareholders' equity.
During the year ended February 2, 1997, the functional currency of the
operations outside the United States was deemed to be the U.S. dollar due to the
change of the operations discussed in Note 1. As a result, the effects of
foreign currency translation adjustments are now charged to the statement of
operations.

F-9
<PAGE> 81

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting for Stock Based Compensation -- The Company accounts for
stock-based compensation under the provisions of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). The Company
has adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation," effective January
29, 1996. (See Note 10.)

Income (Loss) per Common Share -- Net income per common share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Net loss per share is based on the
weighted average number of common shares outstanding during the period. Common
equivalent shares have not been included in the calculation of loss per share as
their inclusion would be antidilutive. The effect of the assumed conversion of
the 5 1/4% convertible subordinated debentures was antidilutive for all periods
presented and excluded from the computation.

Fiscal Year -- The fiscal year of the Company was a 52- or 53-week period
ending the Saturday closest to December 31 for 1994 and 1995. Subsequent to the
Merger, the Company changed its fiscal year to a 52/53 week fiscal year ending
on the Sunday closest to January 31. Accordingly, the Company's current fiscal
year commenced on January 29, 1996, ended on February 2, 1997 and included 53
weeks. The financial statements for the transition period from January 1, 1996
to January 28, 1996 are also included herein.

Reclassifications -- Certain reclassifications have been made to prior
period financial statements to conform to the current presentation.

3. MERGER WITH JTS CORPORATION

Prior to the Merger, the Company had made a $30 million loan to JTS and
upon consummation of the merger the loan was cancelled. The merger was accounted
for as a purchase of JTS by Atari and, accordingly, the operating results of JTS
from July 30, 1996, the date of the merger, have been included in the
accompanying financial statements. The allocation resulted in $133.6 million
allocated to purchased technology, $110 million of which represented in-process
research and development. The $110 million has been expensed in the accompanying
statement of operations for the year ended February 2, 1997, as the technology
had not yet reached technological feasibility and does not have alternative
future uses.

The purchase price has been allocated as follows (in thousands):

<TABLE>
<S> <C>
Inventories, trade accounts receivable and other current assets... $ 24,697
Equipment and tooling............................................. 20,600
In-process research and development............................... 110,012
Acquired technology............................................... 23,542
Goodwill.......................................................... 17,956
Liabilities assumed............................................... (84,308)
---------
Net assets acquired.......................................... $112,499
=========
</TABLE>

Acquired technology and goodwill are amortized using the straight-line
method over seven and ten years, respectively and the accumulated amortization
as of February 2, 1997 was $3,924,000 and $1,283,000 for existing technology and
goodwill, respectively.

In April 1996, JTS acquired 90% of the outstanding shares of Moduler
Electronics, a contract disk drive component manufacturer, the owner of which is
a significant shareholder of JTS. JTS acquired the stock in consideration for
1,911,673 shares of JTS' Series A preferred stock and a warrant to purchase
750,000 shares of JTS' common stock at an exercise price of $0.25 per share. The
acquisition was accounted for as a purchase.

F-10
<PAGE> 82

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the acquisition, net assets acquired were as follows:

<TABLE>
<S> <C>
Inventories and other current assets.............................. $ 9,542
Equipment and leasehold improvements.............................. 7,754
Current liabilities assumed....................................... (12,681)
Long-term liabilities assumed..................................... (2,768)
--------
Net assets acquired..................................... $ 1,847
========
</TABLE>

The following unaudited proforma financial information shows the results of
operations for the fiscal years ended February 2, 1997 and December 31, 1995 as
if the JTS acquisition and JTS' acquisition of Moduler Electronics had occurred
at the beginning of each period presented. The results are not necessarily
indicative of what would have occurred had the acquisitions actually been made
at the beginning of each of the respective periods presented or of future
operations of the combined companies. The proforma results for 1997 combine
Atari's, JTS' and Moduler Electronics' results for the fiscal year ended
February 2, 1997. The proforma results for 1995 combine Atari's results for the
fiscal year ended December 31, 1995 with JTS' and Moduler Electronics' fiscal
year ended January 28, 1996.

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
FEBRUARY 2, 1997 DECEMBER 31, 1995
---------------- -----------------
<S> <C> <C>
Revenue.............................................. $ 124,294 $ 33,403
Net loss............................................. (182,794) (96,997)
Net loss per share................................... $ (1.75) $ (0.94)
Weighted average common shares outstanding........... 104,356 103,697
</TABLE>

4. FINANCIAL INSTRUMENTS

Marketable Securities -- Marketable securities available-for-sale consist
of the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 28, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
GROSS GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
COST VALUE GAINS COST VALUE GAINS
--------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity securities --
Dixon common stock.................. $ 2,534 $ 6,418 $3,884 $ 4,565 $11,606 $7,041
Government securities --
Federal Home Loan Bank.............. 4,993 5,009 16 4,993 5,026 33
Federal Home Loan Mortgage Corp..... 5,003 5,033 30 5,003 5,017 14
------- ------- ------- ------- -------
Total marketable securities...... $12,530 $16,460 $3,930 $14,561 $21,649 $7,088
======= ======= ======= ======= =======
</TABLE>

The contractual maturities of the government securities range from two to
four years. All marketable securities were sold by February 2, 1997. Realized
gains were $3.9 million and $2.4 million for the years ended February 2, 1997
and December 31, 1995 and $2.4 million for the one month period ended January
28, 1996, which are included in "Other Income" in the accompanying statements of
operations.

Fair Value of Financial Instruments -- The estimated fair value of the
5 1/4% convertible subordinated debentures issued by the Company and reflected
as long-term debt in the accompanying balance sheet at February 2, 1997 was
approximately $26 million based primarily on quoted market prices at that date.
The carrying amounts of the remainder of the Company's financial instruments at
February 2, 1997, consisting of cash and equivalents, approximate fair values
due to their short term maturities.

F-11
<PAGE> 83

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. GAME SOFTWARE DEVELOPMENT COSTS

Internal game software development costs are expensed as incurred as these
costs relate primarily to development tools. External development costs are
capitalized once technological feasibility has been determined. During 1995 and
1994, the Company capitalized $12.8 million and $5.8 million, respectively, of
amounts paid to third parties, primarily as prepaid licenses, in connection with
game development for the Jaguar. The Company amortized such costs over the
shorter of 12 months from game introduction or the estimated unit sales of the
game title. The Company assesses the recoverability of capitalized games
software development costs in light of many factors, including, but not limited
to, anticipated future revenues, estimated economic useful lives and changes in
software and hardware technologies. Amortization expense and adjustments for
management's assessment of recoverability were $17.1 million (including a
write-off of $16.6 million) and $1.5 million (including a write-off of $804,000)
for the years ended December 31, 1995 and 1994, respectively. The capitalized
development costs, net of amortization, as of December 31, 1995 amounting to
$758,000 was included in "Other Assets" in the accompanying balance sheet and
were written off during the year ended February 2, 1997.

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE FEBRUARY 2, JANUARY 28, DECEMBER 31,
(YEARS) 1997 1996 1995
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Equipment and tooling................ 2-7 $25,945 $ 1,424 $ 1,526
Furniture and fixtures............... 2-7 3,495 131 198
Leasehold improvements............... 4 410 -- --
------ ------ ------
Total................................ 29,850 1,555 1,724
Accumulated depreciation and
amortization....................... (2,176) (956) (753)
Reserve for production tooling....... -- -- (300)
------ ------ ------
Property and equipment, net.......... $27,674 $ 599 $ 671
====== ====== ======
</TABLE>

In March 1995, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that
long-lived assets be reviewed for impairment and, if necessary, an impairment
loss be recorded whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. SFAS 121 became effective
for the year ended February 2, 1997. The adoption of SFAS 121 did not have a
material effect on the financial position or results of operations of the
Company. In fiscal 1997, the Company wrote off equipment with a book value of
approximately $2.7 million and the loss is included in "Other income" in the
accompanying statement of operations.

7. LONG-TERM DEBT OBLIGATIONS AND BANK ARRANGEMENT

New Revolving Line of Credit Arrangement -- On April 16, 1997, the Company
obtained a commitment from a finance company for a revolving line of credit to
refinance present debt and to obtain working capital credit facilities of up to
$30 million. The revolving line of credit will have an initial term of three
years with automatic annual renewals thereafter unless terminated by the finance
company. The Company will grant the finance company a first and exclusive lien
on all of the Company's present and future accounts receivable, inventory,
equipment and intangible assets to secure the obligations. The agreement will
also contain certain financial covenants.

F-12
<PAGE> 84

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Bank Line of Credits -- The Company has a line of credit arrangement with a
bank for $5 million, of which all was outstanding as of February 2, 1997. The
line of credit is collateralized by certain assets, bore interest at Prime plus
0.75% (9% as of February 2, 1997) and the principal was replaced by the
factoring arrangement with the same amount in April 1997.

The Company's Indian subsidiary, JTS Technology Ltd. ("Technology"), has
entered into an agreement with a consortium of three Indian Government owned
commercial banks to obtain working capital credit facilities. While the three
banks have agreed to a total extension of credit and an allocation of
participation, each bank independently sanctions its portion of the
participation. The credit agreement with the consortium has four separate
facilities, namely, export sales accounts receivable bill discounting, exports
sales order based inventory packing credit, foreign letters of credit and
letters of guarantee. Technology can borrow up to $10,375,000 and, as of
February 2, 1997, $5,540,000 was outstanding. The line of credit is
collateralized by certain assets, is guaranteed by a relative of the Chairman of
the Company and bears interest from 6.5% to 15%.

According to the terms stipulated in the credit facility sanction letter of
one of the banks, the Company is required to contribute unsecured loans of
approximately $1.8 million to Technology. No unsecured loans have been
contributed as of February 2, 1997. However, management believes it is in
compliance with this provision due to the open accounts receivable which they
have from Technology and intends to convert a portion of its open accounts
receivable from Technology to unsecured loans to satisfy this requirement.

Convertible Subordinated Debentures -- The Company has $42.4 million of
5 1/4% convertible subordinated debentures due April 29, 2002. The debentures
may be redeemed at the Company's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into common stock at
$16.3125 per share. As of February 2, 1997, 2,596,414 shares of common stock
were reserved for issuance upon conversion. Default with respect to other
indebtedness of the Company in an aggregate amount exceeding $5 million would
result in an event of default whereby the outstanding debentures would be due
and payable immediately.

In 1995, the Company reacquired in the open market and extinguished $1.1
million face value of these debentures for $500,000, resulting in an
extraordinary gain of $582,000.

Secured Long Term Loans -- Technology has entered into term loan agreements
with the Industrial Credit and Investment Corporation of India Limited
("ICICI"), a term lending institution in India under which $2,625,000 was
outstanding as of February 2, 1997. The loan is repayable in US dollars in 13
equal quarterly installments of $202,000 each commencing from April 1997.
Interest on outstanding amounts is payable quarterly at the rate of US dollar
LIBOR plus 2.75% per annum (8.5% at February 2, 1997). As of February 2, 1997,
Technology also has a second loan outstanding from ICICI for $7,000,000,
repayable in US dollars in twelve equal quarterly installments of $583,000 each
commencing on May 20, 1998. Interest on these loans is payable at US dollar
LIBOR plus 4% (9.94% at February 2, 1997).

On June 13, 1996, Technology entered into a loan agreement with the
Shipping Credit and Investment Corporation of India Limited. As at February 2,
1997, the Company has borrowed $2.12 million and the loan is repayable in US
dollars in 12 equal quarterly installments of $177,000 each commencing from the
first quarter of 1998. Interest on these loans is payable at US dollar LIBOR
plus 4% (9.94% at February 2, 1997).

The loans are collateralized by all of the Technology's property and
equipment and are guaranteed by a relative of the Chairman of the Company.

The loan covenants require Technology to increase its paid in capital by
approximately $5.6 million and the Company is required to make unsecured loans
of $3.7 million to Technology. With respect to the equity requirement, the
Company has obtained the approval of the Reserve Bank of India ("RBI") to
contribute funds aggregating to $5 million. Subsequent to February 2, 1997,
Technology received $2.5 million towards

F-13
<PAGE> 85

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

capital contribution from the Company. These funds, along with amounts invested,
would result in Technology's paid in capital to increase to $5.88 million.

No unsecured loans have been contributed up to the date of the financial
statements. Management believes that the lender is unlikely to require the
Company to immediately repay advances outstanding for non-compliance with debt
covenants. Management believes it is in compliance with this provision due to
the open accounts receivable which they have from Technology and intends to
convert a portion of its open accounts receivable from Technology to unsecured
loans to satisfy this requirement.

Capitalized Lease Obligations -- As of February 2, 1997, the Company has
equipment lease agreements of which payments are due in equal monthly
installments over a 36 month period. As of February 2, 1997, the cost of the
leased assets was $925,000 and the related accumulated depreciation was
$220,000. The leases bear interest between 11.5% and 18.2%.

The following is a schedule of future payments under subordinated
debentures, secured long term loans and capital lease obligations together with
the present value of the net minimum lease payments at February 2, 1997.

<TABLE>
<CAPTION>
SECURED
CAPITAL LEASE LONG TERM SUBORDINATED
YEAR OBLIGATIONS LOANS DEBENTURES AMOUNT
------------------------- ------------- --------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998..................... $ 560 $ 1,516 $ -- $ 2,076
1999..................... 521 3,848 -- 4,369
2000..................... 27 3,848 -- 3,875
2001..................... -- 2,534 -- 2,534
2002..................... -- -- -- --
2003..................... -- -- 42,354 42,354
--------------
Total.................... 55,208
Less: Amount representing
interest............... (160)
--------------
Present value............ 55,048
Less: Current portion.... (1,967)
--------------
Long term portion........ $ 53,081
===========
</TABLE>

8. INCOME TAXES

The effective income tax rate for the periods shown below was 0% and
differs from the Federal statutory rate of 35% as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED PERIOD ENDED DECEMBER 31,
FEBRUARY 2, JANUARY 28, --------------------
1997 1996 1995 1994
---------- ------------ -------- -------
<S> <C> <C> <C> <C>
Computed at federal statutory rates... $(53,373) (1,515) $(17,402) $ 3,288
Nondeductible acquired in-process
research and development............ 38,504 -- -- --
Nondeductible amortization expense.... 2,042 -- -- --
Other................................. (5,511) (1,053) (1,202) --
Valuation allowance................... 18,338 2,569 18,604 (3,288)
-------- -------
Income tax............................ $ -- $ -- $ -- $ --
======== =======
</TABLE>

F-14
<PAGE> 86

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net deferred tax asset consist of (in thousands):

<TABLE>
<CAPTION>
FEBRUARY 2, JANUARY 28, DECEMBER 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Federal operating loss carryforwards........... $ 85,760 $ 57,238 $ 57,706
State operating loss carryforwards............. 8,764 4,999 3,820
Capital loss carryforwards..................... 1,008 1,008 1,035
Research and development tax credit
carryforwards............................... 3,100 1,496 1,813
Inventory reserves............................. 7,268 5,287 3,237
Capitalized software development costs......... 3,022 3,022 3,022
Other.......................................... 8,045 4,613 4,461
-------- --------
Subtotal......................................... 116,967 77,663 75,094
Valuation allowance.............................. (116,967) (77,663) (75,094)
-------- --------
Net deferred tax asset........................... $ -- $ -- $ --
======== ========
</TABLE>

Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the net deferred tax assets such that a valuation allowance has been recorded to
completely offset the net deferred tax assets. Such factors include recurring
operating losses from inception, recent increases in expense levels to support
the Company's growth, and the fact that the market in which the Company competes
is intensely competitive and is characterized by rapidly changing technology.

For income tax purposes, the Company has Federal and State net operating
loss ("NOL") carryforwards of approximately $245 million and $94 million,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $2.1 million and $1.0 million, respectively, all
of which will expire on various dates through 2012.

Under the Internal Revenue Code of 1986, as amended, certain changes in the
ownership or business of a corporation that has Federal NOLs or tax credit
carryforwards will result in the inability to use or the imposition of
significant restrictions on the use of such NOLs or tax credit carryforwards to
offset future income and tax liabilities of the Company. The merger between
Atari and JTS constituted a change in ownership with respect to JTS and
accordingly, restricts the use of JTS' pre-merger NOLs against post-merger
income of the Company to the maximum of $12.5 million per year, unless
previously expired. In addition, subsequent events may result in the imposition
of restrictions on the ability of the Company to utilize its NOLs and tax credit
carryforwards. There can be no assurance that the Company will be able to
utilize all or any of its NOL's or tax credit carryforwards.

Under the Indian Income Tax Act 1961, Technology is exempted from payment
of certain corporate income taxes for a period of five years during the first
eight years of operations, subject to fulfillment of certain conditions.
Technology continues to be exempt from certain income tax to the extent of
income attributable to the export sales of Technology. As Technology did not
have any taxable income for the period from July 30, 1996 to February 2, 1997,
no provision for income tax has been made.

F-15
<PAGE> 87

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. CONVERTIBLE PREFERRED STOCK

Convertible preferred stock outstanding as of February 2, 1997 consisted of
the following (dollars in thousands, except share amounts):

<TABLE>
<S> <C>
Series B:
Authorized -- 15,000 shares
Outstanding -- 15,000 shares; liquidation preference of
$15,193....................................................... $ 15,000
Series C:
Authorized -- 25,000 shares
Outstanding -- 25,000 shares; liquidation preference of
$25,034....................................................... $ 25,000
--------
$ 40,000
=======
</TABLE>

The rights, restrictions and preferences of Series B convertible preferred
stock are as follows:

- Each stockholder is entitled to receive annual dividends at a rate of
$50.00 per share when, and if, declared by the Board of Directors, prior
to payment of dividends on common stock. Dividends are cumulative and
payable in cash or in common stock quarterly. As of February 2, 1997,
dividends accrued totaled $193,000.

- Each stockholder may convert any or all of his shares into common stock
at the lower of (i) $3.6125 or (ii) 85% of the average trading price of
the common stock on the five consecutive trading days immediately
preceding the conversion date times the conversion rate (defined in the
agreement). In addition, for every ten shares of common stock issued upon
conversion, the holder is entitled to receive a warrant to purchase one
share of common stock. Each warrant is exercisable at 110% of the lower
of the average closing price of common stock for the five days
immediately preceding (i) the conversion notice date or (ii) the closing
date of the stock purchase agreement.

- In the event of any voluntary liquidation, dissolution or winding up of
the Company, the holders are entitled to receive an amount per share
equal to the total amount of (i) $1,000 and (ii) all dividends accrued
and unpaid.

The rights, restrictions and preferences of Series C convertible preferred
stock are as follows:

- Each stockholder is entitled to receive dividends at a rate of 5% per
annum which are cumulative and payable in cash or in common stock. As of
February 2, 1997, dividends accrued totaled $34,000.

- Each stockholder may convert any or all of his shares and unpaid
dividends into common stock at the lower of (i) $2.94 or (ii) 85% of the
average market price for the common stock for the five consecutive
trading days immediately preceding the conversion date.

- The holders have the right, at the option of the holders of at least two
thirds of the Series C convertible preferred stock then outstanding, to
require the Company to redeem all of the Series C Preferred upon the
occurrence of certain events, all of which are within the control of the
Company and therefore, Series C is included in shareholders' equity in
the accompanying balance sheet.

- In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders are entitled to receive an amount
per share equal to the total amount of (i) $1,000 and (ii) an additional
amount defined in the agreement.

- Holders do not have any voting right.

10. COMMON STOCK AND STOCK OPTION PLANS

Reduction in Par Value -- Upon the Merger, a new Certificate of
Incorporation was approved and the par value of the common stock was reduced
from $.01 per share to $.001. As a result, the common stock account was reduced
by $573,000 and the additional paid-in capital account was increased by the same
amount.

F-16
<PAGE> 88

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Warrants -- In connection with the acquisition of Moduler Electronics, the
Company issued warrants to purchase 750,000 shares of the Company's common stock
at an exercise price of $0.25 per share to an entity owned by a relative of the
Chairman of the Company, of which 500,000 warrants have been exercised. The
remaining 250,000 shares become exercisable when there becomes available to
Technology certain borrowings and credit facilities in the amount of at least
$29 million. Subject to the foregoing, the warrant may be exercised at any time
until February 25, 2001.

The Company issued a warrant to purchase 37,500 shares of the Company's
common stock at an exercise price of $4.26 per share to a placement agent upon
the issuance of Series B convertible preferred stock. (See Note 9.) The warrant
is exercisable at any time until November 5, 1999. Such warrants were deemed to
have nominal value at the issuance date and, accordingly, are carried at no
value in the accompanying financial statement.

The Company has issued warrants to purchase 50,000 shares of common stock
at $3.00 to the bank with which it has a line of credit. The warrants may be
exercised at any time before various dates through 2001. Such warrants were
deemed to have nominal value at the issuance date and, accordingly, are carried
at no value in the accompanying financial statements.

Restricted Stock Purchase Agreement -- Prior to the Merger, JTS issued
5,000,000 shares of its common stock to certain officers in exchange for notes
receivable amounting to $2,750,000, of which $240,000 has been subsequently
collected. The notes bear interest at annual rates ranging from 5.45% to 5.91%
and the principal and interest is payable on various dates within four years.
The notes are with full recourse and are collateralized by the stock purchased.
The Company has the right to repurchase such shares upon termination of
employment at the original purchase price; however, the Company's right to
repurchase lapses ratably over four years. As of February 2, 1997, 3,162,494
shares were subject to repurchase.

Stock Option Plans -- The Company has reserved 9,000,000 shares of common
stock for issuance under its 1995 Stock Option Plan. Under the plan, either
incentive or nonstatutory stock options may be granted to purchase shares of
common stock. Nonstatutory stock options may be granted to employees,
nonemployee members of the Board of Directors and consultants at prices not less
than 85% of the fair value of the stock at the date of the grant, as determined
by the Board. Incentive stock options may be granted only to employees at prices
not lower than the fair value of the stock at the date of grant, as determined
by the Board. Options granted under the plan are generally exercisable over four
years, and expire no later than ten years from the date of grant. Options
granted vest at a rate of 25% per annum.

The Company has also reserved 500,000 shares of common stock for issuance
under its 1996 Non-Employee Directors' Stock Option Plan. Under the plan, each
Non-Employee Director has options to purchase shares of common stock at the
market value at the date of grant. Options vest in two equal annual installments
from the date of grant and will expire no later than ten years from the date of
grant.

F-17
<PAGE> 89

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents the option activity through February 2, 1997:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance, December 31, 1994.............................. 1,308,458 $ 3.94
Granted................................................. 1,487,000 $ 2.66
Exercised............................................... (82,333) $ 1.44
Cancelled............................................... (615,600) $ 5.47
---------
Balance, December 31, 1995.............................. 2,097,525 $ 2.68
---------
Granted................................................. 195,000 $ 1.60
Exercised............................................... (4,000) $ 1.19
Cancelled............................................... --
Balance, January 28, 1996............................... 2,292,525 $ 2.59
---------
Granted................................................. 4,201,203 $ 1.83
Assumed upon JTS merger................................. 3,885,747 $ 2.31
Exercised............................................... (1,047,000) $ 1.04
Cancelled............................................... (2,130,933) $ 2.21
Balance, February 2, 1997............................... 7,197,542 $ 2.34
=========
</TABLE>

The following table summarizes information concerning stock options
outstanding and exercisable as of February 2, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF SHARES AVERAGE AVERAGE SHARES AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.25 2,430,229 8.59 $ 0.25 749,065 $ 0.25
$2.50 - $4.20 4,637,313 9.66 $ 3.41 375,609 $ 3.77
$6.00 130,000 7.49 $ 6.00 55,000 $ 6.00
--------- ---- ----- --------- -----
7,197,542 9.22 $ 2.34 1,179,674 $ 1.53
========= ==== ===== ========= =====
</TABLE>

Stock-Based Compensation -- In January 1996, the Company adopted FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 defines a fair value method of accounting for stock-based compensation
plans. Under the fair value method, compensation cost is measured at the grant
date on the value of the award and is recognized over the service period. As
permitted under SFAS 123, the Company continues to apply the provisions of APB
25 and related interpretations in accounting for its stock-based compensation
plans and, accordingly, does not recognize compensation cost. If the Company had
elected to recognize compensation cost based on the fair value of the stock
options at the grant date as prescribed by SFAS 123, net loss and loss per share
would have been as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED YEAR ENDED
FEBRUARY 2, JANUARY 28, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Net loss -- As reported........................ $ (152,495) $ (4,330) $(49,576)
Net loss -- Pro forma.......................... $ (161,496) $ (4,335) $(49,778)
Loss per share -- As reported.................. $ (1.81) $ (0.07) $ (0.78)
Loss per share -- Pro forma.................... $ (1.92) $ (0.07) $ (0.78)
</TABLE>

F-18
<PAGE> 90

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Because SFAS 123 has not been applied to options granted prior to January
1, 1995, the resulting pro-forma compensation cost may not be representative of
that to be expected in future years.

The weighted average fair value of stock options granted during the year
ended December 31, 1995, the one month ended January 28, 1996 and the year ended
February 2, 1997 was $0.57, $0.18 and $4.38 per share, respectively. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model assuming a risk free interest rate of 6%, dividend yield of
0%, volatility factor of the expected market price of the Company's Common Stock
of 1.10 and a weighted average expected option life of 4 and 6 years from the
vest date.

Common Stock Reserved for Future Issuance -- As of February 2, 1997, the
Company has reserved the following shares of common stock for issuance in
connection with:

<TABLE>
<S> <C>
Conversion of preferred stock.................................... 27,037,500
Conversion of subordinated debentures............................ 2,596,414
Stock option plans............................................... 9,429,416
Warrants to purchase common stock................................ 337,500
-----------
39,400,830
=========
</TABLE>

11. COMMITMENTS AND CONTINGENT LIABILITIES

License Agreements and Royalty Obligations -- The Company licenses certain
"Nordic" disk drive technology from TEAC Corporation ("TEAC"). In the event the
Company sells certain products incorporating certain technology jointly
developed by TEAC and the Company or independently developed by TEAC, it will
incur a royalty obligation. There was no sale of a product incorporating such
technology and accordingly, no royalties were due as of February 2, 1997. In
addition, the Company is obligated to license certain technology independently
developed by the Company on a royalty-free basis to TEAC.

The Company also has a cross-license agreement with Pont Peripherals
Corporation ("Pont") pursuant to which the Company granted to Pont a
royalty-free, nonexclusive perpetual license to use certain technology
independently developed by the Company and jointly developed. In return, Pont
granted to the Company a royalty-free, nonexclusive, perpetual license to use
certain technology independently developed by Pont and jointly developed.

The Company has entered into a Development Agreement with Compaq
Corporation which imposes certain restrictions on the Company's ability to
sublicense "Nordic" technology to third parties. In addition, the Development
Agreement imposes a royalty of $2 per unit with respect to the sale of "Nordic"
disk drives to third parties during the term of the agreement. No royalties were
due as of February 2, 1997.

The Company has also entered into a Technology and License Agreement with
Western Digital Corporation ("WDC") pursuant to which WDC obtained certain
manufacturing and marketing rights to "Nordic" disk drive technology. The
Company and WDC have reciprocal, royalty-free, cross-license agreement for
future Nordic technology developments, and WDC has granted to the Company
licenses on existing patents covering certain technology on a royalty-free
basis.

Lease Commitments -- The Company leases various facilities and equipment
under noncancellable operating lease arrangements. These leases generally
provide renewal options of five additional years.

F-19
<PAGE> 91

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum future lease payments under noncancellable operating leases as of
February 2, 1997 are as follows (in thousands):

<TABLE>
<S> <C>
1998................................................ $ 781
1999................................................ 553
2000................................................ 571
2001................................................ 243
------
Total minimum lease payments.............. $2,148
======
</TABLE>

Rent expense for operating leases was $1,015,000, $1,193,000 and $1,218,000
for the years 1997, 1995 and 1994, respectively, and $61,000 for the period
ended January 28, 1996.

Claims and Suits -- On January 3, 1997, Dusseldorf Securities, Limited
("DSL") and Greystone Capital, Ltd. ("GCL"), through counsel, made a letter
demand of the Company for payment of $1,250,000 allegedly due under a letter
agreement between DSL and the Company dated December 21, 1996 (the "Agreement").
DSL and GCL claim that the Company owes $1,250,000 as fees for a January 1997
private placement of the Company's stock which was not completed through DSL
and/or GCL. On February 26, 1997, DSL and GCL filed suit against the Company in
Los Angeles County Superior Court, No. BC166450, entitled Dusseldorf Securities,
Limited v. JTS Corporation. The lawsuit asserts claims for breach of contract,
breach of warranty, and misrepresentation against the Company and asserts those
and other tort claims against an individual not affiliated with the Company,
through whom the Company recently completed a private placement of its
securities. A writ of attachment has been filed and is scheduled to be argued on
May 9, 1997. The Company denies the allegations of the complaint and intends to
vigorously defend itself in the action.

Certain claims and suits arising in the ordinary course of business have
been filed or are pending against the Company. The number of such claims has
increased as the Company significantly downsized its development operations. In
the opinion of management, all such matters have been adequately provided for,
are without merit, or are such that if settled unfavorably would not have a
material adverse effect on the Company's consolidated financial position and
results of operations.

12. SETTLEMENTS OF PATENT LITIGATION

During the first quarter of 1994, the Company received $2.2 million with
respect to the settlement of litigation between the Company, Atari Games
Corporation and Nintendo. Although not part of the litigation, the Company sold
1,500,000 shares of its common stock to Time Warner (parent company of Atari
Games Corporation), Inc. for $12.8 million.

During the fourth quarter of 1994, the Company completed a comprehensive
agreement ("Agreement") with Sega Enterprises, Ltd. ("Sega") concerning
resolution of disputes, equity investment and patent and product licensing
agreements. The results of the Agreement were as follows: (i) Sega acquired
4,705,883 shares of the Company's common stock for $40.0 million; (ii) the
Company received a payment of $29.8 million ($50.0 million from Sega, net of
$20.2 million of legal fees and associated costs) in exchange for a license from
Atari covering the use of a library of Atari patents issued between 1977 through
1984 (excluding patents which exclusively claim elements of the Company's JAGUAR
and LYNX products) through the year 2001; and (iii) the Company and Sega agreed
to cross-license up to five software game titles each year through the year
2001.

13. SEGMENT INFORMATION

The Company operates in two industry segments -- the design and sale of
consumer electronic products and the manufacture and distribution of hard disk
drives. The Company's foreign operations at February 2,

F-20
<PAGE> 92

JTS CORPORATION (FORMERLY ATARI CORPORATION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 consist of sales and distribution facilities in Europe and a manufacturing
plant in India. Corporate assets are primarily cash and equivalents, marketable
securities, real estate held for sale and intangible assets.

The following tables present a summary of operations by geographic region
(in thousands):

<TABLE>
<CAPTION>
ONE MONTH YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
FEBRUARY 2, JANUARY 28, ---------------------
1997 1996 1995 1994
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
North America....................... $ 30,840 $ 510 $ 8,163 $ 23,158
Export sales from North America..... 45,934 -- 1,868 8,538
Europe.............................. 13,756 225 4,595 7,052
------- ------- -------
Total....................... $ 90,530 $ 735 $ 14,626 $ 38,748
======= ======= =======
Operating income (loss):
North America....................... $ (153,234) $ (6,632) $(51,036) $(21,600)
Europe.............................. 445 (39) (2,629) (2,447)
India............................... 3,140 -- -- --
------- ------- -------
Total....................... $ (149,649) $ (6,671) $(53,665) $(24,047)
======= ======= =======
Identifiable assets at period end:
North America....................... $ 26,871 $ 9,135 $ 14,588 $ 37,627
Europe.............................. 8,285 1,810 1,856 1,650
India............................... 35,855 -- -- --
Corporate assets.................... 59,706 59,230 61,125 91,765
------- ------- -------
Total....................... $ 130,717 $ 70,175 $ 77,569 $131,042
======= ======= =======
</TABLE>

The following table presents a summary of the revenues by industry segment
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 2,
1997
-----------
<S> <C>
Hard disk drives........................................................ $85,751
Multimedia entertainment system......................................... 4,779
-----------
$90,530
========
</TABLE>

All revenues for the years ended December 31, 1995 and 1994 and for the one
month period ended January 28, 1996 are from the multimedia entertainment system
segment.

No single customer accounted for more than 10% of total revenues for the
years ended December 31, 1995 or 1994 or for the one month period ended January
28, 1996. Sales to major customers in 1997 in excess of 10% of total revenues
are as follows:

<TABLE>
<S> <C>
Karma International 30%
Future Technology 13%
Synnex Information Technology 12%
</TABLE>

F-21
<PAGE> 93

JTS CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
MAY 4, FEBRUARY 2,
1997 1997
--------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including $2,100, and $1,800 held as
restricted balances at May 4, 1997 and February 2, 1997,
respectively)................................................... $ 13,396 $ 24,766
Accounts receivable, less allowance for doubtful accounts of $1,409
and $1,615 at May 4, 1997 and February 2, 1997, respectively.... 30,257 21,445
Inventories........................................................ 28,131 17,750
Other current assets............................................... 3,473 2,341
--------- ---------
Total current assets............................................ 75,257 66,302
PROPERTY AND EQUIPMENT, net.......................................... 31,399 27,674
ACQUIRED TECHNOLOGY, net............................................. 18,917 19,618
GOODWILL, net........................................................ 16,256 16,673
OTHER ASSETS......................................................... 427 450
--------- ---------
TOTAL...................................................... $ 142,256 $ 130,717
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank lines of credit............................................... $ 12,009 $ 10,540
Borrowings under factoring arrangement............................. 4,650 2,981
Accounts payable................................................... 55,280 33,327
Accrued liabilities................................................ 14,166 16,415
Current portion of long-term obligations........................... 1,583 1,967
--------- ---------
Total current liabilities.................................. 87,688 65,230
--------- ---------
LONG-TERM OBLIGATIONS................................................ 54,365 53,081
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value -- authorized,
10,000,000 shares; outstanding, 35,807 and 40,000 shares;
liquidation value of $36,491 and $40,227 at May 4, 1997 and
February 2, 1997, respectively.................................. --
Common stock, $.001 par value -- authorized, 150,000,000 shares;
outstanding, 107,151,842 and 104,744,765 at May 4, 1997 and
February 2, 1997, respectively.................................. 107 105
Additional paid-in capital......................................... 350,036 349,961
Notes receivable from shareholders................................. (2,510) (2,510)
Accumulated deficit................................................ (347,430) (335,150)
--------- ---------
Total stockholders' equity...................................... 203 12,406
--------- ---------
TOTAL...................................................... $ 142,256 $ 130,717
========= =========

</TABLE>

(See Condensed Notes to Consolidated Financial Statements)

F-22
<PAGE> 94

JTS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 4, 1997 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MAY 4, MARCH 31
1997 1996
-------- ---------
<S> <C> <C>
NET SALES.............................................................. $ 73,413 $ 1,272
-------- -------
Cost of sales........................................................ 70,220 6,211
======== =======
GROSS MARGIN (DEFICIT)................................................. 3,193 (4,939)
Amortization of acquired technology.................................. 701 --
Research and development expense..................................... 6,700 201
Selling, general and administrative expense.......................... 6,081 2,009
-------- -------
Total operating expenses............................................... 13,482 2,210
-------- -------
OPERATING LOSS......................................................... (10,289) (7,149)
Exchange loss.......................................................... (25) (60)
Other income (loss), net............................................... (135) 6,640
Interest income........................................................ 291 332
Interest expense....................................................... (1,666) (569)
-------- -------
NET LOSS............................................................... $(11,824) $ (806)
Preferred stock dividends.............................................. 456 --
NET LOSS ATTRIBUTABLE TO COMMON STOCK.................................. (12,280) (806)
LOSS PER COMMON SHARE.................................................. $ (0.116) $ (0.01)
======== =======
Weighted average number of shares used in computations................. 105,841 63,701
</TABLE>

(See Condensed Notes to Consolidated Financial Statements)

F-23
<PAGE> 95

JTS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MAY 4, MARCH 31,
1997 1996
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities................................. $(9,659) $ (947)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities......................................... -- 20,908
Purchase of property and equipment.................................... (5,704) --
Proceeds from the sale of property.................................... -- 33
Borrowing by JTS...................................................... -- (25,000)
Decrease in other assets.............................................. -- 22
Game software development costs....................................... -- (103)
------- -------
Net cash used in investing activities................................. (5,704) (4,140)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and factoring liability............... 4,411 --
Payment on capital leases............................................. (233) --
Extinguishment of 5 1/4% convertible subordinated debentures.......... -- (75)
Preferred stock dividends paid........................................ (185) --
Issuance of common stock.............................................. -- 63
------- -------
Net cash provided by (used in) financing activities................... 3,993 (12)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS............ (94)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................... (11,370) (5,193)
CASH AND CASH EQUIVALENTS:
Beginning of period................................................... 24,766 28,941
------- -------
End of period......................................................... $13,396 $ 23,748
======= =======
OTHER CASH FLOW INFORMATION FROM CONTINUING OPERATIONS:
Interest paid......................................................... $ 3,165 $ (12)
Conversion Preferred stock to Common stock............................ 2
Capital leases entered into........................................... 265
</TABLE>

(See Condensed Notes to Consolidated Financial Statements)

F-24
<PAGE> 96

JTS CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.

The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.

On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS
Corporation ("JTS") and the separate existence of Atari ceased. Although the
business combination resulted in Atari merging into the JTS legal entity, the
substance of the transaction was that Atari, as a public company with
substantially greater operating history and net worth owns approximately 62% of
the equity of the merged company. Therefore, for accounting purposes, the merger
was accounted for as a purchase of JTS by Atari. See Note 2.

Subsequent to the merger, the Company changed its fiscal year from a 52/53
week fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. Accordingly, the
Company's current fiscal year commenced on February 2, 1997 and the current
quarter ended on May 4, 1997.

Due to this fiscal year change, the end of the quarter does not coincide
with the end of the quarter of the previous year. The Company did not recast the
financial information for the prior fiscal year as management believes that
financial statements for the quarters of the preceding year are nearly
comparable to the quarters in the newly adopted fiscal year and that there are
no seasonal factors and other factors that could affect the comparability of the
information or trends reflected.

NOTE 2. MERGER WITH JTS CORPORATION ("JTS")

The following unaudited pro forma information shows the results of
operations for the three months ended March 31, 1996 as if the JTS acquisition
had occurred at the beginning of the period at the purchase price established on
July 30, 1996. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of each of the
respective periods presented or of future operations of the combined companies.
The pro forma results for 1996 combine Atari's results for the three month
period ended March 31 1996 with JTS' three month fiscal period (13 weeks) ended
April 28, 1996.

F-25
<PAGE> 97

JTS CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma results include the straight-line amortization
of intangibles over periods ranging from seven years to ten years in the first
quarter of 1997.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
MARCH
MAY 4, 31,
1997 1996
-------- --------
<S> <C> <C>
Revenue................................................. $ 73,413 $ 18,853
Gross Margin............................................ 3,193 (9,068)
Net (loss).............................................. (11,824) (16,578)
Net loss attributable to Common Stock................... (12,280) (16,578)
Net (loss) per share.................................... $ (0.116) $ (0.16)
Weighted average common and common equivalent shares
outstanding........................................... 105,841 103,701
</TABLE>

NOTE 3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
MAY 4, FEBRUARY 2,
1997 1997
-------- -----------
<S> <C> <C>
Finished goods.......................................... $ 1,094 $ 489
Raw materials and work-in-process....................... 27,037 17,261
------- -------
Total......................................... $ 28,131 $17,750
======= =======
</TABLE>

NOTE 4. NEW ACCOUNTING STANDARD

The Financial Accounting Standards Board issued FASB No. 128, "Earnings per
share." This statement becomes effective for periods ending after December 15,
1997. The Company will adopt the statement from its fourth quarter, ending
February 1, 1998. The impact of the statement is expected to be immaterial on
the previously reported earnings per share results.

F-26
<PAGE> 98

======================================================

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 7
Use of Proceeds........................ 15
Dividend Policy........................ 15
Capitalization......................... 16
Price Range of Common Stock............ 17
Selected Historical Financial Data..... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business............................... 25
Management............................. 36
Certain Transactions................... 43
Principal Stockholders and Selling
Security Holders..................... 46
Description of Capital Stock........... 64
Shares Eligible for Future Sale........ 68
Plan of Distribution................... 69
Legal Matters.......................... 70
Experts................................ 70
Additional Information................. 71
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

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56,392,046 SHARES

JTS CORPORATION

COMMON STOCK
--------------------
PROSPECTUS
--------------------
DECEMBER 3, 1997

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